Regence Blueshield et al vs. BNY Mellon Bank NA, No. 2:2009cv00618 - Document 14 (W.D. Wash. 2009)
Court Description: ORDER denying plaintiffs' 2 Motion for TRO by Judge Robert S. Lasnik.(RS)
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Regence Blueshield et al vs. BNY Mellon Bank NA Doc. 14 1 2 3 4 5 6 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 7 8 REGENCE BLUESHIELD, et al., 9 10 11 12 Plaintiffs, Case No. C09-0618RSL v. ORDER DENYING MOTION FOR A TEMPORARY RESTRAINING ORDER BNY MELLON BANK, N.A., Defendant. 13 14 15 16 I. INTRODUCTION This matter comes before the Court on plaintiffs’ motion for a temporary 17 restraining order requiring defendant BNY Mellon Bank, N.A. (“Mellon” or “defendant”) 18 to (1) terminate plaintiffs’ participation in the securities lending program and terminate all 19 existing loans of plaintiffs’ securities to third parties in the Program, (2) return all of 20 plaintiffs’ securities in the Program, (3) refrain from requiring a collateral insufficiency to 21 be funded by Regence, (4) refrain from crediting to Regence the redemptions by the 22 investment funds that result in illiquid or otherwise non-tradeable lots of one or more 23 securities, (5) refrain from holding all cash collateral (and related investments) held in 24 respect of loans of Regence’s securities, and (6) refrain from continuing to invest cash 25 26 ORDER DENYING MOTION FOR A TEMPORARY RESTRAINING ORDER - 1 Dockets.Justia.com 1 collateral on behalf of Regence, prior to resolution of this lawsuit. 2 3 The Court heard oral argument in this matter on May 12, 2009. For the reasons set forth below, the Court denies the motion. 4 5 6 II. DISCUSSION A. Background Facts. Mellon has served as the custodial bank for seven of the plaintiffs since as early as 7 1996 pursuant to their respective custodial contracts. Mellon is the custodian for 8 approximately $250 million of plaintiffs’ collective assets. Plaintiffs have also agreed to 9 participate in Mellon’s securities lending program (the “Program”) to offset the costs 10 associated with having a custodial relationship with a bank. As part of the Program, 11 Mellon loans plaintiffs’ securities to creditworthy third parties, who are required to post 12 collateral of not less than the value of the loaned securities (the “cash collateral”). As of 13 April 30, 2009, Mellon had loaned plaintiffs’ securities totaling approximately $195 14 million to third parties. The cash collateral is invested in a separate fund; the fund at 15 issue in this case is the Mellon GSL DBT II Collateral Fund Series of the Mellon GSL 16 Reinvestment Trust (“DBT II Fund”). Regence earns a return on the invested cash 17 collateral. 18 During the recent economic credit crisis, one of the structured investment vehicles 19 in the DBT II Fund, referred to as SIGMA, began to fail. Mellon created a new series of 20 DBT II called the Mellon GSL Reinvestment Trust II (the “Sigma Liquidating Fund”) and 21 transferred all of the SIGMA notes held by DBT II into that series. To provide for some 22 liquidity, Mellon divided the remaining assets of DBT II into two categories (1) 23 “cash/overnight assets,” which included cash and any assets having a maturity of one 24 business day or less, and (2) the “terms assets,” which included all remaining assets of 25 26 ORDER DENYING MOTION FOR A TEMPORARY RESTRAINING ORDER - 2 1 DBT II. The term assets were transferred in kind from DBT II to the newly created DBT 2 II Liquidating Fund. 3 On October 1, 2008, Regence gave written notice to defendant to suspend its 4 participation in the Program and sought the return of plaintiffs’ securities. In response, 5 defendant advised Regence that it had three options: (1) immediately withdraw its 6 securities, which would result in realized losses and less than 100% return of the value of 7 its securities, (2) take a pro rata share of the DBT II Fund (a “vertical slice”) and pay for 8 a proportionate share of the associated unrealized loss of the DBT II Fund, or (3) remain 9 passively in the Program and over time reduce the amount of securities on loan until the 10 markets normalized or all the securities had been returned. Plaintiffs chose to do nothing 11 at the time. On November 19, 2008, Mellon advised Regence of its proportionate share 12 of the collateral cash deficiency. On April 14, 2009, Regence sent a second notice to 13 suspend plaintiffs’ participation in the Program and demanded the return of its securities. 14 The parties conducted a telephone call, then Mellon followed up with a written response 15 that led plaintiffs to believe that Mellon would not be returning its securities and would 16 instead liquidate a vertical slice of the collateral pool. Plaintiffs filed this motion for a 17 TRO on May 7, 2009. Currently, the cash collateral Mellon holds for plaintiffs consists 18 of (1) units of DBT II, (2) units in the Sigma Liquidating Fund, and (3) units in the DBT 19 II Liquidating Fund. 20 B. Analysis. 21 1. Applicable Standards. 