Bank of New York v. Sheff
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In the Circu it Court for P rince Geo rge s Cou nty Case No. 02-21119 IN THE COURT OF APPEALS OF MARYLAND No. 137 September Term, 2003 ______________________________________ THE BAN K OF NEW YOR K, TRUSTEE, ET AL. v. RONALD SHEFF, ET AL. ______________________________________ Bell, C.J. Raker Wilner Harrell Battaglia Greene Eldridge, Jo hn C. (Re tired, Specially Assigned), JJ. ______________________________________ Opinion by Wilner, J. ______________________________________ Filed: July 28, 2004 This action arises from the sale of nearly $50 million in tax-exempt revenue bonds by Prince George s County, M aryland, in 1993. The ultimate recipients of the net proceeds and the true borrowers w ere health care providers in the D istrict of Columbia-Prince G eorge s County area that comprised the Greater Southeast Healthcare System. Everyone agrees that the county acted m erely as a cond uit; it issued the bonds, received the proceeds of the sale, and immedia tely passed the p roceeds o n to the borrowers which, alone, were responsible for repayment. T he county ha d no oblig ation to the b ondhold ers for repa yment. Part of the security for repayment of the bonds was a lien on the assets of the individual health care providers and their subsidiaries, including their accounts receivable. In order to perfect that lien, it was necessary to file a UCC Financing Statement with the Maryland State Department of Assessments and Taxation (SDAT), with the Clerk of the Circuit Court for Prince George s County for the health care providers located in the county, and with the District of Columbia Recorder of Deeds for the health care providers located in the District. Financing statements were appropriately filed with SDAT and with the Clerk in Prince George s County, but, u nfortunate ly, a financing sta tement w as not filed with the D.C. Recorder of D eeds , and , as a r esult of th at lap se, th e bondholde rs los t the o pportunity to perfect against third parties a first lien on the receivables of the entities located in the District, one of which was the 483-b ed Greater South east Commu nity Hospital (GSCH ). That became a problem when the consortium defaulted on the bonds and it was discovered that another creditor, Daiw a Healthco-2 LLC, had obtained a first lien on the receivables of GSC H in 19 97. The Bank of New York, as trustee for the bondholders, and four municipal bond funds that hold the bonds, led by Eaton Vance Municipal Bond Fund, blamed one of the law firms that acted as counsel for the county in the transaction, Piper & Marbury (now Piper Rudnick) (P & M), for the failure to file a financing statement in the District. They sued th e firm in the Circuit Court for Prince George s County for negligence (legal malpractice) and breach of fiduciary obligation.1 Finding no genuine dispute of material fact, the court, upon concluding that (1) P&M did not act as counsel to the bondholders and had no o bligation to them, (2) P&M never assu med a du ty to file the financing statement in the District, and (3) even if there we re liability on P& M s part, th e action was barred by limitations, granted summary judgmen t to the defen dants. The plaintiffs ap pealed. O n our ow n initiative, we granted certiorari prior to proceedings in the Court of Special Appeals, and, convinced that the action is barred by limitations, we shall affirm. BACKGROUND Most any bond sale is a complex transaction, and this one was no exception. There were eight borrowers who were part of the consortium (one of which owned several health care facilities, including GSCH), a corporate trustee for multiple bond purchasers, six 1 The suit also named as defendants two individual lawyers from P&M who worked on the transaction. For convenience, we shall refer to the defendants, collectively, as P&M. -2- underwriters, and the county. Over 70 documents were drafted, circulated, and negotiated, and it appears that five law firms were involved in planning and consummating the transaction. Each of the law firm s was assig ned respo nsibility for drafting documents. Among the documents assigned to P&M to draft were general certificates of the borrowers, the Trust Indenture, the Loan Agreement, the Master Indenture, bond counsel opinions, and Financing Statement Covering the Receipts. The financing statements were obviously an important part of the transaction, and they were dealt with in a number of the documents. The Loan