Opinion
03 CIV. 24 (DLC)
June 27, 2003
Brian Guillorn, Esq., New York, NY, Alan N. Alpern, Esq., New York, NY, For Plaintiff.
Jeffrey Q. Smith, Esq., Paul A. Straus, Esq., David S. Rubenstein, Esq., King Spalding LLP, New York, NY, For Defendants.
OPINION AND ORDER
Plaintiff PSINet Liquidating LLC ("PSI") brings claims under New York's law limiting the fees attainable by a loan broker. It seeks to recoup the majority of a profit taken by defendants in the course of a securities underwriting. Defendants move to dismiss, primarily arguing that the statute on which PSI relies is inapplicable to the instant transaction. Because defendants are correct, their motion is granted and the case is dismissed.
BACKGROUND
The following facts are either undisputed or as pleaded by PSI. PSI is the successor in interest to PSINet, a now-bankrupt "global provider of Internet and eCommerce solutions." Defendants are all United Kingdom-based investment dealers. This action was originally filed on December 2, 2002, in New York State Supreme Court, and named the defendants' United States affiliates as parties as well. Following timely removal to this Court, on the ground of diversity jurisdiction, the parties stipulated to the dismissal of the action as against the United States affiliates without prejudice.
Following removal, defendants moved to eliminate the United States affiliates from the case as improperly joined, and PSI moved to remand. Both motions were mooted by the parties' stipulation dismissing the case as to the United States affiliates.
As reflected in the documents created for the transaction, the defendants purchased debt securities, or notes, from PSI, and resold those notes to investors. Pursuant to a Purchase Agreement dated November 24, 1999, at closing in New York on December 2, 1999, PSI sold a $600,000,000 note to defendants. On the same day, in London, PSI sold a 150,000,000 (approximately $148,000,000) note to defendants. Defendants purchased the notes at a 2.26% discount from their face value. Defendants simultaneously re-sold the notes, at full face value, to domestic and foreign institutional investors, pursuant to the Purchase Agreement and the regulations governing the sale of unregistered securities, realizing over $17 million in the sale because of their discount price.
PSI brings this suit claiming that the series of transactions governed by the Purchase Agreement were in fact a loan brokered by defendants. As such, it argues that it was subject to the limits on loan brokerage fees under New York law, and it seeks a return of a significant portion of the discount retained by defendants.
PSI alleges that numerous conditions precedent to the primary sale, between PSI and defendants, in the Purchase Agreement transform these transactions into a brokerage. For example, PSI points to the existence of the Registration Rights Agreement, incorporated into the Purchase Agreement, which PSI alleges gave defendants a discretionary "out" in the transaction not normally available in a securities underwriting. PSI alleges that, as a result, the defendants never held a beneficial interest in the notes, but that the notes passed directly to the ultimate purchasers located by defendants. In sum, the complaint alleges that "the sole `risk' from ownership of the Beneficial Interests from the time of their issuance and sale was that of the Ultimate Purchasers."
Plaintiff's opposition to this motion to dismiss elaborates on this contention that defendants bore no risk in these transactions, and therefore were merely brokers, by claiming that the purchase of the notes was not a "firm commitment underwriting," but rather a "best efforts placement." Because an investment bank, in a "best efforts" placement, does not bear the risk of unsold shares, PSI argues that a bank in this type of transaction is a broker and not a purchaser. PSI argues that those clauses in the Purchase Agreement that gave defendants the discretionary ability to get out of the purchase make the transaction a best efforts placement as a matter of law.
See, e.g., MDCM Holdings, Inc. v. Credit Suisse First Boston Corp., 216 F. Supp.2d 251 (S.D.N.Y. 2002):
Underwriting agreements generally fall into two categories. "In so-called `firm commitment' IPOs such as the Plaintiff's [sic] herein, the [investment bank] purchases the IPO securities directly from the issuer, and markets and resells the securities to investors." Even if the investment bank fails to resell the amounts of securities it purchased, it must still pay the agreed upon sum of money to the corporation. The second type of agreement is known as a "best efforts" agreement. In this type of agreement, the investment bank agrees to sell the securities for the corporation but does not guarantee the amount of capital raised by the issue. Thus, the issuer bears the risk that not all of the stock will be sold.
Id. at 253 n. 2 (citation omitted).
Defendants move to dismiss pursuant to Rule 12(b)(1) and Rule 12(b)(6) of the Fed.R.Civ.P. for lack of standing and failure to state a claim on which relief can be granted.
Defendants also contend that the doctrine of collateral estoppel bars relief, because of the recent granting of the motion to dismiss in PSINet Liquidating LLC v. Bear Stearns Co, Inc. et al., 2003 WL 367863 (S.D.N.Y. Feb 19, 2003) (GBD)("PSI I"). PSI I was brought by the same plaintiff against virtually identical defendants, appears to have construed a virtually identical purchase agreement, and addressed a claim for relief under the same provision of New York law. The court in PSI I rejected plaintiff's attempt to escape the terms of the agreement and characterize the defendants as brokers, and not principals.
