Water Works Bd. of Birmingham v. U.S. Bank N.A.

• Decision Date: 10 June 2020
• Docket Number: CIV. NO. 4:17-CV-04113-LLP
• Parties: THE WATER WORKS BOARD OF THE CITY OF BIRMINGHAM; WASHINGTON SUBURBAN SANITARY COMMISSION EMPLOYEES' RETIREMENT PLAN; ATLANTIC GLOBAL YIELD OPPORTUNITY MASTER FUND, L.P.; AND ATLANTIC GLOBAL YIELD OPPORTUNITY FUND, L.P., Plaintiffs, v. U.S. BANK NATIONAL ASSOCIATION, Defendant.
• Court: U.S. District Court — District of South Dakota

THE WATER WORKS BOARD OF THE CITY OF BIRMINGHAM;WASHINGTON SUBURBAN SANITARY COMMISSION EMPLOYEES' RETIREMENT PLAN;ATLANTIC GLOBAL YIELD OPPORTUNITY MASTER FUND, L.P.; ANDATLANTIC GLOBAL YIELD OPPORTUNITY FUND, L.P., Plaintiffs, v. U.S. BANK NATIONAL ASSOCIATION, Defendant.

CIV. NO. 4:17-CV-04113-LLP

UNITED STATES DISTRICT COURT DISTRICT OF SOUTH DAKOTA SOUTHERN DIVISION

June 10, 2020

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING MOTION TO EXCLUDE EXPERT TESTIMONY AND DENYING MOTION FOR SUMMARY JUDGMENT AND MOTION TO SEVER

Pending before the Court are USB's Motion for Summary Judgment, Doc. 98, Motion to Exclude Expert Testimony of Peter Vinella, Doc. 109, and Motion to Sever, Doc. 112. For the following reasons, the Motion to Exclude Expert Testimony is granted in part and denied in part and the Motion for Summary Judgment and Motion to Sever are denied.

BACKGROUND

Anderson, Burnham and WLCC

In 2013, Timothy Anderson ("Anderson") began doing legal work in the area of economic development for the Wakpamni Lake Community Corporation ("WLCC"). ("Statement of Material Facts "SOMF" 103.) WLCC is a corporation organized under the laws of the Oglala Sioux Tribe, a federally-recognized Indian Tribe, and the Wakpamni Lake Community¹, and is wholly-owned by the Wakpamni Lake Community. (SOMF 4.) In approximately April 2014, while Anderson was a partner in the law firm Dilworth Paxson, LLP, he attended a conference focused on tribal economic development and while there, was asked byWLCC to attend a meeting wherein John Galanis, father of Jason Galanis, presented the idea for issuing taxable revenue bonds to fund construction projects in the Wakpamni Lake Community. (SOMF 103-106.) John Galanis (a/k/a "Yanni") connected Anderson with Burnham Securities, Inc. ("Burnham") based in New York, New York, and his son, Jason Galanis, to serve as the Placement Agent in the WLCC Bond offerings. (SOMF 107.)

Hugh Dunkerley ("Dunkerley") was an investment banker at Burnham working on the WLCC bond deal. (Pentelovitch Decl. Ex. 49, 1005:11-13.) Burnham hired Anderson and his firm, Dilworth Paxon, to serve as its counsel in the WLCC bond offerings. (SOMF 38, 45-46.) Anderson received written conflict waivers from Burnham and WLCC in order to represent Burnham in the WLCC bond issuances. (SOMF 113.)

Acquisition of Hughes Investment Management by GMT Duncan

Dunkerley and Jason Galanis planned to acquire an investment advisor firm, Hughes Capital Management owned by Frankie Hughes, and have Michelle Morton ("Morton"), then a founder and CEO of GMT Duncan, run Hughes after the acquisition. (Pentelovitch Decl., Ex. 48, Trial Tr. 932:17-933:15; SOMF 222.) Hughes was a Registered Investment Advisor that had served for many years as the investment manager to each of Birmingham Water, Washington Suburban, and The Chicago Transit Authority Retiree Health Care Trust ("RHCT"). (SOMF 40.) Hughes had discretionary authority to invest money for these entities within certain guidelines. (Pentelovitch Decl. Ex. 4, Baker Dep. 20:8-21:2; Ex. 9, Johnson Dep. 82:2-12.) The purchase of Hughes Capital would thus provide a client base for the bonds. (Pentelovitch Decl. Ex. 48, Trial Tr. 933:9-12.)

In late August 2014, Washington Suburban and Birmingham Water were informed that GMT Duncan, owned by Morton, would be purchasing Hughes and that Frankie Hughes would be retained for two years after the purchase. (Pentelovitch Decl. Ex. 4, Baker Dep., 32:7-23; Ex. 9, Johnson Dep. 98:8-13.) On September 1, 2014, Hughes filed a Form ADV with the Securities and Exchange Commission listing GMT Duncan as the owner of Hughes effective August 12, 2014, and listing Morton and Richard Deary ("Deary") as partners in GMT Duncan. (SOMF 351.)

USB as Indenture Trustee

Anderson had suggested the U.S. Bank National Association ("USB") would be a good fit as the indenture trustee on the WLCC bond offerings because USB was a well-known and reputable financial institution with "serious experience in tribal Indian Country." (Murzyn Decl. Ex. 122, Trial Tr. 527-28.) USB is a member of the Federal Deposit Insurance Corporation ("FDIC") and is a "financial institution" subject to the provisions of the Bank Secrecy Act ("BSA"). (SOMF 24, 25.) USB is engaged in the corporate trust business through its division called Global Corporate Trust Services ("GCTS") and was known in the corporate trust industry as being one of the largest and most active indenture trustees in the market. (SOMF 26; Murzyn Decl. Ex. 7, Graham Dep. at 58:19-59:16.)

