Preview
1 Emily V. Griffen (SBN 209162)
egriffen@shearman.com
2 George B. Adams (SBN 321904) ELECTRONICALLY
george.adams@shearman.com
3 SHEARMAN & STERLING LLP F I L E D
Superior Court of California,
535 Mission Street, 25th Floor County of San Francisco
4 San Francisco, California 94105-2997
Telephone: (415) 616-1100 06/04/2020
5 Clerk of the Court
Facsimile: (415) 616-1199 BY: VANESSA WU
Deputy Clerk
6 Adam S. Hakki (admitted pro hac vice)
ahakki@shearman.com
7 Daniel C. Lewis (admitted pro hac vice)
daniel.lewis@shearman.com
8 SHEARMAN & STERLING LLP
599 Lexington Avenue
9 New York, New York 10022
Telephone: (212) 848-4000
10 Facsimile: (212) 848-7179
11 Attorneys for Defendant Deutsche Bank
Securities Inc.
12
13
14
SUPERIOR COURT OF CALIFORNIA
15
COUNTY OF SAN FRANCISCO
16
17
SESL RECOVERY, LLC, a Delaware limited Case No. CGC-18-572159
18 liability company,
NOTICE OF SUPPLEMENTAL
19 Plaintiff, AUTHORITY IN SUPPORT OF
DEFENDANT’S DEMURRER TO THE
20 vs. COMPLAINT
21 DEUTSCHE BANK SECURITIES, INC., Date: July 9, 2020
Time: 9:30 a.m.
22 Dept.: 302
Defendant. Trial Date: None Set
23
Date Action Filed: December 17, 2018
24
Reservation Number: 003060422-18
25
26
27
28
SUPP. AUTH. ISO DEF’S DEMURRER CASE NO. CGC-18-572159
1 Defendant Deutsche Bank Securities Inc. (“DBSI”) hereby notifies the Court of a recent
2 decision of relevance issued since briefing on DBSI’s demurrer was completed.
3 On May 22, 2020, the United States District Court for the Southern District of New York
4 (Hon. Paul G. Gardeph, District Judge) issued a decision dismissing negligent misrepresentation
5 and other claims, including on the ground (among others) that “the agreements on which Plaintiff
6 relies provide[d] no basis for a negligent misrepresentation claim” because “the lenders
7 specifically agreed that they had, and would continue to, make their own credit decisions and
8 would not rely on the Defendant banks, either in entering into the facilities or in making decisions
9 in the course of the performance of the relevant agreements,” and that “the contractual disclaimers
10 at issue address the evaluation of credit risk, which is exactly what the alleged misrepresentations
11 relate to.” See Kirschner v. JPMorgan Chase Bank, N.A., No. 17-cv-6334 (PGG) (S.D.N.Y. May
12 22, 2020), ECF 119 at 27. A true and correct copy of the Kirschner decision is attached hereto as
13 Exhibit 1.
14 DBSI submits the decision in Kirschner as relevant to the arguments made in its pending
15 Demurrer, including arguments made on pages 21–22 and 27 of its opening Memorandum and
16 pages 14–15 and 21 of its Reply that Plaintiff’s negligent misrepresentation claims are barred by
17 non-reliance provisions and disclaimers contained in the Second Lien Credit Agreement.
18
19 Dated: June 4, 2020 Respectfully Submitted,
20 By: /s/ Daniel C. Lewis
Daniel C. Lewis
21
Attorneys for Defendant Deutsche Bank
22 Securities Inc.
23
24
25
26
27
28
SUPP. AUTH. ISO DEF’S DEMURRER 2 CASE NO. CGC-18-572159
EXHIBIT 1
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 1 of 37
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
MARC S. KIRSCHNER, solely in his
capacity as Trustee of THE MILLENNIUM
LENDER CLAIM TRUST, MEMORANDUM
OPINION & ORDER
Plaintiff,
17 Civ. 6334 (PGG)
- against -
JPMORGAN CHASE BANK, N.A.;
JPMORGAN SECURITIES LLC;
CITIGROUP GLOBAL MARKETS INC.;
CITIBANK, N.A.; BMO CAPITAL
MARKETS CORP.; BANK OF
MONTREAL; SUNTRUST ROBINSON
HUMPHREY, INC.; and SUNTRUST
BANK,
Defendants.
PAUL G. GARDEPHE, U.S.D.J.:
Plaintiff Marc S. Kirschner – in his capacity as trustee of the Millennium Lender
Claim Trust (the “Trust”) – brings this action against J.P. Morgan Chase Bank, N.A. (“Chase”),
J.P. Morgan Securities LLC (“JPM Securities”), Citibank, N.A. (“Citibank”), Citigroup Global
Markets, Inc. (“CitiGlobal”), Bank of Montreal, BMO Capital Markets Corp., SunTrust Bank,
and SunTrust Robinson Humphrey, Inc. (collectively, “Defendants”) alleging violations of
various state securities laws; negligent misrepresentation; breach of fiduciary duty; breach of
contract; and breach of the implied covenant of good faith and fair dealing. (Cmplt. (Dkt. No. 1-
1))
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 2 of 37
Plaintiff’s claims arise out of a $1.775 billion syndicated loan transaction 1 that
closed on April 16, 2014. (Id. ¶¶ 1, 96) In that transaction, Defendants sold to the Trust’s
beneficiaries – approximately seventy institutional investor groups, comprised of roughly 400
mutual funds, hedge funds, and other institutional investors (the “Investors”) – debt obligations
of Millennium Laboratories LLC (“Millennium”) – a California-based urine drug testing
company. (Id. ¶¶ 1, 94-95)
In November 2015 – nineteen months after the transaction closed – Millennium
filed a bankruptcy petition. (Id. ¶ 3) The bankruptcy plan issued by the Bankruptcy Court
created the Trust, and provided it with the Investors’ claims against Defendants. (Id. ¶ 8)
The Complaint alleges generally that “Defendants misrepresented or omitted . . .
material facts in the offering materials they provided and communications they made to Investors
regarding the legality of [Millennium’s] sales, marketing, and billing practices,” as well as “the
known risks posed by a pending government investigation into the illegality of such practices.”
(Id. ¶ 1)
This action was filed on August 1, 2017, in Supreme Court of the State of New
York, New York County. (See id.) On August 21, 2017, Defendants removed the case to this
District, asserting the Edge Act, 12 U.S.C § 632, as the basis for federal jurisdiction. (Notice of
Removal (Dkt. No. 1)) On September 24, 2018, this Court denied Plaintiff’s motion to remand.
(Dkt. No. 38)
1
“A syndicated loan is a commercial credit provided by a group of lenders,” and is “structured,
arranged, and administered by one or several commercial or investment banks, known as
arrangers.” S&P Global Market Intelligence, Syndicated Loans: The Market and the Mechanics
1 (2017), https://www.lcdcomps.com/d/pdf/LCD%20Loan%20Primer.pdf.
2
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 3 of 37
Defendants have moved to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to
state a claim. (Dkt. No. 76) For the reasons stated below, Defendants’ motion will be granted.
BACKGROUND 2
I. THE DEFENDANTS
Chase is a national banking association with its principal place of business in New
York. (Cmplt. (Dkt. No. 1-1) ¶ 12) JPM Securities – a Chase affiliate – is a registered broker-
dealer and investment advisor with its principal place of business in New York. (Id. ¶¶ 13-14)
Citibank is a national banking association with its principal place of business in
New York. (Id. ¶ 16) CitiGlobal – a Citibank affiliate – is a registered broker-dealer and
investment advisor with its principal place of business in New York. (Id. ¶¶ 15-16)
Bank of Montreal is chartered under the Bank Act of Canada and is a public
company incorporated in Canada. (Id. ¶ 18) BMO Capital Markets is a Bank of Montreal
affiliate and is a registered broker-dealer with its principal place of business in New York. (Id. ¶
17)
SunTrust Bank is chartered under Georgia law and offers banking and trust
services and products. (Id. ¶ 20) SunTrust Robinson Humphrey is a wholly-owned subsidiary of
SunTrust Bank and is a registered broker-dealer with its principal place of business in Georgia.
