Wailea Partners, LP v. HSBC Bank USA, N.A.

Filing 42

ORDER by Judge Samuel Conti granting 23 Motion to Dismiss (sclc2, COURT STAFF) (Filed on 12/15/2011)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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United States District Court

For the Northern District of California

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WAILEA PARTNERS, LP,
) Case No. 11-CV-3544 SC
a Delaware limited partnership, )
) ORDER GRANTING DEFENDANT'S
Plaintiff,
) MOTION TO DISMISS
)
v.
)
)
HSBC BANK USA, N.A.,
)
a national banking association, )
)
Defendant.
)
)
)

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I.

INTRODUCTION
In this action, Plaintiff Wailea Partners, LP ("Plaintiff" or

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"Wailea") seeks rescission of an investment contract entered into

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with Defendant HSBC Bank, USA, N.A. ("Defendant" or "HSBC USA").

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See ECF No. 1 ("Compl.").

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to Dismiss Plaintiff's Complaint.

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is fully briefed.

Before the Court is Defendant's Motion
ECF No. 23 ("Mot.").

The Motion

ECF Nos. 35 ("Opp'n), 40 ("Reply").

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II.

BACKGROUND
As it must on a motion to dismiss under Federal Rule of Civil

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Procedure 12(b)(6), the Court assumes the veracity of Plaintiff's

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well-pleaded factual allegations.

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organized as a Delaware limited partnership.

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majority of Wailea's investors are based in northern California,

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and these California-based investors contributed more than eighty

Wailea is an investment fund
Compl. ¶¶ 1, 7.

The

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percent of Wailea's capital.

Id. ¶ 7.

HSBC USA is the U.S.

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affiliate of an international banking company, and is a member of

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HSBC Group, a worldwide organization of banks and financial

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services companies parented by HSBC Holdings plc.

Id. ¶ 8.

Wailea's investment objective was to achieve long-term capital

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appreciation by investing in structured financial products linked

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to the performance of hedge funds -- specifically, hedge funds that

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utilize a particular risk-minimizing trading strategy known as the

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"split-strike conversion" ("SSC") strategy.

Id. ¶ 1.

In and prior

United States District Court

For the Northern District of California

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to 2007, HSBC USA offered a variety of different structured

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investment contracts linked to the performance of hedge funds using

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the SSC strategy, including "total return swap contracts."

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¶¶ 10-11.

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value and cash flows of an asset or group of assets for the value

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and cash flows of a different asset.

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contracts offered counterparties the prospect of achieving the

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return, or multiples of the return, generated by a reference asset

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-- here, a hedge fund -- without having to own the asset itself.

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Id.

Id. at

A "swap" is a financial transaction created to swap the

Id. ¶ 11.

HSBC USA swap

In May 2007, Wailea and HSBC USA began negotiating the terms

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of a swap contract to be linked to the performance of an investment

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portfolio run by a mutual fund company named Senator Fund SPC

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("Senator").

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Senator Equity Segregated Portfolio One (the "Senator Fund") was a

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suitable reference fund because substantially all of the Senator

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Fund's Capital was deposited with Bernard L. Madoff Investment

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Securities LLC ("BLMIS") to be managed using the SSC strategy.

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¶ 14.

Id. ¶ 13.

The parties decided that a fund called the

Id.

As stated in Senator's July 2006 Offering Memorandum for the

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Senator Fund (the "2006 Senator Fund OM"), "substantially all of

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the Fund's Portfolio One assets are managed by one Manager, who

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utilizes a 'split-strike conversion strategy[.]'"

Id. ¶ 14.

According to Wailea, "investment of Senator Fund's capital in

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accordance with the SSC Strategy was an essential, core condition

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of the parties' proposed swap transaction."

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and HSBC USA demanded and received assurances from Senator that the

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Senator Fund's capital would continuously be invested using the SSC

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strategy.

Id. ¶ 15.

Both Wailea

According to Wailea, "[t]he parties . . . conditioned

United States District Court

For the Northern District of California

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their own contractual rights and duties on the requirement that

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Senator Fund would invest its capital in accordance with the

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specified SSC Strategy."

Id.

On July 10, 2007, HSBC USA sent Wailea and Senator a copy of

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its portfolio guidelines for swaps and other investment products

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(the "HSBC Investment Guidelines") and requested assurances from

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Senator that these guidelines would be followed if HSBC USA and

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Wailea were to enter into a swap contract linked to the Senator

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Fund.

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following terms and conditions: "[t]he Reference Fund will invest

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substantially all of its assets in a managed account . . . at all

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times during the term of this Transaction," and "[t]he Investment

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Manager will use a split-strike conversion strategy."

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further provided that "[t]he Reference Fund will only invest in (1)

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stocks in the S&P 100 index, (2) option on S&P 100 index, and/or

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(3) Money Market/US Treasury Bills."

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Id. ¶ 17.

The HSBC Investment Guidelines included the

Id.

They

Id.

On July 12, 2007, Senator sent Wailea a letter "confirm[ing]

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that Senator is fully invested (with the exception of cash reserves

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kept for payment of expenses) in the 'split-strike' hedged equity

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strategy[.]"

Id. ¶ 18.

On September 4, 2007, Wailea and HSBC USA entered into a swap

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Id. ¶ 19.

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agreement linked to the performance of the Senator Fund.

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The terms of the contract were set forth in a document entitled

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Share Swap Transaction Confirmation (the "Swap Agreement").

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of the Swap Agreement is attached to the Complaint.

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("Swap Agreement").1

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"Investment Guidelines" refers the reader to "Annex II," which

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contains the same language set forth in the HSBC Investment

United States District Court

For the Northern District of California

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A copy

Compl. Ex. 1

Section 7 of the Agreement, labeled

Guidelines quoted above, namely:

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The [Senator] Fund will invest substantially all of its
assets in a managed account . . . at all times during the
term of this Transaction. The Investment Manager will use
a split-strike conversion strategy.

