New Orleans City v. AMBAC Assurance Corporation et al

Filing 248

ORDER and REASONS granting 239 Motion in Limine to Exclude Four New Allegations of Misrepresentation and All Evidence of Or Relating to These New Allegations, as stated within document. Signed by Judge Kurt D. Engelhardt on 12/12/2014. (cbs) Modified on 12/12/2014 to edit document type (cbs).

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA

THE CITY OF NEW ORLEANS

CIVIL ACTION

VERSUS

NO. 08-3949

AMBAC ASSURANCE CORPORATION,
et al.

SECTION "N" (1)

ORDER & REASONS
Now before the Court are Defendants', UBS Securities, LLC and PaineWebber Capital
Services, Inc. ("Defendants"), Motions in Limine to exclude Plaintiff's, the City of New Orleans
("the City"), "new allegations" that Defendants misrepresented certain information related to the
transaction at issue in this case. (Rec. Doc. 239). The City filed a response in opposition (Rec. Doc.
242), and Defendants filed a reply (Rec. Doc. 245). For the reasons stated herein,
IT IS ORDERED that the Motions in Limine are hereby GRANTED, and the City's
substantive claims are limited to its existing causes of action, Counts V, VI, and VIII. In addition,
any evidence of the four misrepresentations at issue in these motions is declared inadmissible at trial.
I. Background
This case arises out of variable rate municipal bonds issued by the City in 2000 in the
principal amount of $170,660,000 to fund the City’s firefighter pension fund. (Rec. Doc. 242 at p.

1

2). Defendants (PaineWebber, Inc., later UBS, as successor-in-interest) served as underwriter for
the bonds. To manage the variable interest rate risk associated with the bonds, the City entered into
an interest rate swap agreement (the "Swap") with Defendants, whereby the City agreed to pay
Defendants a fixed rate of interest, and Defendants paid the weekly variable rate. Unbeknownst to
the City, Defendants then entered into a reciprocal swap ("Reciprocal Swap") with an AMBAC
affiliate, AMBAC Financial Services, LLC ("AFS"), whereby Defendants agreed to pay AFS a fixed
rate, and AFS assumed the risk of the variable rate. In the financial crisis of 2008, the bonds became
unmarketable causing AMBAC to exercise its rights under the Reciprocal Swap, thereby triggering
a provision of the Swap between Defendants and the City. As a result, the City was forced to
refinance the bonds and terminate the Swap.
The City brought suit on July 17, 2008, against AMBAC, AFS, and Defendants.

On

October 10, 2010, this Court dismissed all claims against AMBAC and AFS. (Rec. Doc. 107). In
addition, the City sued Defendants under various theories, and this Court dismissed all claims
against Defendants except the following: (1) fraud in the inducement (Count V); (2) negligent
misrepresentation (Count VI); and (3) breach of the Swap agreement (Count VIII). Counts V and
VI relate to information that Defendants are alleged to have fraudulently omitted. (Rec Doc. 83 at
p. 72-73). In October of 2011, on the City's unopposed motion, the parties administratively closed
the case pending potential settlement negotiations. (Rec. Doc. 169). After such talks proved
ineffective, the City moved to reopen the case in November of 2013, and the Court granted the
motion. (Rec. Doc. 210). The Court issued an updated scheduling order indicating that the time to
amend pleadings, cross-claims, and counter-claims had passed. (Rec. Doc. 212). During the
additional discovery period, the City served on Defendants a combined answer to Defendants' Third

2

Set of Interrogatories and Supplemental and Amended Answers to Defendant's First Set of
Interrogatories ("Supplemental Response") (Rec. Doc. 228, Exh. A), which included the following
new allegations of misrepresentations: (1) UBS provided false information to the City, which
allowed UBS to price the Swap at a considerably higher rate; (2) UBS provided false information
regarding the savings that the synthetic fixed rate bonds would achieve; (3) UBS assured the City
that its 10.7% rate of return was reasonable; and (4) UBS told the City that it was not entering
into a novel deal, but the same kind of deal other municipalities had previously conducted.
(Id.). Defendants moved for a Rule 16 Conference to define the scope of the Second Amended
Complaint ("the Complaint") as it pertains to the "new allegations" of misrepresentation.
During that conference, this Court directed the parties to file motions in limine to address the
issues raised in their Rule 16 Motion. (Rec. Doc. 237). Specifically, the Court directed the City
to indicate why these "new allegations" were being raised at such a late date when evidence of
these assertions was available to the parties back in 2008. Id. Now before the Court are
Defendants' Motions in Limine requesting that the Court to limit the City's claims to the causes
of action left in the Complaint (Counts V, VI, and VIII) and to prohibit introduction of
evidence relating to these four alleged misrepresentation at trial. (Rec. Doc. 239).
II. Law & Ananlysis
Defendants argue that the four "new allegations" contained in the City's Supplemental
Response were not included in the Second Amended Complaint, and the City should not be able to
indirectly amend its Complaint through discovery procedures.

(Rec. Doc. 239-1 at p. 4).