(Id. ¶ 19)
II. EVENTS PRECEDING THE SYNDICATED LOAN TRANSACTION
Millennium was a San Diego-based private company that provided laboratory-
based diagnostic testing of urine samples for physicians. (Id. ¶¶ 26-27) In March 2012, the U.S.
2
The following facts are drawn from the Complaint and are presumed true for purposes of
resolving Defendants’ motion to dismiss. See Kassner v. 2nd Ave. Delicatessen, Inc., 496 F.3d
229, 237 (2d Cir. 2007).
3
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 4 of 37
Department of Justice (“DOJ”) began investigating Millennium for federal healthcare law
violations. (Id. ¶¶ 32-40)
In March 2012, Millennium was also engaged in litigation with a competitor,
Ameritox Ltd. (Id. ¶ 39) Ameritox had sued Millennium in 2011 alleging violations of the Stark
Law and the Anti-Kickback statute. (Id.) These federal statutes proscribe “certain forms of
remuneration to or relationships with physicians who refer Medicare-billable work to other
providers[,] such as drug testing labs.” (Id. ¶ 35) Ameritox claimed that Millennium’s violation
of these statutes constituted “unfair competition.” (Id. ¶ 39)
Also in March 2012, Chase, JPM Securities, SunTrust Bank, SunTrust Robinson
Humphrey, and Bank of Montreal, among others, entered into a credit agreement with
Millennium that provided it with a $310 million term loan and a $20 million revolving credit
facility (the “2012 Credit Agreement”). (Id. ¶¶ 31-32) As DOJ’s investigation of Millennium
continued over the next two years, Chase and JPM Securities “carefully monitored the progress
of the [] investigation” and began “exploring . . . ways to refinance the 2012 Credit Agreement”
to escape their “term loan exposure to Millennium.” (Id. ¶¶ 41, 45, 69)
“[B]y the end of February 2014,” however, “the only financing option left on the
table” was “a huge institutional financing” – totaling $1.775 billion – that “would take out the
$304 million principal balance still owed to [Millennium]’s bank lenders” under the 2012 Credit
Agreement. (Id. ¶¶ 49, 69) This institutional financing would also provide “an extraordinary
dividend and bonuses” to Millennium’s directors, officers, and controlling shareholders (the
“Insiders”), totaling “just shy of $1.27 billion.” (Id. ¶¶ 30, 49, 69) The remaining $196 million
would be used to retire debentures held by a private equity investor, leaving Millennium with
$1.775 billion in debt and none of the proceeds. (Id. ¶¶ 49, 69)
4
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 5 of 37
In a commitment letter dated March 16, 2014 (the “2014 Commitment Letter”),
Chase, Citibank, Bank of Montreal, and SunTrust Bank agreed that they – or, in Citibank’s case,
CitiGlobal or one its affiliates – would fund the $1.775 billion financing through a term loan as
“Initial Lenders.” (Id. ¶ 66) Defendants also agreed that the four broker-dealer Defendants –
JPM Securities, CitiGlobal, BMO Capital, and SunTrust Robinson Humphrey – would serve as
“Arrangers” for the debt financing. (See id. ¶¶ 13, 15, 17, 19, 66)
The 2014 Commitment Letter designates JPM Securities and CitiGlobal as the
“Lead Arrangers,” and BMO Capital and SunTrust Robinson Humphrey as the “Co-Managers”
of the loan facility. (Id. ¶¶ 66-67) The 2014 Commitment Letter also authorizes Defendants to
“‘syndicate’ th[e] initial loan amount to a group of institutional lenders managed by the ‘Lead
Arrangers.’” (Id. ¶¶ 66, 92) According to the “Working Group List” prepared by JPM
Securities, all of Defendants’ employees working on the Millennium financing were located in
the United States. (See Tretter Decl., Ex. A (Working Group List) (Dkt. No. 26-3))
III. MECHANICS OF THE SYNDICATED LOAN TRANSACTION
The syndicated loan transaction that closed on April 16, 2014, “proceeded in three
inter-related and contemporaneous steps.” (Cmplt. (Dkt. No. 1-1) ¶¶ 95-96) First, the Arrangers
agreed among themselves that JPM Securities or its affiliate, Chase, would – “as an
accommodation” to the other Arrangers – “perform the entire initial funding[,] and that the other
Defendants would have to contribute only if some of the Investors failed in their obligations to
buy the [portion of the term loan] for which they had committed.” (Id. ¶ 95) Second, Chase and
Millennium entered into a “Master Consent to Assignment,” in which Millennium agreed to sell
portions of the term loan to the Investors up to the amounts listed in an attached schedule. (Id.)
Third, effective no later than the time that Chase funded Millennium, “each individual Investor
5
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 6 of 37
. . . as ‘Buyer’ became irrevocably committed to [Chase] as ‘Seller’ to purchase . . . the amount
[of the term loan] it had subscribed for and been allocated.” (Id.)
After these three steps, “[t]he actual sale between [Chase] and each Investor was
later documented through a formal Assignment and Assumption agreement,” in which “[e]ach
Investor succeeded to the rights of [Chase] under, and [] became a party to, [a] Credit Agreement
between and among all Investors, Millennium, ML Holdings II [an intermediate holding
company formed to hold Millennium’s stock], and [Chase] as Administrative Agent.” (Id.; see
also id. ¶ 24)
IV. THE SYNDICATED LOAN TRANSACTION IS EFFECTUATED
“[O]n or before 5 p.m. (Eastern) on April 14, 2014,” “Defendants required the
Investors or their investment advisors to make a final legally binding offer to purchase” a portion
of the term loan “‘with [their] [Arranger] salesperson.’” (Id. ¶ 93 (last alteration in original))
The next day, April 15, 2014, the Arrangers informed the Investors or their investment advisors
of the gross allocation that each had been awarded. (Id.)
Investment advisors that managed mutual and other funds considering an
investment in the term loan then had the right to inform the Arrangers of the sub-allocations they
wished to make to particular investors in their own funds. (Id. ¶ 94) For example, an investment
advisor with discretionary authority over multiple funds might make an offer to purchase $50
million in Millennium notes, receive a gross allocation of $45 million, and then sub-divide that
$45 million among a group of investors. (Id.) Defendants referred to the investors that received
initial allocations as “Parent Investors,” and investors that received the sub-allocations as “Child
Investors.” (Tretter Decl. (Dkt. No. 26-2) ¶ 7)
6
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 7 of 37
On April 16, 2014, Chase obtained consent from Millennium to allocate the
entirety of the $1.798 billion debt financing – the $1.775 billion “fronted” by Chase, plus a small
potential over-allotment – to sixty-one Parent Investors. (Trotter Decl., Ex. D (Master Consent
to Assignment) (Dkt. No. 26-6)) Of the sixty-one Parent Investors, fifty-nine are domestic
entities – which were allocated 98.52% of the term loan – and two are foreign domiciliaries that
were allocated 1.48% of the term loan. (Id.; Tretter Decl. (Dkt. No. 26-2) ¶ 8) Of the Child
Investors, more than two hundred are foreign domiciliaries. (See Notice of Removal, Ex. C
(Lender Schedule) (Dkt. No. 1-3)) All the Child Investors are legal entities or funds. (Id.)
On April 16, 2014 – the day that the transaction closed – Chase made the initial
term loan of $1.775 billion to Millennium, which triggered the commitments of the Investors to
purchase the entire amount from Chase through the assigned allocations. Plaintiff has submitted
exhibits demonstrating how Chase effected these sales. (See Pltf. Remand Br. (Dkt. No. 26-1) at
12 n.2; Def. Remand Opp. Br (Dkt. No. 27) at 12) 3
For example, on April 15, 2014, JPM Securities sent an email to a domestic
Parent Investor, Brigade Capital, informing Brigade Capital that it had been allocated $45
million in Millennium notes, and directing that “[s]ub-allocations” were “to be returned via
ClearPar” – a U.S. based clearing house – “and funded within no less than 3 and no more than 10
days after funding.” (See Tretter Decl., Ex. F (April 15, 2014 Brigade Capital email) (Dkt. No.
26-8) at 2) A corresponding ClearPar “Trade Ticket” dated April 25, 2014 indicates that Brigade
Capital had sub-allocated that $45 million among twenty-three Child Investors (Tretter Decl.,
3
All references to page numbers in this Order are as reflected in this District’s Electronic Case
Files (“ECF”) system.
