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M&T Bank Corporation v. Lasalle Bank National Association

February 5, 2012

M&T BANK CORPORATION, PLAINTIFF,
v.
LASALLE BANK NATIONAL ASSOCIATION, GREENWICH CAPITAL MARKETS, INC., CAIRN MEZZ ABS CDO III LTD., AND CAIRN MEZZ ABS CDO III, INC., DEFENDANTS.



The opinion of the court was delivered by: William M. Skretny Chief Judge United States District Court

DECISION AND ORDER

I. INTRODUCTION

Plaintiff M&T Bank Corporation, ("M&T") commenced this action by filing a Complaint in the Supreme Court for the State of New York, Erie County, on July 3, 2008. M&T claims that Defendants LaSalle Bank National Association (LaSalle),*fn1 Greenwich Capital Markets (Greenwich), Cairn Mezz ABS CDO III, Ltd. (Cairn Ltd.), and Cairn Mezz ABS CDO III, Inc. (Cairn Inc.) violated state statutory and common law when they failed to make interest payments owed to Plaintiff on a fifty (50) million dollar note. On August 6, 2008, Defendants removed the case to this Court on the ground of diversity of citizenship, 28 U.S.C. § 1332. LaSalle has moved to dismiss the four claims asserted against it under Rule 12(b)(6) of the Federal Rules of Civil Procedure. (Docket No. 9.)

Greenwich, Cairn Ltd., and Cairn Inc. jointly moved to dismiss the five claims brought against one or more of them. (Docket No. 12.) The motions are fully briefed and the Court has determined that no oral argument is necessary. For the reasons discussed below, Defendants' Motions to Dismiss are granted in their entirety.

II. BACKGROUND

A. The Facts

The Complaint's allegations and referenced documents reveal the following relevant facts. Cairn Ltd. and Cairn Inc. (the "Cairn Defendants") are co-issuers of $960 million in notes (the "Cairn notes"). (Docket No. 1, Compl. ¶ 5.) The Cairn notes are comprised of a series of debt instruments more commonly known as "collateralized debt obligations" ("CDOs"). (Id. ¶ 11.) A CDO is a financial product for which the interest and principal payments owing on the debt are secured or "collateralized" by bonds and/or other interest bearing obligations. (Id. ¶ 15.) The Cairn notes are collateralized, in substantial part, by "subprime mortgages." (Id. ¶ 11.)*fn2

At some point, Greenwich, a registered broker-dealer, purchased the Cairn notes for resale to investors. (Id. ¶ 9.) Thereafter, Greenwich provided M&T with a Preliminary Offering Memorandum (POM) which summarizes and describes the Cairn notes and the payment stream they represent. (Id. ¶ 12; Docket No. 22, Ex. B.)*fn3 In relevant part, the POM discusses 13 classes of notes, with each class representing a different level of priority to the collateral.*fn4

On March 5, 2007, M&T purchased a Cairn "Class A2A note" from Greenwich in the amount of fifty (50) million dollars, which was to pay interest at the annual rate of 5.8176%. (Compl. ¶ 13.) A Class A2A note holds the second-highest level of priority to the collateral. (Id.) Only the Class A1-VF note, also referred to as the "Controlling Class," has a higher priority. (Id.) M&T believes that Greenwich owns all of the Class A1-VF notes. (Id. ¶ 9.)

On March 29, 2007, the Cairn Defendants and LaSalle, as trustee, entered into an Indenture. (Id. ¶ 5; Docket No. 14 ¶ 3 Ex. B.) As trustee, LaSalle is responsible for administering the collateral underlying the notes and making principal and interest distributions to the note holders in accordance with the Indenture. (Compl. ¶ 8.)

By letter dated April 25, 2008, LaSalle notified M&T "of the occurrence of an Event of Default pursuant to section 5.1(i) of the Indenture." ( Compl. ¶ 18.) Thereafter, on or about May 6, 2008, LaSalle issued a report on the status of the Cairn notes and the underlying collateral. (Id. ¶ 20.) The report indicated that the collateral earned $8,091,609 in "Available Interest Proceeds," approximately $1,583,448 of which was distributed to pay fees associated with the collateral and to pay interest and the commitment fee on the Class A1-VF notes. (Id.) Instead of paying interest on any other class of Cairn notes, LaSalle placed the remaining approximately $6,508,160 into a "Reserve Account" for the benefit of Greenwich, the Class A1-VF noteholder. (Id. ¶¶ 20, 22.) LaSalle advised M&T that it interpreted section 13.1(a) of the Indenture as requiring it to take such action upon an Event of Default. (Id. ¶ 22.)

