Fed. Hous. Agency v. Royal Bank of Scot. Grp. PLC

204 F.Supp.3d 426

FEDERAL HOUSING AGENCY, as Conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, Plaintiff,

v.ROYAL BANK OF SCOTLAND GROUP PLC; RBS Holdings USA, Inc.; RBS Securities, Inc. (f/k/a Greenwich Capital Markets, Inc.); RBS Financial Products, Inc. (f/k/a Greenwich Capital Financial Products, Inc.), RBS Acceptance, Inc. (f/k/a Greenwich Capital Acceptance, Inc. ); Financial Asset Securities Corp. ; Joseph N. Walsh III; Carol P. Mathis; Robert J. McGinnis; John C. Anderson; and James M. Esposito., Defendants.

CASE NO. 3:11CV1383(AWT)

United States District Court, D. Connecticut.

Signed August 31, 2016

Adam M. Abensohn, Jordan Goldstein, Julia M. Guaragna, Kathleen M. Sullivan, Andrew P. Marks, Celine Crosa di Vergagni, Christopher T. Cook, Issar Birger, Jonathan B. Oblak, Manisha M. Sheth, Marina Olevsky, Stephen Schweizer, Tyler G. Whitmer, Quinn Emanuel Urquhart & Sullivan, LLC, Philippe Selendy, Sascha N. Rand, Quinn Emanuel Urquhart Oliver & Hedges, LLP, New York, NY, Brittany Frassetto, Jon Corey, Jonathan Eser, Malgorzata Markowski, Michael R. McCray, Quinn Emanuel Urquhart & Sullivan, LLP, Washington, DC, Molly Stephens, Richard A. Schirtzer, Quinn Emanuel Urquhart Oliver & Hedges, Los Angeles, CA, James T. Cowdery, James John Healy, Cowdery & Murphy, LLC, Hartford, CT, for Plaintiff.

Alan C. Turner, Andrew S. Amer, Andrew T. Frankel, Bryce A. Pashler, Christopher O. Hultman, Craig S. Waldman, Daniel J. Cohen, Gabriel E. Bedoya, Isaac Rethy, John Alexander Robinson, Katherine A. Helm, Susannah S. Geltman, Thomas C. Rice, William T. Russell, David J. Woll, Minta J. Nester, Simpson Thacher & Bartlett LLP, New York, NY, Matthew C. Brown, Wiggin & Dana, New Haven, CT, Timothy Andrew Diemand, Wiggin & Dana, Melissa Fernandez, Travelers, Hartford, CT, for Defendants.

RULING ON MOTION TO STRIKE

Alvin W. Thompson, United States District Judge

FHFA brings claims under the Securities Act of 1933, including Section 12(a)(2) of the Act which creates rescissory liability for offering or selling securities by means of false or misleading statements. See 15 U.S.C. § 77l(a)(2). FHFA also brings, inter alia , claims under the Blue Sky laws of Virginia (on behalf of Freddie Mac, which is headquartered in McLean, Virginia) and the District of Columbia (on behalf of Fannie Mae, which is headquartered in Washington, D.C.).¹ Like Section 12 of the 1933 Act, the Blue Sky laws create rescissory liability for false or misleading statements in selling securities.

The Fifteenth and Sixteenth Defenses in the defendants' Answer, Defenses, and Affirmative Defenses, which the defendants represent apply to all of the plaintiff's claims, raise the defense of loss causation. The plaintiff moves, pursuant to Fed. R. Civ. P. 12(f), to strike with prejudice the Fifteenth and Sixteenth Defenses to the extent those defenses are directed at FHFA's claims under the Blue Sky laws of Virginia and the District of Columbia, i.e., Va. Code § 13.1–522 and D.C. Code § 31–5606.05.

For the reasons set forth below, the plaintiff's motion to strike is being granted.

I. LEGAL STANDARD

Pursuant to Fed. R. Civ. P. 12(f), "the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." To prevail on a motion to strike an affirmative defense, the party moving to strike "must establish that: (1) there is no question of fact that might allow the defense to succeed; (2) there is no substantial question of law that might allow the defense to succeed; and (3) they would be prejudiced by the inclusion of the defense." New England Health Care Employees Welfare Fund v. iCare Mgmt., LLC , 792 F.Supp.2d 269, 288 (D. Conn. 2011).

