Case: 08-11038 Document: 00511001283 Page: 1 Date Filed: 01/11/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 11, 2010
No. 08-11038 Charles R. Fulbruge III
Clerk
LONE STAR FUND V (US), LP; LSF5 BOND HOLDING LLC
Plaintiffs - Appellants
v.
BARCLAYS BANK PLC; BARCLAYS CAPITAL INC
Defendants - Appellees
Appeal from the United States District Court
for the Northern District of Texas
Before JONES, Chief Judge, and GARZA and STEWART, Circuit Judges.
EDITH H. JONES, Chief Judge:
Lone Star Fund V (U.S.), L.P. and LSF5 Bond Holdings, LLC (collectively
“Lone Star” or “Appellants”) allege that Barclays Bank PLC and Barclays
Capital, Inc. (collectively “Barclays” or “Appellees”) engaged in a $60 million
fraud relating to mortgage-backed securities that Barclays sold to Lone Star.
The district court dismissed the case for failure to state a claim. Because Lone
Star fails to allege a misrepresentation in light of the “repurchase or substitute”
clauses in the parties’ mortgage-backed securities contracts, we affirm the
district court's dismissal.
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I. BACKGROUND
Among its other enterprises, Barclays sells mortgage-backed securities.
As their name suggests, mortgage-backed securities are secured by pools of
mortgages. To grossly simplify the series of transactions involved here,
mortgage-backed securities work in the following manner: Mortgages are
collected into a trust, mortgage payments are sent to that trust, then pooled, and
then paid out to the holders of the securities. The quality of the mortgage pool
is crucial. If the mortgage pool comprises loans whose borrowers consistently
pay in a timely manner, securities holders will receive a steady stream of
income. In contrast, if the mortgage pool is “sub-prime,” or at risk for missed
payments, then securities holders may not receive the forecast income stream.
Delinquent mortgages result in smaller payment streams and smaller payments
to securities holders.
This dispute involves two sets of mortgage-backed securities that Barclays
sold to Lone Star. To create the securities, in 2006, Barclays purchased
residential mortgages from NC Capital Corporation (“New Century”) pursuant
to the Mortgage Loan Purchase Agreement (“MLPA”). According to the MLPA's
terms, New Century agreed to indemnify and hold harmless Barclays (or provide
contribution rights where indemnity might not be available) against all losses,
claims, damages, and liabilities in a variety of circumstances, including any
breach of a representation about the mortgages (such as payment defaults), and
any claims made against Barclays by third parties.1 This allowed Barclays to
serve as an effective distributor of mortgage-backed securities. New Century
would bear the risk of having sold bad mortgage loans, while Barclays could
focus on packaging the loans into securities and marketing them to potential
investors.
1
Appellants do not dispute New Century’s indemnification and contribution obligations
to Barclays.
2
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After purchasing the mortgages from New Century, Barclays pooled them
into two separate trusts: the BR2 Trust and the BR3 Trust. The BR2 and BR3
Trusts issued the securities to Lone Star in two separate transactions. In May
2007, Barclays Capital, Inc. as underwriter, sold approximately $45 million in
securities backed by the BR2 Trust mortgages to LSF5 Bond Holdings, LLC
pursuant to a prospectus and prospectus supplement (the “BR2 Supplemental
Prospectus”). In June 2007, in a similar transaction, Barclays Capital, Inc.
underwrote approximately $16 million of securities backed by the BR3 Trust to
LSF5 Bond Holdings, LLC pursuant to a prospectus and prospectus supplement
(the “BR3 Supplemental Prospectus”). Both the BR2 and BR3 Supplemental
Prospectuses included, inter alia, representations and warranties guaranteeing
the quality of the mortgage pools, which together contained more than ten
thousand residential mortgages.2
Shortly after the purchases, Lone Star discovered that 290 mortgages in
the BR2 Trust were more than thirty days overdue (“delinquent”) at the time of
purchase. In a letter dated November 7, 2007, Barclays admitted that 144 of the
mortgages were delinquent and promptly substituted new mortgages to replace
any that were still delinquent. Lone Star investigated the BR3 Trust further
and found that 848 of the loans in the BR3 Trust had been delinquent at the
time of purchase.
In January 2008, Lone Star sued Barclays under both state and federal
law for material misrepresentations and fraud in a Dallas, Texas state court.
