Becker v. Bank of N.Y. Mellon Trust Co.

LEONARD BECKER v. THE BANK OF NEW YORK MELLON TRUSTCOMPANY, N.A. and J.P. MORGAN TRUSTCOMPANY, NATIONAL ASSOCIATION

CIVIL ACTION No. 11-6460

C/w No. 12-6412

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

October 5, 2016

MEMORANDUM

Legrome D. Davis, District Judge

Plaintiff Leonard Becker moves in this consolidated litigation¹ to certify a class comprising holders of revenue bonds who are entitled to a distribution under the Plan for reorganization of the bond debtor, Lower Bucks Hospital ("LBH"),² which Plan was confirmed under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 1129, 1101-1146. Fed. R. Civ. P. 23; Pl. Mot. (Doc. 67). It is also requested that Plaintiff be certified as class representative and Barrack, Rodos & Bacine be appointed as class counsel. Id. Defendants The Bank of New York Mellon Trust Company ("BNYM") and J.P. Morgan Trust Company, National Association ("JP Morgan") oppose certification. Defs. Resp. (Doc. 70). For the history of this litigation, see footnote.³ Jurisdiction is diversity and amount in controversy, 28 U.S.C. §§ 1332, 1332(d)(2).

Plaintiff Becker, individually and on behalf of other members of the putative class, sues Defendants BNYM and JP Morgan as successive Indenture Trustee under multi-party agreements that created the bond financing transaction. On January 19, 2012, the confirmed Plan became effective. On January 24, 2012, BNYM received a cash distribution of the funds allowed under the Plan to be paid to the bondholders, a sum of $8,150,000.00. BNYM has not paid any of those funds to the bondholders.

The Complaint in Becker I alleges that Defendants were negligent⁴ and breached their fiduciary and contractual duties to the bondholders by failing to maintain perfected security interests in the property securing the bonds. It is alleged that the bondholders were allowed less in LBH's bankruptcy than they would have been allowed if the security interests had been perfected. The Complaint in Becker II sues for a declaratory judgment that the bondholders are entitled to prompt disbursal of the funds allowed under the Plan for them, and that Defendant BNYM is not entitled to deduct from those funds any amounts that it incurred asserting its personal interests in the bankruptcy proceedings or in this litigation. Becker II also sues for equitable remedies—an injunction compelling BNYM to distribute the bondholders' funds, an accounting of those funds, and damages for conversion and for money had and received.

Becker maintains that under Rules 23(a) and 23(b)(3), the requirements for class certification are met for all claims stated in Becker I and Becker II. In addition, he maintains that under Rules 23(b)(1) and 23(b)(2), the requirements for class certification have been met for the claims stated in Becker II.

Defendants oppose all claims stated in Becker I and Becker II, and they oppose class certification. Principally, they cite Rule 23(b)(3)'s requirement that "questions of law or fact common to class members [must] predominate over any questions affecting only individual members." Fed. R. Civ. P. 23(b)(3). A finding of predominance is precluded, they say, because the proximate cause of the bondholders' alleged losses cannot be proved with evidence that is common to all class members. Defs. Resp. at 19-23. In their view, the evidence of causation varies widely across the proposed class based on each class member's role and actions in the bankruptcy proceedings that led to the $8,150,000.00 allowance for the bondholders.

Defendants primarily maintain that their affirmative defenses of equitable estoppel, waiver, and judicial estoppel preclude a finding of predominance—and defeat other requirements for class certification as well. Defs. Resp. at 24-32. In their view, the evidence supporting these defenses also varies widely across the proposed class based on a multitude of dissimilarities among the class members arising from their individual roles and actions in the bankruptcy proceedings. Id. at 23, 25. Adjudication of these defenses, they say, would require the trier of fact to examine massive, individualized facts as to each of the bondholders. Defs. Resp. at 23, 27, 30, 31. And there are at least 95 bondholders. It is also asserted that these defenses would involve a lengthy series of individual trials for numerous groupings of class members. Id. at 25-28 & nn.9, 10. In addition, Defendants plan to introduce proof peculiar to "unique defenses" asserted against Becker, who is said to be "a class of one." Id. at 28-29, 30. For these reasons among many others, see id. at 3-4, they conclude that class certification should be denied.

