United States District Court, D. Kansas
UNICREDIT BANK AG, NEW YORK BRANCH, f/k/a BAYERISCHE HYPOUND VEREINSBANK AG, as agent for THE BANK OF NEW YORK MELLON, Plaintiff/Counterclaim Defendant,
RKC FINANCIAL CORPORATION, et al., Defendants/Counterclaim Plaintiffs,
THE BANK OF NEW YORK MELLON, Counterclaim Defendant.
MEMORANDUM AND ORDER
SAM A. CROW, Senior District Judge.
The plaintiff, UniCredit Bank AG, New York Branch ("UniCredit"), brings this action as the agent of The Bank of New York Mellon ("BONY") to recover on a defaulted securitized loan against RKC Financial Corporation ("RKC") and the guarantors of that loan, Roger and Mary Cunningham (collectively "defendants or counterclaim plaintiffs"). The case comes before the court on the following pending motions: the defendants' motion to dismiss (Dk. 18), the plaintiff's motion to dismiss amended counterclaims and to strike affirmative defenses (Dk. 26), the counterclaim defendant BONY's motion to dismiss counterclaims (Dk. 45); and the plaintiff's motion to dismiss the second amended counterclaims and to strike affirmative defenses (Dk. 47). For the reasons stated below, the court grants in part and denies in part the defendants' motion and grants the plaintiff's and BONY's motion subject to consideration of a timely motion by the defendants for leave seeking to file an amended pleading.
This case is the fourth in a group of related actions filed by UniCredit to recover on defaulted promissory notes held, pooled, sold and securitized by various corporate and business entities flying the Brooke flag. As an aid in understanding the court's factual background, here is a useful summary of the securitization process taken from a recent decision by Chief Judge Marten:
A securitization involves two steps, which may occur simultaneously or separately. Initially, an entity that creates loans in its normal course of business (the "Originator") sells its loans to a special purpose entity ("SPE"). The sale will be performed in a manner that qualifies as a "true sale, " as opposed to a secured transaction, which is done in part to protect the loans and their streams of revenue from creditors of the Originator. Second, the SPE will issue and sell debt securities, referred to as Notes, to investors. The Notes are secured by the loans the SPE bought from the Originator. Additionally, the SPE will satisfy its obligations on the Notes using the proceeds of the loans it bought from the Originator. When the securitization is "closed, " funds flow from the purchasers of the Notes (the investors) to the SPE, and then from the SPE to the Originator.
UniCredit Bank AG, New York Branch v. Deborah R. Eastman, Inc., 2013 WL 237810 at *1 (D. Kan. 2013). Now, it is just a matter of putting names, dates, documents and details to this process after first describing the original loan that was pooled and sold.
Defendants' Loan Documents
On June 29, 2005, the defendant RKC signed a promissory note designated as "loan number 4683" in the amount of $2, 700, 000.00 for the stated purpose, "[t]o acquire insurance agency assets and purchase buyer's assistance plan." (Dk. 1-6, pp. 1-2). The lender was Brooke Credit Corporation ("BCC"). Id. In support of the note, the parties executed an "Agreement for Advancement of Loan" which set forth the terms and conditions of their contractual relationship involving the loan. (Dk. 1-5). They also executed a commercial security agreement which gave BCC a security interest in RKC's personal property and agency assets. (Dk. 1-7). Also on June 29, the defendant Cunninghams executed a guaranty to secure the RKC loan. (Dk. 1-9). This loan was made in the State of Kansas.
Securitization of Defendants' Loan
As the originator of the loan, BCC funded it from a line of credit issued by a bank under a warehouse arrangement whereby BCC also gave some interest in the loan to the bank and some interest also to Brooke Credit Funding, LLC. Over time, more loans of a similar nature were made and then pooled in the warehouse. (Dk. 1, ¶ 16). BCC and related Brooke entities sponsored securitizations by creating special purpose limited liability securitization companies which were sold the pooled warehouse loans in exchange for cash raised by the securitization companies from the issuing of notes to investors. BCC would sell these loans to the securitization companies under a Sale and Servicing Agreement.
Pursuant to the Sales and Servicing Agreement dated December 1, 2005, BCC sold all of its "right, title and interest in and to the Loans and the Other Conveyed Property relating thereto" to the SPE, Brooke Securitization Company V ("Brooke Securitization" or "Issuer") (Dk. 1-1, p. 19). This Agreement spelled out the transfer in these terms:
[T]he Seller shall sell, transfer, assign, grant, set over and otherwise convey to the Issuer, without recourse (subject to the obligations herein), all right, title and interest of the Seller in and to: (i) the Loans, all monies due thereunder after the Cutoff Date and all Liquidation Proceeds and recoveries received with respect to such Loans; (ii) the security interests in the collateral (including the Agency's Assets, Customer Files and Sales Commissions, if any, securing the Loans; (iii) any proceeds from claims on any repossession loss, physical damage, credit life and credit accident and health insurance policies covering such collateral, if any, or the Obligors; (iv) the Loan File (including the Loan Documents) related to each Loan; (v) the Trust Accounts and all funds on deposit in the Trust Accounts from time to time, and all investments and proceeds thereof (including all income therein) (although the parties hereto acknowledge that the Seller has no interest in the items described in this clause (v)); and (vi) the proceeds of any and all of the foregoing.