7
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 8 of 37
Ex. G (ClearPar Trade Ticket) (Dkt. No. 26-9) at 2-3), ten of which are foreign domiciliaries.
(Tretter Decl. (Dkt. No. 26-2) ¶ 10)
The Institutional Allocation Confirmation, and the Assignment and Assumption
Agreement – both executed by Chase and Brigade Credit Fund II, Ltd., one of the foreign Child
Investors (id. ¶ 11) – are examples of the transaction documents entered into by Chase and the
Child Investors. (See Pltf. Remand Br. (Dkt. No. 26-1) at 12 n.2; Def. Remand Opp. Br. (Dkt.
No. 27) at 12) In the Institutional Allocation Confirmation, Brigade Credit Fund II confirms its
agreement to assume from Chase the obligation to purchase more than $11 million of the term
loan “within ten (10) business days of the Funding, or within such other period agreed to by
[Chase], by assignment pursuant to the Assignment and Assumption [Agreement].” (Tretter
Decl., Ex. H (Brigade Credit Fund II Institutional Allocation Confirmation) (Dkt. No. 26-10) at
2) In the Assignment and Assumption Agreement – which, as contemplated in the Institutional
Allocation Confirmation, was executed on April 15, 2014 – Chase irrevocably sold and assigned
the agreed-upon portion of the term loan. (Tretter Decl., Ex. I (Brigade Credit Fund II
Assignment and Assumption) (Dkt. No. 26-11)) Once Brigade Credit Fund II and Chase
executed the Assignment and Assumption Agreement, Brigade Credit Fund II became a party to
the credit agreement governing the term loan (the “2014 Credit Agreement”). (Id. at 2)
V. MILLENNIUM’S DECLINE AND SUBSEQUENT BANKRUPTCY
On June 16, 2014, two months after the April 16, 2014 closing, a jury in the
Ameritox litigation returned a verdict in favor of Ameritox, finding in special interrogatories that
Millennium had violated both the Stark Law and the Anti-Kickback statute. (Id. ¶ 110) The jury
awarded Ameritox $2.755 million in compensatory damages and $12 million in punitive
damages – later remitted to $8.5 million – based on Millennium’s misconduct in Florida,
8
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 9 of 37
Tennessee, and Texas. (Id. ¶ 111) On the day of the jury’s verdict, Chase and JPM Securities
concluded that it would have a $500 million negative impact on Millennium’s valuation. (Id. ¶
114)
In December 2014 – six months later – DOJ notified Millennium that it intended
to intervene in civil False Claims Act proceedings brought by qui tam relators based on
Millennium’s alleged federal healthcare law violations. (Id. ¶ 118) Two months later, in
February 2015, the Centers for Medicare and Medicaid Services threatened to debar Millennium
based on allegations of illegal billing practices. (Id. ¶ 119) In March 2015, the DOJ formally
intervened in the qui tam proceedings. (Id. ¶ 120)
In May 2015, Millennium disclosed that it had agreed in principle to a $256
million global settlement with DOJ. (Id. ¶ 3) Millennium finalized that settlement on October
16, 2015, and on November 10, 2015, Millennium defaulted on the term loan and filed a
bankruptcy petition. (Id.) The Bankruptcy Court issued a bankruptcy plan that established the
Trust, and Plaintiff was appointed as Trustee. (Id. ¶ 11)
VI. PLAINTIFF’S CLAIMS
The Complaint was filed in Supreme Court of the State of New York, New York
County, on August 1, 2017, and asserts eleven causes of action. Causes of Action One through
Six arise under the securities laws of California, Massachusetts, Colorado, and Illinois, and
allege that Defendants made actionable misstatements and omissions to the Investors. (See id. ¶¶
125-172) The Seventh Cause of Action alleges negligent misrepresentation as to all Defendants.
(Id. ¶¶ 173-181) Causes of Action Eight through Eleven are asserted only against Chase, and
allege breach of fiduciary duty, breach of contract, breach of post-closing contractual duties, and
breach of the implied covenant of good faith and fair dealing. (Id. ¶¶ 182-207)
9
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 10 of 37
The Complaint alleges that all Defendants are liable for negligent
misrepresentation and securities law violations because, inter alia, “Defendants abandoned their
obligations” to perform due diligence concerning (1) Millennium’s exposure to liability,
damages, and penalties in connection with the DOJ investigation; and (2) the artificial inflation
of Millennium’s financial results stemming from the company’s unlawful sales and marketing
practices. (Id. ¶¶ 53-65) The Complaint also alleges that JPM Securities and CitiGlobal created
offering materials that contained material misstatements and omissions that were designed to,
and did, induce the Investors’ purchases of the Millennium notes. (Id. ¶¶ 70-91)
Causes of Action Eight through Eleven arise, in part, from the 2014 Credit
Agreement, which includes as a condition precedent for the $1.775 billion loan that Millennium
not be in breach of the representations and warranties in the 2014 Credit Agreement. (Id. ¶¶ 100-
03) According to the Complaint, Chase knew or should have known that the representations and
warranties in the 2014 Credit Agreement falsely assured Investors that Millennium had no
exposure to material litigation and was in material compliance with all applicable regulations and
laws, and that, therefore, the conditions precedent to funding had not been satisfied. (Id. ¶¶ 101-
05) The Complaint further alleges that Chase “breached its contractual duties, express and
implied, and fiduciary duties as agent to the Investors by (i) failing to give the Investors notice
[that the conditions precedent had not been satisfied]; and (ii) proceeding with the funding of
Millennium.” (Id. ¶ 105)
These claims against Chase extend to the period after Chase assigned the entirety
of the term loan to the Investors, because Chase remained a party to the 2014 Credit Agreement
as Administrative Agent. (Id. ¶ 95) In that role, Chase was obligated to provide Investors with
(1) information from and about Millennium “contemporaneously with intervening material
10
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 11 of 37
developments” (id. ¶ 107); and (2) notice of, inter alia, (a) any “investigation or proceeding that
may exist at any time between [Millennium] and any Governmental Authority, that if adversely
determined would reasonably be expected to have a Material Adverse Effect”; and (b) “any
litigation or proceeding . . . in which the amount involved is $15,000,000 or more and not fully
covered by insurance.” (Id. ¶ 109 (internal quotation marks and citations omitted))
Notwithstanding these obligations, Chase allegedly did not provide contemporaneous notice of
the verdict in the Ameritox litigation (id. ¶ 115), even though Chase viewed the verdict as having
a material effect on the company’s valuation. (Id. ¶ 114) Plaintiff contends that “[i]nterest on
the original . . . judgment would easily put the amount involved at over the $15 million figure . . .
and it is doubtful that any of the punitive damages would have been covered by insurance.” (Id.
¶ 113) The Complaint also alleges that Chase failed to contemporaneously notify the Investors
either of the DOJ’s intervention in the qui tam action or Medicare’s threat to debar Millennium.
(Id. ¶¶ 118-21) Based on these alleged failures, Plaintiff asserts claims against Chase for breach
of contract after the April 16, 2014 closing date. (Id. ¶¶ 196-207)
VII. PROCEDURAL HISTORY
On August 1, 2017, the Complaint was filed in Supreme Court of the State of
New York, New York County. (Id.) On August 21, 2017, Defendants removed the case to this
District, asserting jurisdiction under the Edge Act, 12 U.S.C § 632. (Notice of Removal (Dkt.
No. 1)) On October 4, 2017, Plaintiff moved to remand (Pltf. Mot. (Dkt. No. 26)), arguing that
there is no jurisdiction under the Edge Act. (Pltf. Br. (Dkt. No. 26-1)) On September 24, 2018,
this Court denied Plaintiff’s motion to remand. (Dkt. No. 38) Defendants have moved to
dismiss for failure to state a claim. (Dkt. No. 76)
11
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 12 of 37
DISCUSSION
I. MOTION TO DISMISS STANDARD
“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
“In considering a motion to dismiss . . . the court is to accept as true all facts alleged in the
complaint,” Kassner, 496 F.3d at 237 (citing Dougherty v. Town of N. Hempstead Bd. of Zoning
Appeals, 282 F.3d 83, 87 (2d Cir. 2002)), and must “draw all reasonable inferences in favor of
the plaintiff.” Id. (citing Fernandez v. Chertoff, 471 F.3d 45, 51 (2d Cir. 2006)).
