Opinion
Civil No. 00-269 (JRT/RLE)
September 25, 2001
Thomas B. Heffelfinger, Caryn S. Glover, Robert D. Maher, Marlene A. Petersen, BEST FLANAGAN LLP., Minneapolis, MN; and Philip R. Kaplan, Amy J. Longo, O'MELVENY MYERS LLP., Newport Beach, California, for defendant and third-party plaintiff American Lenders Facilities Inc.
James K. Langdon II and Mitchell Granberg, DORSEY WHITNEY LLP., Minneapolis, MN, for third-party defendant Dain Rauscher.
MEMORANDUM OPINION AND ORDER DENYING THIRD-PARTY DEFENDANT DAIN RAUSCHER'S MOTION TO DISMISS
This matter is before the Court on the motion of third-party defendant Dain Rauscher ("Dain") to dismiss the claims asserted against it by defendant and third-party plaintiff American Lenders Facilities Inc. ("ALFI"). For the reasons that follow, the Court denies Dain's motion.
BACKGROUND
Beginning in 1992, ALFI contracted to provide loan servicing activities for a series of securitized pools of vehicle loans made to borrowers with sub-prime credit. The three securitized loan pools that are the subject of plaintiffs' complaint are known as the First Fidelity 1995-1 Grantor Trust, the First Fidelity 1995-2 Grantor Trust and the First Fidelity 1995-3 Grantor Trust. Each trust is governed by a separate Pooling and Servicing Agreement.
The securitization of automobile loans is accomplished by pooling individual loans and selling participation interests in the proceeds generated by the pools. In this case, First Fidelity Acceptance Corporation bought from dealers and then "pooled" hundreds of loans. It then sold those pools, through subsidiaries, to the various trusts listed above. Certificates representing participation in the principal and interests and other proceeds to be generated from the servicing of the loans held by each trust were then issued as investments.
The 1995-1 Trust is governed by a Pooling and Servicing Agreement dated February 1, 1995. The 1995-2 Trust is governed by a Pooling and Servicing Agreement dated June 1, 1995. Finally, the 1995-3 Trust is governed by a Pooling and Servicing Agreement dated October 1, 1995.
The Pooling and Servicing Agreements set forth the obligations of various parties, including ALFI, in connection with the collection and distribution of proceeds from the underlying auto loans, repossession of sale proceeds, and insurance proceeds. The expectation of the parties was that the Trusts would generate a steady stream of payments from the loan portfolios to the holders of the certificates. However, beginning in 1996 and continuing thereafter, the Trusts failed to generate the level of returns plaintiffs had expected.
As a result, plaintiffs sued ALFI, claiming that the poor performance of the Trusts was the result of ALFI's failure to properly perform its contractual obligations, including, among other things, failing to repossess vehicles within a reasonable time of default, failing to sell repossessed vehicles within a reasonable time, failing to maximize the selling price received for repossessed vehicles, and failing to maximize the amounts recoverable from insurance.
Thereafter, ALFI filed a third-party complaint against several parties, including Dain, for claims of indemnity, contribution and declaratory relief. According to the Second Amended Third-Party Complaint, Dain, a brokerage house, underwrote and sold participations in the Trusts to investors, in the form of two classes of certificates, Class A and Class B, through Private Placement Memoranda ("PPMs"). ALFI alleges that Dain was negligent in carrying out its due diligence duties as underwriter and that ALFI is entitled to indemnity or contribution from Dain or a declaration of such rights for any losses plaintiffs may have incurred.
ANALYSIS
I. Standard of Review
The Federal Rules of Civil Procedure require that a complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a). A claim may be simple and informally pleaded, with few factual averments.
When analyzing a motion to dismiss, the Court presumes all facts alleged in the complaint to be true. Hishon v. King Spalding, 467 U.S. 69, 73 (1984). The complaint must be liberally construed and viewed in the light most favorable to the plaintiff. Id. The Court will dismiss a complaint only when it appears the plaintiff cannot prove any set of facts in support of his claim which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Ossman v. Diana Corp., 825 F. Supp. at 880 (D.Minn. 1993) (dismissal is proper only when "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.").
II. Dain's Motion to Dismiss
In its Second Amended Third-Party Complaint, ALFI alleges that if plaintiffs suffered any recoverable losses from their investment in these Trusts, such losses are attributable, in whole or in part, to the negligent conduct of Dain, the underwriter of the three Trusts. It is the underwriter's responsibility to insure the accuracy of the registration statement. Underwriters also play an important role in pricing the offering and marketing the trusts. In addition, underwriters sometimes place persons on the board of directors of a company whose trusts they have underwritten. Moreover, underwriters may invest in the issuer's trusts. And even if an underwriter does not invest in the issuer's trusts, it will likely be the dominant force in trading the trusts. In re Gap Stores, 79 F.R.D. 283, 300 n. 19 (N.D.Cal. 1978).
Dain alleges that indemnity is barred because there was not an express or implied contract. In addition, Dain claims that there are no grounds for equitable indemnity. Dain also alleges that it does not owe any contribution to ALFI because there was no common liability between the parties. Finally, Dain alleges that there is no need for declaratory relief because neither indemnity nor contribution apply.
ALFI alleges that discovery may lead to evidence that will show an implied contract of indemnity, or that equitable indemnity is met because Dain had continuous involvement through the post-sales period. In the alternative, ALFI alleges that discovery may show common liability due to Dain's involvement in the underwriting and post-sales period. Finally, ALFI alleges that a claim for declaratory relief was properly pled.
Upon consideration and review, the Court concludes that dismissing Dain as a third-party defendant at this time would be premature. The Court cannot find that there are no set of facts that could support a claim against Dain which would entitle ALFI to the relief it seeks. There is the potential for negligence by Dain, which could have occurred anywhere during the underwriting process, during the selling of the trusts, or during post-sales activities. As such, ALFI should be allowed further discovery on this claim. Although ALFI's claim against Dain may not survive a subsequent dispositive motion, the claim is sufficient to survive at this point. Accordingly, the Court denies Dain's motion to dismiss.
ORDER
Based upon all of the files, records and proceedings herein, IT IS HEREBY ORDERED that Dain's motion to dismiss [Docket No. 64] is DENIED.