In Re Color Tile Inc., Debtor. Michael R. Buchanan, Official Committee of Unsecured Creditors, as Disbursing Agent Under the Plan of Liquidation (Formerly the Official Committee of Unsecured Creditors of Color Tile Inc.) v. Reliance Insurance Company Blackstone Family Investment Partnership Pilgrim High Yield Trust Bankers Trust Co. Ids Extra Income Fund, Inc. Dan Lufkin Elise Lufkin Northern Trust Company, as Trustee of a Master Trust for the Benefit of the Allied Signal, Inc. Allied Signal Corp. Prudential High Yield Fund, Inc. Prudential Insurance Company of America, as Investment Manager for the General Motors High Yield Account General Motors, General Motors High Yield Account Prudential Series Fund, Inc. Riverside Capital Advisors, Inc. Bears, Sterns & Company, Inc. Morgan Guaranty Trust Co. Of New York Atwell & Co How & Co Kelly & Co. Btc U.S. High Yield Fund Northeast Investors Trust Northstar High Yield Bond Fund Saloman Brothers, Inc. State Street Research Strategic Growth & Income Fund State Street
Docket: 04-4351
Court: Court of Appeals for the Third Circuit; January 25, 2007; Federal Appellate Court
Michael R. Buchanan, as Disbursing Agent for the Official Committee of Unsecured Creditors of Color Tile Inc., appeals a District Court decision granting summary judgment to State Street Research Investment Services, Inc., and associated mutual funds. Buchanan contends that the District Court erred in its ruling by failing to recognize that the amended complaint relates back to the original complaint under Federal Rule of Civil Procedure 15(c), which would prevent summary judgment based on statute of limitations grounds. The appellate court, led by Circuit Judge Smith, found that the District Court could not conclusively determine that the defendant did not receive imputed notice under Rule 15(c). Consequently, the decision is vacated, and the case is remanded for further fact-finding.
The case involves allegations that Color Tile fraudulently transferred $10 million in dividends to certain stockholders just before filing for Chapter 11 bankruptcy. The Committee initially served its complaint to Cede, an entity representing the Depository Trust Company (DTC), in February 1998 but did not serve the amended complaint on State Street Research until March 2001, which was after the statute of limitations had expired. The DTC acted as a conduit for transmitting dividends from issuers to beneficial owners, with State Street Bank functioning as an agent for State Street Research.
State Street Research was added as a defendant in 2001 after the Committee identified it as a beneficial owner of Color Tile stock during the dividend payments. The 1998 complaint remained unchanged. In April 2002, the Delaware District Court granted State Street Research's motion for summary judgment, ruling that the 2001 complaint was time-barred due to the Committee's failure to show that State Street Research had notice of the 1998 complaint, as required under Federal Rule of Civil Procedure 15(c)(3)(A). The Committee appealed, and the Third Circuit vacated and remanded the case for further factual development regarding whether State Street Bank received notice from DTC and the extent of DTC's obligation to inform State Street Research.
On remand, following a two-day evidentiary hearing, the District Court reaffirmed its summary judgment in favor of State Street Research on October 6, 2004, concluding that the Second Amended Complaint did not relate back to the original complaint because State Street Research lacked notice of the initial suit against DTC/Cede. The District Court had jurisdiction under 28 U.S.C. 1334, and the appellate court reviewed the summary judgment under a plenary standard, applying the same criteria as the District Court. The main issue for review was whether the District Court correctly determined that State Street Research did not receive notice of the 1998 complaint. The District Court noted that State Street Bank was required to forward complaints it received about its clients' securities but ultimately ruled that since the Bank had not received notice of the original complaint, its duty to forward it was moot. The court adopted a narrow definition of actual notice, focusing solely on whether State Street Bank or State Street Research directly received the complaint from DTC.
The District Court determined that the Bank was required to forward any received complaint to State Street Research. The sole issue now is whether DTC had a duty to forward the complaint to the Bank. The court considered imputed notice as akin to constructive notice, referencing the case Singletary v. Pa. Dept. of Corrs., which indicated that notice can be actual, constructive, or imputed under the relation back doctrine. In Garvin v. City of Philadelphia, the court reaffirmed that imputed notice falls under constructive notice, necessitating either a shared attorney or an identity of interests.
However, the current case differs in that plaintiffs aim to impute knowledge from a sub-agent to an agent and subsequently to the principal, rather than under Rule 15(c)(3). This imputed knowledge should be analyzed as actual notice, not constructive or imputed notice. The distinction between this case and Singletary and Garvin lies in the context: here, the focus is on whether an agent and principal are deemed to have received actual notice when a sub-agent acquires knowledge during their employment.
