Firefighters' Retirement System v. Northern Trust Investments, N.A. et al

Filing 155

MEMORANDUM Opinion and Order Signed by the Honorable Robert W. Gettleman on 2/23/2012. (ma,)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
LOUISIANA FIREFIGHTERS’ RETIREMENT )
SYSTEM, PUBLIC SCHOOL TEACHERS’
)
PENSION & RETIREMENT FUND OF
)
CHICAGO, THE BOARD OF TRUSTEES OF
)
THE PONTIAC POLICE & FIRE RETIREMENT )
SYSTEM, and THE BOARD OF TRUSTEES OF )
THE CITY OF PONTIAC GENERAL
)
EMPLOYEES RETIREMENT SYSTEM, on behalf )
of themselves and all others similarly situated,
)
)
Plaintiffs,
)
v.
)
)
NORTHERN TRUST INVESTMENTS, N.A., and )
THE NORTHERN TRUST COMPANY,
)
)
Defendants.
)
_________________________________________ )
)
NORTHERN TRUST INVESTMENTS, N.A., and )
THE NORTHERN TRUST COMPANY,
)
)
Third-Party Plaintiffs,
)
)
v.
)
)
LOUISIANA FIREFIGHTERS’ RETIREMENT )
SYSTEM, PUBLIC SCHOOL TEACHERS’
)
PENSION & RETIREMENT FUND OF
)
CHICAGO, THE BOARD OF TRUSTEES OF
)
THE PONTIAC POLICE & FIRE RETIREMENT )
SYSTEM, and THE BOARD OF TRUSTEES OF )
THE CITY OF PONTIAC GENERAL
)
EMPLOYEES RETIREMENT SYSTEM,
)
)
Third-Party Defendants.
)

No. 09 C 7203
Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER
Plaintiffs Louisiana Firefighters’ Retirement, System, Public School Teachers’ Pension
& Retirement Fund of Chicago, the Board of Trustees of the Pontiac Police & Fire Retirement

System, and the Board of Trustees of the City of Pontiac General Employees Retirement System,
on behalf of themselves and all others similarly situated, have brought an amended putative class
action complaint against defendants Norther Trust Investments, N.A. (“NTI”) and the Northern
Trust Company (“NTC”) alleging breach of fiduciary duties and breach of contract. All of
plaintiffs’ claims arise out of their investment, either directly, indirectly, or both in defendant
NTC’s securities lending program (“SLP”). According to plaintiffs’ complaint, through that
program, NTC arranges loans of securities owned by its customers and/or sponsored funds to
pre-approved borrowers, who use the securities for a variety of purposes. The borrowers pledge
collateral equal to 102% of the market value of the loaned securities, usually in cash. NTC then
invests the cash into fixed-income securities, which pay interest, generating revenue for the
participants in the program. When the loans are terminated the collateral is returned to the
borrowers, along with an additional payment or “rebate” as compensation for the use of the
collateral. If the value of the borrowed securities increases, more collateral must be posted. If
the value of the securities decreases, collateral is returned to the borrower.
The collateral is invested in commingled pools operated by defendants (the “Collateral
Pools”). Because the amount of cash collateral held by defendants must be adjusted and the
collateral must be repaid when the loan is terminated, at least some of the collateral must be held
in conservative short-term liquid investments to preserve capital while generating nominal
return.1

1

A full description of the SLP and plaintiffs’ claims can be found in this court’s
Memorandum Opinion and Order denying (in part) defendants’ motion to dismiss. See
Louisiana Firefighters’ Retirement System v. Northern Trust Invs., N.A., 2011 WL 1770266
(N.D. Ill. 2011).
2

