Appeal from a summary judgment entered by the United States District Court for the Southern District of New York (Thomas P. Griesa, Judge) in favor of the defendants. The plaintiffs, AEP Energy Services Gas Holding Company, Houston Pipe Line Company, and HPL Resources Company, brought several claims for declaratory and other relief against the defendants, Bank of America, N.A. and the Bank of New York, seeking to establish a right superior to the defendants' to use certain reserves of natural gas and related assets in which Bank of America claimed a vested security interest. Bank of America counterclaimed for conversion, breach of bailment agreement, and replevin, alleging a superior secured interest in the gas, which interest had been infringed when the plaintiffs refused to relinquish possession of the gas upon Bank of America's demand. The district court (Thomas P. Griesa, Judge)granted summary judgment in favor of the defendants on all of the plaintiffs' claims and on Bank of America's conversion-related counterclaims, as to which it awarded damages to Bank of America in excess of $345 million. The district court also denied the plaintiffs' motions to amend the complaint and to defer ruling on the summary judgment motions, which were made during the pendency of summary judgment proceedings. The summary judgment for the defendants is vacated with respect to the plaintiffs' non-declaratory claims. The district court's judgment is affirmed in all other respects.
Affirmed in part; vacated in part.
The opinion of the court was delivered by: Sack, Circuit Judge
Argued: September 29, 2009
Before: JACOBS, Chief Judge, SACK and LYNCH, Circuit Judges.*fn2
This action stems from a dispute over the rights to natural gas stored in the Bammel Gas Storage Facility, an underground gas reservoir located in Texas. The plaintiffs, AEP Energy Services Gas Holding Company ("AEP"), Houston Pipe Line Company LP ("HPL"), and HPL Resources Company LP ("HPLR") (hereinafter sometimes collectively the "plaintiffs") entered into a complex series of transactions with Enron Corporation or affiliates thereof (hereinafter collectively "Enron"), Bank of America, and the Bank of New York with respect to the right to use certain natural gas and assets contained in the Bammel Gas Storage Facility. The Bammel Gas Storage Facility is owned by the Bammel Gas Trust, a special-purpose entity formed and owned in equal part by Enron and Bank of America, of which the Bank of New York is Trustee.
After Enron entered bankruptcy proceedings in the United States Bankruptcy Court for the Southern District of New York in December 2001, Bank of America and the Bank of New York attempted to repossess the gas contained in the Bammel Gas Storage Facility, purportedly pursuant to the terms of the operating agreements among the parties. The plaintiffs refused. Instead, they brought suit against the two banks in the United States District Court for the Southern District of Texas (the "Texas District Court") alleging a superior right to continue to use the gas. Bank of America responded by counterclaiming against the plaintiffs for conversion, breach of bailment agreement, and replevin, asserting a superior secured interest in the gas that had vested upon Enron's bankruptcy. Following the approval by the Bankruptcy Court of a settlement agreement among Enron, Bank of America, and the Bank of New York relating to the Bammel Gas transaction at issue in this appeal, the Texas District Court severed the plaintiffs' declaratory claims from their non-declaratory claims, which were based on tort and contract theories, and transferred the declaratory claims, and Bank of America's related counterclaims, to the United States District Court for the Southern District of New York (the "New York District Court"). The Texas District Court retained the plaintiffs' non-declaratory claims and Bank of America's related counterclaims.
Upon this transfer, over the plaintiffs' objections and contrary to the express intention of the Texas District Court, the New York District Court adjudicated the entire controversy, including the non-declaratory claims and counterclaims that had been retained by the Texas District Court. Then, in a series of rulings, the New York District Court granted defendant Bank of America's motion for summary judgment as to both the plaintiffs' declaratory claims and non-declaratory claims, and Bank of America's counterclaims, and awarded damages to Bank of America on its counterclaims in the amount of $345,675,000 plus prejudgment interest. At the same time, the district court denied the plaintiffs' motions filed during the pendency of the summary judgment proceedings to amend the complaint and to postpone a decision on the summary judgment motions in order to permit the conduct of further depositions.