It is clear from the relevant documents to these transactions that the Foreign defendants were bona fide purchasers of the Notes, rather than acting as brokerage agents for PSINet. Both the Purchase Agreement and the Offering Memorandum clearly list the "Initial Purchasers" as being the Foreign defendants, not the New York defendants nor any other institutional investors. As per the terms of the Purchase Agreement, PSINet had the affirmative obligation to sell, and the Foreign defendants had the affirmative obligation to purchase, the Notes at the bargained-for price.
PSI I, 2003 WL 367863, at *4.
DISCUSSION
Defendants move to dismiss the amended complaint for failure to state a claim. To dismiss an action pursuant to Rule 12(b)(6), a court must determine that "it appears beyond doubt, even when the complaint is liberally construed, that the plaintiff can prove no set of facts which would entitle him to relief." Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997) (citations omitted). In construing the complaint, the court must "accept all factual allegations in the complaint as true and draw inferences from those allegations in the light most favorable to the plaintiff." Id. "Given the Federal Rules' simplified standard for pleading, a court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Swierkiewicz, 534 U.S. at 514 (citation omitted).
As noted above, defendants have also moved to dismiss on collateral estoppel grounds, and for lack of standing. Because the Court finds that the complaint fails to state a claim, it is unnecessary to reach these other grounds in defendants' motion.
Although the court's focus should be on the pleadings, it may also consider any written instrument attached to [the complaint] as an exhibit or any statements or documents incorporated in it by reference, . . . and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit.
Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citing Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991)).
Plaintiff's two claims for relief both arise under New York General Obligations Law § 5-531, which sets 0.5% as the maximum fee a broker may collect for brokering a loan. The statute provides in relevant part:
No person shall, directly or indirectly, take or receive more than fifty cents for brokerage, soliciting, driving or procuring the loan or forbearance of one hundred dollars, and in that proportion for a greater or less sum[.]
N.Y. Gen. Oblig. § 5-531(1) (2002) (emphasis supplied). The statute defines "loan broker" as: "any individual, firm, corporation, or partnership who agrees for a fee to obtain a loan or credit for a consumer or to assist a consumer in obtaining a loan or credit[.]" Id. § 5-531(2)(b) (emphasis supplied). "Plaintiff must therefore allege facts that support the contention that: 1) defendants engaged in brokerage activities as agents for PSINet; and 2) the transactions involved a loan or forbearance." PSI I at *3.
Plaintiff seeks to characterize (in spite of the language of the Purchase Agreement) the primary transaction, between PSI and defendants, as something other than a sale. This effort is ultimately irrelevant. In this two-part transaction, if either was a sale, rather than a loan, it defeats PSI's attempt to bring the transaction within the ambit of Section 5-531.
More specifically, for the statute to apply, the money received by defendants in the course of these transactions had to have been a broker's commission in connection with a loan. Even if PSI were successful in characterizing the initial transaction between itself and defendants as a "best efforts" placement, rather than a firm commitment underwriting, and even if that meant that the defendants never effectively purchased the notes from the plaintiff, it cannot overcome the fact that the transaction with defendants and the market was a sale and not a loan, and that the money earned by the defendants was in connection with that sale. Whatever level of risk defendants assumed in the primary transaction, even were the Court to accept PSI's attempt to reject, as a sham, defendants' characterization of themselves as principals and not brokers, the transaction allegedly "brokered" cannot be seen as a loan. PSI has cited no authority, and research has revealed none, that supports its effort to recast the ultimate sale of the notes as a loan transaction. Section 5-531 therefore cannot apply.
The one case that PSI contends reveals that the New York Court of Appeals has "expressly" held that "private placements of debt between corporate borrowers and large institutional investors are subject to [Section] 5-531" holds nothing of the sort. In Fischer v. Panasian Communications Inc., et al., 641 N.Y.S.2d 590 (N.Y. 1996), a broker brought a suit to recover his fee. Plaintiff procured a loan on behalf of defendant in the amount of $1,750,000 from Chase Manhattan Bank. Defendant Panasian Communications, which desired the loan to finance the purchase of a television station, supplied as guarantors the corporate entities who then became co-defendants. The original brokerage agreement had promised plaintiff a fee of at least $300,000; when he was paid only $37,000, he sued for the balance, and defendants cross claimed that the fee should be limited by Section 5-531.
Fischer argued, inter alia, that Section 5-531 should not apply to "private placement transactions between corporate borrowers and large institutional investors." Fischer, 641 N.Y.S.2d at 591. The Court of Appeals rejected that argument, and applied the statute, finding in the language "no express distinction between individual and corporate borrowers" and in the legislative history no "intent to limit the scope of section 5-531 to consumer transactions." Id. The transaction in Fischer, however, was clearly a loan from a bank and not a sale of securities. Fischer may have clarified that Section 5-531 prohibits "excessive brokerage fees for transactions involving corporate borrowers," id., but it does not expand the statute far enough for plaintiff to obtain relief here. It does not stretch the meaning of "loan" to cover a sale of corporate notes.
CONCLUSION
Defendants' motion to dismiss is granted. The Clerk of Court shall close the case.
SO ORDERED: