Opinion
CASE NO: 8:10-cv-693-T-26TBM.
July 27, 2010
ORDER
Before the Court is Defendants Wachovia Bank, N.S. and Metropolitan West Securities, L.L.C.'s Motion to Dismiss Counts II through V of the Complaint (Dkt. 19), and Plaintiff's Memorandum In Opposition. (Dkt. 25). After careful consideration of the allegations of the Complaint (Dkt. 1), the Court concludes that the motion should be granted as to Counts IV and V, and denied as to Counts II and III.
Since the filing of this motion, Plaintiff voluntarily dismissed Defendant Wells Fargo and Company, and this Court denied Wells Fargo's motion to dismiss as moot. See dockets 26 27.
ALLEGATIONS OF THE COMPLAINT
The City of St. Petersburg (the City) brings this action for breach of contract, breach of fiduciary duty, negligence, and violation of two state statutes, in connection with an investment in Lehman Brothers, Inc., which filed bankruptcy causing the value of the investment to plummet. The City sues Wachovia Bank, N.A. (Wachovia), Wells Fargo Company, and Metropolitan West Securities, L.L.C. (Metropolitan West) for the poor investment. Wachovia and Metropolitan West operate under the trade name of Wachovia Global Securities Lending (WGSL). WGSL serves as agent for the City, and lends the City's securities to third-party borrowers. The cash collateral received from any borrower is then reinvested by the City's agent, in this case WGSL. The relationship between WGSL and the City is governed by the Securities Lending Agency Agreement (the Agreement). (Dkt. 19, Exh. A). WGSL's role as agent is further governed by the Securities Lending Investment Guidelines (the Guidelines), which is part of the Agreement and provides that Plaintiff must approve the investments and maintains the authority over the investments with respect to their purchase and sale. (Dkt. 19, Exh. A at Attachment B).
Wells Fargo was sued as a successor in interest to Wachovia, and as noted earlier, has been dismissed from this action.
Metropolitan West is a wholly-owned subsidiary of Wachovia that was acquired by Wachovia in 2004.
In this case, 15 million of the 200 million dollars of the City's cash collateral was invested by WGSL in Lehman Brothers Holdings corporate bonds (the Lehman bonds) on March 23, 2007. (Dkt. 1, paras. 1, 28 47). The maturity date on the Lehman bonds was March 23, 2009. (Dkt. 1, para. 47). In view of the downfall of the mortgage-backed securities investments as evidenced by the collapse of Bear Sterns Co., the City decided to terminate its participation in WGSL's securities lending program sometime in 2008. (Dkt. 1, paras. 52 53). When Lehman Brothers' credit rating fell during June 2008, WGSL failed to inform the City of the risk. (Dkt. 1, paras. 58-62). The City contends it would have liquidated the Lehman bonds had it known of the downward spiraling credit ratings and increased risk of the investment. (Dkt. 1, para. 65). After the City requested WGSL to "unwind all securities lending contracts" on August 5, 2008, WGSL responded that the Lehman bonds would have to be liquidated before their maturity. (Dkt. 1, paras. 66 67). On September 15, 2008, Lehman Brothers filed for bankruptcy. (Dkt. 1, para. 69). When the third-party borrowers returned the loaned securities to the City, the City had to pay 15 million dollars to WGSL to repay those borrowers because the Lehman bonds were almost worthless. (Dkt. 1, para. 72).
The City's portfolio of securities and other investments totals over 350 million dollars. (Dkt. 1, para. 12).
STANDARD OF REVIEW
All allegations of the complaint are considered true and will be viewed in the light most favorable to the plaintiff. See Brown v. Crawford County, 960 F.2d 1002, 1010 (11th Cir. 1992);Ironworkers Local Union No. 68 v. AstraZeneca Pharmaceuticals, L.P., 585 F.Supp.2d 1339, 1342 (M.D. Fla. 2008). The complaint must allege "enough facts to state a claim for relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007). The factual allegations must be "enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 545. "Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009).
ANALYSIS
Although the Agreement embodies part of the relationship between the City and WGSL, the City bases this action on more than merely breach of contract as shown in counts II through V. WGSL seeks to dismiss all counts other than count I for breach of contract on the grounds, first, that the economic loss rule bars recovery on any theory other than breach of contract. Additional grounds for dismissal include the absence of duties created or arising apart from those contractually required, the absence of a fiduciary relationship, the inapplicability of Florida's Deceptive and Unfair Trade Practices Act, section 501.201 of the Florida Statutes (the FDUPTA) to this securities transaction and to Wachovia as a national bank, and the absence of a private right of action under the Florida Securities and Investor Protection Act, sections 517.011-517.32, Florida Statutes (the FSIPA) for transactions other than the purchase or sale of securities.
