R.I. Econ. Dev. Corp. v. Wells Fargo Sec., LLC

RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION v. WELLS FARGO SECURITIES, LLC; BARCLAYS CAPITAL, INC.; FIRST SOUTHWEST COMPANY;STARR INDEMNITY AND LIABILITY COMPANY; CURT SCHILLING;THOMAS ZACCAGNINO; RICHARD WESTER; JENNIFER MACLEAN;ROBERT I. STOLZMAN; ADLER POLLOCK & SHEEHAN, P.C.;MOSES AFONSO RYAN LTD.; ANTONIO AFONSO, JR.;KEITH STOKES; and J. MICHAEL SAUL

C.A. No. PB-12-5616

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS PROVIDENCE, SC. SUPERIOR COURT

FILED: August 28, 2013

DECISION

SILVERSTEIN, J. Before this Court are the Motions to Dismiss of all fourteen Defendants, seeking to dismiss all sixteen counts of the Plaintiff's First Amended Complaint (Complaint).

Table of Contents

I. Facts and Travel...........................................3

A. Parties, Key Non-Parties, and Relationships...........................................4

B. The Impetus for the Deal...........................................5

C. The Beginning of the Deal and the Bond Authorization...........................................6

D. The Months Leading Up to the Issuance of the Bonds...........................................10

E. The Allocation of the Bond Proceeds and Other Payments...........................................12

F. Third-Party Monitoring...........................................13

G. The Travel of the Case...........................................14

II. Standard of Review...........................................15

III. Discussion...........................................17

A. The Sufficiency of the Alleged Injury and Relief Sought...........................................18

1. Declaratory Judgment...........................................18

a. Requisite Standing and Ripeness...........................................20

b. Legal Hypothesis Which Will Entitle the Plaintiff to Real and Articulable Relief...........................................22

2. Alleged Damages...........................................24

a. The Basic Arguments of the Parties...........................................24

b. Relevant Legal Principles...........................................24

c. Loss of $75 million...........................................26

d. The EDC's Liability for the General Assembly's Appropriation of Funds...........................................28

e. The EDC's Reduced Ability to Issue Bonds...........................................28

f. The EDC's Reputation and Credit...........................................29

g. The EDC's Obligation to Make Bond-Service Payments...........................................30

h. The Fees and Salaries Paid to the Defendants...........................................32

3. The EDC's Enforcement Powers and Injunctive Relief...........................................34

4. Summary of Conclusions on the Sufficiency of the Alleged Injury and Relief Sought...........................................35

B. Imputation...........................................36

1. Imputation Principles...........................................37

a. The General Rule and Third Party Limitation...........................................37

b. The Adverse Interest Exception...........................................39

c. Collusion Exception...........................................40

2. Application of Imputation Principles...........................................43

a. Application of the General Rule and Third Party Limitation...........................................43

i. Officers, Law Firms, and Financial Advisor...........................................43

ii. Wells Fargo and Barclays...........................................46

iii. The 38 Studios Defendants and Starr Indemnity...........................................50

b. Application of the Adverse Interest Exception...........................................50

c. Application of the Collusion Exception...........................................50

3. Summary of Court's Conclusions on Imputation...........................................54

C. In Pari Delicto...........................................55

D. Individual Arguments Applying to All or Most Counts...........................................56

1. Saul and Stokes Public Duty Doctrine...........................................56

2. Starr Indemnity Policy Exclusion...........................................58

3. Arguments on Duplicative Nature of Claims...........................................61

a. What is the Proper Rule?...........................................61

b. The Law Firms' Argument of Claims Duplicative with Legal Malpractice...........................................62

c. Stokes's Duplicative Claims Argument...........................................64

E. Remaining Arguments: Count-by-Count...........................................64

1. Count I: Breach of Fiduciary Duty...........................................64

a. Fiduciary Duty Principles...........................................64

b. Did Wells Fargo and Barclays Owe Fiduciary Duties to the EDC?...........................................65

