[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
____________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
JULY 18, 2006
Nos. 04-16650, 04-16651, 05-10031
THOMAS K. KAHN
_____________
CLERK
D.C. Docket Nos. 03-01903-CV-T-17MAP, 03-01904-CV-T-17TGW, 04-01668-
CV-T-17EAJ & 92-16406-8B1
IN RE: Sunshine Jr. Stores, Inc.
d.b.a. Sunshine Supermarkets
d.b.a. Jr. Food Stores,
Debtor.
____________________________________________________
BANK OF NEW YORK,
Plaintiff-Appellant,
versus
SUNSHINE-JR. STORES, INC.,
Defendant-Appellee.
______________
Appeals from the United States District Court
for the Middle District of Florida
_____________
(July 18, 2006)
Before TJOFLAT and BARKETT, Circuit Judges, and MILLS*, District Judge.
*Honorable Richard Mills, United States District Judge for the Central District of Illinois,
sitting by designation.
TJOFLAT, Circuit Judge:
In this Chapter 11 case, the bankruptcy court sanctioned the Bank of New
York (“BONY”) for repeatedly refusing to obey several orders the court issued for
the benefit of Sunshine-Jr. Stores, Inc. (The “Debtor”). First, the court struck
BONY’s response to the Debtor’s claim for interest on funds BONY held as a
fiduciary for the Debtor. Second, having struck BONY’s response, the court gave
the Debtor judgment for the interest. Third, the court ordered BONY to pay the
Debtor’s attorney’s fees.
BONY appealed these decisions to the district court, which affirmed.
BONY now appeals to this court. BONY acknowledges that it held the Debtor’s
funds, as alleged, but asserts that it was not doing so as a fiduciary and thus had no
obligation to pay interest on those funds. As for the sanctions, BONY contends
that they were inappropriate on several grounds. We are unpersuaded by BONY’s
arguments and therefore affirm.
Part I of this opinion sets out the factual background of this case. Part II
analyzes BONY’s various challenges to the bankruptcy court’s imposition of
sanctions, award of interest, and award of attorney’s fees. Part III addresses
BONY’s claim that it was an Indenture Trustee with contractual duties, not a
conventional trustee with an implied fiduciary duty. Part IV briefly concludes.
2
I.
In December 1992, the Debtor commenced Chapter 11 bankruptcy
proceedings in the United States Bankruptcy Court for the Middle District of
Florida. On May 12, 1994, the bankruptcy court confirmed the Debtor’s Plan of
Reorganization (“Reorganization Plan”). As part of the Reorganization Plan, the
Debtor executed a Trust Indenture Agreement (also referred to herein as the
“Agreement”). The purpose of the Agreement was to establish an efficient method
for paying the Debtor’s general unsecured creditors (“Class 7 Creditors”), who
were numerous and geographically scattered. Under the Agreement, each Class 7
Creditor was issued a promissory note (the “Notes”) in satisfaction of its allowed
claim.1 These Notes were then secured by a lien on substantially all of the
Debtor’s assets, valued at approximately $14 million (the “Collateral”).2
To avoid the administrative difficulties of having each individual
Noteholder hold a lien on the Collateral, the Trust Indenture Agreement appointed
1
The Notes were set to mature on May 12, 1999, the fifth anniversary of the
confirmation. No payments were to be made to Noteholders during the first year after
confirmation. Beginning with the second year, principal and interest were to be paid by the
Debtor on a quarterly basis.
2
Section 1.01 of the Trust Indenture Agreement defines “Collateral” as the real and
personal property of the Debtor, any individual item of such real and personal property, and the
“Escrow Account.” That section defines “Escrow Account” as an account established and owned
by the Debtor into which the Debtor is required to place the net proceeds from the sale of any of
the Collateral that secures the Notes, with certain specified exceptions not relevant to this appeal.
3
an Indenture Trustee to hold the liens in trust for the benefit of all Noteholders.3
The Agreement limited the responsibilities and duties of the Indenture Trustee to
those specifically set forth in the Agreement, qualified under the Trust Indenture
Act of 1939 (“TIA”).4 The Agreement also permitted the creation of a separate
trust in which the Debtor would place funds sufficient to satisfy the principal and
interest of the Notes in full, if the Debtor decided to call the Notes in advance of
maturity (the “Prepayment Funds”).5 The Debtor appointed NationsBank as the
Indenture Trustee.
In 1995, E-Z Serve Convenience Stores, Inc. (“E-Z Serve”) agreed to
acquire the Debtor and its assets, including the Collateral.6 To allow the
acquisition to proceed, the Debtor on July 6, 1995 moved the bankruptcy court to
enter an order allowing all of the Notes to be called and prepaid in full, and
3
The Indenture Trustee was empowered to sue the Debtor for payment of the Notes on
behalf of the Noteholders or foreclose on the liens.
4
15 U.S.C. §§ 77aaa-77bbbb (2005).
5
Section 15.01 of the Trust Indenture Agreement provided that “[t]he Notes may be
prepaid before their Stated Maturity in accordance with their terms and in accordance with this
Article, and Section 4.01 G.” Section 4.01 G stated that “[t]he Company shall have the option to
prepay the Notes in whole or in part (in increments of $250,000.00), without premium or penalty.
Prepayments can be made at any time upon at least five days’ written notice.”
6
For simplicity, “Debtor” will refer collectively to Sunshine-Jr. Stores, Inc. and its
successor-in-interest, E-Z Serve.
4
directing the Indenture Trustee to release its liens on the Collateral. The
bankruptcy court granted the Debtor’s motion, and on October 2, 1995, the Debtor
called the Notes for prepayment and deposited with NationsBank approximately
$1 million, the amount necessary to prepay all of the Notes. The Notes became
immediately due and payable by the Debtor when they were called and ceased to
accrue interest. Upon receipt of the Prepayment Funds, NationsBank released the
liens on the Collateral.
In December 1995, BONY acquired the corporate trust division of
NationsBank. As part of this acquisition, NationsBank transferred to BONY
$983,935.11 in Prepayment Funds that had yet to be claimed by Noteholders. The
record does not indicate whether BONY also received from NationsBank a copy
of the Trust Indenture Agreement or the Debtor’s Reorganization Plan, or whether
it was otherwise apprised of the circumstances under which NationsBank came
into possession of the Prepayment Funds. BONY nevertheless disbursed
Prepayment Funds to those Noteholders who tendered their Notes.
According to the Debtor, it made several requests of two BONY officers,
Irene Siegel and Janet Lee (née Wong), to account for those Noteholders who had
yet to tender their Notes for payment. BONY then provided what the Debtor
regarded as an inaccurate printout of the unpaid Noteholders. Based on this
5
printout, the Debtor issued a second call notice to Noteholders. BONY paid those
Noteholders who then tendered their Notes. During this period, the Debtor
continued to ask BONY for a more accurate accounting, but BONY did not
respond to its requests.
On April 24, 2000, the Debtor moved the bankruptcy court to issue an order
requiring BONY to provide a final accounting for all payments NationsBank and
BONY made to Noteholders, and to establish procedures for paying those
Noteholders who sought payment but had lost their Notes. The Debtor served the
motion on “Janet Wong, Bank of New York” that day. BONY did not oppose the
motion or otherwise respond to it. The court granted the motion and ordered
BONY to provide the Debtor with a full accounting no later than June 1, 2000.7
The order further stated that “[i]f the Indenture Trustee fails timely to provide said
accounting and statement [of all claimants for whom funds still are being held],
this Court shall issue an Order to Show Cause as to why the Indenture Trustee has
failed and refused to fulfill its fiduciary duty to the Debtor.” BONY did not
provide the Debtor with a final accounting by the date mandated by the court, nor
7
Specifically, the bankruptcy court ordered BONY to “provide the Debtor’s counsel with
an accounting of all payments made pursuant to the Trust Indenture, as well as a statement of all
claimants for whom funds still are being held, their addresses and the listed amounts of their
allowed claims (the face amount of their note).”
6
did it otherwise respond to the court’s order.