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The [Senator] Fund will only invest in (1) stocks in the
S&P 100 index, (2) option on S&P 100 index, and/or (3)
Money Market/US Treasury Bills.

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Swap Agreement, Annex II.
The Swap Agreement incorporates by reference the terms of the

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1992 version of the Master Agreement of the International Swap

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Dealers Association, Inc. ("ISDA Master Agreement") as well as

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definitions contained in the 2000 ISDA Definitions and the 2002

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ISDA Equity Derivatives Definitions.

Id. at 1.

Pursuant to the terms of the Swap Agreement, Wailea paid HSBC

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In ruling on a motion to dismiss, a court is generally limited to
the allegations of the complaint. Arpin v. Santa Clara Valley
Transp. Agency, 261 F.3d 912, 925 (9th Cir. 2001). However, the
Court may consider documents attached to the complaint, documents
upon which the complaint relies, and documents properly the subject
of judicial notice. Hal Roach Studios, Inc. v. Richard Feiner &
Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990) (documents attached
to the complaint); Marder v. Lopez, 450 F.3d 445, 448 (9th Cir.
2006) (documents upon which the complaint relies); MGIC Indem.
Corp. v. Weisman, 803 F.2d 500, 504 (1986) (judicial notice).

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USA $8,870,000 in collateral, and in return HSBC USA made a

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"synthetic investment" of $31 million in the Senator Fund on

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Wailea's behalf.

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financing for a leveraged investment by Wailea in the Senator Fund.

Id. ¶ 21.

Thus, in effect, HSBC USA provided

On November 2, 2007, Wailea and HSBC USA amended and restated

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the Swap Agreement as set forth in an Amended and Restated Share

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Swap Transaction Confirmation.

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the "Maximum Notional Amount" from $31 million to $38 million,

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meaning that Wailea could increase its synthetic investment in the

Id. ¶ 22.

The parties increased

United States District Court

For the Northern District of California

Id.

On July

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Senator Fund up to $38 million if it chose to do so.

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18, 2008, Wailea and HSBC USA once again amended and restated their

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agreement, as reflected in a Third Amended and Restated Share Swap

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Transaction Confirmation.2

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"Maximum Notional Amount," this time to $39 million.

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The provisions of Annex II and all disclaimer provisions in the

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original version of the Swap Agreement appear in identical form in

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the amended and restated versions.

The parties again increased the
Id. ¶ 23.

See id. Exs. 1-3.

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Between October 2007 and December 2008, Wailea periodically

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adjusted the amount of collateral it provided to HSBC USA, which

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had the effect of adjusting the amount of Wailea's synthetic

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investment in the Senator Fund.

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transferred $15,970,000 in collateral to HSBC USA.

Id. ¶ 24.

In total, Wailea
Id.

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Each month from October 2007 through December 2008, HSBC USA

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sent Wailea a Month-end Valuation Report that purportedly stated:

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(1) the net asset value of individual units of the Senator Fund;

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For the sake of clarification, the Court notes that the parties
do not mention the existence of any second amended swap agreement.
Rather, it appears that the document entitled Third Amended and
Restated Share Swap Transaction Agreement was in fact only the
second amendment and restatement of the initial agreement.

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(2) the net asset value of Wailea's swap investment for the

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previous month; and (3) the amount of accrued interest Wailea owed

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HSBC USA.

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of collateral it made to HSBC USA was predicated on its belief that

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the values reported in the Month-end Valuation Reports were

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accurate, and but for the Month-end Valuation Reports, Wailea would

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not have transferred any additional collateral to HSBC USA.

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26.

Id. ¶ 25.

Wailea alleges that each additional transfer

Id. ¶

On December 11, 2008, Bernard Madoff ("Madoff") was arrested

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United States District Court

For the Northern District of California

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by federal agents for operating a Ponzi scheme through BLMIS's

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investment advisory business.

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"Manager" described in the 2006 Senator Fund OM.

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subsequently pled guilty and acknowledged that he never invested

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any of his clients' funds pursuant to the SSC strategy.

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Ex. 6 ("Madoff Plea Hrg. Tr.") at 26:16-18.3

Id. ¶ 27.

Madoff was the investment
Id.

He

Def.'s RJN

After Madoff's arrest, on December 15, 2008, the District

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Court for the Southern District of New York granted an order

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placing all BLMIS accounts, including the Senator Fund, under the

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protections of the Securities Investor Protection Act and appointed

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Irving Picard ("Picard") as trustee for liquidation of BLMIS

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HSBC USA requests judicial notice of the transcript of Madoff's
plea hearing and five news articles pertaining to Madoff's fraud.
ECF No. 25 ("Def.'s RJN"). Under Rule 201, courts may take
judicial notice of facts contained in public records that are not
subject to reasonable dispute. Lee v. City of Los Angeles, 250
F.3d 668, 689-690 (9th Cir. 2001). Accordingly, the Court takes
judicial notice of Madoff's plea hearing transcript and its
contents. Courts may also take judicial notice of publications
introduced to indicate what was in the public realm at the time but
may not take judicial notice of whether the contents of those
articles are in fact true. Von Saher v. Norton Simon Museum of Art
at Pasadena, 592 F.3d 954, 960 (9th Cir. 2010). Accordingly, the
Court takes judicial notice of the news articles solely as an
indication of what information was in the public realm at the time.

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accounts.

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shareholders suspending the issue and redemption of shares until

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further notice.

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Id. ¶ 29.

The same day, Senator sent a letter to its

Id.

Wailea alleges that HSBC USA had suspected Madoff's

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involvement in fraud as early as 2005 and hid this information from

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Wailea.

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KPMG to conduct a due diligence review of BLMIS for "fraud and

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related operational risk."

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February 2006, noting several risks of fraud with respect to the

Around September 2005, HSBC Group hired the auditing firm

Id. ¶ 33.

