First Trust Natl v. First National Bank

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
m 99-60431
_______________
FIRST TRUST NATIONAL ASSOCIATION,
AS INDENTURE TRUSTEE,
Plaintiff-Appellant,
VERSUS
FIRST NATIONAL BANK OF COMMERCE,
Defendant-Appellee.
_________________________
Appeal from the United States District Court
for the Southern District of Mississippi
_________________________
May 31, 2000
Before REAVLEY, SMITH, and
EMILIO M.GARZA, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
First Trust National Association (“First
Trust”) is indenture trustee for a trust the
assets of which are proceeds of notes sold by
Belle Casinos, Inc. (“BCI”), and Biloxi Casino
Belle, Inc. (“BCBI”). Those assets were
placed by BCI/BCBI into two escrow
accounts to be employed in building two
casinos. The casinos ran over budget, and
BCI/BCBI filed for bankruptcy. First National
Bank of Commerce (“FNBC”), the agent for
these escrow funds, failed to obtain necessary
documentation, guaranteeing the cost of
construction, from various sources, therefore

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contributing to the cost overruns and the
bankruptcy. Before the bankruptcy, First
Trust became aware of cost overruns and of its
failure to receive from FNBC copies of all
necessary documentation.
First Trust sued FNBC, claiming breach of
various contractual and fiduciary obligations to
the noteholders whom First Trust represents as
indenture trustee. FNBC challenged First
Trust’s suit on grounds of standing and the
statute of limitations. The district court found
for FNBC on summary judgment on both
grounds. First Trust appeals. Agreeing with
the district court that limitations bars this ac-
tion, we affirm.
I.
Mississippi Riverboat Amusements, Ltd.
(“MRA”), which owned and operated the
Biloxi Belle Casino in Biloxi, Mississippi,
decided in 1993 to expand its existing casino
(the “Biloxi Project”) and to open a new
casino in Tunica County (the “Tunica
Project”). To facilitate this expansion, MRA
established two subsidiary corporations: BCI,
a Delaware corporation, and BCBI, a
Mississippi corporation. To finance the
construction and expansion of the projects,
certain notes were sold under an offering put
together by Bear, Sterns & Co., Inc., in the
name of BCI. The notes were sold to
investors (the “noteholders” or “Holders”)
pursuant to an Indenture under which First
Trust served as indenture trustee, thereby
agreeing to perform certain acts on behalf of
the Holders and in relation to the notes, which
were sold in October 1993.
Upon sale of the notes, FNBC was selected
as Disbursing Agent for the proceeds, and its
obligations were defined by the Disbursement
and Escrow Agreement (“Disbursement
Agreement”). The proceeds from the notes
were placed into two escrow accounts
administered by FNBC, which agreed to
distribute the funds from those accounts only
on the occurrence of certain conditions listed
in the Disbursement Agreement.
Simultaneously, BCI loaned the net proceeds
of the notes to BCBI, which executed a
Disbursement and Escrow Account Security
Agreement (“Disbursement Security
Agreement”) to BCI in the principal amount of
$75 million. BCBI was to use the net
proceeds of the offering to finance the
construction and expansion of the projects and
thereafter operate the casinos.
After a draw at closing to pay off the
interim loans and closing costs, BCBI
deposited almost $60 million into two escrow
accounts at FNBC. Finally, an Assignment
Agreement was executed between BCI as
assignor and First Trust as assignee, whereby
BCI assigned all of BCI’s rights as Lender to
First Trust, including its rights under the
Disbursement Agreement. Moreover, BCI
assigned its rights, title, and interest in the
escrow accounts to First Trust.
According to article III of the Disbursement
Agreement, FNBC and First Trust were to re-
ceive certain documents (the “initial
documents”) as a precondition to disbursing
money from the escrow accounts. After the
note sale, FNBC received Contractor’s and
Architect’s Certificates (the “Disbursement
Certificates” or “certificates”) as contemplated
by article VI of the Disbursement Agreement,
and in particular section 6.08. FNBC,
however, was to use the Disbursement
Certificates to make disbursements only if both
First Trust and FNBC had first secured the
initial documents.
Neither First Trust nor FNBC received
those documents. FNBC, though, disbursed

