Opinion
No. 02 Civ. 6691 (GBD)
February 19, 2003
MEMORANDUM OPINION AND ORDER
Plaintiff brought suit against defendants in New York State Supreme Court alleging that defendants unlawfully collected exorbitant broker fees from plaintiff in connection with the sale of certain debt securities in violation of New York State law. Defendants thereafter removed this case to federal court on diversity grounds. Plaintiff filed a Motion to Remand to state court, and defendants filed a Motion to Dismiss. For the following reasons, plaintiffs Motion to Remand is denied, and defendants' Motion to Dismiss is granted.
Facts
Plaintiff PSINet Liquidating LLC ("PSINet Liquidating"), a New York corporation, purports to be the direct successor in interest to PSINet, Inc., ("PSINet"), a New York Corporation that has filed for bankruptcy. Defendants are comprised of six companies. Three of the defendants have their principle places of business in New York. Those defendants are. Bear Stearns Co, Inc., Chase Securities, Inc., and Donaldson, Lufkin Jenrette Securities Corp (collectively, the "New York defendants"). The three remaining defendants have their principal places of business in London. Those defendants are: Bear Stearns Int'l Ltd., Chase Manhattan Int'l Ltd., and Donaldson, Lufkin Jenrette Int'l Ltd. (collectively the "Foreign defendants")
Defendants claim that plaintiff has presented no evidence that it is the successor in fact of PSINet, and therefore asks this Court to grant their Motion to Dismiss on the grounds that plaintiff does not have standing to pursue this claim. This Court need not decide this issue. however, as defendants Motion to Dismiss is granted on other grounds.
The Complaint alleges that on July 23, 1999, plaintiffs predecessor, PSINet, issued and sold debt securities in the aggregate principal amount of $1.05 billion in New York City (the "US Notes") and in aggregate principal amount of $153 million in the United Kingdom (the "UK Notes") (hereinafter the US and UK Notes may collectively be referred to as "the Notes"). Governing the sale of the Notes was a Purchase Agreement dated a few days earlier on July 16, 1999. The Agreement names the "Initial Purchasers" of the Notes as the Foreign defendants and provided that they would purchase the Notes at a 2.75% discount As contemplated by the Offering Memorandum, the Foreign defendants intended to re-sell the Notes to various institutional investors. These institutional investors did not get the benefit of the 2.75% discount that the Foreign defendants had secured.
The New York and UK Closings, therefore, involved a series of transactions. At the New York Closing, the New York defendants collected $1.05 billion from the sale of the US Notes from these various institutional investors, subtracted $28.75 million (2.75% of the purchase price), and then transferred the remainder of the money to a PSINet bank account. Similarly, at the UK Closing, the Foreign defendants collected the $153 million from the sale of the UK Notes from various institutional investors, and then subtracted approximately $4.2 million (2.75% of the purchase price), transferring the remainder of the money to PSINet.
Plaintiff initiated this lawsuit alleging that the transactions were a "sham," and that the Foreign defendants were not bona tide purchasers of any of the securities. Plaintiff contends that defendants were not acting as principals in the transactions, but rather as PSINet's "brokers" and that the only parties who actually purchased the securities were the various institutional investors Plaintiff contends that the 2.75% "discount" taken by the defendants, therefore, is nothing more than a 2.75% brokerage fee, and that the re-sale of the securities was actually a "loan" of money to PSINet from the institutional investors. Plaintiff contends that the 2.75% "discount" was unlawful under New York General Obligations Law § 5-531, as that statute limits brokerage fees for services relating to a loan or forbearance to 0.5% Plaintiff seeks damages equal to the difference between the amount of the 2.750% "discount" defendants subtracted from the aggregate principal amount of the Notes and the maximum brokerage fee (0.5%) allowable for brokered loan transactions, as well as interest, punitive damages, and costs.
Discussion
A. Plaintiff's Motion to Remand
Under 28 U.S.C. § 1441(a), "a civil action brought in a State court of which the district courts of the United States have original jurisdiction may be removed by the defendant" to the appropriate district court. 28 U.S.C. § 1441(a) (2002). "The propriety of removal thus depends on whether the case originally could have been filed in federal court." City of Chicago v. Int'l College of Surgeons, 522 U.S. 156, 163 (1997).