KPMG released its report in

United States District Court

For the Northern District of California

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investment of BLMIS clients' money, including failure to segregate

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client funds from BLMIS funds and use of client funds to make

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trades that deviated from the SSC strategy.

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2008, HSBC Group hired KPMG to perform a second review of BLMIS,

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which yielded a report noting the same fraud risks as the 2006

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report, as well as risks of falsification of client mandates,

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embezzlement of client funds, and diversion of client funds for

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Madoff's personal gain.

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Id.

Around March

Id. ¶¶ 34-35.

As KPMG was completing its 2008 diligence review of BLMIS, and

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during the months after the report was issued, "HSBC Group

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affiliates began a massive liquidation of their global investments

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in BLMIS hedge-fund clients."

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immediately preceding Madoff's arrest, HSBC USA and its affiliates

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allegedly redeemed more than $400 million invested in BLMIS hedge-

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fund clients and liquidated substantially all of their holdings in

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the Senator Fund.

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Group's liquidation efforts, HSBC USA told Wailea "that there was

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no reason for concern and that the redemptions were made for

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'market reasons.'"

Id. ¶ 38.

Id. ¶¶ 38-39.

Id.

During the ninety days

When Wailea inquired about HSBC

HSBC USA did not disclose any of the

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contents of the KPMG reports.
On December 5, 2010, Picard, trustee for the liquidation of

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BLMIS, filed suit against several HSBC Group affiliates, including

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HSBC USA, alleging that they "enabled Madoff's Ponzi scheme by

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encouraging investment into an international network of feeder

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funds . . . in order to reap an extraordinary financial windfall."

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Id. ¶ 41.

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Picard suit that Wailea discovered that: (1) HSBC USA lacked a good

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faith basis for believing Madoff was complying with the SSC

Wailea alleges that it was not until the filing of the

United States District Court

For the Northern District of California

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strategy with respect to BLMIS's investment of the Senator Fund's

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capital; and (2) HSBC USA itself may have engaged in wrongdoing

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with respect to the Senator Fund.

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Id. ¶ 42.

Wailea filed this action on July 19, 2011, seeking rescission

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of the Swap Agreement and return of the approximately $15,970,000

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in collateral that Wailea transferred to HSBC USA.

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Wailea asserts the following five claims for rescission: (1) mutual

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mistake, alleging that Wailea and HSBC USA were mutually

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in their belief that the Senator Fund's capital would be invested

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pursuant to the SSC strategy; (2) unilateral mistake, alleging that

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Wailea was unilaterally mistaken about the belief that the Senator

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Fund was following an SSC investment strategy; (3) innocent

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misrepresentation, alleging that HSBC USA made various

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misrepresentations concerning the SSC strategy and the value of

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Wailea's investment; (4) failure of condition precedent, alleging

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that investment of the Senator Fund's capital pursuant to the SSC

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strategy was an express condition of the formation of the Swap

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Agreement that never occurred; and (5) violation of California

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Corporations Code §§ 25401 et seq., alleging that HSBC USA made

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See Compl.

mistaken

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misleading statements and omissions in connection with the sale of

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securities.

See id. ¶¶ 43-64.

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III. LEGAL STANDARD
A motion to dismiss under Federal Rule of Civil Procedure

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12(b)(6) "tests the legal sufficiency of a claim."

Navarro v.

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Block, 250 F.3d 729, 732 (9th Cir. 2001).

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on the lack of a cognizable legal theory or the absence of

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sufficient facts alleged under a cognizable legal theory.

Dismissal can be based

United States District Court

For the Northern District of California

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Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.

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1990).

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should assume their veracity and then determine whether they

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plausibly give rise to an entitlement to relief."

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Iqbal, 129 S. Ct. 1937, 1950 (2009).

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court must accept as true all of the allegations contained in a

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complaint is inapplicable to legal conclusions.

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recitals of the elements of a cause of action, supported by mere

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conclusory statements, do not suffice."

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(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).

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complaint need not contain "detailed factual allegations," but it

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must provide more than an "unadorned, the-defendant-unlawfully-

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harmed-me accusation."

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complaint "must be enough to raise a right to relief above the

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speculative level."

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dismiss should be granted if the plaintiff fails to proffer "enough

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facts to . . . nudge[] [its] claims across the line from

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conceivable to plausible."

"When there are well-pleaded factual allegations, a court

Id. at 1949.

However, "the tenet that a

A

The allegations in the

Id. at 570.

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Threadbare

Iqbal, 129 S. Ct. at 1950

Twombly, 550 U.S. at 555.

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Ashcroft v.

Thus, a motion to

1 IV.

DISCUSSION

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A.

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As an initial matter, HSBC USA argues that Wailea's first four

Choice of Law

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claims are governed by New York law because the Swap Agreement

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contains a valid and enforceable choice of law clause specifying

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that New York law shall govern the Agreement.

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Swap Agreement at 1 ("the governing law is the law of the State of

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New York, without reference to choice of law doctrine.")).4

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argues that the clause does not control because Wailea seeks to

Mot. at 5-6 (citing

Wailea

United States District Court

For the Northern District of California

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rescind, rather than enforce, the Swap Agreement.

For the

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following reasons, the Court agrees with HSBC USA and applies New

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York law to Wailea's first four claims.
A district court sitting in diversity applies the choice of

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law rules of the state in which it sits.

Fields v. Legacy Health

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Sys., 413 F.3d 943, 950 (9th Cir. 2005).

California choice of law

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rules therefore govern the Court's determination of which state's

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law to apply to Plaintiff's claims.

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the application of contractual choice of law clauses.

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Bank, FA v. Super. Ct., 24 Cal. 4th 906, 917 (Cal. 2001).

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California courts will apply the parties' contractually chosen law

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if: (1) the designated state has a substantial relationship to the

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parties or the transaction, and (2) the chosen law would not

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contravene a fundamental policy of California.

California law strongly favors
Wash. Mut.

Id. at 916.