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the requested funds on the strength of the Dis-
bursement Certificates alone.
FNBC first distributed money from the es-
crow accounts on October 14, 1993, and
continued to disburse until May 13, 1994. On
or about April 14, 1994, the Holders were first
notified by BCI that there were construction-
cost overruns. At a meeting between Bear,
Stearns and the Holders on May 5, 1994, the
Holders received a financial report indicating
that the projects had greatly overrun their
budgets.
The Holders hired attorneys to negotiate
further with BCI and to investigate defaults
under the Indenture and Disbursement
Agreements. On May 19, 1994, the
noteholders’ attorney informed Scott Strod-
thoff, First Trust’s vice president, of the
overruns and that a review of the
Disbursement Agreement indicated that a po-
tential default had occurred, and faxed Strod-
thoff a copy of the Disbursement Agreement.
On or about May 19, 1994, Strodthoff ex-
amined First Trust’s file and discovered that
only Disbursement Certificates numbered 3, 4,
and 5 were in the file. First Trust then hired its
own counsel on May 26, 1994, to “review
documents regarding construction
disbursements.” The construction budget in
the Disbursement Agreement limited the Biloxi
and Tunica Projects to about $30 million each.
Accordingly, BCBI could not exceed the bud-
gets by more than $1.2 million without First
Trust’s permission. There is no evidence that
First Trust ever consented to any increase in
the budgets.
First Trust declared default on July 12,
1994, and instructed FNBC to transfer the re-
maining escrowed funds to First Trust; BCI
and BCBI filed for bankruptcy on August 31,
1994. First Trust claims that it first discovered
FNBC’s failure to obtain the initial documents
in July 1996, when its attorneys examined
FNBC’s files.
II.
First Trust sued in its capacity as indenture
trust ee on behalf of the Holders on June 10,
1997, claiming breach of the Disbursement
Agreement, alleging that FNBC disbursed
funds from the escrow accounts without
having first received the initial documents. It
claimed breach of contract and of fiduciary
duty and sought damages in an amount equal
to the funds wrongfully disbursed.
In response, FNBC filed a third-party
complaint against various third-party
defendants, claiming that they were at least
partly responsible for FNBC’s alleged
mishandling of the proceeds. FNBC also filed
a motion for summary judgment, arguing that
First Trust’s action was time-barred and that
First Trust lacked standing under the Indenture
to bring its claims. The district court found for
FNBC on both counts, granting summary
judgment and attorney’s fees under the
Indenture.
III.
All agree that the applicable statute of lim-
itations is Mississippi’s catch-all statute, which
requires that
(1) All actions for which no other period
of limitation is prescribed shall be
commenced within three (3) years next
after the cause of such action accrued,
and not after.
(2) In actions for which no other period
of limitation is prescribed and which in-
volve latent injury or disease, the cause
of action does not accrue until the

