Alabama Public School and College Authority v. JPMorgan Chase Bank

Filing 62

MEMORANDUM OPINION AND ORDER; that the motion to compel as characterized in this opinion and order be and is hereby GRANTED. JPM shall produce the number or numbers on or before September 1, 2010. It is further ORDERED that APSCA's motion for fees and expenses be and is hereby DENIED. Signed by Honorable Charles S. Coody on 8/18/2010. (Attachments: # 1 Civil Appeals Checklist)(jg, )

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A l a b a m a Public School and College Authority v. JPMorgan Chase Bank D o c . 62 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 A N D COLLEGE AUTHORITY, P l a in tif f , v. J P M O R G A N CHASE BANK, D e f e n d a n t. ) ) ) ) ) ) ) ) ) ) C IV IL ACT. NO. 2:08CV863-WKW (W O ) M E M O R A N D U M OPINION AND ORDER I . Introduction In this case, the Alabama Public School and College Authority (APSCA) seeks d e c la ra to ry relief requesting the court to declare void or voidable a 2002 swaption a g re e m e n t between it and defendant JPMorgan Chase Bank (JPM). The nature of the s w a p tio n and the substantive issues involved in this case are described earlier in the c o u rt's opinion on JPM's motion to dismiss. Alabama Public School and College A u th o r ity v. JPMorgan Chase Bank, --- F.Supp. 2d ---, 2009 WL 2171896 (July 21, 2 0 0 9 ). On May 5, 2010, the APSCA filed a motion to compel. (doc. # 33) On June 9, 2 0 1 0 , the court heard argument on the motion. At that time, the parties told the court that th e y had resolved all issues raised in the motion to compel except for document request N o . 8 in which the APSCA seeks A ll documents (including communications) that reflect or relate to JP M o rg a n 's accounting for the Agreement (or any transaction decribed in o r contemplated by the Agreement) including, without limitation, d o c u m e n t s that reflect any revenue or income recognized or cost or expense incu rred by JPMorgan at the inception of the Agreement or thereafter. S trip p e d of the verbosity of typical discovery requests, by this request the APSCA w a n ts to know how much 1 JPM recognized 2 on its books in 2002, when the swaption a g re e m e n t was executed. JPM objects, contending that its "revenues are not at issue in this action and bear no relationship to the question of whether the transactions were p ro p e r under Alabama law." FED.R.CIV.P. 26(b)(1) provides that "[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense . . . " The Committee Comments to FED.R.CIV.P. 26 confirm that requiring relevance to a claim or defense "signals to the court that it has the authority to confine discovery to the claims and defenses asserted in the pleadings, and signals to the parties that they have no entitlement to discovery to develop new claims or defenses that are not already identified in the pleadings." GAP Report of Advisory Committee to 2000 amendments to Rule 26. In determining what discovery to allow, the court is likewise guided by some other fundamental principles. "Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible At oral argument, APSCA clarified its request. "[W]hat we're interested in is the revnue or income recognized for the cost or expense incurred." (Trans. Oral Arg. at 23) As explained by counsel, the term "recognized" as used here means "there is an estimate made at the beginning of the transaction by J.P. Morgan how much it thought it would make on these transactions based on whatever assumptions are made about future events." (Oral Arg. Tr. at 18) Put another way, recognizing a gain contingency by "booking" it at the time of an executed transaction is typical in accrual accounting practices. 2 1 2 evidence." FED.R.CIV.P. 26(b)(1). [D]istrict courts have broad discretion in fashioning discovery rulings, they are bound to adhere "to the liberal spirit of the [Federal] Rules." Burns v. ThiokolChem. Corp., 483 F.2d 300, 305 (5th Cir. 1973). The Federal Rules do not give district courts "blanket authorization . . . to prohibit disclosure of information whenever it deems it advisable to do so, but is rather a grant of power to impose conditions on discovery in order to prevent injury, harassment, or abuse of the court's processes." Williams v. City of Dothan,Ala., 745 F.2d 1406, 1416 (11 Cir. th 1984) (quoting Bridge C.A.T. Scan Assocs.v. Technicare Corp., 710 F.2d 940, 944-45 (2nd Cir. 1983)). Adkins v. Christie, 488 F.3d 1324, 1331 (11th Cir. 2007). W ith these general principles in mind, the court will now address the arguments re la tin g to this