On December 13, 2000, the Debtor moved the court for an order “directing
The Bank of New York to pay EZ Serve [sic] all remaining money that it has on
deposit pursuant to the trust indenture, plus any and all other funds which
currently are in its custody, possession and control that in any way relate to [the
Debtor].”8 The Debtor served this motion on “Irene Siegal, Vice President, The
Bank of New York” the same day. Again, BONY did not oppose or otherwise
respond to the motion. The court granted the motion on February 23, 2001, and
ordered BONY to provide to the Debtor’s counsel “a complete accounting
reflecting all payments made to creditors” no later than March 31, 2001 (the
“February 23 Order”). The court further directed the Debtor to publish a notice in
periodicals serving those areas in which most of the remaining Noteholders
resided, stating that all outstanding claims and Notes had to be tendered for
payment within 30 days of the notice publication date. After that 30-day period
expired, the Prepayment Funds held by BONY would be returned to the Debtor “in
8
The Debtor’s motion was based on 11 U.S.C. § 347(b), which states:
Any security, money, or other property remaining unclaimed at the expiration of the time
allowed in a case under chapter 9, 11, or 12 of this title for the presentation of a security
or the performance of any other act as a condition to participation in the distribution
under any plan confirmed under section 943(b), 1129, 1173, or 1225 of this title, as the
case may be, becomes the property of the debtor or of the entity acquiring the assets of the
debtor under the plan, as the case may be.
11 U.S.C. § 347(b) (2005).
7
accordance with federal law.” The Debtor published the notice on March 30,
2001, and filed a Notice of Publication with the court on April 10, 2001.9 Again,
BONY did not respond to the court’s order, and did not release the Prepayment
Funds to the Debtor.
On May 11, 2001, the Debtor moved the court for an “order to show cause,”
alleging that although BONY had “provided the Debtor with some information
about ‘recent’ payments, it ha[d] failed to provide a complete accounting, which
would allow the Debtor to conclude the case.”10 The Debtor served this motion on
“Irene Siegal, Vice President, and Janet Wong, of The Bank of New York.” Even
though an amended motion for an order to show cause was served on Siegal and
Wong on May 14, 2001, and a second amended motion was sent by certified mail
to Wong on May 31, 2001, BONY did not respond.11 The court granted the
Debtor’s motion on June 14, 2001, and entered an order commanding BONY to
9
Pursuant to the February 23 Order, the Debtor was entitled to receive the unclaimed
Prepayment Funds from BONY after April 29, 2001 or, presumably, the next business day.
10
Neither the May 11 motion for an order to show cause nor the first and second
amended motions referred to in the following text indicated the relief the Debtor was seeking.
Although the record is silent on the point, we assume that the Debtor was invoking the court’s
civil contempt power under 11 U.S.C. § 105. See Hardy v. United States, 97 F.3d 1384, 1389
(11th Cir. 1996).
11
The Debtor’s first motion was filed by E-Z Serve. The first amended motion was filed
by Swifty Serve, Inc., which purported to be Sunshine-Jr. Stores, Inc.’s successor-in-interest.
The second amended motion was identical to the first, except that it was served on Wong by
certified mail.
8
appear before the court on August 13, 2001 “to show cause why the Debtor should
not be granted the relief requested.” As before, BONY ignored the order and
failed to appear on August 13, 2001 as directed.
At the August 13 hearing, the court stated that BONY owed both the Debtor
and the court a fiduciary duty, and that it had failed to carry out that duty.
Accordingly, the court stated its intention to set an evidentiary hearing at which it
would determine the reasonable interest rate that BONY owed to the Debtor on the
Prepayment Funds. The court also stated that it would determine the appropriate
attorney’s fees and costs to charge BONY for its failure to comply with the court’s
orders.
On September 12, 2001, the court entered an “Order to Show Cause for
Contempt Against Bank of New York,” reiterating what it had announced at the
August 13 hearing (the “September 12 Order”). In that order, the court held (1)
that “BONY owes a fiduciary duty to this Court, the Reorganized Debtor, and its
creditors;” (2) that “BONY’s fiduciary duty includes an obligation to provide this
Court and the Reorganized Debtor with an adequate accounting of the funds it
received, those it has paid, and the amount it continues to hold for the Reorganized
Debtor and its creditors;” and (3) that “BONY’s fiduciary duty includes payment
of reasonable interest on the funds that it holds for the Reorganized [Debtor].”
9
The court therefore ordered BONY within 20 days to transfer to a trust account
maintained by the Debtor’s counsel all funds that it was holding for the Debtor.
The September 12 Order also scheduled a hearing for October 30, 2001 “to
determine the reasonable interest rate that BONY shall be required to pay for the
funds it has held on behalf of the Reorganized Debtor and its creditors,” and to
“determine the appropriate amount of fees and costs to surcharge against BONY
for its failure to follow this Court’s Orders and to provide an appropriate
accounting.”
On October 29, 2001, BONY finally appeared before the court.12 At that
hearing, BONY acknowledged that it had not responded to the court’s previous
orders, and informed the court that it was in possession of $487,844.90 of
Prepayment Funds that had yet to be disbursed to Noteholders. The court ordered
BONY immediately to return the unclaimed Prepayment Funds to the Debtor,13
which it did. The court also ordered the parties to meet in a good faith effort to
reach a final accounting of the Prepayment Funds. The court retained jurisdiction
to determine “the reasonable interest rate that [BONY] may be required to pay” on
12
The court rescheduled the hearing for October 29, 2001 at the request of the Debtor.
13
The court stated that “[t]he transfer of the [Prepayment] Funds . . . shall be in full and
complete satisfaction of [BONY]’s obligations to creditors pursuant to the Reorganized Debtor’s
plan of reorganization and shall absolve [BONY] from any further liability to such creditors.”
10
the Prepayment Funds, and the amount of the Debtor’s attorney’s fees and costs
BONY should be surcharged for its “failure to comply with the Court’s prior
orders.”
On April 16, 2002, the Debtor’s counsel moved the court for an order
awarding it “reimbursement for the fees and expenses incurred to obtain a final
accounting from the Bank of New York . . . during the period beginning December
8, 2000 and ending October 26, 2001.” The motion stated that BONY’s counsel
“began to be responsive on or about October 26[, 2001]; however, the Debtor did
not receive an accounting for several months thereafter.” In an April 26, 2002
order, the court directed the Debtor to “commence a contested matter by filing a
Motion seeking interest on the amounts held by BONY,” and BONY to “respond
to the Debtor’s Motion and to its [attorney’s] fee application” by June 14, 2002.
On May 16, 2002, the Debtor filed a “Motion to Surcharge [BONY] and to
Direct Payment of Interest” (the “Surcharge Motion”), in which it sought “an
Order surcharging [BONY] and directing it to pay the Debtor interest, or
investment income, on the funds held by BONY pursuant to [the] Trust Indenture
[Agreement].” The Debtor asserted that under Florida law, BONY had breached
its fiduciary duty to provide the Debtor with a timely accounting and to invest the
Prepayment Funds it held in trust. The Debtor also claimed that BONY had
11
violated the terms of the Trust Indenture Agreement, which required the
Prepayment Funds promptly to be returned to the Debtor three years after the
Notes became due and payable. As the Notes were called on October 2, 1995,
BONY was required to return the Prepayment Funds on October 3, 1998, but
BONY did not do so until ordered by the court on October 29, 2001. The Debtor
calculated that it was entitled to $273,343.87 in interest.
In opposition to the motion, BONY argued that it did not owe any interest
on the Prepayment Funds because it was an Indenture Trustee under the Trust
Indenture Agreement. The TIA, which governs the creation of Trust Indentures,
states that an Indenture Trustee would be under no obligation to perform any
duties other than those expressly set forth in the trust indenture.14 BONY therefore
asserted that its obligations to the Debtor and the Noteholders were solely
contractual, and that Section 10.06 of the Agreement specifically stated that “the
Trustee shall be under no liability for interest on any money received by it
14
The TIA, at 15 U.S.C. § 77ooo(a)(1), states:
(a) Duties prior to default:
The indenture to be qualified shall automatically be deemed
(unless it is expressly provided therein that any such provision is
excluded) to provide that, prior to default (as such term is defined
in such indenture) –
(1) the indenture trustee shall not be liable except for the
performance of such duties as are specifically set out in such
indenture. . . .
12
hereunder except as otherwise agreed with the [Debtor].” BONY offered no
alternative method for calculating the interest on the Prepayment Funds in the
event the court found that interest was owed to the Debtor.
The court scheduled a final evidentiary hearing for September 17, 2002, to
assess such interest. At BONY’s request, it postponed the hearing to April 17,
2003. On September 19, 2002, the Debtor served a “Request for Production of
Documents” on BONY seeking information related to the Trust Indenture
Agreement, BONY’s investment of the Prepayment Funds, and BONY’s interest
income on unrelated trust indentures. In a letter dated October 29, 2002, the
Debtor outlined the topics on which it sought to depose BONY and certain of its
employees. The Debtor followed this letter with a formal deposition notice,
pursuant to Federal Rule of Bankruptcy Procedure 7030 and Federal Rule of Civil
Procedure 30(b)(6),15 on November 13, 2002. BONY agreed to produce certain
documents and to be deposed on certain topics, but otherwise objected to the
15
Fed. R. Bank. P. 7030 incorporates by reference Fed. R. Civ. P. 30. Rule 30(b)(6)
states, in relevant part:
A party may in the party’s notice and in a subpoena name as the deponent a public or
private corporation . . . and describe with reasonable particularity the matters on which
examination is requested. In that event, the organization so named shall designate one or
more officers, directors, or managing agents, or other persons who consent to testify on
its behalf, and may set forth, for each person designated, the matters on which the person
will testify. . . . The persons so designated shall testify as to matters known or reasonably
available to the organization.
Fed. R. Civ. P. 30(b)(6).
13
requests. On November 15, 2002, BONY moved the court for a protective order.
Thereafter, the Debtor’s counsel deposed several of BONY’s employees.
On January 29, 2003, the court granted in part and denied in part BONY’s
motion for a protective order (the “January 29 Order”). It also entered a discovery
order. The order instructed BONY to produce documents and witnesses pertaining
to: (1) the interest BONY had paid on funds received under unrelated trust
indentures; (2) BONY’s normal course of business investment strategy regarding
trust funds received and invested; (3) BONY’s rate of return on trust funds it
invested in a fiduciary capacity; (4) the rate of interest BONY was paying on trust
funds it received; and (5) BONY’s normal strategy for handling trust funds. The
court ordered BONY to provide this information for the period from December
1995 to October 2001. In addition, the court ordered the Debtor to produce all
documents relating to the Debtor’s counsel’s fees and costs, and the interest that
had been earned on the funds BONY had turned over to the Debtor.
Instead of producing the documents and witnesses as ordered, BONY
moved to dismiss the contested matter for lack of subject matter jurisdiction.
Along with its motion to dismiss, BONY filed yet another motion for a protective
order in which it asked the court to stay discovery of the information that the court
had ordered BONY to produce. The court denied both motions.
14
Thereafter, counsel for the parties exchanged correspondence in which
BONY insisted that the Debtor’s discovery requests were too broad to be
manageable, and asked the Debtor to narrow the scope of its requests. In any
event, the Debtor did not receive the information to which the court’s January 29
Order referred. On April 2, 2003, the Debtor moved the court for sanctions. It
asked the court to (1) hold BONY in contempt of court for failure to comply with
the January 29 Order; (2) strike BONY’s defenses to the Surcharge Motion; (3)
award the Debtor interest on the Prepayment Funds at the Florida statutory interest
rate; (4) prohibit BONY from introducing evidence on the rate and amount of
interest applicable to the Prepayment Funds; and (5) award the Debtor attorney’s
fees.
In its written opposition to that motion, BONY denied that it had refused to
comply with the court’s order. Rather, BONY claimed that it attempted to
facilitate an efficient process by which the Debtor’s counsel could review the
documents described in the January 29 Order which, according to BONY, were
numerous and voluminous. BONY also reasserted the defense it had raised in its
opposition to the Surcharge Motion by claiming that “[u]nder the bright light of
prevailing federal law on trust indentures, [the Debtor] is not entitled to the relief
it has demanded.” In other words, BONY again claimed that it was an Indenture
15
Trustee, not a common law trustee, and therefore was under no obligation to the
Debtor to pay interest on the Prepayment Funds.
At an April 7, 2003 hearing, the court stated that it was unpersuaded by
BONY’s arguments, and granted the Debtor’s motion in full.16 Clearly frustrated
by BONY’s recalcitrance, the court emphasized in its May 9, 2003 order (which
memorialized the decision it had reached at the April 7 hearing) that BONY was
still unprepared to provide the information regarding the Prepayment Fund interest
rate described in the January 29 Order. It found that BONY’s failure to provide
the Debtor with documents and witnesses as required constituted “slacking off,”
“dawdling, putting up barriers and obfuscating.”
Citing Chambers v. NASCO, Inc., 501 U.S. 32, 111 S. Ct. 2123, 115 L. Ed.
2d 27 (1991), the court observed that it had the inherent power to sanction litigants
for bad faith conduct. Given that BONY repeatedly had ignored the court’s orders
between April 2000 and October 2001, and had refused to comply with the
Debtor’s discovery requests even after being ordered to do so, the court concluded
that BONY had acted in bad faith and that sanctions were appropriate. The court
awarded the Debtor the attorney’s fees and costs it had incurred from December 8,
16
The court also cancelled the final evidentiary hearing that was to take place on April
17, 2003.
16
2000 to October 26, 2001, which amounted to $14,440.19. The court also allowed
the Debtor to amend its attorney’s fee application to reflect work counsel had
performed through April 17, 2003.
In addition, the May 9 order included a “default” against BONY on the
question of Prepayment Funds interest. The court did not explicitly address
whether BONY was an Indenture Trustee or a common law trustee, i.e., whether in
either capacity, BONY was liable to the Debtor for interest on the Prepayment
Funds. Rather, the court quoted the portion of its September 12, 2001 order in
which it held that BONY owed the Debtor a fiduciary duty that included paying
interest, and moved directly to the amount of interest BONY owed, which it
calculated to be $285,568.29.17 In effect, the court struck sub silentio BONY’s
opposition to the Surcharge Motion, in which it argued that it was an Indenture
Trustee without any liability for interest; the bankruptcy court never considered
the merits of that argument. On June 23, 2003, the court entered a final judgment
on its award of interest and attorney’s fees to the Debtor.
BONY appealed the imposition of these sanctions to the district court. The
17
The court ordered BONY to pay interest on the Prepayment Funds at the prime rate,
compounded monthly, beginning in April 1996 and ending on October 30, 2001. The court
chose April 1996 based on its belief that many of the Notes would have been paid in the first six
months after the Notes were called. Apparently, the court believed that BONY would have
waited until after this flurry of redemptions to invest the funds.
17
district court affirmed the imposition on two grounds. First, it concluded that
BONY’s repeated failure to obey the bankruptcy court’s orders warranted the
attorney’s fees sanction. Second, the court determined that BONY was a common
law trustee, not an Indenture Trustee, and as such owed the Debtor a fiduciary
duty, including the obligation to disgorge any interest it had earned on the
Prepayment Funds. By addressing the question of whether BONY was an
Indenture Trustee, as BONY contended, the court decided the merits of an
argument the bankruptcy court had declined to consider. Put another way, the
court approached the bankruptcy court’s sub silentio strike of BONY’s Indenture
Trustee defense as if the bankruptcy court had actually considered the defense and
rejected it.
The district court reasoned that the Trust Indenture Agreement terminated
when the Debtor transferred the Prepayment Funds to NationsBank. “When
sufficient funds were provided to satisfy the outstanding notes, the trustee’s
authority ended and the rights and obligations under the [Trust Indenture
Agreement] were extinguished.” Thus, NationsBank held the Debtor’s
Prepayment Funds as a conventional trustee under a trust separate from the trust in
which the Indenture Trustee held the liens on the Debtor’s Collateral. When
BONY purchased NationsBank’s corporate trust division it, too, became a
18
conventional trustee with a fiduciary duty, as opposed to an indenture trustee with
contractually-based obligations. Citing 11 U.S.C. § 347(b), the court concluded
that BONY had a fiduciary duty to return to the Debtor any proceeds earned on the
Prepayment Funds.