(Dk. 1-1, p. 19). RKC's loan promissory note, No. 4683, was in this pool of loans sold to Brooke Securitization on December 1, 2005. (Dk. 1-1, p. 61).
For these loans Brooke Securitization paid cash raised by issuing a series of Notes ("2005-2 Notes") pursuant to an indenture dated December 1, 2005, between itself, as the issuer, and BONY as indenture trustee. The Indenture spelled out that the Issuer granted a first priority perfected security interest to the Trustee in the following "Indenture Asset Pool:"
All of the Issuer's right, title and interest in and to: (a) the Loans, all monies received thereunder after the Cutoff Date and all Liquidation Proceeds and recoveries received with respect to such Loans; (b) the security interest in the collateral (including the Agency's Assets, Customer Files and Sales Commissions), if any securing the Loans; (c) any proceeds from claims on any repossession loss, physical damage, credit life and credit accident and health insurance policies, if any, covering such collateral or the Obligors; (d) the Loan File (including the Loan Documents) related to each Loan; (e) the Trust Accounts and all funds on deposit from time to time in the Trust Accounts and in all investments and Proceeds thereof (including all income thereon); (f) the Sale and Servicing Agreement, including the right to cause the Seller to repurchase Loans from the Issuer under certain circumstances, the Master Agent Security Agreement and the other Related Documents; and (g) all present and future claims, demands, causes and choses in action in respect of any or all of the foregoing and all payments on or under and all proceeds of every kind and nature whatsoever in respect of any or in lieu of the foregoing, ....
(Dk. 1-2, p. 5). RKC's loan No. 4683 was among the loans identified in the Indenture Asset Pool. (Dk. 1-3, p. 31). Thus, the Issuer, Brooke Securitization, owned RKC's loan No. 4683, pledged it and all of the Issuer's assets to secure its obligation under the Indenture to pay the 2005-2 Notes, and granted the Indenture Trustee, BONY, a security interest in RKC's loan and all other loan assets for the benefit of the holders of 2005-2 Notes. UniCredit purchased 58.25% of the 2005-2 Notes.
BONY, as the Indenture Trustee, is the secured party in relation to Brooke Securitization and obtained a security interest in the security interests that secure RKC's loan. As the complaint alleges, the Indenture authorizes BONY as trustee to "(i) collect the funds generated by the collateral (i.e. the loans in the Asset Pool) under the indenture; (ii) liquidate the collateral following an event of default under the Indenture, the proceeds of which are to be held in trust for holder of the Notes; and (iii) take measures to protect the collateral under the indenture." (Dk. 1, ¶ 33). These terms became operative upon the default events set out below.
This Sales and Servicing Agreement also designated Textron Business Services, Inc. ("Textron") to act as "Servicer" for the Issuer Brooke Securitization. It provides, in relevant part:
The Servicer is hereby authorized to act as agent for the Issuer and in such capacity shall manage, service, administer and make collections on the Loans, and perform the other actions required by the Servicer under this Agreement.... The Servicer is hereby authorized to commence, in its own name or in the name of the Issuer (provided the Servicer has obtained the Issuer's consent, which consent shall not be unreasonably withheld), a legal proceeding to enforce a Loan pursuant to Section 3.3 or to commence or participate in any other legal proceeding (including a bankruptcy proceeding) relating to or involving a Loan, an Obligor or the collateral, if any, securing the Loan. If the Servicer commences or participates in such a legal proceeding in its own name, the Issuer shall thereupon be deemed to have automatically assigned such Loan to the Servicer solely for purposes of commencing or participating in any such proceeding as a party or claimant, and the Servicer is authorized and empowered by the Issue to execute and delver in the Servicer's name any notices, demands, claim, complaints, responses, affidavits or other documents or instruments in connection with any such proceeding.
(Dk. 1-1, p. 29, § 3.1). With execution of the Sales and Servicing Agreement, Textron then entered into a subservicing agreement with BCC whereby BCC would service the loans for Textron performing only those obligations specifically described and set forth on the schedule of services attached to the subservicing agreement. (Dk. 27-4, pp. 1, 9).