However, "a plaintiff may not defeat a federal court's diversity jurisdiction and a defendant's right of removal by merely joining as defendants parties with no real connection with the controversy."Whitaker v. Am. Telecasting. Inc., 261 F.3d 196, 207 (2d Cir. 2001),quoting Pampillonia v. RJR Nabisco, Inc., 138 F.3d 459, 460-61 (2d Cir. 1998). In order to show that a plaintiffs joinder of a defendant was "fraudulent" so as to destroy diversity jurisdiction, the defendant must show "by clear and convincing evidence either that there has been outright fraud committed in the plaintiffs pleadings, or that there is no possibility, based on the pleadings, that a plaintiff can state a cause of action against the non-diverse defendant in state court" Pampillonia, 138 F.3d at 461. Joinder is considered fraudulent where the plaintiff can not possibly recover against the defendant on the state law claim alleged.See Whitaker, 261 F.3d at 207; Nemazee v. Premier, Inc., 232 F. Supp.2d 172, 178 (S.D.N.Y. 2002).
Plaintiff has filed this Motion to Remand on the basis that complete diversity among the parties does not exist, and that this Court, therefore, does not have subject matter jurisdiction. Defendants, on the other hand, claim that plaintiff has fraudulently joined the New York defendants so as to destroy diversity jurisdiction, and that once the New York defendants are removed from the case, this court properly has subject matter jurisdiction over the remaining claims that pertain to the Foreign defendants. Thus, under Pampillonia, supra, it is first necessary to evaluate defendants' Motion to Dismiss with respect to the New York defendants so as to determine if there is any possibility that plaintiff can state a cause of action against the New York defendants in state court.
B. Defendants' Motion to Dismiss
Federal Rule of Civil Procedure 12(b)(6) allows a party to move to dismiss a Complaint where the Complaint "fail[s] . . . to state a claim upon which relief can be granted[.]" FED. R. CIV. P. 12(b)(6). In reviewing a Motion to Dismiss, this Court accepts the allegations in the Complaint as true and draws all reasonable inferences in favor of the non-moving party. See Patel v. Searles, 305 F.3d 130, 134-35 (2d Cir. 2002). However, bald contentions, unsupported characterizations, and legal conclusions are not well-pleaded allegations, and will not suffice to defeat a motion to dismiss. See Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996). Here, a motion to dismiss will only be granted it the plaintiff can prove rio set of facts in support of its claim that would entitle it to relief. See Citibank, NA. v. K-H Corp., 968 F.2d 1489, 1494 (2d Cir. 1992). A court may look at the Complaint and any documents attached to, or incorporated by reference in, the Complaint. See Dangler v. New York City off Track Betting Corp., 193 F.3d 130, 138 (2d Cir. 1999).
In this case, plaintiff asserts that the New York and Foreign defendants unlawfully charged plaintiff a brokerage fee 5 1\2 times that allowed under New York law. In support of this argument, plaintiff claims that the New York and Foreign defendants acted as brokers, not principals. Plaintiff contends that defendants had no obligation to purchase the Notes, and that the Notes were never issued in the names of, nor delivered to, the defendants. Plaintiff alleges that the institutional investors were the only entities that bore any risk from ownership of the Notes. With particular respect to the New York defendants, plaintiff contends that the New York defendants solicited the institutional investors who ultimately purchased the US Notes, received all funds from those investors, handled the disbursement of those funds, performed all acts at the New York closing in the New York defendants' own name, and took a 2.5% broker's fee.
New York General Obligations Law § 5-531 provides that:
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[.]
NY. Gen. Oblig. § 5-531(1) (2002) (emphasis added) A "loan broker" is defined in the statute 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).
Essentially, § 5-531 caps at 0.5% the fees that a broker may collect for brokering a loan or a forbearance. 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.
