Opinion
Civil Action No. 2:01cv640-T.
September 30, 2004
Regions Bank in its capacity as Indenture Trustee, Plaintiff represented by Eric B. Langley, Balch Bingham Birmingham, AL.
Henry E. Simpson, Adams Reese/Lange Simpson LLP Birmingham, AL.
Laurence J. McDuff, Adams Reese/Lange Simpson LLP Birmingham, AL.
Michael L. Edwards, Balch Bingham Birmingham, AL.
Robert D. Eckinger, Adams Reese/Lange Simpson LLP Birmingham, AL.
Blount Parrish Company Defendant, represented by Andrew P. Campbell, Campbell Waller Poer LLC Birmingham, AL.
Brian Allen Warwick, Adams Reese/Lange Simpson LLP Birmingham, AL,
Cinda R. York, Campbell Waller Poer LLC Birmingham, AL.
Robert David Segall, Copeland Franco Screws Gill Montgomery, AL.
Shannon Lynn Holliday, Copeland Franco Screws Gill Montgomery, AL
David Lee, Movant, represented by J. Doyle Fuller, Law Office of J. Doyle Fuller Montgomery, AL.
Susan Glasscock Copeland, Law Office of J. Doyle Fuller Montgomery, AL.
OPINION
Plaintiff Regions Bank brings this lawsuit against defendant Blount Parrish Co., on behalf of all persons who purchased and own certain industrial development revenue bonds, asserting violations of federal securities law under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, and violations of Alabama law under the Alabama Securities Act, 1975 Ala. Code § 8-6-19(a), and Alabama common-law. This court has subject-matter jurisdiction under 15 U.S.C.A. § 78aa (exclusive jurisdiction over actions brought under the Securities Exchange Act of 1934) and 28 U.S.C.A. § 1367 (supplemental jurisdiction). The case is currently before the court on Blount Parrish's motion to dismiss and alternative motion for judgment on the pleadings. For the reasons that follow, the dismissal motion will be granted.
I. MOTION-TO-DISMISS STANDARD
In considering a defendant's motion to dismiss, the court accepts the plaintiff's allegations as true, Fed.R.Civ.P. 12(b);Andreu v. Sapp, 919 F.2d 637, 639 (11th Cir. 1990), and construes the complaint liberally in the plaintiff's favor.Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 1686 (1974). The lawsuit may not be dismissed unless the plaintiff can prove no set of facts supporting the relief requested. Scheuer, 416 U.S. at 236, 94 S. Ct. at 1686; Duke v. Cleland, 5 F.3d 1399, 1402 (11th Cir. 1993).
II. FACTS
Accepting Regions Bank's allegations as true, the relevant facts are as follows. This case arises out of a February 1999 industrial development revenue bond issued to finance a portion of the costs of the construction and equipping of a manufactured-housing manufacturing facility located in Franklin County, Alabama. The Industrial Development Board of the City of Russellville, Alabama issued the bonds in exchange for Spiral Industry, Inc.'s lease of the manufacturing facility. The rental payments under the lease were to be used to make interest and principal payments to the bondholders. Blount Parrish underwrote the bonds, purchasing them at a closing and then offering them for sale to the public. The bonds are secured by a Mortgage and Trust Indenture from the issuer Russellville Industrial Development Board to Regions Bank.Regions Bank alleges that Blount Parrish made numerous misrepresentations of fact in its offering memorandum to potential bondholders. Pursuant to the indenture, the issuer granted to Regions Bank, as indenture trustee, a mortgage lien for the benefit of the bondholders on the manufactured-housing facility development project. The indenture did not grant to Regions Bank, as indenture trustee, a mortgage lien for the benefit of the bondholders on the eight-acre "original property" in Russellville where Spiral Industries already had a physical plant. Blount Parrish purchased the bonds knowing that Regions Bank had received a mortgage only on the development project, but Blount Parrish sold the bonds to the bondholders pursuant to an offering memorandum stating that the bonds would be secured by a mortgage lien on both the development project and the original property. Blount Parrish made other misrepresentations and omissions of material fact regarding the nature and extent of risks for bondholders in helping to finance the development project.