Economic Loss Rule, Breach of Fiduciary Duty, and Negligence (Counts II III)
"The economic loss rule is a judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses." Indemnity Ins. Co. of N. Am. v. American Aviation, Inc., 891 So.2d 532, 536 (Fla. 2004). The economic loss rule applies in the following two circumstances: (1) "when the parties are in contractual privity and one party seeks to recover damages in tort for matters arising from the contract;" and (2) "when there is a defect in a product that causes damage to the product but causes no personal injury or damage to other property." Id. Clearly, the instant set of facts does not fit within the second category, but the first category of contractual privity could apply. The purpose behind preventing recovery in tort when two parties have entered into a contract lies in the allocation of economic risks. Id. at 536-37. Where the duties breached do not arise under the contract, however, an action for an independent tort may exist even though the parties are in contractual privity. Id. at 537.
A particular exception carved out from the economic loss rule exists for independent torts involving negligence in the rendering of professional services. Id. (citing Moransais v. Heathman, 744 So.2d 973, 983 (Fla. 1999)). In addition to this exception, others, including negligent misrepresentation and the freestanding statutory causes of action, still apply. American Aviation, 891 So.2d at 543 (citing PK Ventures, Inc. v. Raymond James Assocs., 690 So.2d 1296, 1297 (Fla. 1997) for negligent misrepresentation and Comptech Int'l, Inc. v. Milam Commerce Park, 753 So.2d 1219, 1221 (Fla. 1999) for statutory cause of action. The economic loss rule, therefore, does not automatically bar a claim for breach of fiduciary duty, but the rule applies when the claim is based upon and inextricably intertwined with the claim for breach of contract. See Action Nissan, Inc. v. Hyundai Motor Amer., 617 F.Supp.2d 1177 (M.D. Fla. 2008) (citing Royal Surplus Lines Ins. Co. v. Coachman Indus., Inc., 184 Fed.Appx. 894, 902 (11th Cir. 2006) (unpublished opinion).
At least one district court has listed the case scenarios involving inextricable intertwining between the contract and the fiduciary duty, and those cases finding a fiduciary duty independent of the contractual obligations. See Action Nissan, 617 F.Supp.2d at 1193-94. Particularly, one Florida court has held that an independent fiduciary duty arises from the purchase and sale of securities. See First Equity Corp. of Fla., Inc. v. Watkins, 1999 WL 542639, at *1 (Fla.Dist.Ct.App. 1999) (relying on Moransais and recognizing that Interstate Sec. Corp. v. Hayes Corp., 920 F.2d 769, 776-77 (11th Cir. 1991) was decided beforeMoransais and therefore Interstate "cannot be regarded as good law on this point").
This Court finds that the allegations for breach of contract are not inextricably intertwined with the count for breach of fiduciary duty. Moreover, WGSL acted as an investor that purchased and sold investments for the City. Such a position gives rise to professional standards that exist apart from the contract that controls the relationship between the investor and customer. The economic loss rule does not bar the claim for breach of fiduciary duty or negligence involving a special relationship between a professional and a third party. Having reached this decision, this Court has not overlooked Charlotte-Mecklenburg Hosp. Auth, v. Wachovia Bank, N.A., 2009 WL 6328789 (N.C. Super. Ct. 2009), urged by Defendants. That case was decided on North Carolina law, not Florida law, and hence, this Court finds it unpersuasive.
See also Florida Auto. Joint Underwriting Ass'n v. Milliman, Inc., 2007 WL 1341127, at *5 (N.D. Fla. 2007); Pacific Harbor Capital, Inc. v. Barnett Bank, N.A., 2000 WL 33992234, at *10 (M.D. Fla. 2000) (upholding breach of fiduciary duty prior toAmerican Aviation); Crowell v. Morgan Stanley Dean Witter Servs., Co., 87 F.Supp.2d 1287, 1292 (S.D. Fla. 2000) (upholding breach of fiduciary duty prior to American Aviation); Hilliard v. Black, 125 F.Supp.2d 1071, 1081 (N.D. Fla. 2000) (upholding breach of fiduciary duty prior to American Aviation).
