Lone Star Fund V (U.S.), L.P. v. Barclays Bank Plc

• Citation: 594 F.3d 383
• Decision Date: 11 January 2010
• Docket Number: No. 08-11038.,08-11038.
• Parties: LONE STAR FUND V (U.S.), L.P.; LSF5 Bond Holdings LLC, Plaintiffs-Appellants, v. BARCLAYS BANK PLC; Barclays Capital, Inc., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

594 F.3d 383

LONE STAR FUND V (U.S.), L.P.; LSF5 Bond Holdings LLC, Plaintiffs-Appellants, v. BARCLAYS BANK PLC; Barclays Capital, Inc., Defendants-Appellees.

No. 08-11038.

United States Court of Appeals, Fifth Circuit.

January 11, 2010.

David E. Keltner (argued), Marianne Marsh Auld (argued), Kelly, Hart & Hallman, L.L.P., Fort Worth, TX, for Plaintiffs-Appellants.

Mark Tad Josephs, William Ross Forbes, Jr., Jackson Walker, L.L.P., Dallas, TX, Kathleya Chotiros, Evan A. Davis (argued), Rachel Anne Goldbrenner, Mitchell A. Lowenthal, Cleary, Gottlieb, Steen & Hamilton, New York City, for Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before JONES, Chief Judge, and GARZA and STEWART, Circuit Judges.

EDITH H. JONES, Chief Judge:

Lone Star Fund V (U.S.), L.P. and LSF5 Bond Holdings, LLC (collectively "Lone Star" or "Appellants") allege that Barclays Bank PLC and Barclays Capital, Inc. (collectively "Barclays" or "Appellees") engaged in a $60 million fraud relating to mortgage-backed securities that Barclays sold to Lone Star. The district court dismissed the case for failure to state a claim. Because Lone Star fails to allege a misrepresentation in light of the "repurchase or substitute" clauses in the parties' mortgage-backed securities contracts, we affirm the district court's dismissal.

I. BACKGROUND

Among its other enterprises, Barclays sells mortgage-backed securities. As their name suggests, mortgage-backed securities are secured by pools of mortgages. To grossly simplify the series of transactions involved here, mortgage-backed securities work in the following manner: Mortgages are collected into a trust, mortgage payments are sent to that trust, then pooled, and then paid out to the holders of the securities. The quality of the mortgage pool is crucial. If the mortgage pool comprises loans whose borrowers consistently pay in a timely manner, securities holders will receive a steady stream of income. In contrast, if the mortgage pool is "sub-prime," or at risk for missed payments, then securities holders may not receive the forecast income stream. Delinquent mortgages result in smaller payment streams and smaller payments to securities holders.

This dispute involves two sets of mortgage-backed securities that Barclays sold to Lone Star. To create the securities, in 2006, Barclays purchased residential mortgages from NC Capital Corporation ("New Century") pursuant to the Mortgage Loan Purchase Agreement ("MLPA"). According to the MLPA's terms, New Century agreed to indemnify and hold harmless Barclays (or provide contribution rights where indemnity might not be available) against all losses, claims, damages, and liabilities in a variety of circumstances, including any breach of a representation about the mortgages (such as payment defaults), and any claims made against Barclays by third parties.¹ This allowed Barclays to serve as an effective distributor of mortgage-backed securities. New Century would bear the risk of having sold bad mortgage loans, while Barclays could focus on packaging the loans into securities and marketing them to potential investors.

After purchasing the mortgages from New Century, Barclays pooled them into two separate trusts: the BR2 Trust and the BR3 Trust. The BR2 and BR3 Trusts issued the securities to Lone Star in two separate transactions. In May 2007, Barclays Capital, Inc. as underwriter, sold approximately $45 million in securities backed by the BR2 Trust mortgages to LSF5 Bond Holdings, LLC pursuant to a prospectus and prospectus supplement (the "BR2 Supplemental Prospectus"). In June 2007, in a similar transaction, Barclays Capital, Inc. underwrote approximately $16 million of securities backed by the BR3 Trust to LSF5 Bond Holdings, LLC pursuant to a prospectus and prospectus supplement (the "BR3 Supplemental Prospectus"). Both the BR2 and BR3 Supplemental Prospectuses included, inter alia, representations and warranties guaranteeing the quality of the mortgage pools, which together contained more than ten thousand residential mortgages.²

Shortly after the purchases, Lone Star discovered that 290 mortgages in the BR2 Trust were more than thirty days overdue ("delinquent") at the time of purchase. In a letter dated November 7, 2007, Barclays admitted that 144 of the mortgages were delinquent and promptly substituted new mortgages to replace any that were still delinquent. Lone Star investigated the BR3 Trust further and found that 848 of the loans in the BR3 Trust had been delinquent at the time of purchase.