The district court also rejected BONY’s argument that the bankruptcy court
had denied it due process of law in imposing the sanctions. BONY claimed that it
did not receive adequate notice from the bankruptcy court that its conduct could
result in sanctions. However, the bankruptcy court’s finding that BONY
repeatedly ignored numerous motions served by the Debtor, and orders issued by
the court, convinced the district court otherwise. The court therefore concluded
that the bankruptcy court had not abused its discretion when it invoked its inherent
powers to sanction BONY. The court also noted that BONY deliberately withheld
information from the Debtor in breach of its fiduciary duty, which exposed it to
sanction under Florida law.
BONY now appeals to this court, presenting four arguments for reversal.
First, BONY reasserts that it was an Indenture Trustee owing strictly contractual
obligations to the Debtor, not a conventional trustee with an implied fiduciary
duty. This contractual obligation did not require BONY to invest the Prepayment
Funds, or to distribute interest earned on those funds to the Debtor. Second,
19
BONY believes that the bankruptcy court made no findings of bad faith against it
as a litigant and thus could not have invoked its inherent powers to impose
sanctions. Third, BONY again asserts that the bankruptcy court denied it due
process by failing to provide notice that its conduct was sanctionable. The crux of
this argument is that the court’s orders did not use the terms “sanction” or
“contempt,” which would have alerted BONY’s non-lawyer officers – namely
Irene Siegel and Janet Wong – to the fact that failure to obey the orders would
result in punishment. BONY’s officers presumably lack the sophistication to
anticipate such a consequence unless provided these explicit signals. Finally,
BONY argues that the Debtor did not need to pursue any discovery, and thus did
not need to incur any attorney’s fees, regarding the Prepayment Funds interest
rate. BONY claims that the bankruptcy court should have applied a prejudgment
interest rate as provided in 28 U.S.C. § 1961.
“A correct judgment may be affirmed on any ground regardless of the
grounds addressed, adopted or rejected by the district court.” Sosa v. Chase
Manhattan Mortgage Corp., 348 F. 3d 979, 983 (11th Cir. 2003) (citations
omitted). We accordingly affirm the district court on two grounds. First, we
affirm the district court’s holding that the bankruptcy court did not abuse its
discretion when it invoked its inherent power to impose sanctions on BONY.
20
Alternatively, we uphold the district court’s conclusion that BONY was a common
law trustee with respect to the Prepayment Funds, and was therefore liable to the
Debtor for interest. We do so even though the district court approached this
question as if the bankruptcy court addressed it on the merits, when in fact the
bankruptcy court simply refused to consider it.
II.
BONY makes essentially three arguments challenging the bankruptcy
court’s imposition of sanctions. First, BONY believes that the district court did
not find the bad faith necessary to invoke its inherent power to impose sanctions.
Second, BONY claims that the bankruptcy court did not provide it with fair notice
that it was subject to sanctions. Third, BONY would convince us that the
discovery pursued by the Debtor to determine the appropriate interest rate
applicable to the Prepayment Funds was unnecessary because the bankruptcy court
should have applied a prejudgment interest rate set forth in 28 U.S.C. § 1961. We
address each argument in turn.
A.
Federal courts have the inherent power to impose sanctions on parties,
lawyers, or both. Byrne v. Nezhat, 261 F.3d 1075, 1121 (11th Cir. 2001); see also
In re Mroz, 65 F.3d 1567, 1572 (11th Cir. 1995) (acknowledging bankruptcy
21
court’s inherent power to impose sanctions). “This power is derived from the
court’s need ‘to manage [its] own affairs so as to achieve the orderly and
expeditious disposition of cases.’” Byrne, 261 F.3d at 1106 (citing Chambers, 501
U.S. at 43, 111 S. Ct. at 2132) (alteration in original). We review a court’s
exercise of its inherent power for abuse of discretion. Mroz, 65 F.3d at 1572
(citing Chambers, 501 U.S. at 55, 111 S. Ct. at 2138). “In determining whether the
court has abused its discretion we ask whether it ‘applie[d] the wrong legal
standard or ma[de] findings of fact that are clearly erroneous.’” Byrne, 261 F.3d
at 1103.
As we have stated elsewhere, “‘[t]he key to unlocking a court’s inherent
power is a finding of bad faith.’” Byrne, 261 F.3d at 1106 (quoting Barnes v.
Dalton, 158 F.3d 1212, 1214 (11th Cir. 1998)). “A party . . . demonstrates bad
faith by delaying or disrupting the litigation or hampering enforcement of a court
order.” Byrne, 261 F.3d at 1121 (quoting Barnes, 158 F.3d at 1214)). We
therefore begin by reviewing the bankruptcy court’s finding that BONY acted in
bad faith.
Between April 2000 and October 2001, the bankruptcy court issued multiple
orders and scheduled hearings to provide the Debtor with an accounting of the
unclaimed Prepayment Funds, to ensure that the remaining Noteholders were able
22
to receive the payments to which they were legally entitled, and generally to bring
closure to the Debtor’s bankruptcy case.
The court’s May 9, 2003 sanctions order contained a detailed chronology of
BONY’s repeated failure to respond to court orders, its failure to appear before the
court when ordered, and its refusal to provide discovery pursuant to the court’s
January 29 Order. Based on this course of conduct, the bankruptcy court
concluded that “BONY has repeatedly ignored the orders of this Court in bad
faith, and BONY’s dawdling and obfuscation in the response of the discovery
requests, after this Court’s ruling on BONY’s motion for a protective order, have
been done in bad faith.”
BONY’s noncompliance delayed the resolution of the Debtor’s bankruptcy
case, interfered with the bankruptcy court’s ability to manage its case load, and,
most obviously, hampered the enforcement of the court’s orders. Moreover,
BONY’s conduct forced the Debtor repeatedly to appear before the court, seek
relief from the court, and otherwise litigate matters that should have been resolved
far more quickly. We therefore must conclude that the bankruptcy court did not
abuse its discretion in finding that BONY acted in bad faith. The bankruptcy court
properly invoked its inherent powers to sanction BONY.
1.
23
We also find that the bankruptcy court did not abuse its discretion in
applying its inherent powers. As BONY correctly points out, “[b]ecause of their
very potency, inherent powers must be exercised with restraint and discretion.”
Chambers, 501 U.S. at 44, 111 S. Ct. at 2132. “A primary aspect of that discretion
is the ability to fashion an appropriate sanction for conduct which abuses the
judicial process.” Id. at 44-45, 111 S. Ct. at 2132-33.
Under appropriate circumstances, it is within a court’s discretion to assess
attorney’s fees on a party, or even to dismiss its lawsuit, for actions taken in bad
faith. Id. at 45, 111 S. Ct. at 2133. In this case, the bankruptcy court sanctioned
BONY for what reduces to two classes of conduct. First, BONY failed to obey or
otherwise respond to the court’s orders over an extended period of time. Second,
BONY refused to comply with the court’s January 29 Order, which directed
BONY to provide the Debtor with information on the interest BONY had earned
on the Prepayment Funds between April 1996 and October 2001.
In its discretion, the court assessed BONY with the Debtor’s attorney’s fees
from December 8, 2000 through October 26, 2001. During this period BONY
refused to comply with the court’s orders to provide a complete accounting of the
Noteholders it had paid, those that had yet to redeem their bonds, and the amount
of unclaimed Prepayment Funds it held. The court also permitted the Debtor’s
24
counsel to amend her fee application to reflect costs incurred through April 17,
2003, the hearing date at which the court expressed its intention to sanction
BONY. This fee award was directly tied to the delays and protracted litigation
caused by BONY’s dilatory conduct, and therefore was not an abuse of the court’s
discretion.18
2.
The bankruptcy court also entered a default against BONY with respect to
the interest payable to the Debtor on the Prepayment Funds. This default had the
effect of striking BONY’s opposition to the Surcharge Motion and its defense that
it was an Indenture Trustee under no obligation to pay interest on Prepayment
Funds to the Debtor. Dismissal of a party’s complaint or answer, or striking its
defenses, as a sanction for failure to comply with a court’s orders is a heavy
punishment. The “severe sanction of a dismissal or default judgment is
appropriate only as a last resort, when less drastic sanctions would not ensure
compliance with the court’s orders.” Malautea v. Suzuki Motor Co. Ltd., 987 F.2d
1536, 1542 (11th Cir. 1993) (upholding Fed. R. Civ. P. 37(b) sanction of striking
defendant’s answer and entering default judgment based on defendant’s failure to
18
The district court held that the Debtor was also entitled to attorney’s fees under Fla.
