Firefighters' Retirement System v. Northern Trust Investments, N.A. et al
Filing
435
MEMORANDUM Opinion and Order. The Court grants in part and denies in part the Board's motion to dismiss NT's third amended counterclaims 405 . The motion is granted as to the express contract claim asserted in Count I and the ratification claim asserted in Count V, but is otherwise denied. Signed by the Honorable Jorge L. Alonso on 3/17/2015. Notice mailed by judge's staff (ntf, )
IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
LOUISIANA FIREFIGHTERS’
RETIREMENT SYSTEM, THE
BOARD OF TRUSTEES OF THE
PUBLIC SCHOOL TEACHERS’
PENSION & RETIREMENT FUND
OF CHICAGO, 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 SYSTEM, on behalf
of themselves and all others similarly
situated,
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Plaintiffs,
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v.
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NORTHERN TRUST INVESTMENTS, )
N.A. and THE NORTHERN TRUST
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COMPANY,
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Defendants.
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No. 09 C 7203
Judge Jorge L. Alonso
MEMORANDUM OPINION AND ORDER
Plaintiffs allege that defendants (collectively, “NT”) breached their contracts with and
fiduciary duty to plaintiffs by improperly investing plaintiffs’ assets. NT has asserted third amended
counterclaims against the Board of Trustees of the Public School Teachers’ Pension & Retirement
Fund of Chicago (the “Board”) for breach of express and implied contract (Counts I-II), unjust
enrichment (Count III), agency indemnification (Count IV), ratification (Count V), equitable
estoppel (Count VI), and account stated (Count VII). The case is before the Court on the Board’s
Federal Rule of Civil Procedure (“Rule”) 12(b)(6) motion to dismiss all of the counterclaims. For
the reasons set forth below, the Court grants in part and denies in part the motion.
Facts
On October 25, 1989, the Board and NT entered into a Master Custody Agreement that
directs NT “[to] establish an account . . . to hold such assets of the [Board] as are transferred to it
from time to time,” and “one or more sub-accounts . . . for cash, securities and other property of the
[Board],” in accordance with the Board’s directions. (3d Am. Countercl., Ex. 1, Master Custody
Agreement ¶¶ 2-3.) The Master Custody Agreement also states that:
[NT] shall furnish the Board . . . with monthly statements of account showing all
receipts and disbursements and the property in each Sub-account and the value
thereof. An account shall be approved by the Board by . . . failure to object to the
account within six months of the date upon which the account was delivered to the
Board. To the extent permitted by law, the approval of an account shall constitute
a full and complete discharge to NT of all matters set forth in that account.
(Id. ¶ 15.)
On June 28, 1990, the parties entered into a Securities Lending Agreement (“SLA”)
authorizing NT to lend the Board’s securities to pre-approved third parties in exchange for collateral,
which NT then invested in other securities to generate revenue for the Board. (See generally id., Ex.
2, SLA; 5/6/11 Mem. Op. & Order at 2.) When a loan matured or was called back, the borrower
returned the securities to NT and NT returned the collateral along with a rebate, i.e., additional
payment, to the borrower. (5/6/11 Mem. Op. & Order at 2.) The Board profited if the amount
earned by the reinvested collateral exceeded the amount of the rebate. (Id.) The Board paid part of
the profit to NT as a fee for its services. (Id. at 3.)
In 1995, the Board directed NT to invest part of the cash collateral from its securities lending
in two funds managed by NT, the Short Term Extendable Portfolio (“STEP”) and the Short Term
Investment Fund (“STIF”), and to hold the STEP and STIF units in a sub-account. (3d Am.
Countercl. ¶¶ 26, 29.) STIF is a constant-dollar fund, i.e., a fund designed to maintain a constant
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net asset value (“NAV”) of $1.00 per unit. (Id. ¶ 27.) STEP is a mark-to-market fund, meaning that
its NAV fluctuated daily based on the market value of its holdings. (Id.) Thus, the gains and losses
of STEP securities were reflected in STEP’s NAV and impacted the Board’s earnings accordingly.
