In re County of Orange, Bankruptcy No. SA 96-22272 JR
| Decision Date | 05 December 1996 |
| Docket Number | Bankruptcy No. SA 96-22272 JR,Adv. No. SA 96-1624 JR. |
| Citation | 203 BR 983 |
| Court | 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, Plaintiff, v. McGRAW-HILL COMPANIES, INC., a New York Corporation, d/b/a Standard & Poor's Ratings Services, its unincorporated division, Defendant. |
COPYRIGHT MATERIAL OMITTED
Michael J. Hennigan of Hennigan, Mercer & Bennett, Los Angeles, CA, for County of Orange.
Geoffrey L. Thomas of Paul, Hastings, Janofsky & Walker, Los Angeles, CA, for The McGraw-Hill Companies, Inc., d/b/a Standard & Poor's Ratings Services.
Plaintiff County of Orange (the "County") filed a complaint (the "Complaint") against Defendant McGraw-Hill Companies, Inc., dba Standard & Poor's Rating Services ("S & P") alleging three counterclaims: breach of contract, professional negligence, and aiding and abetting breach of a fiduciary duty.
S & P filed a motion (the "Motion") to dismiss the Complaint.
After briefing by the parties and oral arguments, I took the matter under submission.
This court has jurisdiction over this case pursuant to 28 U.S.C. § 1334(a) (1996) (), 28 U.S.C. § 157(a) (1996) (), and General Order No. 266, dated October 9, 1984 (referring all Title 11 cases and proceedings arising in the Central District of California to the bankruptcy judges for the Central District of California). Pursuant to 28 U.S.C. § 157(b)(3) (1996), I determine that this matter is a non-core proceeding.
On December 6, 1994, the County filed its chapter 9 bankruptcy petition.
On June 9, 1995, S & P filed a proof of claim (the "Claim") in the County's bankruptcy asserting an unsecured, nonpriority claim for $65,000. On June 11, 1996, the County filed the Complaint against S & P denying the Claim and asserting three counterclaims: breach of contract, professional negligence, and aiding and abetting breach of a fiduciary duty.
On August 12, 1996, S & P filed with the United States District Court a motion to withdraw the reference in the adversary proceeding (the "Reference Motion").
On August 29, 1996, S & P filed the Motion. In the Motion, S & P alleges that the County has failed to state any claim upon which relief can be granted; therefore, this court should dismiss the Complaint under Federal Rule of Civil Procedure ("FRCP") 12(b)(6), made applicable to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure ("FRBP") 7012. Alternatively, S & P asks this court to dismiss the Complaint for failure to state claims with the required particularity under FRCP 9(b), made applicable to adversary proceedings pursuant to FRBP 7009.
On August 30, 1996, S & P filed a motion to withdraw the Claim (the "Withdrawal Motion"). On October 2, 1996, after oral arguments, I took the Withdrawal Motion under submission. In a separate memorandum opinion, entered December 2, 1996, I granted the Withdrawal Motion.1
On October 17, 1996, the district court granted the Reference Motion; however, the district court noted that the withdrawal shall become effective upon the issuance of this court's written opinion on the Motion.2
All allegations of fact in the Complaint are assumed to be true and are considered in a light most favorable to the County. Clegg v. Cult Awareness Network, 18 F.3d 752, 754 (9th Cir.1994); 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, 101-02, 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 C. Wright & A. Miller, Federal Practice and Procedure § 1357 (1969)).
S & P can only prevail on the Motion if it appears beyond all doubt that the County 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.1990); Gibson, 781 F.2d at 1337 (quoting Conley, 355 U.S. at 45, 78 S.Ct. at 101-02). A FRCP 12(b)(6) motion may not be used to resolve a contest about the facts or the merits of a case. 5A C. Wright & A. Miller, Federal Practice and Procedure § 1356 (1990) (citing Murray v. Amoco Oil Co., 539 F.2d 1385, 1387 (5th Cir.1976)).
There are numerous, complex facts asserted in the Complaint that must be treated as true for the purposes of the Motion. Clegg, 18 F.3d at 754; Western Reserve Oil, 765 F.2d at 1430.
