[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 03-11975 April 16, 2004
________________________ THOMAS K. KAHN
CLERK
D.C. Docket No. 02-01244-CV-JOF-1
GRAY MURRAY, SAM RAMSEY, KEN HENSON,
MARIAM LEWIS, BUD HARTLEY, individually and
as representatives of a Class of Certificate Holders of
TriCity Hospital Authority Revenue Certificates,
Plaintiffs-Appellants,
JUSTIN J. KARL, IRA LEE BROWN, FREDERICK C.
FOLLMER, SHARON R. FOLLMER, BOBBY G.
BANKSTON, RALPH B. TRUELOVE, LILLIAN A.
TRUELOVE, PHILIP H. DAVIS,
Consolidated-Plaintiffs-Appellants,
versus
U.S. BANK TRUST NATIONAL ASSOCIATION,
SOUTHTRUST BANK, f.k.a. Southtrust Bank, N.A.,
Defendants-Appellees,
RELIANCE TRUST COMPANY,
Consolidated-Defendant-Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
_________________________
(April 16, 2004)
Before ANDERSON, BLACK and HILL, Circuit Judges.
HILL, Circuit Judge:
This is an appeal from a district court order denying the bondholder
plaintiffs’ motion to certify a class action and dismissing their complaint without
prejudice on the grounds that they, as trust beneficiaries, lack standing to bring
suit against the three trust fiduciary defendants, or, in the alternative, that as to one
trust fiduciary defendant, their case is not yet ripe. Based on the following, we
affirm the judgment of the district court.
I. FACTUAL AND PROCEDURAL HISTORY1
In 1993, the Tri-City Hospital Authority (the hospital authority) issued
$39,140,000 in bonds and sold them to over one thousand bondholders. The bond
1
We recite the factual background, including the contentions of the parties, that form the
basis of the amended complaint and answer. By these recitations, however, we neither pass upon
nor intimate any resolution of these conflicting contentions. We refer to them purely to
illuminate the circumstances leading up to the dismissal of the amended complaint by the district
court. We adjudicate only the propriety, vel non, of the dismissal.
2
issue was governed by a trust indenture.2 The bondholders were the intended third
party beneficiaries of the trust indenture.
The hospital authority loaned $39,140,000 in bond proceeds to the South
Fulton Medical Center, Inc. (the medical center) to purchase a separate hospital
and its revenues, owned by the hospital authority, and to make necessary capital
improvements. In return, as collateral, the medical center gave the hospital
authority a security interest in the hospital’s personal property, most significantly,
its patient account receivables and inventory. Under the terms of the trust
indenture, a master trustee was appointed to oversee the transaction and collect
payments as they became due. The hospital authority pledged its security interest
to the master trustee.
In 2002, individual bondholders filed a seventy-seven page amended
complaint against three corporate defendants: (1) U. S. Bank Trust National
Association (U. S. Bank), the master trustee of the bonds from November 4, 1999,
to the present; (2) SouthTrust Bank (SouthTrust), the former master trustee of the
2
The term ‘trust indenture’ collectively refers to the Trust Indenture (dated November 1,
1993, between the Master Trustee and the hospital authority), the Master Trust Indenture (dated
November 1, 1993, between the Master Trustee and the medical center), the First Supplemental
Master Trust Indenture (dated November 1, 1993, between the Master Trustee and the medical
center), the Promissory Note and Form of Promissory Note (dated November 1, 1993, between
the Master Trustee and the medical center), and the UCC-1 Financing Statements (filed
December 22, 1993).
3
bonds from October 28, 1996, through November 4, 1999; and (3) Reliance Trust
Company (Reliance), the former servicing agent for the bonds from November 1,
1993, until March 16, 1999. The bondholders sought class certification under Fed.
R. Civ. P. 23(b)(3) or 23(b)(1) and declaratory relief against the defendants, on
behalf of themselves, and a proposed class of over one thousand bondholders, for
violations of the Federal Trust Indenture Act (FTIA), breach of contract, fraud and
misrepresentation, breach of fiduciary duty, and negligence.