discovery dispute. II. The Motive Argument In its motion to compel, the APSCA argued that the requested information "likely w ill reflect what the Authority contends is a clear financial motive for JPMorgan to alter th e Agreement in a manner that failed to comply with Alabama law." The complaint f iled by APSCA contends that the swaption transaction is void or voidable because it v io la te d Alabama law. JPM argues that its motive in entering into the swaption a g re e m e n t is wholly irrelevant to whether the swaption agreement is consistent with A lab a m a law. On these narrow terms the court agrees. Discernment of JPM's motive is n o t relevant to a claim or defense in this case. FED.R.CIV.P. 26(b)(1). I I I . What is the True Nature of the Swaption Agreement? 3 A P S C A argues that the revenue which JPM booked at the time the agreement was e x e c u te d is "part of the fundamental structure of the Swaption Agreement . . . [and] also p ro v id e s insight into JPMorgan's entry into a transaction that depart materially from a tru e swaption." (Mot. Compel at 7) In a related argument, the APSCA contends that the s w a p tio n transaction was more akin to a loan that an interest rate swaption. (Id. at 8) In its last brief on the question, APSCA's argument is more focused. [ T ] h e amount of revenue recorded by JPMorgan is probative on the issue of w h e th e r the swaptions, as characterized by JPMorgan, were permissible h e d g e s under Alabama law (or, for that matter, whether they were hedges at a ll). This is so because the total economic value of the swaptions is the sum o f (1) the payments the Authority received, (2) the payments made to th ird -p a rty professionals who were compensated for their work on the tra n sa c tio n s, and (3) the amount of money that JPMorgan recorded as its o w n revenues on the transactions. As discussed below, it is that total value th a t must be compared to the value of what JPMorgan claims the Authority s o ld in order to determine whether the transactions had a lawful hedging p u rp o s e under Alabama law. (A P S C A Supp. Mem. Doc. # 52 at 2) O n e of APSCA's principal arguments in this case relates to the refunding and re f in a n c in g of Series 1998 Bonds issued by APSCA which contends that the s w a p tio n s were components of an integrated series of transactions. Central to those transactions was the parties' agreement that if JPMorgan exercised its option to place the Authority into swaps, those swaps would be settled by th e Authority's redemption, or "call," of its existing fixed rate Series 1998, 1 9 9 9 A , 1999C, and 1999D bonds and its issuance of variable rate refunding b o n d s on which the swaps would be placed. The objective of the tra n sa c tio n s was to allow the Authority to complete synthetic advance re f u n d in g s of its fixed rate bonds that is, to realize in 2002 (and, by virtue o f amendments to the swaptions in 2003) the anticipated debt service s a v in g s associated with bond refundings that could not otherwise be 4 u n d e rtak en until 2008 or later. (A P S C A Mem. doc. # 52 at 2-3) A P S C A further argues that the only hedge associated with the transactions was a " h e d g e against interest rates payable on the to-be-issued variable rate refunding bonds . . . " Id. at 3. When the total value of the swaptions is compared to the total value of the A u th o rity's call rights, the Court will be able to draw no conclusion other th a n that JPMorgan's view of the hedge in the swaption transactions means th a t the Authority received far more money than its call rights were worth b e c au s e it agreed to take on substantial risk that it did not otherwise have. S tated differently, the only conclusion to be drawn from JPMorgan's c h a ra c te riz a tio n of the swaptions is that they not only failed to reduce or e lim in a te a potential loss the very purpose of a hedge - but actually c re a te d an enormous risk of loss for the Authority. (Id . at 5) In response, JPM argues that there is no authority for APSCA's contention that the v a lu e of the swaption must equate to the value of its call right in order for the swaption to c o n stitu te a hedge. (JPM Supplemental Resp. dn # 58 at 1-2) "APSCA's argument that th e swaptions were not hedges because `the payment it [i.e., APSCA] received' allegedly e x c ee d the value inherent in the Authority's call rights does not in any way depend on h o w much JPMorgan earned on the transaction . . . " (Id. at 2) T h e parties present other arguments, but the court's reiteration of these