Previous rulings in this and three other courts are pertinent to the claims proposed for class treatment here. On January 13, 2010, LBH petitioned for reorganization under Chapter 11of the Bankruptcy Code.⁵ Pet. (Bankr. Doc. 1), In re Lower Bucks Hosp., Bankr. No. 10-10239 (Bankr. E.D. Pa.) (Frank, J.). On April 30, 2010, LBH commenced a bankruptcy adversary proceeding against the Indenture Trustee, BNYM, Lower Bucks Hosp. v. The Bank of New York Mellon Trust Co., N.A., Adv. No. 10-00174 (Bankr. E.D. Pa.) (Frank, J.). On August 12, 2011, LBH and BNYM settled the adversary proceeding. LBH, BNYM, and the Official Committee of Unsecured Creditors filed a consensual plan for LBH's reorganization, which incorporated stipulated terms of that settlement. The proposed plan included a stipulated third party release of potential claims by the bondholders against the Indenture Trustee, then BNYM, based on its alleged failure to maintain perfected security interests and liens against the property securing the bonds. On December 2, 2011, the bankruptcy judge and parties agreed that the proposed plan should then be confirmed, but questions as to confirmation of the third party release would be severed and decided later. On December 7, 2011, the proposed plan was confirmed as agreed.

On May 10, 2012, the Bankruptcy Court denied confirmation of the third party release and struck it from the Plan because the release was inadequately disclosed before the bondholders voted to accept the proposed plan. Order, entered May 10, 2012 (Bankr. Doc. 2041); In re Lower Bucks Hosp., 471 B.R. 419, 459, 464 (Bankr. E.D. Pa. 2012) (Frank, J.). Judge Frank explained:

Based on my analysis of the purpose of the Third Party Release, the factors that the Bondholders necessarily needed to consider in evaluating whether the global settlement was in their best interest and the content of the disclosure provided to them . . . , I am firmly convinced that the Bondholders did not receive adequate disclosure before they voted to accept the Plan.

Id. at 459 (footnote omitted). BNYM appealed that order. On January 2, 2013, the District Court affirmed the Bankruptcy Court's ruling. In re Lower Bucks Hosp., 488 B.R. 303, 325 (E.D. Pa. 2013) (Savage, J.). BNYM appealed again. On June 12, 2014, the Third Circuit affirmed, discerning no abuse of discretion in the ruling that the third party release was not adequately disclosed. In re Lower Bucks Hosp., 571 F. App'x 139 (3d Cir. 2014) (Ambro, J.).

Importantly, before the bondholders voted to accept the proposed plan, nine notices and a disclosure statement were issued. However, none of the notices described the bondholders' potential claims against BNYM or explained what claims by the bondholders against BNYM would be subject to the third party release. Lower Bucks Hosp., 488 B.R. at 320 & n.58 (Savage, J.), aff'g, 471 B.R. at 461-62 (Frank, J.), aff'd, 571 F. App'x 139, 143-44 (Ambro, J.). The District Court ruled that "there was insufficient information from which the Bondholders could have concluded that they had a potential claim against BNYM." Id. The District Court also ruled that the disclosure statement was insufficient:

Significantly, the Bankruptcy Court found that the disclosure statement did not provide the Bondholders with information about the merits or value of the potential claims against BNYM in the class action [this C.A. No. 11-6460] that they would be relinquishing. . . . Consequently, the Bondholders could not evaluate whether the benefits of the proposed plan outweighed what they would give up by agreeing to the third party release.

Id. at 320-21, aff'g, 471 B.R. at 459-62.

Previous rulings on the parties' respective motions for summary judgment have decided certain questions of law, and those rulings guide the certification analysis as well. Order & Mem., dated Mar. 23, 2013 (Docs. 136, 137). See Claims to Be Given Class Treatment, infra, discussing those rulings.

I. HISTORY

In 1992, The Lower Bucks Hospital (also, "LBH") entered into the bond financing transaction, aiming to refinance debts and fund capital improvements. The Borough of Langhorne Manor Higher Education and Health Authority (the "Authority") agreed to issue $35,980,000.00 of hospital revenue bonds, and loan proceeds from sales of the bonds to the hospital. LBH agreed to pay principal and interest on the bond debt. The transaction began with two agreements, each dated November 1, 1992: the Loan and Security Agreement between the Authority and LBH, and the Trust Indenture between the Authority and the original Indenture Trustee, Continental Bank. Loan Agreement (Doc. 126-7); Indenture (Doc. 126-6). JP Morgan succeeded Continental Bank as Indenture Trustee. On October 1, 2006, The Bank of New York Trust Company, N.A. succeeded JP Morgan as Indenture Trustee. On October 31, 2007, BNYM became Indenture Trustee.

The transaction agreements created broad rights to indemnification, running from LBH to the Authority and from LBH to the Indenture Trustee. Loan Agreement §§ 11.4(b), 11.4(e). LBH granted the Authority security interests and liens against LBH's unrestricted gross revenues and reserve funds, as collateral securing the bond debt. Id. §§ 6.2, 6.4. It was agreed that the Authority would assign its rights to the Indenture Trustee, for...