Rotella's Motion To Dismiss F.D.I.C.'s Complaint

Case 2:11-cv-00459-MJP Document 53
Filed 07/01/11 Page 1 of 27
1 2 3 4 5 6 7 8 9 10 THE FEDERAL DEPOSIT INSURANCE CORPORATION, AS RECEIVER OF 11 WASHINGTON MUTUAL BANK, 12 13 v. Plaintiff, ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
The Honorable Marsha J. Pechman
UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE
Case No. 2:11-cv-00459 MJP STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS MOTION TO DISMISS NOTE ON MOTION CALENDAR: September 15, 2011 ORAL ARGUMENT REQUESTED
14 KERRY K. KILLINGER, STEPHEN J. ROTELLA, DAVID C. SCHNEIDER, 15 LINDA C. KILLINGER, and ESTHER T. ROTELLA, 16 Defendants. 17 18 19 20 21 22 23 24 25 26 27
STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS M OTION TO DISMISS CASE NO. 2:11-CV-00459 MJP
SIMPSON THACHER & BARTLETT LLP 425 Lexington Avenue New York, New York 10017 -and1999 Avenue of the Stars, 29th Floor Los Angeles, California 90067
DAVIS WRIGHT TREMAINE LLP 1201 Third Avenue, Suite 2200 Seattle, Washington 98101 Tel.: (206) 622-3150 Fax: (206) 757-7700
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 II. 17 18 III. B. C. D.
TABLE OF CONTENTS Page PRELIMINARY STATEMENT................................................................................................... 1 FACTUAL BACKGROUND ....................................................................................................... 4 A. B. During the Relevant Time Period, Neither the FDIC Nor the OTS Raised Any Red Flags about WaMu ......................................................................................... 4 The FDIC Intervenes to the Detriment of Shareholders, Creditors, Employees, and the Seattle Economy .................................................................... 6 The FDIC Files Its Complaint Two-and-a-Half Years Later................................... 7 The FDIC Files the Appraisal Vendor Lawsuits..................................................... 8
LEGAL STANDARD ................................................................................................................ 10 ARGUMENT ............................................................................................................................. 11 I. THE FDICS COMPLAINT FAILS TO STATE A NEGLIGENCE-BASED CLAIM AGAINST DEFENDANTS ............................................................................................ 11 A. Washingtons Business Judgment Rule Insulates Officers from Lawsuits Attacking Allegedly Mistaken but Good Faith, Informed Business Decisions ...... 11 The Allegations in the Complaint Fall Well within the Protection of the Business Judgment Rule ...................................................................................... 12
THE FDIC CANNOT ADEQUATELY ALLEGE THAT THE DEFENDANTS CONDUCT PROXIMATELY CAUSED THE BANKS FAILURE ............................... 13 THE BREACH OF FIDUCIARY DUTY CLAIM DUPLICATES THE NEGLIGENCE CLAIMS, AND THE COURT SHOULD DISMISS IT.......................... 15 THE FDICS ALLEGATIONS OF FRAUDULENT CONVEYANCE DO NOT SATISFY THE PLEADING REQUIREMENTS OF RULES 9(b) OR 8(a) OF THE FEDERAL RULES OF CIVIL PROCEDURE ................................................................ 16 A. B. The FDIC Does Not Sufficiently Plead Its Allegation Concerning an Alleged Transfer of $1 Million ......................................................................................... 16 The FDICs Allegations Regarding the Transfer of Their Residence Fail As a Matter of Law ................................................................................................... 17
19 IV. 20 21 22 23 24 V.
THE FDICS ASSET FREEZE CAUSE OF ACTION LIKEWISE FAILS ..................... 19
25 CONCLUSION .......................................................................................................................... 20 26 27
STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS M OTION TO DISMISSPAGE i CASE NO. 2:11-CV-00459 MJP
SIMPSON THACHER & BARTLETT LLP 425 Lexington Avenue New York, New York 10017 -and1999 Avenue of the Stars, 29th Floor Los Angeles, California 90067 DAVIS WRIGHT TREMAINE LLP 1201 Third Avenue, Suite 2200 Seattle, Washington 98101 Tel.: (206) 622-3150 Fax: (206) 757-7700
1 2 3
TABLE OF AUTHORITIES Page(s) CASES
4 Am. W. Airlines, Inc. v. GPA Group, Ltd., 877 F.2d 793 (9th Cir. 1989)............................................................................................... 13 5 Awai v. Kotin, 872 P.2d 1332 (Colo. App. 1993)........................................................................................ 16 6 7 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)..................................................................................................... passim 8 Beringer v. Standard Parking OHare Joint Venture, Nos. 07 C 5027, 07 C 5119, 2008 WL 4890501 (N.D. Ill. Nov. 12, 2008)........................... 15 9 10 Bly-Magee v. Cal., 236 F.3d 1014 (9th Cir. 2001)............................................................................................. 10 11 Churchill v. Barach, 863 F. Supp. 1266 (D. Nev. 1994)....................................................................................... 14 12 13 Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53 (Del. 1989) ..................................................................................................... 12 14 CMMF, LLC v. J.P. Morgan Inv. Mgmt. Inc., 915 N.Y.S.2d 2, 6 (App. Div. 2010).................................................................................... 15 15 16 Cooper v. Pickett, 137 F.3d 616 (9th Cir. 1997)............................................................................................... 17 17 Global View Ltd. Venture Capital v. Great Cent. Basin Exploration, L.L.C., 288 F. Supp. 2d 473 (S.D.N.Y. 2003) ........................................................................... 11, 17 18 19 Grassmueck v. Barnett, No. C03-122P, 2003 WL 22128263 (W.D. Wash. July 7, 2003).......................................... 12 20 Hakopian v. Mukasey, 551 F.3d 843 (9th Cir. 2008)............................................................................................... 14 21 22 Holden v. Hagopian, 978 F.2d 1115 (9th Cir. 1992)............................................................................................. 10 23 Hua v. Boeing Corp., No. C08-0010RSL, 2009 WL 1044587 (W.D. Wash. Apr. 17, 2009) .................................. 15 24 25 In re Citigroup Inc. Sholder Deriv. Litig., 964 A.2d 106 (Del. Ch. 2009) ......................................................................................... 2, 11 26 In re Daisy Sys. Corp., No. C-92-1845-DLJ, 1993 WL 491309 (N.D. Cal. Feb. 3, 1993) .............................10, 11, 18 27
STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS M OTION TO DISMISSPAGE i CASE NO. 2:11-CV-00459 MJP
1 In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994)............................................................................................... 10 2 In re Motorwerks, Inc., 371 B.R. 281 (Bankr. S.D. Ohio 2007)................................................................................ 17 3 4 In re Spokane Concrete Prods., Inc., 126 Wn. 2d 269, 892 P.2d 98 (1995)................................................................................... 12 5 In re Sunrise Sec. Litig., 138 F.R.D. 60 (E.D. Pa. 1991) ............................................................................................ 13 6 7 Jacobson v. Wash. State Univ., No. CV-05-0092-FVS, 2007 WL 26765 (E.D. Wash. Jan. 3, 2007)..................................... 15 8 Joy v. North, 692 F.2d 880 (2d Cir. 1982)................................................................................................ 11 9 10 Kearns v. Ford Motor Co., 567 F.3d 1120 (9th Cir. 2009)..................................................................................10, 17, 18 11 Kranz v. Koenig, 240 F.R.D. 453 (D. Minn. 2007) ......................................................................................... 16 12 13 Lane v. City of Seattle, 164 Wn. 2d 875, 194 P.3d 977 (2008)................................................................................. 11 14 Minnick v. Clearwire US, LLC, 683 F. Supp. 2d 1179 (W.D. Wash. 2010)........................................................................... 14 15 16 Natl Ctr. for Empt of the Disabled v. Ross, No. CV 05-2014-PHX-JAT, 2006 WL 778647 (D. Ariz. Mar. 27, 2006)............................. 16 17 Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993)............................................................................................. 16, 19 18 19 Nguyen v. Boeing Co., No. C10-0415MJP, 2010 WL 2102501 (W.D. Wash. May 25, 2010) .................................. 15 20 Nursing Home Bldg. Corp. v. DeHart, 13 Wn. App. 489, 535 P.2d 137 (1975)............................................................................... 11 21 22 Oki Semiconductor Co. v. Wells Fargo Bank, 298 F.3d 768 (9th Cir. 2002)............................................................................................... 13 23 Para-Medical Leasing, Inc. v. Hangen, 48 Wn. App. 389, 739 P.2d 717 (1987)............................................................................... 12 24 25 Premier Capital, Inc. v. Klein, 776 N.Y.S.2d 74 (N.Y. App. Div. 2004) ............................................................................. 18 26 Reddy v. Litton Indus., Inc., 912 F.2d 291 (9th Cir. 1990)............................................................................................... 13 27
STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS M OTION TO DISMISSPAGE ii CASE NO. 2:11-CV-00459
1 Resolution Trust Corp. v. Vanderweele, 833 F. Supp. 1383 (N.D. Ind. 1993) .................................................................................... 16 2 Riss v. Angel, 131 Wn. 2d 612, 934 P.2d 669 (1997)................................................................................. 12 3 4 Schooley v. Pinchs Deli Market, Inc., 134 Wn. 2d 468, 951 P.2d 749 (1998)................................................................................. 14 5 Schwarzmann v. Assn of Apt. Owners, 33 Wn. App. 397, 655 P.2d 1177 (1982) ............................................................................. 12 6 7 Shwarz v. United States, 234 F.3d 428 (9th Cir. 2000)............................................................................................... 14 8 Steckman v. Hart Brewing, Inc., 143 F.3d 1293 (9th Cir. 1998)............................................................................................. 14 9 10 Swartz v. KPMG LLP, 476 F.3d 756 (9th Cir. 2007)......................................................................................... 15, 17 11 Walaschek & Assocs., Inc. v. Crow, 733 F.2d 51 (7th Cir. 1984)................................................................................................. 14 12 13 Winter v. Natural Res. Def. Council, Inc., 129 S. Ct. 365 (2008).......................................................................................................... 19 14 15 STATUTES
16 Fed. R. Civ. P. 12(b)(6) ............................................................................................................ 10 17 Fed. R. Civ. P. 8 ................................................................................................................. 10, 17 18 Fed. R. Civ. P. 9(b)....................................................................................................3, 10, 17, 19 19 RCW 19.40.011..................................................................................................................... 16 20 RCW 19.40.041............................................................................................................... 16, 19 21 RCW 19.40.071..................................................................................................................... 16 22 23 12 C.F.R. 325.103(b) (2011).................................................................................................... 7 24 62 Fed. Reg. 752 (Jan. 6, 1997) .................................................................................................. 5 25 26 27
STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS M OTION TO DISMISSPAGE iii CASE NO. 2:11-CV-00459
REGULATIONS
1 2 3
OTHER AUTHORITIES Dealbook, WaMu Fails, and JPMorgan Steps In, N.Y. Times, Sept. 26, 2008........................................ 6
4 FDIC, JPMorgan Chase Acquires Banking Operations of Washington Mutual, Press Release, Sept. 25, 2008................................................................................................ 1 5 Grind, Kirsten The Washington Mutual Decision, Puget Sound Bus. Journal, Dec. 6, 2009 ...................... 6, 7 6 7 Grind, Kirsten The Downfall of Washington Mutual, Puget Sound Bus. Journal, Sept. 27, 2009 ..................................................................................................................................... 6 8 9 Hearing on the Role of Regulators in Exercising Their Supervision of Washington Mutual Bank from 20042008: Hearing before the Perm. Subcomm. On Investigations of the Committee on Homeland Security and Governmental 10 Affairs of the U.S. Senate, 111th Congress, Statement of Jon T. Rymer, Inspector General, FDIC (April 16, 2010)............................................................................. 3 11 12 Moore, Heidi N. How J.P. Morgan Raised $11.5 Billion in 24 Hours, Wall Street Journal, Sept. 29, 2008................................................................................................................................ 6 13 14 Office of Inspectors General, Department of the Treasury and Federal Deposit Insurance Corporation, Evaluation of Federal Regulatory Oversight of Washington Mutual Bank, EVAL 10-002 (April 2010) ..................................................... 4, 5 15 16 Restatement (Second) of Torts 440, Comment B (2010) ........................................................ 14 17 Uniform Financial Institutions Rating System............................................................................. 5 18 Wall Street & the Financial Crisis: Anatomy of a Financial Collapse, Staff Report by the Perm. Subcomm. on Investigations of the Comm. on Homeland Sec. & Governmental Affairs of the U.S. Senate, Apr. 13, 2011........................... 5 19 20 21 22 23 24 25 26 27
STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS M OTION TO DISMISSPAGE iv CASE NO. 2:11-CV-00459
Defendants Stephen J. Rotella and David C. Schneider (together, Defendants)
2 respectfully move pursuant to Federal Rule of Civil Procedure 12(b)(6) and Local Civil Rule 7 to 3 dismiss Counts I-III, V and VI of the Complaint (Doc. No. 1) (Complaint or Compl.) of the 4 Federal Deposit Insurance Corporation, as Receiver for Washington Mutual Bank (FDIC). 5 6 PRELIMINARY STATEMENT This lawsuit amounts to a pure public relations stunt designed to deflect criticism away
7 from the FDIC, which has beenand continues to beunder fire for its regulatory failures with 8 respect to WaMu and refuses to take any responsibility for its central role in the financial crisis. 9 In March 2011, two and a half years after Washington Mutual Bank was seized, the FDIC filed 10 its politically-motivated complaint purporting to stand in the shoes of a bank that no longer exists 11 and whose assets the FDIC hastily and improvidently sold off without regard to the impact on 12 creditors, shareholders, employees, or the Seattle economy. The same day the FDIC wiped out 13 more than $7 billion in shareholder equity, the FDIC issued a press release declaring that its fire 14 sale of WaMus banking operations to JPMorgan Chase for $1.9 billion ensured that neither the 15 uninsured depositors nor the insurance fund absorbed any losses.1 The reckless and widely16 criticized seizure and sale of a well-capitalized bank with $29 billion in net liquidity had 17 catastrophic effects on Seattles local economy and thrust Washington Mutual into bankruptcy. 18 Despite the FDICs role in causing staggering losses to creditors, shareholders, and employees it 19 has inserted itself at the eleventh hour into the WaMu-related director and officer litigation under 20 the pretext of seeking to recover unspecified losses for unidentified creditors. 21 Despite exhaustively investigating the former Washington Mutual officers for over two
22 years at enormous taxpayer expensewith complete and unfettered access to Washington 23 Mutuals books and records (but without ever asking to interview the officers themselves), and 24 with an obvious agenda to find scapegoatsthe FDIC alleges no fraud, no intentional 25 26 27
STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS M OTION TO DISMISSPAGE 1 CASE NO. 2:11-CV-00459 MJP
SIMPSON THACHER & BARTLETT LLP 425 Lexington Avenue New York, New York 10017 -and1999 Avenue of the Stars, 29th Floor Los Angeles, California 90067 DAVIS WRIGHT TREMAINE LLP 1201 Third Avenue, Suite 2200 Seattle, Washington 98101 Tel.: (206) 622-3150 Fax: (206) 757-7700 1
FDIC, JPMorgan Chase Acquires Banking Operations of Washington Mutual, Press Release, Sept. 25, 2008, http://www.fdic.gov/news/news/press/2008/pr08085.html (last visited June 14, 2011).
