Ally Fin. Inc. v. Wells Fargo Bank, N.A. (In re Residential Capital, LLC)

• Decision Date: 12 May 2015
• Docket Number: Adv. Proc. No. 14–02435 MG,Case No. 12–12020 MG
• Citation: 531 B.R. 25
• Parties: In re : Residential Capital, LLC, et al., Debtors. Ally Financial Inc., Plaintiff, v. Wells Fargo Bank, N.A., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

531 B.R. 25

In re : Residential Capital, LLC, et al., Debtors.

Ally Financial Inc., Plaintiff

v.Wells Fargo Bank, N.A., Defendants.

Case No. 12–12020 MG

Adv. Proc. No. 14–02435 MG

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

Signed May 12, 2015

BAKER & McKENZIE LLP, Attorneys for Defendant, 452 Fifth Avenue, New York, New York 10018, By: James Donnell, Esq., Jacob M. Kaplan, Esq.

KORNSTEIN VEISZ WEXLER & POLLARD, LLP, Attorneys for Plaintiff, 757 Third Avenue, New York, New York 10017, By: William B. Pollard, III, Esq., Amy C. Gross, Esq.

MEMORANDUM OPINION AND ORDER GRANTING DEFENDANT'S MOTION TO DISMISS

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Before the Court is Defendant Wells Fargo Bank, N.A.'s (“Wells Fargo”) motion (the “Motion,” ECF Doc. # 9) to dismiss the complaint (the “Complaint,” ECF Doc. # 1) in the above-captioned adversary proceeding (the “Adversary Proceeding”) filed by Plaintiff Ally Financial Inc. (“AFI”), the non-debtor parent company of the former debtor Residential Capital, LLC (“ResCap”). AFI filed an opposition (the “Opposition,” ECF Doc. # 16) and Wells Fargo filed a reply (the “Reply,” ECF Doc. # 17).

This Adversary Proceeding arises out of deposit accounts opened by AFI and certain of its debtor and non-debtor affiliates and subsidiaries with Wells Fargo. The parties entered into the contract to open the accounts in January 2012. Two months later, apparently in anticipation of the bankruptcy filings by ResCap, Wells Fargo used the “change of terms” provision in the account agreement and unilaterally amended the agreement with AFI. The amendment expanded the indemnification provision in the agreement, making AFI liable as a guarantor for any debts to Wells Fargo of ResCap and its debtor affiliates (collectively, the “Debtors”). The notice of the unilateral amendment gave AFI 37 days to close the accounts or the amendment was deemed accepted. (The account agreement required that Wells Fargo give AFI 30 days' notice of any change of terms.) AFI's Complaint alleges that it was unable to close all of the accounts by the deadline (because of the extensive use of the accounts and the number of checks outstanding) and the amendment became effective before the Debtors filed their bankruptcy petitions approximately three weeks later. Wells Fargo thereafter debited funds from AFI's accounts to satisfy amounts Wells Fargo claimed were owed by the Debtors, allegedly incurred before and during the Debtors' bankruptcies. These amounts (approximately $500,000) primarily related to attorneys' fees that Wells Fargo incurred in monitoring the Debtors' bankruptcy cases.

AFI alleges that Wells Fargo's unilateral amendment of the account agreement and debiting of AFI's account were improper, giving rise to damages claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and conversion. AFI also requests declaratory relief. Wells Fargo's Motion to dismiss argues that the plain language of the contract permitted the amendment and, therefore, as a matter of law, AFI's claims must be dismissed.

AFI and Wells Fargo were both obviously sophisticated parties. The change of terms contract language is clear and unambiguous and is enforceable under applicable New York law.¹ While the Court believes that Wells Fargo engaged in what can only be described as “sharp practices,” Wells Fargo acted in accordance with the terms of the parties' contract. AFI cannot rewrite the terms of the contract with the benefit of hindsight.

Therefore, as set forth below, Wells Fargo's Motion is GRANTED and AFI's Complaint is DISMISSED with prejudice as to the breach of contract, conversion, and part of the breach of the implied covenant of good faith and fair dealing claims. AFI's remaining theory of breach of the implied covenant—that Wells Fargo acted uncooperatively in carrying out its own requisite procedures for closing accounts—is DISMISSED without prejudice and AFI is GRANTED leave to amend to better allege this claim.

I. BACKGROUND

A. The Parties' Original Contractual Relationship

AFI, directly or through its subsidiaries, is one of the largest providers of automotive financing and leasing products and services in the United States. (Compl.¶ 14.) The Debtors were separate and independent legal entities that were direct or indirect subsidiaries of AFI and were engaged in the mortgage loan origination, securitization, and servicing businesses. (Id. ¶ 16.)

