In re Jefferson Cnty.

491 B.R. 277

In re JEFFERSON COUNTY, ALABAMA, a political subdivision of the State of Alabama, Debtor.

No. 11–5736–TBB.

United States Bankruptcy Court,

N.D. Alabama,

Southern Division.

April 15, 2013.

James Blake Bailey, Patrick Darby, Christopher L. Hawkins, Jennifer Harris Henderson, Bradley Arant Boult Cummings LLP, Jay R. Bender, Birmingham, AL, Whitman L. Holt, Samuel M. Kidder, Kenneth N. Klee, Robert J. Pfister, Klee, Tuchin, Bogdanoff & Stern LLP, David M. Stern, Los Angeles, CA, for Debtor.

Memorandum Opinion on the Automatic Stay and the Assured Action

THOMAS B. BENNETT, Bankruptcy Judge.

I. Introduction

Creative lawyering has its merits. Sometimes, it allows one to solve what previously had been an intractable legal issue. Other times, it is a bane masking problems inherent in what creativity's means is attempting to accomplish. This is a case of the second sort demonstrating the downside of creativity. What is involved is an attempt to avoid the shield afforded debtors by the automatic stay of the Bankruptcy Code, 11 U.S.C. § 362(a), based on Jefferson County, Alabama (“the County”) not having been sued by the plaintiff, Assured Guaranty Municipal Corp., f/k/a Financial Security Assurance, Inc. (“Assured”) in one of two lawsuits pending in the same New York state court, before the same judge, with the same counsel and coordinated discovery, involving virtually identical claims that arose from the same, critical factual background.

The question presented to this Court is whether the degree of sameness between these two lawsuits is sufficient for the automatic stay to apply when the only meaningful difference is that the County is a defendant in one suit and a third-party defendant in the other. Viewed from another perspective, the issue is whether Assured's creative pleading is enough to avoid application of 11 U.S.C. § 362(a)'s shield. The Court holds that it is not. The automatic stay applies to Assured's action against JPMorgan in New York state court (“Assured Action”), and there is no cause to modify the stay to allow the Assured Action to proceed.

II. The Assured and Syncora Actions—The Sameness

The United States District Court for the Northern District of Alabama entered a consent decree in 1996 that required Jefferson County, Alabama to remediate its Sewer System (“Sewer System”). The County proceeded to raise billions of dollars for the development of its sewer system by issuing warrants secured exclusively by revenue generated by its Sewer System, which were underwritten by JPMorgan Chase Bank, N.A. and its affiliate, J.P. Morgan Securities LLC (collectively, “JPMorgan”). The County also entered into several interest rate swap transactions with JPMorgan in relation to these warrants. Between 2002 and 2005, the County and JPMorgan made several agreements with Assured and Syncora Guarantee Inc. (“Syncora”) in which Assured and Syncora issued policies that insured against the County's failure to pay principal and interest on the warrants. Assured also reinsured over $360 million in policies originally issued by Syncora and Financial Guaranty Insurance Company (“FGIC”). See Assured's Statement of Legal Issues, at 4, Nov. 15, 2011 (Doc. 146).

To obtain these policies, the County and JPMorgan allegedly made statements and representations to Assured and Syncora that purposefully misrepresented and concealed information about bribes that JPMorgan had paid to County officials. Additionally, the County and JPMorgan allegedly failed to disclose the 2003 Krebs Report, an analysis of the Sewer System's ability to generate revenues and needed sewer rate modifications, to Assured and Syncora.

Syncora's credit rating was downgraded in 2008 partially as a result of its overexposure to subprime residential mortgages. This downgrade triggered a modified and accelerated principal repayment schedule in the Sewer System warrant indebtedness. In addition, starting in April 2008, the Sewer System failed to generate sufficient revenues to meet the payment obligations on its warrants. This confluence of events caused the County to default on its obligations to warrantholders. The SEC subsequently censured JPMorgan for its involvement in the financing of the Sewer System, and several Jefferson County Commissioners were convicted of crimes relating to its rehabilitation and improvements.

On April 29, 2010, Syncora filed a complaint against JPMorgan and the County in the Supreme Court of the State of New York, County of New York (“New York court”) that alleged fraud and aiding and abetting fraud in connection with the financing of the Sewer System (“Syncora Action”). Syncora opened its Complaint with the following paragraph:

This action arises out of one of the biggest cases of municipal corruption in United States history and a massive fraud perpetrated by Defendants JeffersonCounty and JPMorgan in connection with billions of dollars of municipal debt that the County, with the aid of JPMorgan, issued to finance a sewer system remediation project. As part of an unprecedented scheme of corruption and abuse, which has resulted in over 20 criminal convictions (including several County Commissioners), and multiple SEC enforcement actions (including ones against JPMorgan and two of its former senior bankers), Jefferson County and JPMorgan fraudulently induced Syncora, a New York-based insurer, to provide over $1 billion in insurance coverage for certain of the County's municipal debt.