Stat. § 737.627. Since the court’s inherent powers were sufficient to award the Debtor with
attorney’s fees, we need not review that holding.
25
comply with discovery orders). “However severe the sanctions though, we will
not interfere unless important historical findings are clearly erroneous or – by the
imposition of sanctions which are not just – there has been an abuse of discretion.”
Jaffe v. Grant, 793 F.2d 1182, 1189 (11th Cir. 1986) (quoting Marshall v. Segona,
621 F.2d 763, 767 (5th Cir. 1980) (internal quotation marks and alterations
omitted)).
The Debtor first requested information from BONY on the interest income it
had earned on the Prepayment Funds in September 2002. BONY sought a
protective order to avoid providing some of that information. On January 29,
2003, the bankruptcy court granted the protective order in part and denied it in
part, and ordered BONY to produce witnesses and documents relating to the
interest earned on the Prepayment Funds. BONY did not ask the court to clarify
its order as to which materials it was required to produce, nor did BONY appeal
the partial denial of the protective order. Instead, BONY moved to dismiss the
contested matter and sought yet another protective order (presumably to protect it
from the court’s discovery order). BONY was still unprepared to produce
discovery on April 7, 2003, more than two months after it was ordered to do so by
the court. Of course, BONY had already demonstrated its penchant for ignoring
the court between April 2000 and October 2001.
26
Given BONY’s clear history of bad faith stonewalling in this case, the
bankruptcy court was well within its discretion to conclude that BONY had
forfeited its opportunity to dispute both its liability to the Debtor for interest and
the amount of interest it had earned on the Prepayment Funds. Though the district
court did not explicitly find that other sanctions would have forced BONY to
comply with the January 29 Order, such a conclusion is readily implied from the
record. Entry of a judgment awarding that interest income to the Debtor was
appropriate.
3.
BONY further argues that the bankruptcy court erred by using the monthly
“prime rate” to calculate the interest earned on the Prepayment Funds. Instead,
BONY believes that the court should have applied the prejudgment interest rate
set forth in 28 U.S.C. § 1961, which applies to a party’s failure to pay a sum of
money by a date certain. Again, BONY forfeited this argument when it refused to
obey the court’s discovery order.
B.
Finally, BONY asserts a due process challenge to the bankruptcy court’s
imposition of sanctions, claiming that the court failed properly to notify BONY of
the consequences of its failure to respond to the court’s orders.
27
Courts must afford a sanctioned party due process, both in determining the
bad faith required to invoke the court’s inherent power to impose sanctions and in
assessing fees. In re Mroz, 65 F.3d 1567, 1575 (11th Cir. 1995) (citing Chambers,
501 U.S. at 49, 111 S. Ct. at 2135). “Due process requires that the [party] be given
fair notice that [its] conduct may warrant sanctions and the reasons why.” Id.
(citing Donaldson v. Clark, 819 F.2d 1551, 1559-60 (11th Cir. 1987)).
Importantly, a party can be given notice from either the court or from the party
seeking sanctions. Id. The party subject to sanctions must be afforded the
opportunity to justify its actions either orally or in writing. Id. at 1575-76.
Here, BONY’s assertion that it did not receive adequate notice that it could
be sanctioned is, quite frankly, astounding. As we have already described in
detail, BONY consciously and wilfully ignored numerous orders issued by the
bankruptcy court over the course of eighteen months, and refused to appear before
the court when commanded to do so. Moreover, BONY received the Debtor’s
numerous motions, including the May 14, 2001 motion which was based on
BONY’s “failure to comply with the clear terms of the Court’s Orders.” As the
district court correctly observed, BONY’s “blatant disregard for the Bankruptcy
Court’s orders is itself notice.”
We note that BONY has never made the argument that it did not receive the
28
bankruptcy court’s orders or hearing notices. Rather, BONY attempts to explain
away its failure to respond by pointing to the fact that the court’s orders were
served on its non-lawyer employees. These non-lawyers should supposedly be
excused from complying with the bankruptcy court’s orders because the orders did
not include the words “contempt” or “sanctions,” which would have alerted them
(as presumably unsophisticated bank employees) that their noncompliance would
subject them to punishment. Unsurprisingly, BONY cites not one case to support
this proposition.
It is equally unsurprising that this court has already stated “that even a non-
lawyer should realize the peril to her case, when she . . . ignores numerous notices,
and fails to attend hearings and depositions. Even a non-lawyer should realize the
need to communicate either with the court or with opposing counsel.” Anthony v.
Marion County Gen. Hosp., 617 F.2d 1164, 1169 (5th Cir. 1980);19 see also Moon
v. Newsome, 863 F.2d 835, 838 n.5 (11th Cir. 1989). We also note that BONY
offers no explanation as to why its non-lawyer employees did not refer the
Debtor’s motions and the bankruptcy court’s orders to its legal department or its
outside counsel upon receipt. In sum, BONY’s arguments are unpersuasive.
19
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), this
court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to
the close of business on September 30, 1981.
29
Even if BONY is correct that the court’s orders should have included the
words “contempt” or “sanctions,” we must still reject its argument. The
bankruptcy court took specific steps to ensure that BONY received proper notice
and opportunity to respond to the Debtor’s request for interest. The court’s April
26, 2002 order specifically directed the Debtor to “commence a contested matter
by filing a Motion seeking interest on the amounts held by BONY,” and for
BONY to “respond to the Debtor’s Motion and to its fee application.” The
Debtor’s Surcharge Motion sought “an Order surcharging [BONY] and directing it
to pay the Debtor interest, or investment income, on the funds held by BONY
pursuant to [the] Trust Indenture [Agreement].”
Thus, BONY had ample notice that it could be required to pay interest and
attorney’s fees, and was given ample opportunity to defend itself. Indeed, BONY
filed a response opposing the Surcharge Motion on June 14, 2002. The
bankruptcy court did not direct BONY to pay attorney’s fees or interest on the
Prepayment Funds until April 7, 2003, almost a full year after the Debtor
commenced the contested action. As BONY could have raised the notice issue
with the bankruptcy court on any number of occasions, we find no plain error.20
20
BONY concedes that it did not raise this issue before the bankruptcy court. Therefore,
we review the bankruptcy court’s decision for plain error. See Mike Ousley Prods. Inc. v.
WJBF-TV, 952 F.2d 380, 383 (11th Cir. 1992) (“Because [the plaintiff’s attorney] failed to raise
30
BONY’s due process argument accordingly fails.
We now turn to BONY’s assertion that the district court erred by finding
that BONY was a common law trustee with a fiduciary duty, as opposed to an
Indenture Trustee with contractual duties.
III.
We review de novo determinations of law, whether reached by the district
court or the bankruptcy court. See In re Simmons, 200 F.3d 738, 741 (11th Cir.
2000). We set aside the bankruptcy court’s factual findings only if they are clearly
erroneous. Id. The interpretation of contractual language is a question of law.
Tobin v. Mich. Mut. Ins. Co., 398 F.3d 1267, 1274 (11th Cir. 2005) (citing Bragg
v. Bill Heard Chevrolet, Inc., 374 F.3d 1060, 1065 (11th Cir. 2004)). Thus, we
review de novo whether the district court correctly concluded that BONY was a
conventional trustee.
BONY contends that it succeeded NationsBank as Indenture Trustee. To
whit, BONY claims that its obligations to the Debtor and to the Noteholders were
governed exclusively by the terms of the Trust Indenture Agreement. BONY
argues that the Trust Indenture Agreement imposed no obligation on the Indenture
the [Rule 11] notice issue at the district court level, we review for plain error.”) (citing United
States v. S. Fabricating Co., 764 F.2d 780, 781-82 (11th Cir. 1985)).
31
Trustee to pay interest on the Prepayment Funds provided by the Debtor for the
purpose of satisfying the Notes.
The sine qua non of BONY’s theory is its implicit assertion that it assumed
NationsBank’s obligations under the Trust Indenture Agreement. In response, the
Debtor contends that the Trust Indenture Agreement terminated once the
Prepayment Funds were transferred to NationsBank and NationsBank released its
lien on the Debtor’s assets.
A.