A complaint is inadequately pled “if it tenders ‘naked assertion[s]’ devoid of
‘further factual enhancement,’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557), and
does not provide factual allegations sufficient “to give the defendant fair notice of what the claim
is and the grounds upon which it rests.” Port Dock & Stone Corp. v. Oldcastle Northeast, Inc.,
507 F.3d 117, 121 (2d Cir. 2007) (citing Twombly, 550 U.S. at 555 (quoting Conley v. Gibson,
355 U.S. 41, 47 (1957))).
Fed. R. Civ. P. 9(b) sets standards for pleading fraud claims and requires that “[i]n
alleging fraud or mistake, a party must state with particularity the circumstances constituting
fraud or mistake.” Fed. R. Civ. P. 9(b); see also In re Pfizer Inc. Sec. Litig., 584 F. Supp. 2d
621, 632–33 (S.D.N.Y. 2008) (quoting Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001)).
Rule 9(b) requires a plaintiff to “(1) specify the statements that the plaintiff contends were
fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4)
explain why the statements were fraudulent.” Kottler v. Deutsche Bank AG, 607 F. Supp. 2d
447, 462 (S.D.N.Y. 2009) (quoting Stevelman v. Alias Research, Inc., 174 F.3d 79, 84 (2d Cir.
1999) (internal quotation marks omitted)).
12
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 13 of 37
II. STATE SECURITIES LAW CLAIMS
Defendants Chase, JPM Securities, Citibank, and CitiGlobal (collectively, “Chase
and Citi”) have moved to dismiss Plaintiff’s claims under the securities laws of California,
Colorado, Illinois, and Massachusetts – so-called “blue sky laws” – on the ground that “a
syndicated bank loan is not a ‘security’ and a loan syndication is not a ‘securities distribution.’”
(Chase and Citi. Br. (Dkt. No. 77) at 10) Defendants Bank of Montreal, BMO Capital Markets,
SunTrust Bank, and SunTrust Robinson Humphrey (collectively, “BMO and SunTrust”) join in
Chase and Citi’s arguments, and offer additional grounds for dismissal. (BMO and SunTrust Br.
(Dkt. No. 80) at 5) Plaintiff contends that the Millennium notes are securities, and thus subject
to the state security laws. (Pltf. Opp. Br. (Dkt. No. 81) at 22)
A. Legal Standards
In determining whether debt obligations such as the Millennium notes are
“securities,” courts apply the “family resemblance” test set forth in Reves v. Ernst & Young. 494
U.S. 56 (1990). For purposes of resolving Defendants’ motion to dismiss, this Court accepts
Plaintiff’s assertion that Reves applies to Plaintiff’s claims under California, Colorado, Illinois,
and Massachusetts law. (See Pltf. Opp. Br. (Dkt. No. 81) at 21 n.9)
In Reves, the Supreme Court instructed that “because the Securities Acts define
‘security’ to include ‘any note,’” courts should “begin with a presumption that every note is a
security.” Reves, 494 U.S. at 65. The Court adopted the Second Circuit’s “list of instruments
commonly denominated ‘notes’ that nonetheless fall without the ‘security’ category,” however.
Id. “[T]ypes of notes that are not ‘securities’ include ‘the note delivered in consumer financing,
the note secured by a mortgage on a home, the short-term note secured by a lien on a small
business or some of its assets, the note evidencing a “character” loan to a bank customer, short-
term notes secured by an assignment of accounts receivable, []a note which simply formalizes an
13
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 14 of 37
open-account debt incurred in the ordinary course of business (particularly if, as in the case of
the customer of a broker, it is collateralized’ [and] ‘notes evidencing loans by commercial banks
for current operations.’” Id. at 65, 67 (first quoting Exchange Nat. Bank of Chicago v. Touche
Ross & Co., 544 F.2d 1126, 1138 (2d Cir. 1976), then quoting Chemical Bank v. Arthur
Andersen & Co., 726 F.2d 930, 939 (2d Cir. 1984)). The presumption that a note is a security
“may be rebutted only by a showing that the note bears a strong [family] resemblance . . . to one
of the enumerated categories of instrument” set forth above. Id. at 67.
The four factors of the family resemblance test are: (1) “the motivations that
would prompt a reasonable seller and buyer to enter into [the transaction]”; (2) “the plan of
distribution of the instrument”; (3) ‘the reasonable expectations of the investing public”; and (4)
“the existence of another regulatory scheme [to reduce] the risk of the instrument, thereby
rendering application of the Securities Act unnecessary.” Id. at 66-67.
B. Analysis
Plaintiff argues that the determination of whether an instrument is a security “is a
fact intensive question and generally ‘not appropriately resolved on a motion to dismiss.’” (Pltf.
Opp. Br. (Dkt. No. 81) at 20 (quoting S.E.C. v. Rorech, 673 F. Supp. 2d 217, 225 (S.D.N.Y.
2009) (citation omitted))) Courts in this District have on occasion, however, concluded on a
motion to dismiss that a particular instrument is not a security under Reves. See, e.g., Intelligent
Digital Sys., LLC v. Visual Mgmt. Sys., Inc., 683 F. Supp. 2d 278, 281, 283, 286 (finding on a
motion to dismiss that an “unsecured convertible promissory note” is not a security) (E.D.N.Y.
2010); Benedict v. Amaducci, No. 92 CIV. 5239 (KMW), 1995 WL 413206, at *1, *10
(S.D.N.Y. July 12, 1995) (finding on a motion to dismiss that several notes at issue were not
securities). In analyzing the four Reves factors here, this Court assumes the truth of the
Complaint’s factual allegations.
14
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 15 of 37
1. Motivations of Seller and Buyer
The first Reves factor requires to consider “the motivations that would prompt a
reasonable seller and buyer to enter into [a particular transaction]”:
If the seller’s purpose is to raise money for the general use of a business enterprise or to
finance substantial investments and the buyer is interested primarily in the profit the note
is expected to generate, the instrument is likely to be a “security.” If the note is
exchanged to facilitate the purchase and sale of a minor asset or consumer good, to
correct for the seller’s cash-flow difficulties, or to advance some other commercial or
consumer purpose, on the other hand, the note is less sensibly described as a “security.”
Reves, 494 U.S. at 66; see also Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 812 (2d Cir.
1994) (the first Reves factor asks “whether the motivations are investment (suggesting a
security) or commercial or consumer (suggesting a non-security)”).
In arguing that the Millennium notes are securities – Plaintiff points out that
Chase assigned an “analyst who normally covered high-yield debt securities” to this transaction;
referred to participants as “public investors”; and “employed practices and terminology specific
to an investment transaction.” (Pltf. Opp. Br. (Dkt. No. 81) at 24)
Defendants counter that the Millennium notes offered a fixed rate of return,
without any opportunity to share in profits earned by Millennium. (See Chase and Citi Br. (Dkt.
No. 77) at 23 (citing Credit Agreement (Dkt. No. 79-1) §§ 2.14-2.15 (providing for a market rate
of interest plus a fixed “applicable margin” that varies depending on the lender’s tranche))) In
Pollack, however, the Second Circuit held that “the district court erred in finding that the fixed
rate of return cut against the presumption that the notes are securities.” Pollack, 27 F.3d at 813.
Defendants also cite the seller’s motivation, which was to pay dividends and to
satisfy or refinance existing debt. (Cmplt. (Dkt. No. 1-1) ¶¶ 49, 69) Defendants argue that
“[t]hese are core commercial lending functions not traditionally associated with securities
offerings.” (Citi and Chase Br. (Dkt. No. 77) at 23)
15
Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 16 of 37
Applying the Reves dichotomy – where “the seller’s purpose is to raise money for
the general use of a business enterprise or to finance substantial investments . . . the instrument is
likely to be a ‘security,’” but where “the note is exchanged to facilitate the purchase and sale of a
minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or to advance
some other commercial or consumer purpose, . . . the note is less sensibly described as a
‘security,’” Reves, 494 U.S. at 66 – the Millennium notes are not, from the seller’s perspective,
for the purpose of an investment or for Millennium’s general use. Instead, from Millennium’s
perspective, the Notes are better described as advancing “some other commercial purpose[s]”:
loan repayment and the paying of a dividend.