Additionally, Defendants assert that the City has not plead these "new allegations," which pertain
to affirmative misrepresentation, with specificity as required by Rule 9(b) of the Federal Rules of

3

Civil Procedure. (Id.). The City responds declaring that it has no intention of raising the
misrepresentations as substantive claims, instead, that the City intends to rely on the
misrepresentations as evidence "that goes toward the fraud and breach of contract claims already
pled." (Rec. Doc. 242 at p. 1).
A. Misrepresentations as Causes of Action
Rule 9(b) requires the plaintiff to set forth the “who, what, when, where, and how” of the
alleged fraud. See, e.g., United States ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 266 (5th
Cir. 2010); see also Sullivan v. Leor Energy,LLC, 600 F.3d 542, 550-51 (5th Cir. 2010) ([C]laimant
must "specify the statements contended to be fraudulent, identify the speaker, state when and where
the statements were made, and explain why the statements were fraudulent."). "At a minimum, Rule
9(b) requires allegations of the particulars of the time, place, and contents of the false
representations, as well as the identity of the person making the misrepresentation and what he
obtained thereby." Tel-Phonic Services, Inc. v. TBS International, Inc., 957 F.2d 1134, 1138 (5th
Cir. 1992).
To the extent that the City, in its Supplemental Response, attempts to raise the four
misrepresentations as substantive claims of fraud, the Court finds that the City has not pled, much
less pled with particularity as required by Rule 9(b), the allegations as claims for relief. In fact, the
City concedes in its opposition, "the four misstatements do no constitute an independent or new
cause of action as to which the City seeks to recover. Rather, they are evidence...." (Rec. Doc. 242
at p. 1). Therefore, the Court finds Defendants' Motions in Limine seeking to limit the City's
complaint to the already existing claims found in Counts V, VI, and VIII are warranted and
uncontested.

4

B. Misrepresentations as Evidence of Fraud by Omission
In their motions in limine, Defendants also contend that the newly alleged misrepresentations
are not admissible as evidence as they do not relate to the omission claims made in the Complaint.
(Rec. Doc. 239). The City claims that the misrepresentations are evidence of fraudulent intent and
materiality pertaining to their existing fraud and breach of contract claims. (Rec. Doc. 242). For
the reasons that follow, the Court finds Defendants' motions to exclude evidence of the four
misrepresentations proper and such evidence is hereby declared inadmissible at trial.
"[A] district court has wide and flexible discretion concerning the admissibility of
evidence." Dixon v. International Harvester Co., 754 F.2d 573, 584 (5th Cir.1985). When the Court
first addressed Defendants' concerns about the new allegations as substantive claims, the Court
directed the parties to submit their arguments as motions in limine, specifically instructing the City
to include its reasons for not bringing these assertions at an earlier date. (Rec. Doc. 237 at p. 12-13).
The Court expressed concerns of a "back-door" approach to pleading, especially when the parties
are as far along in a proceeding as is the case here. (Id. at p.17). Defendants argued, and the Court
agrees, that information upon which the City relies in forming the alleged misrepresentations has
been identified and available to the City since, at least, the outset of this case filed six years ago.
(See Id.; generally Rec. Doc. 242 and attachments, Rec. Doc. 239 at pp.12, 15, 18, 21). However,
the City completely disregarded the Court's request for such an explanation in its response in
opposition.
The court is not inclined to allow evidence of alleged misrepresentations that could have
been properly pled, and thereby subject to Rule 9(b) motion practice, without some explanation as
to the basis for delay.

After more than three years of active litigation and two years of

5

administrative closure for purposes of settlement negotiation, the Court did not grant reopening so
that the City could expand upon its claims against Defendants. (See Rec. Doc. 212).
However, the Court recognizes the City's argument, under the holding in Chrysler Credit
Corp. v. Whitney Nat. Bank, 824 F. Supp. 587 (E.D.La. 1993), that these misrepresentations are
merely evidence and should be allowed. The Court is aware of the holding in Chrysler Credit Corp.,
which barred claims not properly plead under Rule 9(b) but allowed evidence of fraud as it may be
"probative of other propositions." Id. at 599. Although, in that case, the court found that the parties
sought to admit evidence of fraud that was relevant to Chrysler's conversion claim, a non-fraud
allegation. Here, the City intends to rely on recently identified but long known affirmative
misrepresentations, that the City could have pled alongside its current claims, as evidence of
fraudulent omissions.1 For this reason, the Court finds that case is distinguishable. Furthermore,
the Court finds that the City's attempt to put a "Trojan Horse" packaging around these allegations
to get these claims into Court as evidentiary support, all the while disguising the real purpose of the
misrepresentations to serve as substantive allegations, is unfounded and misguided. At best, the
City's timing in raising these allegations is peculiar. As a result, the Court finds that no good cause
exists for the Court to allow such material additions to what has been properly pled and litigated
heretofore in this case. And, the facts simply do no justify introduction of this specific evidence
under the circumstances.
Even if the Court were inclined to disregard the reasons stated above, the Court finds that

1

The City does argue that Defendants' misrepresentation regarding the trading spreads pertains to
Defendants' bad faith, "an issue relevant to the City's breach of contract claim." (Rec. Doc. 242 at p.16). However,
the Court points out that Count VII "Bad Faith" was alleged against AMBAC only (See Rec. Doc. 83 at p. 76), and
the count has been dismissed by this Court. To the extent that the City contends that the misstatement relates to its
breach of contract claim against Defendants, the Court finds the alleged misrepresentation irrelevant as to whether
Defendants provided notice of any transfer of rights.

6

the misrepresentations are not relevant of materiality to the City's existing fraud and breach of
contract claims under Rule 401 of the Federal Rules of Evidence, nor are they probative of intent
under Rules 403 and 404 such that the Court should allow evidence of these assertions at trial. In
particular, the misrepresentations are distinct acts that do no pertain to omissions regarding the
structure and risks associated with the structure of the transaction or any alleged conflict of interest,
and, thus, they are not relevant to proving any of the elements necessary to the City's existing claims.
New Orleans, Louisiana, this 12th day of December 2014.

_____________________________________
KURT D. ENGELHARDT
United States District Judge

7