We agree with the district court with respect to the grant of summary judgment as to the declaratory claims and related counterclaims, which had been properly transferred by the Texas District Court to New York, and as to the denial of the plaintiffs' motions to amend and to allow them to take further depositions. We conclude, however, that adjudication of the non-declaratory claims by the New York District Court was an abuse of discretion. The Texas District Court -- in which the claims were first filed -- expressed a clear intention to retain the non-declaratory claims and no special circumstances were present to outweigh the presumption in favor of the first-filed jurisdiction; therefore, the New York District Court should have declined to consider them. Having so determined, we vacate the summary judgment with respect to the non-declaratory claims, which we conclude should be adjudicated in Texas.
The relevant facts are rehearsed in detail in the district court's four lengthy and careful opinions in this case. See AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., 2007 WL 2428474, 2007 U.S. Dist. LEXIS 63421 (S.D.N.Y. Aug. 28, 2007) ("AEP I"); AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., 2007 WL 4458117, 2007 U.S. Dist. LEXIS 93022 (S.D.N.Y. Dec. 18, 2007) ("AEP II"); AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., 2008 WL 925433, 2008 U.S. Dist. LEXIS 30587 (S.D.N.Y. Apr. 2, 2008) ("AEP III"); AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., 2008 WL 3338203, 2008 U.S. Dist. LEXIS 61264 (S.D.N.Y. Aug. 11, 2008) ("AEP IV"). They are set forth here only insofar as we think it necessary for an understanding of our resolution of this appeal. We construe the evidence in the light most favorable to the plaintiffs, as the non-moving parties, and draw all reasonable inferences in their favor. See, e.g., SCR Joint Venture L.P. v. Warshawsky, 559 F.3d 133, 137 (2d Cir. 2009).
In November 1997, Enron,*fn3 in an effort to generate off- balance-sheet capital before the end of the year, entered into a series of interrelated agreements (the "Operative Agreements") with Bank of America ("BofA") and the Bank of New York as trustee ("BONY" or the "Trustee"), among other entities, to monetize the natural gas owned by Enron's then-wholly owned subsidiary HPL. At that time, HPL owned and operated an underground natural gas storage reservoir in Harris County, Texas, called the Bammel Gas Storage Facility (the "Storage Facility"). HPL and its own subsidiary, HPLR, owned approximately 80 billion cubic feet ("Bcf")*fn4 of natural gas kept in the Storage Facility (the "Storage Gas").
In order to achieve its goal of off-balance-sheet financing, Enron and BofA's predecessor in interest in this transaction, NationsBank, N.A.,*fn5 created the Bammel Gas Trust ("BGT" or the "Trust"), a special-purpose entity that was owned in equal parts by the two entities. BONY was designated to act as the Trustee of BGT.
Following the creation of BGT, Enron caused HPL and HPLR to sell the Storage Gas to BGT for a purchase price of $232 million. The sale was pursuant to a Storage Gas Sale Agreement, which stated, among other things, that the agreement would "serve as a bill of sale for the Storage Gas without the necessity of having any separate bill of sale or other evidence of the transfer of the Ownership of the Storage Gas" from HPL to BGT, and that BONY, as Trustee of BGT, would be "deemed to have taken delivery of the Storage Gas" as of the date of purchase. Storage Gas Sale Agreement dated December 30, 1997 ("1997 Sale Agreement") §§ 2.03, 2.04, Exh. H to the Declaration of Aaron Rubinstein in Support of Defendants' Motion for Summary Judgment ("Rubinstein Decl."), AEP Energy Gas Servs. Holding Co. v. Bank of Am., N.A., No. 05 Civ. 4248 (S.D.N.Y. Aug. 28, 2006). See generally Participation Agreement dated December 30, 1997 ("1997 Participation Agreement"), Exh. A to Rubinstein Decl.