Lone Star alleged that, contrary to Barclays’ representations, the BR2 and BR3
Trusts had a substantial number of delinquent loans, and that the
misrepresentations constituted fraud. Barclays removed the case to federal
court pursuant to 28 U.S.C. §§ 1334(b) and 1452(a). The district court accepted
2
On April 2, 2007, however, New Century filed for reorganization in Delaware, and
Barclays later filed a proof of claim for potential indemnification.
3
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the removal, upholding jurisdiction because the dispute was “related to” New
Century’s bankruptcy. Following the removal, Barclays moved to dismiss the
case pursuant to Fed. Rule Civ. Proc 12(b)(6) for Lone Star’s failure to state a
claim. The district court granted the motion. Lone Star appeals.
II. JURISDICTION
Before discussing the merits, this court must first address the issue of
subject matter jurisdiction, which is reviewed de novo. Gasch v. Hartford
Accident & Indem. Co., 491 F.3d 278, 281 (5th Cir. 2007). Bankruptcy
jurisdiction, like all federal jurisdiction, must be based in statute. In re Bass,
171 F.3d 1016, 1022 (5th Cir. 1999). In this case, the MLPA’s indemnity
provisions are sufficient to create a dispute that is “related to” New Century’s
bankruptcy. 28 U.S.C. § 1334(b). Federal courts have “related to” subject matter
jurisdiction over litigation arising from a bankruptcy case if the “proceeding
could conceivably affect the estate being administered in bankruptcy.” In re
TXNB Internal Case, 483 F.3d 292, 298 (5th Cir.) (citation omitted), cert denied,
128 S. Ct. 613 (2007). “Related to” jurisdiction includes any litigation where the
“outcome could alter, positively or negatively, the debtor’s rights, liabilities,
options, or freedom of action or could influence the administration of the
bankrupt estate.” Id. Barclays maintains that because the MLPA renders New
Century liable for all damages that could be imposed on Barclays by this
litigation, the district court had jurisdiction to rule on the case.
On appeal, Appellants have supplemented their argument and contend
that “related to” jurisdiction only arises if claims for contribution or indemnity
have “accrued.” Appellants mean that a right to indemnity or contribution must
be established such that no further litigation is required to substantiate such
rights against the debtor. Their reliance for this proposition on the Third
Circuit’s decision In re Federal-Mogul Global, Inc., 300 F.3d 368, 382 (3d Cir.
2002), is misplaced. Federal-Mogul concerned tort contribution principles where
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the debtor’s liability for asbestos-caused injuries would ultimately have to be
litigated before contribution rights would “accrue” in favor of other producers of
asbestos products. We take no position on the Federal-Mogul situation. Compare
Arnold v. Garlock, Inc., 288 F.3d 234, 238-39 (5th Cir. 2002) (holding that absent
a judgment against a defendant at time of removal, common law contribution
could not give rise to “related to” jurisdiction). In this case, Barclays relies
heavily, if not exclusively, on contractual indemnity provisions with New
Century containing representations about the quality of the mortgage loans
purchased by Barclays, which are nearly identical to the representations
Barclays made to Lone Star. This circuit has already ruled, moreover, that
contractual indemnification rights may give rise to “related to” jurisdiction. See
In re Stonebridge Techs., Inc., 430 F.3d 260, 266 (5th Cir. 2005) (holding that a
debtor’s letter of credit obligation triggered “related to” jurisdiction in a dispute
between two non-bankrupt third parties).
III. DISCUSSION
Appellate review of a district court’s dismissal for failure to state a claim
under Rule 12(b)(6) is de novo. Jones v. Greninger, 188 F.3d 322, 324 (5th Cir.
1999). The ultimate question in a Rule 12(b)(6) motion is whether the complaint
states a valid claim when all well-pleaded facts are assumed true and are viewed
in the light most favorable to the plaintiff. In re Katrina Canal Breaches Litig.,
495 F.3d 191, 205 (5th Cir. 2007). The court’s review is limited to the complaint,
any documents attached to the complaint, and any documents attached to the
motion to dismiss that are central to the claim and referenced by the complaint.
Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir. 2000).
