Broyles v. Cantor Fitzgerald & Co. et al

Filing 188

RULING: J.P. Morgan's #161 Motion to Strike is GRANTED and the CA Funds' #158 Motion to Dismiss is DENIED. J.P. Morgan shall file an amended counterclaim consistent with the Court's ruling within 7 days. Signed by Judge James J. Brady on 6/18/2014. (SMG)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA
JOSEPH N. BROYLES
CIVIL ACTION
VERSUS
NO. 10-854-JJB
CANTOR FITZGERALD & CO., ET AL
consolidated with
JOSEPH N. BROYLES, ET AL
CIVIL ACTION
VERSUS
10-857-JJB
CANTOR FITZGERALD & CO. ET AL
RULING
This matter is before the Court on two motions. The first motion that the Court will
address is a Motion (doc. 161) to Strike and Alternative Motion to Conduct Discovery brought
by counterclaim plaintiff, J.P. Morgan Clearing Corp. (“J.P. Morgan”),1 on its own behalf and as
successor to Bear Stearns Securities Corp. (“Bear Stearns”). Counterclaim defendants, CA Core
Fixed Income Fund, LLC, CA Core Fixed Income Offshore Fund, Ltd., CA High Yield Fund,
LLC, CA High Yield Offshore Fund, Ltd., and Sand Springs Capital III Master Fund, LLC
(collectively referred to herein as the “CA Funds”), have filed an opposition (doc. 164). The
second motion that the Court will address is a Motion (doc. 158) to Dismiss Counterclaim
brought by the CA Funds. J.P. Morgan has filed an opposition (doc. 163). The CA Funds have
filed a reply (doc. 168), to which J.P. Morgan has filed a sur-reply (doc. 177). Oral argument is
unnecessary. The Court’s jurisdiction exists pursuant to 28 U.S.C. § 1331.
I.

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Background

Improperly named as J.P. Morgan Securities, LLC.

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The CA Funds have filed suit against J.P. Morgan and others asserting several causes of
action under various state and federal corporate and securities laws. (Doc. 185). The CA Funds
allege that J.P. Morgan and others have committed “a variety of wrongs relating to and arising
out of the CA Funds’ investments in the Collybus CDO.” (Doc. 185, at ¶ 1). As it specifically
relates to J.P. Morgan and Bear Stearns, the CA Funds allege that Bear Stearns was aware of redflags presented by the unlawful transactions complained of in the suit, but nevertheless
“materially participated in, aided and abetted such transactions[.]” (Doc. 185, at ¶ 85).
J.P. Morgan has asserted counterclaims against the CA Funds by way of its answer.
(Doc. 62 in No. 10-857). J.P. Morgan alleges that the CA Funds entered into various agreements
with Bear Stearns including institutional account agreements and other supplemental agreements.
(Doc. 62, p. 75, at ¶ 5).

J.P. Morgan further alleges that these agreements contained

representations and warranties in which the CA Funds agreed, among other things, that Bear
Stearns was not its fiduciary or advisor and that it would not rely upon Bear Stearns “taking any
action with respect to any account, position, or activity.” (Doc. 62, p. 75, at ¶ 6). J.P. Morgan
also alleges that the CA Funds further agreed to limit Bear Stearns’ liability and that Bear
Stearns shall have no liability for “any consequential, indirect, incidental, or similar
damages…and irrevocably and unconditionally waive[d] any right” to recovery any such
damages. (Doc. 62, p. 76, at ¶¶ 8-9). Finally, J.P. Morgan alleges that the CA Funds agreed to
indemnify Bear Stearns for all losses associated with any claims. (Doc. 62, p. 76, at ¶ 10).
Based upon the foregoing allegations, J.P. Morgan asserted two counterclaims against the
CA Funds: (1) breach of contract; and (2) breach of the covenant of good faith and fair dealing.
The CA Funds have brought the present motion to dismiss contending that J.P. Morgan’s claims
should be dismissed under several theories.

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II.

Discussion
Before substantively addressing the motion to dismiss, the Court must decide whether to

consider the documents attached thereto by the CA Funds. When determining whether to grant a
motion to dismiss, courts cannot look beyond the pleadings. Scanlan v. Texas A&M Univ., 343
F.3d 533, 536 (5th Cir. 2003). That said however, under the Collins exception, a court may
consider documents attached to a motion to dismiss if such documents are referenced in the
plaintiff’s complaint and are central to the plaintiff’s claim.

