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June 28, 1979

Jay A. ZEFFIRO, Individually and on behalf of all other persons similarly situated,
FIRST PENNSYLVANIA BANKING AND TRUST COMPANY. Harry M. BERNARD, Jr., on behalf of himself and all others similarly situated, v. FIRST PENNSYLVANIA BANK, N. A., and Capital First Corporation

The opinion of the court was delivered by: BECHTLE


Presently before the Court are the motions of the defendant First Pennsylvania Bank, N.A. *fn1" ("First Pennsylvania"), to dismiss for lack of subject matter jurisdiction, pursuant to Fed.R.Civ.P. 12(b)(1), and to dismiss for failure to state a claim upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons stated below, the motions will be denied.

 In 1972, Capital Equipment Leasing Corporation, a predecessor of defendant Capital First Corporation ("Capital"), issued $ 1,500,000 principal amount, 9% Subordinated debentures with a maturity date of May 31, 1982 ("the debentures"). The debentures were issued under a trust indenture which named First Pennsylvania Banking and Trust Company, a predecessor of First Pennsylvania, as indenture trustee. It is alleged that the debenture issue was subject to the qualification requirements of the Trust Indenture Act of 1939 ("the Act"), 15 U.S.C. §§ 77aaa 77bbbb, and the Court will assume, for the purpose of the instant motions, that the issue was so qualified. Pursuant to the requirements of the Act, the indenture contained numerous provisions detailing the duties of First Pennsylvania toward the debenture holders. In December of 1976, Capital defaulted on its obligation to pay interest on the debentures and, subsequently, filed a petition under Chapter XI of the Bankruptcy Act on December 19, 1978.

 On September 29, 1978, plaintiff Jay Zeffiro ("Zeffiro") filed a class action complaint against First Pennsylvania, alleging jurisdiction under § 322 of the Act, 15 U.S.C. § 77vvv(b), which incorporates by reference the concurrent jurisdictional section of the Securities Act of 1933. See 15 U.S.C. § 77v(a). Zeffiro, as an owner of the debentures in the amount of $ 5,000, seeks to represent all persons who at any time owned any of Capital's 9% Subordinated debentures due in 1982. Zeffiro alleges that: (1) First Pennsylvania violated § 311 of the Act, 15 U.S.C. § 77kkk, and § 6-13 of the indenture by failing to account to the debenture holders for certain funds it received from Capital as part of a separate and subsequent loan transaction; (2) First Pennsylvania violated § 313 of the Act, 15 U.S.C. § 77mmm, and § 7-13 of the indenture because, even if such an account was created, the debenture holders were not notified of such action; (3) First Pennsylvania breached its contractual and fiduciary obligations by its failure to obtain certain security for the benefit of the debenture holders; and, (4) First Pennsylvania breached a confidential trust and was negligent.

 On December 27, 1978, plaintiff Harry M. Bernard *fn2" ("Bernard") filed a class action complaint against First Pennsylvania and Capital, alleging jurisdiction under the Act *fn3" and invoking the pendent jurisdiction of the Court. In addition to various claims against Capital which are not relevant here, Bernard, as owner of debentures in the amount of $ 12,000, alleges that First Pennsylvania violated the Act and the indenture by its failure to provide certain notifications and reports to the debenture holders' benefit.

 On January 5, 1979, the Court ordered the consolidation of the Zeffiro and Bernard actions for all purposes, pursuant to Fed.R.Civ.P. 41. Pursuant to the provisions of the Bankruptcy Act, all proceedings are stayed against Capital, absent permission to proceed from the bankruptcy court.

 First Pennsylvania acknowledges that the debenture holders may allege common law causes of action for breach of trust and breach of contract, but contends that the Act does not expressly provide for a federal cause of action or for federal jurisdiction and that, therefore, the debenture holders' suit must be brought in state court. In the alternative, First Pennsylvania argues that the action is barred by the one-year period of limitation established by the Act for the bringing of suits to establish liability under its express liability section. See § 323, 15 U.S.C. § 77www.


 We are squarely presented with the question of whether there is a federal cause of action in favor of debenture holders against a trustee for breach of the provisions of an indenture, when those provisions are governed by the Trust Indenture Act. Although it is clear that debenture holders would have a cause of action for breach of trust cognizable in state court, we must determine whether such an action is within the jurisdictional grant of the Act. Although the Act has been in existence for many years, this question has only been addressed on several occasions. In Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S. Ct. 1678, 32 L. Ed. 2d 195 (1972), the Supreme Court assumed Arguendo that bond holders could allege a federal cause of action against a trustee, Id., at 406 n. 17, 433 n. 23, but held that the defaulting issuer's trustee in bankruptcy did not have standing under the Bankruptcy Act to assert those claims. Id., at 434. See also Caplin v. Marine Midland Grace Trust Co., 439 F.2d 118, 123 n. 5 (2d Cir. 1971).

