In Re: Color Tile ( 2007 )

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
1-26-2007
In Re: Color Tile
Precedential or Non-Precedential: Precedential
Docket No. 04-4351
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PRECEDENTIAL
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Case No: 04-4351
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., et al.),
Appellant
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 US HIGH YIELD FUND;
NORTHEAST INVESTORS TRUST; NORTHSTAR HIGH
YIELD BOND FUND; SALOMAN BROTHERS, INC.;
STATE STREET RESEARCH STRATEGIC GROWTH &
INCOME FUND; STATE STREET RESEARCH INCOME
TRUST; STATE STREET RESEARCH EQUITY TRUST;
STATE STREET RESEARCH INVESTMENT SERVICES,
INC.; STATE STREET RESEARCH GROWTH TRUST;
METROPOLITAN LIFE INSURANCE COMPANY
On Appeal from the United States District Court
for the District of Delaware
District Court No. 98-cv-358
District Judge: The Honorable Sue L. Robinson
Submitted Pursuant to Third Circuit L.A.R. 34.1(a)
December 13, 2006
Before: FUENTES and SMITH, Circuit Judges,
and YOHN, District Judge*
(Filed: January 26, 2007)
I. Connor Bifferato, Esq.
Joseph K. Koury, Esq.
*
The Honorable William H. Yohn, Jr., Senior District Judge
for the Eastern District of Pennsylvania, sitting by designation.
2
Bifferato, Gentilotti, & Biden
1308 Delaware Ave.
Wilmington, DE 19806
David F. Heroy, Esq.
Brian E. Martin, Esq.
Kevin Y. Pak, Esq.
Bell, Boyd & Lloyd, LLC
70 West Madison, Suite 3300
Chicago, IL 60602
Counsel for Appellant
Paul A. Bradley, Esq.
A. Richard Winchester, Esq.
James J. Freebery, Esq.
McCarter & English, LLP
919 N. Market St., Suite 1800
Wilmington, DE 19801-3023
Counsel for Appellees
________________________
OPINION
________________________
SMITH, Circuit Judge.
I.
Appellant Michael Buchanan argues that the District
Court’s grant of the defendant’s Motion for Summary Judgment
3
should be reversed because the amended complaint in this case
relates back to the original complaint under Federal Rule of
Civil Procedure 15(c), thereby precluding a grant of summary
judgment on statute of limitations grounds. Because we believe
that, with the information that was available to it, the District
Court could not properly determine as a matter of law that the
defendant did not receive imputed notice under Rule 15(c), we
will vacate the District Court’s decision and remand for further
factfinding.1
II.
This case involves an appeal by the plaintiff, the
Disbursing Agent Under the Plan of Liquidation (formerly the
Official Committee of Unsecured Creditors of Color Tile, Inc.
(“the Committee”)). The Committee appealed to this Court
1
We note in passing that we deny the plaintiff’s motion to
take judicial notice of Section 19b-4 of the Securities Exchange
Act of 1934, codified at 17 C.F.R. § 240.19b-4, and an apparent
response by the Depository Trust Company to a questionnaire
by the International Organization of Securities Commissions.
See Berwick Grain Co., Inc. v. Ill. Dept. of Agric., 116 F.3d 231,
234 (7th Cir. 1997) (“The appellate stage of the litigation
process is not the place to introduce new evidentiary materials.
To grant such motions not only would promote inefficient
allocation of judicial resources, but also would deny
non-movants fair notice of the record they are to confront on
appeal.”) (parenthetical citation omitted).
4
from an order granting summary judgment to defendant State
Street Research Investment Services, Inc. (and affiliated mutual
fund defendants) (“State Street Research”).
The Depository Trust Company (“DTC”) is an
association of more than 200 brokerage houses and financial
institutions which was formed pursuant to Congressional
mandate for the purpose of owning shares for the beneficial
interest of customers. Cede & Co. (“Cede”) is the name used by
DTC to hold shares that it owns. Among other services not
relevant here, Cede transmits the dividends received from
issuers to the beneficial owners, through “participating” or
“depository” banks acting as conduits. In re Color Tile Inc., 92
Fed. Appx. 846, 847-48 (3d Cir. 2004). State Street Bank (“the
Bank”) acted as State Street Research’s conduit with respect to
the Color Tile shares held in Cede’s name. In short, DTC
functioned as a sub-agent for the State Street Bank, who in turn
operated as an agent for State Street Research (the principal).