In the Complaint, the County alleges that beginning in the summer of 1991 through December 6, 1994, the date the County filed bankruptcy, former County Treasurer Robert L. Citron committed the financial portfolio under his control to an investment strategy that was dependent on interest rates remaining low. Compl. ¶¶ 9, 70 & 76.3
The County states that Citron's investment strategy used the proceeds of short-term borrowings and other moneys to invest in long-term securities. In many cases, these long-term securities were highly-volatile derivatives. Through reverse repurchase agreements, these long-term securities were pledged to borrow additional moneys. Compl. ¶¶ 10, 71-74 & 76.
From 1992 through 1993, this investment strategy enabled Citron to realize extraordinary profits on Pool investments. Compl. ¶¶ 11 & 77. Fearing that the magnitude of these profits might cause alarm about his investment strategy or create unrealistic expectations, Citron and his assistant, Matthew Raabe, as part of a fraudulent effort to manage the expectations of Pool Participants, diverted some of the interest earnings from Pool Participants to the County. Compl. ¶¶ 11 & 77.
In early February 1994, when interest rates began to rise, the Pool suffered horrendous losses in the market value of the Pool assets. Compl. ¶¶ 12 & 78-79. By March 1994, the rising interest rates and Pool losses seriously threatened the financial viability of the Pool; therefore, Citron concluded that a massive infusion of new cash was needed if he was going "to maintain competitive yields with other investment alternatives, while at the same time publicly reaffirming the safety and integrity of the Pool and maintaining the confidence and support of Pool Participants and lenders." Compl. ¶ 13; see also Compl. ¶¶ 78-79.
Citron and Raabe created a plan to deal with the impending crisis. Compl. ¶¶ 80 & 126. Under their plan, the County would raise massive amounts of new cash by issuing short-term, tax-exempt notes. The proceeds from these new short-term notes would be used to purchase five-year securities with higher yields. Compl. ¶¶ 14, 80-81. The County states that:
by `doubling-down\' the interest rate bet in that manner, Citron and Raabe hoped to obtain enough additional securities to forestall the snowballing of the forced sale of securities and to begin to earn enough `spread\' to reestablish the future competitiveness of the Pool\'s yield, and thereby to provide an illusion of liquidity that would allow them to publicly maintain that the Pool was safe and sound.
Compl. ¶ 14.
According to the County, the flaw in the plan was that if the interest rates continued to rise, the County and the Pool assets would be exposed to even greater risks. Compl. ¶¶ 15, 84 & 126. The County alleges that despite the high risks associated with the strategy, Citron and Raabe were determined to press ahead with their plan. Compl. ¶ 15.
In 1993 and 1994, Citron and Raabe retained S & P to render bond rating and investment services to the County in support of new debt offerings. Compl. ¶¶ 16 & 93. "These debt offerings were designed and intended by Citron and Raabe at first to implement their enormous interest rate bet and then later, in 1994, to greatly expand its scope in an increasingly desperate effort to prevent Pool Participants, the Orange County Board of Supervisors and the public from appreciating the deteriorated and deteriorating condition of the Pool." Compl. ¶ 16.
Under the terms of S & P's contract with the County, S & P was required to render bond rating and investment services to the County that were competent, honest, and not deceptive. Compl. ¶ 17. With respect to each debt offering made by the County in 1993 and 1994, S & P entered into a contract called a "Memorandum of Agreement — re Municipal Debt Contract Ratings" ("MOA"). Compl. ¶ 89.
The County contends that S & P breached the MOAs. Compl. ¶¶ 17-18, 89-92, 140-53 & 172-76.
From 1993-94, S & P provided analysis and ratings services to the County, both publicly and privately, for large debt security issues. These analyses and ratings wrongly represented and concluded that the County\'s financial condition and ability to repay such debts were fundamentally sound and safe, and that the County\'s 1993 and 1994 debt issues could and would be repaid in accordance with their terms.
Compl. ¶ 18; see also Compl. ¶¶ 89-91.
S & P's ratings, information, and analysis were important factors in the County's decision to issue its 1993 and 1994 debt securities. Compl. ¶¶ 18, 83 & 137. Without S & P's ratings, information, and analysis, the County would not have wanted or been able to market its debt securities in 1993 and 19...
To continue reading
Request your trial