At the core of their amended complaint, the bondholders allege that, as to
their secured interest in the hospital’s personal property, the defendants failed to
file a UCC-3 continuation statement on December 22, 1998.3 It is alleged that, on
that date, the perfected security interest that the bondholders held in their bonds
lapsed and they became unsecured creditors, expecting to receive only 30% of the
face value of their bonds.
When U. S. Bank assumed its fiduciary duties, it claims that it was unaware
that the bondholders’ perfected security interest had lapsed. In fact, U. S. Bank
3
The security interest was perfected when the original UCC-1 financing statement was
filed on December 22, 1993. O.C.G.A. § 11-9-302(1). It was effective for a five-year period.
O.C.G.A. § 11-9-403(2). Under Georgia law, once a security interest has been perfected, it must
be maintained by the filing of a UCC-3 continuation statement, within six months prior to the
expiration of the five year period beginning on the date the original financing statement was
filed. O.C.G.A. § 11-9-515. In this case, the UCC-3 was due to be filed anytime from June 22,
1998, to and including December 22, 1998.
4
further claims that, prior to taking control, while performing its final audit, both
SouthTrust and Reliance had expressly warranted and represented to it that they
had done everything necessary to maintain the perfection.
From November 1999, to April 2000, the medical center had continued to
make payments against the promissory note. In April 2000, however, it filed
voluntary petitions for bankruptcy under Chapter 11 of the Bankruptcy Code.
This was considered an event of default under Section 801 of the bond trust
indenture, hence voiding the bondholders’ security interest in the collateral.
In October 2001, U. S. Bank, as successor trustee, had filed suit on behalf of
the bondholders in the Superior Court of Fulton County, Georgia, alleging breach
of fiduciary duty and negligence against SouthTrust and Reliance, for failing to
file the UCC-3 continuation statements. It sought damages for the difference
between the value of the secured collateral and the amount actually received by the
bondholders upon a distribution by the bankruptcy estate. That case is now
pending in federal district court.4
4
U. S. Bank later dismissed its case pending in state court and refiled that case with the
federal district court. Expenses and attorneys’ fees are to be paid by the bondholders under the
terms of the trust indenture.
5
In July 2002, the present class action was filed. Here the bondholders, as
trust beneficiaries, seek class certification in an effort to replace U. S. Bank as the
proper plaintiff against SouthTrust and Reliance in pursuing their lapsed security
interest claims. They also seek to add U. S. Bank as a negligent and conflicted
defendant, claiming that it had a duty during the thirteen months prior to the
bankruptcy filing to discover that the UCC-3 continuation statements had not been
filed, and to either cure or mitigate the situation. The bondholders claim that U. S.
Bank lacks the incentive to prosecute SouthTrust and Reliance as rigorously as
they would.5
In rebuttal, U. S. Bank contends that, as the security interest did not lapse on
its watch, it has no conflict of interest. Further, U. S. bank argues that, as
SouthTrust and Reliance certified that all necessary filings had been done, it relied
on those certifications and was under no duty to do more. U. S. Bank claims to
have no liability as a joint tortfeasor.6
5
In April 2002, one set of bondholders filed a class action. In May 2002, another set of
bondholders filed a class action. The two lawsuits, comprised of thirteen individual bondholder
plaintiffs, were consolidated by order of the district court.
6
The bondholders claim that SouthTrust and Reliance greatly prefer U. S. Bank as the
proper party plaintiff in the action filed against them. The bondholders claim there may be
substantial affirmative defenses available to South Trust and Reliance, i.e., comparative
negligence, avoidance and proximate cause, against U. S. Bank, that would not be otherwise
available against the bondholders. See also note 13 infra.
U. S. Bank contends that, even if affirmative defenses are asserted against it by
6
The district court denied class certification and dismissed the action by the
bondholders against SouthTrust and Reliance. It found that general principles of
trust law and the terms of the trust indenture itself expressly provide that U. S.
Bank is the proper party with standing to assert claims against third parties on
behalf of the trust beneficiaries.