Under basic agency law, when an agent receives notice, it is imputed to the principal. The knowledge of the agent is treated as the knowledge of the principal, meaning that notice to the agent regarding material facts is notice to the principal. This principle is supported by various precedents, stating that the knowledge acquired by an agent in the course of their duties is imputed to the principal, affecting the principal's rights and liabilities in relation to third parties.
Knowledge possessed by an agent is typically imputed to the principal, except when a third party acts against the principal's interests, a principle that extends to sub-agents. The focus of the analysis is the relationship between DTC and State Street Bank regarding DTC's obligation to forward a complaint against Cede. If such an obligation exists, it indicates DTC's authority within the scope of its agency. This obligation is governed by the participation agreement between the parties. A key question is whether DTC had the duty to pass on complaints in a manner that beneficial stock owners, like State Street Research, would receive them.
DTC's obligation to forward complaints is suggested by Rule 6 of its Rules and By-Laws, which mandates delivery of various documents related to a Participant's Deposited Securities. Plaintiffs argue that "other property or documents" includes complaints, as this aligns with DTC's duty to deliver dividends. This interpretation is supported by prior rulings indicating that a depository bank should notify beneficiaries of claims related to dividends.
However, further discovery revealed an internal operating procedure (IOP) that may limit the applicability of Rule 6. According to DTC's Director of Legal and Regulatory Compliance, the IOP states that while DTC may provide certain documents to Participants, it is under no obligation to do so and advises Participants to independently monitor information. The ambiguity arises from the lack of specific mention of "complaints" in Rule 6 and the non-specific nature of the Geigel IOP, raising uncertainty over DTC's obligation to forward complaints.
Ambiguity in the participant agreement must be addressed through fundamental contract law principles, as the agreement is governed by New York law. Rule 6, incorporated into the agreement, is part of DTC's by-laws, which are binding on the Bank. The case cites IBJ Schroder Bank. Trust Co. v. Resolution Trust Corp., affirming that contract interpretation rules apply to by-laws. Geigel's declaration serves as primary evidence for State Street Research, asserting that the Geigel IOP governs legal complaints rather than Rule 6, indicating that participants could not expect DTC to forward complaints. Geigel further clarifies that DTC does not interpret Rule 6 as imposing an obligation to act as an agent for participants regarding service of legal process.
Given the reasonable but conflicting interpretations of Rule 6 and the Geigel IOP, the contract's ambiguity precludes summary judgment at this early litigation stage, as highlighted in Mellon Bank, N.A. v. United Bank Corp. of New York. The court notes that interpreting ambiguous contracts is a factual matter, often informed by the parties' practical interpretations. The resolution of competing interpretations regarding DTC's obligations necessitates factual determination by a jury, as guided by Scholastic, Inc. v. Harris.
Consequently, the court vacates the District Court's judgment and remands for further proceedings, while denying the plaintiff's motion to introduce new evidentiary materials at the appellate stage, emphasizing the importance of maintaining a fair and efficient judicial process. The Committee also contends that DTC had an independent obligation to forward the complaint to the Bank.
The argument centers on the principle of "apparent authority," which occurs when a principal leads others to reasonably believe that an agent possesses authority, even without a formal agency relationship. The Committee has not provided evidence that State Street Research or the Bank led them to believe that DTC was authorized to receive service of process or to forward complaints on behalf of State Street Research. The only fact presented is that Color Tile shares were held in Cede's name, and that Delaware and New York law requires service on the registered owner of the stock. The Committee does not assert that state law prohibits serving the beneficial owner or that they were unaware of DTC's operational framework. The Committee, being a sophisticated entity, is presumed to understand that DTC holds shares in "street name" for beneficial owners and has not suggested otherwise.
Additionally, DTC's internal operating procedures (IOPs) specify which legal notices are not to be posted on its electronic notice service (LENS and LENL). The procedures indicate that notices involving "Defendant" and "Dividend" should not be published, and those listing Cede, Co. or DTC as a defendant should be forwarded to the legal department. State Street Research and the District Court argue that these IOPs demonstrate DTC's lack of obligation to publish the complaint. However, the relevance of the IOPs is limited to the electronic notice publication process and does not address how the legal department should handle complaints clearly related to securities in a participant's account. The Committee contends that Rule 6 is the regulation that the legal department was required to follow.
