Turkle Trust v. Wells Fargo & Company
Filing
38
ORDER GRANTING DEFENDANTS 26 MOTION TO DISMISS. Signed by Judge Claudia Wilken on 7/2/2012. (ndr, COURT STAFF) (Filed on 7/2/2012)
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IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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JAMES L. TURKLE TRUST,
individually and on behalf of all
others similarly situated,
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United States District Court
For the Northern District of California
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Plaintiff,
No. C 11-6494 CW
ORDER GRANTING
DEFENDANT’S MOTION
TO DISMISS
(Docket No. 26)
v.
WELLS FARGO & COMPANY,
Defendant.
________________________________/
Defendant Wells Fargo & Company moves to dismiss the
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complaint filed by Plaintiff James L. Turkle Trust.
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opposes Defendant’s motion.
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the parties and their oral arguments at the hearing, the Court
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GRANTS Defendant’s motion to dismiss.
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Plaintiff
Having considered the papers filed by
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BACKGROUND
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The following facts are taken from Plaintiff’s complaint and
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from certain documents submitted by Defendant, of which the Court
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takes judicial notice.1
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Trust preferred securities are a form of preferred stock
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commonly issued by bank holding companies since 1996 to increase
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their Tier I regulatory capital amount, in order to meet the
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Federal Reserve’s capital adequacy guidelines.
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These securities often have a high interest rate for investors.
United States District Court
For the Northern District of California
10
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Compl. ¶¶ 16-17.
Id. at ¶ 18.
Plaintiff was a holder of Defendant’s Capital Trust X 7.85%
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Trust Preferred Securities at the time of their redemption on
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October 3, 2011.
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were issued by Wachovia Corporation on November 21, 2007.
Compl. ¶¶ 13, 29, 38.
The Trust X securities
Id. at
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Defendant requests that the Court take judicial notice of
certain documents filed with the Securities and Exchange
Commission (SEC), some of which are documents whose contents are
alleged in the complaint. See Request for Judicial Notice (RJN).
Plaintiff agrees that the Court may take judicial notice of
Exhibits One through Eight, which are SEC filings that relate to
the securities at issue in the instant case. “Public records,
such as SEC filings, are properly the subject of judicial notice,
and routinely considered in deciding a motion to dismiss in a
securities case.” In re Extreme Networks, Inc., 573 F. Supp. 2d
1228, 1232 (N.D. Cal. 2008) (citations omitted). See also
Dreiling v. Am. Express Co., 458 F.3d 942, 946 (9th Cir. 2006)
(“We review de novo a dismissal under Rule 12(b)(6) . . . and may
consider documents referred to in the complaint or any matter
subject to judicial notice, such as SEC filings.”) (internal
citations omitted). Accordingly, the Court GRANTS Defendant’s
request as to Exhibits One through Eight.
Plaintiff opposes Defendant’s request for judicial notice of
Exhibits Nine and Ten, which are SEC filings with excerpts from
other banks’ contracts. The Court finds these materials to be
immaterial to the resolution of this motion and DENIES Defendant’s
request as to Exhibits Nine and Ten.
2
1
¶ 19.
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assume all outstanding guarantee obligations of the securities.
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Id. at ¶ 2.
Defendant subsequently merged with Wachovia and agreed to
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The Trust X securities have several governing documents,
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including the Trust Agreement, which was superseded by the Amended
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and Restated Trust Agreement, and the Base Indenture, which was
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amended and supplemented by the Fourth Supplemental Indenture.
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See RJN, Exs. 1, 2, 5.
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included the Prospectus, which referred to provisions in both the
The offering documents for the securities
United States District Court
For the Northern District of California
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Indenture and the Trust Agreement.
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parties agree that the Indenture is governed by New York law.
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Mot. at 10; Opp. at 7 n.4.
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Fourth Supplemental Indenture, RJN, Ex. 5 at 340.