After the court denied defendants’ motion to dismiss, defendants answered the amended
complaint, raised 31 separate affirmative defenses, brought a third-party complaint asserting
claims for contribution and indemnification against the Board of Trustees of the Louisiana
Firefighters Retirement System, the Board of Trustees of the Public School Teachers and
Pension and Retirement Fund of Chicago (the “CTPF Board”), the Board of Trustees of the City
of Pontiac Police & Fire Retirement System, and the Board of Trustees of the City of Pontiac
General Employees Retirement System, and brought a counterclaim for breach of contract
against Public School Teachers and Pension and Retirement Fund of Chicago (“CTPF”). The
third-party defendants have moved to dismiss the third party complaint, CTPF has moved to
dismiss the counterclaim, and plaintiffs have moved to strike some of the affirmative defenses.
For the reasons explained below, the motion to dismiss the third party complaint is granted, the
motion to dismiss the counterclaim is denied, and the court strikes all 31 affirmative defenses.
DISCUSSION
1. Motion to Dismiss Third-Party Complaint
The two count third-party complaint purports to bring claims for: (1) equitable and
implied indemnification (Count I); and/or (2) contribution (Count II) against the third party
defendants who are the Boards of Trustees of the individual plaintiff retirement funds (the
“Boards”). The Boards have moved to dismiss on a number of grounds including that
defendants’ claims are not properly brought in a third-party complaint, and that neither
indemnification nor contribution is available for claims of breach of fiduciary duty.
The third-party complaint is brought under Fed. R. Civ. P. 14(a)(1), which provides that:
A defending party may, as third-party plaintiff, serve a summons and complaint
on a nonparty who is or may be liable to it for all or part of the claim against it.
3

“[T]he distinguishing characteristic of a claim brought under Rule 14(a) is that the
defendant is attempting to transfer to the third-party defendant the liability asserted against the
defendant by the original plaintiff.” Forum Ins. Co. v. Ranger Ins. Co., 711 F. Supp. 909, 915
(N.D. Ill. 1989). “A third-party defendant’s liability must be derivative of the impleading party’s
liability.” Beale v. Revolution Portfolio, LLC, 2009 WL 1285527 at *2 (N.D. Ill. 2009) (citing
U.S. Gen., Inc. v. City of Joliet, 598 F.2d 1050, 1053 (7th Cir. 1979)). Liability is derivative
where it is dependent on the determination of liability in the original action. U.S. Gen. Inc., 598
F.2d at 1053.
In the instant case, the Boards argue that defendants’ third-party complaint pursues a
“blame the victim strategy.” According to the Boards defendants are essentially alleging that if
they are liable to plaintiffs for imprudently investing, then the Boards are more liable for hiring
defendants and not stopping them from breaching their fiduciary duty.
Defendants’ response is to repeat throughout their brief2 that the third party complaint
alleges that it was the Boards that chose to participate in the SLP, selected their own investment
guidelines, knew precisely how defendants were implementing the guidelines and made the
affirmative decision to “stay the course.” For example, defendants’ brief argues:
The Northern defendants do not believe the investment choices were imprudent.
. . . But if plaintiffs are right that the collateral investment strategies the Boards
chose were obviously imprudent, then they and their trustees bear sole
responsibility for that imprudence because they made the choice to accept a
certain level of risk in return for the potential investment rewards. [p. 2; emphasis
in the original.]
. . .

2

Defendants’ 35 page brief is presented in 11 point font in violation of Local Rule
5.2(c)(1) and this court’s standing order.
4

Although the Boards now contend that Northern Trust failed to follow those
guidelines, the Third Party Complaint alleges exactly the opposite (¶16) and
claims that it was the Boards that affirmatively decided to adopt the very
strategies they now say were imprudent . . . . [p. 8]
. . .
Based on these factual allegations, the Northern defendants seek equitable and
implied indemnification against the Boards in Count I of the their Third Party
Complaint on the ground that the Boards alone are responsible for the investment
choices they made and they alone caused the losses for which they seek recovery.
[p. 9; emphasis added.]
As is readily apparent from the examples quoted above, defendants’ theory is not that if
they are found liable, then the Boards are liable to them. Rather, defendants’ theory is that if
plaintiffs have been harmed at all, it is by the Boards’ actions, not by defendants’ action. This is
a defense, not a third-party claim.
As observed by Judge Pell in Parr v. Great Lakes Express Co., 484 F.2d 767, 769 (7th
Cir. 1973):
We do not understand the function or purpose of this count. If the accident was
solely and proximately caused by someone else’s negligence this would seem to
be a complete defense to the original action and would not seem to be the basis of
a third-party action, which presupposes liability on the part of the original
defendant which he is attempting to pass on to the third-party defendant.
Nor can defendants state a claim for implied indemnity or equitable contributions.
Implied indemnity generally rises where the parties have failed to include an indemnity
provision in an agreement and there is reason for the court to read one in. Mizuho Corporate
Bank v. Corey & Assoc., Inc., 341 F.3d 644, 652 (7th Cir. 2003). “[I]mplied indemnity actions
lie only where one party is in some sense `at fault,’ and the other party is blameless though liable
– typically because of strict liability, respondeat superior, implied warranty, or some other legal
principle that imposed liability regardless of fault.” Id. A claim of implied indemnity arises