As to the suit by the bondholders against U. S. Bank, the district court
denied class certification and dismissed on the grounds that they lacked standing
to sue U. S. Bank. In the alternative, in a footnote, the district court held that their
claims were unripe until such time as it is determined whether or not the action
filed by U. S. Bank against SouthTrust and Reliance would make the bondholders
whole.
The bondholders appeal the judgment of the district court.
II. STANDARD OF REVIEW
SouthTrust and Reliance, it still has every incentive to maximize a full recovery for the
bondholders in its suit against SouthTrust and Reliance. To the contrary, the bondholders claim
that U. S. Bank has every incentive to downplay the amount of damages sustained when the
security interest lapsed because, it too, may be liable for such losses. However, U. S. Bank
admits that if it does not receive a full recovery, in all likelihood, they will be liable to the
bondholders for the shortfall.
Under the trust indenture, twenty-five percent (25%) of the bondholders could demand
that U. S. Bank be replaced as trustee. As a practical matter, the bondholders contend that there
is not a bank in the country that would voluntarily choose to get involved with the scenario
presented here, bankruptcy, lapsed security interests and multiple litigation.
7
We review orders denying class certification for abuse of discretion. See
Wooden v. Bd. of Regents of the Univ. Sys., 247 F.3d 1262, 1271 (11th Cir. 2001),
citing Prado-Steiman v. Bush, 221 F.3d 1266, 1278 (11th Cir. 2000).7 Nonetheless,
“[w]hether the district court applied the correct legal standard in reaching its
decision on class certification . . . is a legal question that we review de novo.” See
London v. Wal-Mart Stores, Inc., 340 F.3d 1246, 1251 (11th Cir. 2003), citing
James v. City of Dallas, 254 F.3d 551, 562 (5th Cir. 2001) (for the proposition that
a district court’s decision to deny certification of a class shall only be reversed
7
As artfully explained in Prado-Steiman:
Thus, it is well-settled that prior to the certification of a class, and technically
speaking before undertaking any formal typicality or commonality review, the
district court must determine that at least one named class representative has
Article III standing to raise each class subclaim. “[A]ny analysis of class
certification must begin with the issue of standing.” Griffin v. Dugger, 823 F.2d
1476, 1482 (11th Cir. 1987); see also Brown v. Sibley, 650 F.2d 760, 771 (5th Cir.
Unit A, July 1981)(stating that the “constitutional threshold [of standing] must be
met before any consideration of the typicality of claims or commonality of issues
required for procedural reasons by Fed.R.Civ.P. 23. “Only after the court
determines the issues for which the named plaintiffs have standing should it
address the question whether the named plaintiffs have representative capacity, as
defined by Rule 23(a), to assert the rights of others.” Griffin, 823 F.2d at 1482. It
is not enough that a named plaintiff can establish a case or controversy between
himself and the defendant by virtue of having standing as to one of many claims
he wishes to assert. Rather, “each claim must be analyzed separately, and a claim
cannot be asserted on behalf of a class unless at least one named plaintiff has
suffered the injury that gives rise to that claim.” Id. at 1483.
Prado-Steiman, 221 F.3d at 1280. Thus, just as a plaintiff cannot pursue an individual claim
unless he proves standing, a plaintiff cannot represent a class unless he has standing to raise the
claims of the class he seeks to represent. Id.
8
upon a showing that the court abused its discretion or that it applied incorrect legal
standards in reaching its decision).
