Kirschner v. JP Morgan Chase Bank, N.A.

Background

Marc S. Kirschner, solely as trustee of the Millennium Lender Claim Trust, sued JPMorgan Chase Bank, N.A.; JPMorgan Securities LLC; Citigroup Global Markets Inc.; Citibank, N.A.; BMO Capital Markets Corp.; Bank of Montreal; SunTrust Robinson Humphrey, Inc.; and SunTrust Bank. The Trust held claims transferred through Millennium Laboratories LLC’s bankruptcy plan. The claims arose from a $1.775 billion syndicated loan transaction that closed on April 16, 2014. Millennium later defaulted and filed for bankruptcy after a government investigation and related litigation concerning its sales, marketing, and billing practices.

The complaint asserted six state securities-law causes of action, a negligent-misrepresentation claim, a breach-of-fiduciary-duty claim, two breach-of-contract claims against Chase, and a claim for breach of the implied covenant of good faith and fair dealing. The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim.

State Securities-Law Claims

The court applied the four-factor “family resemblance” test for determining whether a note is a security: the parties’ motivations, the plan of distribution, the reasonable expectations of purchasers, and whether another regulatory system reduces the instrument’s risks.

The court found that the first factor was mixed because Millennium used the financing for loan repayment and a dividend, while many purchasers acquired the notes for investment portfolios. The other three factors favored treating the notes as commercial loans rather than securities. The distribution was relatively narrow and aimed at sophisticated institutional purchasers rather than the general public. The credit agreement and confidential information memorandum described the transaction as a loan and the purchasers as lenders. The court also found that federal banking regulation supported treating the notes as loans. It therefore concluded that the presumption that the notes were securities had been overcome and granted the motion to dismiss Causes of Action One through Six.

Negligent Misrepresentation

The court applied New York law because the plaintiff had not shown that another state had a greater interest in, or more significant contacts with, the dispute. Under New York law, negligent misrepresentation requires a special relationship creating a duty to provide accurate information, an incorrect statement supplied negligently, and reasonable reliance.

The court held that the complaint did not allege facts showing that the defendants used their superior knowledge to induce the investors to purchase the notes. It also held that the credit agreement’s disclaimers defeated the claim. Those provisions stated that Chase had no duty to provide credit information and that each lender would conduct its own credit analysis without relying on Chase or another lender. The court therefore granted dismissal of the negligent-misrepresentation claim.

Fiduciary-Duty and Contract Claims

The court dismissed the breach-of-fiduciary-duty claim against Chase because the credit agreement expressly limited Chase’s duties as administrative agent and stated that Chase had no fiduciary relationship with the lenders.

The court dismissed the contract claim based on conditions precedent because the cited provisions did not require Chase to investigate or enforce Millennium’s representations and warranties before closing. The agreement also stated that Chase was not liable for statements or warranties made by a loan party and had no obligation to investigate compliance with the conditions.

The court dismissed the contract claim based on failure to provide notice because the agreement required Chase to give notice after receiving a notice of default and stated that Chase would not be deemed to know of a default without such notice. The complaint did not allege that Chase received the required notice.

The court dismissed the implied-covenant claim because it was not tied to a specific contractual duty and, to the extent it relied on the same conditions-precedent and notice provisions, duplicated the contract claims.

Motions and Disposition

The conclusion states that the defendants’ motion to dismiss was granted. It also states that the plaintiff’s motion for leave to amend, the motion for leave to file an amicus curiae brief, and the parties’ motions for oral argument were denied. The order directed the clerk to terminate those motions.

The opinion contains an internal inconsistency about amendment. In the section addressing amendment, it first says that the motion for leave to file the proposed amended complaint is denied because the proposal included dismissed claims, but it then says, “Here, Plaintiff will be granted leave to amend,” and directs that any amendment motion include the proposed amended complaint. The conclusion nevertheless states that the motion for leave to amend was denied. The opinion does not state that the claims were dismissed with or without prejudice.