5

under Illinois law only where the indemnitee (in the instant case defendants) was guiltless with
respect to the underlying claim. Id.
In the instant case, if the defendants are found liable to plaintiffs, it can be based only on
defendants’ own breaches of fiduciary duties, not on any legal principle that makes them liable
for the Boards’ actions. Defendants can be liable to plaintiffs based only on their own guilt.
Because they cannot be both blameless and liable, they have no claim for implied indemnity.3
Count II of the third-party complaint alleging contribution fairs no better. Recognizing
that they do not qualify for relief under the Illinois Joint Tort Feasors Contribution Act, 740
ILCS 100/2, because breach of fiduciary duty allegations do not constitute tort claims, see
Kinzer v. City of Chicago, 539 N.E.2d 1216, 1220 (Ill. 1989), defendants assert a claim for
equitable contribution. Under this theory, “the right to contribution arises due to the compulsory
payment by a joint obligor of more than his share of a common obligation.” Flynn v. Levy, __
F.Supp.2d __, 2011 WL 6793997 (N.D. Ill. 2011) (quoting Ruggio v. Ditkowsky, 147 Ill.App.3d
638, 642 (2d Dist. 1986). The right to equitable contribution typically arises in the context of
co-insurers, but Illinois courts have found a right to equitable contribution outside the insurance
context when the parties have a joint financial obligation to a third party created by agreement or
statute. Flynn, 2011 WL 67937997 at *4; Canadian Pacific Ry Co. v. Williams-Hayward
Protective Coating, 2004 WL 2108413, *3 (N.D. Ill. 2004).

3

The result is the same under Louisiana law, which defendants argue applies to the
Louisiana Firefighters Retirement System’s claims, Carter v. Dietz, 505 So.2d 106, 108 (La.
App. 1987), and Michigan law, Oberle v. Hawthorne Metal Prods. Co., 480 N.W.2d 330, 333
(Mich. Ct. App. 1991), Lakeside Oakland Dev., LC v. H&J Beef Co., 644 N.W.2d 765, 772
(Mich. Ct. App. 2002) which the parties agree applies to the Pontiac plaintiff’s claims.
6

In the instant case, there is no statute or agreement that could create a joint obligation by
the Boards and defendants to plaintiffs. Any duty the Boards may owe to plaintiffs arises from
their positions as trustees. Any duty owed by defendants comes from their contractual
agreements and their position as investment managers. Indeed, as the Boards point out, rather
than suggesting a joint obligation by the Boards and defendants to plaintiffs, the agreements
signed by defendants contain indemnification clauses requiring the defendant to indemnify the
plans from any losses caused by defendants’ failure to make a reasoned determination of the
quality and suitability of Collateral Investment; or defendants’ failure otherwise to perform its
duties and responsibilities. Thus, there is no joint obligation owed to plaintiffs by the Boards
and defendants. See Del Monte Fresh Produce, N.A., v. Kinnavy, 2010 WL 1172565 at *24
(N.D. Ill 2010) (Parties’ obligations must arise out of same source.), and Count II fails to state a
claim.
Accordingly, for the reasons described above, the Boards’ motion to dismiss the thirdparty complaint is granted.

7

2.