"A motion to strike an affirmative defense under Rule 12(f), Fed. R. Civ. P. for legal insufficiency is not favored and will not be granted unless it appears to a certainty that plaintiffs would succeed despite any state of the facts which could be proved in support of the defense." William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp. , 744 F.2d 935, 939 (2d Cir. 1984), cert. granted, judgment vacated on other grounds, 478 U.S. 1015, 106 S.Ct. 3324, 92 L.Ed.2d 731 (1986) (internal citation and quotation marks omitted). "Moreover, even when the facts are not disputed, several courts have noted that a motion to strike for insufficiency was never intended to furnish an opportunity for the determination of disputed and substantial questions of law." Id. (internal citations and quotation marks omitted). "This is particularly so when ... there has been no significant discovery." Id. " ‘[E]ven when the defense presents a purely legal question, the courts are very reluctant to determine disputed or substantial issues of law on a motion to strike; these questions quite properly are viewed as determinable only after discovery and a hearing on the merits.’ " Id. (quoting 5 C. Wright & A. Miller, Federal Practice & Procedure § 1381, at 800–01 ).

"Affirmative defenses will be stricken only when they are insufficient on the face of the pleadings." Electro–Methods, Inc. v. Adolf Meller Co. , No. 3:06CV686 (JBA), 2006 WL 2850415, at *2 (D. Conn. Oct. 3, 2006). Where an affirmative defense "is insufficient as a matter of law, the defense should be stricken to eliminate the delay and unnecessary expense of litigating it at trial." F.D.I.C. v. Collins , 920 F.Supp. 30, 33 (D. Conn. 1996).

II. DISCUSSION

A. Collateral Estoppel

The plaintiff argues that the defendants are precluded from asserting a loss causation defense to the Blue Sky claims because the defendants have already fully litigated and lost that issue on summary judgment in a related case. See Fed. Hous. Fin. Agency v. HSBC North America Holdings , 988 F.Supp.2d 363, 367–70 (S.D.N.Y. 2013) ("HSBC "). The defendants argue, inter alia , that collateral estoppel cannot apply to any of the defendants except RBS Securities, as they were not parties to the HSBC action.

"The doctrine of collateral estoppel (or ‘issue preclusion’) bars relitigation of a specific legal or factual issue in a second proceeding where (1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and actually decided, (3) there was [a] full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits." Grieve v. Tamerin , 269 F.3d 149, 153 (2d Cir. 2001) (internal citation and quotation marks omitted).

[O]ne is not bound by a judgment in personam in a litigation in which he is not designated as a party or to which he has not been made a party by service of process. This rule is part of our deep-rooted historic tradition that everyone should have his own day in court. As a consequence, a judgment or decree among parties to a lawsuit resolves issues as among them, but it does not conclude the rights of strangers to those proceedings.

Richards v. Jefferson Cnty., Ala. , 517 U.S. 793, 798, 116 S.Ct. 1761, 135 L.Ed.2d 76 (1996) (internal citations and quotation marks omitted).

FHFA argues that RBS Securities "fairly represented the interests of itself and the other defendants here (its agents and affiliates) for purposes of applying collateral estoppel." (Pl.'s Mem. in Supp. of Mot. to Strike, Doc. No. 641-1, at 6.) "[A] nonparty may be bound by a judgment if she was adequately represented by a party to the earlier suit." Taylor v. Sturgell , 553 U.S. 880, 898, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008). The adequate representation exception applies only when

(1) The interests of the nonparty and her representative are aligned; and (2) either the party understood herself to be acting in a representative capacity or the original court took care to protect the interests of the nonparty. In addition, adequate representation sometimes requires (3) notice of the original suit to the persons alleged to have been represented.

Id. at 900, 128 S.Ct. 2161 (internal citations and quotation marks omitted).

The defendants state that RBS Securities was not sued in any representative capacity, nor did it purport to act in such a capacity, in the HSBC case. They also state that the other defendants in the instant case were not served with process in HSBC , did not believe themselves to be parties to the litigation or that RBS Securities was representing their interests, and did not receive notice from the HSBC court that they could be bound by that litigation. Also, in Taylor , the Supreme Court noted that preclusion based on an agency relationship "is appropriate only if the putative agent's conduct of the suit is subject to the control of the party who is bound by the prior adjudication." 553 U.S. at 906, 128 S.Ct. 2161. Moreover, as the defendants point out, collateral estoppel cannot apply to the claims under the District of Columbia Blue Sky laws because no claim under that statute was ever asserted against RBS Securities in the HSBC case.

The court agrees with the defendants that FHFA has not met its burden of establishing the elements of the adequate representation exception. In any event, FHFA's collateral estoppel arguments raise substantial and disputed issues, specifically with respect to agency and adequate representation, that cannot be resolved on a motion to strike. See Etienne v. Wal–Mart Stores, Inc. , 197 F.R.D. 217, 222 (D. Conn. 2000) ("[S]everal courts have stated that a motion to strike for insufficiency was never intended to furnish an opportunity for the determination of disputed and substantial questions of law.").

B. Blue Sky Claims and Loss Causation

The court agrees with FHFA, however, that loss causation is not a defense to the Blue Sky claims under the District of Columbia statute, D.C. Code Ann. § 31–5606.05 or the Virginia statute, Va. Code Ann. § 13.1–522.

The pertinent part of the District of Columbia statute provides that:

A person shall be civilly

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