Toledo Fund, LLC v. HSBC Bank USA, National Association
Filing
21
MEMORANDUM OPINION & ORDER: Causes of Action Two through Six are dismissed with prejudice. (Signed by Judge Katherine B. Forrest on 2/3/2012) (ft)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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TOLEDO FUND, LLC,
Plaintiff,
11 Civ. 7686 (KBF)
MEMORANDUM OPINION
& ORDER
-v-
HSBC BANK USA, NATIONAL
ASSOCIATION,
Defendant.
------------------------------------x
KATHERINE B. FORREST, District Judge:
On September 30, 2011, plaintiff Toledo Fund, LLC
("Toledo") filed this action against HSBC Bank, USA,
National Association ("HSBC") in New York state court. On
October 28, 2011, defendant timely removed the action based
on complete diversity between the parties. Defendant now
moves to dismiss the action in its entirety.
For the reasons set forth below, defendant's motion is
GRANTED in part and DENIED in part.
FACTUAL BACKGROUND
In 2004 the parties entered into a series of
consecutive swap transactions that spanned a period of
several years.
(Compl. , 12.) The transactions enabled
Toledo to participate in returns generated by a basket of
assets without requiring Toledo to own those assets
directly.
(Compl. , 2.) The basket of assets assembled by
HSBC in which Toledo had indirect participation, was a
group of hedge funds (referred to as the "Reference
Basket"). (Id.)
According to Toledo, it entered into the initial
transaction as well as subsequent transactions, in reliance
on representations made by Mark Overley, Managing Director
of HSBC's Structured Fund Product Marketing.
(Id. , 14.)
Plaintiff alleges that Overley told its representative that
HSBC would closely and continuously administer and monitor
the Reference Basket and that a watchful eye would be kept
on the eligibility of the funds maintained therein.
Id.,
14.) This was touted as a benefit - "Toledo Fund would not
be saddled with such burdens, which would be obligations of
HSBC." (Id. , 14.) Toledo was told that this careful
administration would avoid "blow ups." (Id. , 14.) One way
that HSBC would avoid "blow ups" would be by affirmatively
monitoring and, when necessary, removing, funds that did
not meet the eligibility criteria from the Reference
Basket.
Id., 14.)
Plaintiff states that it relied on these
representations in 2004 and "HSBC repeatedly made the same
representations to Toledo Fund about the importance that it
2
placed upon its monitoring, research and due diligence
obligations, as well as its superior skills in such areas,
to assure that the hedge funds included in the Reference
Basket would remain eligible at all times.
."
(Id. ~
15.) Such promises were alleged to have been repeated each
year between 2005 and 2008.
(Id. ~ 15.)
The transactions between Toledo and HSBC were governed
by two sets of contractual documents, an "International
Swap Dealers Association" Master Agreement (the "ISDA
Form"), executed in 2004, and individual "Confirmation"
agreements that would govern a specific transaction.
(See
Compl. Ex. A at 1.)
On December 10, 2007, the parties executed the
Confirmation at issue in this case.
(Id. Ex. A at Ii see
also id. ~ 20.) Pursuant to this Confirmation, HSBC and
Toledo agreed to a series of specific terms pursuant to
which Toledo would have certain rights relating to shares
of a particular Reference Basket.
(Id. Ex. A.) The group of
funds included in the Reference Basket was referred to as
the "Eligible Reference Funds."
(Id. ~ 3.)
The ultimate question in this case is the extent to
which Toledo had enforceable contractual obligations as
against defendant HSBC to conduct ongoing due diligence,
3
monitor and apply eligibility criteria with respect to the
funds in the Reference Basket.
Pursuant to the 2007 Confirmation, HSBC exercised sole
discretion to choose in which hedge funds it would invest;
from time to time, and pursuant to certain "eligibility
criteria", HSBC had the right, in its sole discretion, to
apply the eligibility criteria and to change, or not
change, which funds were Eligible Reference Funds
includable in the Reference Basket.
(Compl. Ex. A at Annex
1.)
Of course, the quality and value of the funds in the
Reference Basket was the key to Toledo's risk and reward.
The interest that Toledo would pay to HSBC was equal to
"the amount of interest payments that [HSBC] would have
earned if HSBC had loaned Toledo Fund the money to purchase
the hedge funds"; whereas, "Toledo Fund would receive the
market appreciation (or loss) of the applicable hedge funds
in the Reference Basket in the same manner as if it had
been the direct \ legal' owner of the hedge funds. I'
~
(Compl.