From the buyers’ perspective, however, the purpose of acquiring the Notes
appears to have been investment. Many of the ultimate purchasers are pension and retirement
funds who purchased the Millennium Notes for their investment portfolios. (Pltf. Opp. Br. (Dkt.
No. 81) at 23)
Given that the buyers’ and sellers’ motivations are mixed, this factor does not
weigh heavily in either direction.
2. Plan of Distribution
The second Reves factor considers “the plan of distribution” for the instrument,
including whether it is subject to “common trading for speculation or investment.” Reves, 494
U.S. at 66.
Defendants argue that the purchasers of the Notes “are a small group of
sophisticated institutions; members of the general public were not solicited and did not
participate in the loan syndication.” (Chase and Citi Br. (Dkt. No. 77) at 23 (citing Cmplt. (Dkt.
No. 1-1) ¶ 66)) The Lender Schedule attached to the Complaint indicates that only a few
hundred Parent and Child Investors purchased the Notes.
Preview
1 Emily V. Griffen (SBN 209162) egriffen@shearman.com 2 George B. Adams (SBN 321904) ELECTRONICALLY george.adams@shearman.com 3 SHEARMAN & STERLING LLP F I L E D Superior Court of California, 535 Mission Street, 25th Floor County of San Francisco 4 San Francisco, California 94105-2997 Telephone: (415) 616-1100 06/04/2020 5 Clerk of the Court Facsimile: (415) 616-1199 BY: VANESSA WU Deputy Clerk 6 Adam S. Hakki (admitted pro hac vice) ahakki@shearman.com 7 Daniel C. Lewis (admitted pro hac vice) daniel.lewis@shearman.com 8 SHEARMAN & STERLING LLP 599 Lexington Avenue 9 New York, New York 10022 Telephone: (212) 848-4000 10 Facsimile: (212) 848-7179 11 Attorneys for Defendant Deutsche Bank Securities Inc. 12 13 14 SUPERIOR COURT OF CALIFORNIA 15 COUNTY OF SAN FRANCISCO 16 17 SESL RECOVERY, LLC, a Delaware limited Case No. CGC-18-572159 18 liability company, NOTICE OF SUPPLEMENTAL 19 Plaintiff, AUTHORITY IN SUPPORT OF DEFENDANT’S DEMURRER TO THE 20 vs. COMPLAINT 21 DEUTSCHE BANK SECURITIES, INC., Date: July 9, 2020 Time: 9:30 a.m. 22 Dept.: 302 Defendant. Trial Date: None Set 23 Date Action Filed: December 17, 2018 24 Reservation Number: 003060422-18 25 26 27 28 SUPP. AUTH. ISO DEF’S DEMURRER CASE NO. CGC-18-572159 1 Defendant Deutsche Bank Securities Inc. (“DBSI”) hereby notifies the Court of a recent 2 decision of relevance issued since briefing on DBSI’s demurrer was completed. 3 On May 22, 2020, the United States District Court for the Southern District of New York 4 (Hon. Paul G. Gardeph, District Judge) issued a decision dismissing negligent misrepresentation 5 and other claims, including on the ground (among others) that “the agreements on which Plaintiff 6 relies provide[d] no basis for a negligent misrepresentation claim” because “the lenders 7 specifically agreed that they had, and would continue to, make their own credit decisions and 8 would not rely on the Defendant banks, either in entering into the facilities or in making decisions 9 in the course of the performance of the relevant agreements,” and that “the contractual disclaimers 10 at issue address the evaluation of credit risk, which is exactly what the alleged misrepresentations 11 relate to.” See Kirschner v. JPMorgan Chase Bank, N.A., No. 17-cv-6334 (PGG) (S.D.N.Y. May 12 22, 2020), ECF 119 at 27. A true and correct copy of the Kirschner decision is attached hereto as 13 Exhibit 1. 14 DBSI submits the decision in Kirschner as relevant to the arguments made in its pending 15 Demurrer, including arguments made on pages 21–22 and 27 of its opening Memorandum and 16 pages 14–15 and 21 of its Reply that Plaintiff’s negligent misrepresentation claims are barred by 17 non-reliance provisions and disclaimers contained in the Second Lien Credit Agreement. 18 19 Dated: June 4, 2020 Respectfully Submitted, 20 By: /s/ Daniel C. Lewis Daniel C. Lewis 21 Attorneys for Defendant Deutsche Bank 22 Securities Inc. 23 24 25 26 27 28 SUPP. AUTH. ISO DEF’S DEMURRER 2 CASE NO. CGC-18-572159 EXHIBIT 1 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 1 of 37 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK MARC S. KIRSCHNER, solely in his capacity as Trustee of THE MILLENNIUM LENDER CLAIM TRUST, MEMORANDUM OPINION & ORDER Plaintiff, 17 Civ. 6334 (PGG) - against - JPMORGAN CHASE BANK, N.A.; JPMORGAN SECURITIES LLC; CITIGROUP GLOBAL MARKETS INC.; CITIBANK, N.A.; BMO CAPITAL MARKETS CORP.; BANK OF MONTREAL; SUNTRUST ROBINSON HUMPHREY, INC.; and SUNTRUST BANK, Defendants. PAUL G. GARDEPHE, U.S.D.J.: Plaintiff Marc S. Kirschner – in his capacity as trustee of the Millennium Lender Claim Trust (the “Trust”) – brings this action against J.P. Morgan Chase Bank, N.A. (“Chase”), J.P. Morgan Securities LLC (“JPM Securities”), Citibank, N.A. (“Citibank”), Citigroup Global Markets, Inc. (“CitiGlobal”), Bank of Montreal, BMO Capital Markets Corp., SunTrust Bank, and SunTrust Robinson Humphrey, Inc. (collectively, “Defendants”) alleging violations of various state securities laws; negligent misrepresentation; breach of fiduciary duty; breach of contract; and breach of the implied covenant of good faith and fair dealing. (Cmplt. (Dkt. No. 1- 1)) Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 2 of 37 Plaintiff’s claims arise out of a $1.775 billion syndicated loan transaction 1 that closed on April 16, 2014. (Id. ¶¶ 1, 96) In that transaction, Defendants sold to the Trust’s beneficiaries – approximately seventy institutional investor groups, comprised of roughly 400 mutual funds, hedge funds, and other institutional investors (the “Investors”) – debt obligations of Millennium Laboratories LLC (“Millennium”) – a California-based urine drug testing company. (Id. ¶¶ 1, 94-95) In November 2015 – nineteen months after the transaction closed – Millennium filed a bankruptcy petition. (Id. ¶ 3) The bankruptcy plan issued by the Bankruptcy Court created the Trust, and provided it with the Investors’ claims against Defendants. (Id. ¶ 8) The Complaint alleges generally that “Defendants misrepresented or omitted . . . material facts in the offering materials they provided and communications they made to Investors regarding the legality of [Millennium’s] sales, marketing, and billing practices,” as well as “the known risks posed by a pending government investigation into the illegality of such practices.” (Id. ¶ 1) This action was filed on August 1, 2017, in Supreme Court of the State of New York, New York County. (See id.) On August 21, 2017, Defendants removed the case to this District, asserting the Edge Act, 12 U.S.C § 632, as the basis for federal jurisdiction. (Notice of Removal (Dkt. No. 1)) On September 24, 2018, this Court denied Plaintiff’s motion to remand. (Dkt. No. 38) 1 “A syndicated loan is a commercial credit provided by a group of lenders,” and is “structured, arranged, and administered by one or several commercial or investment banks, known as arrangers.” S&P Global Market Intelligence, Syndicated Loans: The Market and the Mechanics 1 (2017), https://www.lcdcomps.com/d/pdf/LCD%20Loan%20Primer.pdf. 2 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 3 of 37 Defendants have moved to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. (Dkt. No. 76) For the reasons stated below, Defendants’ motion will be granted. BACKGROUND 2 I. THE DEFENDANTS Chase is a national banking association with its principal place of business in New York. (Cmplt. (Dkt. No. 1-1) ¶ 12) JPM Securities – a Chase affiliate – is a registered broker- dealer and investment advisor with its principal place of business in New York. (Id. ¶¶ 13-14) Citibank is a national banking association with its principal place of business in New York. (Id. ¶ 16) CitiGlobal – a Citibank affiliate – is a registered broker-dealer and investment advisor with its principal place of business in New York. (Id. ¶¶ 15-16) Bank of Montreal is chartered under the Bank Act of Canada and is a public company incorporated in Canada. (Id. ¶ 18) BMO Capital Markets is a Bank of Montreal affiliate and is a registered broker-dealer with its principal place of business in New York. (Id. ¶ 17) SunTrust Bank is chartered under Georgia law and offers banking and trust services and products. (Id. ¶ 20) SunTrust Robinson Humphrey is a wholly-owned subsidiary of SunTrust Bank and is a registered broker-dealer with its principal place of business in Georgia. (Id. ¶ 19) II. EVENTS PRECEDING THE SYNDICATED LOAN TRANSACTION Millennium was a San Diego-based private company that provided laboratory- based diagnostic testing of urine samples for physicians. (Id. ¶¶ 26-27) In March 2012, the U.S. 2 The following facts are drawn from the Complaint and are presumed true for purposes of resolving Defendants’ motion to dismiss. See Kassner v. 2nd Ave. Delicatessen, Inc., 496 F.3d 229, 237 (2d Cir. 2007). 