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plaintiff has discovered, or by reasonable
diligence should have discovered, the
injury.
MISS. CODE ANN. § 15-1-49 (1999).
First Trust sued on June 10, 1997. Under
subsection (1), therefore, its action is barred if
it accrued before June 10, 1994. First Trust
claims, however, that the “discovery rule”
should apply to toll the statute until July 1996,
when it first discovered that FNBC had never
sent it the initial documents, or, if the
discovery rule does not apply, that its claim
was still timely, because its cause of action did
not accrue until BCI and BCBI declared bank-
ruptcySSafter June 10, 1994.
The district court and FNBC reason, to the
contrary, that First Trust’s claim accrued on
the day of the first disbursement of funds, that
the discovery rule does not apply, and that
even if it did, the tolling pursuant to that rule
would have ended at the very latest on June
10, 1994, when First Trust’s attorneys
explained to First Trust that breach had
probably occurred and that the relevant
documents should be reviewed. We agree.
A.
In Mississippi, a breach of contract claim
accrues at the time of the breach regardless of
when damages resulting from the breach oc-
cur. See Young v. Southern Farm Bureau Life
Ins. Co., 592 So. 2d 103, 107 (Miss. 1991);
Johnson v. Crisler, 125 So. 724, 724-25
(Miss. 1930). The breach First Trust com-
plains of is FNBC’s disbursement of money
without having received and transmitted to
First Trust the appropriate documents.
Disbursements began on October 14, 1993,
and continued until May 13, 1994. First
Trust’s cause of action therefore emerged at
the earliest on the first of those dates and,
most generously, on the last.
First Trust claims that its cause of action
could not arise until BCI and BCBI filed for
bankruptcy, because “First Trust’s claims
against FNBC were contingent on whether
BCI paid the amounts due and owing under
the Notes. Only when it became clear that
BCI was unable to satisfy its obligations under
the Notes was First Trust able to seek
recovery of principal and interest from other
sources.” First Trust argues that the district
court’s earlier denial of summary judgment to
the third-party defendants (regarding the
claims brought by FNBC) on limitations
grounds should, under the law-of-the-case
doctrine, protect First Trust from FNBC’s
summary judgment motion as well.
First Trust errs in comparing its cause of
action to FNBC’s. As we will explain, First
Trust’s viable, independent action against
FNBC sounds in contract, while FNBC’s ac-
tion sounds in tortSSrecovery as a result of
fraud. The district court’s refusal to find the
third-party defendants dismissed on limitations
grounds is based on when tort actions, not
contract actions, accrue. As we have said,
contract actions accrue when the breach, not
the injury, accrues. While it might have been
the case that First Trust’s injuries became final
when BCI/BCBI filed for bankruptcy, formal
breach had occurred long before.
Moreover, First Trust errs in its assertion
that it enjoyed no option of action before
bankruptcy ensued because it could prove no
damages. The Disbursement Agreement
provides that, “[u]pon the occurrence of any
Event of Default, Lender may, in its sole
discretion and without notice to or demand on
Borrower, and in addition to all rights and
remedies available to Lender under the
Collateral Documents, demand the return of

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any funds in the Escrow Account,” and take
various actions against the borrower. First
Trust then, immediately upon disbursement of
the first funds, could have recognized that it
had not been sent copies of the initial docu-
ments, demanded them from FNBC, found
that FNBC lacked them as well, declared
breach, and seized the escrow accounts.
These actions would have ensured, as
concretely as did BCI’s and BCBI’s
bankruptcy, that expenditures from the
account would cease until the documentary
deficiencies were resolvedSSeither through
proper provision of the documentation
(thereby protecting the Holders) or through
FNBC’s discovery of fraud by various third
parties and recovery against them (thereby
reco mpensating the Holders). In short, First
Trust’s claim that its cause of action did not
materialize until BCI and BCBI declared
bankruptcy cannot stand; it accrued on
disbursement of the funds.
B.
First Trust argues that the analysis above
ignores the fact that its claim against FNBC
for breach of fiduciary duty is an independent
tort that could have emerged at a different,
later, time, because tort claims generally arise
only when damages therefrom occur.1 As the
district court noted, however, an independent
tort does not arise in circumstances in which
the tort claim is based solely on a breach of a
contractual duty.2
First Trust’s fiduciary-duty claims against
FNBC arise from the same source and the
same incidents as do its breach of contract
claimsSSthe relationship between the parties
created by FNBC’s contract and the failure to
get and deliver the initial documents to First
Trust. No basis independent of the contract
exists for finding a fiduciary duty. The district
1 See Williams v. Kilgore, 618 So. 2d 51, 54
(Miss. 1992) (citing Owens-Illinois, Inc. v.
Edwards, 573 So. 2d 704, 706-07) (Miss. 1990)).
2 See Palmer v. Orkin Exterminating Co.,
871 F. Supp. 912, 914-15 (S.D. Miss. 1994),
(continued...)
(...continued)
aff’d, 71 F.3d 875 (5th Cir. 1995); Smith v. Orkin
Exterminating Co., Inc., 791 F. Supp. 1137, 1143-
44 (S.D. Miss. 1990), aff’d, 943 F.2d 1314 (5th
Cir. 1991) (noting that the “mere failure to perform
a contract obligationSSor non-actionSSgives rise to
no claim in tort”); see also Carter Equip. Co. v.
John Deere Indus. Equip. Co., 681 F.2d 386, 390
(5th Cir. 1982) (opining that “[o]rdinarily, courts
do not impose fiduciary duties upon parties to
contractual agreements”). In Palmer, the court
explained that
[i]t is axiomatic that a single act or course
of conduct may constitute not only a breach
of contract but an independent tort as well,
if in addition to violating a contract
obligation it also violates a duty owed to
plaintiff independent of the contract to
avoid harming him. Such independent harm
may be found because of the relationship
between the parties, or because of
defendant's calling or because of the nature
of the harm. However, not all breaches of
contract are also independent torts: where
defendant's negligence ends merely in
nonperformance of the contract and where
defendant is not under any recognized duty
to act apart from contract, the courts
generally still see no duty to act
affirmatively except the duty based onSSand
limited bySSdefendant's consent.
Palmer, 871 F. Supp. at 914-15 (citations, quotation
marks and ellipses omitted; emphases added).