To fund this purchase, BofA (through its affiliate, Kitty Hawk Funding) loaned BGT approximately $218 million, and BofA and Enron each injected approximately $7 million of equity into BGT, with Enron's equity contribution also financed by BofA.*fn6 As collateral for the loan, BONY, the Trustee of BGT, granted BofA a security interest in all of the assets held in the Trust, including the Storage Gas, pursuant to a Security Agreement. See Security Agreement dated December 30, 1997 ("1997 Security Agreement") § 3, Exh. B to Rubinstein Decl.
Concurrently with this transaction, BGT granted HPL and HPLR continued use of the Storage Gas and the Storage Facility under a Pressurization and Storage Gas Borrowing Agreement (the "Pressurization Agreement") in exchange for the payment of "pressurization fees" to BGT, which BGT then used to pay the interest on the BofA loan. Pursuant to this agreement, HPL and HPLR could use the Storage Gas to pressurize the Storage Facility, in order to facilitate the storage and withdrawal of other customers' natural gas; HPL and HPLR could also borrow and withdraw up to a certain quantity of the Storage Gas for other working uses, subject to replacement.
The Pressurization Agreement provided that title to and ownership of the Storage Gas remained with the Trustee until such time as the Storage Gas was either withdrawn and sold by the Trust or borrowed by HPL. The Pressurization Agreement also provided that beginning in 2004 (when the loan principal was due to be repaid to BofA), HPL was obligated to withdraw the Storage Gas from the facility and make it available to BGT in accordance with a "Withdrawal Schedule." Enron was then obligated to sell that gas pursuant to a Marketing Agreement and to pay to BGT the Houston Ship Channel Index price*fn7 for the gas, irrespective of the price that Enron actually received from the sale. The proceeds from this sale were to be applied by BGT to repayment to BofA of the principal of the loan.
HPL also had the option under this agreement, instead of withdrawing the Storage Gas to be sold pursuant to the Withdrawal Schedule, to supply Enron with "Exchange Gas" of equivalent quality and value to be sold by Enron pursuant to the Marketing Agreement to fund BGT's repayment of the BofA loan, and thereby to continue to use the Storage Gas in the Storage Facility after the 2004 withdrawal date.
In addition, through a Performance Guaranty (the "Guaranty"), Enron guaranteed all the obligations of its subsidiaries, including HPL and HPLR, under the Operative Agreements. The Guaranty provided that in the event of a "Guaranty Default," the Trustee had the right to immediate possession of the gas. A Guaranty Default was deemed to exist to the extent that, inter alia, "[a]ny representation or warranty made by Enron under or in connection with this Guaranty shall prove to have been incorrect in any material respect when made and such materiality is continuing" or "Enron or any of its Principal Subsidiaries shall become the subject of a Bankruptcy Event." Performance Guaranty dated December 30, 1997 ("1997 Guaranty") §§ 5.01(a), 5.01(c), Exh. E to Rubinstein Decl.
Although BGT nominally owned the Storage Gas and the Storage Facility following this transaction, HPL and HPLR's right to use the sold assets continued uninterrupted except for (1) the payment from BGT to HPL for the purchase of the Storage Gas and the Storage Facility, (2) fees paid by HPL to BGT for the use of the Storage Gas and the Storage Facility, and (3) the fact that Enron could now book this as a "sale" for year-end-revenue accounting purposes. In effect, the transaction functioned similarly to a sale and leaseback of the gas.
In 2000, Enron decided to sell HPL.*fn8 However, for its own accounting advantage, it wanted to keep the existing off-balance-sheet structure in place. AEP expressed interest in purchasing HPL outright, but Enron was unwilling to unwind the 1997 transaction structure in order to make the sale of HPL to AEP.
