Unpublished Disposition, 848 F.2d 1242 (9th Cir. 1983)

MEMORANDUM^* 

* This appeal arises out of an $18.5 million public offering of revenue bonds by the City of Fresno, California in 1984 ("the bonds"). The bonds were offered to finance the construction of a multi-unit rental apartment complex in Fresno. Appellant, Central Bank, was appointed as trustee for the bondholders under an indenture of trust dated December 1, 1983 ("the indenture").

In 1986, Central Bank filed a complaint in the Eastern District of California against Fresno and other parties affiliated with the bond issue or construction project ("appellees"). The amended complaint alleges various causes of action under securities and racketeering statutes, as well as common law fraud and negligence. The gravamen of the complaint is that appellees, either fraudulently or negligently, induced the bondholders to purchase the bonds at artificially inflated prices.

The district court did not reach the merits of the complaint, but rather, granted appellees' motion for summary judgment on the basis of standing. The court held that Central Bank lacked standing to prosecute the action because the indenture empowered the trustee to maintain, on behalf of the bondholders, only those actions grounded in contract (to collect principal and interest), not those grounded in tort (for fraud and negligence).

In this appeal, we are presented with a single, narrow issue: whether the terms of the indenture authorize Central Bank to maintain an action grounded in fraud or negligence in connection with the issuance of the bonds. As an appeal from a grant of summary judgment, we review the district court's determination de novo. See Darring v. Kincheloe, 783 F.2d 874, 876 (9th Cir. 1986).

II

The language of the indenture, around which this dispute centers, is found in Article IX, Section 9.08:

All rights of action (including the right to file proof of claims and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Bondholders allowed in any judicial proceedings) under this Indenture or under any of the Bonds may be enforced by Trustee without the possession of any of the Bonds or the production thereof in any trial or other proceeding relating thereto, and any such suit or proceeding instituted by Trustee shall be brought in its name as Trustee, as trustee of an express trust without the necessity of joining as plaintiffs or defendants any owners of the Bonds, and any recovery of judgment shall be for the equal and ratable benefit of the owners of the Outstanding Bonds.

(Emphasis added).

Central Bank argues that the emphasized language is broad enough to authorize a trustee action based either in contract or tort. It contends that so long as the action does not arise solely from statute or common law, and could not exist but for the bonds, the action must be deemed to be "under the bonds" and thereby authorized by Sec. 9.08. Central Bank primarily relies on Dietzel v. Anger, 8 Cal. 2d 373, 65 P.2d 803 (1937), for supporting authority.

Appellant's reliance on Dietzel is misguided. Dietzel is factually distinguishable from the case at hand. In Dietzel, the California Supreme Court did not hold that a trustee, under an indenture similar to the one before us, could maintain a tort-based action on behalf of the bondholders. It rather held that bondholders could not sue to enforce bond obligations because the indenture vested in the trustee the exclusive authority to bring such actions. Id. at 377.

Moreover, Dietzel does not stand for the broad proposition, espoused by Central Bank, that any action which could not be brought but for the existence of the bonds necessarily "arises under" the bonds. The Dietzel court was able to conclude that the action was "based on" the bonds because the specific, substantive obligations being asserted were defined by the bonds (the bondholders, under a now repealed California statute which made shareholders liable for corporate debts, brought an action against the shareholders for payment of principal and interest remaining due under the bonds). In the present case, we are unable to reach a similar conclusion. The specific, substantive obligations being asserted by Central Bank are not defined by the bonds, but instead, by federal and state anti-fraud provisions. See e.g., S.E.C. Rule 10b-5 (codified at 17 C.F.R. Sec. 240.10b-5). Therefore, whereas the action before us is certainly related to the bonds, and could not have been brought but for the bonds, it did not "arise under" the bonds.

Central Bank argues that to exclude its non-contractual claims from the purview of "rights of action under the bonds" in Sec. 9.08 is to render Sec. 9.08 "meaningless and redundant." It contends that Sec. 9.08 must be construed to confer upon the trustee a remedial authority that extends beyond the authority conferred in other sections of the indenture.¹  We disagree.

Section 9.08 clearly was not intended to vest additional remedies in the trustee. Rather, the plain language of the section reveals that it was intended to remove procedural barriers to remedies already vested in the trustee. In the absence of Sec. 9.08, the trustee may have been precluded from maintaining an action to enforce payment on the bonds without possession of the bonds or production of the bonds at trial. Section 9.08 enables the trustee to maintain such an action without possession or production of the bonds. The section also enables the trustee to file suit in its own name, to avoid the necessity of joining the numerous bondholders.

Construed as a procedural provision, as it must be, Sec. 9.08 is in no way meaningless or redundant. Furthermore, it would be inconsistent to construe Sec. 9.08 to authorize the trustee to maintain tort-based actions when virtually every other section of Article IX is focused on events of default. See, e.g., Sec. 9.01 (defining events of default), Sec. 9.02 (acceleration remedy upon default), Sec. 9.03 (legal and equitable remedies upon default), Sec. 9.05 (appointment of receivers upon default), Sec. 9.06 (waiver of certain rights upon default), Sec. 9.07 (application of moneys to principal and interest outstanding).

III

Accordingly, we hold that the indenture generally, and Sec. 9.08 specifically, do not authorize Central Bank, as trustee for the bondholders, to bring an action alleging violations of securities and racketeering statutes, as well as common law fraud and negligence. Without such authority Central Bank lacked standing to sue. Thus, the district court's grant of summary judgment was proper.

We AFFIRM.