III. DISCUSSION
A. The Trust Indenture
1. Section 805
The controlling section of the trust indenture is Section 805, entitled “Right
of [Bondholders] to Institute Suit.”8 Section 805 prohibits bondholders from suing
8
Section 805 reads in full:
No owner of any of the [bonds] shall have any right to institute any suit,
action or proceeding in equity or at law for the execution of any trust hereunder,
or for any other remedy hereunder or on the [bonds] unless (a) such owner
previously shall have given to the Trustee written notice of an event of default as
hereinabove provided [in Section 801;] (b) the owner, or owners, of 25% of the
outstanding principal amount of the [bonds] shall have made written request of
the Trustee after the right to exercise such powers or right of action, as the case
may be, shall have accrued, and shall have afforded the Trustee a reasonable
opportunity either to proceed to exercise the powers hereinabove granted, or to
institute such action, suit, or proceeding in its name; (c) there shall have been
offered to the Trustee security and indemnity satisfactory to it against the costs,
expenses and liabilities which may be incurred therein or thereby; and (d) the
Trustee shall have refused or neglected to comply with such request within a
reasonable period of time; and such notification, request, offer of indemnity and
refusal or neglect are hereby declared in every such case, at the option of the
Trustee, to be conditions precedent to the execution of the powers and trusts of
this Indenture or for any other remedy hereunder. The parties hereto intend that
no one or more owners of the [bonds] shall have any right in any manner whatever
by his or their action to affect, disturb or prejudice the security of this Indenture,
or to enforce any right hereunder, except in the manner herein provided, and that
all proceedings at law or in equity shall be instituted, had and maintained in the
manner herein provided and for the equal benefit of all owners of the outstanding
[bonds].
Nothing in this Article contained shall, however, affect or impair the right
9
third parties unless: (1) they have provided written notice to the Trustee; (2) 25%
of the bondholders have made such a request; (3) the bondholders have offered to
indemnify the Trustee; and (4) the Trustee nonetheless refuses the request. The
three fiduciary defendants argue that the bondholders lack standing to bring suit
against them because these four conditions have not been met, and therefore, that
they must await the outcome of the action filed on their behalf. If a full recovery
is made, the bondholders’ alleged claims would be moot.9
2. Section 902
In rebuttal, the bondholders claim that Section 902 of the trust indenture, in
essence, trumps Section 805, when the current trustee is also negligent. Although
of any owner of a [bond], which is absolute and unconditional, to enforce the
payment of the principal of and interest on such owner’s [bonds] out of the
moneys provided for such payment, or the obligation of the [hospital authority] to
pay the same out of the sources pledged hereto, at the time and place expressed
herein.
9
Clauses such as set forth in Section 805 of the trust indenture are referred to as ‘no-
action clauses.’ See Cruden v. Bank of New York, 957 F.2d 961, 967-969 (2d Cir. 1992). As
trust indentures commonly vest exclusive power in the indenture trustee to enforce remedial
provisions in the event of a default, ‘no-action’ clauses typically bar bondholders from instituting
any judicial proceedings against the obligor unless the indenture trustee refuses to act after being
instructed by the requisite number of bondholders specified in the trust indenture, or, if the
indenture trustee acts in bad faith, or, has an adverse interest conflicting with its responsibilities
under the trust indenture. Id.; see also Watts v. Missouri-Kansas-Texas R. Co., 383 F.2d 571 (5th
Cir. 1967). Such ‘no-action’clauses have generally been upheld by the courts in order to avoid a
multiplicity of lawsuits and to ensure that any litigation will inure for the equal and ratable
benefit of all bondholders. See Friedman v. Chesapeake & O.R.Co., 395 F.2d 663 (2d Cir.1968).
10
Section 902 is over three pages long, the bondholders cite only the following
language: “No provision of this Indenture shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act, or its
own willful misconduct . . . .”10
II. The Bankruptcy Court Order
The bondholders argue that the trust indenture was terminated by the
December 20, 2001, order of the bankruptcy court. They claim, therefore, that any
limitation in Section 805 in the trust indenture, such as the 25% rule, on their right
to sue third parties has been removed. The order provides in pertinent part:
The Master Indenture, the Certificate Indenture and the [bonds]
issued thereunder shall terminate as of the effective date . . . except as
necessary to administer the rights, claims, liens, and interests of the
Master Trustee, the Certificate Trustee and the [bondholders], except
[they] shall continue in effect to the extent necessary to allow the
Master Trustee and the Certificate Trustees to receive distributions
pursuant to the Plan . . . and to the extent necessary to facilitate the
Master Trustee’s prosecution for settlement of that certain action
venued in the Superior Court of Fulton County, Georgia and
Captioned U. S. Bank Trust, National Association v. SouthTrust Bank
et al . . . .