In May 2001, Enron and AEP settled on the following transaction structure: Enron created a new subsidiary, BAM LeaseCo ("LeaseCo"), which assumed all of the rights and obligations of HPL under the Operative Agreements, as well as specified assets of HPL, pursuant to an Assignment and Assumption Agreement. Thus LeaseCo effectively stepped into the shoes of HPL with respect to its transaction with BGT, freeing HPL of these rights and obligations. AEP then bought HPL. Soon after, HPL bought approximately 25 Bcf of gas back from BGT for $94 million. BofA thereafter agreed to release its security interest in this gas. That left BGT with title to only 55 Bcf of Storage Gas, and BofA with this same amount of Storage Gas as secured collateral for the loan. LeaseCo then subleased the Storage Facility and associated pipelines and equipment back to HPL for a term of thirty years (with a further twenty-year option), for which AEP prepaid the rent of $274 million to LeaseCo.
Additionally, under a "Right To Use Agreement," LeaseCo granted HPL "quiet enjoyment" of the Storage Gas for the entire term of the sublease. Specifically, section 2.01(b) of the Right To Use Agreement provides, in relevant part, that:
LeaseCo covenants and agrees that, so long as no HPL Default has occurred and is continuing, and notwithstanding the terms, provisions and restrictions in any Counterparty Agreement, LeaseCo will have sufficient rights in and to the [Storage Gas] to enable it to make, and that it will cause and allow, such [Storage Gas] to be available to HPL at the Storage Facility for HPL's right to Quiet Enjoyment at all times during the Term[ of the sublease]. . . . The existence of a Permitted Lien shall not be a breach by LeaseCo of this Section 2.01(b); provided, however, that LeaseCo covenants and agrees with HPL that LeaseCo shall timely perform and comply with those of its obligations under the Counterparty Agreements to which LeaseCo is a party applicable to the [Storage Gas], and shall timely perform and comply with its obligations hereunder with respect to amounts secured by Permitted Liens, to ensure that HPL has the Quiet Enjoyment of the [Storage Gas] throughout the Term.
Right To Use Agreement dated May 31, 2001 ("Right To Use Agreement") § 2.01(b), Exh. W to Rubinstein Decl. Quiet enjoyment is defined in the Right To Use Agreement as "the Enjoyment of the [Storage] Gas free of adverse claims of Third Parties, of any kind or nature, in, to or with respect to the [Storage] Gas, or any part thereof, that interfere with, restrict or impede the Enjoyment of the [Storage] Gas." Id. § 1.01 (definition of "Quiet Enjoyment"). The BofA secured loan is among the "Permitted Liens" that are contemplated by this provision, id. (definition of "Permitted Liens"), whose existence does not infringe on the right to quiet enjoyment under the agreement.
The Right To Use Agreement further provides that "LeaseCo shall use only Exchange Gas to satisfy its obligations under Article III of the Pressurization Agreement [setting forth the requirement to withdraw the gas in 2004 pursuant to the Withdrawal Schedule to be sold by Enron in repayment of the loan] to make withdrawals of Natural Gas from the Storage Facility." Id. § 8.01. This clause effectively provided the mechanism by which LeaseCo and Enron would repay the principal on the BofA loan when it came due in 2004 without interrupting HPL's right under the restructured agreements to quiet enjoyment and continued use of the Storage Gas for the thirty-year term of the sublease.
As part of the 2001 Transaction, each of the Operative Agreements executed in 1997 -- including the Participation Agreement, Pressurization Agreement, Security Agreement, and Guaranty -- was amended and restated to replace HPL and HPLR with LeaseCo. See Amended and Restated Participation Agreement dated May 31, 2001 ("2001 Participation Agreement"), Exh. L to Rubinstein Decl.; Amended and Restated Pressurization and Storage Gas Borrowing Agreement dated May 31, 2001 ("2001 Pressurization Agreement"), Exh. N to Rubinstein Decl.; Amended and Restated Security Agreement dated May 31, 2001 ("2001 Security Agreement"), Exh. M to Rubinstein Decl.; Amended and Restated Performance Guaranty dated May 31, 2001 ("2001 Guaranty"), Exh. O to Rubinstein Decl. LeaseCo was used as a vehicle for granting HPL (and thereby AEP, which was purchasing HPL) all of the rights that HPL had had under the 1997 Transaction, while Enron continued to retain all of the obligations of HPL under that transaction (via LeaseCo), such that HPL could continue to use and operate the Storage Facility and the Storage Gas, but LeaseCo was now responsible for the payments of fees and other obligations to BGT.