The court’s task is to determine whether the plaintiff has stated a legally
cognizable claim that is plausible, not to evaluate the plaintiff’s likelihood of
success. Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949 (2009). Further,
as the claims sound in fraud and negligent misrepresentation, Appellants must
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plead the misrepresentations with particularity under Fed. Rule Civ. Proc. 9(b).
Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 723-24 (5th Cir.
2003).3
All of Appellants’4 various claims 5 are predicated upon Barclays’ alleged
misrepresentation that there were no delinquent loans in the BR2 and BR3
Trusts when Lone Star purchased the securities. Consequently, to prevail,
Appellants must successfully allege both that Barclays represented that the BR2
and BR3 Trusts had no delinquent mortgages and that the representations were
false when made. We accept as true for present purposes that there were
delinquent mortgages in the trusts when Lone Star purchased the securities.
Appellants’ remaining burden is to demonstrate how Barclays misrepresented
that the BR2 and BR3 Trusts contained no delinquent mortgages.
To do this, Appellants first reference the BR2 and BR3 Supplemental
Prospectuses, each of which stated:
3
Barclays also contends that Lone Star did not meet the pleading requirements of
Rule 9(b). Lone Star asserts that it does not need to satisfy Rule 9(b) for claims that do not
involve fraud. Belying this contention is the fact that Lone Star’s complaint, on its face, pleads
with particularity the exact representations it claims were false. Moreover, Rule 9(b) does
apply. “[T]his court has applied the heightened pleading requirements when the parties have
not urged a separate focus on the negligent misrepresentation claims” such as when “fraud
and negligent misrepresentation claims are based on the same set of alleged facts.”
Benchmark, 343 F.3d at 724. We need not determine, however, whether Lone Star fully
complied with Rule 9(b) because taken, as a whole, the agreements covered by the complaint
do not allege a misrepresentation in the first instance.
4
Barclays contends that Lone Star Fund V does not have standing to bring any claims
because it did not purchase the securities or suffer any direct harm. Only LSF5 Bond
Holdings LLC, Lone Star Fund V’s subsidiary, purchased the securities and suffered direct
economic harm. If Lone Star Fund V were the sole plaintiff, we might have to address the
issue of standing or real party in interest. However, LSF5 Bond Holdings LLC, which
unquestionably has standing, is co-plaintiff.
5
Appellants alleged claims related to Sections 11, 12(a)(2) and 15 of the Securities Act
of 1933, 15 U.S.C. §§ 77k, 77l(a)(2) and 77o; Section 33 of the Texas Securities Act, Tex. Rev.
Civ. Stat. art. 581-33(A)(2); Tex. Bus. and Comm. Code § 27.01; and common law fraud,
fraudulent inducement, and negligent misrepresentation.
6
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Barclays will make representations and warranties with respect to
each mortgage loan [New Century] sold to the sponsor as of the
closing date, including, but not limited to:
(1) As of the servicing transfer date, except with respect to
the Delinquent mortgage loans described under “The
Mortgage Loan Pool–General” in this prospectus
supplement, no payment required under the mortgage
loan is 30 days or more Delinquent nor has any
payment under the mortgage loan been 30 days or more
Delinquent at any time since the origination of the
mortgage loan.
In addition, both prospectuses reference a Representations and Warranties
Agreement that Barclays signed, detailing similar representations and
warranties about the mortgages. Appellants assert that the Representations
and Warranties Agreement repeated Barclays’ misrepresentations in the
following pertinent clause:
Payments Current. (i) All payments required to be made up to the
Closing Date for the Mortgage Loan under the terms of the
Mortgage Note, other than payments not yet 30 days delinquent,
have been made and credited, [and] (ii) no payment required under
the Mortgage Loan has been 30 days or more delinquent at any time
since the origination of the Mortgage Loan[.]
Appellants also allege that less than two months before New Century went
bankrupt, Barclays touted the due diligence it had performed on the underlying
mortgage loan pools before soliciting Lone Star to buy the Securities.
Standing alone, these “no delinquency” provisions would support
Appellants’ contentions. Nevertheless, the representations are isolated portions
of complex contractual documents that must be read in their entirety to be given
effect. Transitional Learning Community at Galveston, Inc. v. U.S. Office of
Personnel Mgmt., 220 F.3d 427, 431 (5th Cir. 2000) (“[A] contract should be
interpreted as to give meaning to all of its terms—presuming that every
provision was intended to accomplish some purpose, and that none are deemed
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superfluous”); also see Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2, 5
(2d Cir. 1996) (“It is undisputed that the prospectuses must be read as a whole.”)