Agreement between the county and the borrowers and the Master Trust Indenture entered into by the borrowers and the trustee for the bondho lders each p ut the obliga tion to file all necessary financing statements on the borrowers the health care providers who ultimately received the bond proceeds.2 Section 3.05 of the Loan Agreement stated: The Borrowers shall keep, record and file, at the expense of the Borrowers, all necessary fin ancing state ments and renewals thereof, in such places as may be required by law in orde r to preserve and protect fully the security of the holders of Bonds and the rights of the Co unty and the Tru stee. Section 4.02(b) of th e Master Trust Inde nture conta ined a nea rly identical require ment, although it referred to the health care providers as the Obligate d Group Members rather than as Borrowers. Section 6.12 of the Indenture of Trust required the Borrowers, [i]n 2 At oral argu ment, we were adv ised that it is com mon in tran sactions suc h as this one to put the obligation to secure the lender s lien on the borrowers. That does strike us, however, as akin to directing the fox to guard the chicken house. -3- accordance with Sectio n 3.05 of th e Loan A greemen t, to file such continuatio n statemen ts as may be required by the District of Columbia Uniform Commercial Code and the Maryland Uniform Comm ercial Cod e . . . in order to con tinue perfe ction of the security interest of the Trustee in such items of tangible or intangible p ersonal pro perty . . . and provide a stamped copy of such continuation statements to the Trustee prior to the expiration of the financing stateme nts. In conform ance with its assignment to draft financing statements, P&M drafted and circulated such statements for filing with SDAT and the Clerk of the Circuit Court for Prince George s County. Th e statemen ts drafted by P&M instructed the filing officer to return the statement, after recordation, to P&M. P&M did not draft a financing statement for filing in the District, however; nor did anyone else. Comm ents were received on the first drafts of the statements, and chan ges were made prio r to closing. P &M, w hose ma in office w as in Baltimore, filed the financing statement with SDAT in Baltimore on the morning of the closing, paid the filing fee for that statement, and brought stamped copies of the filed statement to the closing. The financing statement prepared for filing in Prince George s County was given to local counsel for the county, Robert Ostrom , and he saw to its signature by the ap propria te coun ty official and its f iling w ith the C ircuit Co urt Cler k. At the pre-closin g on M ay 12, 1993, a ll documents to be filed, including the financing statements for SDA T and P rince Geo rge s Cou nty, were circu lated to the lawyers fo r all parties for final approval. Following the formal closing on May 13, P&M prepared and -4- circulated to all parties, including the trustee, a Closing Binder that contained all transaction documents. Because a financing statement for filing in the District had not been prepared, no such document appeared in the Binder. Notwithstanding everyone s knowledge that some of the borrow ers, including GSCH, were located in the District of Columbia, no one complained about (or apparently noticed) the lack of a financing statement for filing in the District, a nd no o ne filed such a s tateme nt. By 1997, app arently as the resu lt of significant changes in M edicaid and man aged care reimbursement policies, the System s financial status had deteriorated. In April of that year, GSCH a major constituent entity of the System entered into an agreement with DaiwaHealthco-2 LLC (Daiwa) under which Daiwa purchased $15 million of selected Government and insurance company receivables held by GSCH. A stated condition to the purchase, articulated in the agreement, was that GSCH was the legal and beneficial owner of the receivables free and clear of any [l]iens, that Daiwa would receive valid ownership of each Receivable . . . subject to no third-party claims of interest thereon, and that [n]o effective financing statement or other instrument similar in eff ect coverin g any Rece ivable or the Collectio ns with resp ect thereto is o n file in any reco rding office, except those filed in favor of [ Daiwa ]. The ag reement a lso required that, prior to closing, Daiwa receive timestamped copies of financing statements showing Daiwa as a secured creditor with respect to the purchased accounts and, if necessary, releases