Granite Partners, L.P. v. Bear, Stearns & Co. Inc.
| Citation | 17 F.Supp.2d 275 |
| Decision Date | 25 August 1998 |
| Docket Number | No. 96 Civ. 7874(RWS).,96 Civ. 7874(RWS). |
| Parties | GRANITE PARTNERS, L.P., Granite Corporation and Quartz Hedge Fund, by and through the Litigation Advisory Board of Granite Partners, L.P., Granite Corporation and Quartz Hedge Fund, Plaintiffs, v. BEAR, STEARNS & CO. INC., Bear, Stearns Capital Markets Inc., Howard Rubin, Donaldson, Lufkin & Jenrette Securities Corporation, Elizabeth Comerford and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Friedman Kaplan & Seiler, New York City (Robert D. Kaplan, Eric Seiler, Robert J. Lack, Robert S. Loigman, Nicole L. Gueron, of counsel), Berlack, Israels & Liberman, New York City (Steven E. Greenbaum, Edward S. Weisfelner, John P. Biedermann, Anne M. Cunningham, of counsel), for plaintiffs.
Fried, Frank, Harris, Shriver & Jacobson, New York City (David M. Morris, Albert Shemmy Mishaan, of counsel), for Bear Stearns & Co. Inc., Bear Stearns Capital Markets Inc. and Howard Rubin.
Morgan, Lewis & Bockius, New York City (Catherine A. Ludden, Gary G. Staab, Scott S. Balber, Maureen C. Weiss, of counsel), for Donaldson, Lufkin & Jenrette Securities Corp.
Brown & Wood, New York City (A. Robert Pietrzak, William M. Goldman, Elizabeth Storch, Rick B. Antonoff, of counsel), for Merrill Lynch, Pierce, Fenner & Smith Inc.
Hahn & Hessen, New York City (Jeffrey L. Schwartz, Howard Ruda, Jaime E. Kriss, of counsel), for The Bond Market Association.
Defendants Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Bear, Stearns & Co. Inc., Bear, Stearns Capital Markets Inc. (collectively, "Bear Stearns"), Howard Rubin ("Rubin"), and Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill Lynch") (together with DLJ, Bear Stearns, and Rubin, the "Brokers") have moved for partial dismissal of the First Amended Complaint ("Complaint") pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted and for failure to plead fraud with particularity. Specifically, the Brokers move to dismiss the following claims against them: (1) inducing and participating in breach of fiduciary duty (Count I), (2) tortious interference with contract (Counts II, XII, and XXI, which is against Merrill Lynch), (3) rescission of unauthorized trades (Count III), (4) breach of duty due to wrongful margin calls and liquidation (Count V), (5) conversion (Count VI), (6) violations of the Sherman and Donnelly Acts (Counts VII and VIII), (7) prima facie tort against Bear Stearns (Count IX), (8) breach of contract due to commercially unreasonable liquidations (Count X), (9) breach of duty to liquidate in a commercially reasonable manner (Count XI), (10) common law fraud (Count XIII), (11) negligent misrepresentation (Count XIV), (12) innocent misrepresentation (Count XV), (13) breach of express warranty (Count XVI), (14) unjust enrichment (Count XVII), and (15) equitable subordination (Count XX).
For the reasons set forth below, the Brokers' motion will be granted in part and denied in part.
Plaintiff Granite Partners, L.P. ("Granite Partners"), a Delaware limited partnership, was established in January 1990 as an investment fund to invest primarily in mortgage-related securities on behalf of individuals and entities subject to United States taxation.
Plaintiff Granite Corporation ("Granite Corp."), a Cayman Islands corporation, was organized in January 1990 to invest primarily in mortgage-backed securities on behalf of offshore investors and domestic tax-exempt entities, including foundations and pension funds.
Plaintiff Quartz Hedge Fund ("Quartz") (collectively with Granite Partners and Granite Corp., the "Funds"), a Cayman Islands corporation, was established in January 1994 as a vehicle to invest primarily in mortgage-related securities on behalf of offshore investors and others exempt from United States taxation.
The Funds bring this action by and through the Litigation Advisory Board (the "LAB"), which was given the exclusive authority on behalf of and in the name of the Funds' estates to commence, prosecute, settle, or otherwise resolve all unresolved claims and causes of action of the Funds' estates by order of the United States Bankruptcy Court for the Southern District of New York.
DLJ, Bear Stearns, and Merrill Lynch, all Delaware corporations with their principal places of business in New York City, are broker-dealers that transacted business with the Funds.