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court therefore decided that the fiduciary duty
claim was parasitic of the breach on contract
claim, and thus accrued as the contract claim
accrued.
First Trust does nothing to defeat the dis-
trict court’s reasoning; it merely reasserts that
FNBC owed it a contract-based fiduciary duty.
Even were it able to convince us that the
court erred in finding that First Trust’s tort
claim is entirely derivative of its contract
claim, however, First Trust would gain no
ground on the limitations front, because, for
reasons we will explain, First Trust was or
should have been aware, more than three years
before it brought the instant action, that it had
been actionably damage.
C.
We agree with the district court that First
Trust’s fiduciary duty claim is derivative of its
contract claim. Because First Trust insists that
a fiduciary relationship existed between it and
FNBC, however, and because the bare
existence of a fiduciary relationship is, in
Mississippi, a question of fact for the jury,3 we
will analyze First Trust’s contention that the
discovery rule should apply in this case under
the assumption that FNBC was, pursuant to its
contractual relationship, a fiduciary of First
Trust’s.
First Trust argues that the discovery rule
should apply in this context because FNBC’s
errors were latent and undiscoverable,
especially because FNBC stood in the position
of fiduciary to First Trust, responsible to
3 See Carter Equip., 681 F.2d at 390. As
discussed, we have recognized that any fiduciary
duty owed First Trust by FNBC would have arisen
as a result of the agreements discussed herein, and
thus cannot create an independent tort action. We
have not held thereby that FNBC did in fact owe
First Trust a fiduciary duty for any purposes, be-
cause such a conclusion is reserved to the jury. We
conduct the following analysis to demonstrate the
irrelevance of such a finding, whatever the answer,
to this case.

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report all of its errors to First Trust at every
opportunity. FNBC responds by noting that
the discovery rule has never been applied in
Mississippi to a contract claim, and urges us to
construe the discovery rule as inapplicable to
the contract setting. These facts, however, do
not require us to make that determination of
Mississippi law.
Even the assumption, arguendo, that the
discovery rule should apply in a contract set-
ting such as this does First Trust no material
good. When applying the discovery rule,
“[t]he focus is upon the time that [First Trust]
discovers, or should have discovered by the
exercise of reasonable diligence, that [it]
probably has an actionable injury.”4 The
would-be plaintiff need not have become abso-
lutely certain that he had a cause of action; he
need merely be on noticeSSor should beSSthat
he should carefully investigate the materials
that suggest that a cause probably or
potentially exists.5 Neither need the plaintiff
know with precision each detail of breach,
causation, and damages, but merely enough to
make a plain statement of the case backed by
evidence sufficient to survive a summary
judgment motion.6
First Trust argues that FNBC’s breaches
were inherently undiscoverable, because
FNBC “actively concealed its breaches” by
“represent[ing] to First Trust, as its fiduciary
. . . that it was not aware of any evidence
supporting an Event of Default.” First Trust
makes a gross overstatement to suggest that
FNBC “actively concealed” breach. First
Trust provides no evidence of active
concealment by FNBC. In fact, the only
evidence First Trust supplies in purported
support of its position is a letter dated July 13,
1994, in which FNBC explained to First Trust,
in relevant part, that
[a]fter reviewing the documentation, we
have reached the conclusion that we
cannot comply with your request that
we deliver funds directly to you under
the Escrow Agreement or the Security
Agreement.
Under the terms of the Escrow
4 Smith v. Sanders, 485 So. 2d 1051, 1052
(Miss. 1986) (emphases added); see also In re
Catfish Antitrust Litig., 826 F. Supp. 1019, 1031
(N.D. Miss. 1993). The court explained that
The plaintiffs need not have actual
knowledge of the facts before the duty of
due diligence arises; rather, knowledge of
certain facts which are “calculated to excite
inquiry” give rise to the duty to inquire. The
statute of limitations begins to run once
plaintiffs are on inquiry that a potential
claim exists.
Id. (citations omitted; emphasis added).
5 Mississippi courts have upheld summary
judgments on limitations grounds even where the
(continued...)
(...continued)
summary judgment record shows that the discovery
rule would otherwise have applied under the
circumstances, because the plaintiff either knew or
should have known that an action had accrued, and
it was not therefore latent. See Robinson v.
Singing Riv. Hosp. Sys., 732 So. 2d 204, 208
(Miss. 1999); Womble v. Singing Riv. Hosp., 618
So. 2d 1252, 1266 (Miss. 1993); cf. Chamberlin v.
City of Hernando, 716 So. 2d 596, 601 (Miss.
1998).
6 See Robinson, 732 So. 2d at 208; FED. R.
CIV. P. 8, 56.

