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January 13, 2003


The opinion of the court was delivered by: Gerard B. Lynch, United States District Judge:


Plaintiffs Beacon Hill CBO II, Ltd. ("CBO II") and Beacon Hill CBO III, Ltd. ("CBO III") (collectively the "Issuers") entered into portfolio management agreements on July 19, 2001, and August 7, 2002, respectively ("Portfolio Management Agreements" or "Agreements"), with defendant Beacon Hill Asset Management LLC ("Beacon Hill" or "Portfolio Manager"), covering plaintiffs' investment portfolios that total over $650 million in managed assets. These agreements formed part of a larger series of transactions by which plaintiffs issued securities commonly known as collateralized bond obligations. On November 19, 2002, the Issuers filed this lawsuit against Beacon Hill, and moved by order to show cause for various forms of relief. The Issuers sought a temporary restraining order ("TRO") prohibiting Beacon Hill, pending a hearing, from destroying any document or record relevant to this action and from collecting any fees or compensation in connection with plaintiffs' portfolios or making any extraordinary payments, distributions, withdrawals or redemptions from plaintiffs' assets, or payments to defendant's principals or current or former affiliates. They also sought a preliminary and permanent injunction removing Beacon Hill as Portfolio Manager in favor of a new portfolio manager designated by plaintiffs. The Court granted the TRO on November 19, 2002. Having considered the thoughtful and thorough presentations of both parties in appearances before the Court on November 22, 2002, November 26, 2002, and December 12, 2002, and in submitted memoranda, the Court vacated the TRO on December 19, 2002, and now denies plaintiffs' request for a preliminary and permanent injunction.


This action concerns two securitization transactions, commonly known as CBOs (Compl. ¶ 1), established and governed by a collection of transaction documents including Portfolio Management Agreements between Beacon Hill and CBO II (Pls. Ex. B) and between Beacon Hill and CBO III (Pls. Ex. C), Indentures with The Chase Manhattan Bank as Trustee (Irwin Opp. Aff. Exs. A, B), Collateral Acquisition Agreements, Collateral Administration Agreements, Offering Memoranda (see, e.g., Dyer Rebuttal Aff. Ex. H), Securities Purchase Agreements, Securities Account Control Agreements, and Hedge Agreements (collectively "Transaction Documents"). (See generally Dyer Rebuttal Aff Ex. J and Irwin Opp. Aff. Ex. D.) Neither all of these Transaction Documents nor all of the parties to those agreements are before the Court. The parties are in agreement, however, about the essential nature of the relationships.

Beacon Hill manages a pool of capital that has been raised from investors ("the Investors"). The plaintiff Issuers are entities created for the limited purpose of issuing bonds, thereby raising the capital which is used to purchase assets, which are then pledged to a trustee bank ("the Trustee") under an indenture agreement, permitting them to serve as collateral for the bonds. The Issuers have contracted with Beacon Hill as Portfolio Manager to manage and invest the assets pursuant to the terms of the indenture. Under the terms of the contract, the Portfolio Manager has discretion to manage the assets within the limits set by the indenture, and the Issuers have no right to direct the actions of the Portfolio Manager, to change its instructions as set forth in the indenture, or to unilaterally terminate Beacon Hill's status as Portfolio Manager without cause. Unquestionably, Beacon Hill as Portfolio Manager acts as a fiduciary for the benefit of others. The assets it manages are owned by the Issuers, pledged to the Trustee, and ultimately invested for the benefit of the Investors, who lent the money that was used to purchase them in the first place and who are to receive the proceeds in the form of interest and eventual repayment of the principal of the bonds.

The instant lawsuit has been brought by the Issuers, seeking to end Beacon Hill's management of the portfolios. The Portfolio Management Agreements between the Issuers and Beacon Hill outline procedures for terminating the Portfolio Manager "for cause" and procedures for resignation by the Portfolio Manager.*fn1 On this motion, the Issuers have not sought to invoke these procedures, or to assert that one of the contractually-specified grounds for termination for cause has occurred.*fn2 Rather, they claim that they have an absolute right to remove the Portfolio Manager because of their loss of trust and confidence in Beacon Hill, although such a loss of confidence is not specified in the Agreements as a basis for removal, and the Agreements accordingly provide no specified procedure for a termination on that ground.