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also agree that the Trust Agreement is governed by Delaware law.
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Mot. at 16 n.3; Opp. at 17 and n.8.
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Prospectus, RJN, Ex. 3.
The
See Base Indenture, RJN, Ex. 1 at 23;
The parties
See RJN, Ex. 2 at 147.
The trust documents gave Defendant the right to redeem all or
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part of the outstanding securities at any time on or after
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December 15, 2012, which Plaintiff refers to as the “optional
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redemption date.”
Compl. ¶¶ 3, 22; Fourth Supplemental Indenture,
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RJN, Ex. 5 at 330.
The Indenture also gave Defendant the option
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to redeem all, but not some, of the securities upon the occurrence
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of a “capital treatment event.”
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Indenture, RJN, Ex. 5 at 330.
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204, 254.
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as
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Compl. ¶ 23; Fourth Supplemental
See also Prospectus, RJN, Ex. 3 at
A capital treatment event is defined in the Indenture
the reasonable determination by the Company that, as
result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the
laws (or any rules or regulations thereunder) of the
United States or any political subdivision thereof or
3
therein, or as result of any official or administrative
pronouncement or action or judicial decision
interpreting or applying such laws, rules or
regulations, which amendment or change is effective or
which pronouncement, action or decision is announced on
or after the date of issuance of the Trust Preferred
Securities of a Wachovia Trust, there is more than an
insubstantial risk that the Company will not be entitled
to treat an amount equal to the aggregate Liquidation
Amount of such Trust Preferred Securities as ‘tier 1
capital’ (or the then equivalent thereof) for purposes
of the capital adequacy guidelines of the Federal
Reserve, as then in effect and applicable to the
Company.
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Base Indenture, RJN, Ex. 1 at 12.
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Prospectus, RJN, Ex. 3 at 255.
See also Compl. ¶ 23;
If a capital treatment event
United States District Court
For the Northern District of California
10
occurs, Defendant is entitled to redeem the securities for their
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face value of twenty-five dollars, plus any interest accrued to
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the date of redemption.
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Compl. ¶ 24.
On July 21, 2010, the President signed into law the
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Dodd-Frank Wall Street Reform and Consumer Protection Act,
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including the Collins Amendment.
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of the Collins Amendment was to disallow the treatment of trust
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preferred securities as Tier I capital.
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preferred securities issued before May 19, 2010 by large bank
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holding companies, the new requirements will be phased in
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incrementally from January 1, 2013 through January 1, 2016.
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Before January 1, 2013, bank holding companies will be allowed to
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treat all of these outstanding trust preferred securities as Tier
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I capital.
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1, 2016, they will be allowed to treat at least some of the
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securities as Tier I capital.
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of the new requirement would begin after the optional redemption
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date for these securities passed on December 15, 2012.
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¶ 29.
Id.
Id. at ¶¶ 25-26.
One provision
Id. at ¶ 26.
For trust
Id.
Until the end of the phase-in period on January
Id.
4
Notably, the phase-in period
Id. at
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On September 1, 2011, Defendant announced that it would
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redeem the Capital Trust X securities on October 3, 2011.
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¶ 27.
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Treatment Event occurred with the passage of the Dodd-Frank Wall
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Street Reform and Consumer Protection Act.”
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at 418.
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amount of the securities was $837.5 million, at twenty-five
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dollars per share, or 33.5 million shares.
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2011, Defendant redeemed the outstanding securities.
United States District Court
For the Northern District of California
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Id. at
Defendant stated that it “has determined that a Capital
Form 8-K, RJN Ex. 7
At that time, Defendant reported that the principal
Id.
On October 3,
Compl. ¶ 29.
Plaintiff filed the instant action on December 20, 2011.
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Docket No. 1.
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and all holders of the Capital Trust X securities on October 3,
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2011.
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contract and breach of the implied covenant of good faith and fair
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dealing for redeeming the Capital Trust X securities on October 3,
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2011, before Defendant’s optional redemption date of December 15,
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2012.
