Bass, Berry & Sims attorney Chris Lazarini examined a case of alleged breach of trust and breach of fiduciary duty against a bank acting as the indenture trustee related to a foreclosure action on defaulted mortgage revenue bonds. The trial court granted summary judgment for the bank, which was later affirmed, since under Ohio law, causes of action for breach of trust and breach of fiduciary duty accrue, and the applicable statute of limitations begins to run, when the plaintiff knew or should have known of the alleged breach.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication.

Ross Sinclaire and Assoc., LLC vs. The Huntington National Bank, No. 17AP-355 (Ohio App., 10Dist., 2/22/18) 

*Under Ohio law, causes of action for breach of trust and breach of fiduciary duty accrue, and the applicable statute of limitations begins to run, when the plaintiff knew or should have known of the alleged breach. 

**Where, however, a trustee's misconduct is surreptitious or hidden from the trust beneficiary, the causes of action accrue and the statute of limitations begins to run when the fiduciary relationship ends. 

In 1998, Montgomery County, Ohio issued $5.8 million in multi-family housing mortgage revenue bonds, the proceeds of which were used to redevelop an apartment complex for low-income families, which served as security for the bonds. In 2001, the indenture trustee, Huntington National Bank ("HNB"), issued its first notice of default to bond holders. Numerous additional default notices and other status reports followed. In early 2006, knowing the bonds were in default, an account executive ("AE") at Ross Sinclaire, an investment banking, brokerage and asset management firm ("RSA") who specialized in distressed municipal bonds, began purchasing the bonds for pennies on the dollar. In April 2009, HNB filed a foreclosure action. RSA continued buying the bonds, and eventually owned $1.5 million face value of the bonds at a cost of $217,000. In 2012, the complex sold for $1.6 million, and RSA received $164,000 from the proceeds. In July 2013, RSA sued HNB, alleging breach of fiduciary duty and breach of trust. The trial court granted summary judgment for HNB, finding that RSA's claims accrued in April 2009, when the foreclosure action was filed, and were barred by the applicable four-year statute of limitations.

RSA appealed, arguing that HNB provided bondholders with false and misleading information that prevented RSA from discovering the breach of trust until HNB's fiduciary relationship ended with the sale of the property and distribution of the proceeds. Conducting a de novo review, the Court explains that the limitations period began to run when RSA either knew or should have known of the alleged breach of trust. According to the AE's testimony, RSA knew or should have known of the breach of trust in 2008, because it knew of the default, knew that alternative financing efforts had failed and, the AE had concluded, the only way the trustee could preserve the assets for bondholders was to file a foreclosure action. Based on his conversations with HNB, the AE knew HNB had no intention of pursuing foreclosure at the time. Rejecting RSA's misinformation argument, the Court finds it "difficult to conceive" how RSA could claim to be unaware of the bonds' desperate financial condition, given the information in HNB's notices. At the latest, the April 2009 foreclosure action was a red flag warning to bondholders that their investment was in distress. Because the complaint was not filed until July 2013, the matter is time-barred and the Court therefore affirms.