or termination statements evidencing the release of all security interests or other rights previously granted by GSCH in the receivables. -5- Prior to closing, GSCH sent a copy of the transaction documents to the Bank of New York (BNY), w hich, since 1995, had a cted as trustee for the 1993 bondholders, to ma ke sure that the trustee was aware of the transaction and to obtain any consents that might be nece ssary.3 Knowing that Daiwa would insist on having a first lien on the receivables, counsel for GSCH had already made a search for liens against the receivables, found the filing in Prince George s County, but found nothing in the District of Columbia. A trust officer for BNY , acknowledging the Bank s responsibility for protecting the interests of the bondholders, scanned the docum ents and fo rwarded a copy of the m, along w ith [a]ll the relevant bond docum ents, to BNY s counsel, noting that GSCH was setting up a re ceivable financing that was not in the ordinary course of business and that the parties needed the trustee s perm ission/a uthoriz ation. Counsel was asked to review the documents and verify that such transactions are allowe d. Counsel billed BNY for reviewing the docum ents, including the Daiwa purchase agreeme nt, a bill that BN Y forw arded to G SCH f or reimbu rsement. 4 The controller for GSC H belie ved tha t BNY had a pprov ed the transac tion. Notwithstanding the Daiw a purchas e, the System s f inancial con dition contin ued to worsen. In June, 1998, Moody s Investors Service downgraded the System s debt rating 3 Upon a ssuming its ro le as trustee, B NY w as given all re levant doc uments pertaining to the transaction by the former trustee, including the assignment of drafting responsibilities and the Closing B inder. 4 The attorn ey, though claim ing that she re viewed th e indenture s, did not reca ll reviewing the purchase agreement, notwithstanding that the bill charged for that service. -6- from Baa3 to Ba3 and put it on a watchlist for further downgrading, noting that the downgrade affected the 1993 bonds. Contemporaneously, Fitch IBCA downgraded the bonds from B BB+ to BB. A month late r, Mood y s downg raded the b ond rating to B1; in Nove mber, 1 998, it d owng raded th e bond s to Caa 3. Possibly as early as June, 1998, but in any event by September, 1998, an analyst with Eaton Vance Management, one of the municipal bond funds holding the 1993 bonds, became aware of the Daiw a agreem ent that G SCH h ad sold to D aiwa rece ivables sup posedly pledged to the bondholders and that GSC H s performance had significantly deteriorated in 1997-98. On O ctober 16, 1 998, he fa xed a letter to th e Assistant T reasurer of BNY in reference to the bonds, asking whether the receivables had been perfected and whether the UCC s [had] been filed. Although he spoke with som eone at BNY in regard to the letter, he never got a response as to whether the receivables had been perfected. He was told that UCC statements for Maryland, good for 12 years, had been filed in May, 1993, but received no info rmation rega rding any filing in the District. The analyst believed that he asked for copies of the f inancin g statem ents bu t never r eceive d them from B NY. Concerned that the sale of receivables to Daiwa might constitute a violation of the bond documents a concern that Eaton Vance expressed in a meeting that it had with GSCH in mid-No vember, 1 998 the f irm emplo yed the law firm of Mintz, Levin, Cohn, Ferris, Glovsky & Po peo, P.C ., to render legal advice concerning the sale. The record reveals that the firm was so employed o n or befo re Nove mber 20 , 1998. -7- In the course of its investigation, the firm did a UCC filing search on GSCH and faxed the result to Eaton Vance on November 24, 1998. Based on its review of that information, Eaton Vance learned that UCC financing statements were not on file in the District of Columbia. Upon learning tha t it did not hav e a perfec ted lien on th e receivab les sold to Daiwa, the trustee com menced negotiation s with the S ystem to obtain replacem ent collateral. When those negotiations failed, BNY, on May 26, 1999, formally declared a default on the bonds. The next day, four of the System members, including GSCH, initiated Chapter 11 bankruptcy proceedings in the District of Columbia. During the course of the bankruptcy, a buyer purchased GSCH s assets for over $21 million, and the parties entered into a settlement agreement dividing the proceeds. Part of that settlement involved the exchange