All told, AEP paid more than $741 million for HPL and for the right to use the Storage Gas and Storage Facility.
As a condition precedent to the 2001 Transaction, BofA signed a Consent and Acknowledgment ("Consent"), consenting to the assignment of HPL's rights and obligations under the Operative Agreements to LeaseCo, and to HPL's use of the Storage Gas and Storage Facility as provided in the sublease and the Right To Use Agreement. The Consent acknowledges that HPL was entering into these transactions "in reliance upon" the execution of this Consent and that "but for" this Consent, AEP would not purchase HPL and HPL would not enter into the agreements with LeaseCo. Consent and Acknowledgment dated May 30, 2001 ("Consent") § 2(a)(ii), Exh. X to Rubinstein Decl.
The Consent contains several provisions of particular relevance to the plaintiffs' claims. Section 2(e) of the Consent, which provides the basis for AEP's non-declaratory tort and contract claims, reads:
Estoppel and Release. Each of BofA and the Trustee hereby agrees and acknowledges that each Operative Agreement is in full force and effect and that, to its actual knowledge, no defaults by LeaseCo, Holdings, [Enron], [Enron North America] or [HPL] exist and no events or conditions exist which after the passage of time or the giving of notice or both would constitute a default or Event of Default by LeaseCo, Holdings, [Enron] or [Enron North America] or [HPL] thereunder.
Id. § 2(e). Under section 5.01 of the Guaranty, one of the Operative Agreements, any materially incorrect representation made by Enron under the Guaranty constitutes a default. Included among the representations made by Enron under the Guaranty is that:
The audited consolidated balance sheet of Enron and its Subsidiaries as of December 31, 2000, and the related audited consolidated statements of income, cash flows, and changes in stockholders' equity accounts for the fiscal year then ended and the unaudited consolidated balance sheet of Enron and its Subsidiaries as of March 31, 2001, and the related unaudited consolidated statements of income, cash flows, and changes in stockholders' equity accounts for the fiscal quarter then ended, . . . fairly present, in conformity with GAAP, . . . the consolidated financial position of Enron and its Subsidiaries. . . . 2001 Guaranty § 3.01(d)(i). This representation, as it subsequently would be learned, was dramatically false.
As related to the plaintiffs' declaratory claims, section 2(g) of the Consent provides that:
In connection with the assignments referred to in clause (a)(i) of this Section 2 [providing for the assignment by HPL and HPLR of all rights and obligations under the Operative Agreements to LeaseCo (hereinafter the "Assigned Obligations")], each of BofA and the Trustee has agreed, and hereby agrees, to enforce payment and performance of the Assigned Obligations solely against LeaseCo and Holdings and has agreed to release, and hereby releases, each of [HPL] and HPLR from all liabilities and obligations under the Operative Agreements. . . .
Consent § 2(g). Section 11 further provides, "For avoidance of doubt, nothing herein shall impair the lien and security interest of BofA under the Security Agreement or, except as expressly set forth in Section 2 hereof, reduce the rights and remedies of BofA under the Security Agreement." Id. § 11. Section 2 of the Consent gives HPL, among other things, the right (but not the obligation) to cure any defaults that may arise that affect HPL's right to use the gas, and precludes the Trustee and BofA from exercising any of their rights and remedies granted by the Operative Agreements upon a default absent notice to and failure to cure by HPL. In addition to HPL's right to notice of and the opportunity to cure a default, under a Purchase Option Agreement (another of the Operative Agreements), HPL received from LeaseCo the right to purchase the Storage Gas outright if certain events of default occurred, including but not limited to Enron's entry into bankruptcy proceedings.