In February 1998, the Committee served its initial
complaint against Cede upon DTC. The Committee did not
serve its amended complaint on State Street Research until
March 2001–after the statute of limitations had run against State
Street Research. The Committee’s allegations arise out of Color
Tile’s payment of $10 million in dividends to certain of its stock
holders, shortly before it filed for Chapter 11 bankruptcy. The
Committee alleges that the dividends were fraudulently
transferred, and seeks return of the dividends from the stock
5
holders, including State Street Research. State Street Research
was added as a defendant in 2001 because the Committee
discovered that State Street Research had been a beneficial
owner of Color Tile stock at the time that the dividends were
paid. The 1998 complaint was otherwise unmodified.
In April 2002, the District Court of Delaware granted
State Street Research’s motion for summary judgment on the
ground that the Committee’s 2001 complaint was time barred.
The Court held that the Committee failed to demonstrate that
State Street Research had received notice of the 1998 complaint,
as required under Federal Rule of Civil Procedure 15(c)(3)(A),
and therefore the 2001 complaint could not “relate back.”
The Committee appealed the grant of summary judgment
and this Court vacated and remanded the case. In re Color Tile
Inc., 92 Fed. Appx. 846 (3d Cir. 2004) (Color Tile I). This
Court in Color Tile I determined that the Rule 15 notice issue
could not be determined without further factual development.
The Court remanded the case for limited discovery directed to
(1) whether State Street Bank received actual notice of the
complaint from DTC; and (2) whether the scope of DTC’s
obligations to the Bank included forwarding notice of
complaints in such a manner that they would reach State Street
Research.
On remand, the District Court conducted a two-day
evidentiary hearing and issued an opinion on October 6, 2004.
6
The Court granted State Street Research’s motion for summary
judgment and concluded that the Second Amended Complaint
did not relate back to the original complaint under Rule 15(c)
because State Street Research had no notice of the initial suit
brought against DTC/Cede.
III.
The District Court had jurisdiction over State Street
Research’s motion for summary judgment pursuant to 28 U.S.C.
§ 1334. We have jurisdiction pursuant to 28 U.S.C. § 158(d)
and 28 U.S.C. § 1291. Our standard of review over the District
Court’s grant of summary judgment is plenary, and we “apply
the same standard that the District Court should have applied.”
Shuman ex rel. Shertzer v. Penn Manor Sch. Dist., 441 F.3d 141,
146 (3d Cir. 2005) (internal citations omitted); DeRienzo v.
Harvard Indus., Inc., 357 F.3d 348, 352-54 (3d Cir. 2004);
Becton Dickenson & Co. v. Wolckenhauer, 215 F.3d 340, 343
(3d Cir. 2000). A court should grant summary judgment “if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law.” FED.
R. CIV. P. 56(c). This Court will, in applying this standard,
“view the facts in the light most favorable to the nonmoving
party and draw all inferences in that party’s favor.” Shuman,
441 F.3d at 146.
7
IV.
The primary issue for this Court to address on plenary
review is whether the District Court properly concluded, at the
summary judgment stage, that State Street Research had no
notice of the original February 1998 complaint brought against
DTC/Cede.
We note at the outset that the District Court in its October
6, 2004 opinion concluded that State Street Bank “was obligated
to forward complaints it received regarding its clients’
securities” to State Street Research. The District Court drew
support for this position from § 2.14 of the Bank’s Custodian
Agreement, which states that it “shall transmit” all written
information it received pertaining to the securities it held for its
clients. However, the District Court stated that “[b]ecause the
court has already concluded that [the Bank] did not receive
notice of the original complaint, its obligation to forward the
original complaint is irrelevant.”
The District Court took an extremely narrow view of
what constitutes actual notice. The Court held that “[n]either
State Street Bank nor defendants received actual notice of the
original complaint.” In examining the scope of actual notice,
the Court looked only at whether the Bank (the agent) or State
Street Research (the principal) examined or physically received
the complaint from DTC (the sub-agent). Because the District
Court has already concluded that the Bank needed to forward
8
the complaint to State Street Research if the Bank received it,
the only question we must answer is whether DTC had an
obligation to forward the complaint to the Bank.