Where, as here, one of the parties has its principal place of

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Nearly all provisions of the Swap Agreement remain unchanged in
the amended and restated versions of the agreement. Therefore,
when citing provisions that are identical in all three versions,
the Court refers simply to the "Swap Agreement."

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business in the designated state,5 the substantial relationship

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test is met.

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Cory, Hargreaves & Savitch, LLP, 152 Cal. App. 4th 42, 59 (Cal. Ct.

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App. 2007).

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between California and New York law on rescission claims, applying

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New York contract law in this case does not undermine the public

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policy of California.

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93-4672 (WDK), 1995 U.S. Dist. LEXIS 22008, at *7 (C.D. Cal. June

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20, 1995).

United States District Court

Moreover, because there is no significant difference

See Peterson v. Highland Music, Inc., No. CV

Finally, under California's choice-of-law rules, a valid

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For the Northern District of California

Expansion Pointe Props. Ltd. P'ship v. Procopio,

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choice-of-law clause encompasses all claims arising from or related

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to an agreement -- even claims seeking to rescind the agreement.

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Seidman & Seidman v. Wolfson, 50 Cal. App. 3d 826, 830-31 (Cal.

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1975).

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law clause does not apply here because Wailea disputes the very

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formation of the contract and "whether a contract was formed in the

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first place . . . precedes the question whether the Court may

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enforce its terms."

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Seidman sought to rescind a contract containing a choice-of-law

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clause on the basis of mistake and misrepresentation.

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held that the choice-of-law clause was valid and enforceable absent

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a contention by the plaintiff that "the inclusion of the choice of

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law clause itself was obtained by misrepresentation or mistake."

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Id. at 831.

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itself was included in the Agreement because of mistake or

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misrepresentation, and therefore, the clause is valid and

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Seidman disposes of Wailea's argument that the choice-of-

Opp'n at 5 n.5.

Like Wailea, the plaintiff in

The court

Wailea does not contend that the choice-of-law clause

Wailea alleges, and HSBC USA admits, that HSBC USA's principal
place of business is located in New York. Compl. ¶ 8; Mot. at 6.

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enforceable under Seidman.

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B.

Claims for Mutual and Unilateral Mistake

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HSBC USA argues that Wailea's claims for mutual and unilateral

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mistake fail as a matter of law because Wailea expressly assumed

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the risk of the alleged mistake under the plain language of the

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Swap Agreement.

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assume certain specified risks under the terms of the Swap

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Agreement, it did not assume the risk that the Senator Fund's

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capital would not be invested pursuant to the SSC strategy.

United States District Court

For the Northern District of California

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at 21.6

Mot. at 10.

Wailea responds that, although it did

Opp'n

For the following reasons, the Court agrees with HSBC USA.

Under New York law, a mistake of material fact is not grounds

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for rescission of a contract if the party seeking rescission bears

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the risk of mistake.

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Co., 622 F.2d 655, 656-57 (2d. Cir. 1980).

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bear the risk of mistake if: (1) the risk is so allocated by

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agreement of the parties; (2) at the time the contract is made, the

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party has only limited knowledge with respect to the facts relating

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to the mistake, but the party treats that knowledge as sufficient;

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or (3) the risk is allocated to that party by terms supplied by the

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court on the ground that it is reasonable under the circumstances

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to do so.

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here.

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circumstances apply here and accordingly finds that Wailea assumed

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the risk mistake as to the Senator Fund's investment strategy.

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Id.

Albert Elia Bldg. Co., Inc. v. Am. Sterilizer
A party will be held to

HSBC USA argues that all three circumstances apply

Mot. at 9.

The Court agrees that the first two

Wailea also responds by repeatedly emphasizing that the Senator
Fund's use of the SSC strategy was an absolutely essential precondition to formation of the Swap Agreement. Id. at 20-21.
Because this argument is a reiteration of Wailea's failure of
condition precedent claim, the Court addresses it when discussing
that claim below.

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First, the Swap Agreement consistently and unambiguously

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allocates to Wailea the risk of mistake as to the Senator Fund's

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performance, which alone suffices to defeat Wailea's claims for

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rescission based on a mistake with respect to the Senator Fund.

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See Beecher v. Able, 575 F.2d 1010, 1015 (2d Cir. 1978) (holding

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that if "there is a term in a valid agreement that the risk as to

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the existence of an assumed state of facts is to be upon one of the

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contracting parties, there can be no rescission of the transaction

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for mistake as to such facts") (internal quotation omitted).

United States District Court

For the Northern District of California

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Under the Section 12 of the Swap Agreement, Wailea affirmed that it

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understood and assumed the financial risks of "the Transaction":

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Each party has the capability to make its own legal,
regulatory, tax, investment, financial, accounting and
business evaluation of and to understand, and has
evaluated and does understand on its own behalf, the
terms, conditions and risks of entering into this
Transaction and is willing to accept those terms and
conditions and to assume (financially and otherwise)
those risks.

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Swap Agreement, § 12(b).

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liable to it if the financial effects of "the Transaction" turned

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out differently than Wailea expected:

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Wailea also agreed that HSBC would not be

Neither party or any affiliate thereof will bear any
responsibility or liability if the legal, regulatory,
tax, investment, financial, accounting, business or
credit effects or consequences of this Transaction are
other than those contemplated by the other party.

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Id. § 12(c).

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Wailea further agreed that it was "solely responsible for

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making an independent appraisal of[,] and investigation into[,] the

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financial condition, prospects, creditworthiness, status and

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business of [the Senator Fund],"

id. § 12(f), and that Wailea was

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not relying on any representations or warranties made by HSBC USA

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regarding the Senator Fund, id. §§ 12(d),(g).

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Wailea concedes that it assumed "specified risks 'of entering

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into this Transaction,'" but argues that it did not assume the risk

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of the particular mistake alleged here.

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Agreement § 12(b)).

