La. Stadium & Exposition Dist. v. Fin. Guar. Ins. Co.

Citation701 F.3d 39
Decision Date06 November 2012
Docket NumberDocket No. 10–2030.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
PartiesLOUISIANA STADIUM & EXPOSITION DISTRICT, State of Louisiana, Plaintiff–Appellants, v. FINANCIAL GUARANTY INSURANCE CO., Defendant–Appellee, Merrill Lynch, Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., FGIC Corporation, Defendants.

OPINION TEXT STARTS HERE

James R. Swanson, Fishman Haygood Phelps Walmsley Willis & Swanson, LLP (Lance C. McCardle, Alysson L. Mills, on the brief), New Orleans, LA, for PlaintiffsAppellants Louisiana Stadium & Exposition District and State of Louisiana.

Brian S. Fraser, Richards Kibbe & Orbe, LLP, New York, NY (Shari A. Brandt, on the brief; Rudy J. Cerone, pro hac vice, McGlinchey Stafford PLLC, New Orleans, LA, on the brief, for DefendantAppellee Financial Guaranty Insurance Corp.).

Before: WINTER, POOLER, HALL, Circuit Judges.

Judge HALL dissents in a separate opinion.

POOLER, Circuit Judge:

Louisiana Stadium and Exposition District and the State of Louisiana (together, LSED) seek to rescind an agreement to purchase bond insurance from Financial Guaranty Insurance Co. (FGIC) and recover its $13 million premium payment. LSED bases its claim on failure of cause, a tenet of Louisiana law that requires all contracts be supported by cause—“the reason why a party obligates himself.” La. Civ.Code Ann. art. 1966, 1967. “Cause” is a broader concept than “consideration,” because cause does not require anything be given in return. Aaron & Turner, L.L.C. v. Perret, 22 So.3d 910, 915 (La.App. 1st Cir.2009). Because we find that the principal cause of the agreement between the parties was the purchase of bond insurance to protect the bondholders in the event of default, not to reduce the interest rate LSED paid to borrow money, we affirm the district court's decision.

BACKGROUND

LSED owns the Superdome in New Orleans. FGIC is a stock insurance company with its principal place of business in New York, New York. In 2005, LSED sought to refinance its existing debt to take advantage of lower interest rates. LSED eventually accepted a proposal from Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) to serve as lead underwriter and broker-dealer for the proposed bonds. In March 2006, LSED issued approximately $240 million in auction rate securities (the “Bonds”). Auction rate securities (“ARS”) are long-term, variable rate securities that have their interest rates reset periodically at Dutch auctions. At a Dutch auction, buy orders are filled starting with the lowest rate bid until all the securities offered for sale are matched with purchase orders. The rate at which the final sell order is filled is known as the “clearing rate,” and the clearing rate applies to all outstanding ARS in that issue until the next Dutch auction.

In connection with the Bonds being issued, LSED purchased $13 million in bond insurance from FGIC, purchasing both a Municipal Bond New Insurance Policy and Municipal Bond Debt Service Reserve Fund Policies (together, the “Policies”). LSED alleges that it “understood that its future interest payment savings would be substantially greater than the amount of the premium paid to FGIC.” LSED alleges that it expected that the Policies would “wrap” the Bonds with FGIC's triple-A credit rating, making the Bonds more attractive to investors.

In 2008—two years after the bonds were issued—FGIC lost its triple-AAA credit rating after it came to light that FGIC invested in risky credit default swaps and subprime mortgage markets. FGIC eventually was stripped of its credit ratings altogether, and was ordered by the N.Y. Insurance Department to stop writing new policies and to “suspend paying any and all claims” against existing policies.

LSED commenced this action in the U.S. District Court for the Eastern District of Louisiana against FGIC. LSED also sued Merrill Lynch, alleging that Merrill Lynch failed to disclose that the success of the proposed bond structure depended on Merrill Lynch's submitting support bids in every auction for the thirty-year life of the bonds. LSED's action eventually was transferred to the Southern District of New York by the Judicial Panel on Multidistrict Litigation along with four other actions. See In re Merrill Lynch & Co., Inc., Auction Rate Sec. (ARS) Mkg. Litig., 626 F.Supp.2d 1331 (J.P.M.L.2009). FGIC moved to dismiss the claims against it for failure to state a cause of action, a motion the district court granted on May 11, 2010. In re Merrill Lynch Auction Rate Sec. Litig., Docket Nos. 09–2030, 09–5404, 09–6770, 2010 WL 1924719, at *14 (S.D.N.Y. May 11, 2010). This appeal followed.1

DISCUSSION

We review the grant of a motion to dismiss for failure to state a claim de novo. Harris v. Mills, 572 F.3d 66, 71 (2d Cir.2009). We consider the legal sufficiency of the complaint, taking its factual allegations to be true and drawing all reasonable inferences in the plaintiff's favor.” Id. We apply a plausibility standard in determining if plaintiff states a complaint for which relief may be granted. Id. at 72. Our plausibility analysis is

guided by two working principles. First, although “a court must accept as true all of the allegations contained in a complaint, that tenet is inapplicable to legal conclusions,” and threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. Second, only a complaint that states a plausible claim for relief survives a motion to dismiss, and determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.

