Ross Sinclaire & Assoc. v. Premier Senior Living, LLC
| Decision Date | 27 June 2012 |
| Docket Number | Case No.: 11-CV-5104 YGR |
| Court | U.S. District Court — Northern District of California |
| Parties | ROSS SINCLAIRE & ASSOC., Plaintiff, v. PREMIER SENIOR LIVING, LLC, ET AL., Defendants. |
Defendants Premier Senior Living, LLC, et al., bring their Petition to Compel Arbitration and Stay Proceedings. Plaintiff Ross Sinclaire & Associates brings a motion for preliminary injunction to prevent those arbitration proceedings from going forward.
Having carefully considered the papers submitted, the admissible evidence, and the pleadings in this action, and for the reasons set forth below, the Court hereby GRANTS the Petition to Compel Arbitration and Stay Proceedings and DENIES the Motion for Preliminary Injunction.
The issue before this Court is whether Defendants Premier Senior Living, LLC, et al., were "customers" of Ross Sinclaire & Associates for purposes of requiring that the present dispute between the parties be arbitrated before the Financial Industry Regulatory Authority. The factsbelow bear on the parties' relationship and the transaction at issue. They are not in dispute unless otherwise indicated.
Plaintiff Ross Sinclaire & Associates ("RSA") is a financial firm and a member of FINRA.1 RSA has a number of divisions, including one that provides brokerage services for customers seeking to invest in or trade securities, and one that works in public and corporate finance, including structuring, pricing and distributing bonds.
Defendant Premier Senior Living, LLC ("PSL") is a limited liability company whose sole member and manager is Aldo Baccala. Baccala is also the sole shareholder and president of Baccala Realty, Inc. and AKPF, Inc., both affiliates of Premier Senior Living, LLC. These companies, collectively "the PSL Defendants," own and operate several senior healthcare and residential assisted living facilities in the southeastern United States.
In 2006, after a meeting between Terrence Ross of RSA and Aldo Baccala, Baccala Realty entered into a "letter agreement" with RSA in which RSA agreed to assist the PSL Defendants with refinancing mortgages on the various properties and raising capital for improvements and operating expenses. On June 15, 2006, Aldo Baccala, on behalf of the PSL Defendants, signed the two-page letter agreement with RSA ("Letter Agreement"). (Declaration of James Goldberg, Dkt No. 40-2 ["Goldberg Dec."], Exh. 1.) The terms of the Letter Agreement provided that RSA would act "as sole underwriter and placement agent...in connection with the sale and placement (the "Transaction(s)") of taxable Variable Rate Demand Notes and/or other securities (the "Bonds")...."(Id.) More specifically, RSA agreed to provide the services necessary for the sale and placement of the Bonds, including, in summary:
(Id., emphasis supplied.)
Thereafter, and presumably to effectuate the PSL Defendants' goals, RSA structured and counseled the PSL Defendants to undertake a complex, sophisticated financing arrangement involving issuance of variable rate bonds. The financing structure contained four key components (collectively, the "Financing Deal"): (1) issuance of the bonds (as to which RSA acted as the underwriter); (2) a bond purchase agreement (pursuant to which RSA acted as the remarketing agent); (3) a letter of credit agreement with a backing financial institution; and, at the behest of the backing financial institution here, (4) an interest rate swap or hedge.2
The first component of the Financing Deal called for PSL to issue approximately $51 million in floating, or variable rate, bonds to refinance its obligations and raise capital. To effectuate this component, the PSL Defendants and RSA entered into a Bond Purchase Agreement. (Goldberg Dec., Exh. 39.) Per the terms of the Bond Purchase Agreement, PSL was the "issuer" of the bonds and RSA was designated, notably, as both the "underwriter" and as the "remarketing agent" for the bonds. (Id.)
The second component of the Financing Deal, set forth both in the terms of the Bond Purchase Agreement and the Remarketing Agreement, established that RSA was authorized to purchase bonds from PSL at a discount and to make its best efforts to remarket them to third parties. (Goldberg Dec., Exhs. 39 and 40.) There is no indication in the record that the PSL Defendants investigated independently the terms or competitiveness of RSA's role as remarketing agent. As the sole remarketing agent, RSA had unfettered discretion to set interest rates on the bonds according to what it determined the market would require to sell the Bonds at par, and to make that decision on a weekly basis. (Goldberg Dec., Exh. 40 and 50.) The interest rate on the bonds, as set by RSA, was not required to be tied to any standard, such as LIBOR or a U.S. Treasury index.3 Under this component of the Financing Deal, RSA received a fee for each bond sold. The PSL Defendants were obligated to pay the third-party purchasers of the Bonds, according to the weekly rate set by RSA, upon the sale of the Bonds.