CTPF’s Motion to Dismiss the Counterclaim
The defendants have brought a counterclaim against CTPF, alleging that CTPF breached

its obligations under the SLA to ensure that the collateral and the CTPF Custom Collateral Fund
is sufficient to repay borrowers when loans or securities are recalled. The count alleges that
there was a collateral deficiency in the CTPF Custom Fund during the period in question, that
defendants repeatedly notified CTPF that it was responsible for making-up those losses under the
SLA, but that CTPF has consistently refused to pay its obligations. Defendants seek a
declaration that CTPF is required to make those payments and an order compelling it to do so, to
ensure sufficient funds to disclose CTPF’s obligation to repay collateral borrowers when the
loans and/or the loan securities are returned.
CTPF has moved to dismiss on several grounds, the most simplistic being that it is not a
party to the contract allegedly breached. The SLA that is the subject of the counterclaim was
entered into by defendant NTC on the one side, and the City Treasurer of Chicago and the CTPF
Board on the other. It is axiomatic that non-parties to a contract are not liable for its breach.
Swiss Reinsurance America Corp. v. Access General Agency, Inc., 571 F. Supp2d. 882, 885
(N.D. Ill. 2008).
Defendants counter by arguing that CTPF has sued them for breach of the same contract,
and they are simply countersuing against the entity that sued them. According to defendants
“[i]f CTPF can sue [defendants] for allegedly breaching the agreement, then it necessarily
follows that [defendants] can counterclaim against CTPF for breaching its obligations under the
very same agreement.” This, of course, is erroneous. If the wrong party has sued defendants,
then the proper course would be to either move to dismiss Count II of the complaint, or to seek

8

an order requiring a substitution of the correct plaintiff, not a counterclaim for breach of contract
against a non-party to the contract.
CTPF suggests in its reply brief that it is suing as a third-party beneficiary of the SLA,
but it cites to no such allegation in the amended complaint and the court has found none. This
leaves a serious question as to whether CTPF is the proper plaintiff for the breach of contract
claim in Count II of the amended complaint. There is no question, however, that the
counterclaim cannot state a claim for breach of the SLA against CTPF. Accordingly, the motion
to dismiss the counterclaim is granted. The parties are directed to meet and confer to determine
whether Count II of the amended complaint must be amended to reflect the proper plaintiff; and
to report to the court at the next status conference.
3.

Affirmative Defenses
Finally, plaintiffs have moved to strike some (15-19, 24, 25) of the 31 affirmative

defenses raised by defendants, arguing that they essentially recycle the ill-fated theme of the
third party-claim by blaming plaintiffs for defendants’ failures. This court applies a three-part
test to affirmative defenses subject to a motion to strike (Davis v. Elite Mortgage Services, 592
F. Supp.2d 1052, 1058 (N.D. Ill. 2004)):
(1) the matter must be properly pleaded as an affirmative defense; (2) the matter must be
adequately pleaded under the requirements of the Federal Rules of Civil Procedure 8 and
9; and (3) the matter must withstand a Rule 12(b)(6) challenge – in other words, if it is
impossible for the defendant to prove a set of facts in support of the affirmative defense
that would defeat the complaint, the matter must be stricken.
To survive a Rule 12(b)(6) challenge, affirmative defenses must plead sufficient facts to
suggest plausibly a right to relief. Twombly, 550 U.S. at 555-56. This court, like most district
courts, applies Twombly’s standards to motions to strike affirmative defenses (see Reimer v.

9

Chase Bank USA, N.A., 274 F.R.D. 637 (Cole M.J., collecting cases). None of the 31 asserted
affirmative defenses presents any factual predicate. They do not incorporate by reference the
answer or the allegations of the third-party complaint or counterclaim. As such, they are simply
conclusory allegations. They fail under Fed. R. Civ. P. 8, and are stricken.4
CONCLUSION
For the reasons described above, the third party defendants’ motion to dismiss the thirdparty complaint is granted. The motion to dismiss the counterclaim is granted, and plaintiffs’
motion to strike the affirmative defenses is granted, and all 31 affirmative defenses are stricken.

ENTER:

February 23, 2012

__________________________________________
Robert W. Gettleman
United States District Judge

4

Defendants’ principal argument in opposition to the motion to dismiss the affirmative
defenses is that the allegations of the third-party complaint should be implicitly read into the
defenses to provide the factual predicate the court has found lacking. Because the court has
dismissed the third-party complaint, and in any event no such implicit incorporation by reference
is permitted, defendants are granted leave to replead affirmative defenses consistent with the
findings of this opinion.
10