(Id.) Though the Board knew that STEP was not a constant-dollar fund, it directed NT to keep the
unit value of the STIF/STEP sub-account at a constant $1.00 NAV. (Id. ¶ 30.) Thus, the Board had
to replenish the sub-account whenever reductions in STEP’s NAV would otherwise have caused the
NAV of the sub-account to fall below $1.00. (Id.)
Starting in mid-2007, securities held in STEP began to incur losses. (Id. ¶ 37.) On August
13, 2007, NT sent an email to the Board, saying that “the [Board’s] securities lending earnings for
the month of July are negative. The net earnings for the month are -$287,505.21. As we have in
the past, we will carry the negative earnings forward to be offset versus future positive earnings
unless you request otherwise.” (3d Am. Countercl., Ex. 3, Email from Anderson to Huber (Aug. 13,
2007).) The Board never requested otherwise. (Id. ¶ 40.)
On November 13, 2007, NT wrote a letter to the Board, which states:
I am writing to clarify [NT’s] currently existing process relating to treatment of
negative earnings in your securities lending program. . . . With July and August
negative earnings reaching higher levels than in the past, we felt it would be timely
to re-confirm our process.
Under the securities lending authorization agreement, clients are responsible for a
portion of losses incurred due to negative earnings. As an accommodation, we
currently offer clients who incur negative earnings, in any given month two options
concerning the obligation to repay [NT] for the loss created after we pay the rebates
to borrowers for use of their collateral. Clients may elect to repay us as soon as
practical in the month following the loss, after the audited earnings are
communicated. Alternatively, clients may elect to repay their obligation by carrying
forward negative earnings and applying any future months’ securities lending
earnings against the obligation (the “carryforward option”). A client who opts to no
longer use STEP as a part of their collateral reinvestment or who leaves the securities
lending program overall must repay their obligation in full at that time.
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....
For those clients requesting that [securities lending] negative earnings be carried
forward to be offset by future earnings, [NT] will report the following transactions,
going forward:
....
•
Amount due to [NT] to cover . . . negative earnings will be recorded as an
obligation/liability in the client’s account . . . .
As of any reporting date, any outstanding liability balance will be reflected on the
client’s Asset Detail template, to represent the amount due to [NT].
In subsequent periods when the [securities lending] earnings are positive, [NT] will
record those earnings as usual, but will also record a transaction that reduces the
balance of the obligation to [NT] balance by the client’s net [securities lending]
positive earnings . . . . Once the liability reaches zero, this transaction will no longer
be reported.
(Id., Ex. 4, Letter from Stevenson to Huber (Nov. 13, 2007).)
From 2007 through May 2010, NT made advances on the Board’s behalf whenever the Board
had negative securities lending earnings. (Id. ¶ 50.) The Board’s account statements from NT
during that period each had an entry titled “liability to [NT] for Securities Lending Negative
Earnings.” (3d Am. Countercl. ¶ 47.)
In February 2008, NT first applied the Board’s share of positive securities lending earnings
to repay NT for advances it had made on the Board’s behalf. (Id.) The Board’s account statements
from NT from February 2008 until the Board withdrew from NT’s securities lending program
showed the amount of positive securities lending earnings NT used “to reduce amount due to [NT]
to cover securities lending negative earnings.” (Id.) The Board never objected to any of these
statements. (Id. ¶¶ 48, 50.)
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From 2007 through August 2008, NT’s advances to cover the Board’s negative earnings
covered only unrealized losses, i.e., temporary losses in value that might be recovered. (Id. ¶¶ 32,
54.) However, after Lehman Brothers filed for bankruptcy in 2008, the Lehman securities in the
STEP fund incurred realized losses, i.e., losses that cannot be or are unlikely to be recovered. (Id.