The District Court viewed imputed notice as a form of
constructive notice. This Court in Singletary v. Pa. Dept. of
Corrs., 266 F.3d 186, 195 (3d Cir. 2001) suggested that, for the
purposes of the relation back doctrine, notice can be “actual,
constructive, or imputed.” The Singletary panel apparently
considered imputed notice as a form of constructive notice. See
id. at 189. In Garvin v. City of Philadelphia, 354 F.3d 215 (3d
Cir. 2003), we followed Singletary for the proposition that
imputed notice falls under the doctrine of constructive notice, so
that imputed notice under Rule 15(c)(3) requires either a shared
attorney or an identity of interests. See id. at 222-27.
The type of imputation at issue in Singletary and Garvin,
however, differs from what we are presented with in this case.
Here, the plaintiffs are attempting to impute knowledge from a
sub-agent to an agent (and therefore the principal), as opposed
to imputing notice under Rule 15(c)(3). Imputing knowledge
from an agent to a principal must be analyzed according to
principles of actual notice rather than constructive/imputed
notice. In Singletary, the primary issue was whether a plaintiff
could amend her complaint to include a staff psychologist in a
§ 1983 case brought by the mother of a prisoner who committed
suicide in a state correctional institution. 266 F.3d at 189. In
Garvin, the relevant issue was whether a complaint could be
9
amended to include several police officers in an excessive force
case. 354 F.3d at 220. Both of these cases dealt with imputed
notice in the context of whether the actors who actually
committed the allegedly tortious and unconstitutional acts could
be added to the complaint. Neither of these cases addressed the
issue that confronts this panel. Here, we are simply analyzing
whether, as a matter of law, an agent and a principal should be
deemed to have received actual notice when their sub-agent
receives knowledge within the scope of its employment by the
agent. As a matter of basic agency law, imputed knowledge
falls under the rubric of actual notice rather than imputed (and
therefore constructive) notice. The key difference between the
Singletary/Garvin line of cases and the situation here is that, in
the former context, a plaintiff seeks to impute notice against a
defendant who allegedly perpetrated the act or acts at issue in
the complaint. In the agency context, however, the plaintiff
seeks to add a party to whom actual knowledge should be
imputed based on agency principles.
Where an agent receives notice, that notice is imputed to
the principal. Am. Sur. Co. v. Pauly, 170 U.S. 133, 153 (1898)
(“It is the rule that the knowledge of the agent is the knowledge
of his principal, and notice to the agent of the existence of
material facts is notice thereof to the principal, who is taken to
know everything about a transaction which his agent in it
knows.”). See also Martin Marietta Corp. v. Gould, Inc., 70
F.3d 768, 773 n.4 (4th Cir. 1995) (stating that “the knowledge
imputed to the principal is considered actual knowledge, not
10
constructive”) (emphasis added); Higgins v. Shenango Pottery
Co., 256 F.2d 504, 509 (3d Cir. 1958) (noting that “it is a rule of
agency that the knowledge of the agent is imputed to the
principal in connection with any transaction conducted by the
agent in behalf of his principal”); Tonelli v. United States, 60
F.3d 492, 495 (8th Cir. 1995) (“As a general rule, notice to an
agent is effective if the agent has a duty to receive that
knowledge and report it to the principal.”) (citation omitted);
Veal v. Geraci, 23 F.3d 722, 725 (2d Cir. 1994) (“In general,
when an agent is employed to represent a principal with respect
to a given matter and acquires knowledge material to that
representation, for purposes of assessing the principal’s rights
and liabilities vis-à-vis a third person the agent’s knowledge is
imputed to the principal.”) (citations omitted); N. Assur. Co. of
Am. v. Summers, 17 F.3d 956, 964 (7th Cir. 1994) (stating that
“knowledge of an agent is ordinarily to be imputed to the
principal,” but not when a third party acts with the agent
contrary to the interests of the principal) (citation omitted). This
imputation applies to sub-agents as well; from sub-agent to
agent, and then from agent to principal. See RESTATEMENT
(SECOND) OF AGENCY § 283(a).