Before we can determine whether the Trust Indenture Agreement limited
BONY’s duties as it claims, we must first consider whether BONY is in fact an
Indenture Trustee. In other words, was BONY a party to the Trust Indenture
Agreement such that its obligations to the Debtor are contractually limited by that
instrument? The parties do not dispute that NationsBank was the original
Indenture Trustee and a party to the Trust Indenture Agreement. In December
1995, BONY bought NationsBank’s corporate trust division, and by way of that
acquisition gained control over the Debtor’s Prepayment Funds. It is by this
acquisition that BONY now claims it succeeded NationsBank as the Indenture
Trustee.
BONY correctly points out that, unless the Debtor defaults on its
32
obligations to its Noteholders, “the indenture trustee shall not be liable except for
the performance of such duties as are specifically set out in [the trust] indenture.”
15 U.S.C. § 77ooo(a)(1). The scope of the Indenture Trustee’s duties and
liabilities, therefore, is dictated by the express terms of the Trust Indenture
Agreement. See Baker v. Summit Bank, 46 Fed. Appx. 689, 690 (3d Cir. 2002)
(“It is well settled that under the Trust Indenture Act, the obligations of the
Indenture Trustee are limited to the terms of the Indenture.”); Elliot Assocs. v. J.
Henry Schroder Bank & Trust, Co., 838 F.2d 66, 71 (2d Cir. 1988) (“[I]t is clear
from the express terms of the [Trust Indenture] Act and its legislative history that
no implicit duties . . . are imposed on the trustee to limit its pre-default conduct.”);
Meckel v. Cont’l Res. Co., 758 F.2d 811, 816 (2d Cir. 1985) (stating that “[u]nlike
the ordinary trustee, who has historic common-law duties imposed beyond those in
the trust agreement, an indenture trustee is more like a stakeholder whose duties
and obligations are exclusively defined by the terms of the indenture agreement”).
The Indenture Trustee is therefore a creature created and governed by contract.
To support its assertion that it succeeded NationsBank as Indenture Trustee,
BONY must argue that it assumed NationsBank’s contractual obligations under
the Trust Indenture Agreement. BONY offers no explicit justification for finding
that such an assumption took place. Instead, BONY implies that it assumed the
33
obligations of Indenture Trustee when it purchased NationsBank’s corporate trust
division. The fact of this acquisition, standing alone, is legally insufficient to
support the conclusion that BONY assumed NationsBank’s contractual
obligations.
Under Florida law,21 an “assignor cannot relieve himself of his obligations
[under a contract] by an assignment unless the party with whom he contracted
agrees to accept the responsibility of the assignee.” 3A Fla. Jur. 2d Assignments §
26 (2006) (citing Kornblum v. Henry E. Mangels Co., 167 So. 2d 16 (Fla. Dist. Ct.
App. 1964)). Normally, an assignment involves only the assignee’s acquisition of
rights under a contract and not the assignor’s obligations, unless it is found that
the assignment was also a novation. Sans Souci v. Div. Fla. Land Sales &
Condos., 448 So. 2d 1116, 1120 (Fla. Dist. Ct. App. 1984).
A novation is a mutual agreement between the parties to a contract for the
discharge of a valid existing obligation by the substitution of a new valid
obligation. Jakobi v. Kings Creek Vill. Townhouse Ass’n, Inc., 665 So. 2d 325,
327 (Fla. Dist. Ct. App. 1995). “There are four essential elements necessary to
form a substitute contract or novation: (1) the existence of a previously valid
21
Pursuant to Section 1.12 of the Agreement, the Agreement “shall be construed in
accordance with and governed by the laws of the State of Florida.”
34
contract; (2) the agreement of the parties to cancel and extinguish the first
contract; (3) the agreement of the parties that the second contract takes the place
of the first; and (4) the validity of the new contract.” Id. Although consent of the
parties to substitute a new contract for the old may be implied from surrounding
circumstances, “this is not to say that mere knowledge of the assignment by the
obligee and acquiescence therein, alone is sufficient to release the original obligor
and create a novation.” Sans Souci, 448 So. 2d at 1121.
BONY has not alleged, let alone proved, that a novation of the Trust
Indenture Agreement took place. BONY has not asserted, nor is there any proof in
the record, that the Debtor and NationsBank ever contemplated the cancellation of
the Trust Indenture Agreement for the purpose of creating a new agreement with
BONY. More fundamentally, BONY has adduced no evidence of a second
contract that could be construed as replacing the Agreement. In oral argument
before this court, BONY’s counsel admitted that BONY had not produced a copy
of its acquisition agreement with NationsBank, nor any other document that would
set forth the terms of that acquisition. In fact, BONY could not even confirm that
it received a copy of the Trust Indenture Agreement prior to the acquisition.
Consequently, we need not reach the question of whether the parties agreed
that said second contract replaced the first, or whether said second contract was
35
valid. Given that BONY has failed to demonstrate that it assumed NationsBank’s
contractual obligations as Indenture Trustee, we cannot conclude that BONY
became the Indenture Trustee when it acquired NationsBank’s corporate trust
division.22
BONY offers the following factual recitation in response to the Debtor’s
allegation that it never received a copy of the Trust Indenture Agreement: “(a) the
Trust Indenture was part of the confirmed plan of reorganization, (b) the funds
held by NationsBank were subject to the Trust Indenture when tendered to
NationsBank, and (c) the funds transferred by NationsBank to [BONY] were to be
paid to [N]oteholders in accordance with the terms of the plan, the Trust
Indenture, and the bankruptcy court’s defeasance Order.”
This characterization of events, even if accepted as true, does not answer the
22
Section 10.12 of the Trust Indenture Agreement stated that a merger or acquisition of
NationsBank’s corporate trust business makes the acquiror the indenture trustee “without the
execution or filing of any paper or any further act on the part of any of the parties hereto.”
BONY may be inclined to argue that this provision shows the Debtor’s intent that BONY
become the Indenture Trustee. However, BONY is not a party to the Trust Indenture Agreement,
and so has no rights or obligations pursuant to its terms. See 11 Fla. Jur. 2d Contracts § 19
(2006) (“In Florida, a contract cannot bind one who is not a party thereto, because in order to
create an enforceable contract, there must be reciprocal assent to a certain and definite
proposition.” (citing In re Univ. Ctr. Hotel, Inc., 323 B.R. 306 (Bankr. N.D. Fla. 2005))). While
it can be argued that this provision did express the Debtor’s agreement to cancel the Trust
Indenture Agreement in the event that NationsBank transferred its corporate trust department,
BONY would still need to provide evidence of an agreement with NationsBank to undertake the
role of Indenture Trustee. As we later discuss, however, this provision did express the Debtor’s
intention that NationsBank’s successor replace NationsBank as trustee.
36
salient question of whether BONY was an Indenture Trustee. It is entirely
plausible that BONY accepted the Prepayment Funds and disbursed them to the
Noteholders in a manner outwardly consistent with the Trust Indenture
Agreement, without any actual knowledge of what the Agreement required, and
without actually accepting NationsBank’s responsibilities as Indenture Trustee.23
Put another way, BONY’s actions with respect to the Prepayment Funds will not
substitute as proof that it entered into a formal agreement with NationsBank and
the Debtor to assume the role of Indenture Trustee.24
Curiously, BONY faults the Debtor for failing to provide any written
agreement, other than the Trust Indenture Agreement, that might set forth BONY’s
rights and duties with respect to the Prepayment Funds. It is BONY that has
asserted that its relationship to the Debtor and to the Noteholders is governed by
the Trust Indenture Agreement. It was not the Debtor’s obligation to provide
23
There is no evidence in the record that BONY acquired personnel as well as trust
accounts with NationsBank’s corporate trust department. Moreover, there is no indication of
which records (if any) NationsBank provided to BONY. In short, we have no evidence as to how
or when BONY came to understand the purpose of the Prepayment Funds, or how or when
BONY identified the persons to whom those Prepayment Funds were payable.
24
BONY would have us give legal effect to the fact that the bankruptcy court and the
Debtor referred to BONY as “indenture trustee” at several points in the record below. For
example, the Debtor’s December 13, 2000 motion stated that “[t]he Bank of New York became
the indenture trustee” after its acquisition of NationsBank’s corporate trust division, and that
BONY held the Prepayment Funds “pursuant to the trust indenture.” Again, absent proof of a
novation or of an assignment of NationsBank’s obligations to BONY, we must conclude that
such references were in error.