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members have been damaged in the amount of $79.7 million, the
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amount of dividend payments that 33.5 million shares would have
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earned between October 3, 2011 and December 15, 2012.
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¶¶ 36, 50, 61.
Plaintiff seeks to prosecute it on behalf of itself
Compl. ¶ 34.
Plaintiff charges Defendant with breach of
Id. at ¶¶ 41-61.
Plaintiff alleges that it and the class
Id. at
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On April 12, 2012, the Court issued an order granting
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Defendant’s motion to dismiss in a related case, Call v. Wells
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Fargo & Co., Case No. 11-5215, 2012 U.S. Dist. LEXIS 51731 (N.D.
25
Cal.).
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against Defendant arising from its redemption of other similar
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securities, Defendant’s Capital XIV 8.625% Enhanced Trust
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Preferred Securities, simultaneously with the redemption of the
In that case, the plaintiff, Daniel Call, brought claims
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1
securities at issue in this action.
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case was also based on its determination that the Dodd-Frank Act
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constituted a capital treatment event.
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governing documents, including the capital treatment event clause,
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for the securities at issue in Call are materially identical to
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those for the securities here, and that the only relevant
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difference is that Defendant’s optional redemption date in Call
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was September 15, 2013, after the start of the phase-in period for
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the Dodd-Frank Act on January 1, 2013.
United States District Court
For the Northern District of California
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Defendant’s action in that
The parties agree that the
LEGAL STANDARD
A complaint must contain a “short and plain statement of the
12
claim showing that the pleader is entitled to relief.”
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Civ. P. 8(a).
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state a claim, dismissal is appropriate only when the complaint
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does not give the defendant fair notice of a legally cognizable
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claim and the grounds on which it rests.
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Twombly, 550 U.S. 544, 555 (2007).
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complaint is sufficient to state a claim, the court will take all
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material allegations as true and construe them in the light most
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favorable to the plaintiff.
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896, 898 (9th Cir. 1986).
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to legal conclusions; “threadbare recitals of the elements of a
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cause of action, supported by mere conclusory statements,” are not
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taken as true.
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(citing Twombly, 550 U.S. at 555).
Fed. R.
On a motion under Rule 12(b)(6) for failure to
Bell Atl. Corp. v.
In considering whether the
NL Indus., Inc. v. Kaplan, 792 F.2d
However, this principle is inapplicable
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009)
26
When granting a motion to dismiss, the court is generally
27
required to grant the plaintiff leave to amend, even if no request
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to amend the pleading was made, unless amendment would be futile.
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1
Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911
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F.2d 242, 246-47 (9th Cir. 1990).
3
amendment would be futile, the court examines whether the
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complaint could be amended to cure the defect requiring dismissal
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“without contradicting any of the allegations of [the] original
6
complaint.”
7
Cir. 1990).
In determining whether
Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th
8
DISCUSSION
Defendant argues that Plaintiff’s complaint should be
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United States District Court
For the Northern District of California
9
dismissed, because it did not breach the contract as a matter of
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law and because exercising contractual rights cannot be a breach
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of the implied covenant of good faith and fair dealing.
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also argues that Plaintiff lacks standing to sue.
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I.
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Defendant
Breach of Contract
The parties dispute whether Defendant could have reasonably
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determined that the enactment of the Dodd-Frank Act constituted a
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capital treatment event, even though it would not affect
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Defendant’s ability to treat any of the securities as Tier I
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capital until after the optional redemption date had passed.
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Defendant contends that the definition of a capital treatment
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event in the Indenture does not limit such an event to those that
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will actually go into effect before the optional redemption date.
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Although Plaintiff agrees that the clause contains forward-looking
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language and that Defendant may declare a capital treatment event
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based on a change that will take effect in the future, it argues
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that the clause cannot reasonably be read to include events that
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will only occur after the optional redemption date, because such a
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reading would not comport with the clear purpose of the clause in
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1
the context of the agreement as a whole.