Id. (internal quotation marks, citations omitted; omission in the original).

The parties agree that Louisiana law governs the analysis. In re Merrill Lynch, 2010 WL 1924719, at *4. Louisiana is a civil law state, and analyzes cases under a different methodology than common law states:

Under Louisiana's Civil Law tradition, courts look first and foremost to statutory law. The Louisiana Civil Code instructs that [t]he sources of law are legislation and custom,’ and that [l]egislation is a solemn expression of legislative will.’ [T]he primary basis of law for a civilian is legislation, and not (as in the common law) a great body of tradition in the form of prior decisions of the courts.’ The concept of stare decisis is foreign to the Civil Law, including Louisiana. Therefore, in cases such as this we are guided by decisions rendered by the Louisiana appellate courts, particularly when numerous decisions are in accord on a given issue—the so-called jurisprudence constant—but we are not strictly bound by them.

Transcon. Gas Pipe Line Corp. v. Transp. Ins. Co., 953 F.2d 985, 988 (5th Cir.1992) (footnote omitted).

I. Failure of cause.

The primary issue on this appeal is whether LSED may rescind the bond insurance policy for failure of cause. Louisiana's Civil Code requires that all contracts be supported by cause—“the reason why a party obligates himself.” La. Civ.Code Ann. art. 1966, 1967. “Cause” is a more expansive concept than consideration, because:

[u]nlike the common law analysis of a contract using consideration, which requires something in exchange, the civil law concept of ‘cause’ can obligate a person by his will only. The difference has been analogized to a civilian contract-consent approach compared to a common law contract-bargain approach. Consideration is an objective element required to form a contract, whereas cause is a more subjective element that goes to the intentions of the parties. Therefore, in Louisiana law, a person can be obligated by both a gratuitous or onerous contract.

Aaron & Turner, L.L. C. v. Perret, 22 So.3d 910, 915 (La.App. 1st Cir.2009).

Louisiana law recognizes at least two grounds for failure of cause. “Error can vitiate consent, so that a contract may be rescinded based upon an error.” Cyprien v. Bd. of Supervisors ex rel. Univ. of La., 5 So.3d 862, 868 (La.2009). But [e]rror vitiates consent only when it concerns a cause without which the obligation would not have been incurred, and that cause was known or should have been known to the other party.” La. Civ.Code art. 1949. Cause may also fail when circumstances change, even if the changes are created by the acts of third parties. Carpenter v. Williams, 428 So.2d 1314, 1318 (La.App. 3d Cir.1983) ([t]he parties entered into a contract assuming certain facts or conditions to exist. When the assumed fact or condition was found not to exist or did not come into existence even through the act of third parties [ ], the contracts have been rescinded.”). Thus, under Louisiana law, a failure of cause that occurs after an agreement is entered into provides a basis for rescission, so long as that cause was known to the other party.

While [c]ause is the reason why a party obligates” itself, St. Charles Ventures, LLC v. Albertsons, Inc., 265 F.Supp.2d 682, 687 (E.D.La.2003), a party may also have “motive” to enter into an agreement. “Motive relates to a party's internal, subjective reasons for entering a contract, which cannot be imputed to the knowledge of the other party.” Bluebonnet Hotel Venture LLC v. Wachovia Bank, N.A., No. 10–cv–489 (E.D.La. Sept. 29, 2011). Unlike cause, an error as to a party's motive does not provide a ground for rescission of an agreement. St. Charles Ventures, 265 F.Supp.2d at 692 (collecting cases discussing actionable cause and inactionable motive). A failure of cause is therefore a viable ground for rescission, but a failure of motive is not.

Cyprien is particularly instructive on the issue of failure of cause. There, plaintiff applied for a job as head coach of the University of Louisiana at Lafayette (“ULL”) basketball team. Cyprien, 5 So.3d at 864. Plaintiff had a student worker at his former university fax a copy of plaintiff's resume to ULL. Id. According to the resume, plaintif...

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