Id. (discussing the exception

recognized in Collins v. Morgan Stanley Dean Witter, 224 F.3d 496 (5th Cir. 2000)). Whether to
consider documents outside of the pleadings is left to the “complete discretion” of the trial court.
Isquith ex rel. Isquith v. Middle South Utils. Inc., 847 F.2d 186, 196 n.3 (5th Cir. 1988). If the
court decides to consider matters outside of the pleadings, the motion to dismiss must be treated
as a motion for summary judgment. See id.; see also FED. R. CIV. P. 12(d).
In its motion to strike, J.P. Morgan argues that exhibits attached to the CA Funds’ motion
to dismiss, including documents concerning the CA Funds’ Chapter 11 reorganization
proceedings captioned, In re: Sand Spring Capital III, LLC, et al., Case No. 11-13393 (Bankr. D.
Del.), and documents referring to FINRA and Securities and Exchange Commission notices and
rule changes, should not be considered during the Court’s review of the motion to dismiss. J.P.
Morgan argues that such documents should not be considered because they were not referenced
in J.P. Morgan’s counterclaim and are not central to J.P. Morgan’s claims. J.P. Morgan further
argues that the documents are submitted in support of the CA Funds’ affirmative defenses, which
J.P. Morgan avers, should not be considered at this time. In the event that the Court decides to
consider the attached documents, J.P. Morgan requests leave to conduct discovery. In response,
the CA Funds argue that the Court should take judicial notice of these documents as permitted by

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both binding and persuasive precedent. The CA Funds further argue that J.P. Morgan has failed
to identify any genuine issue of material fact and therefore, its request for discovery should be
denied.
After review, the Court finds that J.P. Morgan’s motion to strike should be granted. The
documents attached to the CA Funds’ motion to dismiss are neither referenced in J.P. Morgan’s
counterclaim nor central to J.P. Morgan’s claim.

Accordingly, they do not satisfy the

requirements necessary to permit the Court to look beyond the pleadings. See Scanlan, 343 F.3d
at 337 (finding that the trial court erred when it considered evidence that did not qualify under
the Collins exception). Furthermore, the Court declines to take judicial notice of the attached
documents. As J.P. Morgan asserts and CA Funds acknowledge, these documents are submitted
to support, and are central to a determination of, CA Funds’ affirmative defenses. Even a
cursory review of the parties’ submissions concerning the motion to dismiss reveals a fervent
dispute as to the applicability and enforceability of these documents. This alone militates against
the Court taking judicial notice of the attached documents. See Taylor v. Charter Medical Corp.,
162 F.3d 827, 830 (5th Cir. 1998) (agreeing with sister circuits that a court cannot take judicial
notice of facts subject to reasonable dispute).
Additionally, the Court deems consideration of these affirmative defenses premature at
this stage of the litigation for several reasons. First, a successful affirmative defense does not
appear clearly on the face of J.P. Morgan’s pleadings. See Clark v. Amoco Production Co., 794
F.2d 967, 970-71 (5th Cir. 1986) (reversing the trial court’s dismissal on the basis of an
affirmative defense when the complaint did not establish each element of the proffered defense).
Second, as previously mentioned, the applicability and enforceability of the attached documents
are hotly contested, and thus, so are the merits of the CA Funds’ affirmative defenses. Finally,

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the affirmative defenses present genuine issues of material fact which may be better resolved
after consideration of the fully developed record after discovery.
In short, as the submissions make clear, a consideration of these documents would send
the Court down a proverbial rabbit hole, requiring the determination of intertwined, complex,
and highly fact dependent issues of law. Such a determination is both imprudent and improper at
this stage of the litigation. Accordingly, J.P. Morgan’s motion to strike is granted.2
Guided by its holding concerning the motion to strike and its declination to consider the
CA Funds’ affirmative defenses at this time, the Court’s inquiry on the motion to dismiss is
focused on whether J.P. Morgan has stated plausible claims for breach of contract and breach of
the covenant of good faith and fair dealing that withstand dismissal.3
Federal Rule of Civil Procedure 12(b)(6) provides for dismissal of a complaint for
“failure to state a claim upon which relief can be granted.” FED. R. CIV. P. 12(b)(6). When
reviewing the complaint, a court must accept all well-pleaded factual allegations as true. C.C.
Port. Ltd. v. Davis-Penn Mortg. Co., 61 F.3d 288, 289 (5th Cir. 1995). Facts must be viewed in
the light most favorable to the non-movant. See Bass v. Stryker Corp., 669 F.3d 501, 506 (5th
Cir. 2012). In order to survive a motion to dismiss, the complaint must plead “enough facts to
2

J.P. Morgan’s motion to strike is also granted to the extent that it urges the Court to strike the CA Funds’ request
for “contempt sanctions.” The CA Funds withdrew its request through its opposition, but reserves all rights to
reassert this request before the bankruptcy court. (Doc. 164, at 11).
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Throughout its submissions, the CA Funds argue that the bankruptcy court is the proper forum in which J.P.
Morgan should bring its claims and therefore, J.P. Morgan is enjoined from pursuing its claims in this Court.
Though the CA Funds initially urged the Court to interpret and enforce the bankruptcy court’s order and find that the
order enjoins J.P. Morgan from seeking redress in this Court and/or that J.P. Morgan’s claims have been discharged
in bankruptcy, in its reply, the CA Funds do an about-face and argue that the Court is precluded from doing this by
Celotex v. Edwards, 514 U.S. 300 (1995). Not only does the Court believe this to be disingenuous, but the Court
finds it to be incorrect. J.P. Morgan’s claims do not collaterally attack the bankruptcy court’s order. Instead, by
adjudicating J.P. Morgan’s claims, the Court will be called upon to do exactly what the CA Funds initially urged this
Court to do when it presented its discharge defense, and that is to interpret the bankruptcy order to determine its
applicability to, and therefore enforceability against, J.P. Morgan. These are appropriate determinations to be made
in this forum. See Velasquez v. Delta Airlines, Inc., No. 2:07-CV-796 TS, 2008 WL 2225832, *2 (D. Utah May 29,
2008) (finding that “[t]he affirmative defense of ‘discharge in bankruptcy’ is appropriately raised in nonbankruptcy
forums.”).

