Bayerische Landesbank, New York Branch v. Aladdin Capital Management LLC
Filing
67
OPINION AND ORDER re: 56 MOTION for Leave to File Second Amended Complaint Adding Aladdin Capital Holdings LLC as a Defendant filed by Bayerische Landesbank. Plaintiff's December 4, 2012 motion to amend is granted. (Signed by Judge Denise L. Cote on 3/19/2013) (lmb)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
BAYERISCHE LANDESBANK,
:
:
Plaintiff,
:
:
-v:
:
ALADDIN CAPITAL MANAGEMENT LLC,
:
:
Defendant.
:
:
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11 Civ. 673 (DLC)
OPINION AND ORDER
Appearances:
For plaintiff:
David Spears
Jason Mogel
Laurie F. Richardson
Spears & Imes LLP
51 Madison Avenue
New York, NY 10010
For defendant:
Jason M. Halper
Lambrina Mathews
Cadwalader, Wickersham & Taft LLP
One World Financial Center
New York, NY 10281
DENISE COTE, District Judge:
By motion dated December 4, 2012, plaintiff Bayerische
Landesbank (“Bayerische”) seeks leave to file a second amended
complaint adding Aladdin Capital Holdings LLC (“ACH”) as a
defendant in this action with respect to its gross negligence
claim (“Second Amended Complaint”), with relation back under Rule
1
15(c)(1)(C), Fed. R. Civ. P., to the date plaintiff filed its
original complaint.
Defendant Aladdin Capital Management LLC
(“ACM”) opposes the motion to amend on the ground that amendment
would be futile.
For the following reasons, the motion to amend
is granted.
Background
This dispute arises out of investment losses incurred by the
plaintiff as a result of its decision in December 2006 to
participate in a collateralized debt obligation known as Aladdin
Synthetic CDO II (the “CDO”).
Familiarity with the facts and
procedural history of this action is presumed.
Accordingly, only
those facts necessary to the resolution of plaintiff’s present
motion will be recited here.
Plaintiff commenced this action against ACM on January 31,
2011, and filed an amended complaint on April 28, 2011 (“First
Amended Complaint”).
The original and First Amended complaints
each assert two claims against ACM: (1) breach of contract,
alleging that ACM breached its obligations under the Portfolio
Management Agreement (“PMA”) governing the CDO, 1 and (2) gross
1
The PMA contains several relevant terms. It defines the
“Portfolio Manager” as “Aladdin Capital Management LLC . . .
together with its successors and assigns in such capacity.” It
also obliges the Portfolio Manager inter alia “to perform its
obligations . . . in good faith using a degree of skill, care,
diligence and attention consistent with the practice and
procedures followed by reasonable and prudent institutional
managers . . . .”
2
negligence, alleging that ACM’s management of the CDO was grossly
negligent and caused plaintiff harm.
ACM moved to dismiss the
First Amended Complaint in its entirety, which this Court granted
by Orders dated July 8 and September 14, 2011.
Plaintiff
appealed, and on August 6, 2012, the Second Circuit found inter
alia that “Bayerische has plausibly alleged that [ACM]’s gross
negligence exposed Bayerische to greater risk that it would lose
its entire investment than would have otherwise been the case,”
and remanded for further proceedings.
Bayerische Landesbank, New
York Branch v. Aladdin Capital Management LLC, 692 F.3d 42, 65
(2d Cir. 2012) (“Bayerische”).
Following a conference with this Court, a Pretrial
Scheduling Order was issued on September 28, 2012, which set a
deadline of October 12, 2012 for the joinder of parties and
amendment of the pleadings (“September 28 Order”).
On October
12, the parties stipulated to a revised First Amended Complaint,
which removed a named plaintiff but continued to assert two
claims of breach of contract and gross negligence against ACM
alone.
Plaintiff received ACM’s initial disclosures under Rule
26(a) on May 25, 2011.
The disclosures in relevant part
identified seven individuals as likely to have discoverable
information, and characterized each one as either an “ACM
3
Employee” or “Former ACM Employee.” 2
At least three of these
individuals -- MacDonald, Marshman, and Morris -- had attended a
meeting at plaintiff’s New York offices in October 2006, at which
they presented marketing materials to solicit plaintiff’s
investment in the CDO and provided the plaintiff with ACM
business cards bearing their names.
In ACM’s November 13, 2012 responses to plaintiff’s first
set of interrogatories (“Responses”), ACM identified ten
individuals who were “employed by an affiliate or otherwise
related entity of ACM” or were “employees of ACH” during the
relevant time period and “had significant involvement in
structuring, offering, marketing, operating and/or managing the
Aladdin CDO.”
Listed among these ten names were the seven
individuals previously identified as present or former “ACM
Employee[s]” in ACM’s initial disclosures.
Plaintiff sought
clarification of the apparent inconsistency via letter dated
November 15.
In an email to plaintiff of November 19, ACM
confirmed that the ten individuals listed in the Responses “are
or were technically employees of ACH,” and explained that it had
previously referred to these individuals as ACM employees in its
initial disclosures “because they acted on behalf of ACM with
respect to the subject matter for which they [were] listed
2
These individuals are: Scott MacDonald (“MacDonald”), Alexander
Avtsin, George Marshman (“Marshman”), Jason Morris (“Morris”),
Rohit Sethi, Darin Feldman, and Yi Zhao.
4
therein.” 3
This was the first notice that ACM provided to the
plaintiff that the individuals with which it met in October 2006
were ACH employees and not ACM employees.
At all times relevant to this action, ACH was the parent
company and sole member of defendant ACM.
Fact and expert
discovery are set to conclude on June 28, 2013 and October 4,
2013, respectively.
Discussion
Without conceding that ACM is not a proper defendant, the
plaintiff now moves to add ACH as an additional defendant as to
its gross negligence claim.
Plaintiff’s motion to amend was made
pursuant to Rule 15(a)(2), Fed. R. Civ. P., which provides that a
court “should freely give leave [to amend] when justice so
requires.”
But in a case where a scheduling order has been
entered, as here, the lenient standard of Rule 15(a) is replaced
by the Rule 16(b) standard, which prohibits amendment except upon
a showing of “good cause.”
Fed. R. Civ. P. 16(b)(4).
Rule 16
“is designed to offer a measure of certainty in pretrial
proceedings, ensuring that at some point both the parties and the
pleadings will be fixed.”
3
Parker v. Columbia Pictures Indus.,
This subject matter included information regarding: “the
underlying portfolio of assets . . . referenced in [the CDO],”
“ACM’s management of the Reference Portfolio,” “the structuring
and sale of the Notes to the Initial Purchasers,” “research
analytics relating to the management of the Reference Portfolio,”
and “quantitative analytics relating to the Reference Portfolio.”
5
204 F.3d 326, 340 (2d Cir. 2000) (citation omitted).
Therefore,
a finding of good cause “turns on the diligence of the moving
party.”
Holmes v. Grubman, 568 F.3d 329, 334 (2d Cir. 2009)
(citation omitted).
While the deadline for amendment of pleadings set forth in
the September 28 Order has passed, the plaintiff has demonstrated
“good cause” for its application to amend.
Bayerische discovered
on November 13, 2012 that individuals who had “significant
involvement” in marketing and managing the CDO were, in fact,
employees of ACH during the relevant time period.
Plaintiff
wrote to ACM immediately to clarify the apparent inconsistency
with ACM’s initial disclosures.
When ACM responded on November
19, plaintiff filed its motion to amend shortly thereafter, on
December 4.
Notably, any assertion that plaintiff should have
known prior to receiving the Responses that any individuals
involved in managing the CDO were employed by ACH or that ACH was
otherwise involved in the CDO is conspicuously absent from the
defendant’s opposition to this motion.
Plaintiff has therefore
shown that it was sufficiently diligent in its pursuit of the
proposed additional defendant to constitute “good cause” for
amending its pleading at this stage.
There is also no evidence
of bad faith or dilatory motive on the part of Bayerische, and
there is no indication of undue prejudice to ACM, particularly
given that discovery is ongoing.
6
Plaintiff’s proposed amendment also would not be futile.
court may deny a motion to amend on grounds of futility.
A
Foman
v. Davis, 371 U.S. 178, 182 (1962); Anderson News, L.L.C. v.
American Media, Inc., 680 F.3d 162, 185 (2d Cir. 2012).
An
amendment is futile if it fails to state a claim on which relief
may be granted or is subject to motion to dismiss on another
basis, such as the statute of limitations.
Id.; Mackensworth v.
S.S. American Merchant, 28 F.3d 246, 251 (2d Cir. 1994).
The
defendant contends that the proposed amendment adding ACH as a
defendant would be futile because (1) the Second Amended
Complaint fails to state a claim as to ACH, and (2) the proposed
amendment does not relate back and is thus time-barred.
Both
arguments fail.
A plaintiff states a claim for gross negligence if it
“alleges facts plausibly suggesting that the defendant’s conduct
evinces a reckless disregard for the rights of others or smacks
of intentional wrongdoing.”
omitted).
Bayerische, 692 F.3d at 61 (citation
Recklessness in the context of a gross negligence
claim means “conduct which is highly unreasonable and which
represents an extreme departure from the standards of ordinary
care.”
AMW Materials Testing, Inc. v. Town of Babylon, 584 F.3d
436, 454 (2d Cir. 2009) (citation omitted).
Gross negligence
claims “require only a ‘short and plain statement of the claim,’
so long as the facts alleged and any reasonable inferences that
7
can be drawn in [plaintiff’s] favor give rise to a plausible
claim for relief.”
Bayerische, 692 F.3d at 64; Rule 8(a), Fed.
R. Civ. P.
In Bayerische, the Second Circuit held that the First
Amended Complaint sufficiently alleged a claim of gross
negligence to survive dismissal.
It found that several of
Bayerische’s allegations as to ACM’s management of the CDO “smack
of intentional wrongdoing,” including claims that the defendant
“added Reference Entities to the Reference Portfolio at spreads
that were substantially below the then-prevailing market spreads”
and “failed to adjust the subordination levels” to reflect
appropriate levels of risk.
Id. at 62 (citation omitted).
It
also found that this conduct plausibly evidenced “an extreme
departure from the standard of ordinary care” and appeared to be
“contrary to how defendant explicitly represented it would manage
the portfolio on behalf of [Bayerische and other] Noteholders.”
Id. at 62-63.
In the Second Amended Complaint, plaintiff alleges that ACH
is liable for gross negligence based on its direct involvement in
this very same conduct.
Bayerische claims that ACH “held itself
out as, and acted as, Defendant ACM with regard to all of
Defendant ACM’s portfolio management duties,” that “employees of
Defendant ACH performed all of the duties that Defendant ACM
undertook as portfolio manager,” and that as a result, “ACH owed
8
the same duty of care to Plaintiff that Defendant ACM owed.”
It
alleges that ACH made representations to plaintiff at a “meeting
among employees of Defendant ACH” that ACM’s and ACH’s interests
were aligned with plaintiff’s interests.
Plaintiff also alleges
that ACM and ACH made investment decisions in managing the CDO
that negligently exposed plaintiff’s investment to inappropriate
levels of risk, including by “fail[ing] to ensure that the
adjustments to the levels of subordination for the different
tranches were accurate,” and by trading at levels “substantially
below the then-prevailing market spreads.”
Particularly in light of Bayerische, this conduct plausibly
alleges an “extreme departure” from the ordinary standard of care
that is sufficient to sustain a claim for gross negligence as to
ACH at this stage.
While the defendant contends that plaintiff’s
amended pleading is defective because ACM is the sole legal
entity that performed the acts at issue and because Bayerische
improperly disregards ACM’s corporate form by claiming that ACH
carried out any of the challenged conduct, these arguments are
best-suited for a determination on the merits.
Bayerische has
pleaded that ACH is directly liable for the gross negligence of
its own employees as they performed ACM’s duties as portfolio
manager.
Bayerische is not proceeding on a theory that
disregards the corporate form.
Thus, the Second Amended
Complaint sufficiently pleads a claim for gross negligence
9
against ACH.
Moreover, the three-year statute of limitations does not
prohibit an amendment adding ACH as a defendant at this stage
because the proposed Second Amended Complaint relates back to the
original complaint. 4
“If a complaint is amended to include an
additional defendant after the statute of limitations has run,
the amended complaint is not time barred if it ‘relates back’ to
a timely filed complaint.”
VKK Corp. v. National Football
League, 244 F.3d 114, 128 (2d Cir. 2001).
Under Rule 15(c), an
amended complaint that adds a new defendant relates back to the
date of the original pleading if (1) the claims arise out of the
same conduct or occurrences set forth in the original pleading;
(2) within the time provided by Rule 4(m) -- 120 days -- the new
party has received notice of the action such that it will not be
prejudiced in its defense; and (3) the new party “knew or should
have known that the action would have been brought against it,
but for a mistake concerning the proper party’s identity.”
Rule
15(c)(1)(C)(ii), Fed. R. Civ. P.; see Rule 4(m), Fed. R. Civ. P.;
VKK Corp., 244 F.3d at 128; Soto v. Brooklyn Corr. Facility, 80
F.3d 34, 35 (2d Cir. 1996).
4
Claims of gross negligence must be brought within three years
of accrual. Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank,
Nat. Ass’n, 731 F.2d 112, 122 (2d Cir. 1984). Under the Second
Amended Complaint, it appears that Bayerische’s gross negligence
claims accrued in November 2007 and “early 2008” when plaintiff
alleges that ACH and ACM made certain investment decisions giving
rise to its gross negligence claim.
10
There is no dispute that the proposed Second Amended
Complaint arises out of the same events alleged in the
plaintiff’s original and First Amended complaints.
Therefore, if
the amendment is intended to correct a mistake, and the proposed
defendant had notice within the statutory time period, the
amendment is permitted.
A.
Both conditions are met here.
Mistake
A plaintiff makes a “mistake concerning the proper party’s
identity” within the meaning of Rule 15(c)(1)(C) when it
“harbor[s] a misunderstanding about [the prospective defendant’s]
status or role in the events giving rise to the claim at issue,
and . . . mistakenly choose[s] to sue a different defendant based
on that misimpression.”
S.Ct. 2485, 2494 (2010).
Krupski v. Costa Crociere S. p. A., 130
The fact “[t]hat a plaintiff knows of a
party’s existence does not preclude [it] from making a mistake”
under Rule 15(c).
Id.
Indeed,
a plaintiff may know generally what party A does while
misunderstanding the roles that party A and party B played
in the conduct, transaction, or occurrence giving rise to
[its] claim. If the plaintiff sues party B instead of party
A under these circumstances, [plaintiff] has made a mistake
concerning the proper party’s identity notwithstanding [its]
knowledge of the existence of both parties.
Id. (citation omitted).
Such are the circumstances here.
Although Bayerische was
aware that ACH served as ACM’s parent and sole member at the time
of filing its original complaint, it only discovered that ACH
11
employees had “significant involvement” in inter alia
structuring, operating, and managing the CDO upon receipt of
defendant’s Responses in November 2012.
Without the knowledge
that ACH or ACH employees had played a role in the CDO’s
portfolio management, Bayerische misunderstood ACH’s potential
liability as to its gross negligence claim, and thus made a
“mistake” within the meaning of Rule 15(c).
Id.; see, e.g.,
Abdell v. City of New York, 759 F.Supp.2d 450, 457 (S.D.N.Y.
2010).
The defendant contends that Bayerische did not make a
mistake in identifying ACH as the proper defendant because the
plaintiff continues to sue ACM in the Second Amended Complaint.
There is no requirement, however, that an amendment must replace
a party in order to establish a mistake warranting relation back.
Amendments adding new defendants may relate back if the
requirements described above are met.
See, e.g., VKK Corp., 244
F.3d at 128; Black v. Coughlin, 76 F.3d 72, 75 (2d Cir. 1996).
The key here is that the plaintiff failed to include ACH in its
original complaint because it did not know that it needed to name
ACH at the time of filing.
See Ish Yerushalayim v. United
States, 374 F.3d 89, 91-92 (2d Cir. 2004) (“Had [plaintiff] not
known that he needed to name individual defendants and thus
failed to do so, that would presumably constitute a ‘mistake.’”);
Soto, 80 F.3d at 37.
That Bayerische continues to name ACM as a
12
defendant does not demonstrate the absence of a mistake in
misunderstanding the role that ACH also played in the underlying
conduct.
See Krupski, 130 S.Ct at 2494 (such a “deliberate but
mistaken choice does not foreclose a finding that Rule
15(c)(1)(C)(ii) has been satisfied.”).
B.
Notice
Having concluded that any error in initially identifying the
proper parties in this case was the result of a mistake, it is
necessary to determine whether ACH had notice of this action
within the time provided under Rule 4(m) and “knew or should have
known” that it was also a proper party to the lawsuit.
The focus
of this inquiry is “what the prospective defendant reasonably
should have understood about the plaintiff’s intent in filing the
original complaint against the first defendant,” id. at 2496
(emphasis added), and not what the plaintiff knew or should have
known at the time of filing.
Id. at 2493.
The defendant does not dispute that ACH received notice of
the action.
In fact, counsel for Bayerische sent ACH’s General
Counsel at the time, Sharad Samy, a copy of the original
complaint and ACH posted a notice describing the case on its
website.
ACH also should have known that, but for Bayerische’s
misunderstanding of ACH’s role in managing the CDO, ACH would
have been sued for gross negligence along with ACM.
13
The original
complaint makes clear that Bayerische intended to sue for gross
negligence those responsible for making the allegedly negligent
management decisions that caused the total loss of its principal
investment in the CDO.
As laid out in the original complaint,
plaintiff’s gross negligence claim is grounded in the defendant’s
conduct in “perform[ing] its duties . . . as portfolio manager
for the [CDO]” as it “had represented that it would,” not in the
defendant’s status as a signatory to the PMA.
It impugns the
defendant for its “actions and omissions” in “select[ing] and
manag[ing]” the Reference Portfolio, including making a series of
allegedly negligent trading decisions that it claims “abandoned
the management approach it had described to Plaintiff prior to
issuance.”
It also specifically mentions a meeting at which
“representatives of [the] Defendant” marketed the CDO to
Bayerische.
ACM does not dispute that ACH employees made representations
to plaintiff as to how the CDO would be managed or that ACH
employees were “significantly” involved in “operating and/or
managing the . . . CDO.”
ACH thus should have known, within the
Rule 4(m) period, that it was not initially named as a defendant
only because of Bayerische’s misunderstanding about ACH’s role in
marketing and managing the CDO -- a “mistake concerning the
proper party’s identity,” a mistake which ACM fostered in serving
the misleading initial disclosures.
14
ACM principally contends that ACH was entitled to believe
that the plaintiff made a deliberate choice to sue ACM -- and not
ACH -- because Bayerische knew that ACH was ACM’s parent company
at the time of filing and nonetheless failed in its original
complaint to refer to ACH, ACM’s “parent,” or the
“employer”/“employee” relationship between ACH and the
individuals involved in the challenged conduct.
unavailing, for two reasons.
This argument is
First, as discussed above, the
proper inquiry is not what Bayerische knew but rather what ACH
reasonably should have understood from plaintiff’s initial
filings.
Krupski, 130 S.Ct at 2496.
Even if Bayerische was
aware that ACH was ACM’s parent and sole member, that fact “does
not foreclose the possibility that [plaintiff] nonetheless
misunderstood crucial facts regarding the two companies’
identities” and that ACH should have known that it was omitted
from the initial filings as a result of that misunderstanding.
Id. at 2497.
Second, the fact that plaintiff failed to mention ACH by
name or refer to a “parent” or “employer” in its original
complaint does not prove that Bayerische made a deliberate or
informed decision not to sue ACH in the first instance.
Instead,
given that ACM held itself out to be the sole entity involved in
CDO management decisions, that ACH employees presented ACM
business cards to the plaintiff at a meeting about the CDO, and
15
that ACM characterized ACH employees as present or former “ACM
Employee[s]” in its initial disclosures, the most logical
explanation for plaintiff omitting terms such as “ACH,” “parent,”
“employer,” or “employee” from its original or subsequent
pleadings is that Bayerische misunderstood that any entity other
than ACM had played a role in the portfolio management decisions
giving rise to its gross negligence claim.
Bayerische brought negligence claims against ACM in its
original complaint because of the investment decisions ACM made
while managing the CDO.
The record now indicates that ACM and
ACH knew that ACH employees helped make those decisions.
ACH may
not escape suit on these same claims solely because Bayerische
was ignorant of crucial facts about its role in the direct
management of the CDO.
See Krupski, 130 S.Ct at 2494, 2497.
The
requirements for relation back of the amendment having been met,
the plaintiff’s motion to amend is granted.
CONCLUSION
Plaintiff’s December 4, 2012 motion to amend is granted.
SO ORDERED:
Dated:
New York, New York
March 19, 2013
__________________________________
DENISE COTE
United States District Judge
16
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