AMBAC ASSUR. v. ADELANTO PUBLIC UTILITY AUTHORITY

696 F. Supp.2d 396

AMBAC ASSURANCE CORPORATION, Plaintiff, v. ADELANTO PUBLIC UTILITY AUTHORITY, Defendant.

No. 09 Civ. 5087(JFK).

United States District Court, S.D. New York.

March 15, 2010.

David W. Dykhouse, Esq., Robert P. LoBue, Esq., Patterson Belknap Webb & Tyler LLP, for Plaintiff Ambac Assurance Corporation.

William M. Marticorena, Esq., A. Patrick Munoz, Esq., Todd O. Litfin, Esq., Rutan & Tucker, LLP, Michael S. O'Reilly, Esq., E. Evans Wohlforth, Jr., Esq., Gibbons P.C., for Defendant Adelanto Public Utility Authority.

Opinion and Order

JOHN F. KEENAN, District Judge.

This action arises from the early termination of an interest rate swap agreement between Piper Jaffray & Company ("Piper Jaffray") and defendant Adelanto Public Utility Authority (the "Authority" or "Defendant"). Plaintiff Ambac Assurance Corporation ("Ambac" or "Plaintiff"), a surety to the agreement, brings claims for reimbursement, breach of contract, and specific performance as a result of an early termination payment it made to Piper Jaffray that has not been reimbursed by the Authority. Before the Court is the Authority's motion to dismiss for lack of subject matter jurisdiction and lack of venue. For the reasons that follow, the motion is denied.

I. BACKGROUND

The following facts are derived from Ambac's Amended Complaint ("Am. Compl.").

Ambac, a Wisconsin corporation with its principal place of business in New York City, is in the business of surety and financial guaranty insurance. The Authority is a public utility authority existing under the laws of California, with its principal place of business in Adelanto, California.

In or about September 2005, the Authority issued $70,635,000 face amount of Variable Rate Revenue Bonds, 2005 Series A and B (Utility System Project) (the "Bonds"). The Bonds were underwritten by Piper Jaffray. Ambac issued a policy of bond insurance with respect to the Bonds, insuring payment of the principal and interest thereon.

Contemporaneously with its issuance of the Bonds, the Authority entered into an interest rate swap agreement (the "Swap Agreement") with Piper Jaffray in order to hedge its risk as the issuer of the Bonds. The Swap Agreement stays in effect for the life of the Bonds, but it may be terminated upon the occurrence of certain events, such as a party's default or bankruptcy. In the event of an early termination, the Swap Agreement provides for certain payments to compensate for the termination.

On September 7, 2005, Ambac issued a surety bond for the Swap Agreement (the "Surety Bond"). The Surety Bond provides that if the Authority were to fail to make certain payments required by the Swap Agreement, including certain termination payments, Ambac would make those payments.

Ambac was not a party to the Swap Agreement, but it is specifically identified in it as the issuer of the Surety Bond and is given the title "Swap Insurer." The Swap Agreement further provides that the Authority shall unconditionally reimburse Ambac, as the Swap Insurer, for any incurred fees, costs, or other expenses resulting from a breach of the Authority's obligations under the Swap Agreement. The Authority is also obligated under the Swap Agreement to reimburse Ambac for any amounts paid under the Surety Bond and any costs of collection and enforcement thereof, with interest at a specified rate.

The Swap Agreement is governed by New York law.¹ Regarding venue, the parties agreed as follows:

With respect to any suit, action, or proceeding relating to this Agreement ("Proceedings"), each party irrevocably —

(i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the exclusive jurisdiction of the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and

(ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party; provided that Party A Piper Jaffray will consent to the transfer of any such Proceedings initiated by Party B the Authority to the United States District Court with jurisdiction of the Government Entity the Authority if prior to seeking such transfer Party B has taken all steps as may be required by the laws that would be applicable in such transferee court to effect the valid waiver of jury trial by Party B in such court.

(Def. Ex. A § 11(b)(1), Schedule Part 3(f).) (the "forum-selection provision").