In December 2000, Spiral failed to make the monthly rental payments to Regions Bank as required under the lease. As a result of this default, Regions Bank accelerated all payments from Spiral. Spiral filed for Chapter 11 bankruptcy on April 13, 2001.
There are dueling state and federal lawsuits arising from the same facts in this case. On February 8, 2001, Blount Parrish filed a lawsuit on behalf of Spiral's bondholders in Alabama state court against Regions Bank for breach of its fiduciary duties as indenture trustee. On September 27, 2001, the complaint was amended to substitute David Lee as the class representative, still bringing claims on behalf of the bondholders. On May 25, 2001, Regions Bank filed this lawsuit in this court, also on behalf of the same group, Spiral's bondholders. As described above, this lawsuit alleges violations of federal securities law, Alabama state-law fraud, and Alabama state-law securities fraud against Blount Parrish.
III. DISCUSSION
As grounds for its motion to dismiss, Blount Parrish argues that Regions Bank, as indenture trustee, lacks standing to pursue its claims on behalf of the bondholders of these bonds. Both Regions Bank and Blount Parrish recognize that the language of the indenture agreement controls whether the trustee may bring suit on behalf of the bondholders. See Navarro Savings Ass'n v. Lee, 446 U.S. 458, 464-65, 100 S. Ct. 1779, 1783-1784 (1980) (holding that powers of an indenture trustee derive from the instruments creating the trust relationship); De Cuellar v. Brady, 881 F.2d 1561, 1568 (11th Cir. 1989) (holding that indenture trustee's "responsibilities are determined by the terms of the Agreement"); Regions Bank v. Blount Parrish Co., Inc., 2001 WL 726989 at *3 (N.D. Ill. 2001) (holding that whether trustee had rights to sue on behalf of bondholders would be determined by indenture provisions). However, the parties disagree as to whether the indenture agreement in this case contains a broad grant of authority allowing Regions Bank to bring this suit on behalf of the bondholders. The relevant section of the agreement states:
"[U]pon the occurrence and continuance of an Event of Default, the Trustee may pursue any other available remedy to enforce the payment of Bond Service Charges or the observance and performance of any other covenant, agreement or obligation under this Indenture, the Lease, or any other instrument providing security, directly or indirectly, for the Bonds."
Complaint, Exhibit B, Section 6.4(a).
Blount Parrish argues that, although this section does provide specific remedies for the trustee in the event of a default, it limits the trustee in its pursuit of other claims, so that the trustee may only seek to enforce payments or other provisions of the indenture or lease related to security for the bonds. Blount Parrish therefore argues that Regions Bank's authority as trustee encompasses seeking payment on the bonds but does not extend to bringing claims on behalf of the bondholders.
The Northern District of Illinois found a lack of standing in a case with the same parties in the same positions and with similar agreement language, although with different bonds at issue.Regions Bank v. Blount Parrish Co., Inc., 2001 WL 726989 (N.D. Ill. 2001). In the Illinois case, there were two sections on which the plaintiff relied in that case to support its claim to a broad grant of authority to bring its suit on behalf of the bondholders:
"Section 7.08. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the principal of, premium, if any, or interest on the Bonds or to enforce the performance of any provision of the Bonds, this Indenture, the Facility Lease Agreement or the Guaranty.
* * *
Section 8.05. Duties of Trustee. a) If an Event of Default has occurred and is continuing, the Trustee shall exercise its rights and powers and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of the person's own affairs."Id. at *2. The Illinois court analyzed these sections in light of other cases in which trustees sought authority to bring tort cases under indenture agreements, concluding that the sections did not grant such broad authority. As the court reasoned,
"Plaintiff here has been given the power under the Indenture to pursue `any available remedy,' but that language refers only to actions designed to `collect the principal of, premium, if any, or interest on the Bonds' or to enforce the performance of any provision of the Bonds or the Indenture. Section 7.08 does not give Plaintiff power to protect any and all rights of the bondholders or pursue bondholder's tort claims, nor does Plaintiff point to any other section of the Indenture where the bondholders assigned such claims to it. Without such an assignment in the Indenture, Plaintiff cannot proceed with an action for fraud."Id. at *5.
