Lehman Bros Inc. v. City of Lodi

333 F.Supp.2d 895

LEHMAN BROTHERS INC., Plaintiff, v. CITY OF LODI, Lodi Financing Corporation, and Does 1 through 50, Defendants.

No. CIV. S-040850FCDJFM.

United States District Court, E.D. California.

August 20, 2004.

Helen L. Duncan, Fulbright & Jaworski LLP, Los Angeles, CA, for Plaintiff.

Gregory D. Call, Folger Levin & Kahn, San Francisco, CA, for Defendants.

MEMORANDUM AND ORDER

DAMRELL, District Judge.

This matter is before the court on Lehman Brothers Inc.'s ("Lehman") motion to remand pursuant to 28 U.S.C. § 1447. Lehman contends defendants City of Lodi and Lodi Financing Corporation (collectively, the "City") improperly removed this action because Lehman's wholly state law claims do not, as the City maintains, (1) arise under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or any other federal law; (2) attack or undermine a federal court judgment or settlement; or (3) require resolution of threshold CERCLA issues. Lehman thus moves this court to remand the action to San Joaquin County Superior Court, from which it was removed, on the basis of lack of subject matter jurisdiction. Lehman further seeks its attorneys' fees and costs incurred as a result of the removal. 28 U.S.C. § 1447(c).

The court heard oral argument on the motion on July 9, 2004. For the reasons set forth below, Lehman's motion is DENIED; its request for attorneys' fees and costs is, accordingly, likewise DENIED.¹

BACKGROUND

1. Relevant History²

In April 1989, the City first detected tetrachloroethene ("PCE") in a water sample from a new water tank. Subsequent testing found PCE contamination in the groundwater and several Lodi water wells. In March 1992, the Central Valley Regional Water Quality Control Board ("RWQCB") issued a report identifying a Lodi cleaning business as one potential source of PCE-contaminated wastewater discharged into the City's sewer lines and suspected as a source of the soil and groundwater contamination.

In 1993, the California State Department of Toxic Substance Control ("DTSC") commenced an investigation of the contamination. In 1994, DTSC initiated an administrative action against selected potentially responsible parties, including the City, to address the soil and groundwater contamination.

Thereafter, on May 6, 1997, the Lodi City Council authorized the City Manager to execute a "Comprehensive Joint Cooperative Agreement" ("Cooperative Agreement") with DTSC concerning the investigation and abatement of hazardous substance contamination within the City. Under the Cooperative Agreement, DTSC was required to act with the City in a consolidated effort, providing the oversight, consultation, and cooperation necessary and appropriate to ensure the contamination site was remediated in a timely, competent, and cost-effective manner. In exchange for DTSC's "ongoing and substantial services," the DSTC received in excess of one million dollars.

Since the discovery of the contamination, the City has faced the issue of potential liability. Indeed, the Cooperative Agreement expressly stated that DTSC may have certain claims against the City for the design, construction, operation, and maintenance of its sewer system. Despite this acknowledgment of potential liability, the Cooperative Agreement specifically designated Lodi the "lead enforcement entity," in place of the DTSC, and obligated the City to "cause a prompt, comprehensive, and cost-effective investigation and remediation" of the ground and soil contamination.

To support the City's lead enforcement role, the Cooperative Agreement also required the "prompt enactment and enforcement of a comprehensive municipal environmental response ordinance."³ Just ninety days later, on August 6, 1997, Lodi's City Council enacted the Comprehensive Municipal Environmental Response Ordinance ("MERLO"), which sets forth a remedial liability scheme partially modeled on CERCLA.

MERLO provided the City with municipal authority to investigate and remediate existing or threatened environmental nuisances affecting the City and to hold responsible parties or their insurers liable for the cost of Lodi's nuisance abatement activities. MERLO incorporated many of CERCLA's standards. Specifically, MERLO borrowed CERCLA's definition of (1) who may be considered a "potentially responsible party" ("PRP"), (2) who may avoid liability by proving certain affirmative defenses, and (3) who may impose joint and several liability on responsible parties. However, in significant departures from CERCLA, MERLO's liability scheme did not provide a mechanism for responsible parties to impose costs upon the City for its share of any attributable costs but did provide the City recovery for a broad range of "action abatement costs,"⁴ including attorneys' fees and the costs the City incurred servicing and retiring financing it obtained to fund its enforcement activity (including, particularly, the financing from Lehman described below).

