In re Lifetrade Litigation

Background

Former investors brought a derivative action on behalf of Lifetrade Fund B.V., an investment fund involved in the life-settlement business. The investors alleged that Wells Fargo aided and abetted breaches of fiduciary duty by Lifetrade managers Roy Smith and John Marcum and that Wells Fargo entered an unconscionable, or extremely unfair and legally unenforceable, settlement agreement with Lifetrade.

Wells Fargo became Lifetrade’s lender after acquiring Wachovia Bank. Lifetrade later defaulted, could not obtain replacement financing, and entered into a settlement agreement with Wells Fargo in August 2012. The agreement used a strict foreclosure, under which Wells Fargo took the portfolio, gave Lifetrade three additional months to seek financing and repurchase it, and gave Lifetrade a right to receive a substantial share of net proceeds if Wells Fargo sold the portfolio to a third party.

The remaining motions were Wells Fargo’s motion for summary judgment on the investors’ claims; the investors’ cross-motion for summary judgment; John Marcum’s motion for summary judgment on Wells Fargo’s third-party claims; and Wells Fargo’s motion for judgment on the pleadings or summary judgment on Marcum’s counterclaims.

Aiding-and-abetting claim

The court held that the investors’ derivative claim required them to show that Wells Fargo substantially assisted Smith and Marcum in breaching duties owed to Lifetrade. Because the claim belonged to Lifetrade rather than the investors individually, only harm to Lifetrade was relevant.

The court rejected the investors’ theories that Wells Fargo induced the managers to sign an unreasonable settlement or induced them to conceal the settlement from investors. Lifetrade had defaulted, repeatedly failed to obtain replacement financing, and faced either a public foreclosure sale or bankruptcy. The investors did not establish that the portfolio was worth more than Lifetrade’s debt or that delaying foreclosure would have produced a better result. The court also concluded that the loan agreement’s valuation model did not govern the value of the portfolio in post-default foreclosure proceedings.

The court further held that, even if the settlement was suboptimal, Smith and Marcum’s decision to sign it was protected by New York’s business judgment rule. That rule generally prevents courts from second-guessing good-faith business decisions. The court found no evidence of fraud, bad faith, or a disqualifying conflict of interest. It also concluded that the confidentiality provision did not support liability because the withheld information was not material and did not cause damages to Lifetrade. The court therefore granted Wells Fargo summary judgment on the aiding-and-abetting claim.

Unconscionability claim

The court also granted Wells Fargo summary judgment on the investors’ claim that the settlement agreement was unconscionable. Under New York law, an agreement ordinarily must involve both a lack of meaningful choice and terms that are unreasonably favorable to the other party.

The court assumed that the settlement favored Wells Fargo but concluded that it was not so extreme as to be unconscionable. Lifetrade had defaulted, could not secure alternative financing, and faced a public foreclosure or bankruptcy. The settlement provided a limited repurchase opportunity and a possible share of later sale proceeds. The court also found no sufficient evidence that Wells Fargo’s conduct before the settlement established unconscionability. It therefore granted Wells Fargo summary judgment on this claim as well.

Marcum’s claims and Wells Fargo’s third-party claims

Wells Fargo’s third-party claims against Marcum and Marcum’s contribution and indemnification counterclaims were conditional on the investors prevailing. Because the court disposed of the investors’ remaining claims, it denied Marcum’s motion for summary judgment on Wells Fargo’s third-party claims as moot and dismissed Marcum’s contribution and indemnification claims as moot.

The court granted Wells Fargo summary judgment on Marcum’s additional counterclaims. It held that Marcum’s breach-of-contract claim failed because there was no underlying contract giving him an enforceable release. The court held that Marcum’s misrepresentation and tortious-interference claims were barred by New York’s six-year statute of limitations. Marcum’s argument that a tolling rule or a statute permitting certain otherwise untimely claims to be used defensively saved his claims was rejected because he sought affirmative relief and Wells Fargo no longer had viable claims against him.

Disposition

The court granted Wells Fargo’s motion for summary judgment on the investors’ remaining claims; denied the investors’ motion for summary judgment; denied Marcum’s motion for summary judgment on Wells Fargo’s third-party claims as moot; dismissed Marcum’s contribution and indemnification claims as moot; and granted Wells Fargo’s motion for summary judgment on Marcum’s additional counterclaims. The court also denied as moot the motions concerning oral argument and expert evidence.