Woman's Hospital Foundation v. National Public Finance Guarantee Corporation et al

Filing 28

RULING granting 20 Motion to Dismiss the claims of pltf, Woman's Hospital Foundation with prejudice.. Signed by Judge James J. Brady on 3/20/2012. (CMM) Modified on 3/20/2012 to edit text. (CMM)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA
WOMAN’S HOSPITAL FOUNDATION
CIVIL ACTION
VERSUS
NO. 11-cv-00014
NATIONAL PUBLIC FINANCE
GUARANTEE CORPORATION, et al.
RULING ON MOTION TO DISMISS
Before the Court is a motion (Doc. 20) by defendants National Public Finance Guarantee
Corporation (“National”) and Financial Guaranty Insurance Company (“FGIC”) to dismiss
plaintiff Woman’s Hospital Foundation’s (“WHF”) complaint for breach of contract. WHF filed
an opposition (Doc. 24), and defendants submitted a reply (Doc. 26). Oral argument was
requested by WHF, but the Court finds it unnecessary. Jurisdiction exists pursuant to 28 U.S.C.
§ 1332 following removal from state court.
I.
The following facts are taken from WHF’s complaint and the documents it incorporates
by reference.
WHF operates as a non-profit hospital providing the largest amount of obstetric, neonatal,
and gynecological services in Louisiana. In order to fund renovations to its 40 year-old facility,
in 2005 WHF contracted with the Louisiana Public Facilities Authority (“the Authority”) to issue
nearly $40 million in tax-exempt bonds on its behalf (“the 2005 bonds”). The Authority issued
the bonds and loaned the proceeds from the 2005 bonds to the Hospital pursuant to their loan
agreement. The Hospital agreed to make monthly payments on the principal and interest of the
bonds to the Bank of New York Trust Company (“New York Trust”), the trustee the Authority
contracted with to administer the loan agreement. WHF and New York Trust separately entered
1

into a “Master Trust Indenture,” a document which created terms and conditions upon which
WHF could assume additional long term debt.
At the same time, WHF purchased a bond insurance policy from FGIC. WHF paid an
up-front, prepaid premium for FGIC’s guarantee of WHF’s payment to the 2005 bondholders.
The insurance agreement they signed sets forth the duties and obligations between them. It
provides for conditions under which WHF could incur additional debt, conditions that were more
onerous than those imposed by the Master Trust Indenture WHF agreed to with New York Trust.
The agreement also conditions certain actions WHF might otherwise take with FGIC’s prior
written consent.
In September 2008, FGIC reinsured its WHF insurance policy relating to the 2005 bond
issuance with National. 1

The reinsurance agreement between FGIC and National allowed

National to stand in FGIC’s shoes for purposes of enforcing FGIC’s insurance agreement with
WHF.
Notwithstanding WHF’s renovations to its facility financed by the 2005 bonds, it outgrew
that facility. Sometime in 2008, it began contemplating an entirely new facility and planned to
issue bonds in January 2010 in the principal amount of $350,000,000 (“the 2010 bonds”). WHF
complied with the additional debt tests set forth in both its Master Trust Indenture with New
York Trust and its insurance agreement with FGIC/National. 2
In December 2009, WHF began negotiating with National to obtain its consent to the
additional debt undertaking the 2010 bonds would represent.
1

While the parties conducted

The original transaction occurred between FGIC and MBIA, another bond insurer. Subsequently, MBIA
transferred its public finance portfolio (including the reinsurance agreement involved here) to its subsidiary, MBIA
Illinois, which later changed its name to Nation Public Finance Guarantee Corporation.
2
Since, at this point, National had taken over enforcement of the insurance agreement, all subsequent references to
WHF’s bond insurer will refer to National instead of FGIC, even though FGIC and not National entered into the
agreement with WHF.

2

substantial negotiations, National did not consent in the timeframe WHF thought its bond
issuance required. Specifically, while WHF thought National would give consent if it agreed to
additional covenants, during negotiations National desired to visit the site of the proposed new
hospital. Therefore, WHF resolved to pay back the entirety of the balance on the 2005 bonds in
order to free it to issue the 2010 bonds on time without the impediments presented by the Master
Trust Indenture or the insurance agreement. Through WHF’s attempts to obtain National’s
consent it alleges National wrongfully withheld, along with its added expenses in paying off the
2005 bonds ahead of schedule, WHF alleges damages in excess of $2.5 million.
II.
In December 2010, plaintiff WHF filed this action in Louisiana state court (Petition, Doc.
1-2), which defendants removed to this Court in January 2011 (Doc. 1). The action alleges four
causes of action under Louisiana law: (1) breach of the insurance agreement due to National’s
withholding of consent, notwithstanding WHF’s compliance with the additional long-term debt
test set forth in that agreement; (2) breach of the defendants’ duties of good faith by failing to
provide consent without any basis; (3) a claim for abuse of rights based on the improper motives
and purposes behind the withholding of consent; and (4) detrimental reliance based on National’s
intimations that it would consent which it later withheld after significant expenditures by WHF
attempting to obtain that consent.
In February 2011, defendants filed a motion to dismiss (Doc. 5), but that motion was
dismissed without prejudice while the parties pursued settlement (see Order, Doc. 15). After
settlement efforts did not succeed, however, defendants renewed their motion to dismiss. (Doc.
20).

