Justinian Capital SPC v. Westlb AG

• Decision Date: 15 August 2012
• Parties: JUSTINIAN CAPITAL SPC, for and on behalf of BLUE HERON SEGREGATED PORTFOLIO, Plaintiff, v. WESTLB AG, New York Branch, WestLB Asset Management (US) LLC, and Brightwater Capital Management LLC, Defendants.
• Court: New York Supreme Court

37 Misc.3d 518
952 N.Y.S.2d 725
2012 N.Y. Slip Op. 22227

JUSTINIAN CAPITAL SPC, for and on behalf of BLUE HERON SEGREGATED PORTFOLIO, Plaintiff,
v.
WESTLB AG, New York Branch, WestLB Asset Management (US) LLC, and Brightwater Capital Management LLC, Defendants.

Supreme Court, New York County, New York.

Aug. 15, 2012.

[952 N.Y.S.2d 727]

Grant & Eisenhofer P.A. for plaintiff.

Hughes Hubbard & Reed LLP for defendants.

SHIRLEY WERNER KORNREICH, J.

[37 Misc.3d 519]This action arises out of the collapse of two special purpose vehicles incorporated in the Cayman Islands, Blue Heron Funding VI, Ltd. and Blue Heron Funding VII, Ltd. (the SPCs), that were formed to invest in securities. Two corresponding companies, Blue Heron Funding VI Inc. and Blue Heron Funding VII, Inc., were incorporated in Delaware. Defendant WestLB AG, New York Branch (WestLB AG), a banking institution incorporated in Germany, served as the sponsor and asset manager of the SPCs, along with WestLB Asset Management LLC (WestLB AM) and Brightwater Capital Management LLC (BWC) (collectively, WestLB). Plaintiff Justinian Capital SPC (Justinian), as the current holder of two series of notes (the Class B Notes), one issued by each of the SPCs, brought suit against WestLB alleging the following causes of action: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) fraud; (4) fraudulent inducement; (5) breach of fiduciary duty; (6) negligence; (7) negligent misrepresentation; and (8) constructive trust/unjust enrichment. WestLB now moves to dismiss based upon documentary evidence, lack of legal capacity (standing and champerty) and failure to state a cause of action. CPLR 3211(1), (3) and (7). Plaintiff opposes. The motion is granted in part and denied in part for the reasons that follow.

I. Procedural History and Background

As discussed infra, the Court declines to address the portions of the motion directed at substantive claims, due to the need for discovery on the champerty issue. Therefore, the Court will not discuss the complex

[952 N.Y.S.2d 728]

factual background surrounding the events leading up to the collapse of the SPCs. Instead, the Court limits its discussion to the events surrounding Justinian's involvement with the SPCs.

It also should be noted that at oral argument, held on May 5, 2011, the Court requested that Justinian provide proof of ownership of the Class B Notes. In a letter dated May 12, 2011, Justinian supplied the Court with the April 1, 2010 Sale and Purchase Agreement (the SPA) between Deutsche Pfandbriefbank AG (DPAG) and Justinian that purported to show that “Justinian took all right, title and interest to the Class B Notes as of April 13, 2010.”

The complaint states “Justinian Capital SPC brings the action for and on behalf of the Blue Heron Segregated Portfolio [37 Misc.3d 520](“Justinian”), by its attorneys, Reed Smith LLP.” ¹ Compl. p. 1.

It further states that “Justinian's predecessors-in-interest invested” in the Class B Notes and explains that “Plaintiff” shall include reference to these predecessors-in-interest and mean Class B Noteholders. Id. at p. 1, n. 2. Justinian admits that it was not the original holder of the Class B Notes nor did it hold them at the time the alleged misconduct occurred. Instead, it contends it purchased them prior to the commencement of this suit, along with “all attendant rights, claims, and/or causes of action they possessed.” Compl. & 33. Neither in its complaint nor in the papers submitted in opposition to this motion does Justinian state the identity of the original Class B Noteholders.

The SPA identifies DPAG as the seller of the Class B Notes. The pertinent provisions of the SPA are as follows:

3.1 “The Seller hereby agrees to sell and the Purchaser hereby agrees to purchase the Assets on the Closing Date on the terms set forth below.

Elsewhere “the Assets” are defined as the Class B Notes and “all the Seller's legal, beneficial and equitable rights and claims for breach of contract, debt, tort, fraud or breach of fiduciary duty or wrong of whatever nature and under any applicable law against any Person arising now or in the future from its original acquisition or investment and subsequent retention or holding of the Notes or interests in the Notes.”