Anderson contacted Keith Henselen ("Henselen") at USB to determine USB's interest and pricing to serve as indenture trustee on the WLCC bond issuances. (Murzyn Decl. Ex 8, Henselson Dep. 27:10-21.) USB's counsel, who had practiced in the area of indenture trusts and public finance since 1982, had not previously heard of Burnham prior to the WLCC Bond transactions, and neither Henselen, nor his supervisor Robert Von Hess ("Von Hess"), had any prior experience with Burnham. (Murzyn Decl. Ex. 14, Slania Dep. 193:3-6; Ex. 8, Henselen Dep. 32:8-10; Ex. 16, Von Hess Dep. 47:8-15.) A FINRA BrokerCheck Report indicates that Burnham had been sanctioned for disclosure issues prior to the WLCC bond issuances. (Murzyn Decl. Ex. 113.) Also unfamiliar to Henselen, Von Hess, and USB counsel prior to this deal were WLCC and the Annuity Provider, Wealth Assurance Private Client. (Murzyn Decl. Ex. 14, Slania Dep. 192:3-18; Ex. 8, Henselen Dep. 22-25, 32:5-7, 205:15-206:4.)

USB did not perform any due diligence on the deal team members. (SOMF 192.) As part of its Know Your Customer review, USB obtained WLCC's name, address, federal tax identification number, and a copy of WLCC's Articles of Incorporation. (SOMF 169, 191.) At the time of the August 2014 bond issuance, USB policy classified customers engaging in payday loan activities as "high risk," and under USB policy, such accounts may require enhanced due diligence, formal approval, and increased monitoring. (Murzyn Decl. Ex. 65.) There were articles on the internet showing that WLCC may have been involved with payday lending although USB did not perform an internet search on WLCC prior to the August 2014 bond issuance. (SOMF 191; Murzyn Decl. Ex. 18, Woodward Dep. at 57-59, 102-105; Ex. 51.)Henselen testified that he could not recall doing any inquiry on WLCC's business type. (Murzyn Decl. Ex. 8, Henselen Dep. 152:7-19.)

August 2014 Bond Issuance

USB classified the bonds as municipal bonds. (SOMF 179.) Most municipal bonds are issued to finance a particular project, but the nature of the tribal development project supporting the bond issuance was unclear from the start which counsel for USB acknowledged as being unusual. (Murzyn Decl. Ex. 14, Slania Dep. 195:3-15; 205:8-16.) A term sheet sent by Anderson to USB on July 1, 2014, suggested that part of the proceeds would be used to build a "distribution facility" without any additional detail about what would be distributed from the facility. (Murzyn Decl. Ex. 7, Graham Dep. 78:6-79:8; Ex. 24.) A draft of the indenture dated July 23, 2014, that was provided to USB's counsel suggested that the bond proceeds would be used to build a "gaming facility." (Murzyn Decl. Exs. 35, 55.) Under USB policy existing at the time, gaming was designated under USB policy as an additional risk factor that may render a customer account high risk, thus requiring additional due diligence. (Murzyn Decl. Ex. 65.) Typically, a private placement memorandum describing the business purpose of the municipal bond transaction is provided, but no such memorandum was ever prepared with the WLCC bond issuances. Contrary to custom and practice in the industry, no construction budget or plans for the development project were produced. (Murzyn Decl. Ex. 14, Slania Dep. 204:22-205:16; Ex. 13, Pillar Dep. 104:17-105:04; Ex. 89.) Henselen testified at his deposition that he could not recall what the economic development project was for the August 2014 bond issuance and did not recall ever seeing a construction budget. (Murzyn Decl. Ex. 8, Henselen Dep. 206:13-23.)

The deal team members changed throughout the August 2014 bond deal. In a draft Indenture emailed to USB on August 15, 2014, the designated Issuer changed from Wakpamni Lake Community Development Corporation to Wakpamni Lake Community Corporation and provided that WLCC shall deliver a letter to USB at closing appointing Wealth Assurance AG as the Investment Manager. (Murzyn Decl. 8, Henselen Dep. 78:1-15.) The draft Indenture received by USB on August 25, 2014, two days prior to closing, showed a change in the Investment Manager from Wealth Assurance AG to Private Equity Management, LLC. (Murzyn Decl. Ex. 81.)

Ultimately, the Trust Indenture was executed on August 25, 2014, and provided that WLCC would be issuing $24,844,089² Special Limited Revenue Bonds (Taxable) to finance the purchase of an annuity investment in the amount of $22,094,089 as well as economic development projects for the benefit of the Wakpamni Lake Community, including "projects near the junction of Routes 18 and 391, including a certain warehouse/distribution center and other revenue producing enterprises." In addition to the development project being ill-defined, another unique aspect of the deal was that it involved an annuity. Deal team members and USB's expert testified that they had never been involved with a bond issuance involving an annuity, especially one that would finance nearly ninety percent of the principal and interest payments to bondholders. (SOMF 109; Ex. 14, Slania Dep. 148:5-9; Ex. 1, Ambriz-Reyes Dep. 107:12-15; Ex. 16, Von Hess Dep. 22:19-23; Ex. 6, Gadsen Dep. 49:21-25.) Despite the unusual structure of this bond issuance, Henselen indicated on the "Establish Deal" form that the sources for all assets and cash transfers were coming from known sources that fit the standard profile for this product. (Pillar Decl., Ex. O.)

The Annuity Contract provided...