Monterey Bay Military Hous., LLC v. Ambac Assurance Corp.

• Decision Date: 30 March 2021
• Docket Number: 19 Civ. 9193 (PGG)
• 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.
• Court: U.S. District Court — Southern District of New York

531 F.Supp.3d 673

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.

19 Civ. 9193 (PGG)

United States District Court, S.D. New York.

Signed March 30, 2021

Filed March 31, 2021

George Robert Gage, Jr., William B. Fleming, William Fleming, Gage, Spencer & Fleming, LLP, Joseph Myer Sanderson, Lamina E. Bowen, Kirkland & Ellis LLP, New York, NY, Jeffrey L. Willian P.C., Jeffrey L. Willian, Benjamin T. Kurtz, Donna Marie Welch, Pro Hac Vice, Pratik Kumar Ghosh, Pro Hac Vice, Yates McLaughlin French, Kirkland & Ellis LLP, Chicago, IL, Michael Phillip Esser, Kirkland and Ellis LLP, San Francisco, CA, for Plaintiff Monterey Bay Military Housing, LLC.

George Robert Gage, Jr., William B. Fleming, William Fleming, Gage, Spencer & Fleming, LLP, Joseph Myer Sanderson, Lamina E. Bowen, Kirkland & Ellis LLP, New York, NY, Jeffrey L. Willian P.C., Jeffrey L. Willian, Benjamin T. Kurtz, Donna Marie Welch, Pratik Kumar Ghosh, Yates McLaughlin French, Kirkland & Ellis LLP, Chicago, IL, Michael Phillip Esser, Kirkland and Ellis LLP, San Francisco, CA, for Plaintiffs 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, AMC West Housing LP, Lackland Family Housing, LLC, Vandenberg Housing LP.

George Robert Gage, Jr., William B. Fleming, William Fleming, Gage, Spencer & Fleming, LLP, Joseph Myer Sanderson, Lamina E. Bowen, Kirkland & Ellis LLP, New York, NY, Jeffrey L. Willian P.C., Benjamin T. Kurtz, Jeffrey L. Willian, Donna Marie Welch, Pratik Kumar Ghosh, Yates McLaughlin French, Kirkland & Ellis LLP, Chicago, IL, Michael Phillip Esser, Kirkland and Ellis LLP, San Francisco, CA, for Plaintiff AETC Housing LP.

Steven G. Madison, Quinn, Emanuel, Urquhart, Oliver & Hedges, LLP, Noah Samuel Helpern, Browne George Ross LLP, Thomas Scott Mills, Jr., Quinn Emanuel Urquhart and Sullivan, Los Angeles, CA, Michael Barry Carlinsky, Rachel Elizabeth Epstein, Quinn Emanuel Urquhart & Sullivan LLP, New York, NY, for Defendant AMBAC Assurance Corporation.

Scott Sonny Balber, Emily Abrahams, John O'Donnell, Pro Hac Vice, Michael Paul Jones, Herbert Smith Freehills New York LLP, Justin Raphael, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendant Jefferies Mortgage Finance, Inc.

Scott Sonny Balber, Emily Abrahams, John O'Donnell, Michael Paul Jones, Herbert Smith Freehills New York LLP, Justin Raphael, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendants Jefferies & Company Inc., Jefferies L.L.C., Jefferies Group LLC.

Reed Michael Brodsky, Amer Shahid Ahmed, Anne Marie Champion, Gibson, Dunn & Crutcher, LLP, New York, NY, Joseph Richard Rose, Stephen William Henrick, Gibson Dunn & Crutcher LLP, San Francisco, CA, Robert Edward Dunn, Gibson Dunn Crutcher LLP, Palo Alto, CA, for Defendant Danny Ray.

David L. Goldberg, Pro Hac Vice, Katten, Muchin, Rosenman LLP, David L. Goldberg, Sean Akchin, Katten Muchin Rosenman, LLP, Zachary Denver, Herrick, Feinstein LLP, New York, NY, Yonaton M. Rosenzweig, Katten Muchin Rosenman LLP, Los Angeles, CA, for Defendant Chetan Marfatia.

MEMORANDUM OPINION & ORDER

PAUL G. GARDEPHE, U.S.D.J.:

This civil RICO action was filed in the Northern District of California in 2017. Plaintiffs are eighteen entities engaged in housing construction at military bases nationwide. Plaintiffs allege that Defendants – lenders, loan servicers, and insurers for Plaintiffs’ military housing projects – "formed a RICO enterprise to illegally profit on the financing" of these projects, and assert substantive RICO and RICO conspiracy claims, as well as state law claims, against them. (See Second Amended Complaint ("SAC") (Dkt. No. 256) ¶¶ 4, 251-307)

In September 2019, after two years of litigation, the district court in the Northern District of California (the "California Court") denied Defendants’ motions to dismiss the SAC for failure to state a claim, but determined that it lacked personal jurisdiction over all but one Defendant. Accordingly, the court sua sponte transferred the case to the Southern District of New York, where it was assigned to this Court.