¶¶ 32, 55.) On September 29, 2008, NT told the Board that, as a result of the permanent impairment
of Lehman’s and other securities:
[O]n an aggregate basis, STEP recognized the full extent of realized losses of
$402,248,390 for Lehman and $230,850,003 for Sigma and Theta combined. Prior
to the point of segregating these assets in the [Securities Lending Agreement], these
losses had been treated as unrealized loss and so did not affect the NAV or yield of
the [account] used for securities lending in any way differently from what would
have been had these remained unrealized losses.
Our Securities Lending Authorization Agreement with you identifies your risk for
all realized and unrealized principal losses. [NT] has borne some unrealized losses
contingently in the past to the extent of its fee split as an accommodation to clients
utilizing STEP and based on an expectation that these securities would mature at par.
Now that the losses for Lehman, Sigma and Theta are realized losses (as they are
highly unlikely to be recovered at par value), we can no longer absorb these losses
not previously passed on to you.
....
Your total amount owed for [NT’s] previously absorbed realized loss equals
$8,672,616.61. . . .
Please note that in order to reduce the impact of these losses, Northern will again
offer clients the opportunity to carry-forward the losses (rather than pay them off
directly) so that these losses may be offset in time by any future positive securities
lending earnings. If you would like to utilize this option, please let me know as soon
as possible. Please also be aware that, at this point, we intend to continue absorbing
a portion of your share of unrealized losses as we have in the past, although we are
not under any contractual obligation to do so and we reserve the right to adjust this
policy in the future.
(Id., Ex. 5, Letter from Stevenson to Huber (Sept. 29, 2008).) After this letter, and after every other
realized loss, NT’s account statements to the Board reflected a liability titled “securities lending
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STEP fund reimbursement.” (3d Am. Countercl. ¶ 56.) The Board never objected to the statements.
(Id. ¶ 58.)
In May 2014, the Board told NT that it “did not agree” that NT could apply the Board’s
securities lending earnings to pay down its liability to NT and demanded that NT stop doing so. (Id.
¶ 70.)
Discussion
On a Rule 12(b)(6) motion to dismiss, the Court accepts as true all well-pleaded factual
allegations of the complaint, drawing all reasonable inferences in plaintiff’s favor. Hecker v. Deere
& Co., 556 F.3d 575, 580 (7th Cir. 2009). “[A] complaint attacked by a Rule 12(b)(6) motion to
dismiss does not need detailed factual allegations” but must contain “enough facts to state a claim
for relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
The Board argues that all of NT’s counterclaims are defeated by the integration clause of the
SLA, which states:
This Agreement, including the Schedules annexed hereto and the Master Custody
Agreement dated October 25, 1989, between and among the Board, the Treasurer and
[NT] (and any written amendments or modifications thereto signed by the parties
thereto) contains the entire agreement between and among the Board, the Treasurer
and [NT] relating to the lending of securities in the [Board’s] portfolio of securities
held by [NT], supersedes all prior agreements on this subject, and may not be
modified or amended except by a writing signed by the parties hereto.
(3d Am. Countercl., Ex. 2, SLA, ¶ 16.) In the Board’s view, NT’s decision to advance money on
the Board’s behalf falls within the scope of the SLA. Thus, the Board argues, any contract claim
stemming from an alleged modification of the SLA or another purported contract relating to
securities lending is barred by the integration clause.
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As a matter of Illinois law, however, an integration clause does not preclude NT from
pursuing a contract claim based on a subsequent oral modification of the SLA. See U.S.
Neurosurgical, Inc. v. City of Chi., 572 F.3d 325, 332 (7th Cir. 2009) (“[U]nder Illinois law, the
terms of a written contract can be modified by a subsequent oral agreement notwithstanding
contractual language to the contrary.” (citing Tadros v. Kuzmak, 660 N.E.2d 162, 170 (Ill. App. Ct.