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defined to be a share swap transaction with certain

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specifications," including the specification that the investment

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manager of the Senator Fund would use the SSC strategy and would

United States District Court

For the Northern District of California

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Opp'n at 21 (quoting Swap

Wailea argues that "the term 'Transaction' is

only invest in certain low-risk assets.

Id.

The definition of the "Transaction" provided in the Swap

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Agreement does not assist Wailea's argument.

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preamble (defining the "Transaction" simply as "the Share Swap

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Transaction entered into between [HSBC USA] and [Wailea] on the

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Trade Date specified below").

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in Sections 12(b)-(f) of the Agreement cited above, especially

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section 12(f), Wailea's argument that the risks it assumed under

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the Agreement did not include the risk that the Senator Fund would

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not follow the SSC strategy is inconsistent with the plain meaning

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of the Swap Agreement.

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See Swap Agreement

Moreover, in light of the language

Second, even if the Swap Agreement did not allocate the risk

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of the alleged mistake to Wailea, Wailea nevertheless assumed this

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risk under the second prong set forth in Albert Elia because it

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chose to treat the limited knowledge it had concerning the Senator

25

Fund as sufficient and disclaimed reliance on any representations

26

made by HSBC USA.

27

was aware of, and concerned about, the risk that the Senator Fund

28

would not follow the SSC strategy.

See 622 F.2d at 656-657.

14

Wailea alleges that it

Wailea alleges that it sought

1

repeated assurances about the Senator Fund's investment strategy

2

and was even able to persuade the Senator Fund to amend its

3

offering memorandum to describe its investment strategy more

4

clearly.

5

Wailea agreed that it had read and received "all relevant documents

6

with respect to [the Senator Fund]," and that it "underst[ood] the

7

nature of making an investment in [the Senator Fund], and has

8

concluded that such an investment would be suitable for it in light

9

of its own investment objectives, financial capabilities, and

Compl. ¶¶ 15-18.

Nevertheless, despite its concerns,

United States District Court

For the Northern District of California

10

expertise."

Swap Agreement § 12(i).

Because Wailea elected to

11

treat whatever knowledge it had regarding the Senator Fund as

12

sufficient and expressly disclaimed reliance on any representations

13

made by HSBC, Swap Agreement §§ 12(d),(g), Wailea agreed to assume

14

the risk of mistake as to the Senator Fund's investment strategy.

15

See Beecher, 575 F.2d at 1015 ("[I]n determining whether rescission

16

is warranted in a given circumstance, there must be excluded from

17

consideration mistakes as to matters which the contracting parties

18

had in mind as possibilities and as to the existence of which they

19

took the risk.") (internal quotation omitted).

20

Accordingly, the Court finds that Wailea assumed the risk that

21

the Senator Fund's assets would not be invested pursuant to the SSC

22

strategy, and the Court DISMISSES WITH PREJUDICE Wailea's first and

23

second claims for rescission due to mutual and unilateral mistake.

24

C.

Innocent Misrepresentation Claim

25

A claim for rescission due to innocent misrepresentation under

26

New York law requires a plaintiff to "set forth the circumstances

27

in detail showing that a false material representation was made and

28

that [it] relied on the representation to [its] detriment," Albany

15

1

Motor Inn

Rest., Inc. v. Watkins, 85 A.D.2d 797, 798 (N.Y. App.

2

Div. 1981), and that its reliance was justified.

3

A.D.2d. 583, 584 (N.Y. App. Div. 1996).

Steen v. Bump,

4

As the basis for its third claim, Wailea alleges that it

5

relied on two distinct sets of representations made by HSBC USA:

6

(1) oral and written representations that the Senator Fund had

7

historically followed the SSC strategy and would continue to do so;

8

and (2) representations in each Month-end Valuation Report that

9

misstated the value of Wailea's investment.

Compl. ¶¶ 51-55.

United States District Court

For the Northern District of California

10

Wailea alleges that these representations induced it to enter into

11

the Swap Agreement and to deliver its initial collateral payment

12

and subsequent collateral payments.

13

Id. ¶ 55.

HSBC USA argues that disclaimer provisions in the Swap

14

Agreement and in the Month-end Valuation Reports preclude Wailea

15

from asserting that it justifiably relied on the alleged

16

misrepresentations.

17

with regard to any representations allegedly made prior to the

18

parties' final amendment and restatement of the Swap Agreement on

19

July 18, 2008, HSBC USA argues that Wailea disclaimed reliance on

20

such representations by repeatedly reaffirming Section 12 of the

21

Swap Agreement.

22

("Neither [HSBC USA or its affiliates] is making, and has not made,

23

in connection with this Transaction any representation or warranty

24

whatsoever as to the Reference Fund[.]"); id. § 12(d) ("Neither

25

party is relying on any communication (written or oral) from the

26

other party . . . as investment or other advice or as a

27

recommendation to enter into this Transaction[.]").

28

any representations contained in Month-end Valuation Reports sent

Mot. at 14; Reply at 11-13.

Specifically,

Mot. at 14 (citing Swap Agreement § 12(g)

16

With regard to

1

after the parties' final amendment and restatement of the

2

Agreement, HSBC USA argues that: (1) sections 12(f) and 20(b) of

3

the Agreement confer a continuing obligation upon Wailea to

4

evaluate the financial condition of the Senator Fund and provide

5

that HSBC USA had no duty to apprise Wailea of information in its

6

possession; and (2) disclaimer language contained in the Month-end

7

Valuation Reports themselves precludes any viable claim of

8

reliance.
In response, Wailea argues that the aforementioned disclaimers

9

United States District Court

For the Northern District of California

10

do not defeat its claim because "the subject matter of the

11

misrepresentation -- investment of the [Senator] Fund's capital in

12

accordance with the SSC Strategy -- is not specifically

13

disclaimed."

14

disclaimer defeats its claim because Section 3(a)(v) of the ISDA

15

Master Agreement provides that enforcement of the Swap Agreement is

16

"subject . . . to equitable principles of general application."