The third component of the Financing Deal required letters of credit. To enhance the marketability of the Bonds, RSA recommended that the Bonds be secured with a "credit enhancement" in the form of letters of credit ("LOCs"). The Bond Purchasing Agreement required, as a condition of RSA's agreement to act as the remarketing agent, that PSL ensure the LOCs were in full force and effect at the time of closing. (Goldberg Dec., Exh. 39 at §5(b)(iii).) RSA advised the PSL Defendants that the interest rate on the Bonds would be directly related to the LOC bank's credit rating. (Goldberg Dec., Exh. A at 44:22-45:17.) Since an investor buying a bond can tender the bond for cash on any interest-reset date, if the bond is backed by LOCs (which require the bank to pay on the bond until a new investor buys it), the investment for the buyer is less risky. A less risky investment translates to a lower interest rate paid out. As a corollary, an issuing bank's poorcredit rating translates into higher risk of nonpayment, and the higher the risk of nonpayment on the bond, the higher the interest rate on the bonds would have to be for buyers to be willing to invest.
Wachovia Bank, N.A. (the "Bank")4 was one of the possible backing financial institutions that RSA found for the transaction. It ultimately issued LOCs to back the Bonds, secured by the PSL Defendants' real property and other assets. To obtain this proposed "credit enhancement" on the Bond issuance, the Bank required its own credit enhancement. Specifically, the Bank required that PSL agree to pay a flat rate of 1.25% of the face value of the LOCs and, if the LOCs were drawn upon, to pay an additional amount of interest on the amount drawn, accruing at a rate of LIBOR plus 2.25%. It is notable that the arrangement did not require the Bank to maintain a satisfactory credit rating.
The fourth and last component of the Financing Deal was also tied to the issuance of the LOCs. The Bank presented PSL with a term sheet for the LOCs dated May 25, 2007 ("Term Sheet"). In that Term Sheet, the Bank conditioned the issuance of the LOCs on an interest rate swap as follows: "[b]orrowers will be required to enter into an interest rate protection agreement that at a minimum would cap the interest rate at closing." (Goldberg Dec., Exh. 46.)
Upon receipt of the Term Sheet, PSL's chief financial officer, Matt Nizibian ("Nizibian"), immediately forwarded it to RSA for review. RSA's Brian Nurick ("Nurick") responded, on Sunday, May 27, 2007, via email, that the interest rate hedge might subject PSL to a termination fee if terminated prior to the ten-year term. (Goldberg Dec., Ex.17, Ex. D at 93:7-21.)5 On WednesdayMay 30, 2007, Nizibian emailed Nurick that the Bank would be sending over some options in the next few days and that he would "forward [Nurick] his write-up to review and advise." (Goldberg Dec., Exh. 18.) Nurick's response was (Id.)
Nurick initiated an email to Nizibian on Monday, June 4, 2007, asking (Goldberg Dec., Exh. 19.) Early on the morning of June 6, 2007, Nizibian forwarded to Nurick the information he had received from the Bank the day prior about the interest rate hedging alternatives. He relayed that PSL would be sending the signed term sheets to Wachovia "tomorrow" and asked Nurick to review which of "the interest rate hedging alternatives sent by Brant McDuffie ["McDuffie"] from Wachovia" was best and to suggest "any other alternatives ... may be more appropriate in our situation." (Goldberg Dec., Ex. 20 and Ex. D at 38:14-39:12.) He also noted that he would be forwarding that night some additional information that McDuffie had sent later in the day on June 5, and that McDuffie had indicated that Nurick himself could call McDuffie directly with additional questions about alternatives. (Goldberg Dec., Exh. 20.) The Bank presented two main options: an interest rate hedge or "swap," and an interest rate "collar." (Goldberg Dec., Exh. 20 and Exh. D. at 125:14-22.)
Thereafter, and shortly before 8:00 a.m. on June 6, Nurick sent an email to Nizibian saying (Goldberg Dec., Exh. 25.) Around 8:30 a.m. on June 6,...
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