10
The bondholders try to buttress this argument by contending that, in addition to Section
902 of the trust indenture, Georgia law specifically and independently authorizes a cause of
action against a trustee whose acts and omissions result in injury to another person: “When trust
or confidence is reposed in a person in consideration of a payment or promise of a reward to him,
negligence in the person trusted which results in injury to the other person shall give the injured
party a right of action.” O.C.G.A. § 51-1-19.
11
(Emphasis added).
The district court found that the trust indenture was only partially
terminated by the bankruptcy court. It held it was still effective to administer “the
rights, claims, liens, and interests of the trustee and the bondholders” and “to
facilitate U.S. Bank’s suit against SouthTrust and Reliance on behalf of the trust
beneficiaries, the bondholders.”11 We agree.
III. Georgia Trust Law
1. The Turner Case
This case is governed by Georgia law. In Turner v. Trust Co. of Georgia,
105 S.E.2d 22 (1958), the current trustee filed suit against a former trustee for
malfeasance. The trust beneficiaries attempted to sue the former trustee directly.
They claimed that the advocacy espoused by the current trustee was deficient in
that he wasn’t pursuing their case against the third party tortfeasor in the manner
that fully represented their interest in the trust estate.
The Supreme Court of Georgia in Turner affirmed the restraint of the trust
beneficiaries from proceeding further with their suit. It held that, where the
11
The bondholder get the ‘nice try of the week’ award when they claim that the trust
indenture has been fully terminated as the bankruptcy court order only references
U. S. Bank’s state action, not its later, removed, federal action.
12
instruments creating the trust confer upon the trustee discretionary power to be
exercised according to its judgment, a court of equity will not interfere to control
the trustee, acting bona fide, in the reasonable exercise of its discretion. Turner,
105 S.E.2d at 26 (citations omitted).12 The court also found that the beneficiaries
were bound by the result of the suit instituted by the trustee for the benefit of the
trust estate. Id. at 27(citations omitted). Their remedy lay against the current
trustee if there was a loss. Id. We find Turner applies on all fours here.
Both parties agree that Turner controls the disposition of this case, but for
different reasons. Both parties cite to the same paragraph of Turner as indicative
of their position:
Where the title to property is put in one person for the benefit of
others, the latter take cum onere. The skill, ability, and solvency of
the trustee operate to their advantage. But as to acts within the scope
of his express or implied powers, they must suffer the consequences
when they ultimately prove detrimental to the beneficiaries. The
remedy in such a case is not to undo what has lawfully been done, but
to proceed against the trustee, . . . whose personal and financial
fitness were passed upon by the grantor when giving the land. The
very instrument which created the estate put forward the trustee as the
person who was to represent those interested therein when it became
necessary to deal with third persons.
12
The Turner court illustrated its rationale using a hypothetical trust with four
beneficiaries, each demanding a different course of action. Turner, 105 S.E.2d at 28. The trustee
is bound to consider what effect each of the four courses of action will have upon the trust estate
and use its best judgment. Id. It would be intolerable if multiple beneficiaries were each trying
to do the job given the trustee in the trust indenture.
13
Turner, 105 S.E.2d at 27 (emphasis added).
a. The Contentions of U. S. Bank as to Turner
U. S. Bank relies on key language in the paragraph that states that “they
must suffer the consequences when they ultimately prove detrimental to the
beneficiaries.” It claims that the consequences here have not, as yet, been
‘ultimately proved detrimental.’
It is undisputed that U. S. Bank has the authority to sue its predecessor
trustee for a harm done to the trust estate. Therefore, under Turner, when it is
acting within the scope of its authority, it must be allowed to complete that action.