13.) The Confirmation also provided that Toledo would
have the ability to request that HSBC alter the composition
of the Reference Funds. This was referred to as the "Buyer
Adjustment. I'
Confirmation
(Id. Ex. A at 3.) Under the terms of the
l
HSBC was under no obligation to make any
4
requested changes - according to the plain terms of the
Confirmation, it exercised sole discretion over the
composition of the funds.
(Id. Ex. A at 3.)
As time passed, and the market and stock market
volatility took their toll on all and sundry, Toledo
alleges that HSBC failed to live up to its end of the
bargain. In sum, Toledo alleges that HSBC kept funds in the
Reference Basket that should have come out, and did not
disclose to Toledo true values of certain funds. Had HSBC
done so, alleges Toledo, it would have exercised its Buyer
Adjustment and requested a change in the composition of the
Reference Basket.
(See e.g., Compl. , 25.)
The complaint references two funds in particular that
Toledo asserts HSBC failed to remove from the basket or
provide adequate information concerning. According to the
complaint, "by no later than approximately March 2008, HSBC
knew or should have known that Lancelot Investors Fund,
L.P. and/or Lancelot Investors Fund II, L.P.
(collectively,
'Lancelot') did not qualify as an Eligible Reference Fund
and thus should have no value ascribed to it."
(Id. , 25.)
Over time, this failure reduced the value of the Reference
Basket by $45 million. Similarly, sometime prior to June
2008, Toledo alleges that HSBC knew or should have known
that a hedge fund called Palm Beach Finance Partners II,
5
L.P.
("Palm Beachll) did not qualify as an Eligible
Reference Fund and thus should have been removed from the
Reference Basket and valued at zero. Over time, this
reduced the value of the Reference Basket by approximately
$23 million.
(Id. , 26.)
The complaint alleges claims for Breach of Contract
(First Cause of Action), Breach of the Implied Covenant of
Good Faith and Fair Dealing (Second Cause of Action), Fraud
(Third Cause of Action), Negligent Misrepresentation and
Negligence (Fourth and Fifth Causes of Action), and
Promissory Estoppel (Sixth Cause of Action). All of these
causes of action seek the same damages of "at least $70
million."
(Compl. at 21.)
LEGAL STANDARD
To survive a Rule 12(b} (6) motion to dismiss, "the
plaintiff must provide the grounds upon which [its] claim
rests through factual allegations sufficient 'to raise a
right to relief above the speculative level.'" ATSI
Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d
Cir. 2007)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007)). In other words, the complaint must allege
"enough facts to state a claim to relief that is plausible
on its face." Starr v. Sony BMG Music Entm't, 592 F.3d 314,
6
321 (2d Cir. 2010)
(quoting Twombly, 550 U.S. at 570). See
also Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949
(2009)
(same). "A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable
for the misconduct alleged." Iqbal, 129 S.Ct. at 1949. In
applying that standard, the court accepts as true all well
plead factual allegations, but does not credit "mere
conclusory statements" or "threadbare recitals of the
elements of a cause of action." Id. If the court can infer
no more than "the mere possibility of misconduct" from the
factual averments, dismissal is appropriate. Starr, 592
F.3d at 321 (quoting Iqbal, 129 S.Ct. at 1950).
DISCUSSION
Breach of Contract
Plaintiff alleges that the December 2007 Confirmation
constitutes a contract, that it performed its obligations
thereunder, but that HSBC breached it. HSBC's breach
allegedly arises from its failure to fulfill its
obligations to monitor the Reference Basket and "conduct
due diligence and other investigation sufficient to ensure
only Eligible Reference Funds were included in the
Reference Basket as reported to the Toledo Fund."
7
(Compl. ~
32.} In particular, plaintiff asserts that HSBC's actions
and inactions with respect to the Lancelot and Palm Beach
Funds breached its contractual obligations.
(Id. "
25-26.)
Plaintiff has alleged the basic elements for a breach
of contract action under New York law. See Fischer &
Mandell, LLP v. Citibank, N.A., 632 F.3d 793, 799 (2d Cir.
2011)
("Under New York law, a breach of contract claim
requires proof of (1) an agreement,
performance by the plaintiff,
(2) adequate
(3) breach by the defendant,
and (4) damages."). Dismissal of this claim would therefore
not be based on a failure to allege the basic requirements,
but whether an examination of those allegations reveals
that there could not be a breach of the sort asserted
because the face of the contract contradicts that HSBC has
the obligations claimed. Accordingly, despite using magic
words of breach, no breach could lie.