On November 5, 2008 Moody's Investors Service downgraded Ambac's credit rating. Pursuant to the Swap Agreement, the downgrade of Ambac's credit rating required the Authority either to replace Ambac as the Swap Insurer or to obtain or maintain an unenhanced rating on the Bonds at or above a certain minimum within 30 days. The Authority's failure to satisfy either of those tasks within that time period would allow Piper to terminate the Swap Agreement. According to Ambac, the Authority did not make a good-faith effort to satisfy the terms of the Swap Agreement in either manner. Piper Jaffray chose not to immediately terminate the Swap Agreement; instead, in a letter dated February 5, 2009, Piper Jaffray stated that it "would like to resolve this matter without terminating," but it would do so if the Authority did not make "substantial and prompt progress" in resolving its financial difficulties. (Am. Compl. ¶ 16.)

The Authority failed to resolve its financial difficulties to the satisfaction of Piper Jaffray, and as a result, Piper Jaffray terminated the Swap Agreement and demanded a termination payment of $4,524,000 by notice to the Authority dated June 1, 2009. That same day, June 1, 2009, Ambac filed the instant action against the Authority, seeking the equitable remedies of quia timet and exoneration to compel the Authority to make the termination payment. Ambac made that $4,524,000 payment to Piper Jaffray on June 3, 2009, two days after the notice of termination because, according to Ambac, the Authority "failed to pay the termination payment in a timely manner," rendering Ambac liable for that amount pursuant to its obligations under the Surety Bond. (Am. Compl. ¶ 26.) After making the termination payment to Piper Jaffray, on June 24, 2009, Ambac amended the Complaint to assert claims for breach of contract, reimbursement, and specific performance.

The Authority moves to dismiss the Amended Complaint for lack of subject matter jurisdiction and lack of venue. It claims that although the requirements of diversity jurisdiction are present, the Court is stripped of jurisdiction under the Johnson Act. It further argues that the case does not belong in this district in light of the forum-selection provision of the Swap Agreement.

II. DISCUSSION

A. Standard of Review

On a motion to dismiss for lack of subject matter jurisdiction, plaintiff "has the burden of proving by a preponderance of the evidence that it exists." Makarova v. United States, 201 F.3d 110, 113 (2d Cir.2000). The Court accepts as true all material factual allegations in the Complaint, but "jurisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it." Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir.1998).

"The burden of showing that venue in the forum district is proper falls on the plaintiff." U.S.E.P.A. ex rel. McKeown v. Port Auth. of N.Y. & N.J., 162 F.Supp.2d 173, 183 (S.D.N.Y.2001). All facts must be construed in a light most favorable to the plaintiff, and the Court may consider documents outside of the complaint. See Cartier v. Micha, Inc., No. 06 Civ. 4699, 2007 WL 1187188, at *2 (S.D.N.Y. Apr. 20, 2007).

B. The Johnson Act

Defendant concedes that this case fulfills the requirements of federal diversity jurisdiction under 28 U.S.C. § 1332(a); the parties are diverse and the amount in controversy is well over $75,000. It contends, however, that the Court is stripped of jurisdiction to preside over this case by the Johnson Act, 28 U.S.C. § 1342, which provides:

The district courts shall not enjoin, suspend or restrain the operation of, or compliance with, any order affecting rates chargeable by a public utility and made by a State administrative agency or a rate-making body of a State political subdivision, where:

(1) Jurisdiction is based solely on diversity of citizenship or repugnance of the order to the Federal Constitution; and,

(2) The order does not interfere with interstate commerce; and,

(3) The order has been made after reasonable notice and hearing; and,

(4) A plain, speedy and efficient remedy may be had in the courts of such State.

Id.

The Johnson Act was enacted in 1934 following "a quarter century of agitation to eliminate federal court interference with state control of public utility rates." Note, Limitation of Lower Federal Court Jurisdiction Over Public Utility Rate Cases, 44 Yale L.J. 119, 119 (1934). Before the passage of the Johnson Act, utilities were able to invoke federal diversity jurisdiction to challenge the orders of state agencies or rate-making authorities, a procedure the states objected to because it involved the "federal court's passing upon the validity of the states' regulatory action to the exclusion of a determination by the states' own courts ... and also the expense and delay frequently incident to this type of federal judicial review." Id. As observed by the United States Supreme Court, the Act's legislative history "makes clear that its purpose was to prevent public utilities from going to federal district court to challenge state administrative orders or avoid state administrative and judicial...