Alabama Public School and College Authority v. JPMorgan Chase Bank
MEMORANDUM OPINION AND ORDER that JPM's 6 MOTION to Dismiss is DENIED. Signed by Honorable William Keith Watkins on 7/21/2009. (Attachments: # 1 Civil Appeals Checklist)(cc, )
IN THE UNITED STATES DISTRICT COURT F O R THE MIDDLE DISTRICT OF ALABAMA N O R T H E R N DIVISION A L A B A M A PUBLIC SCHOOL AND C O L L E G E AUTHORITY, P la in tif f , v. J P M O R G A N CHASE BANK, D e f e n d a n t. ) ) ) ) ) ) ) ) ) )
C A S E NO. 2:08-CV-863-WKW[WO]
M E M O R A N D U M OPINION AND ORDER I . INTRODUCTION F is h -a n d -c h ip s and derivative transactions: Each has been adopted by the United S ta te s from its English heritage.1 One is more appetizing than the other, but this opinion is n o t about fish-and-chips. It is about the Alabama Public School and College Authority's a p p e tite for a bad taste of a derivative transaction. In this declaratory judgment action, Plaintiff Alabama Public School and College A u th o rity (the "Authority") argues that a swaption transaction entered into between it and D e f e n d a n t JPMorgan Chase Bank ("JPM") in March 2002, and amended in January 2003, is void or, alternatively, voidable. Pending is JPM's Motion to Dismiss (Doc. # 6), filed p u rs u a n t to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The motion is
Alexander E. Kolar, Hammersmith Meets Orange County: "Wishing Upon a Star" with Taxpayer Money in the Municipal Bond Derivative Market, Washington Univ. Journal of Urban & Contemporary Law (Summer 1996).
accompanied by a Memorandum of Law (Doc. # 7).2 The Authority filed a Memorandum in Opposition to JPM's Motion to Dismiss (Doc. # 16), to which JPM submitted a Reply (D o c . # 18). As explained below, the arguments for and against Rule 12(b)(6) dismissal lead to more questions than answers, revealing an abundance of factual and legal chasms and m a k in g this action wholly unsuitable for resolution on a motion to dismiss. The motion to d is m is s , therefore, is due to be denied. II. JURISDICTION AND VENUE J u ris d ic tio n is exercised pursuant to 28 U.S.C. § 1332 (diversity jurisdiction) and 28 U .S .C . § 2201 (Declaratory Judgment Act). The parties do not contest personal jurisdiction o r venue, and the court finds allegations sufficient to support both. I I I . STANDARD OF REVIEW A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint against the le g a l standard set forth in Rule 8: "a short and plain statement of the claim showing that the p le a d e r is entitled to relief," Fed. R. Civ. P. 8(a)(2). "To survive a motion to dismiss, a c o m p la in t must contain sufficient factual matter, accepted as true, to `state a claim to relief th a t is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (May 19, 2009) ( q u o t i n g Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "Determining whether a c o m p la in t states a plausible claim for relief [is] . . . a context-specific task that requires the
JPM later substituted a Memorandum of Law (Doc. # 13) for the purpose of correcting the table of contents and the table of authorities in the original Memorandum of Law (Doc. # 7). Herein, citations to the record are to Document Number 13. Additionally, for ease of reference, the briefs are referred to only by their assigned docket number.
reviewing court to draw on its judicial experience and common sense." Id. at 1950 (brackets a d d e d ; citation omitted). "[F]acial plausibility" exists "when the plaintiff pleads factual c o n te n t that allows the court to draw the reasonable inference that the defendant is liable for t h e misconduct alleged." Id. (citing Bell Atl. Corp., 550 U.S. at 556). Hence, while the c o m p la in t need not set out "detailed factual allegations," Bell Atl. Corp., 550 U.S. at 555, it m u s t provide sufficient factual amplification "to raise a right to relief above the speculative le v e l," id. In addition to considering the properly-pleaded allegations of the complaint, the court c a n consider "documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, _ _ _ , 127 S. Ct. 2499, 2509 (2007). Public records comprise a category of documents subject to judicial notice. See Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1278 (11th Cir. 1999). Moreover, "where the plaintiff refers to certain documents in the complaint and those d o c u m e n t s are central to the plaintiff's claim, then the Court may consider the documents p a rt of the pleadings for purposes of Rule 12(b)(6) dismissal[.]" Brooks v. Blue Cross & B lu e Shield of Fla., Inc., 116 F.3d 1364, 1369 (11th Cir. 1997) (per curiam). And "the d e f e n d a n t's attaching such documents to the motion to dismiss will not require conversion o f the motion into a motion for summary judgment." Id. The court's "duty to accept the f a c ts in the complaint as true does not require [the court] to ignore specific factual details of th e pleading in favor of general or conclusory allegations." Griffin Indus., Inc. v. Irvin, 496
F.3d 1189, 1205-06 (11th Cir. 2007). "Indeed, when the exhibits contradict the general and c o n c lu s o ry allegations of the pleading, the exhibits govern." Id. at 1206. I V . FACTUAL BACKGROUND 3 A. T h e Parties The Authority is an Alabama public corporation established pursuant to Alabama C o d e §§ 16-16-1 to 16-16-16. It is charged with providing for the acquisition, construction, a n d equipping of public schools and other educational facilities in the State of Alabama. (Compl. ¶ 2); Ala. Code § 16-16-7. To effect its statutory purposes, the Authority is a u th o riz e d to issue bonds secured by and payable from certain state taxes required by law to b e paid into Alabama's Education Trust Fund. (Compl. ¶ 2); Ala. Code § 16-16-8. JPM is a New York banking corporation.4 (Compl. ¶ 3.) It is alleged that JPM " re g u la rly conducts business in Alabama and engaged in activities in this district relating to th e interest rate swap transaction that is the subject of this action." (Compl. ¶ 3.)
The following allegations are taken from the Complaint and the documents attached to and/or incorporated by reference in the Complaint.
JPM is a New York corporation with its principal place of business also in New York. (Compl.
