Higher Education Loan Authority of the State of Missouri v. Wells Fargo Bank, N. A.
Filing
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MEMORANDUM AND ORDER - IT IS HEREBY ORDERED that Plaintiff Higher Education Loan Authority of the State of Missouri's Motion to Dismiss Counterclaim of Defendant Wells Fargo Bank, N.A. 79 is DENIED. Signed by Honorable John A. Ross on 6/19/12. (LAH)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
HIGHER EDUCATION LOAN
AUTHORITY OF THE STATE OF
MISSOURI,
Plaintiff,
vs.
WELLS FARGO BANK, N.A., et al.,
Defendants.
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No. 4:10-CV-1230-JAR
MEMORANDUM AND ORDER
This matter is before the Court on Plaintiff Higher Education Loan Authority of the State
of Missouri’s (“MOHELA”) Motion to Dismiss Counterclaim of Defendant Wells Fargo Bank,
N.A. (“Wells Fargo”) [ECF No. 79]. The motion is fully briefed and ready for disposition. For
the following reasons, the motion will be denied.
Background
This action arises out of the remarketing of student loan revenue bonds. In November
2005 and April 2006, MOHELA issued $383,000,000 of variable rate demand bonds to finance
and purchase student loans. These bonds and related assets were placed in trust (“2005 Trust”)1,
and Wells Fargo was named the trustee. The bonds were secured by a bond insurance policy
issued by MBIA Insurance Corporation (“MBIA”), and a “liquidity facility” provided by Depfa
Bank plc (“Depfa”), to fund the purchase of any bonds tendered by investors. Any bonds so
tendered would then be held by Depfa as “liquidity provider bonds” and resold by designated
1
The trust is governed by a Trust Indenture dated November 1, 2005 between MOHELA
and Wells Fargo, a Supplemental Trust Indenture dated November 1, 2005 between MOHELA
and Wells Fargo, and a Supplemental Trust Indenture dated April 1, 2006 between MOHELA
and Wells Fargo. (First Amended Complaint, Doc. No. 38, ¶ 10).
remarketing agents. Under the Indenture and Remarketing Agreement, liquidity provider bonds
were not to be remarketed unless the liquidity facility was in place, and such bonds were not to
be released by Wells Fargo, as trustee, unless Well Fargo had received notice from Depfa to this
effect.
When the financial and credit crisis began in late 2007, investors began to tender their
bonds for repurchase. By July 2008, Depfa had purchased all of the bonds and held them as
liquidity provider bonds.
In January 2009, Well Fargo & Co., ultimate parent of Wells Fargo Bank, N.A., acquired
the Wachovia Defendants.
On February 18, 2009, MBIA’s rating was downgraded, which, according to Depfa, was
an event of default and an automatic termination of its liquidity facility.2 MOHELA alleges that
as trustee, Wells Fargo knew or should have known about the downgrading of MBIA. (First
Amended Complaint, Doc. No. 38, ¶ 26).
In April 2009, MOHELA learned the Wachovia remarketing agent3 was remarketing $40
million of the bonds at 8.08%, while other remarketing agents had set their interest rate for
MOHELA bonds considerably lower.4 MOHELA alleges that neither Wells Fargo nor the
Wachovia remarketing agent sought to verify whether the liquidity facility was in place at this
2
Under Depfa’s Standby Bond Purchase Agreement with MOHELA and Wells Fargo, a
downgrade in the rating of the bond insurer (MBIA) by Moody’s below a “Baa3” rating is an
event of default and an Automatic Termination Event. In the event of such an occurrence,
Depfa’s obligation to maintain the liquidity facility ceased. (First Amended Complaint, Doc. No.
38, ¶ 18)
3
At this time, Wells Fargo was, through a corporate acquisition, the parent corporation of
the Wachovia remarketing agent.
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MOHELA alleges comparable bonds were being remarketed at 0 .32% to 1.51%, with an
average interest rate of 0.64% (First Amended Complaint, Doc. No. 38, ¶¶ 30, 31).
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time, even though the 2005 Trust provided that the bonds “shall be released only after the
Trustee...has received electronic notice from [Depfa] that the Liquidity Facility has been
reinstated by the amount of the funds drawn to purchase Liquidity Provider Bonds.” (First
Amended Complaint, Doc. No. 38, ¶¶ 36-39). Over MOHELA’s objection, the sale of the
remarketed bonds closed on April 13, 2009, and Wells Fargo, as trustee, released the liquidity
provider bonds it held in the 2005 Trust to an unnamed purchaser. MOHELA alleges the
unnamed purchaser was affiliated with Wells Fargo and/or the Wachovia defendants. (Id., ¶ 58).
MOHELA further alleges that from April 13, 2009 until November 2009, when the 2005
Trust was refinanced, the Wachovia remarketing agent set the weekly interest rate on remarketed
bonds at 6.0% or higher, while other remarketing agents of the bonds were setting interest rates
at 0.42% to 0.08%. (Id., ¶¶ 41, 42).
On November 4, 2009, the day before the refinancing of the 2005 Trust, Wells Fargo
submitted an invoice for administrative and attorneys’ fees of $187,747.80, and stated it would
not consent to the restructuring unless the invoice was paid.
MOHELA claims that as a result of the Defendants’ actions, it was damaged by having to
pay excessive interest on the remarketed bonds, and by delays in efforts to refinance the 2005
Trust.
MOHELA’s claims against Wells Fargo are based on Wells Fargo’s alleged failure to
perform its duties under the 2005 Trust. In Count I, Breach of Fiduciary Duty - Breach of Trust,
MOHELA alleges Wells Fargo breached its duty to verify whether the liquidity facility was in
place before releasing the remarketed bonds, and breached its fiduciary duties by releasing the
remarketed bonds under the circumstances that existed on April 13, 2009, including MOHELA’s
objection to the remarketing and high interest rate. In Count II, Breach of Fiduciary Duty Breach of Loyalty, MOHELA alleges that as trustee, Wells Fargo owed a duty of undivided
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loyalty to MOHELA, a duty it breached by the above alleged conduct, which resulted in the
Wachovia Defendants, entities affiliated with Wells Fargo through a common parent, selling the
remarketed bonds at a high interest rate to a purchaser related to them. In Count III, Negligence,
MOHELA alleges Wells Fargo was negligent for failing to exercise, as trustee, the highest
degree of care in the above matters.
Wells Fargo filed its counterclaim against MOHELA based on certain indemnification
provisions in the 2005 Trust, alleging that if it is found liable for any loss, liability or expense in
connection with this lawsuit incurred without negligence, willful misconduct, or bad faith on its
part, it is entitled to payment and/or reimbursement, including its legal costs and expenses in the
event of a complete defense verdict. Section 1004 of the 2005 Trust states in pertinent part that
Wells Fargo as trustee shall be entitled to payment or reimbursement:
(c) to indemnify [Wells Fargo] for, and to hold it harmless against, any loss,
liability or expense incurred without negligence, willful misconduct, or bad faith
on its part, arising out of or in connection with the acceptance or administration of
this trust, including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder.
Section 1004 goes on to require Wells Fargo as Trustee to:
promptly notify [MOHELA] in writing of any claim or action brought against
[Wells Fargo] in respect of which indemnity may be sought against [MOHELA],
setting forth the particulars of such claim or action, and [MOHELA] will assume
the defense thereof, including the employment of counsel satisfactory to [Wells
Fargo] and the payment of all expenses.
Legal Standard
In ruling on a motion to dismiss, the Court must view the allegations in the complaint
liberally in the light most favorable to Plaintiff. Eckert v. Titan Tire Corp., 514 F.3d 801, 806 (8th
Cir.2008) (citing Luney v. SGS Auto Servs., 432 F.3d 866, 867 (8th Cir.2005)). Additionally, the
Court “must accept the allegations contained in the complaint as true and draw all reasonable
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inferences in favor of the nonmoving party.” Coons v. Mineta, 410 F.3d 1036, 1039 (8th Cir.2005)
(citation omitted). To survive a motion to dismiss, a complaint must contain “enough facts to state
a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007) (abrogating the “no set of facts” standard for Fed.R.Civ.P. 12(b)(6) found in Conley v.
Gibson, 355 U.S. 41, 45–46 (1957)). Thus, as a practical matter, a dismissal under Rule 12(b)(6)
should be granted “only in the unusual case in which a plaintiff includes allegations that show, on
the face of the complaint, that there is some insuperable bar to relief.” Strand v. Diversified
Collection Serv., Inc., 380 F.3d 316, 317 (8th Cir.2004). The issue on a motion to dismiss is not
whether the plaintiff will ultimately prevail, but whether the plaintiff is entitled to present evidence
in support of his or her claim. Rosenberg v. Crandell, 56 F.3d 35, 37 (8th Cir.1995).
