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Jeffrey S. Becker v. U.S. Bank National Association

September 1, 2011


The opinion of the court was delivered by: McLaughlin, J.


This lawsuit arises from the plaintiff's investment in bonds held in trust by the defendant, U.S. Bank National Association ("the Trustee"). The plaintiff is a minority holder of what are referred to in this litigation, and the governing Trust Indenture, as Series 2004A Bonds. Citigroup Global Markets ("Citigroup") is a majority owner of the Series 2004A Bonds.*fn1

The plaintiff alleges breach of the governing Trust Indenture and of fiduciary duty.

The Trustee did not pay the final installment of the principal due on June 1, 2009 on plaintiff's bonds because of revenue shortfalls. The plaintiff contends that the principal on these bonds should have been paid before interest payments on other bonds were paid and that the Trustee should use reserve funds to pay his overdue principal. Both parties have moved for summary judgment on all claims. The Court will grant the defendant's motion and deny the plaintiff's motion.

I. Summary Judgment Record

A. Terms of the Trust Indenture

The bonds in this case were issued to fund the

construction of a student housing project (the "project"). The bonds are governed by a Trust Indenture which contains three preliminary sections, eleven articles, and nine exhibits. The sections relevant to this dispute are summarized here. The third preliminary section, called the Granting Clauses, defines the relationship between the Trustee and the bondholders. It provides that all bonds are held in trust "for the equal and ratable benefit and security of all and singular the Owners of all Bonds issued hereunder, without preference, priority or distinction as to lien or otherwise, except as otherwise hereinafter provided." Pl.'s Mot. for Summ. J., Ex. B ("Trust Indenture") at 3.

Article IV of the Trust Indenture directs the allocation of funds from the project and payment of bonds. Section 405 provides that revenue from the project is deposited in the Pledged Revenue Fund. The Pledged Revenue Fund is then used to pay the Series 2004A Bonds. Payment of bonds is governed by section 416. That section directs the trustee to pay the principal due on bonds as those bonds mature and then to pay interest due on unmatured bonds. Id. §§ 405, 408, 416(a)(3). The parties refer to this payment scheme as the "416 waterfall."

The Trust Indenture also creates a Debt Service Reserve Fund ("DSRF"). If the Pledged Revenue Fund is insufficient, the DSRF is used to pay debt service on the bonds. The DSRF is used only to "pay principal of or interest on the Series 2004A Bonds." The Trustee is required to maintain a minimum amount of funding in the DSRF. Id. §§ 410, 411.

The Trust Indenture also contains an article which governs if there is an "Event of Default." Section 701 defines various events of default, which include "payment of any installment of interest on any of the Bonds . . . not made when the same shall be come due and payable." Section 703 describes the remedies available to the Trustee if an event of default occurs. The Trustee may institute "suit at law or in equity to enforce the payment of the principal . . . and interest on the Bonds then Outstanding or to enforce any obligations of the Authority hereunder." Id. §§ 701, 703.

Article VII also provides powers to a "majority in principal amount" of bondholders if an event of default has occurred. A majority of bondholders can direct the Trustee to "accelerate" the bonds, meaning the "entire principal and interest on the Bonds shall thereupon become and be immediately due and payable." In addition, the majority of bondholders "shall also have the right, at any time, by an instrument or instruments in writing . . . to direct the time, the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of this Indenture." This direction must be in accordance with law and the other requirements of the Trust Indenture. Id. §§ 702, 703, 704.

Section 705 provides for the payment of funds if an event of default has occurred. First, section 705 dictates that any money received by the Trustee pursuant to action taken under Article VII is put into the Pledged Revenue Fund. Then, "all moneys in the Pledged Revenue Fund shall be applied" in a specific order. Under section 705 the money in the Pledged Revenue Fund is paid first to "all installments of interest then due" and then to "the unpaid principal of any of the [bonds] which shall have become due." Id. § 705. The parties refer to this payment scheme as the "705 waterfall."