T h e Swaption 5 T h e Authority filed this declaratory judgment action seeking to void a derivative
tra n s a c tio n known as a "swaption" it entered into with JPM on March 13, 2002 (Compl. ¶ 6), p e rta in in g to the Authority's outstanding fixed interest rate Series 1998 Bonds ("Series 1998 B o n d s " ) issued in the original principal amount of $300,000,0006 (Compl. ¶ 2). JPM
A "swaption," as defined by the Authority, "is simply an option to enter into an interest rate swap at a future date[.]" (Doc. # 16, at 3 n.2.) The Authority says that "the type of interest rate swap at issue in this case is `an agreement by which one party agrees to pay the counterparty a fixed rate of interest on a notional amount for a specified period of time. In return, the courterparty agrees to pay the first party an adjustable rate of interest on the same notional amount for the same period of time.'" (Doc. # 16, at 3 n.2 (quoting BankAtlantic v. Blythe Eastman Paine Webber, Inc., 955 F.2d 1467, 1469 (11th Cir. 1992)).) In JPMorgan Chase & Co. v. C.I.R., 530 F.3d 634 (7th Cir. 2008), a decision involving the taxation of JPM's income from swap transactions, the Seventh Circuit defined a swap in the following helpful manner: [Swaps] are essentially contracts between two parties designed to serve as protection against fluctuations embedded in an investment. These fluctuations can come from a number of sources, such as interest rates, commodities, or currencies. The two parties to a swap contract agree to exchange payments at specified intervals. The value inherent in a swap is a function of the difference between the amount of money that one party takes in from and gives out to the other party (i.e., the "counterparty"). To clarify, in the context of an interest rate swap, the magnitude of payments in both directions is determined by multiplying the relevant interest rate by some constant referred to as the "notional amount." Usually, one party multiplies this notional amount by a fixed interest rate, and the other party multiplies this amount by a floating interest rate (e.g., the London Interbank Offered Rate). These payments are then exchanged, or swapped, periodically. If the floating rate is, for instance, below the fixed rate, the party paying out the floating rate takes in money, and the other party loses money on the swap. Id. at 636 (internal footnote omitted). Henceforth, the court refers to the interest rate swap transaction entered into between the parties on March 13, 2002, and amended on January 16, 2003, as "the Swaption." The Swaption is governed by the ISDA Master Agreement dated March 13, 2002; the U.S. Municipal Counterparty Schedule to the Master Agreement, dated March 13, 2002; an ISDA Credit Support Annex, dated March 13, 2002; and Confirmations of swap transactions (including the Amended and Restated Confirmation, dated January 16, 2003) (collectively, "Swaption Agreement"). These documents, which are central to the Authority's claims, are attached to the Complaint and, thus, are properly considered on a motion to dismiss. See Tellabs, 127 S. Ct. at 2509. It is notable also that, although not material to resolution of the motion to dismiss, according to
"marketed the [S]waption" as a transaction that, among other things, would represent "a h e d g e by which [the Authority] could protect against the risk of future rises in interest rates," a n d would permit the Authority "to refund and refinance its . . . Series 1998 Bonds by issuing v a ria b le rate bonds, the costs of which would not exceed . . . the costs associated with debt s e rv ic e on the Series 1998 Bonds." (Compl. ¶ 7.) U n d e r the terms of the Swaption, JPM, in exchange for a payment to the Authority of $ 2 .2 million (the "premium" as it is called in the Swaption Agreement, see Doc. # 1-2, at 65), " a c q u ir e d the supposed right to enter into an interest rate swap with [the Authority] on or a f te r November 1, 2008." (Compl. ¶ 7.) The November 1, 2008 date coincided with the first d a te upon which the Series 1998 Bonds could be redeemed.7 The Swaption also was based u p o n an "expectation" by both the Authority and JPM "that if [JPM] exercised its option," th e Authority (1) "simultaneously would issue variable rate bonds to refund and refinance its Series 1998 Bonds," (2) "would make periodic fixed rate payments to [JPM]," and (3 ) "would receive periodic variable rate interest payments, based upon a percentage of the 1 -m o n th London Interbank Offered Rate (`LIBOR'), from [JPM]." (Compl. ¶ 7.) The n o tio n a l principal amount to which the "Fixed Rate Payer Payment" and the "Floating Rate P a ye r Payment" are tied is equal to the principal amount of the refunding bonds that the
JPM, JPM has entered into "four related swaption transactions" with the Authority. (Doc. # 13, at 1; see also Doc. # 16, at 27.) It is the first Swaption that is at issue in this lawsuit. The Series 1998 Bonds reach final maturity on November 1, 2018, twenty years after the date of their original issuance. (Doc. # 16, at 2.) Under specified conditions, but no earlier than November 1, 2008, the Authority may redeem the Series 1998 Bonds before maturity and refinance them by issuing refunding bonds. (Doc. # 16, at 2.)
Authority expected to issue upon JPM's exercise of the Swaption. (Swap Transaction C o n f irm a tio n , dated March 13, 2002, at 2, 3 (Ex. to Compl. (Doc. # 1-2, at 64)).) The S w a p tio n was amended on January 16, 2003, for the purpose of lowering from 70 percent to 67 percent the percentage of the one-month LIBOR, upon which JPM's floating rate p a ym e n t would be calculated in the event JPM exercised its option. In connection with the J a n u a ry 16, 2003 amendment, JPM made an additional "premium" payment to the Authority in the amount of $500,000. (Compl. ¶ 7; (see Doc. # 1-2, at 72).) C. T h e Basis for this Lawsuit T h is dispute arose in June 2008, when JPM notified the Authority that on November 1 , 2008, it intended to exercise its Swaption and effectuate the swap transaction. (Compl. ¶ 11.) The Authority filed this declaratory judgment action "to determine the rights and o b lig a tio n s of the parties" with respect to this Swaption. (Compl. ¶ 1.) More specifically, th e Authority asks the court to declare that the Swaption is "void" or "voidable." (Compl. ¶ 13.) 1. T h e Authority's Allegations that the Swaption is Void a. T h e Alleged Material Departures
T h e Authority alleges that the Swaption is void because, in two ways, it "departed m a te ria lly from the manner in which a swaption typically operates" (Compl. ¶ 8), and in d o in g so, violated Alabama law authorizing swaptions. First, while Alabama law
" a u th o riz e [ s ]" the Authority to enter into a swaption for the purpose of "hedg[ing] against
an interest rate or other similar risk," the Swaption "was not a legitimate hedging transaction w ith in the meaning of Alabama law." (Compl. ¶ 8.) The combined $2.7 million premium p a ym e n ts made by JPM to the Authority in 2002 and 2003 "were designed to represent s a v in g s that [the Authority] would expect to receive upon a later refunding of the Series 1998 B o n d s [ .]" (Compl. ¶ 8.) In this "sense," the premium payments "were described by [JPM] a s a hedge against a rise in interest rates between 2002 and November 2008, when refunding b o n d s could be issued." (Compl. ¶ 8.) The premium payments, however, "represented less th a n 1% of the outstanding amount of the Series 1998 Bonds." (Compl. ¶ 8.) Factoring in the anticipated costs of issuing refunding bonds in November 2008, when J P M exercised its Swaption, the Authority "realize[d] virtually no savings in connection with th e supposed hedge by the [S]waption." (Compl. ¶ 8.) "[T]he effect of the [S]waption was th a t [the Authority] sold to [JPM] its right to potential future benefits that would result from a decline in long-term interest rates in exchange for avoiding the risk of an extraordinary and h is to ric a lly unprecedented increase in long-term rates." (Compl. ¶ 8.) "That supposed risk w a s so remote as to have been no risk at all." (Compl. ¶ 8.) Second, contrary to that which is "commonly specified in legitimate swaption tra n s a c tio n s ," the "fixed rate payment[s]" set out in the Swaption did not "match the d e c lin in g balances of an existing fixed rate bond issue." (Compl. ¶ 9.) Rather, it was, in e s s e n c e , a "loan" to JPM from the Authority, but the Authority "has no statutory or legal a u th o rity to make loans[.]" (Compl. ¶ 9.) Under a "legitimate" structure, the Authority's