3

In essence, defendants contend the insurance agreement provisions requiring consent give
them an unqualified right to deny consent, which necessarily defeats the breach of contract
claim.

They further contend that their withheld consent was based on prudent economic

considerations that cannot, as a matter of law, show bad faith or an abuse of rights. Finally, they
claim plaintiff’s own pleading contradicts any possible detrimental reliance.
In support of its claims, WHF argues the additional debt tests were inserted into both the
Master Trust Indenture and the insurance agreement in order to provide, at worst, a standard by
which consent should be judged and, at best, an exception to the consent requirement.
III.
Pursuant to Fed. Rule Civ. P. 12(b)(6), on a motion to dismiss for failure to state a claim,
the Court accepts all well-pleaded, non-conclusory facts in the complaint as true. Ashcroft v.
Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009). “To survive a motion to dismiss, a complaint
must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible
on its face.’” Id. (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “[A]
formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555.
A complaint that pleads facts merely consistent with a defendant’s liability “stops short
of the line between possibility and plausibility.”

Id. at 557.

When well-pleaded factual

allegations populate the complaint, “a court should assume their veracity and then determine
whether they plausibly give rise to an entitlement to relief.” Iqbal, 129 S.Ct. at 1950. Courts
may consider not only the complaint itself, but also documents attached to the complaint or
documents incorporated into the complaint by reference. Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 322-23 (2007). The facts in the complaint are viewed collectively, not
scrutinized in strict isolation. Id. Courts are permitted to take public records and others matters
4

of judicial notice into account when evaluating a motion to dismiss. Hall v. Hopkins, 305
Fed.Appx. 224, 227-28 (5th Cir. 2008); Davis v. Bayless, 70 F.3d 367, 372 n. 3 (5th Cir. 1995).
IV.
While WHF brings four separate claims against the defendants, they all hinge on how the
Court interprets the consent provisions of the insurance agreement. If the consent requirements
are unqualified, defendants did not breach the agreement by not consenting. Thus, they would
not have acted in bad faith, and likely would not have abused their rights or provided any
statement on which WHF could reasonably rely. Conversely, if the additional debt test qualifies
the consent provisions of the agreement, then WHF has likely stated plausible claims. Thus, at
present the case reduces to how the provisions of the insurance agreement interact with each
other.
A.
Article II of the insurance agreement sets forth, among other things, the covenants WHF
owes to the bond insurer. (Doc. 20-3, p. 5). Two sections are of particular import. The first is
Section 2.2(f), which lays out a more stringent additional debt test than the Master Trust
Indenture requires. (Id., pp. 7-10). The second is Section 2.6, which subjects any amendment or
supplement to the loan transaction documents to the prior written consent of the bond insurer.
(Id., p. 12). The insurance agreement defines the loan transaction documents to include, inter
alia, the 2005 bonds, the 2005 note, the loan agreement, the Master Trust Indenture between
WHF and New York Trust, and the bond trust indenture between the Authority and New York
Trust. (Id., § 1.1, p. 3). In fact, the Supplemental Master Trust Indenture No. 1 (Doc. 20-9)
between WHF and New York Trust explicitly confirms in Section 5.10 that “anything contained
in … the Master Trust Indenture to the contrary notwithstanding, [New York Trust] and [WHF]
5

shall not supplement or amend the Master Trust Indenture, this Supplemental Indenture or the
Assignment without the prior written consent of the Bond Insurer.” (Doc. 20-9, § 5.10, p. 9).
WHF concedes its 2010 proposed bonds required amending and/or supplementing the
Master Trust Indenture to provide, for instance, more mortgaged property as security for the
bond insurer’s provision of the policy. (Memo. in Opp., Doc. 24, p. 11). It simply contends the
bond insurer had no right to withhold written consent under Section 2.6 because the requested
supplement to the Master Trust Indenture satisfied the additional debt test in Section 2.2(f) of the
insurance agreement.
However, the Court finds the insurance agreement plainly and explicitly provides for the
bond insurer’s right to consent to any change to the Master Trust Indenture. Moreover, the right
to consent, as written, admits of no qualifications or exceptions. It is contained in a separate
section of the insurance agreement and does not mention the additional debt test provisions. As
a sophisticated party, WHF had the ability to negotiate for the right of the bond insurer to
consent based on more objective criteria, but it failed to do so. 3 The Court finds nothing in the
insurance agreement implying that satisfaction of the debt test in Section 2.2(f) compelled the
bond insurer to consent to the amendments to the Master Trust Indenture.
Contrary to WHF’s position, giving full force and effect to Section 2.6’s unqualified right
to consent does not render Section 2.2(f) meaningless.