FDUTPA (Count IV)
WGSL argues that the FDUTPA does not apply to securities transactions and does not apply to Wachovia as a national bank. While it may be argued that it is unclear whether the particular investing services provided by WGSL are subject to the FDUTPA, it is clear that the FDUTPA does not apply to federally regulated banks such as Wachovia. See DeLeon v. Bank of Am., N.A., 2009 WL 3822392 (M.D. Fla. 2009) (citing Caban v. J.P. Morgan Chase Co., 606 F.Supp.2d 1361, 1371 (S.D. Fla. 2009), and International Brokerage Surplus Lines, Inc. v. Liberty Mut. Ins. Cos., 2007 WL 220172, at *7 (M.D. Fla. 2007)). As discussed in these cases, section 501.212(4)(C) of the Florida Statutes specifically exempts from FDUTPA all banks regulated by the federal government. Having determined that Wachovia is exempted from the application of the FDUTPA, this Court need not determine whether the precise investments in this case are subject to the FDUPTA. Count IV is dismissed with prejudice.
See Rogers v. CISCO Sys., Inc., 268 F.Supp.2d 1305, 1316-17 (N.D. Fla. 2003) (dismissing FDUTPA claim based on securities transactions on basis that FDUTPA does not regulate securities);Crowell v. Morgan, Stanley, Dean Witter Servs., Co., 87 F.Supp.2d 1287, 1295 (S.D. Fla. 2000) (ruling that in absence of Florida law, majority of cases hold that deceptive and unfair trade practices acts are not held to be applicable to fraudulent securities transactions); Rogers v. Nacchio, No. 05-60667, slip op. at * 28-29 (S.D. Fla. Jun. 5, 2006) (following Cisco andCrowell and holding that FDUTPA does not apply to securities claims).
FSIPA (Count V)
There are no allegations of purchase or sale involving the Lehman bonds at issue in this case; the only allegations involve WGSL's inducement of the City to hold or retain the Lehman bonds at the time when WGSL should have been directing the City to sell them. The City alleges that WGSL induced it to not act, or rather to "hold" or retain the Lehman bonds, by failing to reveal the impending downfall of Lehman at a time when WGSL was required to disclose such information. Because this case does not involve the purchase or sale of securities, but rather the "holding" of securities, it cannot be brought as a federal private right of action under § 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j(b) or Rule 10b-5 based on the standing requirement.Merrill Lynch, Pierce, Fenner Smith, Inc. v. Dabit, 547 U.S. 71, 77-80, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006) (explaining the standing limitation of purchaser or seller for private federal securities actions as espoused in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975)). A "holder" action is distinguishable from a typical § 10b or Rule 10b-5 action in the sole respect that the holders of the securities, rather than the purchasers or sellers, bring the action. Dabit, 547 U.S. at 76, 88-89, 126 S.Ct. at 1515. These "holder" actions can then be brought only in state court provided the state has a cause of action under its particular statutory law. Dabit, 547 U.S. at 86 (stating that "[f]acts supporting an action by purchasers under Rule 10b-5 (which must proceed in federal court if at all) typically support an action by holders as well, at least in those States that recognize holder claims.").
Count V of the Complaint alleges that WGSL "[i]n connection with the rendering of such investment advice" . . . "failed to inform the City that WGSL was basing its continuing recommendation to hold the Lehman bond investment on WGSL's hope for a government bailout of Lehman." (Dkt. 1, paras. 93 94(c)).
The Supreme Court in Dabit did not create a private right of action under 10(b) of the 1934 Act to "holder" plaintiffs. See Amorosa v. Ernst Young LLP, 682 F.Supp.2d 351 (S.D. N.Y. 2010).
Historically, since the Private Litigation Securities Reform Act of 1995, 15 U.S.C. §§ 77z- 1 and 78u-4 (PLSRA), was enacted to curb the misuse of class actions in federal securities fraud cases by imposing more stringent requirements on plaintiffs, more securities fraud cases appeared in state court to overcome the hurdles of the PLSRA. Dabit, 547 U.S. at 81-82. Congress acted again in 1998 by passing the Securities Litigation Uniform Standards Act, 15 U.S.C. §§ 78bb(f), 77p(b) (SLUSA), to rectify the rise in state court class action securities fraud cases, which were perceived as diversionary maneuvers to avoid the PLSRA. Id. at 82; Instituto de Prevision Militar v. Merrill Lynch, Pierce, Fenner Smith, Inc., 546 F.3d 1340, 1344-45 (11th Cir. 2008) (noting that SLUSA was passed to prevent state private securities class actions alleging fraud from frustrating the purpose of the PLSRA). In the context of interpreting SLUSA, Dabit notes that rather than technically pre-empting any state cause of action, it "simply denies plaintiffs the right to use the class-action device to vindicate certain claims." Dabit, 547 U.S. at 87. SLUSA, therefore, "does not deny any individual plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce any state-law cause of action that may exist." Dabit, 547 U.S. at 87.