Plaintiff can not allege facts sufficient to support the allegation that defendants engaged in a brokerage as agents for PSINet. These transactions were governed by a Purchase Agreement. In the Agreement, the "Initial Purchasers" are listed in an attached schedule as being the Foreign defendants. See Purchase Agreement, p. 1 and Sch. B-1. Notably, neither the New York defendants nor the institutional investors are listed as "Initial Purchasers" on the schedule or anywhere else in the Purchase Agreement. Paragraph 2 of the Purchase Agreement states:
. . . [T]he Company [PSINet] agrees to issue and sell to the Initial Purchasers, and each Initial Purchaser agrees . . . to purchase from the Company, the aggregate principal amount of (i) Dollar Notes [the US Notes] . . . at a purchase price equal to 97.25% of the Offering Price thereof and (ii) Euro Notes [the UK Notes] . . . at a price equal to 97.25% of the Offering Price. . . .
Purchase Agreement, § 2. Thus, pursuant to the Agreement, PSINet agreed to sell to the Foreign defendants, and the Foreign defendants agreed to purchase from PSIINet, the Notes at a price equal to 97.25% of the Offering price, or at a 2.75% discounted price.
The Agreement further contemplated that the Foreign defendants would then offer the Notes for re-sale. The Agreement states: "[t]he Initial Purchasers have advised the Company [PSINet] that the Initial Purchasers will make offers. . . of the initial Notes purchased hereunder for resale on the terms set forth in the Offering Memorandum." Id. at § 3. The Agreement further stated that the Foreign defendants proposed to re-sell the Notes to qualified institutional buyers both in the United States and elsewhere for a specified price. See id.
The Notes were re-sold pursuant to an Offering Memorandum that PSINet prepared See id. § 1(a). The Offering Memorandum again listed the names of the Initial Purchasers in the Agreement as the Foreign defendants. See Offering Mem., p. 130. It further stated that "the initial purchasers have severally agreed to purchase from us the respective principal amount of [the] notes" and that the "initial purchasers are obligated to purchase and accept delivery of all of the notes if any are purchased" Id. The Offering Meniorandum then represented that the Foreign defendants proposed offering the Notes for resale to qualified institutional buyers. See id.
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. That price was the aggregate principal amount minus a 2.75% discount. Plaintiffs contention that the Foreign defendants bore no risk from ownership of the Notes is flatly contradicted by the controlling documents. This transaction clearly was one between two principals, PSINet and the Foreign defendants. The Foreign defendants were acting as neither agents nor brokers for PSINet. Further, there is no dispute that PSINet was paid the price it bargained for.
It is also clear from the relevant documents that the Foreign defendants, in turn, proposed a separate series of transactions between themselves and various institutional investors whereby the Foreign defendants would re-sell the Notes to various institutional investors once they had purchased them from PSINet. As authorized by the Purchase Agreement and the Offering Memorandum, the Foreign defendants were to re-sell the US Notes through their U.S. Affiliates (the New York defendants). See Purchase Agreement, § 1(a) and Sch. B-2; Offering Mem. at p. 130. The Foreign defendants realized a profit from their purchase and re-sale of the Notes, as they bought the Notes at a 2.75% discount, and re-sold them to the various institutional investors at the higher market price. The re-sale of the Notes was a separate transaction between two sets of principals, this time between the Foreign defendants and the institutional investors. As with the initial purchase of the Notes, the Foreign defendants were neither acting as brokers nor as agents for PSINet.
By July 23, 1999, the date the Foreign defendants were to purchase the Notes from PSINet, the Foreign defendants had already lined up institutional investors for the immediate resale of the Notes. Thus, on this day, a series of transactions occurred. First, the Foreign Defendants bought the Notes from PSINet at the reduced rate. The Foreign Defendants then re-sold the Notes to the institutional investors at the market rate. As noted earlier, the Foreign defendants re-sold the U.S. Notes through their U.S. affiliates, the New York defendants. As the Closings were simultaneous, the Foreign defendants paid PSINet with the money it received from the institutional investors, minus 2.75%, as this was the purchase price to which the parties (the Foreign defendants and PSINet) had agreed.