1 wrongdoing, no bad faith, and no corporate looting. Rather, the FDIC simply contends that 2 Messrs. Rotella and Schneider were negligent in executing their duties during their relatively 3 brief careers at WaMu. With the benefit of hindsight, the FDIC criticizes statements made in a 4 handful of emails, memoranda and presentations and surmises that the officer defendants 5 negligently pursued a high-risk strategyone sanctioned by the FDIC itself at all times relevant 6 to this lawsuitthat resulted in significant losses to WaMu. 7 Leaving aside the obvious impropriety of the FDICs shameless blame-shifting exercise,
8 the Court should dismiss the FDICs Complaint for the following reasons: 9 First, the FDIC is looking back on the countrys worst economic crisis since the Great
10 Depression in search of anyone other than itself to blame and improperly attacking Defendants 11 good faith business decisions. Business decision-makers must operate in the real world, with 12 imperfect information, limited resources, and an uncertain future. In re Citigroup Inc. Sholder 13 Deriv. Litig., 964 A.2d 106, 126 (Del. Ch. 2009). In these circumstances, based upon the 14 allegations in the Complaint, Washingtons business judgment rule mandates dismissal. Indeed, 15 from 2004 until 2008, neither the FDIC nor the OTS raised any significant concerns about 16 WaMu. The FDIC knew in the Summer of 2004 (before the 2005 arrivals of Messrs. Rotella and 17 Schneider at WaMu) that WaMus Board of Directors reviewed and later approved a five-year 18 strategic plan pursuant to which WaMu intended to implement a higher risk mortgage loan 19 strategy. Neither the FDIC nor the OTS questioned this strategy; in fact, both agreed with the 20 OTSs fundamentally sound rating of WaMu until July 2008just two months before WaMu 21 was seized.2 The high-risk lending strategy that the FDIC now decries is the very lending 22 strategy that the federal government promoted through the government-sponsored secondary 23 market for subprime loans that the Government-Sponsored Enterprises (Fannie Mae and Freddie 24 25 26 27
STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS M OTION TO DISMISSPAGE 2 CASE NO. 2:11-CV-00459
See Office of Inspectors General, Department of the Treasury and Federal Deposit Insurance Corporation, Evaluation of Federal Regulatory Oversight of Washington Mutual Bank, EVAL 10-002 (April 2010) (OIG Report) at 45, http://fdicoig.gov/reports10%5C10-002EV.pdf (last visited June 16, 2011).
1 Mac) in large part created. It is also the lending strategy that the OTS, WaMus primary 2 regulator, and the FDIC countenanced throughout the relevant time period. In these 3 circumstances, where high-profit, high-risk lending was effectively a government-sponsored 4 lending strategy for a government-sponsored market, the FDIC cannot establish that Defendants 5 acted with negligencemuch less gross negligence. During the limited time Messrs. Rotella and 6 Schneider worked at WaMu, the FDIClike many othersfailed to foresee the depth or 7 severity of the looming financial crisis. Indeed, FDIC examiners explained that no one could 8 have predicted the precipitous fall in home prices and the complete shut-down of the secondary 9 market.3 10 Second, the FDICs causation allegations do not pass muster under Twombly and Iqbals
11 plausibility requirement given that the FDIC has alleged in separate, later-filed federal lawsuits 12 that the real cause of the losses in the Banks held-for-investment portfolio was the gross 13 negligence of two appraisal companies, eAppraiseIT and LSI. Just weeks after filing this action, 14 the FDIC filed two lawsuits in the Central District of California alleging that the Banks outside 15 appraisal companies proximately caused the same losses that the FDIC alleges the officer 16 defendants supposedly caused. See FDIC v. Corelogic Valuation Servs., LLC, No. SACV11-704 17 DOC (ANx) (C.D. Cal. May 9, 2011); FDIC v. LSI Appraisal, LLC, No. SACV11-706 JST 18 (MLGx) (C.D. Cal. May 9, 2011) (the Appraisal Vendor Lawsuits). The FDICs assertion that 19 the appraisal companies superseding acts caused the losses here is fatal to the FDICs claims. 20 And, the FDICs contradictory causation allegations cannot be accepted as true. 21 Finally, the FDIC has failed to make any particularized allegations under Rule 9(b) of the
22 Federal Rules of Civil Procedure that would transform the Rotellas ordinary financial planning 23 into fraudulent conveyances. The truly commonplace estate planning measure of putting a home 24 25 26 27
Hearing on the Role of Regulators in Exercising Their Supervision of Washington Mutual Bank from 20042008: Hearing before the Perm. Subcomm. On Investigations of the Committee on Homeland Security and Governmental Affairs of the U.S. Senate, 111th Congress, Statement of Jon T. Rymer, Inspector General, FDIC (April 16, 2010) at 10, http://www.fdicoig.gov/testimony /T10-01_04-16-10.shtml (last visited June 16, 2011).
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1 into a qualified trust, for example, hardly rises to the level of a fraudulent conveyance. That 2 there were pending lawsuits against Mr. Rotella at the time of the alleged transfers is of no 3 moment given thatas the FDIC knowsMr. Rotella was protected at all times both by 4 directors and officers insurance as well as an indemnification agreement with Washington 5 Mutual. And the meritless claims the FDIC is asserting against Mrs. Rotella (who is separately 6 moving to dismiss for lack of personal jurisdiction) and Mrs. Killinger demonstrate the in 7 terreroem purpose of this lawsuit. 8 9 10 11 As WaMus federal regulators, the FDIC and OTS oversaw the bank. Unlike Messrs. 12 Rotella and Schneider, who did not join WaMu until January 2005 and August 2005, 13 respectively (see Compl. 15, 16), the FDIC and OTS knew in the Summer of 2004 that the 14 WaMu Board of Directors reviewed and later approved a five-year plan guiding WaMu to 15 undertake a higher risk business strategy. (See Compl. 2225.) Although the FDIC now 16 vigorously takes issue with the five-year plan, at the time the plan was conceived and approved, 17 neither the FDIC nor the OTS questioned this strategy. In fact, both the FDIC and the OTS 18 agreed that WaMu deserved a fundamentally sound rating until July 2008just two months 19 before WaMu was seized. (See OIG Report, supra note 2, at 45 (FDIC did not challenge the 20 OTS CAMELS composite rating for WaMu in any year except for the composite 3 rating 21 assigned by OTS in July 2008. FDIC did not challenge those prior ratings because FDIC 22 believed the CAMELS composite ratings were appropriate.).) 23 The following chart shows the OTSs CAMELS ratings of WaMu since 2003well 24 before the five-year plan was approvedand illustrates that the five-year plan did not affect the 25 rating. The composite ratings range on a scale from 1 (best) to 5 (worst), and reflect the 26 agencys assessment according to the following definitions: 1=Sound in every respect; 27
Accordingly, the Court should dismiss the Complaint in its entirety. FACTUAL BACKGROUND A. During the Relevant Time Period, Neither the FDIC Nor the OTS Raised Any Red Flags about WaMu
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1 2=Fundamentally Sound; 3=Exhibits some degree of supervisory concern in one or more of the 2 component areas (i.e., capital adequacy, asset quality, management, earnings, liquidity, 3 sensitivity to market risk); 4=Generally exhibits unsafe and unsound practices or conditions; 4 5=Exhibits extremely unsafe and unsound practices or conditions; exhibits a critically deficient 5 performance; often contains inadequate risk management practices relative to the institutions 6 size, complexity, and risk profile; and is of the greatest supervisory concern. (See Uniform 7 Financial Institutions Rating System, http://www.fdic.gov/regulations/laws/rules/5000-900.html 8 at 16; 62 Fed. Reg. 752, 753 (Jan. 6, 1997).) 9 10 11 12 13 14 15 16 17