As Section 2.2 of the insurance

agreement itself states (Doc. 20-3, p. 7) and Section 4.12 of the Master Trust Indenture confirms
(Doc. 20-4, p. 30), WHF was permitted to incur some new debt without seeking consent or

3

Indeed, the parties included a separate consent provision tailored to Section 2.2 itself, which required WHF to
comply with the terms of the covenants it made in favor of the bond insurer unless it received written consent from
the bond insurer. The parties were thus quite capable of either inserting a more detailed consent provision into
Section 2.6 or modifying the Section 2.2 consent provision, either of which could have mandated conditions on
which consent must be granted.

6

modifying to the Master Trust Indenture; however, if the debt to be incurred rose above certain
levels, the Master Trust Indenture required amendment, which in turn required the consent of the
bond insurer. Thus, the text of the agreement plainly and unambiguously permits the bond
insurer to grant or withhold consent irrespective of WHF’s compliance with Section 2.2(f). See
La. C.C. art. 2046 (requiring enforcement of clearly written contracts that lead to no absurd
consequences); La. C.C. art. 2047 (mandating that courts construe words in a contract according
to their plain meaning). WHF seeks to add a stipulation the parties did not make at the outset but
it wishes to insert in hindsight. See Lloyd’s of London v. Transcontinental Gas Pipe Line Corp.,
101 F.3d 425, 429 (5th Cir. 1996). The breach of contract claim therefore has no merit, and
National’s motion to dismiss this claim is therefore granted with prejudice.
B.
Louisiana law requires contracts to be performed in good faith. La. C.C. art. 1983.
While the Code does not define good faith, comment (b) to La. C.C. art. 1997 defines “bad faith”
as “an intentional and malicious failure to perform.”

Louisiana courts have analyzed

performance based on the dichotomy between good faith and bad faith without resort to any
middle ground. Cope v. CitiMortgage, Inc., No. 2:10-CV-922, 2010 WL 4976868, at * 3 (W.D.
La. Dec. 1, 2010). Thus, to breach the duty of good faith, there must be an intentional and
malicious failure to perform. Id. When a party does precisely what the express terms of an
agreement permit it to do, that party cannot as a matter of law be acting in breach of the implied
covenant of good faith and fair dealing.

Amoco Prod. Co. v. Texas Meridian Resources

Exploration Inc., 180 F.3d 664, 669-70 (5th Cir. 1999); Clark v. America’s Favorite Chicken
Co., 110 F.3d 295, 298 (5th Cir. 1997).

7

Because the Court has determined the bond insurers acted within their rights under the
insurance agreement in exercising their right to withhold consent, the Court finds as a matter of
law that they cannot have acted in bad faith. The motion to dismiss is therefore granted with
prejudice on this claim.
C.
Under Louisiana’s abuse of rights doctrine, the holder of a right is liable to a party
against whom the right is exercised if one of the following is present:
(1) The predominant motive for exercise of the right is to cause harm;
(2) There is no serious or legitimate motive for exercise of the right;
(3) The exercise of the right violates moral rules, good faith, or elementary fairness;
or
(4) The exercise of the right is for a purpose other than that for which it was granted.
Steier v. Heller, 732 So.2d 787, 791 (La. App. 2d Cir. 1999). Because application of this
doctrine renders unenforceable rights otherwise subject to judicial protection, this doctrine has
been applied sparingly to only limited circumstances. Id. at 790-91. Thus, when a party has a
legitimate interest in exercising a contractual right, he may do so even if it causes harm to
another, but if the party does not have a legitimate and serious interest in exercising the right,
and doing so would bring unnecessary harm to another, the doctrine of abuse of rights will bar
exercise of the contractual right. Massachusetts Mutual Life Ins. Co. v. Nails, 549 So.2d 826,
829 (La. 1989).
WHF brings nothing more than conclusory allegations relating to this claim.