"fixed rate payment obligations would have been spread roughly equally over the ten-year p e rio d following [JPM's] exercise of the swaption." (Compl. ¶ 9.) Under the terms of the S w a p tio n , however, "the payment schedule called for [JPM] to receive more than 50% of the f ix e d rate payments due from [the Authority] over $35 million within a year after e x e rc isin g the swaption and more than 95% of such payments a total of more than $66 m i ll io n within two years of exercise." (Compl. ¶ 9.) This payment schedule meant that J P M 's "exercise of the swaption was for all intents and purposes a certainty, since by doing s o it would receive what amounts to a $66 million loan from [the Authority] with effectively n o rate of return or implied interest rate." (Compl. ¶ 9.) b. T h e Alleged Absence of a Statutorily-Required Certification
T h e Authority alleges that the Swaption is "void" for an additional reason. (Compl. ¶ 10.) It says that it "has located no . . . finding, determination, or certification with respect to " the Swaption, as required by Alabama Code § 41-1-42. (Compl. ¶ 10.) 2. T h e Authority's Allegations that the Swaption is Voidable
T h e Authority avers that the Swaption is "voidable" because of the "Authority's in a b ility to issue variable rate refunding bonds, as the parties contemplated," (Compl. ¶ 13), in compliance with the "Act of May 17, 2004, 2004 Ala. Acts 533; 2004 HB 817 (the `2004 A c t')" and the "Act of Dec. 28, 2001, 2001 Ala. Acts 1107; 2001 HB 66 (the `2001 Act')" (Compl. ¶ 11). "Central to the parties' performance under the [S]waption . . . was their m u tu a l assumption that [the Authority] in fact could issue variable rate refunding bonds in
compliance with Alabama law if [JPM] exercised the [S]waption." (Compl. ¶ 11; see also C o m p l. ¶ 11 (alleging that in June 2008, JPM notified the Authority that it intended to e x e rc ise the Swaption as of November 1, 2008, and that it "consequently expected [the A u th o rity] on that date to issue variable rate refunding bonds for which [JPM] would provide a variable to fixed rate swap").) Compliance with the 2001 Act and the 2004 Act, however, is not possible because the " `a g g re g a te annual payment obligations' to which both [Acts] refer include liquidity and s u p p o rt costs associated with [the Authority's] ability to issue and, if necessary, to remarket its bonds." (Compl. ¶ 11.) "Those costs, coupled with the previously described fixed rate p a ym e n ts due to [JPM] under the [S]waption, will substantially exceed, as of November 1, 2 0 0 8 , the aggregate amount payable on the Series 1998 Bonds that would be refunded by v irtu e of [JPM's] exercise of the [S]waption." (Compl. ¶ 11.) JPM "was aware of that fact, a n d of the parties' erroneous factual assumption that [the Authority] could comply with the p ro v is io n s of Alabama law, when [JPM] notified [the Authority] in June 2008 that it intended to exercise the [S]waption." (Compl. ¶ 11.) 3. T h e Relief Requested
B a se d on the foregoing allegations, the Authority requests that the court enter an order (1 ) declaring that the Swaption is void and of no force or effect, (2) declaring that the S w a p tio n is voidable by the Authority, (3) rescinding the Swaption, conditioned upon the
repayment of amounts previously paid by JPM, and (4) awarding the Authority such other re lie f as the court deems appropriate. (Compl. 7.) V. DISCUSSION T h e Authority alleges that the Swaption is void. It says that it did not have the a u th o rity to enter into the Swaption because the Swaption was not a lawful transaction (e.g., w a s not entered into for the purpose of hedging as required by Alabama law), and did not c o n ta in the statutorily-required certification. Alternatively, the Authority alleges that the S w a p tio n is voidable because of the Authority's alleged inability under Alabama law to issue re f u n d in g bonds on November 1, 2008, when JPM exercised the Swaption. Moving for d is m is s a l, JPM advances several arguments why it contends that "[t]hese claims are without m e rit" (Doc. # 13, at 1), and in its response (Doc. # 16), the Authority counters those a rg u m e n ts. The court addresses the arguments in turn. A. C la im s Asserting that the Swaption is Void J P M contends that the governing Swaption Agreement defeats the Authority's claim th a t the Swaption is void. (Doc. # 13, at 6.) Namely, JPM says that it is entitled to rely on certa in representations in the Swaption Agreement and that based upon those representations, w h e th e r or not the Swaption "was actually a hedge [and] properly authorized" by statute, the A u th o rity cannot "now be heard to contest its representations in the Swaption Agreement that th e . . . Swaption was a properly authorized, binding, and enforceable transaction." (Doc. # 13, at 6.)
1. C e r tific a tio n
T h e Authority's Alleged Failure to Locate the Statutorily-Required
I t is undisputed that the Authority has express statutory power to enter into swap tra n s a c tio n s . (See Compl. ¶ 8 (admitting that the Authority "is authorized to enter into a s w a p tio n transaction" where "the purpose of the transaction is to hedge against an interest ra te or other similar risk").) That statutory power is grounded in the Alabama Code. See A la . Code §§ 41-1-40 to 41-1-44.8 Section 41-1-40 of the Alabama Code provides, in p e rtin e n t part: T h e Legislature finds and declares that the making and managing of in v e s tm e n ts or the borrowing of money by governmental entities involves a v a rie ty of interest rate, investment, payment, and similar risks. A number of f in a n c ia l instruments are available to hedge against those risks. Many g o v e rn m e n ta l entities lack express statutory authority to take advantage of th o s e instruments, and it is desirable that they have the authority. A la . Code § 41-1-40.9
These statutory sections are codified in Article 3 (titled "Swap Agreements") of Chapter 1 of Title 41, and Article 3 is to "be liberally construed to effect its purpose," Ala. Code § 41-1-44.
Section 41-1-41 is the definitions section. It provides:
In this article, the following terms shall have the following respective meanings: (1) Counterparty. The provider of the interest rate floor, cap or collar, or the other party to the swap agreement. (2) Governmental entity. The state (or equivalent thereof) or any political subdivision thereof, or any department, agency, board, commission, or authority of the state, or any such political subdivision, or any public corporation, authority, agency, board, commission, state colleges, or universities, or other governmental entity controlled by the state or any such political subdivisions. This definition shall be inclusive of both the singular and plural form of this term.
Section 41-1-42, in turn, sets out the parameters of a governmental entity's authority to enter into a swap agreement. At issue is § 41-1-42(2) and the concluding paragraph of this s e c tio n . Section 41-1-42(2) provides in pertinent part: N o governmental entity shall enter into any swap agreement unless . . . : a . The governmental entity's governing body first finds and determines, and c e rtif ie s to the counterparty, that the swap agreement is entered into for the p u rp o s e of hedging against an interest rate, investment, payment, or other s im ila r risk that arises in connection with or incidental to the proper activities o f the governmental entity. Ala. Code § 41-1-42(2). Section 41-1-42(2) concludes with the following: A counterparty that enters into any swap agreement with a governmental entity m a y rely on a certification by the governmental entity that the factual matters re la tin g to the governmental entity, and other matters in the certification, are c o rre c t. Any inaccuracy of the governmental entity's certification shall not a f f e c t the enforceability of the swap agreement. Ala. Code § 41-1-42(2).10
(3) Swap agreement. An agreement (including terms and conditions incorporated by reference therein) in the initial notional amount of $5,000,000.00 or more (which notional amount may reduce periodically under the agreement), commonly known as the following: a. An interest rate swap agreement, an interest rate cap agreement, an interest rate floor agreement, an interest rate collar agreement, or any other similar agreement, including any option to enter into any of the foregoing. b. Any combination of any of the foregoing. c. A master agreement for any of the foregoing, together with all supplements. Here, the governmental entity is the Authority; the Authority's governing body comprises the Governor, the State Superintendent of Education, and the Director of Finance, see Ala. Code § 16-16-3; (Doc. # 16, at 12 n.9); and JPM is the counterparty.