Report Transmittal Date Capital Adequacy Asset Quality Management Earnings Liquid Assets Sensitivity to Risk Composite Rating
8/22/2003 9/13/2004 8/29/2005 8/29/2006 9/18/2007 2/27/2008 6/30/2008 9/19/2008
2 2 2 2 2 2 3 3
2 2 2 2 2 3 4 4
2 2 2 2 2 2 3 3
2 2 2 2 2 4 4 4
2 2 2 2 1 3 3 4
3 3 2 2 2 2 2 2
2 2 2 2 2 3 3 4
In addition, the FDIC assigned its own CAMELS rating to WaMu. (See Wall Street &
18 the Financial Crisis: Anatomy of a Financial Collapse, Staff Report by the Perm. Subcomm. on 19 Investigations of the Comm. on Homeland Sec. & Governmental Affairs of the U.S. Senate, Apr. 20 13, 2011, at 37, http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf 21 (last visited June 16, 2011).) But it was not until September 18, 2008 that the FDIC 22 independently downgraded the bank for the first time. (Id. at 229.) As the OIG report explained, 23 WaMu remained in the highest-rated (lowest-risk) deposit insurance risk category from January 24 2003 until December 2007 and in the second highest-rated deposit insurance category from 25 March to June 2008. FDIC monitoring did not influence WaMus deposit insurance risk 26 category because the risk category was based on WaMus consistent CAMELS composite 2 27 fundamentally soundrating and WaMus regulatory capital level. (OIG Report, supra note
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1 2, at 36.) Thus, the FDIC did not foresee the looming financial meltdown when it was WaMus 2 regulatorbut has filed a complaint predicated on the fanciful notion that Defendants were 3 negligent because they should have predicted what the FDIC did not. 4 5 During the countrys financial meltdown, WaMu faced repeated runs on deposits and in 6 early September 2008, the FDICthrough Chairman Sheila Bairgave WaMu until September 7 30, 2008 to find a buyer for the bank. (See Kirsten Grind, The Downfall of Washington Mutual, 8 Puget Sound Bus. Journal, Sept. 27, 2009, http://www.bizjournals.com/seattle/stories/2009/09/28 9 /story1.html (last visited June 28, 2011) (Sept. 27 PSBJ).) In the following weeks, WaMus 10 management worked tirelessly to find a possible buyershopping the bank on the East Coast, 11 and inviting potential buyers to WaMus headquarters in Seattle to pore over the banks books. 12 (Id.) During this time, the FDIC undercut WaMus efforts to sell the bank in an open-market 13 transaction. (Id.) The FDIC began to secretly solicit bidsa clear sign to potential buyers that 14 seizure was imminent and a signal they could obtain the bank at a bargain price rather than a 15 more lucrative private sale price. (See Kirsten Grind, The Washington Mutual Decision, Puget 16 Sound Bus. Journal, Dec. 6, 2009, http://www.bizjournals.com/seattle/stories/2009/12/07/ 17 story1.html (last visited June 28, 2011) (Dec. 6, 2009 PSBJ); Heidi N. Moore, How J.P. 18 Morgan Raised $11.5 Billion in 24 Hours, Wall Street Journal, Sept. 29, 2008, Wall Street 19 Journal, http://blogs.wsj.com/deals/2008/09/29/how-jp-morgan-raised-115-billion-in-24-hours/ 20 (last visited June 29, 2011); Dealbook, WaMu Fails, and JPMorgan Steps In, N.Y. Times, Sept. 21 26, 2008, http://dealbook.nytimes.com/2008/09/26/jpmorgan-buys-wamu-assets-after22 government-seizure/?pagemode=print (last visited June 29, 2011).) The FDICs actions 23 undermined any ability of WaMu management to preserve shareholder value by independently 24 selling the bank. Despite Ms. Bairs stated deadline of September 30, the FDIC and OTS entered 25 WaMus headquarters on the evening of September 25, 2008, seized the bank, and 26 choreographed the sale of WaMu to JPMorgan Chase & Co. the same evening. (Sept. 27 PSBJ.) 27
B.
The FDIC Intervenes to the Detriment of Shareholders, Creditors, Employees, and the Seattle Economy
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1 The FDICs premature actions wiped out $7 billion in shareholder equity, created the very 2 creditors it now purports to represent, and imposed thousands of job losses and significant 3 economic hardship in the Seattle area. (Dec. 6, 2009 PSBJ.) If the FDIC had not undermined 4 WaMus efforts to sell the bank, these damages would have been significantly reducedif not 5 eliminated. 6 More fundamentally, the FDICs actions took place despite the fact that WaMus
7 liquidity and capital thresholds remained well above the levels typically required for seizure. 8 (Id.) For example, a bank is considered in danger of being seized if its net liquidity dips below 9 5% of total assets. (Id.) WaMu had $29 billion in net liquidityabout 9.4% of assets and nearly 10 twice the closure threshold on the day it was seized. (Id.) Likewise, WaMus capital exceeded 11 all regulatory minimums. (Id.) Its leverage ratio stood at 7.66% of total assets while regulators 12 consider a level of 5% to be well-capitalized. (Id.; 12 C.F.R. 325.103(b) (2011).) 13 14 C. The FDIC Files Its Complaint Two-and-a-Half Years Later
The FDICs 215-paragraph Complaint spends a paltry 11 paragraphs addressing specific
15 acts by Mr. Rotella and 15 paragraphs addressing specific acts by Mr. Schneider. Elsewhere, the 16 FDIC makes broad claims against all three defendants collectively and fails to differentiate what 17 purportedly wrongful acts each committed. (See, e.g., Compl. 1 (their negligence . . .); 2, 8, 18 182, 184, 185, 188190, 193 (Killinger, Rotella, and Schneider . . . ); 2, 3, 512, 57, 70, 86, 19 88, 90, 91, 93, 95, 96, 98, 100, 103, 107, 116, 119, 136, 141, 142, 153, 155, 156, 161, 165, 170, 20 176, 177, 180, 186, 191, 194196 (Defendants . . . ); 4, 72, 88, 99, 109, 137, 138, 143145, 21 148, 151, 152, 157, 157, 166, 169, 171, 174 (WaMu . . . ); 7 (They . . ..); 2627, 29, 3132, 22 4445 (Killinger and Rotella . . .).) The allegations specific to Messrs. Rotella and Schneider 23 merely establish that they kept the Board apprised of their activities, continually assessed risks, 24 carried out their duties, and attempted to survive the financial crisis. 25 With respect to the FDICs fraudulent conveyance claim against the Rotellas, the FDIC
26 alleges that in early 2008, Mr. and Mrs. Rotella transferred their interest in their home to trusts 27 bearing their own names. (Compl. 204.) The FDICs allegations do not explain how this
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1 common financial planning tool amounts to fraud. And, with respect to Mrs. Rotella in 2 particular, the FDIC does not plead any facts that explain how a transfer by Mrs. Rotella (who 3 the FDIC does not claim to be an FDIC creditor) of her unknownand not describedinterest 4 in the residence to the Esther T. Rotella QPRT 2008 Trust can be a fraudulent conveyance. 5 The FDIC concedes the remaining fraudulent conveyance allegations lack any factual
6 basis as the FDIC makes these allegations of fraud on information and belief. (See Compl. 7 205.) The FDICs allegation [o]n information and belief, Stephen Rotella transferred in 8 excess of one million dollars to Esther Rotella after WaMu failed in September 2008 (id.), fails 9 to set forth the what, when, and how of the purported fraud. 10 11 D. The FDIC Files the Appraisal Vendor Lawsuits
On May 9, 2011, the FDIC filed the Appraisal Vendor Lawsuits against eAppraiseIT and
12 LSI. These complaints are attached hereto as Exhibits A and B, respectively, and Defendants 13 respectfully request that the Court take judicial notice of the allegations pled by the FDIC 14 pursuant to Rule 201 of the Federal Rules of Evidence. 15 In the Appraisal Vendor Lawsuits, the FDIC alleges that unbeknownst to WaMuand