Looking into the contract to examine the existence or
non-existence of certain claims is normally not an inquiry
that this Court would or could undertake on a motion to
dismiss. Here, the contract is incorporated by reference
into the complaint and is, indeed, attached as Exhibit A
thereto. Thus, this Court can and should ask whether, as a
matter of law, it is possible for defendant to have
breached the contract in the manner alleged in the
8
complaint. See Frey v. Bekins Van Lines, Inc'
2d 176, 182 (E.D.N.Y. 2010)
l
748 F. Supp.
(granting a motion to dismiss
on breach of contract claim because there could be no
breach of the contract) i United States v. Davis 1 666 F.
Supp. 641, 643 (S.D.N.Y. 1987)
(denying a motion to dismiss
after determining that the contract at issue could in fact
be breached). If the answer is "yes", then the action is
well pled and may proceed. If "no"
1
then this count must be
dismissed. The answer is "yes", with a significant caveat.
The face of the Confirmation could not be clearer:
HSBC had the sole discretion to determine whether or not a
fund met the eligibility criteria.
(Compl. Ex. A at Annex
I.) Defendant argues that this necessarily means that it
could not engage in a breach for failing to remove any fund
- because all decisions as to which funds were in and which
were out were HSBC's alone.
(Mem. of Law in Supp. of Def.'s
Mot. to Dismiss the Compl. at 7.) This Court agrees that
plaintiff ceded a great deal of discretion to defendant.
Indeed
l
all decision making authority over who was in or
out.
But, under New York law
1
implicit in all contracts is
a covenant of good faith and fair dealing. 511 West 232nd
Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 1441 153
(N.Y. 2002). "This covenant embraces a pledge that neither
9
party shall do anything which will have the effect of
destroying or injuring the right of the other party to
receive the fruits of the contract.
1I
Id. Furthermore,
" [w]hile the duties of good faith and fair dealing do not
imply obligations inconsistent with other terms of the
contractual relationship, they do encompass any promises
which a reasonable
p~rson
in the position of the promisee
would be justified in understanding were included.
1I
Id.
(internal quotation marks omittedi citations omitted) .
Implicit in the bargain at issue here, was that
decisions would in fact be made, that the eligibility
criteria for funds that made up the Reference Basket were
riot simply window dressing and extra words on a page.
Defendant HSBC had an obligation under the covenant of good
faith and fair dealing - which is a contractual obligation
-
to undertake an eligibility analysis regarding the funds
placed into and maintained within the Reference Basket.
HSBC may have undertaken such analysis, or it may not have
done so. If it did so, and in its sole discretion
nevertheless decided to keep the Lancelot and Palm Beach
Funds (and perhaps other funds) in, then it may transpire
that plaintiff cannot succeed on the merits of its case.
That is a determination for down the road, after discovery
on this topic. But if, for instance, defendant failed to
10
undertake any analysis at all, if it failed to apply the
eligibility criteria at all, or if funds failed the
eligibility criteria but were nonetheless maintained in the
Reference Basket (and HSBC therefore did not make a
determination that they "passed" the criteria) - all of
which Toledo may have reasonably expected under the
Confirmation -
then defendant may have failed to fulfill
its duties of good faith and fair dealing to Toledo. This
is also a determination for another day.
Accordingly, there is a plausible set of facts that
could entitle plaintiff to relief on its breach of contract
claim. See Twombly, 550 U.S. at 570i Iqbal, 129 S. Ct. at
1949-50. The merits of that claim are left for another day.
Breach of the Implied Covenant of Good Faith and Fair
Dealing
Plaintiff has asserted a separate claim for breach of
the implied covenant of good faith and fair dealing.
This
claim is entirely redundant of the breach of contract
claim. Under New York law, such duplicative claims should
be dismissed. See e.g., Harris v. Provident Life and
Accident Ins. Co., 310 F.3d 73, 80 (2d Cir. 2002)
{"Under
New York law, parties to an express contract are bound by
an implied duty of good faith, but breach of that duty is
11
merely a breach of the underlying contract."). If plaintiff
is entitled to recovery of its contract claim, Count One
provides a sufficient basis.
Accordingly, the Second Cause of Action (For Breach of
the Implied Covenant of Good Faith and Fair Dealing) is
dismissed as redundant of the First Cause of Action (For
Breach of Contract) .
Fraud
The fraud claim is similarly redundant of the breach
of contract claim. However, there is an additional nuance.