T h e Arguments
T h e Complaint alleges that the Authority has not "located" the requisite "finding, d e te rm in a tio n or certification." (Compl. ¶ 10.) JPM, however contends that specific language in three different provisions of the documents comprising the Swaption Agreement, w h ic h are appended to the Complaint, satisfy § 41-1-42(2)'s certification requirement. (Doc. # 13, at 7.) In sum and substance, in the Swaption Agreement, the Authority represents that (1 ) it had "the power . . . to perform" its contractual obligations and had "taken all necessary a c t i o n and made all necessary determinations and findings to authorize such execution, d e liv e ry and performance"1 1 ; (2) that its obligations under the Swaption Agreement were " le g a l, valid and binding . . . [and] enforceable in accordance with their respective terms" 1 2 ; a n d (3) that the Swaption Agreement and transactions authorized under it would "be . . . e n te re d into for purposes of managing of [the Authority's] borrowing or investments or in c o n n e c tio n with a line of business and not for the purpose of speculation." 1 3 A d d itio n a lly, JPM points out that, as part of the Swaption Agreement, the Authority d e liv e re d to JPM an opinion from the Authority's counsel, Maynard Cooper (the "Maynard C o o p e r Opinion"), dated March 13, 2002. (Doc. # 13, at 8 (citing Ex. 4 to Long Decl.); see a ls o U.S. Municipal Counterparty Schedule, Part III, Agreement to Deliver Documents (Doc.
(U.S. Municipal Counterparty Schedule, Part 5(g)(ii).) (Master Agreement § 3(a)(v).) (U.S. Municipal Counterparty Schedule, Part 5(g)(iv)(k).)
# 1-2, at 24).) The Maynard Cooper Opinion represents, among other things, that "[t]he A u th o rity has the requisite power and authority to enter into the Agreement and to perform its obligations thereunder, and the Agreement has been duly authorized, executed and d e liv e re d by the Authority." (Maynard Cooper Op. ¶ 2; see also Maynard Cooper Op. ¶ ¶ 5-6.) In light of the foregoing representations made by the Authority in the Swaption A g re e m e n t and the Maynard Cooper Opinion, JPM contends that the Complaint's allegation th a t the Authority has not "located" the requisite "finding, determination, or certification" (C o m p l. ¶ 10) is insufficient to defeat JPM's motion to dismiss. T h e Authority, however, contends that the "various assurances" in the Swaption A g re e m e n t upon which JPM relies cannot "be cobbled together as a matter of law to s u b s titu te for the actual finding, determination, and certification," required by Alabama Code § 41-1-42(2). (Doc. # 16, at 16.) The Authority has submitted what it says is a compliant c e rtif ic a tio n from an unrelated transaction, and asks the court to take judicial notice of it as a public record. (Powell Decl., Ex. B (Doc. # 17).) That document, titled "Certificate of the S ta te of Alabama" and signed by the Governor, was issued in connection with a derivative tra n s a c tio n entered into by the State of Alabama in 2004 and, among other things, provides
that the certificate is being provided "as required by Section 41-1-42(2)" of the Alabama C o d e .14 (Powell Decl., Ex. B.) b. A n a ly sis
A s framed by JPM's motion, the issue is whether the Swaption Agreement's re p r e s e n ta t io n s that the Authority "ha[d] taken all necessary action," had made "all n e c e s s a ry determinations and findings," had undertaken "obligations" that were "legal, valid, a n d binding," and had entered into the Swaption "not for the purpose of speculation" c o n s titu te a certification within the meaning of § 41-1-42(2). JPM contends that the answer is "Yes" and that, therefore, the Authority cannot state a plausible claim for relief on the C o m p la in t's assertion that § 41-1-42(2)'s certification has not been "located" (Compl. ¶ 10). Without explanation, the parties' briefs have sidestepped a seemingly significant th re s h o ld factual issue. The Authority has alleged that it has not "located" the requisite " f in d in g , determination, or certification." (Compl. ¶ 10.) That allegation begs the question o f why the Authority has been unable to locate what it contends is the required d o c u m e n ta tio n . Is the finding, determination or certification lost or destroyed, or was there n e v e r a finding, determination or certification in the first place? In the corporate and tax law c o n te x t, for example, a lost, destroyed or stolen certificate or record has a legal consequence
The Authority has not articulated a position that a freestanding certification, mirroring the one submitted, is the only manner in which a governmental entity can be found in compliance with § 41-142's certification requirement, or whether it believes that there are other permissible parameters for a statutorily-compliant certification. As explained infra, it is not necessary today to resolve what form, if any, a finding and determination, and certification must take. It is merely noted that the Authority's stance on this issue is ambivalent.
and a remedy. See, e.g., Wilkerson v. Moore, 318 So. 2d 241, 243-44 (Ala. 1975) (discussing re m e d y for lost, stolen or destroyed tax records and explaining that "[w]hen records become m a te ria l in the determination of rights between parties, and those records are shown to have e x is te d , and to have been afterwards lost or destroyed, their contents, like those of d o c u m e n ta ry evidence[,] may be shown by testimony in its nature secondary" (brackets a d d e d )); N.Y. U.C.C. § 8-405 (replacement of lost, destroyed, or wrongfully taken security c e r t i f ic a te ). On the other hand, the complete absence of a finding, determination and c e rtif ic a tio n leads to at least two inferences: first, that a finding, determination and c e rtif ic a tio n were made, but were not properly recorded and reduced to a written form; or s e c o n d , that there never was a finding, determination or certification and, hence, nothing of w h ic h to make a record. Each of these scenarios (1) a lost or destroyed certification, (2) a failure to properly record a certification, or (3) no certification at all would be analyzed d if f e re n tly and, arguably, could result in three different legal outcomes. This factual issue, d e v e lo p m e n t of which has been avoided by both parties, has potentially serious legal im p lic a tio n s that should not at this early stage be bypassed in favor of an outcome based only u p o n sketchy facts.15 It has not been overlooked that JPM presses for a different legal conclusion, i.e., that t h e Authority's representations in the scattered documents comprising the Swaption A g re e m e n t provide a sufficient basis upon which to conclude that there is compliance with
Notably, although central to the Authority's claims, the official transcript documenting the Swaption Agreement has not been submitted by either party.
the statutorily-mandated finding and determination, and certification. The court, however, d e e m s it imprudent to delve into an area of law, which at best appears to be unsettled,1 6 at the f a c tu a lly-c o n f in e d motion to dismiss stage. This is so particularly when the universe of facts in c lu d e s only (1) the Complaint's negative representation of fact, i.e., that the Authority "has lo c a te d no . . . finding, determination, or certification" (Compl. ¶ 10); (2) a negative d e d u c tio n relied upon by JPM that the Authority, by representing that the Swaption was "not u n d e rta k e n for speculation," "effectively represented that [the Swaption was] undertaken for h e d g in g " (Doc. # 13, at 7 n.5); and (3) the scattered representations in the Swaption A g re e m e n t concerning the Authority's power to enter into and perform its obligations under th e Swaption. Based upon these meager facts and the unanswered questions shrouding the re a s o n s the Authority cannot locate a finding and determination, and a certification, the court f in d s that a more complete evidentiary record would provide a better backdrop for deciding th e issue of whether the Authority complied with § 41-1-42(2). Accordingly, the Authority's c la im survives JPM's motion to dismiss. 2. T h e Allegations that the Swaption Was Not a Lawful Transaction
T h e Complaint details the respects in which the Swaption allegedly materially d e p a rte d from conventional and commonly understood interest rate swaptions, and the
JPM cites several reported cases where Alabama courts have addressed the requirement of a certification (Doc. # 18, at 6), but not a certification under § 41-1-42(2), and the Authority has offered case law in support of its contrary position (Doc. # 16, at 17). No authority, however, has been cited by the parties from an Alabama court, or any other court, that interprets the certification requirement in § 41-1-42(2). To the extent that this action presents an issue of first impression under state law, the court is reluctant to summarily dismiss it at the motion to dismiss stage where the facts are not fully developed.