37
BONY with the evidence it needed to prove its allegations.
B.
Having eliminated the possibility that BONY was an Indenture Trustee, we
address the question of what obligations, if any, BONY had to the Debtor. The
Debtor asserts that the role of Indenture Trustee terminated when it transferred the
Prepayment Funds to NationsBank, and that pursuant to Section 8.02 of the Trust
Indenture Agreement, NationsBank held those funds in a common law trust. In
sum, the Debtor asserts that the duties owed to it by BONY were not governed by
the terms of the Agreement. Rather, the Debtor contends that BONY was a
common law trustee with an attendant fiduciary duty.
In its orders, the bankruptcy court repeatedly stated that BONY owed a
fiduciary duty to the Debtor and to the court. The court, however, never explicitly
stated a legal basis for this conclusion. Apparently, the court assumed that BONY
became a common law trustee with respect to the Prepayment Funds when it
purchased NationsBank’s corporate trust division.
The district court came to the same conclusion, though by explicitly
articulated means. The court focused on the fact that the Debtor transferred the
Prepayment Funds to NationsBank before BONY acquired NationsBank’s
corporate trust division. From this fact the court inferred that NationsBank’s
38
rights and obligations under the Trust Indenture Agreement were extinguished
once the Debtor provided the funds to satisfy the Notes in full. Put another way,
the district court regarded the transfer of the Prepayment Funds to NationsBank as
a termination of both the Trust Indenture Agreement and of NationsBank’s role as
Indenture Trustee. Consequently, that role could not have passed to BONY as part
of its acquisition. Instead, NationsBank became a common law trustee with
respect to the Prepayment Funds, and BONY succeeded in that capacity once the
acquisition was effected. The district court, however, did not provide a legal basis
for concluding that BONY could assume the role of common law trustee from
NationsBank.
1.
We begin our assessment of BONY’s argument by addressing the district
court’s conclusion that NationsBank’s duties regarding the Prepayment Funds
were those of a common law trustee, as opposed to those of an Indenture Trustee.
While we agree with this conclusion, we find that the district court could have
reached it by analyzing the terms of the Trust Indenture Agreement itself.
Specifically, the Agreement established different trustee obligations depending on
the res to be held in trust. It made clear that the trust for the Prepayment Funds is
not governed by the terms of the Agreement or the TIA. Separate and apart from
39
delineating the role of Indenture Trustee, the Agreement was a trust instrument
that expressed the Debtor’s intention to create a conventional trust for the
Prepayment Funds.
“‘The polestar of trust interpretation is the settlor[‘s] intent.’” Roberts v.
Sarros, 920 So. 2d 193, 195 (Fla. Dist. Ct. App. 2006) (quoting L’Argent v.
Barnett Bank, N.A., 730 So. 2d 395, 397 (Fla. Dist. Ct. App. 1999)). “If the trust
language is unambiguous, the settlor[‘s] intent as expressed in the trust controls . .
. .” Id. (citing L’Argent, 730 So. 2d at 397; Ludwig v. AmSouth Bank of Fla., 686
So. 2d 1373, 1376 (Fla. Dist. Ct. App. 1997)). “In determining the settlor’s intent,
the court should . . . construe ‘the instrument as a whole,’ taking into account the
general dispositional scheme.” Id. (quoting Pounds v. Pounds, 703 So. 2d 487,
488 (Fla. Dist. Ct. App. 1997)).
Section 4.03 of the Trust Indenture Agreement stated that the Indenture
Trustee’s responsibilities with respect to the Collateral for the Notes were
governed by the terms of the Agreement and the TIA.25 That section directed the
Indenture Trustee to “perform its obligations under the Security Documents in
25
The terms “Collateral” and “Escrow Account” are defined in footnote 2, supra. The
Agreement’s definition of the term “Trust Moneys” includes all moneys, including the net
proceeds from the sale of the Collateral, paid into the Escrow Account. The Trust Moneys were
essentially part of the Collateral securing the Notes.
40
accordance therewith,”26 but its obligations were also limited “by the provisions of
the TIA,” the federal statute under which the role of Indenture Trustee was
created. Similarly, Section 7.01 of the Trust Indenture Agreement placed the
responsibility for disbursing the Trust Moneys, including those held in the Escrow
Account, on the Indenture Trustee alone.27 With respect to the Collateral and the
Trust Moneys, the Indenture Trustee’s obligations were expressly limited to the
Agreement and the TIA. These obligations included taking care of the Collateral
and the Trust Moneys.
In contrast, Section 15.04 (entitled “Deposit of Prepayment Price”)28 of the
Agreement set out the procedure by which the Debtor must deposit the
Prepayment Funds for payment of the Notes. It stated:
On or prior to any Prepayment Date, the [Debtor] shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own
26
Section 1.01 of the Agreement defines “Security Documents” as “any and all security
agreements, mortgages, deeds of trust and deeds to secure debt (including collateral assignments
obtained pursuant thereto), assignments, pledges and other agreements or documents pursuant to
which the [Debtor] grants a security interest in or lien upon, or otherwise pledges or assigns, any
Collateral to the Trustee for the benefit of the Noteholders.”
27
Under limited circumstances, the Debtor was permitted to use insurance proceeds
placed in the Escrow Account to repair the property held by the Indenture Trustee as Collateral.
Even here, the funds could not be released from the Escrow Account unless certain proofs were
provided to the Indenture Trustee.
28
We note that Section 1.08 states that “[t]he Article and Section headings herein are for
convenience only and shall not affect the construction hereof.” We therefore give no interpretive
effect to the Agreement headings mentioned in this opinion.
41
Paying Agent, segregate and hold in trust as provided in Section 14.03) an
amount of money sufficient to pay the Prepayment Price of all the Notes
which are to be prepaid on that date. Such money shall be held in trust [f]or
the benefit of the Persons entitled to such Prepayment Price and shall not be
deemed to be part of the Collateral or Trust Moneys.
Under this provision, the Debtor could have deposited the Prepayment Funds with
one of three entities: the Indenture Trustee, a “Paying Agent,”29 or itself. Clearly,
the Paying Agent and the Debtor did not become Indenture Trustees (trustees
whose duties were dictated by the Trust Indenture Agreement and the TIA) simply
because they held Prepayment Funds for the benefit of the Noteholders. Section
15.04 did not provide different obligations for different entities; each entity was
charged to hold the Prepayment Funds “in trust” without further modification. In
addition, Section 15.04 explicitly separated the Prepayment Funds by stating that
they “shall not be deemed to be part of the Collateral or Trust Moneys.” The trust
into which the Prepayment Funds had to be placed, therefore, was separate and
distinct from the trust containing the Collateral.
This reading is bolstered by Section 8.02 of the Trust Indenture Agreement,
which is entitled “Application of Deposited Money.” Echoing the language of
Section 15.04, this section stated, in pertinent part:
29
Section 1.01 defines a “Paying Agent” as a “any person authorized by the [Debtor] to
pay the principal of, or interest on, any Notes on behalf of the [Debtor].”
42
Moneys deposited with the Trustee pursuant to Section 8.01 [which dealt
with the satisfaction and discharge of the Notes] shall not be a part of the
Collateral and shall not be deemed to be Trust Moneys but shall constitute a
separate trust fund for the benefit of the Persons entitled thereto.
Here, the Agreement explicitly stated that the funds used to discharge and satisfy
the Notes, including the Prepayment Funds, were not part of the Collateral held by
the Indenture Trustee and not part of the Trust Moneys. Rather, those funds had to
be placed in a separate trust set up for the benefit of third parties. The Agreement
in no way limited or modified the responsibilities of the trustee for this separate
trust, nor did the Agreement anywhere provide that the duties owed by the trustee
for this separate trust were limited by the TIA. Moreover, and unlike its treatment
of the Collateral, the Debtor did not give the Indenture Trustee a security interest
in, a lien upon, or otherwise pledge or assign the Prepayment Funds to the
Indenture Trustee.