 The first case to hold that debenture holders could allege a federal cause of action was Morris v. Cantor, 390 F. Supp. 817 (S.D.N.Y.1975). The Morris court noted that the legislative history of the Act indicated that Congress was concerned with serious abuses of the trust indenture as an instrument of corporate finance, Id., at 820, and was cognizant of the national scope of the problem. Id., at 822. The court concluded by stating:

(T)his legislation must be viewed as an indirect method of imposing nationally uniform and clearly defined obligations upon those associated with the issuance of corporate debt. The Court holds that the statute thereby "created liability" as surely as though it had directly required the same actions and standards of behavior of trustees and obligors . . . .

 Id. The court, therefore, held that the Trust Indenture Act vested federal courts with jurisdiction to enforce the terms of trust indentures. Id., at 833.

 The Morris v. Cantor holding was followed without discussion in In re Equity Funding Corp. of America Securities Litigation, 416 F. Supp. 161 (C.D.Cal.1976). See also Lewis v. Marine Midland Grace Trust Co., 63 F.R.D. 39 (S.D.N.Y.1973). However, subsequent developments in the law in terms of the creation of implied causes of action convince us that the Morris v. Cantor holding must be reexamined. Clark v. Gulf Oil Corp., 570 F.2d 1138, 1148 (3d Cir. 1977), Cert. denied, 435 U.S. 970, 98 S. Ct. 1611, 56 L. Ed. 2d 62 (1978).

 In Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975), the Supreme Court articulated four factors to be considered when a court is asked to imply a cause of action:

In determining whether a private remedy is implicit in a statute not expressly providing one, several factors are relevant. First, is the plaintiff "one of the class for whose Especial benefit the statute was enacted," that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?

 Id., at 78, 95 S. Ct. at 2088 (citations omitted). The Court notes that a private remedy will not be implied in the context of every federal statute, Polansky v. Trans World Airlines, Inc., 523 F.2d 332 (3d Cir. 1975); Rauch v. United Instruments, Inc., 548 F.2d 452, 456 (3d Cir. 1976); Wolf v. Trans World Airlines, Inc., 544 F.2d 134 (3d Cir. 1976), and that Cort has been characterized as having "severely limited the circumstances in which a federal court may imply a private cause of action from a federal statute." Chrysler Corp. v. Schlesinger, 565 F.2d 1172, 1188 (3d Cir. 1977).


 A study was conducted in 1936 by the SEC, pursuant to a statutory mandate, 15 U.S.C. § 78jj, which revealed widespread abuses in the issuance of corporate bonds under indentures. *fn4" See Securities and Exchange Commission Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganization Committees, Part IV, Trustees Under Indentures (1937) ("SEC Report"). The report made it clear that indenture trustees frequently did not represent the interests of the debenture holders but were more closely identified with the issuer and were protected by broad exculpatory clauses in the indenture. SEC Report at 2-9, 68-70. The debenture holders were often widely scattered and had difficulty enforcing their rights under indentures. SEC Report at 5-6. Furthermore, courts often enforced indenture terms as written, rather than applying the traditional standards of fiduciary duty. Id.

 The problem was seen as being national in scope in light of the large volume of debt securities traded on national exchanges. See Senate Committee on Banking and Currency, Report on the Trust Indenture Act of 1939, S.Rep.No.248, 76th Cong., 1st Sess. 3-4 (1939) ("Senate Report"); H.R.Rep.No.1016, 76 Cong., 1st Sess. 25 (1939) ("House Report"). Although it was clear that a nationwide solution, which would establish clearly defined obligations, was needed, there was concern that additional federal intrusions into capital markets would be dangerous at a time when the Nation needed to revitalize those markets. Hearings on H.R. 10292 Before a Subcommittee of the Committee on Interstate and Foreign Commerce, 75th Cong., 3rd Sess. 31-32 (1938) (statement of SEC Commissioner Douglas) ("House Hearings"). Furthermore, there was vigorous opposition by banking institutions to additional regulation of business, Morris v. Cantor, supra, ...

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