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state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
570 (2007). A court need not determine at this preliminary stage whether the plaintiff’s claims
will ultimately succeed on the merits. Id. at 556. Instead, a court must identify the factual
allegations entitled to the presumption of truth and determine whether they state a plausible
claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).
A review of the counterclaim reveals that J.P. Morgan has alleged sufficient factual
matter to assert a plausible claim for breach of contract against the CA Funds. To state a breach
of contract claim, J.P. Morgan must prove the following elements: “(1) the obligor's undertaking
an obligation to perform, (2) the obligor failed to perform the obligation (the breach), and (3) the
failure to perform resulted in damages to the obligee.” Favrot v. Favrot, 68 So. 3d 1099, 110809 (La. App. 4 Cir. 2011). Here, J.P. Morgan has satisfied these elements by alleging that it and
the CA Funds executed several agreements in which the CA Funds agreed to, inter alia, limit J.P.
Morgan’s liability for “any consequential, indirect, incidental, or similar damages…and
irrevocably and unconditionally waive[] any right” to recover any such damages; that the CA
Funds breached these agreements by filing suit against J.P. Morgan for alleged improprieties;
and as a result of this breach, J.P. Morgan has suffered and continues to suffer damages. See
Counterclaim, Doc. 62 in 10-857, p. 75-76, ¶¶ 5-14. Accordingly, J.P. Morgan has stated a
claim for breach of contract.
Further review of the counterclaim reveals that J.P. Morgan’s claim for breach of the
covenant of good faith and fair dealing is insufficiently pled. Louisiana law imposes a duty upon
contracting parties to perform their duties in good faith. See LA. CIV. CODE ARTS. 1983, 1759.
Before a court may make a judicial determination of bad faith performance, it must first be
shown that there was a breach of contract. Favrot, 68 So. 3d at 1110 (“Stated another way, we

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do not examine a party’s good faith (or bad faith) unless and until we find that the party has
failed to perform an obligation, from which the obligee has sustained damages.”). Courts have
defined bad faith as “mean[ing] more than mere bad judgment or negligence and it implies the
conscious doing of a wrong for dishonest or morally questionable motives.”

Volentine v.

Raeford Farms of Louisiana, L.L.C., 121 So. 3d 742, 753 (La. App. 2 Cir. 2013); see also
Industrias Magromer Cueros y Pieles S.A. v. Louisiana Bayou Furs Inc., 293 F.3d 912, 922 (5th
Cir 2002) (relying upon a similar definition of bad faith).
The CA Funds argue that J.P. Morgan has failed to state a claim for breach of the
covenant of good faith and fair dealing because it has failed to allege that the CA Funds acted
with malicious intent. The Court agrees. Rule 9(b) of the Federal Rules of Civil Procedure
requires that malice and intent be alleged generally. Here, J.P. Morgan relies upon allegations
that demonstrate that the CA Funds breached their contract. While the Court may infer that the
breach was conscious, there are not additional facts to make it plausible, and not just possible,
that the conscious breach was motivated by “dishonest or morally questionable motives.”
Accordingly, J.P. Morgan’s claim for breach of the covenant of good faith and fair dealing
should be dismissed.
However, J.P. Morgan has requested leave to amend its counterclaim in the event that the
Court found this claim to be deficient. While it is true that “a bare request in an opposition to a
motion to dismiss…does not constitute a motion for [leave to amend],” Pension Fund v.
Integrated Electrical Services, Inc., 497 F.3d 546, 555-56 (5th Cir. 2007) (citations omitted),
district courts may allow plaintiffs at least one opportunity to cure any deficiencies found in the
pleadings before dismissing their case. Great Plains Trust Co. v. Morgan Stanley Dean Witter &
Co., 313 F.3d 305, 329 (5th Cir. 2002). A court may deny a request to amend to avoid “undue

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delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies
by amendments previously allowed, undue prejudice to the opposing party by virtue of
allowance of the amendment, futility of amendment, etc.” Pension Fund, 497 F.3d at 556
(citation omitted).

J.P. Morgan avers that it can specifically allege facts to cure the

counterclaim’s deficiency. Therefore, the Court will grant J.P. Morgan’s request for leave to
amend.
III.

Conclusion
For the reasons stated herein, J.P. Morgan’s Motion (doc. 161) to Strike is GRANTED

and the CA Funds’ Motion (doc. 158) to Dismiss is DENIED.
J.P. Morgan shall file an amended counterclaim consistent with this Court’s ruling within
7 days.
Signed in Baton Rouge, Louisiana, on June 18, 2014.





JUDGE JAMES J. BRADY
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA

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