22 The Supreme Court recently explained, “A plaintiff seeking a preliminary 23 injunction must establish that he is likely to succeed on the merits, that he is likely to 24 suffer irreparable harm in the absence of preliminary relief, that the balance of equities 25 26 ORDER DENYING MOTION FOR A TEMPORARY RESTRAINING ORDER - 3 1 tips in his favor, and that an injunction is in the public interest.” Winter v. Natural Res. 2 Def. Council, Inc., __ U.S. __, 129 S. Ct. 365, 374 (2008). Following Winter, the Ninth 3 Circuit has explained, “To the extent that our cases have suggested a lesser standard, they 4 are no longer controlling, or even viable.” American Trucking Associations, Inc. v. City 5 of Los Angeles, 559 F.3d 1046 at *14-15 (9th Cir. 2009). 6 In determining the appropriate standard, the Court must also consider the type of 7 immediate relief sought. “A prohibitory injunction preserves the status quo.” Stanley v. 8 Univ. of S. Cal., 13 F.3d 1313, 1320 (9th Cir. 1994). In contrast, “[a] mandatory 9 injunction goes well beyond simply maintaining the status quo pendente lite and is 10 particularly disfavored. When a mandatory preliminary injunction is requested, the 11 district court should deny such relief unless the facts and law clearly favor the moving 12 party.” Id. (internal quotation marks and citations omitted). In this case, plaintiffs are 13 requesting affirmative relief: the return of their securities. Requiring that Mellon do so 14 would alter, not preserve, the status quo. Therefore, the relief that plaintiffs seek is 15 subject to heightened scrutiny by the Court. See Dahl v. HEM Pharms. Corp., 7 F.3d 16 1399, 1403 (9th Cir. 1993) (“‘[M]andatory preliminary relief’ is subject to heightened 17 scrutiny and should not be issued unless the facts and law clearly favor the moving 18 party.”) (citing Anderson v. United States, 612 F.2d 1112, 1114 (9th Cir. 1980)). 19 2. 20 Plaintiffs contend that they are entitled to a TRO because Mellon violated the Likelihood of Success on the Merits. 21 parties’ contracts by refusing to return plaintiffs’ securities when requested in violation of 22 the parties’ contracts. Mellon does not dispute that the loans are terminable at plaintiffs’ 23 election and that once plaintiffs give notice, Mellon is required to return assets in some 24 form to plaintiffs. The issue is whether Mellon is required to return plaintiffs’ securities 25 26 ORDER DENYING MOTION FOR A TEMPORARY RESTRAINING ORDER - 4 1 in the same form as plaintiffs lent them to Mellon. That issue is a close call. Section 2 11(a) of the 2006 version of the Securities Lending Contract requires, 3 4 5 The Client may, in its sole and absolute discretion, direct the Lending Agent to terminate any loan of the Client’s securities at any time and for any reason in which event the Lending Agent shall, promptly, upon receipt of notice thereof from the Client, take all steps necessary to cause the termination of such Loan and the return of the loaned securities to the Client’s account within the standard settlement period for such securities. 6 Section 13 of the 1999 agreement provides that upon termination, the lending agent “shall 7 promptly take all reasonable actions to terminate all securities loans then outstanding.” 8 Section 9 of the same agreement provides that if the agreement is terminated and the 9 loaned securities are not returned for any reason, then Mellon must “promptly replace the 10 loaned securities” or if it is unable to purchase the securities on the open market, credit 11 the client’s account with the value of the same. Those provisions seem to contemplate a 12 return of plaintiffs’ actual securities. 13 In response, defendant argues that plaintiffs agreed to bear any losses to its 14 securities. Although defendant’s point is correct, and indeed, undisputed, it does not 15 resolve the issue of what form the returned assets must take. Defendant also argues that 16 its Mellon GSL Reinvestment Trust Declaration of Trust document and the “constituent 17 documents”1 regarding the liquidating funds permit it to impose withdrawal restrictions 18 and require in-kind redemption. On one hand, the securities lending contracts do not 19 incorporate the trust agreement or the constituent documents. Nor do they explicitly 20 permit Mellon to unilaterally amend its contractual obligations. On the other hand, 21 plaintiffs agreed that their money could be invested in the DBT II Fund, which is a trust. 22 According to the trust document, 23 24 25 26 1 Various amendments to the Trust document permit the fund to redeem a client’s interest in part or in whole for cash or in-kind. ORDER DENYING MOTION FOR A TEMPORARY RESTRAINING ORDER - 5 1 Notwithstanding any other provision in this Section 3.5 to the contrary, in accordance with Section 4.4 hereof, the Trustee may in its discretion (or, in the event that authority has been delegated to the Investment Manager pursuant to the Investment Management Agreement, then only at the direction of the Investment Manager) suspend the right of Beneficial Owners to require the Trust to redeem Units. 2 3 4 McDermott Decl., Ex. 2 at Section 3.5(b). However, the import and applicability of the 5 trust document is unclear. If defendant files a dispositive motion, it should clarify those 6 points and the interaction between the trust document and the securities lending contracts. 7 Although the language in the securities lending contracts certainly seems to favor 8 plaintiffs, they have not shown that the facts and the law clearly favor them despite the 9 language in the trust documents. Therefore, they are not entitled to mandatory injunctive 10 relief. 