Monterey Bay Military Hous. v. AMBAC Assurance Corp.
| Decision Date | 14 September 2021 |
| Docket Number | Civil Action 19 Civ. 9193 (PGG) (SLC) |
| Court | U.S. District Court — Southern District of New York |
| Parties | MONTEREY BAY MILITARY HOUSING, LLC, MONTEREY BAY LAND, LLC, MEADE COMMUNITIES LLC, FORT BLISS/WHITE SANDS MISSILE RANGE HOUSING LP, RILEY COMMUNITIES LLC, FORT LEAVENWORTH FRONTIER HERITAGE COMMUNITIES, I, LLC, FORT LEAVENWORTH FRONTIER HERITAGE COMMUNITIES, II, LLC, CARLISLE/PICATINNY FAMILY HOUSING LP, BRAGG COMMUNITIES LLC, FORT DETRICK/WALTER REED ARMY MEDICAL CENTER LLC, PICERNE-FORT POLK FUNDING, LLC, RUCKER COMMUNITIES LLC, STEWART HUNTER HOUSING LLC, SILL HOUSING LLC, AETC HOUSING LP, AMC WEST HOUSING LP, LACKLAND FAMILY HOUSING, LLC, and VANDENBERG HOUSING LP, Plaintiffs, v. AMBAC ASSURANCE CORPORATION, JEFFERIES MORTGAGE FINANCE, INC. JEFFERIES & COMPANY, INC., JEFFERIES LLC, JEFFERIES GROUP LLC, DANNY RAY, AND CHETAN MARFATIA, Defendants. |
Before the Court is Plaintiffs'[1] motion to strike Ambac's, the Jefferies Defendants', and Ray's Unclean Hands Defense, or, in the Alternative, for a Protective Order (the “Motion to Strike” (ECF No. 334)), and the cross-motion of Defendants Jefferies Mortgage Finance, Inc. Jefferies & Company, Inc., Jefferies LLC, and Jefferies Group LLC (together, “Jefferies”) for leave to file an amended answer (“Jefferies' Cross-Motion” (ECF No. 338)). Following a conference on August 12, 2021, the Court denied the Motion to Strike granted Jefferies' Cross-Motion, and explained that its reasoning would be set out in further detail in this Opinion and Order. (ECF No. 352).
The factual background of this action is set out in detail in the Memorandum Opinion & Order issued by the Honorable Paul G. Gardephe on March 31, 2021. See Monterey Bay Mil. Hous., LLC v. Ambac Assurance Corp., No. 19 Civ. 9193 (PGG), 2021 WL 1226984 (S.D.N.Y. Mar. 31, 2021) (“Monterey Bay I”). The Court incorporates that factual summary, and all defined terms. Very briefly, Plaintiffs are eighteen “project entities” that operate, pursuant to the Military Housing Privatization Initiative of 1996 (“MHPI”), 16 privatized military housing projects (the “Projects”) at 20 military bases throughout the United States. Id. at *2. The Projects “‘collectively needed billions of dollars of long-term financing' for development and construction.” Id. at *2 (quoting Second Amended Complaint (“SAC”) (ECF No. 256) ¶ 4). Among the financial institutions that provided loan origination services for the Projects was non-party GMAC Commercial Mortgage Corporation (“GMAC”), of which Defendant Danny Ray was a managing director. Id. “Ray chose Defendant Ambac, an AAA-rated insurance company to insure, or ‘credit enhance,' the load for the Fort Meade Project, thereby permitting GMAC to syndicate the loan by selling AAA-rated bonds.” Id. at *3. Defendant Chetan Marfatia was managing director of Ambac. Id. In 2009, Defendant Jefferies Mortgage Finance, Inc. (“Jefferies Mortgage”) purchased Ray's military housing business from GMAC's successor, non-party Capmark, and Defendant Jefferies & Co. (“Jefferies & Co.”) hired Ray and his team to continue the business. Id. at *7.
Plaintiffs assert claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962 et seq. (“RICO”) and other state law theories, arising out of alleged fraud the Defendants committed in connection with financing the development and renovation of military housing projects. (ECF No. 353 at 7). Plaintiffs claim that, among other things, Defendants set “above-market credit spread on Project loans” that enable them to “realiz[e] secret profits based on that above-market interest rate, ” “manipulated the ‘shadow ratings'” that Ray, GMAC, Ambac, and Marfatia “claimed were necessary for the Projects' credit enhancement, ” misrepresented that the ratings agencies required bond insurance and a surety bond on the Projects' loans, entered into “stealth” credit enhancement agreements with Ambac, and required the Projects to accept an “original issue discount” (“OID”), even though there was “no economic purpose” for doing so, thereby enabling “Ray and GMAC to make millions in profits on [] pre-closing bond sales.” Monterey Bay I, 2021 WL 1226984 at *4-6.