1995))); Gondeck v. A Clear Title & Escrow Exch., LLC, No. No. 11 C 6341, 2013 WL 4564994,
at *5 (N.D. Ill. Aug. 28, 2013) (“Although Gondeck’s agreement with A Clear Title provided that
a ‘signed’ order was necessary before his deposits could be ‘surrendered’ . . . , it is settled law in
Illinois that parties may modify contracts orally after including a contract provision that precludes
oral modification.” (quotations and alteration omitted)); Tadros, 660 N.E.2d at 170 (“The law seems
well settled; the terms of a written contract can be modified by a subsequent oral agreement even
though, as in this case, the contract precludes oral modifications.”). Moreover, because the subject
matter of the alleged modification, NT’s advancement of funds on behalf of the Board, is not
addressed in the SLA, that agreement does not preclude NT from pursuing claims for breach of
implied contract and unjust enrichment. See Stone v. City of Arcola, 536 N.E.2d 1329, 1339 (Ill.
App. Ct. 1989) (stating that the existence of an express contract between the parties on one subject
does not mean there cannot be another express or implied contract between them on another);
Heavey v. Ehret, 519 N.E.2d 996, 1001 (Ill. App. Ct. 1988) (“No claim on a contract implied in law
can be asserted if an express contract or a contract implied in fact exists between the parties and
concerns the same subject matter, but the rule is otherwise if the quasi-contractual claim involves
different subject matter.”).
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Alternatively, the Board argues that the SLA does not create the predicate for NT’s claims,
i.e., it does not make the Board liable for losses incurred in its securities lending account. The Board
contends that any such liability arose from section 10 of the SLA as amended in 1992 by the First
Amendment (known as the “Letter Amendment”). The reference to the Board’s liability was
subsequently removed from section 10 by the Seventh Amendment to the SLA. Thus, the Board
concludes, the SLA as currently written does not make it liable for securities lending losses.
The premise of the Board’s argument, that its liability arises from section 10 of the SLA, is
incorrect. The original SLA addresses the allocation of securities lending revenues in section 10 but
says nothing, in section 10 or anywhere else, about the allocation of deficiencies. (See id. § 10
(“The loan premium paid by the borrower . . . shall be apportioned 30 percent to [NT] and 70 percent
to the [Board] . . . . The [Board’s] portion of the loan premium shall be credited monthly to the
account.”). That void was filled by the second full paragraph on page 2 of the Letter Amendment:
Because securities become available for loan for all participants [in NT’s securities
lending program] in an arbitrary sequence and because it cannot be predicted what
type of Collateral a borrower will furnish, all clients within a section are deemed to
have a relatively equal opportunity to profit from the lending of securities. As
before, in return for that opportunity, should a Collateral deficiency occur beyond
[NT’s] responsibilities, the deficiency shall be allocated pro rata among all client
lenders within the section. Each lender’s pro rata share of a deficiency shall be
determined based on that client’s portion of the total value of borrowed securities
outstanding within the section as of the date the collateral is needed under the
agreement with the borrower.
(3d Am. Countercl., Ex. 2, SLA, Letter to Caldwell from Bargerhuff at 2 (Feb. 21, 1992).) In the
third full paragraph on that page, the Letter Amendment addresses the subject matter of section 10,
the payment of NT’s fee:
Revenues collected from Securities Lending will continue to be credited monthly to
your account, provided that we will simultaneously deduct from your account as
compensation for our services under the Securities Lending program, fees equal to
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those percentages of loan premium as are specified in your Securities Lending
agreement.
(Id.)