17

Id.; see Patchen Decl. Ex. A ("ISDA Master Agreement") § 3(a)(v).7

Opp'n at 19.

Wailea also argues that neither

The Court agrees with HSBC USA and finds that Wailea cannot as

18
19

a matter of law establish that it reasonably relied upon the

20

alleged misrepresentations.

21

reaffirmed each time it agreed to amend and restate the Swap

22

Agreement, precludes any viable claim of reliance on

23

representations made by HSBC USA prior to July 18, 2011 -- the date

Sections 12(g) and 12(d), which Wailea

24
7

25
26
27
28

Jonathan A. Patchen ("Patchen"), attorney for Defendant, filed a
declaration in support of the Motion. ECF No. 24 ("Patchen
Decl."). The Court properly takes judicial notice of the ISDA
Master Agreement, which both parties quote from in their briefs,
because the Plaintiff's claims depend on the contents of the
document and the parties do not dispute its authenticity. See
Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005).

17

1

on which the parties executed their final amendment and restatement

2

of the Agreement.

3

specifically address the Senator Fund's failure to follow the SSC

4

strategy fails because, although a vague "omnibus statement"

5

disclaiming representations will not preclude a claim for

6

misrepresentation, when a contract disclaims "reliance on specified

7

representations," a party will not be allowed to assert that it

8

relied on those specified representations.

9

Fund v. Wachovia Bank, N.A., No. 07-Civ-11078(LTS)(AJP), 2009 U.S.

Wailea's argument that the disclaimers do not

See CDO Plus Master

United States District Court

For the Northern District of California

10

Dist. LEXIS 59540, at *10-11 (S.D.N.Y. July 13, 2009).

11

disclaimer does not have to identify precisely the alleged

12

misrepresentation, but the disclaimer must track the substance of

13

the misrepresentation."

14

enforce a disclaimer clause where, as here, the clause is the

15

product of negotiations between "sophisticated business people."

16

Id.

17

Id. at *11.

" The

Courts are more inclined to

Here, the Swap Agreement specifically disclaims

18

representations relating to the Senator Fund and provides that

19

Wailea is solely responsible for making an independent appraisal of

20

the financial condition and business of the Senator Fund.

21

Agreement §§ 12(f),(g).

22

substance" of the misrepresentations Wailea alleges.

23

they preclude a viable claim for reliance on any misrepresentations

24

allegedly made prior to the parties' final amendment and

25

restatement of the Swap Agreement.

26

LEXIS 59540, at *11-12 (holding that similar disclaimer in an ISDA-

27

based swap agreement precluded hedge fund's claim of reliance on

28

bank's alleged misrepresentations); Republic Nat'l Bank v. Hales,

Swap

These disclaimers adequately "track the

18

Accordingly,

See CDO Plus, 2009 U.S. Dist.

1

75 F. Supp. 2d 300, 316 (S.D.N.Y. 1999) (same).
Both the Swap Agreement and the Month-end Valuation Reports

2
3

also preclude any viable claim of reliance on alleged

4

misrepresentations contained in Month-end Valuation Reports that

5

were issued subsequent to the final amendment and restatement of

6

the Swap Agreement.

7

Wailea "will at all times continue to be" solely responsible for

8

making an independent appraisal of the Senator Fund's financial

9

condition.

Section 12(f) of the Agreement provides that

Section 20(b) of the Agreement provides that HSBC USA

United States District Court

For the Northern District of California

10

may be in possession of material, non-public information relating

11

to the Senator Fund but shall be under no obligation to disclose

12

such information to Wailea.

13

Reports contain a disclaimer providing that they are for

14

"informational purposes only" and stating that "HSBC USA expressly

15

disclaims . . . responsibility for any loss or damage arising out

16

of the provision or use of this information[.]"

17

D ("Oct. 31, 2008 Valuation Report") at 4.8

18

clear and specific disclaimers, Wailea cannot, as a matter of law,

19

establish reasonable reliance in connection with its innocent

20

misrepresentation claim.

Additionally, the Month-end Valuation

Patchen Decl. Ex.

In light of these

Lastly, Wailea's bare assertion that the disclaimer provisions

21
22
8

23
24
25
26
27
28

The Court may properly take judicial notice of the October 31,
2008 Valuation Report because the Complaint expressly relies on
such reports and the parties do not dispute its authenticity. See
Knievel, 393 F.3d at 1076 (9th Cir. 2005). Wailea does not oppose
judicial notice of the report, but states that the report is not
exemplary of all such reports. ECF No. 34 ("Pl.'s Resp. to Def.'s'
RJN") at 2. Plaintiff therefore asks the Court to take judicial
notice of a Month-end Valuation Report dated December 10, 2008.
Id. However, the December 10, 2008 Report contains nearly
identical disclaimer provisions. See id. Ex. A ("December 10,
2008") at 3.

19

1

of the Swap Agreement do not bar its claim because enforcement of

2

the Swap Agreement is "subject . . . to equitable principles of

3

general application" does not salvage its claim.

4

explain how this language relieves it of having to establish the

5

elements of a proper innocent misrepresentation claim.

6

notes, equitable principles of general application do not convert

7

invalid claims into valid ones.

8
9

Wailea does not

As HSBC USA

Reply at 5.

Accordingly, the Court DISMISSES WITH PREJUDICE Plaintiff's
third claim for innocent misrepresentation.

United States District Court

For the Northern District of California

10

D.

Claim for Failure of Condition Precedent

11

In its fourth claim, Wailea seeks to rescind the Agreement on

12

the grounds that a condition precedent to the Agreement -- namely,

13

that the Senator Fund would invest its assets pursuant to the SSC

14

strategy -- failed to occur.

15

that the Senator Fund's following a particular investment strategy

16

was not, as a matter of law, a condition precedent to the

17

agreement.

Compl. ¶¶ 56-60.

HSBC USA argues

The Court agrees.

