The City of Philadelphia v. Bank of America Corporation

Background

These consolidated putative class actions were brought by the City of Philadelphia and the Mayor and City Council of Baltimore on behalf of themselves and a proposed class of state and local public-entity issuers. They sued Bank of America, Barclays, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, the Royal Bank of Canada, Wells Fargo, and related entities.

The complaint alleged that, between 2008 and 2016, the banks’ remarketing agents conspired to fix interest rates for variable-rate demand obligations, or VRDOs. VRDOs are long-term bonds with interest rates that are typically reset weekly. The plaintiffs alleged that the banks shared information about rates, inventory, and planned rate changes, coordinated their weekly resets, kept rates artificially high, and caused issuers to pay more than they would have paid in a competitive market. The complaint relied on alleged communications among bank personnel, accounts from former bank insiders, statistical analyses, and investigations by the Securities and Exchange Commission and the Department of Justice.

The plaintiffs asserted federal antitrust claims under the Sherman and Clayton Acts, as well as state-law claims for breach of contract, breach of fiduciary duty, and unjust enrichment. The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim.

Antitrust claims

The court held that the plaintiffs plausibly alleged a horizontal price-fixing conspiracy. The complaint alleged parallel conduct because the banks allegedly reset VRDO rates at similarly inflated levels and changed numerous rates together through common base rates. The court found that the alleged communications among competing banks, the banks’ common motive to keep VRDOs out of their inventories, and the government investigations served as additional facts supporting an inference of conspiracy.

The court rejected the defendants’ argument that the statistical analyses were methodologically flawed. At the pleading stage, the court said, the analyses only needed to be plausible and the court was required to accept the complaint’s factual assertions as true. The court also concluded that the alleged conduct was a per se unlawful price-fixing scheme rather than merely an exchange of information subject to the more demanding rule-of-reason analysis. The motion to dismiss the federal antitrust claims was denied.

State-law claims

For breach of contract, the court denied the motion as to the Counterparty Defendants: Banc of America Securities LLC; Barclays Capital, Inc.; Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; Merrill Lynch, Pierce, Fenner & Smith Inc.; RBC Capital Markets LLC; Wachovia Bank N.A.; and Wells Fargo Bank, N.A. The complaint plausibly alleged that these entities entered remarketing agreements with the plaintiffs and failed to use their best efforts to reset rates at the lowest possible levels that would allow the bonds to trade at par.

The court granted the motion as to the breach-of-contract claims against the Non-Counterparty Defendants, Morgan Stanley, and the Morgan Stanley Associates. The complaint did not allege that those entities entered contracts with the plaintiffs, served as their remarketing agents, or otherwise facilitated a contractual relationship with them. The court also granted the motion as to all breach-of-fiduciary-duty claims except Baltimore’s claim against Citigroup Global Markets Inc. The court denied the motion on that Baltimore claim because the defendants’ stated argument—that Maryland law did not recognize an independent fiduciary-duty claim—was defeated by a later Maryland Court of Appeals decision, and the defendants did not adequately preserve their separate argument concerning a fiduciary relationship under Maryland law.

The court granted the motion as to Philadelphia’s fiduciary-duty claims against its Counterparty Defendants. It found that Philadelphia did not plausibly allege a special relationship of trust under Pennsylvania law and that the alleged misconduct essentially duplicated the contract claims. The court also granted the motion as to all unjust-enrichment claims. Claims against the Counterparty Defendants were duplicative because the parties did not dispute the validity of the contracts, while claims against the Non-Counterparty Defendants failed to plausibly allege that those entities received a direct benefit from the plaintiffs.

Timeliness and disposition

The court declined to dismiss claims as untimely at this stage. Although the claims were subject to statutes of limitations, the plaintiffs plausibly alleged that the defendants concealed the alleged conspiracy, including through temporary rate reductions described as “window dressing.” The court held that requiring proof of reasonable diligence at the motion-to-dismiss stage would be premature.

In conclusion, the court stated that the defendants’ motion to dismiss was granted in part and denied in part. The court denied the motion as to the federal antitrust claims; denied it as to the Counterparty Defendants’ contract claims and granted it as to the Non-Counterparty Defendants’, Morgan Stanley’s, and the Morgan Stanley Associates’ contract claims; denied it as to Baltimore’s fiduciary-duty claims against Citigroup Global Markets Inc. and granted it as to all other fiduciary-duty claims; and granted it as to all unjust-enrichment claims. Judge Jesse M. Furman declined to grant leave to amend the dismissed claims and directed defendants to answer the remaining claims within three weeks unless the court ordered otherwise.