In 1998, the City approached Lehman to devise a means to finance the City's environmental enforcement activities related to its soil and groundwater contamination problem. (Lehman's Compl., filed March 30, 2004, ¶ 21.) In November 1999, the City adopted a resolution approving the financing agreements it intended to enter into with Lehman. (Id. at ¶ 23.) In December 1999, the City then defended the proposed financing arrangement in a contested validation proceeding in San Joaquin County Superior Court, pursuant to California Civil Code § 860 et seq., ultimately obtaining a ruling that the financing arrangement was valid as a matter of law. (Id. at ¶ s 26-27.) On, May 19, 2000, the superior court entered a permanent injunction enjoining all persons from challenging the financing arrangement. (Id. at ¶ 29.) In June 2000, the City and Lehman entered into a series of related agreements (collectively, the "Investment Contract").

Subsequently, on November 2, 2000, the City filed the case of the People of the State of California and the City of Lodi v. M & P Investments, et al., Civ. S-00-2441 FCD/JFM ("M & P Action"), alleging claims under the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. § 6972(a)(1)(B), and state law nuisance on behalf of the "People of the State of California" and cost recovery claims under the California Water Code and MERLO on behalf of the City, against numerous defendants, including various dry cleaning businesses, who were allegedly responsible for the soil and groundwater contamination within the City.

2. The Investment Contract

The Investment Contract includes a Program Receipts Sale and Repurchase Agreement ("Sale and Repurchase Agreement"), a Trust Agreement, a Certificate Purchase Contract, a Placement Agent Agreement, and a Professional Services Agreement.⁵ (Exs. A-C to City's FAC, filed July 9, 2004, in Civ. 04-606.) Of central importance here is the Sale and Repurchase Agreement executed between the City of Lodi and Lodi Financing Corporation ("LFC"). (Id. at Ex. B.) LFC is the intermediary created under the agreement to sell the certificates and to receive the proceeds under the terms of the Sale and Repurchase Agreement between LFC and Lehman as the original purchaser. Under this agreement, the City assigns its rights to receive "Program Receipts"⁶ to LFC, which were the monetary recoveries (the "Program Receipts") it would recover from responsible parties or their insurers pursuant to the City's environmental enforcement "Program."⁷ LFC would then reconvey the Program Receipts to the City in return for the City's promise to make the repurchase payment to the holders of the certificates (Lehman). Importantly, according to the terms of the Investment Contract, the City could not retain any Program Receipts (other than certain limited deductions) until the repurchase price for all "Program Receipts" is paid in full.⁸ The consideration for the sale of the "Program Receipts" by the City to LFC is the promise to convey to the City the proceeds from the sale of the COPs as those sale proceeds are received less the "Placement Fee" of $1,000,000 due Lehman, which is to be paid to Lehman out of the initial proceeds from the sale of the COPs. The total COPs that can be drawn down is $16,000,000. The interest rate is 20% plus LIBOR (an agreed upon to be determined rate of interest) with the total interest not to exceed 30%. (Id.) Pursuant to the Investment Contract, Lehman provided the City with nearly $16 million. (Lehman's Compl., ¶ s 31-33.)

3. City/Lehman Litigation

On March 26, 2004, the City filed a lawsuit against Lehman seeking a judicial declaration, on several grounds, that it is not obligated to repay to Lehman the financing of its environmental remediation litigation.⁹ Four days thereafter, on March 30, 2004, Lehman filed an action against the City in the San Joaquin County Superior Court. On April 28, 2004, the City removed the action to this court.

In its action, Lehman alleges that the City's obligation to repay Lehman is "absolute and unconditional," and not abated, waived, diminished or otherwise modified for any reason. (Id. at ¶ 45.) In particular, Lehman alleges that in instituting the above-described declaratory relief action seeking to have the Investment Contract declared void and invalid, the City has violated the state court injunction and anticipatorily breached their agreements. (Id. at ¶ s 76, 91-97.) Lehman further alleges the City has breached certain specific provisions of their Investment Contract,¹⁰ giving rise to both breach of contract and breach of the covenant of good faith and fair dealing claims. (Id. at ¶ s 81-88.) Finally, Lehman alleges the City made numerous misrepresentations in order to obtain Lehman's funds during the course of the Investment Contract. (Id. at ¶ 103-113.)

On these grounds, Lehman alleges seven claims for relief against the City: (1) violation of state court injunction; (2) breach of contract; (3) anticipatory repudiation...