In each loan agreement for the Projects, the respective “Plaintiff pledged as collateral, inter alia, its interest in the land on which the military housing projects were intended to be developed, as well as the housing units and related amenities and infrastructure that [P]laintiffs would use the loan proceeds to build.” (ECF No. 338-2 at 146 ¶ 6). “[S]everal factors, including the condition of the collateral and the borrower's ability and willingness to properly maintain the collateral that would be pledged under the loan, ” were relevant to the lenders'-including Jefferies'-decision about what interest rate to offer on the loans to the Projects. (Id.) Jefferies' Mortgage, in particular, as part of the due diligence process on the two loans it issued, commissioned environmental studies to “assess[] how the properties had been maintained, and whether there were observable instances of mold, leaks, bugs, asbestos, or water contamination at the properties” that were to collateralize the loans. (Id.) Jefferies Mortgage also required the Plaintiff on each of the two loans in which it was involved, to:
(i) represent that aside from issues disclosed as part of the environmental investigations, the borrower was in compliance with all environmental, zoning, and/or land use laws; (ii) agree that it would not commit waste or permit material impairment of the housing units, related amenities, and other assets that served as collateral; and (iii) agree to keep the premises in good repair.
(Id.) Jefferies maintains that it would not have entered into the loan transactions had it known Plaintiffs made false representations concerning the loans, or, at least, might have charged a higher interest rate. (See ECF No. 353 at 31). Similarly, each contract between Plaintiffs and Ambac contained a “Security Instrument” that provided the lenders and Ambac “a security interest in the land, housing, and fixtures of the [P]rojects, ” permitting Ambac, in the event of a Plaintiff's failure to repay its loan, to “seek recourse under the Security Instruments . . . .” (ECF No. 342 at 11). Under these Security Instruments, “Plaintiffs promised . . . that they would ‘not commit waste or permit material impairment or deterioration” of the Projects, but “have broken that promise by allowing the deterioration of their military housing [P]rojects . . . .” (Id. At 12). As a result of Plaintiffs' “mismanagement, negligence, and fraud, ” Jefferies asserts that Plaintiffs have lowered the values of the Project properties, “impairing Ambac's security interest, ” and “significantly increased the likelihood that Plaintiffs will default on their loans because of lost rental income after soldiers vacate housing rendered uninhabitable by Plaintiffs' misconduct.” (Id. (citing ECF No. 324 at 41-42).
In 2018 and 2019, news reports appeared regarding investigations by Congress, “the Air Force Office of Special Investigations, the Federal Bureau of Investigation, and the Government Accountability Office into the business practices of the developers backing the Plaintiffs, including [P]rojects managed by the Plaintiffs (the “Investigations”).” (ECF No. 339 at 10; see ECF Nos. 341-1 - 341-9; 342 at 12-14). The Investigations found that the “developers behind the Plaintiffs” (ECF No. 339 at 10) had “falsified maintenance records” to secure incentive fees, (ECF No. 341-7 at 2), engaged in a “history of neglect” of military housing resulting in “mold and other substandard conditions” that injured the military families who lived at Fort Meade and elsewhere. (ECF No. 341-8 at 2-3; see ECF No. 341-8 at 3; 341-9 at 5). Some of the families commenced lawsuits against the military housing contractors, alleging that their negligence resulted in poisoning and other injuries to the families. (ECF Nos. 341-1 at 17; 341-8 at 2). The dangerous conditions in some of the Projects may date as far back as the adoption of the MHPI in 1996. (ECF No. 341-8 at 3). Indeed, Plaintiffs do not dispute that most or all of the properties involved in the Projects have issues with lead paint and mold. (ECF No. 353 at 11).
Jefferies Mortgage asserts that if it “had known the truth about the [developers'] inability (or unwillingness) to properly maintain the properties that they would use [Jefferies Mortgage's] funds to develop, [it] might: (i) never have made the loans in the first place; or (ii) have demanded that Sill and Bliss pay a higher interest rate to compensate [it] for the otherwise hidden risk associated with allowing the Plaintiffs to manage their collateral.” (ECF No. 339 at 11).
On August 28, 2017, Plaintiffs filed the original complaint in this action in the Northern District of California (ECF No 1). See Monterey I, 2021 WL 1226984, at *9. Ambac filed a motion, in which Marfatia and Jefferies joined, to transfer venue to this District pursuant to 28 U.S.C. § 1404(a) (the “Transfer Motion”). Id. (citing ECF Nos. 39, 47, 91). While the Transfer Motion was pending, Plaintiffs filed an amended complaint (the “FAC”), which the Defendants moved to dismiss (the “Motions to Dismiss”). (ECF Nos. 60, 62-64, 66, 71). On January 2, 2018, the California court denied the Transfer Motion. (ECF No. 108). On July 17, 2018, the California court granted Defendants' Motions to Dismiss for lack of personal jurisdiction, except as to the Monterey Bay Plaintiffs' claims against Ambac....
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