3 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 4 of 37 Department of Justice (“DOJ”) began investigating Millennium for federal healthcare law violations. (Id. ¶¶ 32-40) In March 2012, Millennium was also engaged in litigation with a competitor, Ameritox Ltd. (Id. ¶ 39) Ameritox had sued Millennium in 2011 alleging violations of the Stark Law and the Anti-Kickback statute. (Id.) These federal statutes proscribe “certain forms of remuneration to or relationships with physicians who refer Medicare-billable work to other providers[,] such as drug testing labs.” (Id. ¶ 35) Ameritox claimed that Millennium’s violation of these statutes constituted “unfair competition.” (Id. ¶ 39) Also in March 2012, Chase, JPM Securities, SunTrust Bank, SunTrust Robinson Humphrey, and Bank of Montreal, among others, entered into a credit agreement with Millennium that provided it with a $310 million term loan and a $20 million revolving credit facility (the “2012 Credit Agreement”). (Id. ¶¶ 31-32) As DOJ’s investigation of Millennium continued over the next two years, Chase and JPM Securities “carefully monitored the progress of the [] investigation” and began “exploring . . . ways to refinance the 2012 Credit Agreement” to escape their “term loan exposure to Millennium.” (Id. ¶¶ 41, 45, 69) “[B]y the end of February 2014,” however, “the only financing option left on the table” was “a huge institutional financing” – totaling $1.775 billion – that “would take out the $304 million principal balance still owed to [Millennium]’s bank lenders” under the 2012 Credit Agreement. (Id. ¶¶ 49, 69) This institutional financing would also provide “an extraordinary dividend and bonuses” to Millennium’s directors, officers, and controlling shareholders (the “Insiders”), totaling “just shy of $1.27 billion.” (Id. ¶¶ 30, 49, 69) The remaining $196 million would be used to retire debentures held by a private equity investor, leaving Millennium with $1.775 billion in debt and none of the proceeds. (Id. ¶¶ 49, 69) 4 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 5 of 37 In a commitment letter dated March 16, 2014 (the “2014 Commitment Letter”), Chase, Citibank, Bank of Montreal, and SunTrust Bank agreed that they – or, in Citibank’s case, CitiGlobal or one its affiliates – would fund the $1.775 billion financing through a term loan as “Initial Lenders.” (Id. ¶ 66) Defendants also agreed that the four broker-dealer Defendants – JPM Securities, CitiGlobal, BMO Capital, and SunTrust Robinson Humphrey – would serve as “Arrangers” for the debt financing. (See id. ¶¶ 13, 15, 17, 19, 66) The 2014 Commitment Letter designates JPM Securities and CitiGlobal as the “Lead Arrangers,” and BMO Capital and SunTrust Robinson Humphrey as the “Co-Managers” of the loan facility. (Id. ¶¶ 66-67) The 2014 Commitment Letter also authorizes Defendants to “‘syndicate’ th[e] initial loan amount to a group of institutional lenders managed by the ‘Lead Arrangers.’” (Id. ¶¶ 66, 92) According to the “Working Group List” prepared by JPM Securities, all of Defendants’ employees working on the Millennium financing were located in the United States. (See Tretter Decl., Ex. A (Working Group List) (Dkt. No. 26-3)) III. MECHANICS OF THE SYNDICATED LOAN TRANSACTION The syndicated loan transaction that closed on April 16, 2014, “proceeded in three inter-related and contemporaneous steps.” (Cmplt. (Dkt. No. 1-1) ¶¶ 95-96) First, the Arrangers agreed among themselves that JPM Securities or its affiliate, Chase, would – “as an accommodation” to the other Arrangers – “perform the entire initial funding[,] and that the other Defendants would have to contribute only if some of the Investors failed in their obligations to buy the [portion of the term loan] for which they had committed.” (Id. ¶ 95) Second, Chase and Millennium entered into a “Master Consent to Assignment,” in which Millennium agreed to sell portions of the term loan to the Investors up to the amounts listed in an attached schedule. (Id.) Third, effective no later than the time that Chase funded Millennium, “each individual Investor 5 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 6 of 37 . . . as ‘Buyer’ became irrevocably committed to [Chase] as ‘Seller’ to purchase . . . the amount [of the term loan] it had subscribed for and been allocated.” (Id.) After these three steps, “[t]he actual sale between [Chase] and each Investor was later documented through a formal Assignment and Assumption agreement,” in which “[e]ach Investor succeeded to the rights of [Chase] under, and [] became a party to, [a] Credit Agreement between and among all Investors, Millennium, ML Holdings II [an intermediate holding company formed to hold Millennium’s stock], and [Chase] as Administrative Agent.” (Id.; see also id. ¶ 24) IV. THE SYNDICATED LOAN TRANSACTION IS EFFECTUATED “[O]n or before 5 p.m. (Eastern) on April 14, 2014,” “Defendants required the Investors or their investment advisors to make a final legally binding offer to purchase” a portion of the term loan “‘with [their] [Arranger] salesperson.’” (Id. ¶ 93 (last alteration in original)) The next day, April 15, 2014, the Arrangers informed the Investors or their investment advisors of the gross allocation that each had been awarded. (Id.) Investment advisors that managed mutual and other funds considering an investment in the term loan then had the right to inform the Arrangers of the sub-allocations they wished to make to particular investors in their own funds. (Id. ¶ 94) For example, an investment advisor with discretionary authority over multiple funds might make an offer to purchase $50 million in Millennium notes, receive a gross allocation of $45 million, and then sub-divide that $45 million among a group of investors. (Id.) Defendants referred to the investors that received initial allocations as “Parent Investors,” and investors that received the sub-allocations as “Child Investors.” (Tretter Decl. (Dkt. No. 26-2) ¶ 7) 6 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 7 of 37 On April 16, 2014, Chase obtained consent from Millennium to allocate the entirety of the $1.798 billion debt financing – the $1.775 billion “fronted” by Chase, plus a small potential over-allotment – to sixty-one Parent Investors. (Trotter Decl., Ex. D (Master Consent to Assignment) (Dkt. No. 26-6)) Of the sixty-one Parent Investors, fifty-nine are domestic entities – which were allocated 98.52% of the term loan – and two are foreign domiciliaries that were allocated 1.48% of the term loan. (Id.; Tretter Decl. (Dkt. No. 26-2) ¶ 8) Of the Child Investors, more than two hundred are foreign domiciliaries. (See Notice of Removal, Ex. C (Lender Schedule) (Dkt. No. 1-3)) All the Child Investors are legal entities or funds. (Id.) On April 16, 2014 – the day that the transaction closed – Chase made the initial term loan of $1.775 billion to Millennium, which triggered the commitments of the Investors to purchase the entire amount from Chase through the assigned allocations. Plaintiff has submitted exhibits demonstrating how Chase effected these sales. (See Pltf. Remand Br. (Dkt. No. 26-1) at 12 n.2; Def. Remand Opp. Br (Dkt. No. 27) at 12) 3 For example, on April 15, 2014, JPM Securities sent an email to a domestic Parent Investor, Brigade Capital, informing Brigade Capital that it had been allocated $45 million in Millennium notes, and directing that “[s]ub-allocations” were “to be returned via ClearPar” – a U.S. based clearing house – “and funded within no less than 3 and no more than 10 days after funding.” (See Tretter Decl., Ex. F (April 15, 2014 Brigade Capital email) (Dkt. No. 26-8) at 2) A corresponding ClearPar “Trade Ticket” dated April 25, 2014 indicates that Brigade Capital had sub-allocated that $45 million among twenty-three Child Investors (Tretter Decl., 3 All references to page numbers in this Order are as reflected in this District’s Electronic Case Files (“ECF”) system. 