arguments is sufficient to support the court's fundamental conclusion about this discovery dispute. The parties' contentions revolve around a single, all encompassing question. What did 5 th e parties intend when they entered into the swaption transaction. The heading of this s e c tio n of this opinion puts the question another way: What is the true nature of the s w a p tio n agreement? In its earlier Memorandum Opinion the court asked a series of q u e s tio n s , each of which in some way or another touch on this same, central question. See Alabama Public School and College Authority v. JPMorgan Chase Bank, --- F.Supp. 2 d ---, --, 2009 WL 2171896, *25-26 (July 21, 2009). Jurisdiction in this case is founded on diversity; therefore, "state law applies to any is s u e not governed by the Constitution or treaties of the United States or Acts of C o n g re ss ." Mid-Continent Cas. Co. v. American Pride Bldg. Co., LLC, 601 F.3d 1143, 1 1 4 8 (11th Cir. 2010). In Alabama, the central question in interpreting a contract is the in t e n t of the parties. " U n d e r general Alabama rules of contract interpretation, the intent of the c o n tra c tin g parties is discerned from the whole of the contract. See Loerch v . National Bank of Commerce of Birmingham, 624 So.2d 552, 553 (A la.1 9 9 3 ). Where there is no indication that the terms of the contract are u s e d in a special or technical sense, they will be given their ordinary, plain, a n d natural meaning. See Ex parte Dan Tucker Auto Sales, Inc., 718 So.2d 3 3 , 36 (Ala.1998). If the court determines that the terms are unambiguous (s u s c e p tib le of only one reasonable meaning), then the court will presume th a t the parties intended what they stated and will enforce the contract as w ritte n . See id. at 36; Voyager Life Ins. Co. v. Whitson, 703 So.2d 944, 948 (A la .1 9 9 7 )." H o m e s of Legend, Inc. v. McCollough, 776 So.2d 741, 746 (Ala.2000). G iv e n the arguments of the parties in this dispute, as well as the complexity of the s w a p tio n agreements, it is patently obvious that the intent of the parties will not be 6 su sc e p tib le to easy interpretation. Alabama law is clear; the actions of a party with re sp e c t to an agreement or references within an agreement have probative value with re s p e c t to the intent of the parties to the agreement. See, e.g. Daughtrey v. Honeywell, In c ., 3 F.3d 1488, 1492 (11th Cir. 1993); Beverly v. Macy, 702 F.2d 931, 941 (11th Cir. 1 9 8 3 ); Blocker v. Lowry, 233 So.2d 233, 235 (Ala. 1970). T h u s, after careful consideration of the arguments of the parties, the court c o n c lu d e s that JPM's booking of revenue at the time the swaption agreement was e x e c u te d has probative value with respect to how it viewed the nature of the agreement. In other words, JPM's valuation of the agreement is relevant to its view of the nature of the contract. Therefore, under FED.R.CIV.P. 26(b)(1) the discovery sought by APSCA is relevant to a claim or defense in this case. I V . Possible Prejudice to JPM T h e court's conclusion about the relevance of APSCA's discovery does not end th e court's enquiry, however. Notwithstanding the protective order entered in this case on J a n u a ry 19, 2010, (doc. # 29) JPM argues that disclosure of the amount of revenue it b o o k e d could harm JPM because it would disclose proprietary information about how it c o n d u c ts its business. (Trans. Oral Arg. at 24) The court finds the harm argument u n p e rsu a siv e in the context of this case. It is undisputed that JPM no longer engages in th is type of derivative business. JPM has presented no evidence or argument that the p ro te c tiv e order is insufficient to protect any interest that it has regarding its valuation of 7 th e transactions. V . Conclusion F o r the foregoing reasons, the court concludes that the motion to compel should be g ra n te d . As earlier noted, APSCA clarified that its seeks only the amount which JPM b o o k e d at the time the swaption agreement(s) were executed. Thus, the court's order a p p lie s only to that number or those numbers. Accordingly, it is O R D E R E D that the motion to compel as characterized in this opinion and order be an d is hereby GRANTED. JPM shall produce the number or numbers on or before S e p te m b e r 1, 2010. It is further O R D E R E D that APSCA's motion for fees and expenses be and is hereby D E N IE D . D o n e this 18 T H day of August, 2010. /s/Charles S. Coody CHARLES S. COODY U N IT E D STATES MAGISTRATE JUDGE 8

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