Two federal district courts have noted that while Florida law is unclear whether a plaintiff can sustain a state common law "holding" claim, which is an action for fraudulent misrepresentation or omission in inducing a plaintiff not to act or "hold" the securities, neither federal nor Florida securities laws allow an action for the improper "holding" of securities.See Pafumi v. Davidson, 2007 WL 1729969, at *3 n. 4 (S.D. Fla. 2007) (citing Rogers v. Cisco Sys., Inc., 268 F.Supp.2d 1305, 1311-13 n. 13 (N.D. Fla. 2003), Riley v. Merrill Lynch, Pierce, Fenner Smith, Inc., 292 F.3d 1334, 1343 (11th Cir. 2002), and Ward v. Atlantic Sec. Bank, 777 So.2d 1144, 1146-47 (Fla.Dist.Ct.App. 2001)). Riley, however, has since been abrogated by Instituto de Prevision Militar v. Merrill Lynch, Pierce, Fenner Smith, Inc., 546 F.3d 1340, 1348 (11th Cir. 2008), on the issue of the scope of SLUSA. The Eleventh Circuit noted in Instituto de Prevision Militar that the Supreme Court's decision in Dabit expanded the scope of claims exempted by SLUSA. Although SLUSA applies to only class actions, which this case is not, it exempts from state court claims that include not only those involving the purchase or sale of securities covered under SLUSA, but also those by "holders of securities." Instituo de Prevision Militar, 546 F.3d at 1348. In this individual action, the City is a "holder" of the Lehman bonds, about which WGSL allegedly failed to render advice.
"The court in Rogers evaluated whether such claims may be available in common law fraudulent misrepresentation claims."Pafumi, 1007 WL 1729969, at *3 n. 4.
Apart from the issue of the expansive scope of SLUSA, the Florida appellate court case of Ward gives some pause. In Ward, the plaintiff brought a potential "holding" claim premised on section 517.301 of the Florida Statutes, and the court reversed summary judgment in favor of the bank so that the claim could proceed to trial. The court did not definitely decide that a "holding" claim existed, rather, the court reversed the summary judgment on the following basis: "[u]nlike its federal counterpart, a securities fraud claim under section 517.301 may also be brought for fraud `in connection with the rendering of any investment advice.'" Ward, 777 So.2d at 1147. This passing observation has nothing to do with whether a private right of action exist for a "holder" under Florida securities law. The Florida Supreme Court has held that section 517.211 requires the buyer-seller privity with no need of finding any implied right of action for buyers and sellers in section 517.301, as federal law must do under 10b-5. See E.F. Hutton Co. v. Rousseff, 537 So.2d 978, 981 (Fla. 1989). As urged by WGSL, the Ward opinion cannot be reconciled with the language of section 517.211 requiring a purchaser or seller to bring a cause of action under section 517.301. Hence, this Court will follow Rousseff and the plain language of Florida securities law that a "holder" may not bring a statutory securities fraud action. Any attempt to further replead a cause of action under Florida's statutory securities law would be futile based on the City's inability to allege that it was induced to purchase or sell the Lehman bonds. See, e.g., Bryant v. Dupree, 252 F.3d 1161, 1163 (11th Cir. 2001) (citing Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962)).
See also Compania de Elaborados de Café v. Cardinal Cap. Mgt., Inc., 401 F.Supp.2d 1270, 1280 (S.D. Fla. 2003) (citing Rousseff for the premise that plaintiff must allege purchase or sale of securities to maintain action under section 517.301).
Accordingly, it is ORDERED AND ADJUDGED that Defendants' Motion to Dismiss Counts II through V of the Complaint is GRANTED with prejudice as to Counts IV and V and DENIED as to Counts II and III. Defendants shall file an answer to Counts I, II, and III within 10 days of the date of this order.
DONE AND ORDERED at Tampa, Florida.