The Letter Amendment does not explicitly say that the first paragraph quoted above is a new
section of the SLA and the second is a modification of section 10. But that is the only reasonable
inference that can be drawn, given the language of the Third Amendment1 of the SLA. Paragraph
two of the Third Amendment amends “the second full paragraph on page 2 of the Letter Amendment
(relating to Collateral deficiencies),” i.e., the first paragraph quoted above, by adding the following
language:
Notwithstanding the foregoing, any Collateral deficiency arising as a result of cash
Collateral invested in [the Board’s fund] shall not be allocated among client lenders
but shall be allocated solely to the Board assuming [NT] has fulfilled all obligations
under this agreement with respect to such Collateral). For purposes of this
Agreement, a “Collateral deficiency” shall mean any failure, deficiency, impairment
or loss of value of any item of non-cash collateral, or of any investment of cash
collateral . . . .
(Id., Third Amend. ¶ 2.) Paragraph three of the Third Amendment amends section 10. (See id. ¶ 3
(stating that “[p]aragraph 10 of the [SLA] is amended to read as follows . . . .”).) Given the
distinction drawn by the Third Amendment between “the second full paragraph on page 2 of the
Letter Amendment” and section 10, the former has to be a distinct provision of the SLA rather than
an amendment to the latter.
Section 10 was modified twice more after the Third Amendment (see id., Sixth & Seventh
Amends.), and as the Board notes, now makes no reference to the Board’s liability. (See id. Seventh
Amend.) But “the second full paragraph on page 2 of the Letter Amendment,” which is not a part
1
The Court refers to the later of the two amendments denominated “Second Amendment”
as the Third Amendment.
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of section 10, was not amended. (See id., Fourth, Fifth, Sixth & Seventh Amends.). Thus, contrary
to the Board’s belief, the provision in “the second full paragraph on page 2 of the Letter
Amendment,” that “any Collateral deficiency arising as a result of cash Collateral invested in [the
Board’s fund] . . . shall be allocated solely to the Board,” which creates the predicate liability NT
seeks to enforce, remains in the SLA.2
The Board’s next contention is that NT’s claims are defeated by judicial admissions it made
in the first two incarnations of its counterclaims. “Judicial admissions are formal concessions in the
pleadings, or stipulations by a party or its counsel, that are binding upon the party making them.”
Keller v. United States, 58 F.3d 1194, 1198 n.8 (7th Cir. 1995). However, “[w]hen a party has
amended a pleading, allegations and statements in earlier pleadings are not considered judicial
admissions.” 188 LLC v. Trinity Indus., Inc., 300 F.3d 730, 736 (7th Cir. 2002). “An amended
pleading ordinarily supersedes the prior pleading,” such that “[t]he prior pleading is in effect
withdrawn as to all matters not restated in the amended pleading and becomes functus officio.” Id.
(quotation omitted). Accordingly, NT’s prior statements do not defeat its claims.3
2
In the course of its opinion dismissing NT’s second amended counterclaims, the Court
stated that the second full paragraph on page 2 of the Letter Amendment “amended the original
Section 10 of the SLA.” (See 11/6/12 Mem. Opinion & Order at 3.) This statement was not a
ruling, however, and thus is not subject to the discretionary doctrine of law of the case. See Avitia
v. Metro. Club of Chi., Inc., 49 F.3d 1219, 1227 (7th Cir. 1995) (stating that “[t]he doctrine of law
of the case establishes a presumption” the “strength [of which] varies with the circumstances” that
“a ruling made at one stage of a lawsuit will be adhered to throughout the suit”).
3
The Court does not address the Board’s argument that the voluntary payment doctrine
bars NT’s claims because that doctrine is an affirmative defense and thus not appropriately
addressed on a Rule 12(b)(6) motion. See Xechem v. Bristol-Myers Squibb Co., 372 F.3d 899,
901 (7th Cir. 2004) (“Orders under Rule 12(b)(6) are not appropriate responses to the invocation
of defenses, for plaintiffs need not anticipate and attempt to plead around all potential defenses.”)
Wermers Floorcovering, Inc. v. Santanna Nat. Gas Corp., 794 N.E.2d 1012, 1014 (Ill App. Ct.