(internal quotations and citations omitted); Kass v. Kass, 696 NE 2d 174, 180-81
(N.Y. 1998) (“Particular words should be considered, not as if isolated from the
context, but in the light of the obligation as a whole and the intention of the
parties as manifested thereby.”) (quoting Atwater & Co. v. Panama R.R. Co.,
159 N.E. 418, 419 (N.Y. 1927)). Read as a whole, the prospectuses and
warranties provide that the mortgages should be non-delinquent, but if some
mortgages were delinquent then Barclays would either repurchase them or
substitute performing mortgages into the trusts. One way or another, Barclays
committed that the mortgage loan pools would be free of delinquent mortgages.
These “repurchase or substitute” clauses appear in both the BR2 and BR3
Supplemental Prospectuses 6 and the Representations and Warranties
Agreement.7 Moreover, the clauses constitute the “sole remedy” for material
breach for purchasers like Lone Star.
Thus, Barclays did not represent that the BR2 and BR3 mortgage pools
were absolutely free from delinquent loans at the time of purchase. The
agreements envision that the mortgage pools might contain delinquent
6
Both the BR2 and BR3 Prospectuses stated:
The obligations of Barclays to cure such breach or to substitute
or purchase the applicable mortgage loan will constitute the sole
remedies respecting a material breach of any such representation
or warranty to the holders of the [Securities], the servicer, the
trustee, the depositor and any of its affiliates.
7
The Representations and Warranties Agreements included the following clause:
It is understood and agreed that the obligation of [Barclays PLC]
set forth in Section 3(a) to purchase or substitute for a New
Century Mortgage Loan in breach of a representation or
warranty contained in Section 2 constitutes the sole remedy of
the Depositor or any other person or entity with respect to such
breach.
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mortgages, and they impose a “sole” remedy to correct such mistakes. Indeed,
Barclays fulfilled the repurchase or substitute obligations when Lone Star
informed it of the delinquent mortgages in November 2007. Lone Star does not
and cannot allege that Barclays breached its duty to remediate the mortgage
pools.
These provisions are sensible given the difficulties of investigating the
underlying residential mortgages. Even the best due diligence may overlook
problems. A mortgage may become delinquent from a single missed payment.
Some of the loans might fall into delinquency during the pendency of the
transactions leading to an investor’s purchases. Because mistakes are
inevitable, both seller and purchaser are protected by a promise that the
mortgage pools will be free from later-discovered delinquent mortgages. This is
what Barclays promised and Lone Star agreed. As a sophisticated investor
placing a $60 million investment in the trusts, Lone Star has no basis to ignore
these provisions or their consequences.
Consequently, Barclays made no actionable misrepresentations. Even
though the mortgage pools contained delinquent mortgages, Appellants have not
alleged that Barclays failed to substitute or repurchase the delinquent
mortgages. Appellants’ efforts to focus on a single representation amid hundreds
of pages of contractual documents are misplaced. They are bound by the entirety
of the contract.
As a fallback, Appellants assert that the “repurchase or substitute” clauses
are void as against public policy because they waive Appellants’ right to sue for
fraud. This argument is meritless. Under federal and Texas securities laws and
Texas common law, a party cannot waive its right to bring fraud claims by
contract or otherwise. See 15 U.S.C. § 77n; Tex. Rev. Civ. Stat. art. 581-33(L);
Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex. 1997). Rather
than waive Appellants’ right to pursue claims of fraud, the “repurchase or
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substitute” clauses change the nature of Barclays’ representation. If Appellants
had alleged that Barclays falsely represented to prospective investors that it
would repurchase or substitute delinquent mortgages, they might have stated
a case of fraud under the pertinent agreements. This is not their claim.
IV. CONCLUSION
Because a consideration of the parties’ entire agreement reveals that
Barclays has not made any misrepresentations, Appellants’ claims fail as a
matter of law. The district court correctly held that the allegations of
Appellants’ amended complaint do not set forth sufficient facts to state a claim
for relief that is plausible on its face. The judgment of dismissal is AFFIRMED.
10