Syncora Guarantee Inc. v. Jefferson Cnty., Ala., No. 601100/10, Compl. ¶ 1 (N.Y.Sup.Ct. Apr. 29, 2010) (“Syncora Complaint”). The Syncora Complaint contains four causes of action: “Fraud Related to Bribes (2002 Policy, 2003 Policy, and Surety Bond) (Against Jefferson County and JPMorgan)”; “Aiding and Abetting Fraud Related to Bribes (2002 Policy, 2003 Policy, and Surety Bond) (Against Jefferson County and JPMorgan)”; “Fraud Related to Krebs Findings (2003 Policy and Surety Bond) (Against Jefferson County and JPMorgan)”; and “Aiding and Abetting Fraud Related to Krebs Findings (2003 Policy and Surety Bond) (Against Jefferson County and JPMorgan).” Syncora Compl. ¶¶ 108–53. The Syncora Complaint asks the New York court to find “Defendants jointly and severally liable to Syncora for compensatory and punitive damages,” among other requests. Syncora Compl. at p. 43.

On June 16, 2010, Assured (using the same law firm as Syncora) filed a Complaint against JPMorgan—but not the County—in the New York court, alleging fraud and aiding and abetting fraud in connection with the financing of the Sewer System (“Assured Action”). Assured opened its Complaint with the following paragraph:

This action arises out of one of the biggest cases of municipal corruption in United States history and a massive fraud perpetrated by JPMorgan and Jefferson County, Alabama (“Jefferson County” or the “County”) in connection with billions of dollars of municipal debt issued by the County and underwritten by JPMorgan to finance a sewer system remediation project. As part of an unprecedented scheme of corruption and abuse, which has resulted in over 20 criminal convictions (including several County Commissioners), and multiple SEC enforcement actions (including ones against JPMorgan and two of its former senior bankers), JPMorgan and the County fraudulently induced Assured, a New York-based insurer, to provide over $378 million in insurance coverage for Jefferson County municipal debt.

Assured Guar. Mun. Corp. v. JPMorgan Chase Bank, N.A., No. 650642/2010, Compl. ¶ 1, (N.Y. Sup.Ct. June 16, 2010) (“Assured Complaint”). The remainder of the Assured Complaint repeats many of the same allegations—often verbatim—from the Syncora Complaint. The Assured Complaint contains two causes of action, which mirror the first two causes of action in the Syncora Complaint: “Fraud” and “Aiding and Abetting Fraud.” Assured Compl. ¶¶ 28–31. The main difference between the two Complaints, apart from Assured's decision not to name the County as a party, is the absence of discussion about the Krebs Report in the Assured Complaint. The facts section in the Assured Complaint does not discuss the Krebs Report, and the third and fourth causes of action in the Syncora Complaint, which are premised on the Krebs Report, are not present in the Assured Complaint.

The remaining variations between the two Complaints mostly reflect the differing procedural postures of the cases. Finally, much like the Syncora Complaint, the Assured Complaint asks the court to find “JPMorgan liable to Assured for compensatory and punitive damages,” among other requests. Assured Compl. at p. 32.

Both the Assured and Syncora Actions are assigned to the same judge in the New York court. On July 28, 2010, JPMorgan filed a motion to dismiss the Assured Complaint, but the New York court denied this motion. JPMorgan then filed a third-party complaint in the Assured Action on February 10, 2011, in which it denied that Assured is entitled to any relief, but if any liability were to be imposed upon it, JPMorgan asserted two cross-claims against the County for indemnification (both contractual and common law) and contribution. Jefferson County filed a motion to dismiss JPMorgan's third-party complaint on April 1, 2011, but the New York court denied that motion.

JPMorgan's arguments for contractual indemnification are based on provisions in various warrant purchase agreements between JPMorgan and the County. In one such agreement, the County agreed to indemnify J.P. Morgan Securities LLC, along with its members, officers, and employees, among others, against:

any and all losses, claims, damages or liabilities caused by ... any untrue statement or alleged untrue statement of a material fact contained in the Official Statement or caused by any omission or alleged omission from the Official Statement of any material fact necessary to make the statements made therein, in light of the circumstances under which they were made,...