Arguments of the Parties
In support of its motion, MOHELA argues Wells Fargo’s counterclaim must be dismissed
because the 2005 Trust does not expressly require MOHELA to indemnify Wells Fargo for its
wrongful conduct as alleged in the amended complaint, and because Wells Fargo has failed to
allege compliance with the notice requirements of the indemnification provisions. MOHELA’s
claims for breach of fiduciary duties and negligence involve negligence, wilful misconduct and
bad faith. This, MOHELA argues, coupled with the requirement that MOHELA assume the
defense of a claim and hire counsel to defend Wells Fargo, leads to the conclusion that the only
construction of the 2005 Trust is that the indemnification provisions were not intended to apply to
a dispute between Wells Fargo and MOHELA, but rather to third-party claims where MOHELA
and Wells Fargo were co-defendants. (Plaintiff’s Memorandum in Support of its Motion to
Dismiss, Doc. No. 80, p. 5).
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Wells Fargo responds that it has pleaded the requisite facts in support of its counterclaim,
i.e., that its relationship with MOHELA is governed by a 2005 Trust Indenture, and that section
1004(c) of the 2005 Trust requires MOHELA to indemnify Wells Fargo under certain
circumstances. Wells Fargo argues it is not seeking indemnity for negligence, willful misconduct
or bad faith, and that because MOHELA filed this lawsuit, it already had notice and was not
prejudiced by Wells Fargo’s failure to comply with the notice provision. (Wells Fargo Bank,
N.A.’s Memorandum in Opposition, Doc. No. 85, pp. 2-3, 5).
In reply, MOHELA insists its claims are excluded from the indemnification provision of
the 2005 Trust, and that any other interpretation would relieve Wells Fargo of liability for failing
to perform its duties as trustee. As a fiduciary under an agreement, Wells Fargo cannot breach that
agreement and then seek indemnification for its own breaches of duty. (Plaintiff’s Reply
Memorandum, Doc. No. 94, pp. 2-3).
Discussion
It is not the function of the Court on a motion to dismiss, as opposed to a motion for
summary judgment, to determine whether movant is entitled to judgment as a matter of law. The
purpose of a motion to dismiss is to test the sufficiency of the complaint; a viable complaint must
include enough facts to state a plausible claim. After reviewing the pleadings, the Court finds
Wells Fargo has stated a plausible claim for indemnification given the plain language of the
indemnification provisions. First, Wells Fargo alleges that the 2005 Trust was executed by
MOHELA and Wells Fargo. (Wells Fargo Bank, N.A.’s Answer to Counts I, II, and III of
Plaintiff’s First Amended Complaint and Counterclaim, Doc. No. 72, p. 14, ¶ 2). Next, section
1004 of the 2005 Trust states, in part that:
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The Trustee shall be entitled to payment or reimbursement, as follows… to
indemnify the Trustee for, and to hold it harmless against, any loss, liability or
expense incurred without negligence, willful misconduct, or bad faith on its part,
arising out of or in connection with the acceptance or administration of this trust,
including the costs and expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of its powers or duties
hereunder.
All such payments and reimbursements shall be made by the Authority with interest
at the rate of interest per annum equal to the prime rate announced from time to
time by the Trustee.
(Id., pp. 14-15, ¶3). Wells Fargo further alleges that in this lawsuit, MOHELA’s claims against
Wells Fargo “arise out of or are in connection with the acceptance or administration of the 2005
Trust by Wells Fargo.” (Id., p. 15, ¶ 4). Finally, Wells Fargo alleges that in the event it is found
liable for “any loss, liability or expense in connection with this lawsuit incurred without
negligence, willful misconduct, or bad faith on Wells Fargo’s part,” it is entitled to payment
and/or reimbursement pursuant to Section 1004 of the 2005 Trust. (Id., p. 15, ¶ 5). Contrary to
MOHELA’s argument, Wells Fargo is not seeking indemnification for its own negligence.
At this stage of the litigation, without more development of the facts, the Court cannot find
Wells Fargo’s contractual indemnification claim is precluded as a matter of law. The issue of proof
is not before the Court at this time and the Court's review is limited to the sufficiency of the
allegations. Wells Fargo’s pleadings, viewed in a light most favorable to Wells Fargo, show it has
pled a plausible contractual indemnification claim.
Accordingly,
IT IS HEREBY ORDERED that Plaintiff Higher Education Loan Authority of the State
of Missouri’s Motion to Dismiss Counterclaim of Defendant Wells Fargo Bank, N.A. [79] is
DENIED.
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Dated this 19th day of June, 2012.
________________________________
JOHN A ROSS
UNITED STATES DISTRICT JUDGE
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