## Facts

- KH Funding Company issued Series 3 senior secured notes and Series 4 subordinated unsecured notes under an indenture naming Wells Fargo Bank, N.A. as indenture trustee.
- The indenture provided that, upon an event of default, the trustee must exercise its rights and powers “as a prudent man would” in the conduct of its own affairs to protect noteholders.
- In 2005, Wells Fargo filed a UCC financing statement to perfect the Series 3 noteholders’ security interest; the filing was effective for five years unless continued.
- KH’s financial condition deteriorated in 2007–2008, and by 2009 KH’s public filings reflected late payments on interest and principal.
- The plaintiff alleged Wells Fargo knew by early 2009 that KH was in default, including through information received directly from KH.
- In early 2010, Wells Fargo notified noteholders of an event of default and accelerated the notes.
- Wells Fargo allegedly failed to file a continuation statement before the UCC financing statement expired, causing the security interest perfection to lapse.
- Within 90 days of the lapse, KH filed for bankruptcy; the plaintiff alleged the Series 3 noteholders lost secured priority and received a reduced recovery.
- A Series 3 noteholder sued Wells Fargo for breach of the indenture and breach of fiduciary duty of care, seeking relief on behalf of similarly situated noteholders.

## Issues

1. Whether the complaint plausibly alleged breach of contract based on the trustee’s post-default “prudent man” obligations, including failure to act timely in response to default and failure to maintain perfection of the security interest.
2. Whether the complaint plausibly alleged breach of fiduciary duty of care by an indenture trustee based on post-default conduct and the indenture’s “prudent man” clause.
3. Whether the pleadings were legally or factually insufficient to survive judgment on the pleadings under Rule 12(c), including allegations of causation and damages.

## Decision

- The court denied Wells Fargo’s Rule 12(c) motion for judgment on the pleadings.
- The court held the complaint plausibly stated claims for breach of contract and breach of fiduciary duty.
- The court found the alleged loss of secured status and reduced bankruptcy recovery adequately pleaded injury and a plausible causal link at the pleadings stage.

## Legal Principles

- A Rule 12(c) motion is assessed under the same standard applied to Rule 12(b)(6): well-pleaded facts are accepted as true and must plausibly state a claim for relief.
- An indenture’s post-default “prudent man” provision can require affirmative protective action by the trustee, depending on the facts, and may support contract claims tied to collateral and priority protection.
- After default, an indenture trustee may face heightened obligations consistent with acting prudently for noteholders; claims grounded in alleged knowing inaction and resulting loss may proceed beyond the pleadings.
- Allegations that a trustee allowed perfection to lapse shortly before a debtor’s bankruptcy, leading to loss of secured priority and a reduced estate recovery, can sufficiently plead causation and damages at the motion stage when supported by specific timing and knowledge allegations.

## Conclusion

The court allowed noteholders’ claims to proceed because detailed allegations that the indenture trustee knew of defaults, delayed protective action, and failed to continue a UCC filing plausibly supported breach of the indenture’s post-default “prudent man” duties and a related fiduciary-duty theory, as well as a plausible claim of resulting loss in bankruptcy recovery.


Gresser v. Wells Fargo Bank, N.A., No. CCB-12-987, 2012 WL 5250553 (D. Md. Oct. 23, 2012)