As relevant to this dispute, the rights and remedies of BofA under the Security Agreement include, in the event of a Guaranty Default, the right to obtain the remedies set forth in section 5.02 of the Guaranty. This section permits the Trustee, upon a Guaranty Default, to issue a Settlement Notice to Enron for the payment and settlement of all outstanding fees by a fixed date. If Enron fails thereafter to deliver, or to cause LeaseCo to deliver, Exchange Gas in lieu of the Storage Gas by that date, the Trustee may then, at BofA's direction and provided that neither Enron nor the plaintiffs have since cured the default, take possession of and withdraw the Storage Gas.
These restructured transactions all closed concurrently on May 31, 2001.
In December 2001, Enron petitioned for bankruptcy under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. Enron's petition for bankruptcy constituted a Guaranty Default under the Operative Agreements. See 2001 Guaranty § 5.01(c) ("A 'Guaranty Default' shall exist if . . . Enron or any of its Principal Subsidiaries shall become the subject of a Bankruptcy Event.").
Texas State Court Proceedings
In May 2002, following Enron's filing of its bankruptcy petition, BofA demanded access to the Storage Facility to enforce its security interest under the Operative Agreements by taking possession of the Storage Gas. When the plaintiffs -- AEP, HPL, and HPLR -- refused, BofA filed an action against HPL in Texas state court seeking declarations that BofA held a valid and enforceable security interest in the Storage Gas, that it was entitled to pursue contractual remedies against HPL to foreclose on this interest and take possession of the gas, and that HPL's rights to use the Storage Gas were subordinate to BGT's ownership rights and BofA's security interest. HPL then filed a breach of contract counterclaim against BofA, asserting that by bringing this lawsuit against HPL, BofA breached its representation that it would not interfere with HPL's rights to exclusive use and quiet enjoyment of the gas, and sought to enjoin BofA's interference with HPL's continued use of the gas.
In December 2003, the Texas state court granted summary judgment in defendant BofA's favor on both its declaratory claims and HPL's counterclaims, concluding that BofA had a valid security interest in the gas that was superior to any rights of HPL to use the gas, and that HPL was "estopped to deny" that BGT was the owner of the gas. See Bank of Am., N.A. v. Houston Pipe Line Co., No. 2002-36488, slip op. at 2 (Tex. Dist. Ct. Dec. 9, 2003). HPL appealed. On August 24, 2006, the Texas State Court of Appeals vacated the judgment and ordered BofA's claims dismissed. It concluded that the judgment was void because it violated the automatic stay implemented upon Enron's bankruptcy. Houston Pipeline Co. v. Bank of Am., N.A., 213 S.W.3d 418, 428-31 (Tex. App. 2006).
Meanwhile, in October 2003, AEP filed a complaint in the Texas District Court asserting claims for fraud, breach of contract, and negligent misrepresentation against BofA (collectively, the "Tort and Contract Claims") based on the allegedly false representation contained in section 2(e) of the Consent that BofA had no knowledge of any Enron default existing at the time of the execution of the agreement. On January 8, 2004, AEP filed an amended complaint adding five claims for declaratory relief seeking to confirm HPL's superior right to use the gas (the "Declaratory Claims"), and adding HPL and HPLR as plaintiffs and BONY as a second defendant.