Plaintiff asserts that the Overley statements first made in
2004 and then repeated annually until 2008 constitute fraud
in the inducement.
(Compl.
~
14.) As a matter of law,
however, this claim merges with the breach of contract
claim. See Bridgeston/Firestone, Inc. v. Recovery Credit
Services, Inc., 98 F.3d 13, 19-20 (2d Cir. 1996)
("We may
assume that the[] representations were intended to lull
[plaintiff] into a false sense of security . . . . However,
these facts amount to little more than intentionally-false
statements [] indicating [an] intent to perform under the
contract. That is not sufficient to support a claim of
fraud under New York law.")
i
McKernin v. Fanny Farmer Candy
Shops, Inc., 176 A.D.2d 233, 234 (N.Y. App. Div. 1991)
12
("It
is well settled that where, as here, a claim to recover
damages for fraud is premised upon an alleged breach of
contractual duties and the supporting allegations do not
concern representations which are collateral or extraneous
to the terms of the parties' agreement a cause of action
sounding in fraud does not lie.")
In addition, there is a specific contractual provision
in the Confirmation which provides that the Confirmation,
along with all other documents referring to the ISDA Form,
represents the entire agreement between the parties.
(Compl. Ex. A. at 1.) Thus, since plaintiffs are asserting
the Overley made statements to induce it to enter into the
contract at issue, such an action is not cognizable under
New York law.
Accordingly the Third Cause of Action (Fraud) is
dismissed.
Promissory Estoppel
Promissory estoppel also sounds in contract theory.
Restatement (Second) of Contracts
§
90 (1981). Thus, as
with its breach of the implied covenant of good faith and
fair dealing and fraud claims, plaintiff's promissory
estoppel claim must be dismissed because it is redundant of
the breach of contract claim.
(Compare PI.'s Mem. of Law in
13
Opp. to Defs.' Mot. to Dismiss the Compl. at 20 ("HSBC made
specific promises that it would closely and continuously
monitor the hedge funds included in the Reference Basket to
ensure that they met the eligibility requirements for the
. .") with Compl. ~ 5 ("HSBC's obligations
Transactions.
to Toledo fund
~-
as both a close monitor of the continuing
eligibility of hedge funds included in the Reference Basket
and as a communicator of accurate information concerning
the various funds' respective status as an Eligible
Reference Fund -- were material terms of the agreement
between HSBC and Toledo Fund, intended for the benefit of
Toledo Fund.")
The Sixth Cause of Action (Promissory Estoppel) is
therefore dismissed.
Negligent Misrepresentations and Negligence
In order for plaintiff to maintain claims for
negligent misrepresentation or negligence, it must allege
that there was a special relationship of trust and
confidence between the parties. See Sogeti USA LLC v.
Whirlwind Bldg. Sys., Inc., 274 Fed. Appx. 105, 107 (2d
Cir. 2008)
(negligent misrepresentation) i Syracuse v.
Loomis Armored US, LLC, No. 5:11-cv-00744 (MAD/GHL), 2012
WL 88332, at *6 (N.D.N.Y. Jan. 11, 2012)
14
("Plaintiff ahs
failed to allege the existence of a 'special relationshipl
or legal duty independent of its contractual relationship
with Defendanti and
1
therefore
1
the Court grants
Defendant/s motion to dismiss Plaintiff/s negligence causes
of action."). This relationship must be different from the
arms-length l business relationship the parties had. See
Busino v. Meachem, 270 A.D.2d 606
2000)
1
608-609 (N.Y. App. Div.
("A 'special relationshipl requires a closer degree
of trust than an ordinary business relationship."). Here l
no allegations support such an assertion.
There are no plausible facts asserted in the complaint
that suggest that there was any type of special
relationship between the parties. The use of the merely
conclusory allegation that such a relationship existed is
insufficient as a matter of law. See Syracuse v. Loomis
Armored US, 2012 WL 88332
Silverman l 85 A.D.3d 463
1
at *6; Citibank l N.A. v.
1
445 (N.Y. App. Div. 2011).
Accordingly, the Fourth Cause of Action (Negligent
Misrepresentation) and the Fifth Cause of Action
(Negligence) are dismissed.
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CONCLUSION
For the reasons set forth above/ Causes of Action Two
through Six are dismissed with prejudice.
SO ORDERED.
Dated:
New York/ New York
February 3/ 2012
KATHERINE B. FORREST
United States District Judge
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