Rubin, a resident of New Jersey, was at all relevant times a senior managing director and the head CMO trader at Bear Stearns.
At all relevant times to this action, nonparty Askin Capital Management, L.P. ("ACM"), a Delaware limited partnership, was a registered investment advisor, whose exclusive place of business was New York City. ACM was, at all relevant times, controlled by nonparty David J. Askin ("Askin"), who owned and controlled ACM's sole general partner, Dashtar Corporation. Askin also served as ACM's sole limited partner, president, chief executive officer, and chief financial officer. ACM became the investment advisor to Quartz since its formation.
On April 7, 1994, the Funds filed petitions for relief under chapter 11 of the United States Bankruptcy Code. The chapter 11 trustee for the Funds (the "Trustee") initially filed this action in the United States Bankruptcy Court for the Southern District of New York on September 12, 1996. The case was referred to this Court on October 18, 1996. On consent, this Court withdrew the reference from the Bankruptcy Court on December 3, 1966.
On January 27, 1997, the Trustee submitted a Third Amended Joint Plan of Liquidation for the Funds (the "Plan"). Following the Bankruptcy Court's confirmation of the chapter 11 Plan on March 2, 1997, this action has been pursued by the LAB, appointed pursuant to the Liquidation Plan.
The LAB filed the Complaint in this action on August 4, 1997, naming, in addition to Bear Stearns, Rubin, DLJ, and Merrill Lynch as defendants.
In the Complaint, the LAB asserts the following claims: breach of contract, inducing and participating in breach of fiduciary duty, tortious interference with contracts, rescission of unauthorized trades, breach of duty, conversion, federal and state antitrust violations, prima facie tort, common law fraud, negligent and innocent misrepresentation, breach of express warranty, unjust enrichment, objection to claims and interest, and equitable subordination.
Merrill Lynch and DLJ filed their motions to dismiss on November 10, 1997, and Bear Stearns filed its motion on November 12, 1997. Oral argument was heard on May 20, 1998, at which time the motions were deemed fully submitted.
On March 24, 1998, the Bond Market Association (the "BMA") moved for leave to file a memorandum of points and authorities as amicus curiae for the purpose of bringing to the Court's attention its views regarding the treatment of repurchase agreements ("repos") under the applicable state law and informing the Court of the importance of repos to the debt capital markets. The motion was granted on May 20, 1998.
In considering a motion to dismiss, the facts alleged in the complaint are presumed to be true and all factual inferences must be drawn in the plaintiff's favor and against the defendants. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir.1993); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989); Dwyer v. Regan, 777 F.2d 825, 828-29 (2d Cir.1985). Accordingly, the factual allegations considered here and set forth below are taken primarily from the LAB's Complaint and do not constitute findings of fact by the Court. They are presumed to be true only for the purpose of deciding the present motion.
This case arises out of the collapse in early 1994 of the Funds that were managed by Askin and ACM. The major claims brought in this lawsuit fall into two categories: (1) that the Brokers injured the Funds by selling to them inappropriate securities purchased by Askin and ACM, and (2) that the Brokers injured the Funds by making improper margin calls and liquidating the Funds' reverse repurchase positions when the margin calls were not satisfied.
The Funds invested primarily in collateralized mortgage obligations ("CMOs") created by the Brokers and other broker-dealers. ACM, through its president, Askin, purchased the securities for the Funds. The Brokers are alleged to be "among the principal sellers of CMOs to the Funds." (Compl. ¶ 4.)
CMOs are bonds created from and collateralized by mortgage-backed securities formed from pools of residential mortgages or securities backed by such mortgages. They are divided into various classes, or "tranches," each of which is entitled to a different portion of the principal and/or interest payments made by the underlying mortgage obligors. The tranches differ from one another with respect to their sensitivity to interest rate changes and the certainty with which their reaction to such changes can be predicted. The Brokers referred to the riskiest tranches — those most prone to large and unpredictable swings in value — as "toxic" or "nuclear waste."
The two larger Funds, Granite Partners and Granite Corp., were designed to invest in "market-neutral" portfolios of high-quality CMOs. They were intended to acquire balanced holdings of "bullish" bonds and "bearish" bonds. A bullish security is likely to increase in value when interest rates fall and decrease in value when interest rates rise. A bearish security is likely to decrease in value when interest rates fall and increase in value when interest rates rise. By purchasing offsetting positions in predictable...
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