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in the alternative, the capital treatment event clause is
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ambiguous, because it fails to state in definite and precise terms
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when the threatened loss of Tier I status must occur to trigger
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its effects.
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Plaintiff asserts that,
New York law governs the application of the capital treatment
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event clause, which is located in the Indenture.
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law, ‘the fundamental, neutral precept of contract interpretation
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is that agreements are construed in accord with the parties’
“Under New York
United States District Court
For the Northern District of California
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intent.’”
11
Co., 375 F.3d 168, 177 (2d Cir. 2004) (quoting Greenfield v.
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Philles Records, Inc., 98 N.Y.2d 562, 569 (2002)).
13
the best evidence of intent is the contract itself; if an
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agreement is ‘complete, clear and unambiguous on its face[, it]
15
must be enforced according to the plain meaning of its terms.’”
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Id. (quoting Greenfield, 98 N.Y.2d at 569) (formatting in
17
original).
18
Eternity Global Master Fund Ltd. v. Morgan Guar. Trust
“Typically,
“Ambiguity is determined by looking within the four corners
19
of the document, not to outside sources.”
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Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398, 404 (2009)
21
(quoting Kass v. Kass, 91 N.Y.2d 554, 566 (1998)).
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of a contract is not made ambiguous simply because the parties
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urge different interpretations.”
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Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992).
25
a writing is ambiguous is a question of law to be resolved by the
26
courts.”
27
(quoting W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157, 162
28
(1990)).
Riverside S. Planning
“The language
Seiden Associates, Inc. v. ANC
“Whether or not
Eternity Global Master Fund Ltd., 375 F.3d at 178
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1
2
Plaintiff argues that the capital treatment event clause can
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be invoked only if the prospective change in the treatment of the
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securities as Tier I capital could be reasonably anticipated to
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have its effect before December 15, 2012.
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plain language of the capital treatment event clause, nor the
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contract as a whole, contains such a temporal limitation.
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definition of a capital treatment event does not refer to December
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15, 2012 or the optional redemption date generally, or otherwise
United States District Court
For the Northern District of California
10
However, neither the
The
state that the event must take effect before any date.
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Plaintiff argues that the trust documents “stress the
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interplay between the December 15, 2012 optional redemption date
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and the possibility of an earlier redemption based on the
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occurrence of certain events, such as a ‘tax event’ or ‘capital
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treatment event.’”
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points reinforces that these are independent events and dates.
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explaining the various points at which a redemption can occur, the
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documents use the conjunction “or” between the December 15, 2012
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date and other events such as “tax event” or “capital treatment
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event,” not the conjunction “and.”
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(“At Wachovia’s option, the Trust Preferred securities may be
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redeemed at 100% of their liquidation amount on or after December
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15, 2012 or after the occurrence of tax event, capital treatment
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event or investment company event as described herein . . .”); see
25
also Fourth Supplemental Indenture, RJN, Ex. 5 at 330 (using
26
“or”).
27
lists, in different bullet points or numbers.
Opp. at 9.
However, the reference to which it
In
Prospectus, RJN, Ex. 3 at 204
In other places, the documents name these separately in
28
9
See, e.g., Fourth
1
Supplemental Indenture, RJN, Ex. 5 at 338 (numbered list);
2
Prospectus, RJN, Ex. 3 at 254 (bulleted list).
3
Other parts of the documents demonstrate that Defendant,
4
which drafted them, knew how to include language that would limit
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the time within which a capital treatment event must take place,
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if such a limitation had been intended.