Meanwhile, over AEP's objections, on January 15, 2004, the Enron bankruptcy court in New York issued an order approving a Settlement Agreement among Enron, BofA, and BONY (the "Enron Settlement Agreement"). The order allowed the claims relating to the Bammel Gas transaction filed by BofA and BONY as creditors in the bankruptcy proceeding, provided that BofA and BONY would "look solely to the proceeds, if any, from any Sale [of the Storage Gas], as paid to [BofA and BONY] pursuant to Section 8.5 of the Settlement Agreement, for recovery on any allowed BGT Claim. . . . " Order Approving Settlement Agreement at 9, In re Enron Corp., No. 01-16034 (AJG) (Bankr. S.D.N.Y. Jan. 15, 2004). The order also permitted the automatic bankruptcy stay to be "lifted for the sole purpose of allowing the Secured Party [BofA] and the Trustee [BONY] to attempt to realize upon the value of the [Storage] Gas, including allowing the Secured Party and/or the Trustee to cause the issuance of a Settlement Notice and a written notice of an Event of Default (as each such term is defined in the Operative [Agreements])." Id.
Pursuant to this order, BofA sent Notices of Default and Settlement Notices, in accordance with the terms of the Guaranty, to Enron and LeaseCo, with copies to AEP and HPL. Enron did not perform its purported obligations under the Guaranty in response to these letters. Nor did AEP exercise its options under the Operative Agreements to cure the default or to purchase the gas. As a result, on May 14, 2004, BofA demanded that AEP withdraw and transfer custody of 55 Bcf of natural gas in the Storage Facility to BofA. AEP refused.
Back in Texas, on April 6, 2005, the Texas District Court, adopting a September 14, 2004 memorandum and recommendation of a magistrate judge, severed the plaintiffs' Declaratory Claims from their Tort and Contract Claims and transferred the Declaratory Claims only to the New York District Court pursuant to 28 U.S.C. § 1404(a). The Texas District Court concluded that transfer was proper because the resolution of the Declaratory Claims, insofar as they sought a declaration of the rights and obligations under the Operative Agreements to which Enron was a party, and to the extent that they implicated the terms of the Enron Settlement Agreement, could affect legal interests at issue in the Enron bankruptcy proceeding then pending in the Southern District of New York. The Texas District Court retained AEP's Tort and Contract Claims, however, which claims did not implicate the terms of any agreements at issue in the bankruptcy proceedings.
That month, BofA filed an answer in the Texas District Court action. It also asserted counterclaims, in its capacity as BONY's representative, against HPL for breach of contract, breach of bailment agreement, conversion/trover, and detinue/replevin (the "Declaratory Counterclaims") and, in its own capacity, against AEP and HPL for fraud and fraudulent inducement (the "Tort Counterclaims") based on those parties' purported misrepresentations that induced BofA to execute the Consent.
Shortly thereafter, BofA moved in the Texas District Court to transfer the entire action to the New York District Court. On June 29, 2005, a magistrate judge in the Texas District Court recommended that this motion be granted in part and denied in part. In recommending against the transfer of AEP's Tort and Contract Claims to New York, the magistrate judge explained that "the court's decision [in its previous order] to transfer the declaratory claims and retain all other claims was deliberate" and that "[t]he [declaratory] claims that were transferred are clearly distinct in nature from the [tort and contract] claims retained in this suit." Memorandum, Recommendation and Order at 2, AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., Civil No. H-03-4973 (S.D. Tex. June 29, 2005). The magistrate judge further concluded that BofA's "reiteration of this transfer argument is improper," noting that BofA had made the same argument to the Texas District Court in objecting to the September 14, 2004 recommendation to transfer only the declaratory claims, which argument the district court had "necessarily rejected [at that time] . . . by adopting" the magistrate judge's recommendation to transfer those claims alone. Id. at 3.
The magistrate judge recommended, however, that the Declaratory Counterclaims filed by BofA, which paralleled the Declaratory Claims filed by the plaintiffs, be severed from the Tort Counterclaims and transferred to the New York District Court, and that AEP's motion pending in the Texas District Court to amend the complaint to eliminate the Declaratory Claims in conformance with the previous transfer order be granted. On August 31, 2005, the Texas District Court adopted this recommendation in full and ordered the Declaratory Counterclaims severed and transferred to New York.