2003) (characterizing the voluntary payment doctrine as an affirmative defense).
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Even if its claims are not otherwise precluded, the Board argues that NT has not stated an
express contract claim, which requires NT to allege “offer and acceptance, consideration, definite
and certain terms of the contract, [NT’s] performance of all required contractual conditions, the
[Board’s] breach of the terms of the contract, and damages resulting from the breach.” Mannion v.
Stallings & Co., Inc., 561 N.E.2d 1134, 1138 (Ill. App. Ct. 1990). NT alleges that its offer was
embodied in the August 13, 2007 email, which states “[a]s we have in the past, we will carry the
negative earnings forward to be offset versus future positive earnings unless you request otherwise,”
and that the Board accepted by failing to object to the arrangement. (See NT’s Opp’n Mot. Dismiss
at 13; 3d Am Countercl. ¶¶ 39-40; id., Ex. 3, Email from Anderson to Huber (Aug. 13, 2007).) The
email does not, however, address whether or how the Board was to pay the deficit if future positive
earnings were insufficient to offset negative earnings. Thus, the Court agrees with the Board that
the email cannot be the basis for an express contract claim.
NT has, however, stated a claim for a contract implied-in-fact, or alternatively for unjust
enrichment. See Owen Wagener & Co. v. U.S. Bank, 697 N.E.2d 902, 907 (Ill. App. Ct. 1998)
(stating that a contract implied in fact is one in which “the[] agreement is arrived at by a
consideration of the[] [parties’] acts and conduct”) (quotation omitted); Midcoast Aviation, Inc. v.
Gen. Elec. Credit Corp., 907 F.2d 732, 737 (7th Cir. 1990) (stating that the elements of an unjust
enrichment claim are “the performance of services by the plaintiff, the receipt of the benefit of those
services by the defendant, and the unjustness of the defendant’s retention of that benefit without
compensating the plaintiff.”). NT alleges that: (1) starting in 2007, it advanced money on the
Board’s behalf and NT recorded those transaction on the Board’s account statements as a liability
to NT; (2) starting in February 2008, NT applied the Board’s share of positive securities lending
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earnings to repay NT for advances and NT recorded those transactions on the Board’s account
statements as positive earnings used “to reduce amount due [NT] to cover securities lending negative
earnings”; (3) the Board did not object to any of the statements or the arrangement until 2014; and
(4) the Board acknowledged its debt to NT in its published financial statements and other
documents. (3d Am. Countercl.¶¶ 44-72.) These allegations are sufficient to state a claim for
breach of a contract implied-in-fact or unjust enrichment.4
The Court also rejects the Board’s challenge to NT’s equitable estoppel claim. The asserted
infirmity of the claim is that it fails to allege that NT relied on the Board’s account statements and
the Board’s failure to object to them. However, NT’s incorporation of the account statement
allegations into the estoppel claim and its allegation that it relied on the Board’s “words and
conduct” are sufficient to vault the low hurdle of Rule 12(b)(6). (See id. ¶¶ 107, 111-12)
The Court agrees with the Board, however, that the ratification claim fails. NT does not
identify, and the Court has not found, any Illinois law supporting the existence of a ratification cause
of action, and the allegations of that claim are duplicative of those in the agency indemnification and
unjust enrichment counts. Accordingly, the ratification claim is dismissed.
Conclusion
For the reasons set forth above, the Court grants in part and denies in part the Board’s motion
to dismiss NT’s third amended counterclaims [405]. The motion is granted as to the express contract
claim asserted in Count I and the ratification claim asserted in Count V, but is otherwise denied.
4
This conclusion disposes of the Board’s argument that the account stated claim must be
dismissed because NT has alleged no underlying liability to support it. (See Mem. Law Supp.
Mot. Dismiss at 20.)
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SO ORDERED.
ENTERED:
March 17, 2015
__________________________________
HON. JORGE ALONSO
United States District Judge
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