B. The Claims

M&T contends that LaSalle's placement of Available Interest Proceeds into a Reserve Account is contrary to both the terms of the Indenture and the Cairn Defendants' representations in the POM such that: (1) LaSalle breached its obligations under the Indenture and the Note; (2) M&T is entitled to a declaratory judgment on LaSalle's breach of the Indenture and the Note; (3) LaSalle breached its fiduciary duty as trustee of the Cairn Trust; (4) LaSalle unlawfully converted available interest proceeds due M&T; (5) Greenwich aided and abetted LaSalle in its breach of fiduciary duty; (6) Greenwich and the Cairn Defendants are responsible for material misrepresentations and false statements in the POM; (7) Greenwich and the Cairn Defendants violated New York's General Business Law section 350 when they issued the materially misleading POM; (8) Greenwich and the Cairn Defendants violated New York's General Business Law section 349 by soliciting investors through use of the materially misleading POM; and (9) M&T is entitled to rescission of the contract of sale for the Note. (Compl. ¶¶ 30-63.)

LaSalle has moved to dismiss the first through fourth claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure (Docket No. 9), and Greenwich and the Cairn Defendants have moved to dismiss the fifth through ninth claims (Docket No. 12).

III. DISCUSSION

A. Motion to Dismiss Standard

In reviewing a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the Court must accept the factual allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir. 2006). "In order to survive a motion to dismiss under Rule 12(b)(6), a complaint must allege a plausible set of facts sufficient 'to raise a right to relief above the speculative level.'" Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir. 2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). This standard does not require "heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570.

The Supreme Court recently clarified the appropriate pleading standard in Ashcroft v. Iqbal, setting forth a two-pronged approach for courts deciding a motion to dismiss. 556 U.S. 662, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009). The decision instructs district courts to first "identify[ ] pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." 129 S. Ct. at 1950. Though "legal conclusions can provide the framework of a complaint, they must be supported by factual allegations." Id. Second, if a complaint contains "well-pleaded factual allegations[,] a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Id. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. at 1949 (quoting and citing Twombly, 550 U.S. at 556-57 (internal citations omitted)).

Although courts normally are required to determine the sufficiency of the claims on the complaint alone, "documents that are attached to the complaint or incorporated in it by reference are deemed part of the pleading and may be considered." Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007) (citation omitted). Such is the case here.

B. LaSalle's Motion to Dismiss the First through Fourth Claims

This dispute concerns how distributions are to be made to noteholders following an event of default. It is M&T's position that, under sections 11.1 and 13.1(a) of the Indenture, it was entitled to receive, on May 13, 2008, a payment of Available Interest Proceeds of approximately $466,666. According to M&T, after LaSalle notified it of the occurrence of an "Event of Default" and published a "Notice of Acceleration of Maturity" on the LaSalle website, it improperly diverted the May 13, 2008 interest proceeds that should have been paid to M&T and other subordinate noteholders to a Reserve Account for the benefit of Greenwich (the Class A1-VF noteholder). (Docket No. 1 §§ 18-22.)

Section 11.1(a) of the Indenture relates to the priority of payments and states, in pertinent part:

Notwithstanding any other provision in this Indenture, but subject to the other clauses of this Section 11 and Section 13.1, on each Distribution Date, the Trustee shall disburse amounts transferred to the Payment Account from the Collection Accounts during the Due Period relating to such Distribution Date . . . as follows and for application by the Trustee in accordance with the following priorities. (Docket No. 14, Ex. B. § 11.1(a), p. 241 (emphasis added).) What follows is the priority to be applied to Interest Proceeds-first, taxes and fees owed by the Cairn Defendants (§ 11.1(a)(i)(A)), then fees to the Trustee (§ 11.1(a)(i)(B)(a)), followed by various accrued and unpaid fees and administrative expenses (§ 11.1(a)(i)(B)(b)-(c)), and next, payments due under various referenced agreements (§ 11.1(a)(i)(B)(d)-(E)). Thereafter is the distribution at issue here:

(F) to the payment of the Interest Distribution Amount and Commitment Fee with respect to the Class A1-VF Notes (in each case including Defaulted Interest and accrued interest thereon);

(G) to the payment of the Interest Distribution Amount with respect to, first, the Clas A2A Notes, . . . . (emphasis in original).

Section 13.1(a), titled "Subordination," first confirms that Class A2A Notes, inter alia, are "subordinate and junior to the Class A1-VF Notes to the extent and in the manner set forth in this Indenture, including as set forth in Section 11.1 and hereinafter provided." It goes on to state that:

If any Event of Default has not been cured or waived and acceleration occurs in accordance with Section 5, including as a result of an Event of Default specified in Section 5.1(f) or (g), the Class A1-VF Notes shall be paid in full in Cash before any further payment or distribution is made on account of the Subordinate Interests, in either case, in accordance with the Priority of Payments.

1. Breach of Indenture and Note

In moving to dismiss the first cause of action, LaSalle argues that ยง 13.1(a)'s language relative to the Event of Default and acceleration is clear and unambiguous and requires that the Class A1-VF Notes be paid in full in cash prior to any payments to M&T. Thus, LaSalle urges, its purported failure to make an interest ...


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