Authority says that at the "heart" of these allegations is that the Swaption is not authorized b e c a u s e "despite its label," it "was not undertaken `for the purpose of hedging against an in te re s t rate, investment, payment, or other similar risk . . . aris[ing] in connection with or in c id e n ta l to [its] proper activities.'" (Doc. # 16, at 20 (quoting § 41-1-42).) According to th e Authority, the $2.7 million up-front premium payments it received from JPM were s u p p o s e d to be "a hedge against a rise in interest rates between 2002 and November 2008" w h e n the Series 1998 Bonds could be refunded and refinanced (Compl. ¶ 8), but those p re m iu m payments "provided no hedge" (Doc. # 16, at 20). The Authority also says that the S w a p tio n , with its front-end loaded payments, "effectively was nothing more than a huge l o a n to [JPM] with effectively no rate of return[.]" (Doc. # 16, at 20; see also Compl. ¶ ¶ 8-9.) And, the Authority "has no statutory or other legal authority to make loans[.]" (C o m p l. ¶ 9.) No doubt trying to avoid (as both parties do, for different reasons) an admission that th e Authority entered into an incredibly risky and bad derivative deal, the Authority takes the p o s itio n that based upon these material departures, the Swaption exceeded the express terms o f the authorizing statute, and that consequently the Swaption is void (Compl. ¶¶ 8-9). It a s s e rts also that its lack of authority to enter into the Swaption in the first place is an issue s e p a ra te from whether the Swaption is supported by the statutorily-required certification (C o m p l. ¶ 10). (Doc. # 16, at 20.)
There is no dispute in this litigation that swap agreements are complicated financial tra n s a c tio n s . Indeed, as recognized by JPM (Doc. # 13 at 1 n.1), substantial time and effort w e re invested by the Authority in its initial evaluation phase as to the feasibility, risks and b e n e f its of swaptions: (1) Requests for proposals were sought from various financial in s titu tio n s for the terms on which those institutions would be willing to offer the c o n te m p la te d swaptions; (2) legislation in Alabama had to be passed to facilitate the s w a p tio n s ; (3) a "leading swap advisory group" was consulted; and (4) outside counsel for th e Authority was retained. (Doc. # 13, at 1 n.1.) With that recognition, it becomes clear that th e issue of the Authority's authority to enter into the Swaption implicates questions of fact, s o m e mixed with questions of law and some of which may require the aid of expert te s tim o n y and, which left unanswered, advise against dismissal of the Complaint. Two initial issues concern the interplay between the 2001 Act and the 2004 Act (C o m p l. ¶ 11) and the bearing, if any, that either or both of these Acts have on the A u th o rity's authority to agree to the Swaption's terms. At this point, it is helpful to set forth th e text of those acts. The 2001 Act provides: N o tw ith s ta n d in g any other provision of law, the Authority shall have the p o w e r to issue refunding obligations to refund the Authority's Refunded B o n d s without regard to any statutory debt service savings requirement if, and o n ly if, at or prior to the time at which the Authority issues such refunding o b lig a tio n s , the Authority shall have entered into one or more swap a g re e m e n ts , as defined in Section 41-1-41, pursuant to which the Authority s h a ll have fixed its aggregate annual payment obligation (taking into account p a ym e n ts under such swap agreements combined with payments on the re f u n d in g obligations) in an amount not exceeding the aggregate annual a m o u n t payable on the Refunded Bonds. 20
Act of Dec. 28, 2001, No. 2001-1107, § 2, 2001 Ala. Acts 1107 (emphasis added); see also id . § 1(3) (providing that "Refunded Bonds" include the Authority's Series 1998 Bonds). The 2004 Act differs, but substantively for present purposes only in the wording of the last c la u s e . Notwithstanding any other provision of law, the State, acting by and through th e Commission, and each Authority, shall have the power to issue refunding o b lig a tio n s to refund their Refunded Bonds without regard to any statutory d e b t service savings requirement if, and only if, at or prior to the time at which th e Authority . . . issues such refunding obligations, the Authority . . . shall h a v e entered into one or more swap agreements, as defined in Section 41-1-41, p u rs u a n t to which the Authority . . . shall have determined its aggregate a n n u a l payment obligation (taking into account payments under such swap a g re e m e n ts combined with payments on the refunding obligations) in an a m o u n t not expected to exceed the aggregate annual amount payable on the R e f u n d e d Bonds. A c t of May 17, 2004, No. 2004-533, § 3, 2004 Ala. Acts 533 (emphasis added). J P M has noted that "specific legislation" was "sought and obtained" to "facilitate" the S w a p tio n (Doc. # 13, at 1 n.1) entered into between JPM and the Authority in March 2002. It appears to be agreed that the 2001 Act, enacted "less than three months" (Compl. ¶ 11) p rio r to the execution of the Swaption Agreement, is part of that legislation. (See, e.g., Doc. # 16, at 7 ("The [S]waption . . . owes its existence to the 2001 Act[.]").) Indeed, it is
expressly alleged that the 2001 Act "was intended to apply specifically to the [S]waption[.]" 1 7 (C o m p l. ¶ 11.) T h e 2001 Act, which pertains specifically to the Authority, authorizes a singular tra n s a c tio n in relation to its Series 1998 Bonds, and that singular transaction is a refunding o f the Series 1998 Bonds. However, by the specific terms of the 2001 Act, the refunding c a n n o t occur (at least without regard to any statutory debt service savings requirement) w ith o u t a swaption being in place. Here, there is compliance with the 2001 Act to the extent that in November 2008, w h e n the issuance of refunding obligations was to be sought, there was a Swaption already in place. There remains a question, however, whether the Authority "fixed" its obligations in an amount not exceeding the refunded bond payments and, thus, complied with the 2001 A c t.1 8 Under the 2001 Act, the time at which the Authority "shall have fixed its aggregate a n n u a l payment obligation" is at the time of the execution of the Swaption Agreement, i.e., in 2002, not at the time of issuance of the resulting refunding bonds. It is true that the
Notwithstanding the allegation that the 2001 Act "was intended to apply specifically to the [S]waption" (Compl. ¶ 11), and JPM's apparent recognition of that relationship, JPM essentially asks the court to put on blinders and to find, based solely upon the Swaption Agreement's terms, that the Swaption did not require the Authority to refund its Series 1998 Bonds. JPM, however, has not explained how the 2001 Act can be completely divorced from the Swaption Agreement and the Swaption itself. This, at the very least, leaves yet another question unanswered, further confirming that the issues raised in the motion to dismiss are not amenable to resolution at this juncture. The Swaption Agreement's terms are discussed later in this opinion in the section addressing the arguments for and against a finding that refunding was a condition precedent to the Authority's performance under the Swaption, once exercised by JPM. Whether the question is one of law or one of fact, as explained, the court does not believe that a matter of such importance should be decided on the present record on a motion to dismiss.