Likewise, here Regions Bank is given the power to pursue "any other available remedy" specifically to enforce payment under the agreement. Regions Bank may also pursue remedies to enforce "the observance and performance of any other covenant, agreement or obligation under this Indenture, the Lease, or any other instrument providing security, directly or indirectly, for the Bonds." Standing to bring tort claims on behalf of bondholders would thus have to fall under this second category. However, there is no other language establishing that compliance with securities statutes and other tort laws represents "any other covenant, agreement or obligation" under the indenture or any other instrument. Without more specific language granting the trustee the right to bring claims on behalf of the bondholders other than the enforcement of payment, this court cannot conclude that such authority is granted by the agreement.
Both parties also rely on the reasoning in In re Washington Pub. Power Supply Sys. Sec. Litig. (WPPSS), 623 F.Supp. 1466 (D. Wash. 1985), aff'd, 823 F.2d 1349 (9th Cir. 1987), which held that language in a bond resolution was broad enough to grant authority to the bond fund trustee to enforce any of the bondholders' rights. The relevant language authorized the bond fund trustee
"to institute such suits, actions and proceedings at law or in equity for the collection of all sums due in connection with the Bonds and to protect and enforce its rights and the rights of the holders of the Bonds under the Resolution . . . in the enforcement of any other legal or equitable right as the Bond Fund Trustee, being advised by counsel, shall deem most effectual to enforce any of its rights or the rights of the holders of the Bonds."Id. at 1483. The court in the Illinois case distinguished the language in WPPSS from that before it, holding that "[u]nlike the broad language in the WPPSS indenture, the remedies clause in Plaintiff's case omits any reference to protecting and enforcing the rights of the bondholders besides collecting on the bond or enforcing the performance of any provision of the bond."Regions, 2001 WL 726989, at *5.
In the case before this court, Regions Bank attacks the Illinois court's reasoning and attempts to analogize the language in this indenture agreement to that in the bond resolution inWPPSS. Yet Regions Bank does not address the omission of any specific reference to third-party enforcement rights in the indenture agreement before this court. Notwithstanding Regions Bank's arguments to the contrary, the distinction made in the Illinois case is meaningful, and the same omission precludes standing here as well. See also U.S. Bank Nat. Ass'n v. U.S. Timberlands Klamath Falls, L.L.C., 2004 WL 1699057 (Del.Ch. 2004) ("The remedy provision in Regions Bank is very similar to the language of section 6.3 and allows the trustee to pursue `any available remedy' in carrying out the purpose of the trust, which like section 6.3, is to collect on the notes or to enforce the indenture. In Regions Bank, the court, in holding that the trustee did not have the power to protect any and all rights of the bondholders or pursue the bondholders' tort claims, states that an indenture trustee has standing to bring tort claims on behalf of noteholders `only when the indenture carries a broad grant of authority to sue on behalf of the bondholders.' Id. at *5. The court then cites In re Washington Pub. Power Supply Sys. Sec. Litig., 623 F.Supp. 1466, 1483 (W.D. Wash. 1985), aff'd, 823 F.2d 1349 (9th Cir. 1987), for language broad enough to give the indenture trustee the authority to bring a tort claim on behalf of bondholders. In that case, the bond resolution allowed the trustee `to protect and enforce its rights and the rights of the holders of the Bonds under the Resolution . . . in the enforcement of any other legal or equitable right as the Bond Fund Trustee, being advised by counsel, shall deem most effectual to enforce any of its rights or the rights of the holders of the Bonds.' Such broad language was not present inRegions Bank and is not found in section 6.3. Without such language, the trustee does not have inherent authority to bring all non-contractual claims.")
An appropriate judgment will be entered.
JUDGMENT
In accordance with the memorandum opinion entered today, it is the ORDER, JUDGMENT, and DECREE of the court that:
(1) Defendant's motion to dismiss (Doc. no. 9) is granted.
(2) Defendant's motion for judgment on the pleadings (Doc. no. 9) is denied as moot.
(3) This lawsuit is dismissed in its entirety.
It is further ORDERED that all other pending motions are denied.
It is further ORDERED that costs are taxed against plaintiff, for which execution may issue.
The clerk of the court is DIRECTED to enter this document on the civil docket as a final judgment pursuant to Rule 58 of the Federal Rules of Civil Procedure.
DONE.