Aig Financial Products Corp. v. Public Utility District No. 1

• Decision Date: 15 December 2009
• Docket Number: No. 09 Civ. 6795(LMM).,09 Civ. 6795(LMM).
• Citation: 675 F.Supp.2d 354
• Parties: AIG FINANCIAL PRODUCTS CORP., Plaintiff, v. PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY, WASHINGTON, Defendant.
• Court: U.S. District Court — Southern District of New York

Page 354

675 F.Supp.2d 354

AIG FINANCIAL PRODUCTS CORP., Plaintiff, v. PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY, WASHINGTON, Defendant.

No. 09 Civ. 6795(LMM).

United States District Court, S.D. New York.

December 15, 2009.

COPYRIGHT MATERIAL OMITTED

Jonathan Pickhardt, Quinn Emanuel Urquhart Oliver & Hedges LLP, New York, NY, for Plaintiff.

Jayant W. Tambe, Philip E. Cook, Angie Young Kim, Sarah E. Lieber, Jones Day, New York, NY, for Defendant.

MEMORANDUM AND ORDER

McKENNA, District Judge.

The present litigation was brought by AIG Financial Products Corporation ("AIG-FP" or "plaintiff") against Public Utility District No. 1 of Snohomish County, Washington (the "District" or "defendant") alleging breach of contract and seeking declaratory relief.¹ The District has moved this Court to dismiss for lack of personal jurisdiction and improper venue, or in the alternative, to transfer this action to the United States District Court for the Western District of Washington pursuant to 28 U.S.C. § 1404(a). For the reasons stated below, the motion to dismiss is denied and the motion to transfer is granted.

I. BACKGROUND

A. The Parties

AIG-FP is a corporation organized under the laws of Delaware, with its principal place of business in Wilton, Connecticut. (Compl. ¶ 17.) AIG-FP is a subsidiary of American International Group, Inc. ("AIG"). As of 2007, AIG had assets of approximately $1 trillion, $110 billion in annual revenues, 74 million customers and 116,000 employees in 130 countries and jurisdictions. (Def. Mem. at 4.) Created in 1987, AIG-FP has engaged in a wide variety of financial transactions for a global client base. (Id.)

The District is a municipal corporation in the State of Washington, formed to provide electric and water utility services to an area that consists of 2,200 square miles in the State of Washington. (Compl. ¶¶ 18, 28; Def. Mem. at 6.) The District's headquarters and all of its other offices are located in Snohomish County, Washington. (Def. Mem. at 5.) The District was formed by a majority vote of the people of Snohomish County, Washington, under the authority of Title 54 of the Revised Code of Washington. (Id. at 5-6.) The District is governed by a Board of Commissioners (the "Board"), which is comprised of three local Washington State citizens, elected on a nonpartisan basis by the people of Snohomish County and Camano Island, Washington. (Id. at 6.) The Board establishes policies for the District, sets rates, adopts system plans for electric and water utilities, and approves revenue obligations (such as bonds). (Id.)

B. The 1995 Bonds

On or about February 17, 1995, the District adopted Resolution No. 4251 (the "Fourth Supplemental Resolution") for the issuance and sale of Adjustable Tender Generation System Revenue Bonds, Series 1995 (the "1995 Bonds" or the "Bonds"). (Compl. ¶ 29.) Pursuant to the Fourth Supplemental Resolution, the District issued the 1995 Bonds in the principal amount of $58,260,000 for the purpose of financing the construction or improvement of certain electric facilities. (Id.) The 1995 Bonds are variable rate demand obligations and pay a variable rate of interest that is reset weekly by Citigroup, the remarketing agent, pursuant to a February 1, 1995 remarketing agreement (the "Remarketing Agreement").² (Id. ¶¶ 25, 30.) In addition, to provide credit enhancement for the interest and principal payments due on the 1995 Bonds, the District entered into a bond insurance policy (the "MBIA Bond Insurance Policy") pursuant to which the bond insurer, Municipal Bond Investors Assurance Corporation ("MBIA"), insured the District's obligation to make the principal and interest repayments due on the 1995 Bonds. (Id. ¶ 30.)

C. The Swap Agreement

The District also sought to manage its exposure to the variable interest rate associated with the 1995 Bonds by entering into an interest rate swap agreement with AIG-FP on December 1, 1994 (the "Swap Agreement"). (Id. ¶ 32.) Under the Swap Agreement, the District agreed to pay to AIG-FP a constant rate of 6.2% interest in return for payment by AIG-FP to the District of the variable interest rate on the Bonds. (Id.)