Authority "fixed" its payments in the Swaption Agreement (see Annex II appended to the M a rc h 2002 Swap Transaction Confirmation (Doc. # 1-2, at 72)); however, whether those p a ym e n ts would exceed the aggregate annual amount payable on the refunded bonds could o n ly be determined at the time the Swaption went into effect, which was in November 2008. That is because the refunded bonds the Authority was to obtain were based upon variable r a t e s , which would have been unknown in 2002 when the Swaption Agreement was e x e c u te d . It has not been answered by JPM, whether at the time the Swaption Agreement w a s executed, it was possible for the Authority to have "fixed its aggregate annual payment o b lig a tio n . . . in an amount not exceeding the aggregate annual amount payable on the R e f u n d e d Bonds," as required under the 2001 Act. And if, as JPM contends, refunding the S e rie s 1998 Bonds was not an agreed-upon Swaption term, see supra note 17, on the Rule 1 2 (b )(6 ) facts, there would appear to be, at the very least, an unresolved issue as to whether th e Authority agreed to a Swaption for a purpose not authorized by the 2001 Act.19 It may be, as JPM points out (Doc. # 18, at 22), that the 2004 Act cured the problem b y changing the equation from a calculation of certainty ("fixed") to a calculation of
Any action of the Authority outside the specific authorization of the 2001 Act arguably is ultra vires and relatedly, any contract entered into for a purpose not authorized by the 2001 Act arguably is void. See City of Tuskegee v. Sharpe, 288 So. 2d 122, 124 (Ala. 1973) ("This court has always strongly maintained the doctrine, both as to private and municipal corporations, that contracts made by or with them, outside the pale of their corporate authority, confer no right, and that neither the making of an ultra vires contract nor the receiving of its benefits estops the corporation from setting up its invalidity." (quoting Cleveland Sch. Furniture Co. v. City of Greenville, 41 So. 862, 864 (Ala. 1906))); Paterson & Edey Lumber Co. v. Bank of Mobile, 84 So. 721, 722-23 (Ala. 1919) ("`A contract of a corporation which is ultra vires, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the Legislature, is not voidable only, but wholly void, and of no legal effect.'" (quoting Concord First Nat'l Bank v. Hawkins, 174 U.S. 364, 370 (1899))).
probability ("not expected to exceed"). Compare the 2001 Act (i.e., "The Authority shall h a v e fixed its aggregate annual payment obligation . . . in an amount not exceeding the a g g re g a te annual amount payable on the Refunded bonds."), with the 2004 Act (i.e., "[T]he A u th o rity . . . shall have determined its aggregate annual payment obligation . . . in an a m o u n t not expected to exceed the aggregate annual amount payable on the Refunded B o n d s ." ). The crimp here, however, is that the execution of and amendment to the Swaption A g re e m e n t predates the 2004 Act; the Swaption Agreement, executed in 2002 and amended in 2003, was put in place under the more rigorous strictures of the 2001 Act. JPM has not d e m o n s tra te d how the 2004 Act that creates an entirely different standard requiring d is c e rn m e n t of the Authority's expectations of performance2 0 can alter a contract (i.e., the S w a p tio n Agreement) already in place under the 2001 Act.21 T h e s e observations lead to yet another question which is unanswered by the briefs. How can a contractual transaction (i.e., the Swaption Agreement) be complete in its terms, a s claimed by JPM (see, e.g., Doc. # 13, at 11-13), when the very Act (i.e., the 2001 Act) that
Notably, there is no allegation in the Complaint that the 2004 Act's requirement was contemplated by the Authority when the Swaption Agreement was executed. In its reply brief, JPM says for the first time, but without sufficient answers to the nagging questions, that the 2004 Act's requirement as to the Authority's expectation as to its payment obligation on future refunding bonds applies retroactively. (Doc. # 18, at 22.) Because of the complexities of this litigation and because the Authority has not been given an opportunity to respond, the court will not address JPM's argument introduced in a reply brief. Cf. United States v. Oakley, 744 F.2d 1553, 1556 (11th Cir. 1984) (per curiam) (refusing to consider a new legal argument raised for the first time in a reply brief at appellate level).
allegedly "was intended to apply specifically to the [S]waption" (Compl. ¶ 11) imposes a c o n d itio n that seemingly cannot be met under any scenario? In addition to the questions arising from application of the 2001 Act and the 2004 Act to the Swaption, other questions include, but are not limited to: (1) Is the Swaption payment s c h e d u le (see Annex II appended to the March 2002 Swap Transaction Confirmation (Doc. # 1-2, at 72)), requiring the Authority to pay more than $35 million to JPM in the first year, w h ic h equates to more than 50 percent of the total payments due over the life of the payment s c h e d u le (Compl. ¶ 9), typical in interest rate swap agreements? (2) Does the front-loaded p a ym e n t structure render the Swaption illegal? (3) Is there such a thing as a "standard" s w a p tio n ; if so, what are its components, and did the Swaption at issue depart materially from th o s e standards? (4) Is the Swaption an "interest rate swap agreement" at all, as
c o n te m p la te d by the Legislature, taking the term "interest rate swap agreement" at its § 41-14 1 or common meaning? (5) Is the Authority's fixed-rate payment tied to an interest rate, a n d if not, does that affect the legality of the supposed "interest rate swap"? (6) What is the in d u s try definition of a "physical settlement" swap, given the parties' disagreement as to its m e a n in g , and how is that definition applied in light of prevailing industry practices? (Compare the Authority's definition (Doc. # 16, at 8 (arguing that in this case a "physical s e ttle swaption" means that the "interest rate swap actually [was] put in place on an u n d e rlyin g obligation (here the variable rate refunding bonds to be issued by the Authority) if the [S]waption [was] exercised")), with JPM's contrasting position (Doc. # 18, at 13 n.14
(asserting that industry definition of a "physical settlement" swaption "is merely a swaption w h e re in , upon exercise, specified payments are exchanged over time according to an agreed s c h e d u le " )).) (7) Why should it be assumed, as JPM urges, that if the Swaption Agreement w a s "not for the purpose of speculation" (U.S. Municipal Counterparty Schedule, Part 5 (g )(iv )(k )), it decidedly was entered into for purposes of hedging? The court does not pretend to know the answers to all of these issues, whether u ltim a te ly all of these issues will be material to resolution of this case, or whether resolution o f these issues will lie in favor of JPM or the Authority. By the foregoing discussion, the c o u rt merely confirms that the issues are multifaceted and complex, and that on the a rg u m e n ts and facts presented, there are too many missing facts and unresolved questions to grant a motion to dismiss. Hence, the court finds that this action is not amenable to r e s o lu tio n on a motion to dismiss on the question of whether the Swaption was a lawful tra n s a c tio n (see Compl. ¶¶ 8-9). The claim, therefore, will go forward, and the motion to d is m is s will be denied. 3. E s to p p e l
" [ T ]h e purpose of the doctrine of equitable estoppel is to promote equity and justice in an individual case by preventing a party from asserting rights under a general rule of law w h e n his own conduct renders the assertion of such rights contrary to equity and good c o n s c ie n c e ." Robinson v. Boohaker, Schillaci & Co., P.C., 767 So. 2d 1092, 1094 (Ala.