Defendants have moved for reconsideration of the California Court's order denying their motions to dismiss. For the reasons stated below, this Court concludes that (1) the California Court improperly ruled on the merits of Defendants’ motions to dismiss for failure to state a claim, despite determining that it lacked personal jurisdiction over all but one of the Defendants; but (2) Defendants were not prejudiced by the California Court's ruling, except to the extent that the California Court determined that (a) the SAC sufficiently pleads that Defendants Ambac Assurance Corporation ("Ambac") and its managing director, Chetan Marfatia, were Plaintiffs’ fiduciaries; and (b) that Plaintiffs Sill Housing, LLC and Lackland Family Housing, LLC adequately plead predicate acts of mail and wire fraud against Defendants Ambac and Marfatia. This Court will thus grant Defendants’ motions to reconsider and vacate those portions of the California Court's order denying dismissal of (a) Plaintiffs’ breach of fiduciary duty claims against Ambac and Marfatia; and (b) the RICO claims brought by Sill Housing, LLC and Lackland Family Housing, LLC against Ambac and Marfatia. Those claims will be dismissed.¹ Defendants’ motions for reconsideration will otherwise be denied.

BACKGROUND

I. FACTS ²

The United States Armed Forces are authorized, pursuant to the Military Housing Privatization Initiative of 1996 (the "MHPI"), to contract with private developers for the development and construction of housing for military families on military bases. (See SAC (Dkt. No. 256) ¶ 1) The purpose of these public-private partnerships is "to attract private sector financing, expertise and innovation to provide necessary housing faster and more efficiently than traditional [m]ilitary [c]onstruction processes would allow." (Id. ¶ 85).

Plaintiffs are eighteen "MHPI project entities" (id. ¶ 1) that operate sixteen privatized military housing projects (collectively, the "Projects") at twenty military bases in fifteen states across the United States.³ In twelve of the Projects, the U.S. Army entered into a partnership with a private developer, whereby the Army leased land and housing to the developer for 50 years, and the developer provides day-to-day management of the Project. (Id. ¶ 2) In the four remaining Projects, the U.S. Air Force contracted with a private developer, providing land and housing pursuant to a 50-year lease, while the developer provides day-to-day management of the Projects. (Id. ¶ 3) The private developers for the Projects are Balfour Beatty Communities, LLC ("BBC"); Corvias Group, LLC ("Corvias"); Clark Realty Capital, L.L.C. ("Clark"); and Michaels Military Housing, LLC ("Michaels"). (Id. ¶¶ 2-3)

A. Ray, GMAC, and Ambac's Initial Dealings with the Projects

In the years immediately following the enactment of the MHPI, the Projects "collectively needed billions of dollars of long-term financing" for development and construction. (Id. ¶ 4) A number of financial institutions competed to provide loan origination services for the Projects. (Id. ¶ 93) GMAC Commercial Mortgage Corporation ("GMAC") was one such entity. "In order to set himself apart from the competition[,] ... [Defendant Danny Ray, GMAC's managing director,] expressly solicited in writing" that, if selected, he and his GMAC team would not only provide the services offered by a traditional lender, but would also provide financial advisory services. Due in part to Ray's unique promise to "assume the trusted role of Financial Advisor," a promise he made both to Corvias and to the Army's consultant for the Projects – Jones Lang LaSalle ("LaSalle") – Ray and GMAC were hired to finance construction for the Fort Meade Project, the first of the Projects. (Id. ¶¶ 93, 97-98, 100) As discussed below, Ray made the same promise in connection with subsequent Projects. "Ray specifically represented to the developers associated with each Project and to the Army that GMAC would act under his direction as a fiduciary and that he would ... negotiate the most competitive market rate and efficient financial structure." (Id. ¶ 9; see also id. ¶ 96) He likewise represented "that the fiduciary services provided by GMAC were distinct and separate from the more traditional investment banker services [GMAC] provided ‘as lender.’ "⁴ (Id. ¶ 95)

Ray chose Defendant Ambac, an AAA-rated insurance company, to insure, or "credit enhance," the loan for the Fort Meade Project, thereby permitting GMAC to syndicate the loan by selling AAA-rated bonds. (Id. ¶¶ 6, 15) Ray promised Corvias and LaSalle that he "would use good faith and best efforts to negotiate credit enhancement fees with Ambac," but Ray did not engage in meaningful negotiations with Ambac concerning its fees. (Id. ¶ 22-23) Ambac's managing director Chetan Marfatia, for his part, "represented that Ambac...