16 the Defendants hereeAppraiseIT and LSI were grossly negligent in conducting appraisals for 17 WaMu, resulting in substantially inflated appraised values. (Ex. A 3; Ex. B 3.) The FDIC 18 also alleges that the appraisal companies breached their contracts with WaMu by failing to 19 follow federal and state law, regulatory guidelines, and the Uniform Standards of Professional 20 Appraisal Practice (USPAP) in performing their appraisal function. (Id.) 21 According to the Appraisal Vendor Lawsuits, eAppraiseIT and LSI engaged in the
22 following grossly negligent conduct resulting in artificially inflated appraisals: (1) use of 23 improper comparables; (2) failure to include adequate comparables; (3) failure to disclose prior 24 sales history; (4) failure to perform site visits; (5) use of appraisers unfamiliar with the area; 25 (6) failure to identify information obtained from interested parties; (7) use of improper factors 26 that impact value; (8) failure to consider factors that impact value; (9) failure to address long 27 unsold listing periods; and (10) inadequate or improper licensing of appraisers. (See Ex. A 43;
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1 Ex. B 43.) In turn, the FDIC alleges WaMu relied on those grossly-inflated appraisals when it 2 provided mortgage loans to borrowers and was forced to charge-off portions of those loans when 3 borrowers subsequently defaulted. (Ex. A 31, 3334; Ex. B 30, 3233.) 4 The FDICs complaints against eAppraiseIT and LSI demonstrate conflicting theories of
5 fault for WaMus alleged damages. The FDIC claims WaMu relied upon appraisals performed 6 by LSI and eAppraiseIT for loans WaMu held for investment rather than selling into the 7 secondary marketthe same portfolio the FDIC targets in the instant suit. (Compare Compl. 2 8 with Ex. A 3 and Ex. B 3.) The FDIC claims that but for the inflated appraisal services 9 provided by LSI and eAppraiseIT (and corresponding breaches of contract), WaMu would not 10 have made the residential mortgage loans at issue and would not have suffered losses on those 11 loans. (Ex. A 3:13, 12:1617; Ex. B 3:11, 12:2122.) The FDIC further claims that it was 12 clearly foreseeable to eAppraiseIT and LSI that WaMu would incur losses on loans made in 13 reliance on the inflated appraisals. (Ex. A 3; Ex. B 3.) 14 The FDIC calculates that as a direct and proximate result of eAppraiseITs and LSIs
15 gross negligence, WaMu suffered damages in the amount of at least $129,102,303.77 and 16 $154,519,071.10, respectively. (Ex. A 45, 18:4-5; Ex. B 45, 17:24-25). The FDIC also 17 claims that as a direct and proximate result of eAppraiseITs and LSIs breaches of their 18 respective agreements, WaMu suffered damages in the amount of at least $113,140,271.76 and 19 $146,168,762.34, respectively. Finally, the FDIC states that it bases its complaints on mere 20 samples of a few hundred of the hundreds of thousands of appraisals eAppraiseIT and LSI 21 performedspecifically, 259 of the 260,000 eAppraiseIT appraisals and 292 of the 386,000 LSI 22 appraisals provided to WaMu. (Ex. A 26, 31; Ex. B 28, 30.) Incredibly, the FDIC alleges 23 97% of the appraisals contained USPAP violations and 75% of the appraisals contained 24 multiple egregious violations of USPAP and appraisal industry standards. (See Ex. A 31; Ex. 25 B 30.) Thus, once the FDIC analyzes the remaining 259,741 eAppraiseIT appraisals and the 26 385,708 LSI appraisals, it will likely seek billions of dollars in damages. 27
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1 2
LEGAL STANDARD Federal Rules of Civil Procedure 8(a)(2) and 12(b)(6) govern motions to dismiss for
3 failure to state a claim upon which relief can be granted. A complaint must allege enough facts 4 to state a claim to relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 5 570 (2007). To avoid dismissal, a complaint must contain more than a formulaic recitation of 6 the elements of a cause of action; it must contain factual allegations sufficient to raise a right 7 to relief above the speculative level. Id. at 555. The pleading must contain something more . . 8 . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of 9 action. Id. (citation omitted). The Court need not accept conclusory allegations in the 10 complaint as true; rather, it must examine whether [they] follow from the description of facts as 11 alleged by the plaintiff. Holden v. Hagopian, 978 F.2d 1115, 1121 (9th Cir. 1992). 12 Where a plaintiff alleges fraud, Rule 9(b) of the Federal Rules of Civil Procedure requires
13 the plaintiff to plead particularized allegations of the circumstances constituting fraud. In re 14 GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547 (9th Cir. 1994) (superseded by statute on other 15 grounds). See also Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009) (finding that 16 any claim grounded in fraud, even where fraud is not a necessary element of the claim, must 17 satisfy the particularity requirement of Rule 9(b)); In re Daisy Sys. Corp., No. C-92-1845-DLJ, 18 1993 WL 491309, *9 (N.D. Cal. Feb. 3, 1993) (applying Rule 9(b) to fraudulent transfer claim). 19 The purpose of Rule 9(b) is to ensure a defendant has adequate notice of the precise 20 misconduct with which it is charged and safeguard its reputation and goodwill from groundless 21 accusations of fraud. See, e.g., Bly-Magee v. Cal., 236 F.3d 1014, 1018 (9th Cir. 2001) 22 (affirming the lower courts dismissal of qui tam claims because they contained only conclusory 23 assertions without supporting factual allegations). Thus, [t]o allege fraud with particularity, a 24 plaintiff must set forth more than the neutral facts necessary to identify the transaction, it must 25 set forth specific facts demonstrating what is fraudulent about the transaction and why it is 26 fraudulent. In re GlenFed., 42 F.3d at 1548. In the context of a fraudulent transfer claim, failure 27 to allege how or under what conditions the transfer occurred is a fatal pleading defect under
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1 Rule 9(b). In re Daisy, 1993 WL 491309, at *11; see Global View Ltd. Venture Capital v. Great 2 Cent. Basin Exploration, L.L.C., 288 F. Supp. 2d 473, 479 (S.D.N.Y. 2003) (fraudulent 3 conveyance claim should allege the specifics of the purported fraud including the time and 4 amount of transfer, the identification of what was transferred, and how the transfer occurred). 5 6 I. 7 8 9 ARGUMENT THE FDICS COMPLAINT FAILS TO STATE A NEGLIGENCE-BASED CLAIM AGAINST DEFENDANTS A. Washingtons Business Judgment Rule Insulates Officers from Lawsuits Attacking Allegedly Mistaken but Good Faith, Informed Business Decisions
Business decision-makers must operate in the real world, with imperfect information,
10 limited resources, and an uncertain future. In re Citigroup Inc. Sholder Deriv. Litig., 964 A.2d 11 106, 126 (Del. Ch. 2009). The corporate officers function is to encounter risks and to confront 12 uncertainty, and a reasoned decision at the time made may seem a wild hunch viewed years later 13 against a background of perfect knowledge. Joy v. North, 692 F.2d 880, 886 (2d Cir. 1982). 14 The circumstances surrounding a corporate decision are not easily reconstructed in a courtroom 15 years later, and thus a corporate officer who makes a mistake in judgment as to economic 16 conditions will rarely, if ever, be found liable for damages suffered by the corporation. Id. at 17 885-86. Accordingly, [c]ourts are reluctant to interfere with the internal management of 18 corporations and generally refuse to substitute their judgment for that of the directors. Nursing 19 Home Bldg. Corp. v. DeHart, 13 Wn. App. 489, 498, 535 P.2d 137, 143 (1975) (explaining that 20 business judgment rule immunizes management from liability for good faith decisions). 21 Washington courts review business decisions under the business judgment rule and
