## Facts

- Equity Funding Corporation of America issued $38.5 million in convertible subordinated debentures under a 1971 indenture naming First National City Bank as indenture trustee.
- First National City Bank also participated as a lender (with other banks) under a separate revolving-credit facility of up to $75 million to Equity Funding.
- After Equity Funding collapsed and sought bankruptcy reorganization in April 1973, First National City resigned as indenture trustee, and United States Trust Company of New York became successor trustee.
- The successor trustee sued the former trustee on behalf of debenture holders, alleging the former trustee used its trustee position and issuer-related information to protect or improve its own lending position to the detriment of subordinated debenture holders.
- The complaint asserted (among other theories) breach of fiduciary duty based on conflict of interest/self-dealing, and additional claims framed as failures to perform duties stated in the indenture.

## Issues

1. Whether an indenture trustee owes fiduciary duties to debenture holders before an event of default beyond the duties stated in the indenture.
2. Whether an indenture trustee’s dual role as trustee and lender can support a claim for breach of the duty of loyalty based on alleged self-interested conduct.
3. Whether the pleaded allegations stated cognizable claims, or instead improperly attempted to impose non-contractual “watchdog” duties on the trustee.

## Decision

- The Appellate Division held that an indenture trustee’s pre-default obligations are largely defined by the indenture, but the trustee is not free of all fiduciary-type obligations.
- The court permitted certain causes of action to proceed where the allegations plausibly charged disloyal conduct or misuse of the trustee position to obtain advantage over debenture holders.
- The court affirmed dismissal of other causes of action that sought to impose duties not found in the indenture and not otherwise required by law.
- The court affirmed denial of the successor trustee’s motion for partial summary judgment due to unresolved factual issues and potential defenses.
- The order was modified to reflect which claims survived and which were dismissed.

## Legal Principles

- An indenture trustee’s duties before default are primarily contract-based; absent an identified default or an indenture-imposed obligation, the trustee generally has no broad duty to monitor the issuer’s affairs.
- Even pre-default, an indenture trustee remains subject to core fiduciary constraints, including good faith and loyalty, and may not exploit the trusteeship for self-interest at beneficiaries’ expense.
- A trustee’s conflict of interest (including acting as a significant creditor) can support liability if the trustee uses its position or informational advantage to obtain unfair priority or benefit over the beneficiaries.
- Courts will not convert an indenture trustee into an insurer of the issuer’s solvency or a general guarantor against issuer fraud; liability requires a breach of a specific contractual duty or a recognized core fiduciary norm.
- On a motion to dismiss, allegations are taken as true with favorable inferences; claims grounded in disloyalty/self-dealing may survive even where many duties are contract-limited.

## Conclusion

The court treated corporate indenture trustees as primarily governed by the indenture before default, but held they remain accountable for disloyal self-dealing, allowing conflict-based fiduciary claims to proceed while rejecting attempts to impose broad non-contractual monitoring duties.


United States Tr. Co. of N.Y. v. First Nat’l City Bank, 57 A.D.2d 285, 394 N.Y.S.2d 653 (App. Div. 1st Dep’t 1977)