## Facts

- Indenture trustees administered a trust that issued three series of aircraft-backed bonds totaling about $500 million.
- The trust acquired aircraft from Eastern Air Lines through a sale-leaseback and leased the aircraft to Eastern as the bond collateral.
- Eastern filed for Chapter 11 bankruptcy in March 1989 while still in possession of the aircraft, triggering the automatic stay and the trustees’ “prudent person” obligations upon default/triggering events under the indenture, § 315(c) of the Trust Indenture Act (TIA), and common-law fiduciary duty principles.
- After the August 1990 invasion of Kuwait, fuel prices rose and aircraft values fell significantly.
- Bondholders alleged the trustees acted imprudently by waiting too long to seek bankruptcy-court relief to protect collateral value (including lifting the stay or obtaining “adequate protection”).
- The trustees did not move for adequate protection until November 1990.
- Bondholders claimed earlier action could have allowed sale of aircraft at higher values or yielded protections (including priority treatment) that would have reduced the bondholders’ loss.
- Bondholders alleged the trustees’ delay and related conduct would leave bondholders unable to collect full principal and interest.

## Issues

1. Whether the trial court erred by instructing the jury that proximate cause required bondholders to prove they “relied” on the trustees to act prudently.
2. What causation standard applies to claims against indenture trustees for breach of the “prudent person” duty under the indenture, TIA § 315(c), and common-law fiduciary duty.

## Decision

- The Second Circuit reversed the judgment for the trustees and remanded for a new trial.
- The court held the proximate-cause instruction was legally erroneous to the extent it required proof of bondholder “reliance” on trustee prudence.
- Because proximate cause was essential to each claim and the erroneous instruction could have affected the verdict, the error was not harmless.

## Legal Principles

- In suits against indenture trustees for breach of the “prudent person” standard under contract, TIA § 315(c), and fiduciary-duty theories, proximate cause does not require investor reliance akin to reliance elements in misrepresentation-based claims.
- The causation inquiry focuses on whether the trustee’s breach was a proximate or substantial factor in producing the bondholders’ economic loss, assessed against what likely would have occurred had the trustee acted prudently (including earlier pursuit of bankruptcy-court protections).
- Erroneous jury instructions on an essential element such as proximate cause warrant reversal when they may have misled the jury and affected the outcome.

## Conclusion

The Second Circuit set aside a defense judgment because the jury was improperly told that bondholders had to prove reliance to establish proximate cause; the proper inquiry is whether the trustee’s imprudent conduct substantially contributed to the bondholders’ loss, and the case was remanded for a new trial under the correct causation standard.


LNC Invs., Inc. v. First Fid. Bank, N.A., 173 F.3d 454 (2d Cir. 1999)