3.1.1 “The Seller shall transfer and assign to the Purchaser full, complete and ( subject to the terms of this Agreement ) unencumbered title to the Assets by delivery of the Notes to the Custodian under the Custody Agreement.”

3.1.2 “In consideration for the Seller's transfer of the Assets, the Purchaser shall pay to the Seller in immediately available funds on the Base Price Due Date $1,000,000 comprised of (a) $500,000 in respect of the Assets comprised of the Blue Heron VI Notes and their respective Related Rights; and (b) $500,000 in respect of the Assets comprised of the Blue Heron VII Notes and their respective Related Rights ...”

4.1 “Upon the Closing Date: (a) the Seller shall be [37 Misc.3d 521]deemed to have transferred and assigned to the Purchaser full, complete and (subject to the terms of this Agreement) unencumbered title to the Assets ...” [emphasis added]

The term “Closing Date” is defined as “two (2) business days after the date this Agreement becomes effective pursuant to Section 26.” That section states that:

[952 N.Y.S.2d 729]

This Agreement shall be effective upon execution and delivery of this Agreement by the parties hereto and delivery by Purchaser to Seller within 7 business days of the date of this Agreement of (i) a letter in the form of Schedule 1, executed by CIBC [the Custodian] and Purchaser, (ii) a letter in the form of Schedule 2, executed by counsel to Purchaser.

The copy of the SPA submitted by plaintiff appears to be fully executed with signatures from both parties. Plaintiff also submitted the two letters referenced in Section 26 and a statement from CIBC purporting to show that, as of January 31, 2011, it was holding the notes on behalf of Justinian. Finally, Section 5.2 of the SPA provides for a “Purchase Price Adjustment” whereby Justinian will pay DPAG 80% or 85% (depending on when the purchase price is paid) of the net proceeds of any settlement or judgment with respect to the Class B Notes.

II. Discussion

On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts. Amaro v. Gani Realty Corp., 60 A.D.3d 491, 876 N.Y.S.2d 1 (2009); Skillgames, L.L.C. v. Brody, 1 A.D.3d 247, 250, 767 N.Y.S.2d 418 (1st Dept.2003) (citing McGill v. Parker, 179 A.D.2d 98, 105, 582 N.Y.S.2d 91 (1992)); see also Cron v. Hargro Fabrics, 91 N.Y.2d 362, 366, 670 N.Y.S.2d 973, 694 N.E.2d 56 (1998). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action. Skillgames, id. (citing Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275, 401 N.Y.S.2d 182, 372 N.E.2d 17 (1977)). Deficiencies in the complaint may be remedied by affidavits submitted by the plaintiff. Amaro, 60 A.D.3d at 491, 876 N.Y.S.2d 1. “However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration.” Skillgames, 1 A.D.3d at 250, 767 N.Y.S.2d 418 (citing [37 Misc.3d 522]Caniglia v. Chicago Tribune–New York News Syndicate, 204 A.D.2d 233, 612 N.Y.S.2d 146 (1st Dept.1994)). Further, a motion to dismiss will succeed if “documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law [citation omitted].” Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 774 N.E.2d 1190 (2002); Leon v. Martinez, 84 N.Y.2d 83, 88, 614 N.Y.S.2d 972, 638 N.E.2d 511 (1994).

A. Defendant BWC

Justinian alleges that BWC is a limited liability company “incorporated under the laws of the State of New York” and “is a wholly-owned subsidiary of WestLB AG, and a division of WestAM.” Compl. & 16. Defendants claim that BWC is an unincorporated division of WestLB AM with no independent existence. Mauhs Affirm. & 2, 6. Justinian's only response is that “BWC held itself out to be a separate legal entity.” Pl. Mem. of Law, p. 50. Justinian does not allege any facts to suggest that WestLB AG or WestLB AM held BWC out to be an independent entity, as opposed to merely a division or a group of asset managers. All claims pled against BWC, therefore, are dismissed. See Sheldon v. Kimberly–Clark Corp., 111 A.D.2d 912, 490 N.Y.S.2d 810 (2d Dept.1985) (unincorporated division of corporation not jural entity amenable to suit in own right).

[952 N.Y.S.2d 730]

B. Standing and Champerty

As a threshold matter, defendants argue that Justinian does not actually own the Class B Notes and is not a proper party to this litigation. Alternatively, defendants argue that if Justinian actually owns the Class B Notes as a result of a valid purchase from the original noteholders, it purchased...