(See

Petition, Doc. 1-2, ¶ 38). WHF does not specify how the bond insurers would be motivated to
cause it economic harm. WHF does elsewhere contend the bond insurers were motivated to
cause it to defease the 2005 bonds ahead of schedule in order for Nation to realize the prepaid
premium for the insurance policy without the risks of default ever materializing. If so, that
8

appears a legitimate business motivation to use contractual leverage provided by the insurance
agreement to reduce the risk of WHF falling into default by delaying payments on the 2005
bonds due to the acquisition of more debt. Use of this type of economic weapon, negotiated for
at arm’s length with a sophisticated party, does not fall into that narrow class of cases calling for
relief based on an injurious and arbitrary exercise of a contractual right. Cf. Truschinger v. Pak,
513 So.2d 1151, 1154-55 (La. 1987) (finding no abuse of rights when lessor refused to consent
to lessee’s proposed sublease if lessor’s primary motive was economic).
Moreover, as WHF’s complaint shows, the bond insurers never irrevocably refused
consent. (Id., ¶¶ 26-30). Rather, in the course of negotiations, National desired to conduct a site
visit of the proposed new hospital. (Id., ¶ 29). WHF interpreted this as a delaying tactic, paid off
the 2005 bonds, and went ahead with the 2010 bond issuance. (Id., ¶ 34). Even taking WHF’s
allegations as true, it is difficult to say that a month’s worth of negotiations occurring over two
major holidays in December 2009 and January 2010 regarding a $350 million bond offering
almost ten times larger than the previous bond offering could reasonably be interpreted as
intractable stonewalling. Conducting due diligence on such a large business deal, even if it took
more time than WHF wished, does not amount to a violation of moral rules or elementary
fairness. 4
Finally, the Court cannot say the exercise of the right was for a purpose other than that
for which it was granted. The Louisiana Supreme Court has already determined that at least one
purpose of consent provisions is the maintenance of control. Truschinger, 513 So.2d at 1155.
(lessor’s refusal to permit sublease exercised for proper purpose of maintaining control over who
leases property). In the same vein, National in this case was entitled to refuse consent in order to
4

Since National validly exercised its contractual right, as the Court has already noted supra, Part IV.B, that exercise
cannot, as a matter of law, sink to the level of bad faith.

9

control, to the extent it could, the amount of debt WHF might undertake, an increase of which
would heighten the risk of default on the 2005 bonds. Because WHF has not pleaded a plausible
abuse of rights claim, the motion to dismiss that claim is granted with prejudice.
D.
Finally, WHF claims it detrimentally relied on National’s representations that it would
consent. Civil Code article 1967 provides: “A party may be obligated by a promise when he
knew of should have known that the promise would induce the other party to rely on it to his
detriment and the other party was reasonable in so relying.” La. C.C. art. 1967. WHF’s claim
cannot survive as pleaded. First, its characterizations of National’s representations do not appear
to rise to the level of a promise. (See Petition, Doc. 1-2, ¶¶ 28-29). Specifically, WHF alleges
National advised it would consent “but asked that the Hospital agree to additional covenants.”
(Id., ¶ 28). Then once a first draft “was moving toward execution,” National announced it
desired a site visit. (Id., ¶ 29).

As alleged, National’s consent appears to have been hinged on

the insertion of additional covenants, and once the first draft of those covenants moved along, it
further wished to visit the site of the proposed facility. Neither allegation shows a concrete,
ripened promise to consent on which a reasonable person would rely.
Moreover, the insurance agreement’s consent provision specifically calls for “prior
written consent.” (Doc. 20-3, § 2.6, p. 14). Article 1967 states “[r]eliance on a gratuitous
promise made without required formalities is not reasonable.” La. C.C. art. 1967. Likewise,
article 1947 provides that “[w]hen … the parties have contemplated a certain form, it is
presumed that they do not intend to be bound until the contract is executed in that form.” La.
C.C. art. 1947. Obviously, drafting a written consent agreement that ultimately did not come to
fruition shows both parties expected to fulfill the writing requirement for the consent provision,
10

as called for by the insurance agreement. In this circumstance, it is unreasonable as a matter of
law to rely on an alleged oral promise to consent when the parties previously called for a written
consent. Rogers v. Brooks, 112 Fed.Appx. 729, 732-33 (5th Cir. 2004) (citing Carter v. Huber &
Heard, Inc., 657 So.2d 409, 411 (La. App. 3d Cir. 1995)); JCD Marketing Co. v. Bass Hotels
and Resorts, Inc., 812 So.2d 834, 840-41 (La. App. 4th Cir. 2002). The motion to dismiss this
claim must therefore be granted with prejudice.
V.
Accordingly, it is ORDERED that defendants’ motion to dismiss (Doc. 20) the claims of
plaintiff, Woman’s Hospital Foundation, is hereby GRANTED with prejudice.
Signed in Baton Rouge, Louisiana, on March 20, 2012.





JAMES J. BRADY, DISTRICT JUDGE
MIDDLE DISTRICT OF LOUISIANA

11