In January 2008, Lone Star sued Barclays under both state and federal law for material misrepresentations and fraud in a Dallas, Texas state court. Lone Star alleged that, contrary to Barclays' representations, the BR2 and BR3 Trusts had a substantial number of delinquent loans, and that the misrepresentations constituted fraud. Barclays removed the case to federal court pursuant to 28 U.S.C. §§ 1334(b) and 1452(a). The district court accepted the removal, upholding jurisdiction because the dispute was "related to" New Century's bankruptcy. Following the removal, Barclays moved to dismiss the case pursuant to Fed. Rule Civ. Proc. 12(b)(6) for Lone Star's failure to state a claim. The district court granted the motion. Lone Star appeals.

II. JURISDICTION

Before discussing the merits, this court must first address the issue of subject matter jurisdiction, which is reviewed de novo. Gasch v. Hartford Accident & Indem. Co., 491 F.3d 278, 281 (5th Cir. 2007). Bankruptcy jurisdiction, like all federal jurisdiction, must be based in statute. In re Bass, 171 F.3d 1016, 1022 (5th Cir.1999). In this case, the MLPA's indemnity provisions are sufficient to create a dispute that is "related to" New Century's bankruptcy. 28 U.S.C. § 1334(b). Federal courts have "related to" subject matter jurisdiction over litigation arising from a bankruptcy case if the "proceeding could conceivably affect the estate being administered in bankruptcy." In re TXNB Internal Case, 483 F.3d 292, 298 (5th Cir.) (citation omitted), cert. denied, 552 U.S. 1022, 128 S.Ct. 613, 169 L.Ed.2d 393 (2007). "Related to" jurisdiction includes any litigation where the "outcome could alter, positively or negatively, the debtor's rights, liabilities, options, or freedom of action or could influence the administration of the bankrupt estate." Id. Barclays maintains that because the MLPA renders New Century liable for all damages that could be imposed on Barclays by this litigation, the district court had jurisdiction to rule on the case.

On appeal, Appellants have supplemented their argument and contend that "related to" jurisdiction only arises if claims for contribution or indemnity have "accrued." Appellants mean that a right to indemnity or contribution must be established such that no further litigation is required to substantiate such rights against the debtor. Their reliance for this proposition on the Third Circuit's decision In re Federal-Mogul Global, Inc., 300 F.3d 368, 382 (3d Cir.2002), is misplaced. Federal-Mogul concerned tort contribution principles where the debtor's liability for asbestos-caused injuries would ultimately have to be litigated before contribution rights would "accrue" in favor of other producers of asbestos products. We take no position on the Federal-Mogul situation. Compare Arnold v. Garlock, Inc., 288 F.3d 234, 238-39 (5th Cir.2002) (holding that absent a judgment against a defendant at time of removal, common law contribution could not give rise to "related to" jurisdiction). In this case, Barclays relies heavily, if not exclusively, on contractual indemnity provisions with New Century containing representations about the quality of the mortgage loans purchased by Barclays, which are nearly identical to the representations Barclays made to Lone Star. This circuit has already ruled, moreover, that contractual indemnification rights may give rise to "related to" jurisdiction. See In re Stonebridge Techs., Inc., 430 F.3d 260, 266 (5th Cir.2005) (holding that a debtor's letter of credit obligation triggered "related to" jurisdiction in a dispute between two non-bankrupt third parties).

III. DISCUSSION

Appellate review of a district court's dismissal for failure to state a claim under Rule 12(b)(6) is de novo. Jones v. Greninger, 188 F.3d 322, 324 (5th Cir. 1999). The ultimate question in a Rule 12(b)(6) motion is whether the complaint states a valid claim when all well-pleaded facts are assumed true and are viewed in the light most favorable to the plaintiff. In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007). The court's review is limited to the complaint, any documents attached to the complaint, and any documents attached to the motion to dismiss that are central to the claim and referenced by the complaint. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir.2000). The court's task is to determine whether the plaintiff has stated a legally cognizable claim that is plausible, not to evaluate the plaintiff's likelihood of success. Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). Further, as the claims sound in fraud and negligent misrepresentation, Appellants must plead the misrepresentations with particularity under Fed. Rule Civ. Proc. 9(b). Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 723-24 (5th Cir.2003).³

All of Appellants'⁴ various claims⁵ are predicated upon Barclays' alleged misrepresentation that there were no delinquent loans in the BR2 and BR3 Trusts when Lone Star purchased the securities. Consequently, to prevail, Appellants must successfully allege both that Barclays represented that the BR2 and BR3 Trusts had no delinquent mortgages and that the representations were false when made. We accept as true for present purposes that there were delinquent mortgages in the trusts when Lone Star purchased the securities. App...