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Agreement, an event of default must
exist before we, as escrow agent, can
deliver the funds to the trustee.
Although we do not have concrete
evidence of the existence of an event of
default, we would be willing to rely
upon your representation to that effect,
provided that you indemnified us for any
loss we sustained and costs and
expenses incurred in connection with the
transfer of such funds to you. . . .
In the alternative, under the Security
Agreement, you could seize the account.
The seizure of the account should be a
relatively simple matter. . . . Finally, . . .
[w]e can invoke a concursus [interplead-
er] proceeding and deposit funds into
the registry of the court.
This letter hardly indicates active concealment
on FNBC’s part. Rather, it demonstrates a
bank wishing to serve the interests of all
relevant parties to the best of its
capacitySSeven providing legal advice about
how best a threatening party might achieve its
desired ends.
First Trust also argues that the fiduciary re-
lationship between it and FNBC rendered it
“entitled to rely” on its conclusion that FNBC
had collected and provided to First Trust all of
the necessary and appropriate forms, and on
FNBC’s representation that it lacked concrete
proof of an Event of Default. First Trust
apparently thought this entitlement survived
even in the face of mounting evidence of seri-
ous cost overruns, of Holders who had
demanded an accounting, of evidence from its
own files that FNBC had actually defaulted by
failing to file with First Trust most of the nec-
essary documentation related to the
disbursements, and of lawyers who told it that
a default had probably occurred and that it
should begin a review of its records to
document and act on that default. W h i l e
fiduciary relationships do often obscure
misfeasance on the fiduciary’s part and thus
trigger the discovery rule, the principal of a fi-
duciary is not thereby permitted permanently
and willfully to ignore patent evidence of the
fiduciary’s breach so as to delay indefinitely
the accrual of an action against the fiduciary.7
Statutes of limitations exist to protect the
courts from indolent claimants as well as
defendants from stale claims.
In defense of its position, First Trust points
to Merchants & Marine Bank v. Douglas-
Guardian Warehouse Corp., 801 F.2d 742
(5th Cir. 1986). There, a bank hired Douglas-
Guardian to keep track of the inventory of a
debtor. Because of the debtor’s misfeasance,
Douglas-Guardian submitted incorrect reports
to Merchants & Marine Bank, badly
overstating the value of the debtor’s inventory.
Douglas-Guardian did, however, provide all
reports to the bank as scheduled, and left the
bank with no way of discerning the
incorrectness of the reports. See id. at 744-45.
The court held that, under those
circumstances, the bank’s action against
Douglas-Guardian for contract breach did not
accrue until the bank discovered the error in
7 For its proposition, First Trust relies on Smith
v. Sneed, 638 So. 2d 1252, 1258 (Miss. 1994),
holding that the discovery rule would work against
a lawyer in a malpractice suit in part because of
“the inability of the layman to detect [legal]
misapplication; the client may not recognize the
negligence of the professional when he sees it.” Id.
(citations omitted). Here, of course, First Trust
does not merit “lay” status; it is, after all, a trust
company, and therefore must be charged with the
duty of knowing how to read a trust indenture,
being aware of the rights and duties therein, and
being able to protect those rights and duties.