If that action should ultimately prove detrimental to the beneficiaries, then, at that
point in time, the beneficiaries might have a cause of action, but not before.13
b. The Contention of the Bondholders as to Turner
The bondholders rely on the language in the Turner paragraph that states
that their remedy is “to proceed against the trustee.” They interpret that to mean
directly and immediately. They argue that, as the Turner trustee had no conflict of
interest, and, as U. S. Bank in this case does have a conflict of interest, an
13
We have found no case law as to whether or not certain affirmative defenses, such as
avoidance, comparative negligence and proximate cause, potentially available against the trustee
and not the bondholders, would be sufficient cause to create an exception to the Turner rule.
14
exception to the ‘ultimate’ language in Turner is created, and Turner must be read
in conjunction with case law dealing with conflicted trustees.
2. When the Trustee has a Conflict of Interest
a. The Tate case
In Fulton Nat’l Bank v. Tate, 363 F.2d 562, 570 (5th Cir. 1966), the trustee
was allegedly involved in self-dealing, both on his own behalf and in his capacity
as trustee, with a third party purchaser. The trustee was allegedly selling trust
property at a discount in order to garner a better price for his own property. The
Fifth Circuit found that there was such substantial conflict of interest on the
trustee’s part as, under Georgia law, to shift the burden of proof to the trustee to
demonstrate to the court that self-dealing was not present.
b. The Booth case
In Booth v. Sec. Mut. Life Ins. Co., 155 F. Supp. 755 (D.N.J. 1957), the
trustee conspired with third parties to loot the trust estate. It actively participated
in the wrongdoing by third parties. The district court found that the trust
beneficiaries, and not trustee, were the proper class plaintiffs in a class action
against an insurance company for alleged breaches of trust and diversions of trust
funds in connection with writing of group insurance for the trust fund.
c. The Conflict of Interest Alleged Here
15
The bondholders aver that U. S. Bank has a conflict of interest in its suit
against SouthTrust and Reliance because it should have discovered that the UCC-
3 statements weren’t filed, cured the problem by filing a new ones, and mitigated
the damage. We disagree.
What is alleged to have taken place here is not the self-dealing, conspiracy
or corruption that were present in Tate or Booth. The allegation made by the
bondholders here is of a separate wrong by U. S. Bank, independent of any action
or inaction on the part of SouthTrust and Reliance.
Clearly, U. S. Bank is not a joint tortfeasor. We conclude that any conflict
of interest alleged here is not significant enough for us to carve out an exception to
the rule of Turner, under the auspices of either Tate or Booth.14
3. Standing to Sue SouthTrust and Reliance
Therefore, under Georgia trust law, pursuant to the terms of the trust
indenture, kept alive in full by the bankruptcy plan of reorganization, U. S. Bank is
the party with standing to pursue the claims against SouthTrust and Reliance on
14
U. S. Bank claims it has every incentive to exonerate itself by making a full recovery
against SouthTrust and Reliance. To the contrary, the bondholders allege that U. S. Bank has
every incentive to downplay the amount of damages incurred as it too may be liable. They claim
that U. S. Bank is seeking only two million dollars in damages, when in fact, they claim that the
amount is at least six million dollars. The issue of the proper calculation of damages is presently
before the district court on a motion for partial summary judgment.
16
behalf of the trust beneficiaries. See Turner, 105 S.E. 2d at 26. The issue of the
duty of U. S. Bank to act to cure and mitigate will never be adjudicated if it
receives a full recovery from the third party tortfeasors. Id. The bondholders will
be bound by the result and their remedy will then be against U. S. Bank if there is
a loss. Id. at 27.
4. Ripeness and the Statute of Limitations as to U. S. Bank
If and when U. S. Bank receives less than a full recovery, then and only
then, will any potential cause of action against it by the bondholders ripen and
accrue. See Turner, 105 S.E.2d at 27. At that time, the statute of limitations will
begin, and the bondholders will have their claim, as the actions taken by the
trustee, within the scope of its express or implied powers, have ultimately proved
detrimental to them, the trust beneficiaries. Id. The merits of the issue presented,
whether or not U. S. Bank had a duty to act to cure and mitigate, will then be
before a different court.
IV. CONCLUSION
Based upon the foregoing, we affirm the judgment of the district court.
AFFIRMED.
17
18