22 infrequently reverse a business decision. Lane v. City of Seattle, 164 Wn. 2d 875, 885, 194 P.3d 23 977, 979 (2008). Under the business judgment rule, corporate officers cannot be held liable for 24 mere mistake or errors of judgment . . . when they act without corrupt motive and in good faith. 25 DeHart, 13 Wn. App. at 498-99, 535 P.2d at 144 (citation and internal quotation marks omitted). 26 This is true even if the errors are so gross that they may demonstrate the unfitness of the 27
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1 directors to manage the corporate affairs. Id. at 499, 144 (citation and internal quotation marks 2 omitted). The business judgment rule applies to both directors and officers of a corporation. 3 Para-Med. Leasing, Inc. v. Hangen, 48 Wn. App. 389, 395, 239 P.2d 717, 721 (1987); 4 Grassmueck v. Barnett, No. C03-122P, 2003 WL 22128263, at *3 (W.D. Wash. July 7, 2003) 5 (Pechman, J.). 6 The business judgment rule permits liability only if management reached its decision in
7 bad faith or made an uninformed decision. Absent a showing of fraud, dishonesty, or 8 incompetence, it is not the courts job to second-guess the actions of directors. Schwarzmann v. 9 Assn of Apt. Owners, 33 Wn. App. 397, 403, 655 P.2d 1177, 1181 (Wash. Ct. App. 1982). See 10 also Riss v. Angel, 131 Wn. 2d 612, 632, 934 P.2d 669, 681 (1997) (courts will not substitute 11 judgment for that of management absent fraud, dishonesty, or incompetence); In re Spokane 12 Concrete Prods., Inc., 126 Wn. 2d 269, 279, 892 P.2d 98, 104 (1995) (same); Citron v. Fairchild 13 Camera & Instrument Corp., 569 A.2d 53, 66 (Del. 1989) (requiring failure to act in an 14 informed manner to overcome business judgment rule). B. The Allegations in the Complaint Fall Well within the Protection of the 15 Business Judgment Rule 16 The FDICs Complaint against Mr. Rotella and Mr. Schneider for gross and ordinary
17 negligence fail as a matter of law. Specifically, the FDICs Complaint contains no allegations 18 that Rotella and Schneider acted in bad faith or were uninformed; instead, it attacks Messrs. 19 Rotellas and Schneiders historical business decisionsand the business judgment rule insulates 20 them against such allegations. See supra, Section I.A. Indeed, the FDIC alleges WaMus credit 21 risk managers regularly informed Mr. Rotella and Mr. Schneider of the risks associated with the 22 business strategy. (See, e.g., Compl. 27-30, 39, 44, 47, 51, 58, 85.) The Complaint further 23 alleges that Mr. Rotella and Mr. Schneider weighed those risks against the potential returns for 24 shareholders and determined to continue with the business strategy despite the known risks. 25 (Id. 48, 113 (alleging Mr. Rotella identified a laundry list of risk factors that WaMu faced in 26 December 2005); id. 105 (alleging Mr. Rotella was worried about taking on more credit risk 27
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1 if a credit downturn occurred); id. 67 (alleging Mr. Schneider advocated for continued focus 2 on subprime originations even though the subprime market experienced a market correction); 3 id. 73 (alleging Mr. Schneider thought [c]urrent mortgage market conditions presented an 4 opportunity to gain a competitive advantage and add higher quality assets at attractive risk 5 adjusted returns); id. 74 (alleging Mr. Schneider saw [o]pportunities to grow by applying 6 risk-based pricing and economic capital).) 7 Because the Complaint contains no allegations that Messrs. Rotella or Schneider acted in
8 bad faith or without knowledge of the risks in reaching their decisions, the business judgment 9 rule shields them from liability. The Court should dismiss the negligence-based claims. 10 II. 11 12 THE FDIC CANNOT ADEQUATELY ALLEGE THAT THE DEFENDANTS CONDUCT PROXIMATELY CAUSED THE BANKS FAILURE In its Complaint, the FDIC contends Defendants caused Washington Mutual Bank to
13 incur losses as a result of their purported focus on higher risk products. See id. 175-177. In 14 the Appraisal Vendor Complaints filed less than two months later, the FDIC pled that WaMus 15 outside appraisal vendors engaged in grossly negligent conduct resulting in artificially inflated 16 appraisals and that [b]ut for the inflated appraisal services by [eAppraiseIT and LSI], WaMu 17 would not have made the residential mortgage loans at issue and would not have suffered losses 18 on those loans. (Ex. A 3; Ex. B 3 (emphasis added).) These allegations are fatal to the 19 FDICs proximate cause allegations which, in turn, is fatal to the negligence claims. Oki 20 Semiconductor Co. v. Wells Fargo Bank, 298 F.3d 768, 777 (9th Cir. 2002) (affirming dismissal 21 of action for failure to meet all elements of negligence); see also, e.g., Reddy v. Litton Indus., 22 Inc., 912 F.2d 291, 296-97 (9th Cir. 1990) (affirming denial of leave to amend because plaintiff 23 could only plead the elements of a cause of action by contradicting prior pleading); Am. W. 24 Airlines, Inc. v. GPA Group, Ltd., 877 F.2d 793, 801 (9th Cir. 1989) (affirming dismissal and 25 denial of leave to amend when revised allegations could not be proven because they would 26 contradict sworn affidavits); In re Sunrise Sec. Litig., 138 F.R.D. 60 (E.D. Pa. 1991) (In order to 27
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1 prove its negligence claims . . . the FDIC must demonstrate first that the defendants were 2 negligent and second that such negligence was a proximate cause of the losses sustained.);. 3 First, the Appraisal Vendor Complaints allegations amount to judicial admissions that
4 WaMus losses in its held-for investment portfolio were not caused by Defendants alleged 5 action or inactionbut by a third partys gross negligence in virtually every appraisal the FDIC 6 reviewed. See Hakopian v. Mukasey, 551 F.3d 843, 846 (9th Cir. 2008) (Allegations in a 7 complaint are considered judicial admissions) (citation omitted)); Walaschek & Assocs., Inc. v. 8 Crow, 733 F.2d 51, 54 (7th Cir. 1984) ([p]leading in one proceeding is admissible and 9 cognizable as an admission in another). A superseding cause relieves [a defendant] from 10 liability. Restatement (Second) of Torts 440, Comment B (2010). A superseding cause is an 11 act of a third person or other force which by its intervention prevents the actor from being liable 12 for harm to another which his antecedent negligence is a substantial factor in bringing about. 13 Id. 440. See Schooley v. Pinchs Deli Market, Inc., 134 Wn. 2d 468, 482, 951 P.2d 749, 756 14 (1998) (A defendants negligence is a proximate cause of the plaintiffs injury only if such 15 negligence, unbroken by any new independent cause produces the injury complained of.). 16 Second, in light of the causation allegations in the Appraisal Vendor Lawsuits, the FDIC
17 has failed to allege a claim to relief that is plausible on its face. Twombly, 550 U.S. at 555, 18 570. The Court need not accept as true the FDICs allegations that the FDIC itself contradicts in 19 other pleadings filed in different courts. Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 20 2000) (court need not accept as true allegations that contradict facts that may be judicially 21 noticed by the court); see also Minnick v. Clearwire US, LLC, 683 F. Supp. 2d 1179, 1188 (W.D. 22 Wash. 2010) (Pechman, J.) (the documents Plaintiffs incorporate by reference undermine the 23 allegations in the Complaint. . . . The Court is left with Plaintiffs conclusions of law, which are 24 insufficient to state a claim.) (citing Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 129596 25 (9th Cir. 1998)). Indeed, in Churchill v. Barach, 863 F. Supp. 1266, 127677 (D. Nev. 1994)a 26 case directly on pointthe court granted a motion to dismiss because the plaintiff accused two 27 defendants of causing her termination in two different lawsuits. In one suit, plaintiff alleged that