Plaintiff argues that the Closing Memorandum twice identifies the New York defendants as "Initial Purchasers," and that this means that the New York defendants were more than merely agents of the Foreign defendants in the transactions. However, plaintiffs reliance on the Closing Memorandum for support is misplaced. The New York defendants are referred to as "Initial Purchasers" only in two unexecuted cross-receipts attached as exhibits to the Closing Memorandum. See Closing Mem., Ex. F-1 and F-3. The Closing Memorandum clearly states on the cover page that the sale of the Notes was between PSINet and the Foreign defendants, and that this sale is pursuant to the Purchase Agreement. See Closing Mem., p. 1. Moreover, the "Initial Purchasers" are expressly defined in a chart in the Closing Memorandum as being the Foreign defendants, and not the New York defendants. See id. at p. 4. These cross-receipts merely acknowledge that the New York defendants delivered the purchase price to PSINet for the securities on the day of Closing. As noted earlier, both the Purchase Agreement and the Closing Memorandum contemplated that the Foreign defendants would re-sell the U.S. Notes through their U.S. affiliates (the New York defendants). Further, the cross-receipts explicitly make clear that the delivery of the purchase price and the Notes is "in accordance with the provisions of the Purchase Agreement[.]" Id., Ex. F-1 and F-3. In accordance with agency law principles, the money collected by the New York defendants in the re-sale of the U.S. Notes remained that of the Foreign defendants, as the Foreign defendants were the principals in that transaction. See e.g., Heine v. Colton, Hartnick, Yamin Sheresky, 786 F. Supp. 360, 375 (S.D.N.Y. 1992) (an agent may accept payment on behalf of a principal).
Even drawing all reasonable inferences in favor of plaintiff, the supporting documents clearly show that the Foreign defendants were the "Initial Purchasers," and that the documents contemplated and authorized the re-sale of the Notes, with the New York defendants acting as agents for the Foreign defendants in the re-sale of the 17.5. Notes. Further, the documents show that neithier the Foreign defendants nor the New York defendants acted as agents or brokers of any kind for PSINet, making § 5-531 inapplicable.
In any event, there is no evidence at all in the record that these transact ions were either a loan or a forbearance. Plaintiff does not attempt to argue that this was a forbearance, and instead argues that these transactions can be characterized as a loan. It is clear, however, that this was nothing more than a common securities underwriting agreement. In exchange for issuing Notes to the Foreign defendants, PSINet received from the Foreign defendants the aggregate principal amount of the Notes less 2.75%, as agreed upon. Further, at least one court in this district has expressly questioned whether § 5-531 can even be applied to securities transactions:
An examination of the statute [§ 5-531], the New York case law interpreting the section, and the relationship of the section to New York's usury laws and to the securities laws generally convinces the Court that the New York legislature did not intend the statute to apply to private placement transactions between corporate borrowers and large institutional lender-investors[.]See Armstrong v. Rangaire Corp., 493 F. Supp. 390, 395 (S.D.N.Y. 1980). Even drawing all reasonable inferences in favor of the plaintiff, as a matter of law this Court can not find that the sale of securities here can properly be deemed a loan or a forbearance, and plaintiff does not cite to any relevant cases stating otherwise. Therefore, this Court finds that the transactions at issue did not violate § 5-531.
Plaintiffs Motion to Remand is denied, as defendants have shown by clear and convincing evidence that there is no possibility that plaintiff can state a cause of action that the New York defendants violated § 5-531 by acting as PSINet's brokers for services relating to a loan or forbearance. This Court, therefore, grants defendants' Motion to Dismiss as to the New York defendants. Having no cause of action against the New York defendants, this action against the Foreign defendants is properly before this Court. Plaintiff has further failed to state a cause of action that the Foreign defendants violated § 5-531 by acting as PSINet's brokers for services relating to a loan or forbearance. Therefore, defendants' Motion to Dismiss as to the Foreign defendants is also granted.
Conclusion
For the foregoing reasons, plaintiff's Motion to Remand is denied, and defendants' Motion to Dismiss is granted.