7 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 8 of 37 Ex. G (ClearPar Trade Ticket) (Dkt. No. 26-9) at 2-3), ten of which are foreign domiciliaries. (Tretter Decl. (Dkt. No. 26-2) ¶ 10) The Institutional Allocation Confirmation, and the Assignment and Assumption Agreement – both executed by Chase and Brigade Credit Fund II, Ltd., one of the foreign Child Investors (id. ¶ 11) – are examples of the transaction documents entered into by Chase and the Child Investors. (See Pltf. Remand Br. (Dkt. No. 26-1) at 12 n.2; Def. Remand Opp. Br. (Dkt. No. 27) at 12) In the Institutional Allocation Confirmation, Brigade Credit Fund II confirms its agreement to assume from Chase the obligation to purchase more than $11 million of the term loan “within ten (10) business days of the Funding, or within such other period agreed to by [Chase], by assignment pursuant to the Assignment and Assumption [Agreement].” (Tretter Decl., Ex. H (Brigade Credit Fund II Institutional Allocation Confirmation) (Dkt. No. 26-10) at 2) In the Assignment and Assumption Agreement – which, as contemplated in the Institutional Allocation Confirmation, was executed on April 15, 2014 – Chase irrevocably sold and assigned the agreed-upon portion of the term loan. (Tretter Decl., Ex. I (Brigade Credit Fund II Assignment and Assumption) (Dkt. No. 26-11)) Once Brigade Credit Fund II and Chase executed the Assignment and Assumption Agreement, Brigade Credit Fund II became a party to the credit agreement governing the term loan (the “2014 Credit Agreement”). (Id. at 2) V. MILLENNIUM’S DECLINE AND SUBSEQUENT BANKRUPTCY On June 16, 2014, two months after the April 16, 2014 closing, a jury in the Ameritox litigation returned a verdict in favor of Ameritox, finding in special interrogatories that Millennium had violated both the Stark Law and the Anti-Kickback statute. (Id. ¶ 110) The jury awarded Ameritox $2.755 million in compensatory damages and $12 million in punitive damages – later remitted to $8.5 million – based on Millennium’s misconduct in Florida, 8 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 9 of 37 Tennessee, and Texas. (Id. ¶ 111) On the day of the jury’s verdict, Chase and JPM Securities concluded that it would have a $500 million negative impact on Millennium’s valuation. (Id. ¶ 114) In December 2014 – six months later – DOJ notified Millennium that it intended to intervene in civil False Claims Act proceedings brought by qui tam relators based on Millennium’s alleged federal healthcare law violations. (Id. ¶ 118) Two months later, in February 2015, the Centers for Medicare and Medicaid Services threatened to debar Millennium based on allegations of illegal billing practices. (Id. ¶ 119) In March 2015, the DOJ formally intervened in the qui tam proceedings. (Id. ¶ 120) In May 2015, Millennium disclosed that it had agreed in principle to a $256 million global settlement with DOJ. (Id. ¶ 3) Millennium finalized that settlement on October 16, 2015, and on November 10, 2015, Millennium defaulted on the term loan and filed a bankruptcy petition. (Id.) The Bankruptcy Court issued a bankruptcy plan that established the Trust, and Plaintiff was appointed as Trustee. (Id. ¶ 11) VI. PLAINTIFF’S CLAIMS The Complaint was filed in Supreme Court of the State of New York, New York County, on August 1, 2017, and asserts eleven causes of action. Causes of Action One through Six arise under the securities laws of California, Massachusetts, Colorado, and Illinois, and allege that Defendants made actionable misstatements and omissions to the Investors. (See id. ¶¶ 125-172) The Seventh Cause of Action alleges negligent misrepresentation as to all Defendants. (Id. ¶¶ 173-181) Causes of Action Eight through Eleven are asserted only against Chase, and allege breach of fiduciary duty, breach of contract, breach of post-closing contractual duties, and breach of the implied covenant of good faith and fair dealing. (Id. ¶¶ 182-207) 9 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 10 of 37 The Complaint alleges that all Defendants are liable for negligent misrepresentation and securities law violations because, inter alia, “Defendants abandoned their obligations” to perform due diligence concerning (1) Millennium’s exposure to liability, damages, and penalties in connection with the DOJ investigation; and (2) the artificial inflation of Millennium’s financial results stemming from the company’s unlawful sales and marketing practices. (Id. ¶¶ 53-65) The Complaint also alleges that JPM Securities and CitiGlobal created offering materials that contained material misstatements and omissions that were designed to, and did, induce the Investors’ purchases of the Millennium notes. (Id. ¶¶ 70-91) Causes of Action Eight through Eleven arise, in part, from the 2014 Credit Agreement, which includes as a condition precedent for the $1.775 billion loan that Millennium not be in breach of the representations and warranties in the 2014 Credit Agreement. (Id. ¶¶ 100- 03) According to the Complaint, Chase knew or should have known that the representations and warranties in the 2014 Credit Agreement falsely assured Investors that Millennium had no exposure to material litigation and was in material compliance with all applicable regulations and laws, and that, therefore, the conditions precedent to funding had not been satisfied. (Id. ¶¶ 101- 05) The Complaint further alleges that Chase “breached its contractual duties, express and implied, and fiduciary duties as agent to the Investors by (i) failing to give the Investors notice [that the conditions precedent had not been satisfied]; and (ii) proceeding with the funding of Millennium.” (Id. ¶ 105) These claims against Chase extend to the period after Chase assigned the entirety of the term loan to the Investors, because Chase remained a party to the 2014 Credit Agreement as Administrative Agent. (Id. ¶ 95) In that role, Chase was obligated to provide Investors with (1) information from and about Millennium “contemporaneously with intervening material 10 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 11 of 37 developments” (id. ¶ 107); and (2) notice of, inter alia, (a) any “investigation or proceeding that may exist at any time between [Millennium] and any Governmental Authority, that if adversely determined would reasonably be expected to have a Material Adverse Effect”; and (b) “any litigation or proceeding . . . in which the amount involved is $15,000,000 or more and not fully covered by insurance.” (Id. ¶ 109 (internal quotation marks and citations omitted)) Notwithstanding these obligations, Chase allegedly did not provide contemporaneous notice of the verdict in the Ameritox litigation (id. ¶ 115), even though Chase viewed the verdict as having a material effect on the company’s valuation. (Id. ¶ 114) Plaintiff contends that “[i]nterest on the original . . . judgment would easily put the amount involved at over the $15 million figure . . . and it is doubtful that any of the punitive damages would have been covered by insurance.” (Id. ¶ 113) The Complaint also alleges that Chase failed to contemporaneously notify the Investors either of the DOJ’s intervention in the qui tam action or Medicare’s threat to debar Millennium. (Id. ¶¶ 118-21) Based on these alleged failures, Plaintiff asserts claims against Chase for breach of contract after the April 16, 2014 closing date. (Id. ¶¶ 196-207) VII. PROCEDURAL HISTORY On August 1, 2017, the Complaint was filed in Supreme Court of the State of New York, New York County. (Id.) On August 21, 2017, Defendants removed the case to this District, asserting jurisdiction under the Edge Act, 12 U.S.C § 632. (Notice of Removal (Dkt. No. 1)) On October 4, 2017, Plaintiff moved to remand (Pltf. Mot. (Dkt. No. 26)), arguing that there is no jurisdiction under the Edge Act. (Pltf. Br. (Dkt. No. 26-1)) On September 24, 2018, this Court denied Plaintiff’s motion to remand. (Dkt. No. 38) Defendants have moved to dismiss for failure to state a claim. (Dkt. No. 76) 11 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 12 of 37 DISCUSSION I. MOTION TO DISMISS STANDARD “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “In considering a motion to dismiss . . . the court is to accept as true all facts alleged in the complaint,” Kassner, 496 F.3d at 237 (citing Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 87 (2d Cir. 2002)), and must “draw all reasonable inferences in favor of the plaintiff.” Id. (citing Fernandez v. Chertoff, 471 F.3d 45, 51 (2d Cir. 2006)). A complaint is inadequately pled “if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement,’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557), and does not provide factual allegations sufficient “to give the defendant fair notice of what the claim is and the grounds upon which it rests.” Port Dock & Stone Corp. v. Oldcastle Northeast, Inc., 507 F.3d 117, 121 (2d Cir. 2007) (citing Twombly, 550 U.S. at 555 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957))). Fed. R. Civ. P. 9(b) sets standards for pleading fraud claims and requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b); see also In re Pfizer Inc. Sec. Litig., 584 F. Supp. 2d 621, 632–33 (S.D.N.Y. 2008) (quoting Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001)). Rule 9(b) requires a plaintiff to “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Kottler v. Deutsche Bank AG, 607 F. Supp. 2d 447, 462 (S.D.N.Y. 2009) (quoting Stevelman v. Alias Research, Inc., 174 F.3d 79, 84 (2d Cir. 1999) (internal quotation marks omitted)). 12 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 13 of 37 II. STATE SECURITIES LAW CLAIMS Defendants Chase, JPM Securities, Citibank, and CitiGlobal (collectively, “Chase and Citi”) have moved to dismiss Plaintiff’s claims under the securities laws of California, Colorado, Illinois, and Massachusetts – so-called “blue sky laws” – on the ground that “a syndicated bank loan is not a ‘security’ and a loan syndication is not a ‘securities distribution.’” (Chase and Citi. Br. (Dkt. No. 77) at 10) Defendants Bank of Montreal, BMO Capital Markets, SunTrust Bank, and SunTrust Robinson Humphrey (collectively, “BMO and SunTrust”) join in Chase and Citi’s arguments, and offer additional grounds for dismissal. (BMO and SunTrust Br. (Dkt. No. 80) at 5) Plaintiff contends that the Millennium notes are securities, and thus subject to the state security laws. (Pltf. Opp. Br. (Dkt. No. 81) at 22) A. Legal Standards In determining whether debt obligations such as the Millennium notes are “securities,” courts apply the “family resemblance” test set forth in Reves v. Ernst & Young. 494 U.S. 56 (1990). For purposes of resolving Defendants’ motion to dismiss, this Court accepts Plaintiff’s assertion that Reves applies to Plaintiff’s claims under California, Colorado, Illinois, and Massachusetts law. (See Pltf. Opp. Br. (Dkt. No. 81) at 21 n.9) In Reves, the Supreme Court instructed that “because the Securities Acts define ‘security’ to include ‘any note,’” courts should “begin with a presumption that every note is a security.” Reves, 494 U.S. at 65. The Court adopted the Second Circuit’s “list of instruments commonly denominated ‘notes’ that nonetheless fall without the ‘security’ category,” however. Id. “[T]ypes of notes that are not ‘securities’ include ‘the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small business or some of its assets, the note evidencing a “character” loan to a bank customer, short- term notes secured by an assignment of accounts receivable, []a note which simply formalizes an 13 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 14 of 37 open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized’ [and] ‘notes evidencing loans by commercial banks for current operations.’” Id. at 65, 67 (first quoting Exchange Nat. Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126, 1138 (2d Cir. 1976), then quoting Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 939 (2d Cir. 1984)). The presumption that a note is a security “may be rebutted only by a showing that the note bears a strong [family] resemblance . . . to one of the enumerated categories of instrument” set forth above. Id. at 67. The four factors of the family resemblance test are: (1) “the motivations that would prompt a reasonable seller and buyer to enter into [the transaction]”; (2) “the plan of distribution of the instrument”; (3) ‘the reasonable expectations of the investing public”; and (4) “the existence of another regulatory scheme [to reduce] the risk of the instrument, thereby rendering application of the Securities Act unnecessary.” Id. at 66-67. B. Analysis Plaintiff argues that the determination of whether an instrument is a security “is a fact intensive question and generally ‘not appropriately resolved on a motion to dismiss.’” (Pltf. Opp. Br. (Dkt. No. 81) at 20 (quoting S.E.C. v. Rorech, 673 F. Supp. 2d 217, 225 (S.D.N.Y. 2009) (citation omitted))) Courts in this District have on occasion, however, concluded on a motion to dismiss that a particular instrument is not a security under Reves. See, e.g., Intelligent Digital Sys., LLC v. Visual Mgmt. Sys., Inc., 683 F. Supp. 2d 278, 281, 283, 286 (finding on a motion to dismiss that an “unsecured convertible promissory note” is not a security) (E.D.N.Y. 2010); Benedict v. Amaducci, No. 92 CIV. 5239 (KMW), 1995 WL 413206, at *1, *10 (S.D.N.Y. July 12, 1995) (finding on a motion to dismiss that several notes at issue were not securities). In analyzing the four Reves factors here, this Court assumes the truth of the Complaint’s factual allegations. 14 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 15 of 37 1. Motivations of Seller and Buyer The first Reves factor requires to consider “the motivations that would prompt a reasonable seller and buyer to enter into [a particular transaction]”: If the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a “security.” If the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or to advance some other commercial or consumer purpose, on the other hand, the note is less sensibly described as a “security.” Reves, 494 U.S. at 66; see also Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 812 (2d Cir. 1994) (the first Reves factor asks “whether the motivations are investment (suggesting a security) or commercial or consumer (suggesting a non-security)”). In arguing that the Millennium notes are securities – Plaintiff points out that Chase assigned an “analyst who normally covered high-yield debt securities” to this transaction; referred to participants as “public investors”; and “employed practices and terminology specific to an investment transaction.” (Pltf. Opp. Br. (Dkt. No. 81) at 24) Defendants counter that the Millennium notes offered a fixed rate of return, without any opportunity to share in profits earned by Millennium. (See Chase and Citi Br. (Dkt. No. 77) at 23 (citing Credit Agreement (Dkt. No. 79-1) §§ 2.14-2.15 (providing for a market rate of interest plus a fixed “applicable margin” that varies depending on the lender’s tranche))) In Pollack, however, the Second Circuit held that “the district court erred in finding that the fixed rate of return cut against the presumption that the notes are securities.” Pollack, 27 F.3d at 813. Defendants also cite the seller’s motivation, which was to pay dividends and to satisfy or refinance existing debt. (Cmplt. (Dkt. No. 1-1) ¶¶ 49, 69) Defendants argue that “[t]hese are core commercial lending functions not traditionally associated with securities offerings.” (Citi and Chase Br. (Dkt. No. 77) at 23) 15 Case 1:17-cv-06334-PGG-SLC Document 119 Filed 05/22/20 Page 16 of 37 Applying the Reves dichotomy – where “the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments . . . the instrument is likely to be a ‘security,’” but where “the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or to advance some other commercial or consumer purpose, . . . the note is less sensibly described as a ‘security,’” Reves, 494 U.S. at 66 – the Millennium notes are not, from the seller’s perspective, for the purpose of an investment or for Millennium’s general use. Instead, from Millennium’s perspective, the Notes are better described as advancing “some other commercial purpose[s]”: loan repayment and the paying of a dividend. From the buyers’ perspective, however, the purpose of acquiring the Notes appears to have been investment. Many of the ultimate purchasers are pension and retirement funds who purchased the Millennium Notes for their investment portfolios. (Pltf. Opp. Br. (Dkt. No. 81) at 23) Given that the buyers’ and sellers’ motivations are mixed, this factor does not weigh heavily in either direction. 2. Plan of Distribution The second Reves factor considers “the plan of distribution” for the instrument, including whether it is subject to “common trading for speculation or investment.” Reves, 494 U.S. at 66. Defendants argue that the purchasers of the Notes “are a small group of sophisticated institutions; members of the general public were not solicited and did not participate in the loan syndication.” (Chase and Citi Br. (Dkt. No. 77) at 23 (citing Cmplt. (Dkt. No. 1-1) ¶ 66)) The Lender Schedule attached to the Complaint indicates that only a few hundred Parent and Child Investors purchased the Notes.