18

"Conditions are not favored under New York law, and in the

19

absence of unambiguous language, a condition will not be read into

20

[an] agreement."

21

1085, 1099-1100 (2d Cir. 1992).

22

failure of condition, Wailea must point to express language on the

23

face of the Swap Agreement that establishes the parties'

24

unambiguous intent to condition the Swap Agreement's formation on

25

the Senator Fund's capital being invested pursuant to the SSC

26

strategy.

27

Dev., LLC, 83 A.D.3d 1189, 1191 (N.Y. App. Div. 2011) (holding that

28

contract terms did not create a condition precedent to formation

Ginett v. Computer Task Grp., Inc., 962 F.2d
To obtain rescission based on a

See Rest. Creative Concepts Mgmt., LLC v. Ne. Rest.

20

1

because they lacked "unmistakable language of condition").
Here, Wailea claims that Section 7 and Annex II set forth the

2
3

following "express and explicit conditions" to the Agreement:

4

The [Senator] Fund will invest substantially all of its
assets in a managed account (the "Managed Account") at
all times during the term of this Transaction. The
Investment Manager will use a split-strike conversion
strategy.

5
6
7

The [Senator] Fund will only invest in (1) stocks in the
S&P 100 index, (2) option on S&P 100 index, and/or (3)
Money Market/US Treasury Bills.

8
9

Compl. ¶¶ 57-58.

These provisions cannot be construed as

United States District Court

For the Northern District of California

10

conditions because they lack the "'unmistakable language of

11

condition' such as 'if,' 'unless and until' and/or 'null and

12

void,'" which would establish the parties' clear intent to

13

expressly condition the existence of the Agreement upon the Senator

14

Fund's investment strategy.

15

1191.9

Rest. Creative Concepts, 83 A.D.3d at

16

Despite the allegations in the Complaint to the contrary,

17

Wailea argues in its Opposition that it is not asking the Court to

18

interpret any language contained in the written Swap Agreement as a

19

condition precedent.

20

argue that the parties agreed to an oral condition precedent as to

21

the Senator Fund's investment strategy.

22

its Complaint does Wailea allege an oral condition precedent to

23

contract formation.10

24

9

25
26
27
28

Opp'n at 17.

Instead, Wailea appears to

Id. at 14-16.

Nowhere in

Moreover, even if its Complaint were amended

Wailea attempts to distinguish Rest. Creative Concepts on the
ground that it dealt with a summary judgment motion rather than a
motion to dismiss. Opp'n at 15. However, that distinction is
irrelevant to the pure statement of law for which the case is cited
here.
10

Nor does Wailea even state in its Opposition that any such oral
agreement was made. However, it relies heavily on case law
addressing oral agreements precedent to formation.

21

1

to include such allegations, Wailea's claim would still fail as a

2

matter of law as explained below.

3

Wailea relies on numerous cases stating that parol testimony

written agreement if the condition does not contradict the express

6

terms of the agreement.

7

Bush, 10 N.Y.2d 488, 491 (N.Y. 1962)).

8

statement of law, it does not save Wailea's claim because, even if

9

the parties orally conditioned the formation of the Swap Agreement

10

United States District Court

may be used to prove a condition precedent to formation of a

5

For the Northern District of California

4

on the Senator Fund using the SSC strategy, as Wailea now argues,

11

such a condition would contradict the express provisions of the

12

Swap Agreement.

13

HSBC was not making any representations, oral or written, with

14

respect to the Senator Fund.

15

[HSBC USA or its affiliates] is making, and has not made, in

16

connection with this Transaction any representation or warranty

17

whatsoever as to the Reference Fund[.]"); id. § 12(d) ("Neither

18

party is relying on any communication (written or oral) from the

19

other party . . . as investment or other advice or as a

20

recommendation to enter into this Transaction[.]").

21

claims similar to those advanced by Wailea here, New York's highest

22

court has held that allegations of an oral condition precedent

23

cannot be reconciled with an express disclaimer covering the same

24

subject matter.

25

96 (N.Y. 1985).

26

Opp'n at 14, 16 (citing, e.g., Hicks v.
While this is a true

First, as noted above, the Agreement states that

Swap Agreement § 12(g) ("Neither

Addressing

See Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 95-

Second, pursuant to the terms of the underlying ISDA Master

27

Agreement, Wailea and HSBC agreed that the terms of the Agreement

28

"constitute [the parties'] legal, valid and binding obligations,

22

1

enforceable in accordance with their respective terms[.]"

ISDA

2

Master Agreement § 3(a)(v).11

3

formation such as that alleged by Wailea, which would prevent the

4

Swap Agreement from becoming the parties' legal and binding

5

obligation, is expressly contradicted by this language.

6

Stanley High Yield Secs., Inc. v. Seven Circle Gaming Corp., 296 F.

7

Supp. 2d 206, 220 (S.D.N.Y. 2003) ("It simply defies logic to

8

contend that a condition precedent, which would be introduced for

9

the purpose of proving that the Agreement never became a legally

An oral condition precedent to

See Morgan

United States District Court

For the Northern District of California

10

valid and binding document, would not contradict a term, agreed to

11

by both parties, stating that 'this Agreement is (the signing

12

party's) legal, valid and binding obligation enforceable against it

13

in accordance with its terms.'").
Third, this is not a case, like Hicks, where the agreement is

14
15

silent as to the subject matter of the alleged condition.

16

the Swap Agreement explicitly mentions the SSC strategy in Annex

17

II, as discussed above, without using conditional language.

18

Hicks, 10 N.Y.2d at 492 (noting that agreement was silent as to the

19

subject of the alleged condition precedent); see also Torres v.

20

D'Alesso, 80 A.D.3d 46, 57 (N.Y. App. Div. 2010) (rejecting alleged

21

oral condition precedent where condition did not merely deal with a

22

matter on which the contract was silent).