In addition, section 705 has a second payment scheme as well. If an event of default has occurred and all outstanding bonds are due, because of acceleration of the debt or the passage of time, the money in the Pledged Revenue Fund is applied differently. In that case, the money is paid ratably to "the principal and interest then due and unpaid . . . without preference or priority of principal or interest over the other." Id. § 705(b).

Finally, Article VIII governs the obligations of the Trustee. The Trustee is to act "as an ordinarily prudent corporate trustee ordinarily would perform said trusts under a corporate indenture." However, if an event of default has occurred and is continuing, the Trustee's obligation changes slightly. Then, "the Trustee shall exercise such of the rights and powers vested in it" by the Indenture and the Trustee "shall use the same degree of care as a prudent person would exercise or use in the circumstances in the conduct of his own affairs." Id. § 801(a), (m).

B. Bond Payments Not Made

Each year, interest payments on outstanding bonds were paid on June 1 and December 1. Payments of principal were paid on June 1 of the year in which the bond matured. See, e.g., Def.'s Mot. Summ. J. ("Def.'s Mot."), Exs. B-1 to B-2. Once an event of default occurred, the Trustee performs an analysis to determine whether sufficient funds are available to make each distribution. The Trustee considers the funds available in the trust accounts and the expected revenue from the project. The Trustee also seeks the advice of legal counsel. Def.'s Mot, Ex. B ("Jacobsen Aff.") ¶¶ 7-9.

At the end of 2007, the project began to face financial difficulties. The Trustee determined that there was insufficient income to pay the interest due on December 1, 2007 from the Pledged Revenue Fund. The Trustee used the DSRF to make that payment. No bondholder objected to this action. This insufficiency of funds constituted the start of a continuing Event of Default under the terms of the Indenture Trust. Oral Argument Tr.("OA") 4:24-5:4, 4:8-14; Def.'s Mot., Ex. B-1 at 1-2.

The project revenues were again insufficient to pay the scheduled interest payment and principal due on June 1, 2008. Originally, the Trustee determined that it would use the DSRF to pay only the June 1, 2008 interest payment but not pay the principal due at that time. Def.'s Mot., Ex. B-2.

However, a majority of the Series 2004A bondholders, including Citigroup, directed the Trustee to pay the interest as planned and use a portion of the DSRF to pay the principal maturing on June 1, 2008. The Trustee considered the totality of the circumstances and then made the payment recommended by the majority bondholders. No bondholder objected to this action. After this payment, $1,890,492.72 remained in the DSRF. Def.'s Mot., Exs. B-3, B11 to B13; OA 4:45-24; Jacobsen Aff. ¶¶ 13-15.

The Trustee did not disperse the interest payment due on December 1, 2008 because the revenues from the project were again insufficient. Def.'s Mot., Ex. B-4.

The interest and principal payments due on June 1, 2009 were likewise not paid. At that point, the outstanding interest and payments due to Series 2004A bondholders was $3,912,383.26. The amount available for payment of the Series 2004A Bonds was $2,880,711.77. This was the first time the Trustee had failed to pay principal when due. The plaintiff's bonds matured on June 1, 2009. The plaintiff objected to the Trustee's decision not to pay the principal he was due. Def.'s Mot., Ex. B-5; Jacobsen Aff. ¶¶ 21-22.

On October 19, 2009, Citigroup, as a majority bondholder, directed the Trustee to pay the outstanding December 1, 2008 interest, but not to withdraw money from the DSRF until "the Project may reasonably be expected to generate revenues sufficient to replenish the amount withdrawn on a timely basis." After considering the funds available, the funds expected from the project, and the advice of legal counsel, the Trustee determined that Citigroup's direction was in accordance with the Trust Indenture. The Trustee then paid the interest which was due on December 1, 2008. At that time, the additional outstanding interest and principal still due on Series 2004A Bonds exceeded the amount of moneys available. The plaintiff objected to this payment. Def.'s Mot., Exs. B-6, B-15; Jacobsen Aff. ¶¶ 23-26.

There were again insufficient funds to pay the December 1, 2009 interest payment on time. ...

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