Bank of New York v. Sheff

WILNER, J. This action arises from the sale of nearly $50 million in tax-exempt revenue bonds by Prince George’s County, Maryland, in 1993. The ultimate recipients of the net proceeds and the true borrowers were health care providers in the District of Columbia-Prince George’s County area that comprised the Greater Southeast Healthcare System. Everyone agrees that the county acted merely as a conduit; it issued the bonds, received the proceeds of the sale, and immediately passed the proceeds on to the borrowers which, alone, were responsible for repayment. The county had no obligation to the bondholders for repayment.

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, unfortunately, a financing statement was not filed with the D.C. Recorder of Deeds, and, as a result of that lapse, the bondholders lost the opportunity to perfect against third parties a first lien on the receivables of the entities located in the District, one of which was the 483-bed Greater Southeast ²³⁸ Community Hospital (GSCH). That became a problem when the consortium defaulted on the bonds and it was discovered that another creditor, Daiwa Healthco-2 LLC, had obtained a first lien on the receivables of GSCH in 1997.

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 the 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 obligation to them, (2) P & M never assumed a duty to file the financing statement in the District, and (3) even if there were liability on P & M’s part, the action was barred by limitations, granted summary judgment to the defendants. The plaintiffs appealed. On our own 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 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 firms was assigned responsibility for drafting documents.

Among the documents assigned to P & M to draft were general certificates of the borrowers, the Trust Indenture, the Loan Agree ²³⁹ ment, 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 bondholders each put the obligation 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 financing statements and renewals thereof, in such places as may be required by law in order to preserve and protect fully the security of the holders of Bonds and the rights of the County and the Trustee.” Section 4.02(b) of the Master Trust Indenture contained a nearly identical requirement, although it referred to the health care providers as the “Obligated Group Members” rather than as “Borrowers.” Section 6.12 of the Indenture of Trust required the Borrowers, “[i]n accordance with Section 3.05 of the Loan Agreement,” to file “such continuation statements as may be required by the District of Columbia Uniform Commercial Code and the Maryland Uniform Commercial Code ... in order to continue perfection of the security interest of the Trustee in such items of tangible or intangible personal property ... and provide a stamped copy of such continuation statements to the Trustee prior to the expiration of the financing statements.” In conformance 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. The statements drafted by P & M instruct ²⁴⁰ ed 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. Comments were received on the first drafts of the statements, and changes were made prior to closing.

P & M, whose main office was 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 appropriate county official and its filing with the Circuit Court Clerk. At the pre-closing on May 12, 1993, all documents to be filed, including the financing statements for SDAT and Prince George’s County, were circulated to the lawyers for all parties for final approval. Following the formal closing on May 13, P & M prepared and 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 borrowers, 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, and no one filed such a statement. By 1997, apparently as the result of significant changes in Medicaid and managed 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 Daiwa-Healthco-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 [ljiens,” that Daiwa would receive “valid ownership of each Receivable ... subject to no third-party claims of interest thereon,” and that “[n]o effective ²⁴¹ financing statement or other instrument similar in effect coveting any Receivable or the Collections with respect thereto is on file in any recording office, except those filed in favor of [Daiwa].” The agreement also required that, prior to closing, Daiwa receive time-stamped 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. Prior to closing, GSCH sent a copy of the transaction documents to the Bank of New York (BNY), which, since 1995, had acted as trustee for the 1993 bondholders, to make sure that the trustee was aware of the transaction and to obtain any consents that might be necessary. 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 documents and forwarded a copy of them, along with “[a]ll the relevant bond documents,” to BNY’s counsel, noting that GSCH was setting up a receivable financing that was not in the ordinary course of business and that the parties needed the trustee’s “permission/authorization.” Counsel was asked to review the documents and “verify that such transactions are allowed.” Counsel billed BNY for reviewing the documents, including the Daiwa purchase agreement, a bill that BNY forwarded to GSCH for reimbursement. 4 The controller for GSCH believed that BNY had “approved” the transaction. ²⁴² Notwithstanding the Daiwa purchase, the System’s financial condition continued to worsen. In June, 1998, Moody’s Investors Service downgraded the System’s debt rating 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 BBB + to BB. A month later, Moody’s downgraded the bond rating to Bl; in November, 1998, it downgraded the bonds to Caa3. 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 Daiwa agreement — that GSCH had sold to Daiwa receivables supposedly pledged to the bondholders — and that GSCH’s performance had significantly deteriorated in 1997-98. On October 16, 1998, he faxed a letter to the Assistant Treasurer 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 someone 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 information regarding any filing in the District.

The analyst believed that he asked for copies of the financing statements but never received them from BNY. Concerned that the sale of receivables to Daiwa might constitute a violation of the bond documents — a