of mutual releases, and in one of those re leases BNY released the bondholders claims against the System the party charged by the Loan Agreement, the Master Trust Indenture, and the Indenture of Trust with filing the financing statements in the appropriate places. The Chapter 11 plan became effective November 5, 2001. Just over two weeks later, on November 23, 2001, BNY and the four bond funds sued P&M in the Superior Court for the District of Columbia. The court dismissed that action on August 7, 2002, on the ground of forum non conveniens, finding tha t Maryland had a substantial public interest in having the action litigated here. On August 28, 2002, BNY and Eato n Va nce f iled t his suit in the C ircuit Co urt for Pr ince Geo rge s County. -8- DISCUSSION As noted the Circuit Court concluded, as a matter of law, that (1) P&M neither had nor assumed any duty to the trustee to record the financing sta tement in the District of Columbia, and (2) even if it had or assumed such a duty, the plaintiffs were on inquiry notice more than three years before suit was filed in the Superior Court in W ashington that the firm had not, in fact, filed such a statement, and that their actions were therefore barred by limitations.5 We agree with the latter conclusion and therefore need not address the form er. Litigants have three years from th e date their action accrues to file a civil action. Maryland Code, ยง5-101 of the Cts. & Jud . Proc. Article. Maryland applies the d iscovery rule in determ ining w hen an action a ccrues . American General Assur. Co. v. Pappano, 374 Md. 339, 351, 822 A.2d 1212, 1219 (2003). Under that rule, the statute of limitations begins to run when the plaintiff has know ledge of c ircumstanc es which would cause a rea sonable person in the position of the plaintiff[] to undertak e an investig ation whic h, if pursued with reasonab le diligence, wou ld have led to kn owled ge of th e allege d [cau se of ac tion]. Pennw alt Corp. v. Nasios, 314 Md. 433, 448-49, 550 A.2d 1155, 1163 (1988), quoting from 5 BNY and Eaton Vance trace the limitations period back from November 23, 2001 when the action was filed in the District of Columbia Superior Court rather than from August 28, 200 2, when the action w as filed in the Circuit Court fo r Prince George s County. Presumably, although they do not mention it, the plaintiffs are relying on Maryland Rule 2-101(b) in support of that view. As P&M does not contest that Novem ber 23, 200 1 is the critical da te, we shall a ssume, w ithout decid ing, that the R ule applies and was satisfied, and that the action in the District of Columbia effectively tolled the limita tions pe riod fo r filing th e Mar yland acti on. -9- O Hara v. Kovens, 305 M d. 280, 3 02, 503 A.2d 1 313, 13 24 (19 86). See also American General Assur. Corp. v. Pappano, supra, 374 Md. at 351, 822 A.2d at 1219. Like any other issue that is fact-depende nt, if there is any genuine dispute of material fact as to whe n the plaintiff s possessed that degree of know ledge, the issu e is one for the trier of fact to resolve ; summ ary judgm ent is ina pprop riate. O Hara v. Kovens, supra, 305 Md. at 300-01, 503 A.2d at 1323-24. If there is no such genuine dispute, however, and the question of whether the plaintiffs were on inquiry notice more than three years bef ore their suit was filed can be determined as a matter of law, summary judgment on that issue is, indeed, appropriate.6 P&M urges that the trustee was on inquiry notice that P&M had not prepared or filed a fina ncin g stateme nt in the D istric t in M ay, 1993, w hen it received the Closing Binder that contained all of the closing documents, including financing statements filed with SDAT and the Clerk in P rince Geo rge s Cou nty, but did not c ontain a fin ancing state ment for the District. Had the trustee made an inquiry at that time (or had BNY made such an inquiry in 1995, when it as sumed th e trusteeship a nd becam e privy to all of the relevant information possessed by the forme r trustee), it wou ld have disc overed, im mediately, that a financing 6 The plain tiffs comp lain that the C ircuit Court m ade no f indings of fact regarding the limitations defense. That is not entirely the case. The court determined that, although the case could be decided solely on the issue of duty, it concluded that the action was also barred by limitations. In that regard, it expressly adopted the reasons stated in the defendants motion for summary judgment and at the oral argument on that motion , which were th e points noted a bove. -10- statement had not, in fact, been filed in the District and that it did not, therefore, have a perfected lien on the receivables of GSCH. BNY responds that the trustee had a right to rely on P& M to p erform its duty and therefo re had n o reaso n to que stion its w ork. There is no dispute of material fact with re spect to that issu e. If, arguendo, P&M did have a duty to file the financing statement in the District, the absence of such a statement from the Closing Binder should certainly have alerted the trustee to the real prospect that the firm had not performed that duty, especially when the Binder contained the statements filed with SDA T and the Clerk in Princ e Geo rge s C ounty. The omission of that document did, indeed, giv e the trustee re ason to qu estion wh ether P& M had filed the statem ent. P&M adds that, even if the trustee was not on inquiry notice in 1993, it clearly was in April, 1997, when it learned of the propo sed Daiw a transaction . As noted , GSCH sent to the trustee a copy of the transaction documents, which recited that GSCH was the legal and beneficial owner o f the receiva bles to be purchased by Daiwa free a nd clea r of any [ l]iens, that Daiwa would receive va lid owner ship of the r eceivables subject to no third-party claims of interest thereon, an d that [n]o effective f inancing sta tement . . . cov ering any Re ceivable or the Collections with respect thereto is on file in any recording office. A BNY trust officer read enough of the documents to conclude that GSCH was setting up a re ceivable financing that was n ot in the ordinary course of business and that the parties needed the trustee s permission or authorization. Concerned, he sent the documents to counsel for the Bank with a request to verify that such transa ctions are allowed. Th ere is no dispute as to -11- that fact. Unquestionably, BNY was on inquiry notice that it did not have a perfected lien on GSCH receivables; it could not have such a lien if Daiwa was about to purchase the receivables free and clear of any such lien. That necessarily raised the question of whether a proper financing statement had been filed in the District of Columbia. BNY makes the curious resp onse that, be cause it receiv ed a Com pliance C ertificate attesting that GSCH was authorized to engage in the transaction, it had no reason to read the docume nts and had no authority to disapprove the transaction. That is not the issue. The Compliance Certificate simply confirmed what the other documents implied that BNY did not have a perfected lien on the GSCH receivables . The Ce rtificate was accurate; its accuracy, indeed, was the final alarm. The Bank was undisputedly on inquiry notice when its trust officer sent the documents to counsel to investigate whether the proper financing statements had been filed. The Bank did initiate an inquiry; unfortunately, it failed to follow up when it did not get a clear response from its lawyer. Had it done so, it would have discovered almost imm ediately that no f inancing sta tement ha d been file d in the Dis trict. Quite apart fr om w hateve r know ledge m ay have b een po ssessed by BNY , Eaton Vance urges that the undisputed facts show that Eaton Vance had no inkling that there was any problem with the financing statements on file before N ovembe r 23, 1999 . That is simply not true. Indeed, the undisputed facts show exactly the opposite. As we have indicated, at least by September, 1998, Eaton Vance was aware of the Daiwa agreement. On October 16, 1998, on e of its analysts faxed a letter to BNY asking whether the receivables -12- had been perfected. That alone demonstrates inquiry notice. At some po int on or prio r to November 20, 1998, having not received a satisfactory answer from the bank, it employed a law f irm to in vestiga te the m atter. The fundam ental error in Eaton Vance s view is its apparent belief that lim itations did not begin to run until the firm actually discovered that no financing statement had been filed by P&M in the District of Columbia. That is not the case. Limitations began to run when the firm was on inquiry notice that financing statements may not have been filed, triggering a duty on its part to make an investiga tion that, if diligently pursued, would have revealed the sad fac t. On the record bef ore us, it is clear, as a matter of law, that this action was barred by limitations. JUDGMENT A FFIRMED, WITH COSTS. -13-
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