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“tax event” was defined to mean
8
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United States District Court
For the Northern District of California
10
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In the Base Indenture, a
the receipt by Wachovia Trust of an opinion of counsel
experienced in such matters to the effect that as result
of any amendment to or change (including any announced
prospective change) in, the laws or any regulations
thereunder of the United States or any political
subdivision or taxing authority thereof or therein, or
as a result of any official administrative pronouncement
or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective
or which pronouncement or decision is announced on or
after the date of issuance of the Trust Preferred
Securities of such Wachovia Trust, there is more than an
insubstantial risk that (i) such Wachovia Trust is, or
will be within 90 days of the date of such Opinion of
Counsel, subject to U.S federal income tax with respect
to income received or accrued on the corresponding
series of Securities issued by the Company to such
Wachovia Trust, (ii) interest payable by the Company on
such corresponding series of Securities is not, or
within 90 days of the date of such Opinion of Counsel,
will not be, deductible by the Company in whole or in
part for U.S federal income tax purposes or (iii) such
Wachovia Trust is, or will be within 90 days of the date
of such Opinion of Counsel, subject to more than de
minimis amount of other taxes duties or other
governmental charges.
22
Base Indenture, RJN, Ex. 1 at 18 (emphasis added).
23
the definition for capital treatment event used the future-looking
24
word “will” without a corresponding temporal limitation as to when
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the change must take place.
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In contrast,
In fact, a different temporal limitation that otherwise would
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have applied to capital treatment events was removed deliberately
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for these securities.
The Base Indenture, section 11.7,
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1
restricted Defendant to using the capital treatment event clause
2
“within 90 days following the occurrence of such” event.
3
Indenture, RJN, Ex. 1 at 67.
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specifically provides that “Section 11.7 of the Indenture shall
5
not apply” to these securities.
6
RJN, Ex. 5 at 330.
7
Base
The Fourth Supplemental Indenture
Fourth Supplemental Indenture,
Contrary to Plaintiff’s suggestion, the fact that Defendant
omitted a temporal limitation in the definition for a capital
9
treatment event, without affirmatively stating that no such
10
United States District Court
For the Northern District of California
8
limitation was intended, does not make the clause ambiguous.
11
e.g., Greenfield, 98 N.Y.2d at 573 (the “suggestion that the
12
failure of a contract to address certain categories of royalties
13
allows a court to look beyond the four corners of the document to
14
discern the parties’ true intent conflicts with our established
15
precedent that silence does not equate to contractual ambiguity”)
16
(citing Trustees of Freeholders & Commonalty of Town of
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Southampton v. Jessup, 173 N.Y. 84, 90 (1903) (“an ambiguity never
18
arises out of what was not written at all, but only out of what
19
was written so blindly and imperfectly that its meaning is
20
doubtful”)).
21
limitation was included in a similar clause but was omitted in
22
this one.
23
See,
This is especially true here, where a temporal
Plaintiff contends that the capital treatment event clause
24
should be read to allow redemption only if such an event has taken
25
effect before December 15, 2012, because after the optional
26
redemption date has passed, Defendant can redeem the securities
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for any reason and does not need to rely on the occurrence of a
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capital treatment event, rendering that clause superfluous.
11
1
Plaintiff states that this understanding would comport with the
2
purposes of the clause in relationship to the agreement as a
3
whole, by protecting the benefit of the bargain for putative class
4
members, who had purchased the securities with the understanding
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that they would be able to receive a favorable interest rate at
6
least until December 15, 2012.
7
contract makes clear that this benefit was not absolute and was
8
instead contingent upon certain conditions, including that a
9
capital treatment event not occur and that, should one occur,
However, the language of the
United States District Court
For the Northern District of California
10
Defendant not exercise its right to redemption.
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clear purpose of the forward-looking language in the capital
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treatment event clause is to allow Defendant the flexibility to
13
redeem the securities before the prospective change affecting the
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favorable treatment of those securities has actually taken effect,
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in order to anticipate the change in a manner that it deems to
16
make good business sense and ensure adequate capitalization,
17
rather than requiring it to redeem the securities en masse at the
18
moment the change takes effect or on the optional redemption date,
19
if sooner.