Pursuant to the Texas District Court's initial transfer order, the record in this action, including the original complaint, was administratively transferred from the Texas District Court to the New York District Court to initiate proceedings here. The plaintiffs then moved in the New York District Court, as they had in the Texas District Court, to amend the complaint in order to conform the pleadings to the transfer order. Specifically, the plaintiffs moved, inter alia, to restate the Declaratory Claims that had been transferred to New York, to eliminate the Tort and Contract Claims that remained in Texas, and to eliminate AEP as a plaintiff.
The New York District Court held two status conferences with the parties to address this issue, during which the court informed the parties that "for reasons of judicial economy, the entire case should be tried in one place." AEP I, 2007 WL 2428474, at *6, 2007 U.S. Dist. LEXIS 63421, at *19. To this end, the court suggested that if it were to grant the plaintiffs' motion to amend the complaint to eliminate the Tort and Contract Claims, BofA could simply file a mirror-image third-party complaint on these same issues against AEP in New York in order "to effectively bring those claims before this court." Id. On November 30, 2005, the New York District Court issued a memorandum to the parties inviting defendant BofA to "file a third-party complaint against AEP" in order "to bring all the issues before the court in the New York case," and stating that it deemed AEP "subject to the jurisdiction of the court by virtue of having appeared here as a plaintiff, even though it now seeks to withdraw as such." Memorandum to Counsel at 2, AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., No. 05 Civ. 4248 (S.D.N.Y. Nov. 30, 2005). BofA then filed that complaint as the court suggested.
In light of these developments, as the New York District Court later explained: "Recognizing that it could not avoid litigating the claims in this court, AEP consented to the denial of the part of its May 13 motion [to amend the complaint] that related to the elimination of AEP[ as a plaintiff] and the [tort and contract] claims, thereby agreeing to have them remain in the complaint." AEP I, 2007 WL 2428474, at *6, 2007 U.S. Dist. LEXIS 63421, at *19. Accordingly, on January 5, 2006, the New York District Court denied AEP's motion to amend the complaint in these respects, stating only that it had "essentially been agreed" that these motions would be denied. AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., No. 05 Civ. 4248, slip op. at 2 (S.D.N.Y. Jan. 5, 2006). The court did grant plaintiff AEP's motion to amend the complaint in other respects, however, including a restatement of the Declaratory Claims that were properly before the New York District Court. It also dismissed defendant BofA's third-party complaint as moot. Consistent with this order, on January 6, 2006, the plaintiffs filed a second amended complaint in the New York District Court that included the Tort and Contract Claims.
Based on what had transpired in New York, and in light of the New York District Court's expressed intention to adjudicate the entire dispute, defendant BofA filed a renewed motion in the Texas District Court to transfer venue of the Tort and Contract Claims and the related Tort Counterclaims to New York. In a September 22, 2006 order, the Texas magistrate judge denied the motion. She emphatically rejected the validity of any purported "new" grounds for transfer:
The "recent development" from which all of [BofA]'s arguments flow is the sua sponte decision of the New York court to exercise jurisdiction over the contract and tort claims and counterclaims. However, as far as this court is concerned, this court has retained jurisdiction over those claims. This court severed the declaratory actions from the contract and tort claims and counterclaims and transferred only the former [to New York]. . . .
BofA makes no attempt to explain how the United States District Court for the Southern District of New York can assert jurisdiction over claims presently before this court. . . . Absent some legal explanation of that court's jurisdiction over the contract and tort claims and counterclaims, this court finds no reason to revisit the transfer issue. In fact, the parties should be concerned whether those claims are properly before the New York court and whether a judgment issued by the United States District Court for the Southern District of New York on the contract and tort claims and counterclaims would be a nullity.
Order at 4-5, AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., Civil No. H-03-4973 (S.D. Tex. Sept. 22, 2006). On October 27, 2006, the Texas District Court adopted ...