That the Agreement provided different responsibilities for the Indenture
Trustee than it did for the Prepayment Funds trustee is sensible given the purpose
of the Trust Indenture structure. The Trust Indenture was created to secure the
obligation of the Debtor in an administratively manageable fashion. Given the
insolvency of the Debtor, its Class 7 Creditors were provided with liens on the
Debtor’s assets as security in case the Debtor failed to meet its obligations. These
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liens were then pooled and transferred to a single Indenture Trustee, who would
act on behalf of the Noteholders if the Debtor defaulted. Once the Prepayment
Funds were tendered, however, the Noteholders no longer had any concerns
regarding the Debtor’s insolvency. The amount needed to satisfy the debt had
been provided; that, in turn, extinguished the need to foreclose on the liens to
exact payment. Consequently, an Indenture Trustee was no longer necessary.
Reading Sections 4.03, 8.02 and 15.04 together, we must conclude that the
Debtor intended the Prepayment Funds to be held in a common law trust. The
responsibilities of Indenture Trustee, as governed by the Trust Indenture
Agreement and the TIA, did not apply to the trust in which the Prepayment Funds
were held. Additionally, there was no other limitation on or modification of the
trustee’s duties with respect to the Prepayment Funds. Rather, these funds, when
provided by the Debtor, had to be held in a common law trust, and the trustee
charged with caring for them had to be a common law trustee.
2.
Having established that the Prepayment Funds were required to be held in a
common law trust, we turn to the question of whether the role of common law
trustee passed to BONY when it acquired NationsBank’s corporate trust division.
If it did, it was not pursuant to an agreement between the Debtor and BONY;
44
rather, the role of common law trustee had to have passed to BONY, as successor
trustee, under the terms of the Trust Indenture Agreement between the Debtor and
NationsBank.
The Trust Indenture Agreement provided for a successor trustee.30 Section
10.12 of the Agreement (entitled “Merger, Conversion, Consolidation or
Succession to Business”) provided for the appointment of a successor trustee in
the event the original trustee transferred control of its trust business. It stated, in
relevant part:
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder . . .
without the execution or filing of any paper or any further act on the part of
any of the parties hereto.
Section 10.12 unambiguously expressed the will of the Agreement’s creator, the
Debtor, that the entity that purchased NationsBank’s corporate trust division
become the successor trustee. This section placed no limit on its effect; its plain
30
Unless there is a statute to the contrary, an instrument creating a trust may provide for
the succession of a trustee directly, indirectly, or by implication alone. See 90 C.J.S. Trusts §
289 (2005) (citing Payiasis v. Robillard, 171 So.2d 630 (Fla. Dist. Ct. App. 1965). “[A]
successor appointed by the trust instrument takes his place automatically without court action,
and it is competent for the creator of the trust to provide directly for the filling of vacancies in the
trusteeship by the naming of the persons to be substituted.” Douglas Props. v. Stix, 159 So. 1, 5
(1935).
45
language indicated that any trustee, Indenture Trustee or common law trustee,
would become NationsBank’s successor provided the other trustee qualifications
were met.31 Obviously, that entity was BONY.
Section 10.12 could not bind BONY as a matter of contract law. BONY
was not a party to the Trust Indenture Agreement, and there is no evidence that a
tripartite novation took place that substituted BONY as the Indenture Trustee. The
expression of will contained in Section 10.12 did have effect as a matter of trust
law, however, and it operated to transfer NationsBank’s common law trustee
obligations to BONY. We therefore affirm the district court’s conclusion that
BONY held the Prepayment Funds as a common law trustee.32
3.
As common law trustee for the Prepayment Funds, we have no doubt that
BONY owed a fiduciary duty to the beneficiaries of that trust. The question, then,
is whether the Debtor was a trust beneficiary to whom BONY owed a fiduciary
31
The Trust Indenture Agreement set out several preconditions governing the selection
of a trustee or a successor trustee, which are not relevant to this appeal.
32
BONY argues that the requirements for termination of the Trust Indenture Agreement
set out in Section 8.01 were never satisfied. That section requires, among other things, that the
Debtor deliver to the Indenture Trustee an Officers’ Certificate and opinion of counsel stating
that all conditions precedent relating to the satisfaction of the Notes have been met. We need not
address this argument further. As discussed above, BONY has provided us with no reason to
conclude that it was a party to the Trust Indenture Agreement such that the termination
provisions in Section 8.01 would apply.
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duty. The Debtor contends that once the Prepayment Funds were provided to
NationsBank on October 2, 1995, NationsBank (and thereafter BONY) held those
funds for the benefit of the Noteholders in the first instance, and then for the
benefit of the Debtor with respect to any Prepayment Funds the Noteholders did
not claim. In effect, the Debtor claims that it was the residuary beneficiary of the
trust.
BONY has conceded that the Debtor is the residuary beneficiary of the
Prepayment Funds trust. In its “Response in Opposition to the Debtor’s Motion to
Surcharge the Bank of New York and to Direct Payment of Interest,” filed with the
bankruptcy court on June 14, 2002, BONY asserted that the Debtor had no greater
claim to interest on the Prepayment Funds than did the Noteholders. In so doing,
BONY admitted that “all the Debtor had was a contingent remainder right to the
Prepayment Funds, should those funds go unclaimed.” BONY reiterated this
argument in its opening brief to us.
4.
Finally, we must determine whether BONY’s fiduciary duty included a duty
to pay interest to the Debtor on the Prepayment Funds. Fiduciaries have an
unflagging duty of loyalty to the beneficiaries whom they serve, and to avoid
conflicts of interest. See Compton v. Fifth Ave. Ass’n, Inc., 7 F. Supp. 2d 1328,
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1333 (M.D. Fla. 1998). A conflict of interest arises when the fiduciary profits
from the property entrusted to its care, and does so at the expense of the property’s
beneficiaries. “A cardinal rule of the law of trusts is that a trustee may not . . .
manage the affairs of the trust property so as to gain any advantage directly or
indirectly for himself beyond his lawful compensation.” John G. Grimsley, Fla.
Law of Trusts § 6-4 (4th ed. 1993).
Here, BONY held the Debtor’s Prepayment Funds, $487,844.90, for over
five years. During that time, BONY profited on those funds while the Debtor was
unable to use them.33 Moreover, BONY did not relinquish its profit to the Debtor.
Such self-dealing was a clear violation of BONY’s duty of loyalty to the Debtor.
In large measure, BONY’s challenge of the court’s award of interest is
based on its belief that it was under no obligation to accrue interest on the
Prepayment Funds. BONY bases this argument on Section 10.06 of the Trust
Indenture Agreement, which stated, in relevant part:
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under
no liability for interest on any money received by it hereunder except as
otherwise agreed with the [Debtor].
33
As explained in section II.A.2., supra, BONY defaulted its right to challenge the
Debtor’s allegation that BONY had earned interest income on the Prepayment Funds between
April 1996 and October 2001.
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BONY’s reliance on Section 10.06 is misplaced for two reasons. First, as a
general matter, Section 10 of the Trust Indenture Agreement outlined the
contractual obligations and rights of the Indenture Trustee. Section 10.01 stated
that “the Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture, and no implied covenants or obligations
shall be read into this Indenture against the Trustee.” As we have established,
BONY was not the Indenture Trustee. Accordingly, the protections afforded to
the Indenture Trustee by Section 10.06 did not apply to BONY.
Second, the funds to which Section 10.06 referred cannot be the Prepayment
Funds. As already discussed, Sections 8.02 and 15.04 of the Trust Indenture
Agreement specifically required that the Prepayment Funds be placed in a separate
trust. Section 10.06, on the other hand, provided that the funds held by the Trustee
need not be held in a separate trust. If Section 10.06 applied to the Prepayment
Funds, it would obviously conflict with the clear directive expressed in Sections
8.02 and 15.04. We must conclude, therefore, that Section 10.06 does not apply to
the Prepayment Funds.
IV.
The district court correctly concluded that the bankruptcy court did not
abuse its discretion when it imposed sanctions on BONY for its dilatory conduct
49
and repeated refusal to obey the court’s orders. Although the district court did not
address the part of the bankruptcy court’s sanctions that effectively struck
BONY’s response to the Debtor’s claim for interest, we do so and conclude that
the bankruptcy court acted well within its inherent power to manage the case. The
district court determined that BONY was not an Indenture Trustee but, instead, a
common law trustee when it took possession of the Prepayment Funds, and that it
owed a fiduciary duty to the Debtor and to the bankruptcy court. We affirm that
determination for the reasons set out in part III of this opinion. The judgment of
the district court is, accordingly, affirmed.
SO ORDERED.
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