11 3. Likelihood of Irreparable Injury. 12 Plaintiffs must also show a likelihood of “irreparable injury” in the absence of 13 injunctive relief, which includes injuries that cannot be fairly compensated by monetary 14 damages or other forms of relief available at law. See, e.g., Winter, 129 S. Ct. at 374; 15 eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006) (explaining that plaintiff 16 “must demonstrate . . . that remedies available at law, such as monetary damages, are 17 inadequate to compensate for that [irreparable] injury”); Rent-a-Center v. Canyon 18 Television & Appliance, 944 F.2d 597, 603 (9th Cir. 1991). In this case, plaintiffs have 19 failed to show a likelihood of irreparable injury because the alleged harm is economic: the 20 potential loss of funds. Plaintiffs contend that the harm may ultimately be difficult to 21 measure because if defendant retains their securities, it could continue to make 22 investments in unsound ways, resulting in immeasurable losses. However, during oral 23 argument, defense counsel clarified that Mellon is willing to remit to plaintiffs a vertical 24 slice of the collateral pool, minus the approximately $10.5 million in losses incurred. If 25 26 ORDER DENYING MOTION FOR A TEMPORARY RESTRAINING ORDER - 6 1 plaintiffs accepted the vertical slice, they would be free to liquidate those assets or hold 2 them as they choose. Once Mellon remits plaintiffs’ share of the collateral pool, the 3 remaining losses are measurable and the responsibility for shouldering them can be 4 readily adjudicated. 5 Plaintiffs also contend that they are being deprived of their property right in their 6 securities. The alleged property, however, is a fungible economic asset. If plaintiffs 7 choose to accept the vertical slice, then they can enjoy the use of their money prior to an 8 adjudication on the merits. Moreover, pursuant to the securities lending agreement, the 9 borrowers have property rights in the securities until the loans are terminated and the 10 securities are returned. Accordingly, plaintiffs have not shown a likelihood of irreparable 11 injury. 12 4. The Public’s Interest and the Balance of Equities. 13 Finally, plaintiffs must show that the balance of equities tips in their favor, and that 14 an injunction is in the public interest. See, e.g., Winter, 129 S. Ct. at 374. In making this 15 determination, the Court must determine whether the public interest favors the moving or 16 nonmoving party. See Sammartano v. First Judicial Dist. Court in & for the County of 17 Carson City, 303 F.3d 959, 974 (9th Cir. 2002). In this case, if plaintiffs’ motion were 18 granted, defendant would be required to remit all of plaintiffs’ securities to its account, 19 without accounting for any losses plaintiffs’ have incurred. To do so, Mellon contends 20 that it would have to sell plaintiffs’ pro rata portion of the funds, at a loss, to pay for the 21 collateral owed to the third party borrowers, raise additional cash to make up the 22 difference between the value of Regence’s pro rata portion and the collateral owed to the 23 borrowers and recall Regence’s securities on loan to the borrowers. Mellon argues that 24 those actions could unfairly force the remaining participants to absorb plaintiffs’ risk 25 26 ORDER DENYING MOTION FOR A TEMPORARY RESTRAINING ORDER - 7 1 associated with the securities lending. Furthermore, granting this motion could encourage 2 other investors to seek to exit the Program, causing a potential run on the funds. 3 Certainly, similar rushes to withdraw capital have destabilized numerous other funds and 4 in some cases, the banks themselves have failed. The resulting harm to third parties in the 5 funds and to the public could be widespread. 6 Plaintiffs argue that defendant’s argument is misplaced because Mellon could 7 simply provide some of its own cash to stabilize the fund. That assumes, however, that 8 Mellon has large amounts of ready cash, which is unsupported and unlikely in these 9 economic times. Furthermore, because plaintiffs can recoup the vast majority of their 10 capital by taking the vertical slice, they have not shown that the equities favor granting an 11 injunction. 12 At the end of the day, plaintiffs are seeking extraordinary equitable relief: an 13 affirmative injunction and the return of a large sum of money, on a TRO motion without a 14 full hearing of the merits. Plaintiffs, however, have not satisfied their heightened burden 15 of showing that they are entitled to such relief or that they cannot wait the relatively short 16 time needed for a full adjudication on the merits.2 17 III. CONCLUSION 18 For all of the foregoing reasons, Court DENIES the motion for a TRO (Dkt. #2). 19 DATED this 13th day of May, 2009. 20 A Robert S. Lasnik 21 United States District Judge 22 23 24 25 26 2 During oral argument, defendant stated that it would agree to an expedited resolution of this matter. After defendant has answered the complaint, the parties may file a stipulation to facilitate that goal if warranted. ORDER DENYING MOTION FOR A TEMPORARY RESTRAINING ORDER - 8
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