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redemption date to redeem the securities, even though it knew
21
that, shortly thereafter, it would lose the ability to treat as
22
Tier I capital the liquidation amount of the securities, thus does
23
not comport with the purpose of this clause in relation to the
24
documents as a whole.
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Further, the
To require Defendant to wait until the optional
Further, under the definition of capital treatment event,
26
Defendant was required only to make a “reasonable determination”
27
that the triggering conditions had occurred; Defendant was not
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required to be correct in its determination.
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Under the
1
allegations of the complaint, Defendant’s determination was
2
reasonable, because the enactment of the Dodd-Frank Act into law
3
meant that Defendant would not be able to treat an amount of the
4
securities equal to the liquidation amount as Tier I capital.
5
Without reading a temporal limitation into the capital
6
treatment event clause, Plaintiff has failed to state a claim
7
against Defendant for breach of contract, and the Court GRANTS
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Defendant’s motion to dismiss this claim.
9
can cure these deficiencies without contradicting the terms of the
Because no amendment
United States District Court
For the Northern District of California
10
governing contracts, dismissal is without leave to amend.
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II.
Breach of Covenant of Good Faith and Fair Dealing
12
New York law implies a covenant of good faith and fair
13
dealing “pursuant to which neither party to a contract shall do
14
anything which has the effect of destroying or injuring the right
15
of the other party to receive the fruits of the contract.”
16
Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 407 (2d Cir.
17
2006) (citation omitted).
18
Defendant argues that Plaintiff’s claim should be dismissed
19
because it attacks Defendant’s exercise of an express provision of
20
the agreement.
21
understood” the capital treatment event clause “to be limited to
22
changes or proposed changes of law that threatened to use the
23
Capital X TruPS as Tier 1 capital prior to December 15, 2012.”
24
Opp. at 14.
25
consistent with other mutually agreed upon terms in the contract.
26
It does not add to the contract a substantive provision not
27
included by the parties.”
28
F.3d 187, 198-99 (2d Cir. 2005) (citation omitted).
Plaintiff responds that investors “reasonably
However, the covenant “can only impose an obligation
Broder v. Cablevision Sys. Corp., 418
13
As already
1
addressed above, Plaintiff’s interpretation would add to the
2
contract an additional temporal limitation on the use of the
3
capital treatment event clause that is not otherwise included in
4
any of the document governing the securities.
5
Further, this claim is redundant of Plaintiff’s breach of
6
contract claim and New York law does not recognize a separate
7
cause of action for breach of the implied covenant of good faith
8
and fair dealing when the claim is based on the same allegations
9
as a breach of contract claim.
See Serdarevic v. Centex Homes,
United States District Court
For the Northern District of California
10
LLC, 760 F. Supp. 2d 322, 334 (S.D.N.Y. 2010) (“A claim for breach
11
of the implied covenant [of good faith and fair dealing] will be
12
dismissed as redundant where the conduct allegedly violating the
13
implied covenant is also the predicate for breach of a covenant of
14
an express provision of the underlying contract.”).
15
Accordingly, the Court GRANTS Defendant’s motion to dismiss
16
Plaintiff’s claim alleging breach of the covenant of good faith
17
and fair dealing.
18
deficiencies without contradicting the terms of the governing
19
documents for the securities, dismissal is without leave to amend.
20
Because no amendment can cure these
Because the Court dismisses both of Plaintiff’s claims, it
21
does not reach Defendant’s argument that Plaintiff lacks standing
22
to bring these claims.
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CONCLUSION
For the reasons set forth above, the Court GRANTS Defendant’s
motion to dismiss (Docket No. 26).
The Clerk shall enter judgment and close the file.
Defendant
shall recover its costs from Plaintiff.
IT IS SO ORDERED.
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Dated:
7/2/2012
CLAUDIA WILKEN
United States District Judge
United States District Court
For the Northern District of California
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