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1 defendant committed tortious interference in her employment relationship. Id. at 1276. In 2 response, defendant explained that plaintiff had filed a separate suit against another defendant 3 alleging that the other defendant caused her termination. Id. The court granted the first 4 defendants motion to dismiss because plaintiffs allegations in the second case revealed 5 defendant was not the proximate cause of her damage. Id. at 127677. 6 Accordingly, because the FDIC has failed to plausibly plead proximate cause, the Court
7 should dismiss its Complaint. See, e.g., Nguyen v. Boeing Co., No. C10-0415MJP, 2010 WL 8 2102501, at *4 (W.D. Wash. May 25, 2010) (dismissing negligence claim for failing the 9 Iqbal/Twombly requirements completely as plaintiff did not plead with any specificity what the 10 duty is, what injury was suffered, or the proximate cause of the breach). 11 III. 12 13 THE BREACH OF FIDUCIARY DUTY CLAIM DUPLICATES THE NEGLIGENCE CLAIMS, AND THE COURT SHOULD DISMISS IT Count III of the Complaint for breach of fiduciary duty is based upon and incorporates
14 by reference the same facts supporting the negligence claims. (Compl. 192196.) It thus 15 duplicates Counts I and II. As such, the Court should dismiss it. See Swartz v. KPMG LLP, 476 16 F.3d 756, 766 (9th Cir. 2007) (per curiam) (claim that was merely duplicative was properly 17 dismissed); Hua v. Boeing Corp., No. C08-0010RSL, 2009 WL 1044587, at *5 (W.D. Wash. 18 Apr. 17, 2009) (Plaintiffs negligent supervision claim is based on the same facts that support 19 his claim against Boeing for unlawful discrimination. It is therefore duplicative, and, under 20 Washington law, must be dismissed.); Jacobson v. Wash. State Univ., No. CV-05-0092-FVS, 21 2007 WL 26765, at *11 (E.D. Wash. Jan. 3, 2007) (A claim is duplicative and must be 22 dismissed under Washington law when the plaintiff asserts the same factual basis for two 23 claims.); Beringer v. Standard Parking OHare Joint Venture, Nos. 07 C 5027, 07 C 5119, 24 2008 WL 4890501, at *4 (N.D. Ill. Nov. 12, 2008) (dismissing negligence and breach of 25 fiduciary duty claims because both counts involve the same operative facts, the same injury, and 26 require proof of essentially the same elements); CMMF, LLC v. J.P. Morgan Inv. Mgmt. Inc., 27 915 N.Y.S.2d 2, 6 (App. Div. 2010) (affirming dismissal of negligence and breach of fiduciary
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1 duty claims as duplicative of breach of contract claim); Awai v. Kotin, 872 P.2d 1332, 1337 2 (Colo. App. 1993) (affirming dismissal of breach of fiduciary duty claim as duplicative where 3 [t]he factual allegations in support of this claim are the same as those in support of the claim of 4 negligence); Resolution Trust Corp. v. Vanderweele, 833 F. Supp. 1383, 1386 (N.D. Ind. 1993) 5 (dismissing breach of fiduciary duty claim because it amount[ed] to nothing more than a 6 reformulation of the negligence claim). 7 8 IV. 9 10 Accordingly, Count III should be dismissed. THE FDICS ALLEGATIONS OF FRAUDULENT CONVEYANCE DO NOT SATISFY THE PLEADING REQUIREMENTS OF RULES 9(b) OR 8(a) OF THE FEDERAL RULES OF CIVIL PROCEDURE The FDIC purports to seek relief pursuant to the Washington Uniform Fraudulent
11 Transfer Act, RCW 19.40.011 et seq., which provides remedies to creditors in the event of 12 fraudulent transfers by debtors. RCW 19.40.041, 19.40.071. A creditor under the statute 13 means a person who has a claim. RCW 19.40.011(4). Where the purported creditor has no 14 underlying enforceable claim, the UFTA does not provide the Plaintiff with a remedy. Natl 15 Ctr. for Empt of the Disabled v. Ross, No. CV 05-2014-PHX-JAT, 2006 WL 778647, at *8 (D. 16 Ariz. Mar. 27, 2006) (finding only one who has a valid claim and right to payment[] may attack 17 a conveyance as fraudulent). Because the FDIC has no enforceable claims under Counts I, II, 18 and III, its claim for relief under the fraudulent transfer statute (Count V) fails as a matter of law. 19 Moreover, for the reasons set forth below, Count V does not satisfy the pleading requirements of 20 Rules 9(b) or 8(a) of the Federal Rules of Civil Procedure. 21 22 A. The FDIC Does Not Sufficiently Plead Its Allegation Concerning an Alleged Transfer of $1 Million
Paragraph 205 of the FDICs Complaint alleges, in full: On information and belief,
23 Stephen Rotella transferred in excess of one million dollars to Esther Rotella after WaMu failed 24 in September 2008. Where allegations of fraud thus rest only on information and belief, the 25 complaint must state the factual basis for the belief. Neubronner v. Milken, 6 F.3d 666, 672 26 (9th Cir. 1993); see also Kranz v. Koenig, 240 F.R.D. 453, 456 (D. Minn. 2007) (dismissing 27
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1 fraudulent transfer claim for failing to satisfy Rule 9(b) by, inter alia, not identifying the source 2 of the information for the allegations based on information and belief). The FDICs Complaint 3 fails to do so. For this reason alone, the Court should dismiss the FDICs bald assertions of fraud 4 concerning the purported one million dollar fraudulent conveyance. 5 Moreover, Paragraph 205 fails to identify what was transferred, when the transfer
6 took place, or how the transfer was made. Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 7 (9th Cir. 2009); see also Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997); Swartz, 476 F.3d 8 at 764 (fraud allegations should include an account of the time, place, and specific content of 9 the false representations as well as the identities of the parties to the misrepresentations); Global 10 View, 288 F. Supp. 2d at 479 (a claim of fraudulent conveyance should allege the specifics of the 11 purported fraud including the time and amount of transfer, the identification of what was 12 transferred, and how the transfer occurred). Identifying an amount in excess of one million 13 dollars does not identify the what of a fraudulent transfer with particularity under Rule 9(b). 14 In fact, in excess of one million dollars includes more numbers than it excludes. Similarly, the 15 allegation that the transfer occurred sometime after September 2008 cannot satisfy the when 16 prong of Rule 9(b) because it includes a time period spanning over two years. Further, the FDIC 17 makes no allegations as to how the alleged transfer was made. In sum, the FDIC alleges 18 Stephen Rotella gave Esther Rotella, in some unspecified way, some unspecified amount of 19 money, at some point in time after September 2008. Such vague allegations will not satisfy Rule 20 8, much less Rule 9(b)s heightened standards. See, e.g., In re Motorwerks, Inc., 371 B.R. 281, 21 29394 (Bankr. S.D. Ohio 2007) (trustees allegations fail to satisfy Rule 8 where trustees lack 22 of specificity fail[ed] to provide [the bank] with notice of the underlying transfers to be 23 avoided[,] hindering the banks ability to prepare an adequate answer and affirmative defenses). 24 25 Paragraph 204 of the FDICs Complaint alleges, in full: 26 27 In or about March or April 2008, Stephen Rotella and his wife, Esther Rotella, transferred their residence in Orient, New York, to two irrevocable QPRTs dated
B.
The FDICs Allegations Regarding the Transfer of Their Residence Fail As a Matter of Law
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March 14, 2008, named the Stephen J. Rotella QPRT 2008 Trust (which appointed Stephen Rotella as trustee) and the Esther T. Rotella QPRT 2008 Trust(which appointed Esther Rotella as trustee).