2000).2 2 JPM presents two equitable estoppel theories in support of its argument that the A u t h o rity "cannot repudiate" the representations it made in the Swaption Agreement c o n c e rn in g its valid and binding obligations. (Doc. # 13, at 9.) First, JPM relies upon the la n g u a g e in the closing paragraph of § 41-1-42(2) that "[a]ny inaccuracy of the governmental e n tity's certification shall not affect the enforceability of the swap agreement." Ala. Code § 41-1-42(2). As urged by JPM, this statutory provision precludes the Authority from a rg u in g that its representations in the Swaption Agreement were incorrect, thereby rendering th e Swaption enforceable. S e c o n d , JPM relies upon general common-law estoppel principles, asserting that the A u th o rity "is conclusively bound by its representations." (Doc. # 13, at 10.) In support of th is argument, JPM relies on two decisions, Town of Brewton v. Spira, 17 So. 606, 607-08 (A la . 1895) (holding that a recital in a municipal bond issued for electrical lights mistakenly p ro v id in g that the bonds were "`issued by virtue of an ordinance . . . , under authority of and in accordance with the provisions of an act of the Legislature of Alabama . . . authorizing the s a id city of Brewton to issue bonds'" estopped the municipality from asserting that the bonds w e re issued for an unlawful purpose), and Brown-Crummer Inv. Co. of Wichita, Kan., v. City o f Florala, Ala., ("Brown-Crummer"), 55 F.2d 238, 242 (M.D. Ala. 1931) (applying Spira a n d holding that, where the municipality represented and delivered an opinion of counsel to
The parties have relied upon Alabama law in support of their arguments for and against estoppel; hence, the court also has relied upon Alabama law. See U.S. Municipal Counterparty Schedule, and infra note 26.
buyer that bonds were valid and duly authorized, the municipality was estopped from later c o n te s tin g validity of bonds based upon purported lack of authority to issue them). JPM cites th e s e decisions as standing for the "general principle" that "a public entity cannot assert th a t a contract into which it has entered is unauthorized when it has previously represented th a t it is authorized to enter into the agreement." (Doc. # 13, at 9.) The Authority counters that it "appropriately seeks to rescind a transaction that it had n o authority to enter into in the first place," both because, despite its label, the Swaption e s s e n tia lly was a loan which the Authority had "no statutory or other legal authority to make" ( C o m p l. ¶ 9), and because of the Swaption Agreement's "apparent" failure to be " d o c u m e n te d in accordance with" § 41-1-42(2) (Compl. ¶ 10), and that this alleged absence o f authority means that it "cannot be estopped." (Doc. # 16, at 18.) The Authority says that " th e doctrine of estoppel is unavailable to validate a transaction that fails to comply with s ta tu t o r y requirements[.]" (Doc. # 16, at 18.) It principally relies upon Perkins v. Shelby C o u n ty , 985 So. 2d 952 (Ala. Civ. App. 2007). (Doc. # 16, at 18); see Perkins, 985 So. 2d a t 956 ("[A] . . . municipality cannot be estopped . . . [when it] `question[s] the legality of a c o n tra c t into which it had no authority to enter'" or when it "seeks to avoid doing `that which it has no authority to do,'" id. at 956-57 (quoting Talladega City Bd. of Educ. v. Yancy, 682 S o . 2d 33 (Ala. 1996)), and noting a distinction between a municipality's lack of authority to enter into a contract, to which estoppel cannot be applied, id. at 956, and a municipality's
"mere fail[ure] to follow the formalities of contract execution," to which estoppel can be a p p lie d , id. at 957.). There are several problems with JPM's reliance on estoppel at the present juncture. First, estoppel is an affirmative defense, see Fed. R. Civ. P. 8(c)(1), and the general rule is th a t "the existence of an affirmative defense will not support a motion to dismiss," Quiller v . Barclays Am./Credit, Inc., 727 F.2d 1067, 1069 (11th Cir. 1984), en banc reh'g, 764 F.2d 1 4 0 0 , 1400 (11th Cir. 1985) (per curiam) (reinstating panel opinion)2 3 ; see also La Grasta v . First Union Sec., Inc., 358 F.3d 840, 845 (11th Cir. 2004) ("[P]laintiffs [are] not required to negate an affirmative defense in [their] complaint." (citation omitted)). Notably, neither S p i ra nor Brown-Crummer, relied upon by JPM, was decided on a motion to dismiss, but ra th e r on an evidentiary record. See Spira, 17 So. at 608; Brown-Crummer, 55 F.2d at 238. Second, as discussed in the preceding subsection, whether the Authority was a u th o riz e d by Alabama law to enter into the Swaption requires further factual and legal d e v e lo p m e n t; hence, whether the Authority lacked "authority," within the meaning of P e rk in s , 985 So. 2d at 956, or for another reason, is not readily determinable on the Rule 1 2 (b )(6 ) incomplete factual record. Third, and relatedly, the arguments for and against estoppel also are inextricably in te rtw in e d with the issue of whether the Swaption is supported by a certification, compliant
Quiller was relied upon for these principles in a recent Eleventh Circuit opinion, albeit an unpublished one. See Brown v. One Beacon Ins. Co., No. 08-14775, 2009 WL 366801, at *1 (11th Cir. Feb. 17, 2009).
with § 41-1-42(2) of the Alabama Code, as discussed in Section V.A.1. Postponement of re s o lu tio n of the certification issue pending further factual development cautions against re s o lu tio n of whether principles of estoppel can be applied. Based upon the present state of th e record, the court cannot say that it is apparent "on the face of the [C]omplaint" that the A u th o rity is estopped from denying the validity of the Swaption. Quiller, 727 F.2d at 1069; s e e also Douglas v. Yates, 535 F.3d 1316, 1321 (11th Cir. 2008) ("A complaint is subject to d is m is s a l for failure to state a claim `when its allegations, on their face, show that an a f f irm a tiv e defense bars recovery on the claim.'" (citation omitted)). F o u rth , the Authority says that JPM is not an innocent party, as was the bond p u rc h a s e r in Spira, see 17 So. at 607. (Doc. # 16, at 19.) According to the Authority, JPM is not free from blame for the Authority's present plight because JPM "proposed, structured, a n d engineered the [S]waption with knowledge on both the limitations on the Authority's p o w e r and the conditions the Authority was required to satisfy in order to exercise that p o w e r." (Doc. # 16, at 19.) The doctrine of estoppel "is equitable in nature," Dillman v. C o m b u s tio n Eng'g, Inc., 784 F.2d 57, 60 (2d Cir. 1986), which brings into play the maxim th a t one "`who seeks equity must do equity,'" Cable Holdings of Ga., Inc. v. McNeil Real E s t a t e Fund VI, Ltd., 988 F.2d 1071, 1077 (11th Cir. 1993) (Tjoflat, Chief J., dissenting) (c ita tio n omitted); see also Robinson, 767 So. 2d at 1094 ("The party asserting the doctrine o f equitable estoppel may not predicate his claim on his own dereliction of duty or wrongful c o n d u c t." (internal quotation marks and citation omitted)). On the question of JPM's blame,
if any, whether equitable estoppel is a valid defense requires an analysis of several factual is su e s, including among others the extent, if any, of JPM's involvement in the structuring of th e Swaption, and the scope of JPM's knowledge pertaining to the validity of the Swaption u n d e r governing Alabama law. C o m p la in t and its attachments. In sum, a ruling as to whether the Authority is equitably estopped from denying the v a lid ity of the Swaption or whether JPM is not entitled to rely on the affirmative defense g iv e n its alleged wrongful conduct would not be appropriate since there is not a factual re c o rd upon which the ruling can be made. The motion to dismiss on estoppel grounds will b e denied. B. C la im s Asserting that the Swaption is Voidable J P M also contends that the Authority's claims that the Swaption is voidable are s u b je c t to Rule 12(b)(6) dismissal. JPM argues that the allegation that the Authority's p e rf o rm a n c e under the Swaption Agreement was conditioned upon the Authority's ability to issue refunding bonds fails because: (1) the Swaption Agreement does not require that the A u th o rity be able to issue new bonds as a condition to its performance; and (2) the Authority h a s failed to plead facts that, if proven, would demonstrate an inability to issue refunding These fact-intensive issues are not answered by the
bonds under the 2001 Act and the 2004 Act.2 4 Accordingly, JPM argues that the Authority " h a s no basis to evade its contractual obligations." (Doc. # 13, at 1.) 1. W h e th e r the Authority's Ability to Obtain Refunding Bonds Is a Condition
P re c e d e n t to the Performance of the Swaption T h e Complaint alleges that the Swaption is "voidable" because of the "Authority's in a b ility to issue variable rate refunding bonds, as the parties contemplated, in compliance w ith the 2001 Act (as amended by the 2004 Act)." (Compl. ¶ 13; see also Compl. ¶ 11 (" C e n tra l to the parties' performance under the [S]waption . . . was their mutual assumption th a t [the Authority] in fact could issue variable rate refunding bonds in compliance with A la b a m a law if [JPM] exercised the [S]waption.").) In the Complaint, the Authority has a lle g e d that it was "anticipated by the parties" (Compl. ¶ 1), and it further was their " e x p e c ta tio n " (Compl. ¶ 7) and "assumption" (Compl. ¶ 11), that a stipulation to the exercise o f JPM's swaption was the Authority's ability to refund and refinance its fixed rate Series 1 9 9 8 Bonds by issuing variable rate refunding bonds (Compl. ¶ 7). That expectation a lle g e d ly resulted, in part, from pre-contractual representations made by JPM during its m a rk e tin g presentation to the Authority. (Compl. ¶ 7.) JPM repeated those representations to the Authority in 2002 when the Swaption was executed and again in 2003 when the S w a p tio n was amended. Namely, in 2002 and 2003, JPM "described" the payments it made
JPM also argues that the Authority has not alleged (and cannot allege) facts that would excuse it from performing the Swaption pursuant to the doctrine of mutual mistake. (Doc. # 13, at 13-16.) Because the Authority disavows reliance on the doctrine of mutual mistake (Doc. # 16, at 25 n.23), it is unnecessary to address this issue.
