United States Trust Co. of New York v. Jenner

From 1977 through 1982, several unit investment trusts (UITs) purchased bonds from the Washington Public Power Supply System (WPPSS), which the WPPSS issued to finance the construction of two nuclear power plants. The WPPSS later canceled the nuclear project. Subsequently, the Washington Supreme Court held that the state’s guarantee of the bonds was unenforceable. The WPPSS defaulted on the bonds, which resulted in the bondholders filing a lawsuit against the WPPSS and various other defendants for alleged violations of securities laws. The actions were consolidated into a multidistrict litigation (MDL). In the course of the MDL, a settlement was reached pursuant to which the bond trustees (plaintiffs) received over $150 million. The settlement did not address any alleged violations of securities laws. The bond trustees filed an interpleader action to determine how the funds should be distributed regarding three types of bondholders (defendants). The first category was known as the current holders, comprised of investors who acquired the UITs after June 15, 1983, the date that the state declared that it would not guarantee the bonds. The second category was known as the former holders, comprised of the investors who sold the UITs before June 15, 1983. Finally, the third category was known as the continuous holders, comprised of investors who acquired the UITs before June 15, 1983, and held them through that date. The former holders argued that they were entitled to the $150 million because they were the parties who were damaged by the WPPSS’s default. The current and continuous holders argued that they were entitled to the funds based on the terms of the indenture agreements governing the bonds. The indenture agreements provided that all funds received by the trustee would be held as part of the trust fund until required to be disbursed pursuant to the indenture. Payments were to be disbursed on distribution days, with the funds disbursed from a principal account to the owners as of the record date. The district court ruled in favor of the current and continuous holders, and the former holders appealed.