LNC Investments, Inc. v. First Fidelity Bank, N.A.

First Fidelity Bank, N.A., New Jersey (First Fidelity) (defendant) purchased aircraft from Eastern Air Lines, Inc. (Eastern) and then leased the same aircraft back to Eastern. As indenture trustee, First Fidelity issued three series of bonds with a total principal of $500 million pursuant to the sale-leaseback transaction. Later, United Jersey Bank (defendant) and National Westminster Bank (defendant) joined First Fidelity as trustees (collectively, the trustees), each for a different bond series. Eastern went into Chapter 11 bankruptcy in March 1989, triggering both an automatic stay under the Bankruptcy Code and an obligation under the indenture that the trustees act with a prudent degree of care and skill. LNC Investments, Inc., and Charter National Life Insurance Company (the bondholders) (plaintiffs) acquired second- and third-series bonds between 1989 and 1994. In August 1990, the Iraqi invasion of Kuwait caused fuel prices to rise, and the value of the aircraft significantly declined. In November 1990, the trustees filed a motion for adequate protection, which required the bankruptcy court to prohibit a bankrupt party’s use or sale of property serving as collateral if necessary to adequately protect creditors’ interests. The bondholders brought claims of breach of contract, breach of fiduciary duty, and violation of the Trust Indenture Act in federal district court. The bondholders argued that the trustees waited too long to either make the motion for adequate protection or move for the bankruptcy court to lift the stay, in which case the trustees could have sold the aircraft before the loss in value. The court instructed the jury that the bondholders must prove not only imprudence, but also proximate cause of injury. The proximate-cause instruction included a requirement of proof that the bondholders relied upon the trustees to act prudently under the circumstances. The jury found that the trustees had breached their duty of prudence but not proximately caused injury, and the court entered judgment for the trustees. The bondholders appealed. The United States Court of Appeals for the Second Circuit granted certiorari.