On January 3, 2012, AFI and certain of its affiliates and subsidiaries, including the Debtors, executed a commercial deposit agreement (the “CDA,” Compl. Ex. A) with Wachovia Bank and Wachovia Bank of Delaware. (Compl.¶ 17.) Both Wachovia entities were succeeded by Wells Fargo. (Id. ) The CDA sets forth terms and conditions relating to commercial deposit accounts that AFI, the Debtors, and the other signatories maintained with Wachovia, and later Wells Fargo. (Id. ¶¶ 15, 17(citing CDA).) Approximately 30 of these accounts were checking accounts relating to AFI's auto financing and services business (the “Ally Auto Services Accounts”). (Id. ) One of the accounts (the “AFI Funding Account”) was a main funding account that was used to transfer funds to cover checks issued from the Ally Auto Services Accounts. (Id. ) The Debtors' accounts were not used in AFI's auto services business. (Id. )

In its original form, the CDA contained the following relevant provisions:

Throughout this deposit agreement, Wachovia Bank and Wachovia Bank of Delaware, each a division of Wells Fargo Bank, N.A., as applicable, are referred to as “we” or “us,” the commercial deposit accounts we offer are referred to as the “accounts,” the treasury management services that we offer are referred to as the “treasury services,” this deposit agreement and the other documents described below are together referred to as the “agreement;” and: 1) each entity maintaining an account or using any of the services listed on Exhibit A hereto; and 2) each such entity is individual referred to herein as “you.”

(the “Defining Terms Provision,” CDA at 1);

When you open an account and accept service from us, you agree to be bound by the terms and conditions of the agreement.

(id. );

We may amend this agreement and any documentation referred to herein and the rules related to your account at any time. We will provide you 30 days prior notice of any such changes or amendments if they are not in your favor. If you continue to use such services after such notice you will be deemed to have accepted such changes. Notwithstanding the forgoing, we may make such changes immediately where required to do so including amendments required by changes in law, regulation, applicable clearinghouse rule or in any other circumstance that prohibits the giving of such prior notice.

(the “Amendment Provision,” id. );

In the event that any provision of the agreement is held to be invalid, illegal or unenforceable for any reason, the remaining provisions of the agreement will remain in full force and effect.

(id. § 16);

Except as may be limited by applicable law and except to the extent losses, claims, and expenses are finally determined by a court or arbitrator having proper jurisdiction have been caused by our negligence or our willful misconduct or by our breach of our obligations under the agreement, you agree to indemnify and hold us ... harmless from (or at our election and where appropriate to reimburse us for) any and all losses, costs and expenses (including attorneys' reasonable fees and costs) resulting from:

(a) claims brought against us by any person or entity arising in connection with any of the services or treasury services provided under the agreement ...;

...

(d) obligations, losses or expenses we incurred in connection with any legal process, dispute or third-party claim related to you or your accounts;

...

These indemnification obligations will survive the termination of any treasury services in whole or in part or the termination of the agreement.

(the “Indemnification Provision,” id. § 21);

If you ever owe us money as a customer, borrower, guarantor or otherwise including any obligation owed to us for services provided pursuant to this agreement or owed to a financial institution that we acquire, then you agree that, in addition to any other remedies we may have, we have the right to deduct and set off amounts you owe us from any accounts you hold with us or our affiliates.

By accepting services, you also grant us a consensual security interest in your accounts and to the funds held in them as collateral to secure your present and future obligations to us.

With the exception of charging an account for items that may be returned against it, we will not set-off against – and you do not grant us a security interest in – any account for money owed us where the account name indicates, and you actually do, hold the funds in such account in a representative capacity.

(the “Setoff Provision,” id. at 17);

The CDA contains three signature pages, with authorized signatures for AFI and each of AFI's subsidiaries and/or affiliates that opened accounts. (See id. at 23–25.) For each of the entities, the same individual or individuals signed on behalf of the entity, executing and accepting the terms of the CDA. (See id. ) The CDA attaches a list as Exhibit A of each of the AFI entities to which the CDA applies: AFI, Ally Servicing LLC, Motors Insurance Corp., ResCap, Debtor Residential Funding Co., LLC, Debtor Passive Asset Transactions LLC, Debtor RFC Asset Holding II, LLC, Debtor Residential Mortgage Real Estate Holdings, LLC, Debtor Residential Funding Real Estate Holdings, Debtor Homecoming Financial Real Estate Holding, Debtor GMACM Mortgage, LLC, Debtor Ditech, LLC, and Debtor Residential Consumer Services, LLC (together, the “Depositors”). (See id. Ex. A.)

B. Wells Fargo's Amendment to the CDA

Wells Fargo sent the Depositors, including the Debtors and AFI, a letter dated March 19, 2012, stating that it was amending the CDA (the “Am...