23

11

24
25
26
27
28

Rather,

See

This fact supports the

Section 3(a)(v) of the ISDA Master Agreement provides in full
that each party represents to the other party that: "Its
obligations under this Agreement and any Credit Support Document to
which it is a party constitute its legal, valid and binding
obligations, enforceable in accordance with their respective terms
(subject to the applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally
and subject, as to enforceability, to equitable principles of
general application (regardless of whether enforcement is sought in
a proceeding in equity or law))."

23

1

inference that, if sophisticated parties such as those in this case

2

desired that formation of the Swap Agreement be conditioned upon

3

Annex II, they would have included conditional language stating

4

that intention.

5

Wailea again argues that the language in Section 3(a)(v) of

6

the ISDA Master Agreement, stating that the enforceability of the

7

Swap Agreement is "subject . . . to equitable principles of general

8

application," entitles it to the equitable remedy of rescission.

9

Opp'n at 16.

United States District Court

For the Northern District of California

10
11
12

Again, this language does not convert an invalid

claim into a meritorious one.
Accordingly, the Court DISMISSES WITH PREJUDICE Plaintiff's
fourth claim for failure of condition precedent.

13

E.

Claim for Violation of California Corporations Code

14

In its fifth claim, Wailea alleges that HSBC USA violated

15

Section 25401 of the California Corporations Code ("Section

16

25401"), thereby entitling Wailea to rescission of the Swap

17

Agreement under Section 25501 of the Code ("Section 25501").

18

Compl. ¶¶ 61-64.

19

is unlawful for any person to sell a security by means of a

20

communication involving an "untrue statement of a material fact or

21

[omissions of] a material fact necessary in order to make the

22

statements made, in the light of the circumstances under which they

23

were made, not misleading."

24

purchaser of a security sold in violation of Section 25401 may sue

25

the seller for rescission, unless the seller can prove that it

26

exercised reasonable care and did not have knowledge of the untruth

27

or omission.

28

Section 25401 provides, in relevant part, that it

Section 25501 provides that the

Wailea alleges that HSBC made "materially misleading

24

1

statements and omissions" of two types: (1) oral and written

2

representations that the Senator Fund had historically been

3

invested and would be invested pursuant to the SSC strategy; and

4

(2) month-end summary valuations that misstated the net asset value

5

of Wailea's investments.

6

because it is time-barred, and because Wailea cannot point to any

7

actionable statements or omissions subject to Section 25401.

8

Court agrees with the latter argument and therefore need not

9

address the statute of limitations issue.

United States District Court

For the Northern District of California

10

HSBC USA argues that Wailea's claim fails

The

According to the Complaint, HSBC "represented" that the

11

Senator Fund had historically followed an SSC strategy and had not

12

breached HSBC's Investment Guidelines.

13

HSBC also allegedly failed to disclose material information about

14

BLMIS contained in the 2006 KPMG report.

15

Complaint also refers to various representations made by the

16

Senator Fund itself, id. ¶¶ 14-16, 18, and representations in the

17

Month-end Valuation Reports, id. ¶¶ 25, 63(b).

18

that none of these is an actionable representation.

19

not respond to this argument, and the Court agrees with HSBC USA.

20

All of the alleged representations and omissions are either

21

expressly disclaimed in aforementioned provisions of the Swap

22

Agreement or are not cognizable under Section 25401.

23

Compl. ¶¶ 17, 32, 63(a).

Id. ¶ 33.

Wailea's

HSBC USA argues
Wailea does

Wailea expressly agreed that HSBC had not made any

24

representations whatsoever about the Senator Fund, Swap Agreement §

25

12(g); that HSBC was not responsible for any statements made by the

26

Senator Fund, id.; that Wailea had the sole responsibility to

27

investigate the Senator Fund, id. § 12(f); and that HSBC had no

28

obligation to disclose any material information in its possession

25

was not known to Wailea, id. § 20(b).

3

disclaimers is clear and precludes Wailea from now alleging that

4

HSBC USA made representations or omissions about the Senator Fund,

5

as that would directly contradict the bargained-for language of the

6

Swap Agreement.

7

Corp., 96 F.3d 1151, 1159 (9th Cir. 1996) (holding that investors'

8

contractual representation that they did not rely on any other

9

person in purchasing their investment defeated their securities

10

United States District Court

about the Senator Fund, even if such information was not public and

2

For the Northern District of California

1

fraud claim); see also Bank of the West v. Valley Nat'l Bank, 41

11

F.3d 471, 477-78 (9th Cir. 1994) (holding that the "plain and

12

strong words" of a disclaimer of reliance defeated fraud claim

13

because "the [parties] expressly agreed to a relationship in which

14

each would investigate independently and exercise independent

15

judgment[, and] [t]here was no lack of clarity in the contract, no

16

mutual mistake, no reason to suppose that the parties mutually

17

intended any relationship other than what the contract said.")

This plain language of the

See Paracor Fin., Inc. v. Gen. Elec. Capital

18

The remaining purported actionable representations Wailea

19

alleges -- the statements in the Month-end Valuation Reports -- do

20

not support a claim under Section 25401 because they are not

21

communications made by Wailea in connection with the sale of a

22

security and therefore are not covered by Section 25401.
Accordingly, the Court DISMISSES WITH PREJUDICE Plaintiff's

23
24

fifth claim for violation of the California Corporations Code.

25

///

26

///

27

///

28

///

26

1
2

V.

CONCLUSION
For the foregoing reasons, the Court GRANTS the Motion to

3

Dismiss filed by Defendant HSBC Bank USA, N.A., against Plaintiff

4

Wailea Partners, LP.

5

WITH PREJUDICE.

Plaintiff's Complaint is hereby DISMISSED

6
7

IT IS SO ORDERED.

8
9

United States District Court

For the Northern District of California

10

Dated: December 15, 2011
UNITED STATES DISTRICT JUDGE

11
12
13
14
15
16
17
18
19
20
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24
25
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27