On March 7, 2007, RKC and Roger Cunningham filed a petition in Tarrant County District Court of Texas against Brooke Corporation, d/b/a First Brooke Corporation, Brooke Credit Corporation, Brooke Franchise Corporation, Brooke Agency Services, L.L.C. and others alleging various claims regarding the loan and the related franchise agreement ("Tarrant suit"). (Dk. 27-1). This suit was abated and stayed on the parties' agreed order on September 25, 2007, to arbitrate the claims before the American Arbitration Association ("AAA"). (Dk. 27-2). On October 15, 2008, the Arbitrator conducted a telephonic hearing to discuss the final hearing scheduled for October 20, 2008. Jeff Nourse appeared for all party respondents and "announced that because of financial shortcomings within some or all of the Respondents, none of the Respondents would appear at the hearing, neither he nor anyone else would be making an appearance for any Respondent, and all Respondents would be defaulting." (Dk. 27-3). The parties stipulated to the same with Mr. Nourse also stating that he "anticipated that one or more of the Respondents would be seeking debtor relief under the U.S. Bankruptcy laws prior to the time of the hearing." Id. Based on the parties' stipulation of default and on the claimants' presentation of "evidence proving liability, causation and damages, " the Arbitrator entered on October 21, 2008, a final award finding for the claimants on their claims of fraud, fraud in the inducement, conspiracy, breach of contract, civil RICO, conversion, and violations of the Texas Deceptive Trade Practices Act, and finding actual damages of $3, 350, 000; consequential damages of $500, 000; exemplary damages of $3, 350, 000; and attorneys' fees of $187, 500. (Dk. 34-1). Before this arbitration award could be confirmed, the Brooke Corporation filed for Chapter 11 bankruptcy on October 28, 2008. In May of 2010, RKC moved for relief from the automatic bankruptcy stay in order to confirm its arbitration award, and BONY as indenture trustee opposed that motion.
The plaintiff's complaint alleges that RKC has breached the loan documents by not making the required loan payments, and the loan is in default. (Dk. 1, ¶¶ 43-51). Because of this breach, the plaintiff is also seeking payment from the guarantors, Roger and Mary Cunningham, who guaranteed this loan. The plaintiff alleges the Cunninghams have refused to make the payments required by the guaranty. (Dk. 1, ¶¶ 60-62).
The Complaint further alleges that the Issuer Brooke Securitization defaulted on its obligations under the Notes. (Dk. 1, ¶¶ 37-42). UniCredit notified the Trustee BONY on October 9, 2008, that the Issuer had defaulted on the Notes, and it requested BONY to exercise the acceleration clause and demand the remainder of the payments due and to pursue all available remedies against the collateral. Id. at ¶ 38. On October 22, 2008, UniCredit and BONY executed a letter agreement and power of attorney making UniCredit the Trustee's agent "with full power of substitution to take all actions with respect to the rights and remedies permitted under the Indenture, including the right to pursue collection on any collateral securing the Notes." Id. at ¶ 36.
BONY's Federal Action Against Brooke Entities
On September 11, 2008, BONY filed a complaint in the United States District Court for the District of Kansas against various Brooke entities alleging fraud and "misappropriation of millions of dollars pledged to noteholders under certain securitizations." The Bank of New York Mellon v. Aleritas Capital Corporation, et al. No. 08-2424-JWL (Dk. 1, ¶ 1). Alleging that the Brooke entities were "in a rapidly deteriorating financial state" and were "facing a revolt by hundreds of their franchisees, " BONY requested the appointment of a receiver. Id. at ¶ 3. BONY filed an emergency motion for receiver and the defendant Brooke entities countered with a motion to appoint a special master. On September 17, 2008, the district court entered a consent order appointing Albert Riederer as Special Master. (Dk. 27-6). The counterclaim plaintiffs in the instant action allege the Special Master "controlled the defense of the Tarrant County Case filed by RKC and the related arbitration." (Dk. 34, ¶ 38). The consent order also provided that the Special Master could not interfere with "[t]he exercise of duties, rights and remedies by the Noteholders and the Bank of New York Mellon as Indenture Trustee in respect of the Indenture for each Securitization Company." (Dk. 27-6, ¶ 4).
As mentioned above, certain Brooke entitles filed for Chapter 11 relief in the United States Bankruptcy Court for the District of Kansas on October 28, 2008. "On September 20, 2012, the bankruptcy court entered an Order permitting BONY and UniCredit, among others, to pursue the collateral of the securities without any further relief required from the bankruptcy court." UniCredit Bank AG v. Jue-Thompson, 2013 WL 6185750 at *3 (D. Kan. Nov. 26, 2013).
