In re County of Orange
| Citation | 191 BR 1005 |
| Decision Date | 24 January 1996 |
| Docket Number | Bankruptcy No. SA 94-22272 JR. Adv. No. SA 95-1045 JR. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California |
| Parties | In re COUNTY OF ORANGE, a political subdivision of the State of California, Debtor. COUNTY OF ORANGE, a political subdivision of the State of California, and John M.W. Moorlach, in his official capacity as Treasurer-Tax Collector of the County of Orange, Plaintiffs, v. MERRILL LYNCH & CO., INC., a Delaware corporation; Merrill Lynch, Pierce, Fenner & Smith, Inc., a Delaware corporation; Merrill Lynch Government Securities, Inc., a Delaware corporation; Merrill Lynch Capital Services, Inc., a Delaware corporation; Merrill Lynch Money Markets, Inc., a Delaware Corporation, Defendants. |
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Bruce Bennett and Michael Hennigan of Hennigan, Mercer & Bennett, Los Angeles, CA, for Orange County.
Ronald L. Olson and Dennis C. Brown of Munger, Tolles & Olson, Los Angeles, CA, for Merrill Lynch.
On November 13, 1995, Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch Government Securities, Inc., Merrill Lynch Capital Services, Inc., and Merrill Lynch Money Markets, Inc. (collectively "Merrill Lynch") filed a motion to dismiss (the "Motion") the second amended complaint (the "Complaint") filed by the County of Orange (the "County") and John M.W. Moorlach ("Moorlach").
On November 20, 1995, the County and Moorlach ("Plaintiffs") filed their opposition to the Motion. On December 1, 1995, after extensive argument on the Motion, I issued an oral decision to the parties denying the Motion and indicated that a written opinion would follow.
This court has jurisdiction over this case pursuant to 28 U.S.C. § 1334(a) (West 1995) (), 28 U.S.C. § 157(a) (West 1995) (), and General Order No. 266, dated October 9, 1984 (referring all Title 11 cases and proceedings to the bankruptcy judges for the Central District of California). This matter is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (B), (C), (E), (K) & (O) (West 1995).
On December 6, 1994, the County filed its chapter 9 bankruptcy petition. On October 25, 1995, the County and Moorlach, acting in his official capacity as Treasurer-Tax Collector of the County, filed the Complaint against Merrill Lynch claiming, in part, that by refusing to return approximately $1.6 billion of marketable securities that belonged to the County, Merrill Lynch asserted an informal proof of claim against the County and the County is entitled to the proceeds from these liquidated securities as well as interest and any other consequential damages that resulted from Merrill Lynch's conduct.
On November 13, 1995, Merrill Lynch filed the Motion arguing that the Complaint should be dismissed for failure to state claims upon which relief can be granted. Merrill Lynch contends that the securities were not property of the County and it did not assert an informal proof of claim against the County or any of the County's property.
On December 1, 1995, I held a hearing and issued an oral decision denying the Motion, indicating that I would issue a written opinion setting forth my reasoning.
All allegations of fact in the Complaint are assumed to be true and are considered in a light most favorable to Plaintiffs. Fresher v. Shell Oil Co., 846 F.2d 45, 46 (9th Cir.1988); Western Reserve Oil and Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir.1985), cert. denied, 474 U.S. 1056, 106 S.Ct. 795, 88 L.Ed.2d 773 (1986); Love v. United States, 915 F.2d 1242, 1245 (9th Cir.1989); Gibson v. United States, 781 F.2d 1334, 1337 (9th Cir. 1986); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). "It is axiomatic that `the motion to dismiss for failure to state a claim is viewed with disfavor and is rarely granted.'" Hall v. City of Santa Barbara, 833 F.2d 1270, 1274 (9th Cir.1986) (quoting 5 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1357, at 598 (1969)).
Merrill Lynch can only prevail on the Motion if it appears beyond all doubt that Plaintiffs can prove no set of facts in support of their claims that would entitle the County to relief. Arcade Water Dist. v. United States, 940 F.2d 1265, 1267 (9th Cir.1991); Gibson, 781 F.2d at 1337 (quoting Conley, 355 U.S. at 45, 78 S.Ct. at 101-02).