During the first thirteen years of the Swap Agreement, from 1995 through mid-June 2008, the variable interest rate on the 1995 Bonds was below 6.2%. (Decl. of James L. Herrling, dated Aug. 7, 2009 ("Herrling Decl.") ¶ 16.) Starting in mid-June 2008, the market changed and the variable interest rate on the Bonds rose above 6.2%. (Id.) As a result, AIG-FP was obligated to pay the District the difference between the 6.2% fixed rate and the variable interest rate. (Id.) One of the terms of the Swap Agreement provides that the actual weekly interest rate paid on the 1995 Bonds would switch to an Alternative Floating Rate (the "AFR") upon the occurrence of certain triggering events. (Herrling Decl. Ex. 1 at 27, § 2.11.) Significantly for this case, the AFR is triggered by a liquidity put. (Id.) A liquidity put occurs when a bondholder tenders its 1995 Bonds for repurchase and a demand for payment is made to the liquidity provider because there is no open market buyer available. (Compl. ¶ 34.) Thus, in the event that a liquidity put triggers a switch to the AFR, the interest rate that AIG-FP is obligated to pay to the District drops from the actual rate to the significantly lower market index rate. (Compl. Ex. A at 2-5.)

In the fall of 2008, given the impact of the expanding credit crisis and deteriorating financial climate on the interest rate for the 1995 Bonds, AIG-FP and the District entered into discussions regarding a potential termination of the Swap Agreement. (Compl. ¶ 42.) Those discussions failed, however, as a result of a disagreement over the proper valuation of the Swap Agreement. (Id.) AIG-FP calculated the value of the Swap Agreement at approximately $17 million in its favor, while the District insisted it be valued at approximately $3 million in the District's favor. (Id.)

D. The Trust Plan

In September 2008, also in light of the deteriorating financial climate and, in turn, the high risk of a liquidity put, the District convened a meeting of the Board (the "Board Meeting"). (Id. ¶ 43.) During this meeting, the Board considered and adopted a resolution authorizing the execution of a Trust Agreement by the District, pursuant to which a trust would be created and the District would deposit available funds in an amount sufficient to purchase all or a portion of its outstanding 1995 Bonds (the "Trust Plan"). (Id. ¶¶ 43, 45-47.) Subsequent to the Board Meeting, the District implemented the Trust Plan and issued a notice (the "Mandatory Tender Notice") that the Bonds would be subject to mandatory tender for purchase and remarketing. (Id. ¶ 48; Pickhardt Decl. Ex. K.) In essence, the District set up a trust to purchase and hold the 1995 Bonds, with the goal of avoiding a liquidity put that would trigger a switch to the AFR. (Compl. Ex. A at 3, 7-8.)

E. AIG-FP's Claims Against the District

1. Implementation of the Trust Plan

AIG-FP alleges that the District breached the Swap Agreement through its implementation of the Trust Plan. (Compl. ¶¶ 12, 63-65.) Specifically, according to AIG-FP, the District's "repurchase of the 1995 Bonds and its placement of those Bonds in a trust structure contravened specific covenants under the Swap Agreement that expressly prohibited [the District] from `enter[ing] into any . . . agreement for the . . . purchase of Bonds, without the prior written consent of AIG-FP.'" (Id. ¶ 12 (quoting Herrling Decl. Ex. 1 at 46, § 6.2(d)(iii)).) Furthermore, as explained below, AIG-FP alleges that the District's "repurchase of the 1995 Bonds reflected an overt and deliberate attempt to contravene the intent of the parties under the Swap Agreement and thus also violated the implied covenant of good faith and fair dealing." (Id. ¶ 13; see also id. ¶ 69.)

2. Improper Pressuring of Citigroup to Set Higher Rates

AIG-FP also claims that the District breached its obligation to cooperate with AIG-FP to maintain the lowest possible interest rate on the 1995 Bonds. (Id. ¶¶ 14, 67.) AIG-FP alleges that the District "agreed `upon the request of AIG-FP to cooperate with AIG-FP and take such action as is permitted by law (including consultation with AIG-FP, the Remarketing Agent or others) as AIG-FP shall reasonably request . . . in order to achieve or maintain the lowest interest rates on the Bonds'". (Id. ¶ 66 (quoting Herrling Decl. Ex. 1 at 26-27, § 2.9(c)).) According to AIG-FP, "since [the District] repurchased the bonds in October 2008 it has actively embarked on a campaign to manipulate the interest rate payable on the 1995 Bonds in order to further maximize its returns as the now-sole bondholder." (Id. ¶ 14.) For example, AIG-FP alleges that "soon after purchasing the bonds, [the District] proceeded to pressure Citigroup, the remarketing agent responsible for independently determining the weekly interest rate payable on the bonds, to set a higher rate." (Id.; see also id. ¶ 67(a).) According to AIG-FP, the District "insisted that Citigroup ignore a bona fide bid by AIG-FP to purchase the bonds in setting the weekly rate, and . . . threatened Citigroup with legal action for fraud, among other things, if Citigroup failed to accede to [the District's] demands." (Id. ¶ 14.)

3. Failure to Terminate the Bond Insurance Policy

In addition, AIG-FP alleges that the District breached its obligation to cooperate with AIG-FP to maintain the lowest possible interest rate when, following a downgrade in MBIA's credit rating, the District refused to comply with AIG-FP's request to terminate the MBIA Bond Insurance Policy. (Id. ¶¶ 15, 67(e).) According to AIG-FP, this was a reasonable request because, inter alia, it "was predicated on empirical evidence that municipal bonds trade at decreased interest rate levels when decoupled from bond insurance policies issued by distressed insurers, such as...