The City of Philadelphia v. Bank of America Corporation
- Jesse Furman
- 1:19-cv-01608
- U.S. District Court · Southern District of New York
- 23
City of Philadelphia v. Bank of America: Judge Furman granted in part and denied in part the banks’ motion to dismiss.
The ruling directly affected Philadelphia, Baltimore, San Diego, and the defendant banks. It dismissed San Diego’s fiduciary-duty claims and Baltimore’s fiduciary-duty claim against JPMorgan, while allowing San Diego’s claims to proceed past the timeliness challenge at this stage.
What happened
In City of Philadelphia v. Bank of America, Philadelphia, Baltimore, and San Diego accused banks of conspiring to keep interest rates artificially high on municipal bonds with rates that reset periodically. They also brought claims involving contracts and fiduciary duties, meaning duties to act for another party’s benefit.
The banks argued that San Diego and Baltimore had not adequately alleged fiduciary-duty claims and that most of San Diego’s claims were filed too late. The court agreed that the fiduciary-duty claims could not proceed, but found that allegations of concealed misconduct were sufficient at this stage to reject the banks’ timeliness argument.
Judge Jesse M. Furman granted in part and denied in part the banks’ motion to dismiss. He granted the motion as to San Diego’s fiduciary-duty claim in its entirety and Baltimore’s fiduciary-duty claim against JPMorgan, but denied the motion seeking dismissal of most of San Diego’s claims as time barred.
The detailed version
- The City of Philadelphia v. Bank of America Corporation · No. 1:19-cv-01608
- Jesse Furman
- June 28, 2022
Background
The consolidated putative class actions concern variable-rate demand obligations, a type of long-term municipal bond whose interest rate is reset periodically, usually weekly. Municipal and other public entities hire banks as remarketing agents to set the lowest rate that will allow the bonds to trade at face value and to resell bonds that investors return. Philadelphia, Baltimore, and San Diego alleged that eight banks coordinated instead of competing, keeping rates artificially high from 2008 through 2016. They asserted claims under Section 1 of the Sherman Antitrust Act, as well as state-law claims for breach of contract and breach of fiduciary duty.
The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. They sought dismissal of San Diego’s fiduciary-duty claims, Baltimore’s fiduciary-duty claim against J.P. Morgan Securities LLC, and most of San Diego’s claims as untimely.
San Diego’s fiduciary-duty claims
The court applied California law. To state a fiduciary-duty claim, San Diego had to plausibly allege a fiduciary relationship, a breach, and damages. San Diego argued that the banks became fiduciaries by acting as its remarketing agents and that their conduct independently showed they had undertaken to act for San Diego’s benefit.
The court rejected both arguments. It held that San Diego did not plausibly allege an agency relationship because the banks were not alleged to represent San Diego in dealings with third parties, to have authority to alter San Diego’s legal relations, or to have acted with San Diego’s control. San Diego’s right to remove a remarketing agent, without more, was not enough. The banks’ contractual duty to use independent judgment in setting rates also weighed against finding the required control. The court further held that the alleged business dealings did not show that the banks knowingly agreed to act primarily for San Diego’s benefit. The court therefore granted the motion to dismiss San Diego’s breach-of-fiduciary-duty claims in their entirety.
Baltimore’s claim against JPMorgan
The court applied Maryland law and held that the amended complaint presented a new allegation that JPMorgan, rather than Morgan Stanley, was the remarketing-agent counterparty for one of Baltimore’s bonds. Because that allegation was new, the court concluded that the law-of-the-case doctrine did not prevent JPMorgan from challenging the claim.
The court then held that Baltimore also failed to plausibly allege a fiduciary relationship with JPMorgan. Baltimore did not adequately allege that JPMorgan consented to act for Baltimore’s benefit, had power to alter Baltimore’s legal relations with third parties, or undertook to act primarily for Baltimore’s benefit. The court granted the motion to dismiss Baltimore’s fiduciary-duty claim against JPMorgan.
Timeliness of San Diego’s claims
The defendants argued that San Diego’s breach-of-contract and fiduciary-duty claims, along with its antitrust claim concerning conduct before February 21, 2015, were time barred. They contended that a 2014 California False Claims Act complaint gave San Diego enough information to investigate the alleged misconduct and prevented tolling based on fraudulent concealment.
The court denied that part of the motion. It explained that fraudulent concealment can pause the limitations period when defendants concealed misconduct and the plaintiff’s lack of knowledge was not caused by a failure to act reasonably. The court held that San Diego plausibly alleged concealment and reasonable diligence. Even assuming San Diego received notice of the 2014 complaint, that complaint focused on banks’ individual use of mechanical rate-setting, not the alleged conspiracy to inflate rates, and did not assert the same antitrust, contract, or fiduciary-duty theories. The court therefore concluded that the timeliness issue could not support dismissal at this stage.
Disposition
Judge Jesse M. Furman’s order granted in part and denied in part the defendants’ motion to dismiss. The motion was granted as to San Diego’s fiduciary-duty claim in its entirety and Baltimore’s fiduciary-duty claim against JPMorgan. The motion was denied insofar as it sought dismissal of the bulk of San Diego’s claims as time barred. The clerk was directed to terminate the motion.
Read the full 23-page opinion on CourtListener, the free public archive maintained by the Free Law Project.