According to the complaint, the plaintiff demanded the defendants' collateral in June 2013, and their refusal resulted in this action being filed on June 25, 2013. (Dk. 1, ¶¶ 63-64, 143). As the Trustee's acting agent, UniCredit alleges through the above chain of transactions it has acquired the right to enforce the RKC loan documents including the right to pursue the collateral for the collection of the same. UniCredit alleges the following causes of action: (1) Action on the Loan against RKC Agency; (2) Action on the Guaranty against Roger Cunningham and Mary Cunningham; (3) Detinue and Collateral Foreclosure Judgment against RKC Agency; (4) Quantum Meruit against all Defendants; (5) Breach of Implied Covenant of Good Faith and Fair Dealing against all Defendants; (6) Conversion against all Defendants; and (7) Account Notice/Declaratory Relief against all Defendants. (Dk. 1, ¶¶ 72-159).
As presently alleged in their Second Amended Answer and Counterclaim, the defendants are pursuing counterclaims against UniCredit and BONY. (Dk. 34, pp. 29-45). The counterclaim plaintiffs are seeking a declaratory judgment that UniCredit and BONY are liable vicariously for the causes of action and damages contained in the Arbitration Award. (Dk. 34, p. 44). As theories for this liability, the counterclaim plaintiffs allege agency, partnership, joint venture and successor liability between the counterclaim defendants and the named parties in the Tarrant suit. The counterclaims section further asserts that UniCredit and BONY were in privity or had the same interests with the parties in the Tarrant suit as to justify res judicata or collateral estoppel bars. Finally, the counterclaims assert the Brooke Entities are alter egos of the BONY and Unicredit.
STANDARDS GOVERNING MOTIONS
Dismiss for Lack of Standing/Subject Matter Jurisdiction
A prong of Article III jurisdiction is that a plaintiff has standing to sue. Hill v. Vanderbilt Capital Advisors, LLC, 702 F.3d 1220, 1224 (10th Cir. 2012). "To have Article III standing, Petitioners must demonstrate: (i) an injury in fact that is both concrete and particularized as well as actual or imminent; (ii) an injury that is traceable to the conduct complained of; and (iii) an injury that is redressable by a decision of the court.'" Wyoming v. U.S. Dept. of Interior, 674 F.3d 1220, 1230 (10th Cir. 2012) (quoting Wyoming ex rel. Crank v. United States, 539 F.3d 1236, 1241 (10th Cir. 2008) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992))).
Rule 12(b)(1) of the Federal Rules of Civil Procedure authorizes a district court to dismiss a complaint for lack of subject matter jurisdiction. Rule 12(b)(1) attacks on subject matter jurisdiction are typically either facial attacks on the sufficiency of jurisdictional allegations or factual attacks on the accuracy of those allegations. Holt v. United States, 46 F.3d 1000, 1002-03 (10th Cir. 1995). A facial attack questions the sufficiency of the allegations in the complaint as they relate to subject matter jurisdiction. See Holt, 46 F.3d at 1002. In reviewing a facial attack on the complaint, the court must accept all allegations in the complaint as true. Id. If the moving party factually challenges the subject matter allegations, then it falls to the district court to make findings of fact after allowing "affidavits, other documents, and a limited evidentiary hearing." Id. at 1003. The court may decide these matters without converting to a Rule 56 proceeding, unless "resolution of the jurisdictional question is intertwined with the merits of the case" and requires the conversion to a Rule 12(b)(6) motion or a Rule 56 motion. Id. The defendants here lodge a facial attack to the sufficiency of the jurisdictional allegations. A court lacking subject matter jurisdiction must dismiss the cause at any stage of the proceeding in which it becomes apparent that jurisdiction is lacking. Laughlin v. Kmart Corp., 50 F.3d 871, 873 (10th Cir.), cert. denied, 516 U.S. 863 (1995).
Dismiss for Failure to State a Claim
In deciding a Rule 12(b)(6) motion, a court accepts as true "all well-pleaded factual allegations in a complaint and view[s] these allegations in the light most favorable to the plaintiff." Smith v. United States, 561 F.3d 1090, 1098 (10th Cir.2009), cert. denied, 130 S.Ct. 1148 (2010). This duty to accept a complaint's allegations as true is tempered by the principle that "mere labels and conclusions, ' and a formulaic recitation of the elements of a cause of action' will not suffice; a plaintiff must offer specific factual allegations to support each claim." Kansas Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). As recently clarified by the Supreme Court, the standard under 12(b)(6) is that to withstand a motion to dismiss, "'a complaint must contain enough allegations of fact, taken as true, to state a claim to relief that is plausible on its face.'" Al-Owhali v. Holder, 687 F.3d 1236, 1239 (10th Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). Thus, "a plaintiff must offer sufficient factual allegations to raise a right to relief above the speculative level.'" Kansas Penn Gaming, 656 F.3d at 1214 (quoting Twombly, 550 U.S. at 555). "The plausibility standard is not akin to a probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 556). It follows then that if the "complaint pleads facts that are merely consistent with' a defendant's liability it stops short of the line between possibility and plausibility of entitlement to relief.'" Id. "A claim has facial plausibility when the [pleaded] factual content... allows the court to draw the ...