With this framework outlined, the next issue to examine
is the relationship between DTC and State Street Bank. The
bulk of the Committee’s notice arguments turn, at the outset, on
whether DTC had an obligation to the Bank to forward the
complaint against Cede. If DTC had such an obligation, then it
also had such authority, and if DTC had such authority, it was
11
within the scope of DTC’s agency.
Against the backdrop of basic agency law is the fact that
any duty DTC had to the Bank is governed by the parties’
contract. See RESTATEMENT (SECOND) OF AGENCY § 428. In
this case, the contract we look to is the participation agreement.
A threshold issue for the Committee, then, is whether passing on
complaints in a manner that they would be received by
beneficial stock owners (like State Street Research) was within
DTC’s scope of agency by the Bank, and in the Bank’s scope of
agency by State Street Research, as set forth in the parties
respective agreements.2 The clearest indication of DTC’s
2
The Committee also argues that DTC had the obligation to
forward the complaint to the Bank completely independent of its
agreement with the Bank (it argues likewise for the Bank and
State Street Research). The argument is based on the rule of
“apparent authority,” which “‘arises in those situations where a
principal causes persons with whom the agent deals to
reasonably believe that the agent has authority’ despite the
absence of an actual agency relationship.” Am. Tel. & Tel. Co.
v. Winback and Conserve Program, 42 F.3d 1421, 1439 (3d Cir.
1994) (quoting Barticheck v. Fidelity Union Bank/First Nat’l
State, 680 F. Supp. 144, 148-49 (D.N.J.1988)). The Committee
fails, however, to cite any evidence suggesting that State Street
Research or the Bank caused the Committee to believe that DTC
was invested with the authority to receive service of process for
State Street Research, or to forward complaints to State Street
Research. The Committee has only pointed to the undisputed
fact that the Color Tile shares were held in Cede’s name, and
12
obligation to forward the complaint comes from Rule 6 of the
Rules and By-Laws and Organization Certificate of DTC, which
states:
Subject to the provisions of these Rules and the
Procedures, the Corporation, acting in accordance
with duly authorized instructions from the
Participant or Participants and the Pledgee or
Pledgees, if any, having an interest in the
transaction, shall . . . deliver dividends,
distributions, rights, securities, proxy material and
other property or documents received by the
Corporation with respect to a Participant’s
Deposited Securities or Pledged Securities, except
as provided below in this Rule or in the
Procedures.
that Delaware and New York law required that the complaint be
served on the registered owner of the stock. The Committee
does not contend that state law prohibited serving the complaint
on the beneficial owner too. Critically, the Committee does not
contend that it was unaware of how DTC works. Any
sophisticated party like the Committee knew or should have
known that DTC holds shares in “street name” for beneficial
owners—the Committee nowhere suggests it was lead to believe
anything to the contrary.
13
(emphasis added). The plaintiffs argue that “other property or
documents,” in the context of a Participant’s Deposited
Securities, should be read to include a complaint because it so
closely relates to DTC’s duty to deliver dividends to the Bank
(and therefore State Street Research). This view of Rule 6
comports with Color Tile I. As our panel then stated, “[i]t
would seem to us untoward that a depository bank that acts as a
conduit for the transmission of dividends (which perforce it
must transmit) and keeps the financial record of these
transmissions, would not have the obligation to notify the
beneficiaries of a claim to recover some of these same
dividends.” Color Tile I, 92 Fed. Appx. at 851. Further, the
panel stated that “there seems to be no doubt of the obligation of
DTC or its nominee to notify the depository bank of its claim.”
Id.
After further discovery on remand, however, the parties
have supplemented the record to include an internal operating
procedure (IOP) that, according to State Street Research, limits
the applicability of Rule 6. Susan Geigel, DTC’s Director of
Legal and Regulatory Compliance, refers in her declaration to
a written IOP (attached to her declaration) which provides that
[f]rom time to time, DTC receives notices and
other documents and communications concerning
securities that are or were credited to Participants’
DTC accounts. Although DTC may make certain
of such documents and communications . . .
available to Participants, it shall be under no
14
obligation to do so nor, having once or more done
so, shall DTC have a continuing obligation to
make available Information of a certain type.
Therefore, Participants are advised to obtain and
monitor Information independently.
(hereinafter the “Geigel IOP”) (emphasis added).