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the reports.8
Merchants & Marine’s facts are inapposite
here. As the Disbursement Agreement
signifies, “[a]gent’s obligation to disburse any
portion of the funds in the Escrow Account to
Borrower . . . is subject to Agent and Trus-
tee having received the . . . Collateral
Documents.” (Emphasis added). First Trust,
by its own admission, never received these
documents. This failure to receive docu-
mentsSSeven without notice of cost over-
runsSSconstituted the relevant “event of
default.”
It was always within First Trust’s power,
upon knowledge that disbursements were
being made, simply to review its records, note
the lack of documentation, demand the
documents, and order that FNBC cease
disbursements and return the remaining escrow
money to First Trust upon failure to comply
with the demand. Unlike Merchants & Marine
Bank, First Trust did not regularly, and in
conformance with its contract, receive
documents that were false. Instead, it failed to
receive documents that it knew, or should
have known, it should have been receiving.
First Trust, therefore, did not suffer a latent or
hidden breach; the breach was always, or
should always have been, patently obvious to
a reasonably diligent party.9
The district court chronicled the events that
occurred before June 10, 1994:
The record indicates that First Trust was
first informed of the cost overruns on
April 29, 1994. After taking over the
account [a First Trust executive] was
notified of the cost overruns on May 16,
1994, when he received a call from a
Holder. As previously stated, [another
party] also called [him] on May 19,
1994 and discussed the Holders’
concerns about potential defaults under
the Disbursement Agreement and the
Indenture. [He] reviewed the
Disbursement Agreement on or about
May 19, 1994, and discovered that
Disbursement Certificates numbers 3, 4,
and 5 were the only documentation in
First Trust’s file. . . . First Trust hired
its own counsel on May 26, 1994, to
review all documents pertaining to the
construction of the projects. First Trust
also sent letters to FNBC on May 26
and June 3, 1994, acknowledging that
disbursements had been made by FNBC
8 See also Smith, 638 So. 2d at 1257 (holding
that the statute will not run against a fiduciary
“until the client discovers, or should discover, the
material facts in issue” because such tolling “vin-
dicates the fiduciary duty of full disclosure”)
(citation omitted)).
9 First Trust again points the panel to Smith,
638 So. 2d at 1257, wherein the court instructed
that
(continued...)
(...continued)
the general policies underlying th[e] statute
of limitations will not be thwarted by
adoption of the discovery rule in that
limited class of . . . cases in which, because
of the secretive or inherently
undiscoverable nature of the [act] the
plaintiff did not know, or with reasonable
diligence could not have discovered, that
he had been [injured]. In such rare
instances, we do not believe that a plaintiff
can be accused of sleeping on his rights.
Id. (citations omitted; emphasis added). Again,
this is inapposite, because even minimal diligence
by First Trust would have brought discovery of the
agent’s breaches.

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and requesting Disbursement Cer-
tificates that it had not received as
required by section 6.08 of the
Disbursement Agreement.
None of these facts comports with the picture
of an entity’s remaining blissfully unaware that
a cause of action had “probably” or “potential-
ly” arisen. Rather, they are events indicating
that First Trust not only should have
recognized but actually recognized that its
rights had been jeopardized, and that it needed
to take forceful and perhaps litigious action to
defend them.
What follows these actions, though, is a
long pauseSSuntil June 1996 according to First
TrustSSin which First Trust took no action
against FNBC.10 The district court was fully
justified in concluding that First Trust knew or
should have known that breach probably had
occurred before June 10, 1994. Applying the
discovery rule, then, cannot save First Trust’s
cause of action.
IV.
The question of attorney’s fees is parasitic
here. Section 10.14 of the Disbursement
Agreement reads, “[i]f any action or
proceeding is brought by any party against any
other party under this Agreement, the
prevailing party shall be entitled to recover
such cost s and attorneys’ fees as the court in
such action or proceeding may adjudge
reasonable.” Because we affirm the judgment
rendering FNBC the prevailing party, we
affirm too on the issue of attorney’s fees.
Neither side challenges the amount of fees
awarded.
AFFIRMED.
10 First Trust claims in July 1996 to have
learned for the first time that FNBC had not re-
ceived any initial documents (even though it knew
or should have known that it had also never
received such documents, as required), and realized
that FNBC was a relevant target of litigation.
Even then, First Trust still waited another 11
months, until June 1997, to sue FNBC.

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