3 Compl. 204. 4 The FDICs allegation that Esther Rotella transferred her interest in the residence into the
5 Esther Rotella Trust has no significance under Washingtons Uniform Fraudulent Transfer Act 6 because the FDIC does not allege that Esther Rotella is a debtor under the statute or that the 7 FDIC is a creditor of Esther Rotella. See Premier Capital, Inc. v. Klein, 776 N.Y.S.2d 74, 76 8 (N.Y. App. Div. 2004) (finding transfer of real property to defendants wife was not fraudulent 9 as to defendants wife because she was not alleged to be a debtor of the plaintiffs assignor). As 10 such, the Complaint provides no factual basis for the assertion that Esther Rotella intended a 11 transaction to hinder, delay or defraud creditors. In re Daisy, 1993 WL 491309, at *9. 12 Further, nowhere in the Complaint does the FDIC allege that Esther Rotella believed or should 13 have reasonably believed that she would incur debts beyond her ability to pay as they became 14 due. Therefore, the FDIC does notand cannotclaim that it suffered injury by Esther 15 Rotellas transfer to the Esther Rotella Trust. Indeed, these allegations fail even under Rule 8s 16 standard as they are implausible on their face. See Twombly, 550 U.S. at 570. 17 The FDICs allegations of actual intent (Compl. 206(a)(e)) are likewise insufficient.
18 The FDIC does not allege that Esther Rotella was a named defendant in any lawsuits at the time 19 of the transfer, that the transfer of her interest in the residence was concealed, or that she failed to 20 properly record the trust according to the laws and regulations governing the public recording of 21 real property. The only actual intent allegation is that Esther Rotella retained an interest in her 22 share of the residence by remaining a trustee, and that she continued to live in the property after 23 the trust was created. These two facts are not sufficient to uphold a fraudulent transfer allegation 24 against Esther Rotella. Kearns, 567 F.3d at 1124 (Averments of fraud must be accompanied by 25 the who, what, when, where, and how of the misconduct charged). 26 Likewise, the FDICs allegations of actual intent fall short as to Stephen Rotella. For
27 example, the FDIC alleges Stephen Rotella had been personally named as a defendant in
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1 numerous lawsuits at the time of these transfers, which posed a potential exposure far in excess 2 of his means. (Compl. 206(a).) Such vague and conclusory allegations cannot satisfy Rule 3 9(b). Though the FDIC alleges that these so-called numerous lawsuits exposed Stephen 4 Rotella to debts far in excess of his means, the FDIC fails to allege with any particularity how 5 these suits, against which Mr. Rotella was insured, posed a risk to his personal assets. At the 6 time of the alleged transfers, Mr. Rotellas means included $250 million in insurance coverage 7 and an obligation by WaMu to indemnify him in connection with the lawsuits. In addition, the 8 FDICs claim that the transfers were not disclosed to or were concealed from his present and 9 future creditors cannot be made on information and belief without citing the source of the 10 belief. See Neubronner, 6 F.3d at 672 11 Finally, the FDICs constructive fraud allegations fail. Esther Rotella is altogether absent
12 from such allegations (see Compl. 207), and they impermissibly parrot the statutory language 13 without providing sufficient supporting facts. See Twombly, 550 U.S. at 555 (a formulaic 14 recitation of the elements of a cause of action will not survive a motion to dismiss); compare 15 Compl. 207 to Wash. Unif. Fraud. Transfer Act, RCW 19.40.041(a)(2) & (2)(ii). 16 Accordingly, for these reasons, the Court should dismiss the FDICs fraudulent
17 conveyance allegations. 18 V. 19 THE FDICS ASSET FREEZE CAUSE OF ACTION LIKEWISE FAILS In Count VI of the Complaint, the FDIC seeks a preliminary injunction: (i) freezing the
20 supposedly fraudulently transferred assets and (ii) requiring Defendants to provide 30 days 21 advance notice to the FDIC, during the pendency of this litigation and any subsequent judgment 22 in favor of FDIC, of any intended future transfers of their remaining assets in the amount of 23 $10,000 or more in a single transaction. (Compl. 212.) Because Counts I, II and III fail as a 24 matter of law, the FDICs claim for injunctive relief fails as a matter of law. See, e.g., Winter v. 25 Natural Res. Def. Council, Inc., 129 S. Ct. 365, 374 (2008) (requiring plaintiff seeking 26 preliminary injunction to demonstrate likelihood of success on the merits). 27
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CONCLUSION The FDICs complaint against Messrs. Rotella and Schneider does not allege fraud,
3 intentional wrongdoing, bad faith, corporate looting, or uninformed conduct. Absent such 4 allegations, the Court should dismiss the Complaints negligence-based claims (and duplicative 5 breach of fiduciary duty claim) because Defendants are entitled to the protection of 6 Washingtons business judgment rule. Moreover, the FDICs causation allegations fail given the 7 FDICs admissions in separate, later-filed federal lawsuits that the gross negligence of two 8 appraisal companies was the real cause of the losses in the Banks held-for-investment portfolio. 9 Because the FDICs substantive claims fail, the Complaints fraudulent conveyance claim (which 10 also fails under Rules 9(b) and 8(a)) and asset freeze claim cannot withstand a motion to dismiss. 11 Accordingly, this Court should dismiss the Complaint against Messrs. Rotella and Schneider in 12 its entirety. 13 14 Dated this 1st day of July, 2011. DAVIS WRIGHT TREMAINE LLP SIMPSON THACHER & BARTLETT LLP 15 Barry R. Ostrager (pro hac vice) Mary Kay Vyskocil (pro hac vice) 16 425 Lexington Avenue By: /s/ Stephen M. Rummage Stephen M. Rummage, WSBA #11168 New York, New York 10017 17 Tel.: Steven P. Caplow, WSBA #19843 (212) 455-2000 1201 Third Avenue, Suite 2200 Fax: (212) 455-2502 18 Email: bostrager@stblaw.com Seattle, Washington 98101-3045 Tel.: (206) 757-3150 mvyskocil@stblaw.com 19 Fax: (206) 757-7700 -andEmail: steverummage@dwt.com 20 Deborah L. Stein (pro hac vice) stevencaplow@dwt.com 1999 Avenue of the Stars, 29th Floor 21 Los Angeles, California 90067 Tel.: (310) 407-7500 (310) 407-7502 22 Fax: Email: dstein@stblaw.com 23 Attorneys for Stephen J. Rotella and David C. Schneider 24 25 26 27
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CERTIFICATE OF SERVICE I hereby certify that on July 1, 2011, the foregoing was electronically filed with the Clerk
3 of the Court using the CM/ECF system which will send notification of such filing to all counsel 4 of record who receive CM/ECF notification and that the remaining parties shall be served in 5 accordance with the Federal Rules of Civil Procedure. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
CERTIFICATE OF SERVICE FOR STEPHEN J. ROTELLA AND DAVID C. SCHNEIDERS M OTION TO DISMISS CASE NO. 2:11-CV-00459
PAGE 21
DATED this 1st day of July, 2011. DAVIS WRIGHT TREMAINE LLP By: /s/ Stephen M. Rummage Stephen M. Rummage, WSBA #11168 1201 Third Avenue, Suite 2200 Seattle, Washington 98101-3045 Tel.: (206) 757-8136 Fax: (206) 757-7136 Email: steverummage@dwt.com

Rotella's Motion To Dismiss F.D.I.C.'s Complaint

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Rotella's Motion To Dismiss F.D.I.C.'s Complaint

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Case 2:11-cv-00459-MJP Document 53

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The Honorable Marsha J. Pechman

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE

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THE FDICS ASSET FREEZE CAUSE OF ACTION LIKEWISE FAILS ..................... 19

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TABLE OF AUTHORITIES Page(s) CASES

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Defendants Stephen J. Rotella and David C. Schneider (together, Defendants)

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8/22/2003 9/13/2004 8/29/2005 8/29/2006 9/18/2007 2/27/2008 6/30/2008 9/19/2008

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The FDICs 215-paragraph Complaint spends a paltry 11 paragraphs addressing specific

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