Rule 6 refers to “documents” but does not specify
“complaints” or “legal notices,” and the Geigel IOP (which,
according to the Committee, limits Rule 6) refers to “notices and
other documents,” but is otherwise non-specific. Under this
view, DTC’s rules and procedures are ambiguous as to whether
DTC “shall” forward a complaint (under Rule 6) or “shall be
under no obligation to do so” (under the Geigel IOP).
This ambiguity must be resolved according to basic
principles of contract law. By its own terms, the participant
agreement is governed by New York law. Rule 6, which is
incorporated into the participant agreement, is one of DTC’s by-
laws. “It is well established that ‘[t]he rules of contract
interpretation are generally applicable to the interpretation of
bylaws.’” IBJ Schroder Bank & Trust Co. v. Resolution Trust
Corp., 26 F.3d 370, 374 (2d Cir. 1994) (quotation omitted).
Moreover, here, DTC’s by-laws are expressly incorporated into
the Bank’s “participant agreement” with DTC, and bind the
Bank to DTC’s by-laws and rules.
Geigel’s declaration and testimony are State Street
15
Research’s primary evidence that the Geigel IOP rather than
Rule 6 applies to legal complaints. Geigel’s declaration states
that the “notices and other documents and communications
concerning securities” referred to in the Geigel IOP include
complaints, and that because of this IOP, no participant could
reasonably expect that DTC would forward a complaint. Geigel
also stated more generally that “DTC does not interpret Rule 6,
nor was Rule 6 intended, to create an obligation or expectation
that DTC would deliver complaints or act as an agent for the
Participants for service of legal process.”3
3
Another of DTC’s IOPs specifies which legal notices are
not, at least upon first receipt, to be posted on DTC’s electronic
notice service used by participants (LENS and LENL). This
“legal notices IOP” provides that “Defendant” and “Dividend”
are key words used to identify items that should not be
published, and also provides that the “[i]tems where Cede &
Co., or DTC is listed as a defendant,” should not be published,
and should be forwarded to the legal department. State Street
Research (and the District Court) cite the legal notice IOP as
further evidence that DTC had no obligation to publish the
complaint in this case because the terms of the IOP exclude it
from publication. The problem with the argument is that the
legal notice IOP is only relevant to publication of electronic
notice and does not purport to govern the legal department’s
handling of the complaint if it is apparent that it relates to
securities credited to a participant’s account. The Committee,
of course, argues that Rule 6 is the rule that the legal department
was obligated to follow.
16
Given two conflicting but reasonable interpretations, a
contract will be viewed as ambiguous at this early stage in the
litigation. See Mellon Bank, N.A. v. United Bank Corp. of New
York, 31 F.3d 113, 116 (2d Cir. 1994) (applying New York law).
“As a general matter, we have held that when a contract is
ambiguous, its interpretation becomes a question of fact and
summary judgment is inappropriate.” Id.Here, the parties each offer reasonable, but conflicting
interpretations of Rule 6 and the Geigel IOP. See 11 WILLISTON
ON CONTRACTS § 32:14 (4th ed.) (“Given that the purpose of
judicial interpretation is to ascertain the parties’ intentions, the
parties’ own practical interpretation of the contract . . . can be an
important aid to the court.”); RESTATEMENT (SECOND) OF
CONTRACTS § 202 cmt. g (“The parties to an agreement know
best what they meant, and their action under it is often the
strongest evidence of their meaning.”).
We do not in this opinion analyze every piece of
evidence produced by both sides. Such factfinding and
interpreting is best left for trial. The ambiguity arising as a
result of competing interpretations of DTC’s forwarding
obligations is enough to foreclose the possibility of summary
judgment on this issue. See Scholastic, Inc. v. Harris, 259 F.3d
73, 83 (2d Cir. 2001) (“When the language of a contract is
ambiguous and there is relevant extrinsic evidence regarding the
actual intent of the parties, an issue of fact is presented for a jury
to resolve, thereby precluding summary judgment.”). “Only in
17
the rare case is the extrinsic evidence so one-sided that no
reasonable factfinder could find to the contrary, in which event
the court should resolve the ambiguity as a matter of law.” Id.(applying New York law).
V.
For these reasons, we will vacate the judgment of the
District Court and remand for further proceedings consistent
with this opinion.
18