The Issuers trace their desire to oust Beacon Hill as their Portfolio Manager to reports beginning in October 2002 about the financial losses of two hedge funds managed by Beacon Hill. These losses eventually led to an SEC investigation, and a civil suit by the agency resulting in the entry of a consent decree. (Compl. ¶¶ 21-35.) Plaintiffs allege that they have lost trust and confidence in Beacon Hill, their fiduciary, because of,

among other things: the SEC's conclusions that Beacon Hill has provided false or misleading information about the hedge funds that it managed. in violation of the federal securities law; the market's highly negative reaction to the SEC's investigation of and conclusions regarding Beacon Hill; Beacon Hill's failure to have apprised Beacon Hill CBO [II and III] of the existence of the SEC's investigation of Beacon Hill; Beacon Hill's consent decree with the SEC to withdraw as manager of the hedge funds; and Beacon Hill's decision not to withdraw as Beacon Hill's CBO [II and III's] portfolio manager.
(Boggess Supp. Aff. in Supp. ¶ 2 and Dyer Supp. Aff. ¶ 2; see also Pls. Mem. at 2.) Plaintiffs have no financial interest in the hedge funds but claim that Beacon Hill's handling of those funds jeopardizes their CBOs because of market concern about Beacon Hill's economic condition and credibility.

The Issuers thus seek to trump all contract terms that would require cause to fire Beacon Hill, by relying on Beacon Hill's status as a fiduciary. They claim that since they as clients have lost all trust and confidence in Beacon Hill as fiduciary, Beacon Hill must step down as Portfolio Manager upon the Issuers' request and without penalty to plaintiffs. Beacon Hill objects, relying instead on its rights as detailed in the Agreements. For purposes of this motion, therefore, the Court must assume that plaintiffs cannot terminate Beacon Hill "for cause" as outlined in Section 13 of the Agreement and that termination of Beacon Hill at this point would be a breach of those Agreements that might result in damages.

Lingering in the background of the parties' submissions are other parties to these securitization transactions who have also entered into agreements giving them rights and responsibilities, including the Trustee and the Investors. The Investors, several major financial institutions and other institutional investors (Compl. ¶ 2), "purchased the Issuers' securities. [and are to be repaid from] the cash flows from the assets in the CBOs managed by Beacon Hill." (Pls. Mem. at 2.) The Investors have certain rights that are explicit in Section 12 and 13 of the Portfolio Management Agreements, including rights to participate in the decision to terminate the Portfolio Manager for cause. For example, pursuant to Section 13, a majority of certain classes of Investors can vote to terminate the Portfolio Manager for cause (Pl. Ex. B, Section 13), and pursuant to Section 12, no termination is effective if a majority of certain Investors reject the Portfolio Manager's successor (Pls. Exs. B and C, Section 12(c)). While one Investor has submitted an affidavit in support of plaintiffs' motion (see, e.g., Wolowitz Reply Aff. Ex. D) and another allegedly requested Beacon Hill's resignation prior to this suit (see, pig, Compl. ¶ 8; Dyer Rebuttal Aff. ¶ 9), none of the Investors have joined this action. The absence of the Investors is notable since they are significant stakeholders in these sophisticated transactions. Indeed, plaintiffs' Complaint implicitly acknowledges the relevance of the Investors in this dispute, alleging generally that the Investors' "confidence in Beacon Hill" was "shattered" in late October 2002 when the newspapers reported on the hedge fund losses and the SEC investigation (Compl. ¶ 4), and describing in detail actions taken by Banc of America Securities, one of the Investors, subsequent to those news reports (id. ¶¶ 23-27). The Issuers do not claim, however, that they bring this action on behalf of the Investors, rather than in their own right.


"[A] preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion." Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (emphasis in original) (quoting from WRIGHT, MILLER & KANE, FEDERAL PRACTICE AND PROCEDURE § 2948 (2d ed. 1995)). Since CBO II and CBO III seek a mandatory injunction that will change the status quo by requiring Beacon Hill to step down as Portfolio Manager, the Issuers' showing must be judged against the higher standard applicable to mandatory injunctions. Jolly v. Coughlin, 76 F.3d 468, 473 (2d Cir. 1996). Thus, the preliminary injunction may be granted only if plaintiffs have shown (1) that the injunction is necessary to prevent irreparable harm, and (2) there is a "clear" or "substantial" likelihood that they will prevail on the merits. Id. (quoting Tom Doherty Assocs., Inc. v. Saban Entertainment, Inc., 60 F.3d 27, 33-34 (2d Cir. 1995)). Since the Issuers have not established a clear likelihood of success on the merits, they are not entitled to injunctive relief

For purposes of this motion, it is not disputed that the Issuers have in good faith lost all trust and confidence in Beacon Hill's ability to manage the portfolios. The parties disagree on the purely legal question of whether the equitable principle allowing for termination at will of a fiduciary relationship requires Beacon Hill to step down despite the provisions in the Portfolio Management Agreements that expressly require cause for termination. Plaintiffs assert that the issue is simply "whether Beacon Hill, as fiduciary, must withdraw upon request of its client" (Wolowitz Supp. Aff. ΒΆ 2), or alternatively, "whether a client of an investment advisor in which the client has lost all trust and confidence is entitled to terminate that fiduciary relationship as of right" (Pl.'s Reply Mem. at 1). The implication that the questions answer themselves is misleading. In focusing narrowly on the ...

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