Before analyzing the merits of the Motion, it is important to understand the complex facts asserted in the Complaint that must be treated as true for the purposes of the Motion. Western Reserve Oil, 765 F.2d at 1430. In the Complaint, Plaintiffs allege that commencing on July 1, 1991 and continuing through at least December 6, 1994 (the "Time Period"), former County Treasurer Robert Citron ("Citron") entered into hundreds of reverse repurchase agreements ("Repos") with Merrill Lynch1 pursuant to the "Master Repurchase Agreements" (the "MRAs"). Second Am.Compl. ¶ 18.
Plaintiffs contend that under the terms of the Repos, "the County agreed to transfer possession of securities to Merrill Lynch, in exchange for cash, and simultaneously obligated itself to later repay sic the cash plus interest in exchange for a return of possession of the identical securities." Id. Plaintiffs assert that both the County and Merrill Lynch recognized and treated the Repos as full-recourse, secured loans that obligated the County. Id. ¶¶ 19, 22, 26 & Ex. 23 at 175.
Under the MRAs, Plaintiffs allege that "Merrill Lynch was not authorized to sell the securities held in its possession, and was obligated to return to the County possession of the same securities that the County had transferred to Merrill Lynch." Id. ¶ 21 (emphasis in original).
Additionally, the County entered into agreements with Merrill Lynch under a Securities Loan Agreement (the "SLA") which was executed on May 10, 1993. Id. ¶ 24. Plaintiffs contend that all agreements drafted pursuant to the SLA were virtually identical to the Repos entered into pursuant to the MRAs. Id.2
During the Time Period, Plaintiffs allege that on a daily basis, the County and other entities (including but not limited to broker dealers, the United States government, the state of California, California governmental agencies, and various local governmental entities located within and outside the County) placed funds into the County's bank accounts. The vast majority of these funds were deposited, wired, or otherwise transferred into the County's two primary bank accounts. These two accounts were the Concentration Account and the Custodial Account (the "Accounts"). Id. ¶ 28. Plaintiffs characterize all the funds received by the County into the following four categories: "County Moneys," "Non-County Deposited Moneys," "Non-County Invested Moneys," and "Other Moneys." Id. ¶¶ 29-33. Plaintiffs allege that all the securities in the Custodial Account were identified as property of the County. Id. ¶ 47.
Plaintiffs state that the County regularly deposited County funds and funds that were held in trust into the Accounts. On a daily basis, funds were transferred between the Accounts. Id. ¶¶ 28 & 34. Plaintiffs assert that as a result of this massive commingling, the Accounts represented an undifferentiable mass of funds at all times. Accordingly, tracing of individual funds was impossible. Id. ¶ 28, 36 & 37. Plaintiffs contend that Merrill Lynch was aware of this commingling. Id. ¶¶ 38 & 43.
Funds in the Custodial Account were used for many purposes, including payments on the Repos and the purchasing of additional securities. Id. ¶¶ 45 & 46. Plaintiffs allege that nearly all the securities acquired by the County were held in the Custodial Account until the securities were "sold, matured, and/or purportedly transferred to a broker-dealer under a reverse repurchase agreement," id. ¶ 47, and that all, or nearly all, of the securities acquired by the County were acquired by the withdrawal of funds from the Custodial Account. Id. ¶ 50.
Plaintiffs state that as a result of the massive commingling and inability of any entity to trace its funds in the Accounts, it is impossible to establish that any securities are legally or equitably the property of any entity other than the County or that any alleged trust funds were used for any particular purpose. Id. ¶¶ 49-53. Additionally, Plaintiffs assert that tracing specific trust funds to any particular securities is impossible because daily investment decisions by the County were generally made on the basis of the commingled mass of funds available in the Accounts. Id. ¶ 52.
As a result of this massive commingling and inability to trace the various funds (trust funds and nontrust funds, County funds and non-County funds) that were placed in the Accounts, the County contends that all the securities purchased from the commingled funds in the Accounts became the property of the County when it filed its chapter 9 petition. Id. ¶ 53.
Plaintiffs argue that Merrill Lynch permitted, encouraged, and advised Citron to pursue an unlawful, speculative scheme that included the borrowing, primarily through short-term Repos, of billions of dollars and the transfer of billions of dollars of securities owned by the County to Merrill Lynch. As a result of this investment strategy, the County suffered catastrophic losses in 1994. Id. ¶¶ 74-77, 83-88. See also id. ¶¶ 89-98, 103-26.
Plaintiffs state that by June 30, 1991, Citron had obligated the County to repay approximately $1.8 billion pursuant to the Repos. Additionally, by June 30, 1992,...
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