to the Authority "as a hedge against a rise in interest rates between 2002 and November 2 0 0 8 , when refunding bonds could be issued." (Compl. ¶ 4.) Further, it is alleged that when J P M notified the Authority of its decision to exercise the Swaption on November 1, 2008, it "consequently expected the Authority on that date to issue variable rate refunding bonds f o r which [JPM] would provide a variable to fixed rate swap." (Compl. ¶ 11.) a. T h e Arguments
J P M contends that the foregoing allegations fail to state a claim because there is no p ro v is io n in the Swaption Agreement that requires the Authority's issuance of variable rate re f u n d in g bonds upon JPM's exercise of the Swaption. JPM contends that the allegations in the Complaint, phrased as an "expectation" and "assumption," amount to a tacit c o n c e s s io n by the Authority that the Swaption Agreement does not require the Authority to is su e refunding bonds.2 5 (Doc. # 13, at 13.) According to JPM, the fact that the Swaption A g re e m e n t "unequivocally enumerates the conditions to [the Authority's] performance of its o b lig a tio n s under the First Swaption," with no mention that the Authority's "ability to issue b o n d s is . . . one of the conditions[,] is fatal to [the Authority's] voidability claim." (Doc. # 18, at 13.) In the latter regard, JPM argues that the Swaption Agreement required only that th e Authority make "specified payments" and "whether [the Authority] additionally
It should be pointed out that, at the same time, JPM has made, at the very least, a tacit admission that it was "anticipated that [the Authority] would issue variable rate refunding bonds if JPM exercised the . . . Swaption." (Doc. # 18, at 13 (emphasis added); see also Doc. # 18, at 18 n.20 (providing that "[t]he parties clearly foresaw that the [the Authority] may have been unable, or unwilling, to issue refunding bonds").)
undert[ook] a refunding issuance . . . is beyond the scope of the Swaption Agreement." (Doc. # 13, at 13.) Pointing to § 2(a)(iii) of the Master Agreement, JPM also asserts that the A u th o rity's contractual obligations are subject only to the "conditions precedent" expressly e n u m e ra te d and that none of those conditions precedent includes "refunding as a condition." (Doc. # 13, at 11.) And under governing New York law,2 6 JPM says that extrinsic evidence of such an a lle g e d condition precedent may not be considered because it is outside the four corners of t h e Swaption Agreement. Reliance also is placed upon the agreement's merger clause as b a rrin g consideration of any matter extrinsic to the Swaption Agreement. (Doc. # 13, at 12.) In short, JPM's arguments focus solely on the contract language. On the other hand, the Authority takes a more expansive view. It contends that, h a v in g described the parties' expectations and assumptions, it adequately has alleged that its " a b ility to issue variable rate refunding bonds was a condition precedent to [JPM's] exercise o f the [S]waption."2 7 (Doc. # 16, at 25.) Section 2(a)(iii) incorporates into its terms "each o th e r applicable condition precedent specified in this Agreement," and the Authority argues th a t the Swaption Agreement "is replete with evidence that variable rate refunding bonds
The Swaption Agreement provides that it is "governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine, except that issues relating to the statutory power and authority for and authorization of this Agreement by [the Authority] shall be governed by and construed in accordance with the laws of the State of Alabama." (U.S. Municipal Counterparty Schedule, Part 4(e).) In its brief, the Authority explains that its theory "is less one of mutual mistake, as [JPM] suggests, than of failure of a condition precedent to the exercise of the [S]waption." (Doc. # 16, at 25 n.23.) Liberally construing the Complaint, the court will assume the same.
were to be issued by the Authority if [JPM] exercised the [S]waption." (Doc. # 16, at 26.) It says, for example, that it is not "mere happenstance" that the November 1, 2008 "exercise d a te " specified in the Swaption coincides with the first date upon which the Series 1998 B o n d s could be redeemed and refinanced with refunding bonds, or that the Swaption's te rm in a tio n date also is the final maturity date for the Series 1998 Bonds. (Doc. # 16, at 27.) Alternatively, the Authority argues that, if the court finds "as a matter of law that the c o n d itio n precedent of the Authority's ability to issue refunding bonds was not obvious on th e face of the [S]waption documents . . . , extrinsic evidence is admissible to prove the e x is te n c e of the condition." (Doc. # 16, at 28 n.30.) b. C o n d itio n s Precedent under New York Law
In Lindenbaum v. Royco Property Corp., 567 N.Y.S.2d 218 (App. Div. 1991), cited b y the Authority, the court defined a contractual "`condition precedent' . . . as `an act or e v e n t, other than a lapse of time, which must exist or occur before a duty of immediate p e rf o rm a n c e of a promise arises.'" Id. at 220 (citation omitted). "The general rule is that it m u s t clearly appear from the contract itself that the parties intended a provision to operate a s a condition precedent . . . and that where there is ambiguity in a contractual term, the law d o e s not favor a construction which creates a condition precedent." Willis v. Ronan, 631 N .Y .S .2 d 50, 51 (App. Div. 1995) (internal quotation marks and citation omitted). And in Hicks v. Bush, 180 N.E.2d 425 (N.Y. 1962), also relied upon by the Authority, th e court explained the circumstances when a condition precedent that is not written in the
contract can be considered. Hicks held that "[p]arol testimony is admissible to prove a c o n d itio n precedent to the legal effectiveness of a written agreement, if the condition does n o t contradict the express terms of such written agreement." Id. at 427 (internal citations o m itte d ). The purpose of the rule espoused in Hicks "is not to var
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?