2. Count II: Breach of Fiduciary Duty (Wells Fargo's Hidden Commissions)...........................................69

3. Counts III and IV: Fraud and Fraudulent Misrepresentation...........................................70

a. Officers, Financial Advisor, and Law Firms...........................................71b. Wells Fargo and Barclays...........................................71

c. 38 Studios Defendants...........................................73

4. Count V: Negligent Misrepresentation...........................................75

a. Did MacLean Owe Duty of Care?...........................................75

b. Does the Economic Loss Doctrine Bar the Claim?...........................................77

5. Count VI: Legal Malpractice...........................................82

6. Count VII: Negligence...........................................85

7. Count VIII: Breach of Implied Covenant of Good Faith and Fair Dealing...........................................87

8. Count IX: Damages under R.I. Gen. Laws § 42-64-9.3 (Criminal Penalties Including Damages for Violating R.I. Gen. Laws § 42-64-1 et seq.)...........................................88

a. Do the warranties in the BPA preclude this claim?...........................................89

b. Is the claim pled with sufficient particularity? ...........................................89

9. Count XI: Civil Damages under R.I. Gen. Laws § 9-1-2 Based upon Violations of R.I. Gen. Laws §§ 11-18-1, 11-18-6, 11-18-7, 11-18-8, or 11-41-4...........................................90

10. Counts XII and XIII: R.I. RICO...........................................91

a. Count XII: R.I. RICO subsection (a)...........................................93

b. Count XIII: R.I. RICO subsection (c)...........................................93

11. Count XIV: Civil Conspiracy...........................................94

12. Counts X, XV, XVI: Mandatory Final Injunction Pursuant to EDC Enforcement Powers, Unjust Enrichment, and Declaratory Relief on Liability........................................... 96

IV. Conclusion...........................................96

I

Facts and Travel

The basic plot is well-known: 38 Studios, LLC (38 Studios) was induced to move its business to the Ocean State in exchange for a massive financial accommodation; less than two years later, 38 Studios went bankrupt. Much has been written about that plot in the media. Much has been discussed and debated—and continues to be discussed and debated—in the other two branches of government. In this legal action, at this Motion to Dismiss stage, however, the Court considers only the facts alleged in the Complaint by the EDC. The Standard of Review is set out more fully below, but the facts described in this section are gleaned directly from the Complaint, and the Court must accept all of the allegations in the Complaint as true. The facts in this section provide the context for the issues in this legal action. A more detailed discussion of the factual allegations is woven into the legal analysis that follows.

A

Parties, Key Non-Parties, and Relationships

The Plaintiff is the Rhode Island Economic Development Corporation (EDC or Plaintiff), a quasi-public corporation established by G.L. 1956 § 42-64-1 et seq. (Compl. ¶ 1.) The EDC was created "[t]o promote and encourage the preservation, expansion, and sound development of new and existing industry, business, commerce, agriculture, tourism, and recreational facilities in the state, which will promote the economic development of the state and the general welfare of its citizens." Sec. 42-64-5. The powers of the EDC are vested in its Board of Directors (EDC Board). (Compl. ¶ 3.)

There are fourteen total defendants, nine of whom served the EDC. Id. ¶¶ 4-15. Keith Stokes (Stokes) served as Executive Director of the EDC, and J. Michael Saul (Saul) was Deputy Director. Id. ¶ 14-15. First Southwest Company (First Southwest) was the EDC's financial advisor. Id. ¶ 6. Adler Pollock & Sheehan, P.C. (Adler Pollock) was the EDC's general counsel from 1991 through January 2011; Robert Stolzman (Stolzman) was the attorney assigned by Adler Pollock to have primary responsibility for matters involving the EDC. Id. ¶ 12. Additionally, Stolzman served as Secretary of the EDC until January 2011. Id. Moses Afonso Ryan Ltd. (Moses Afonso) provided professional legal services to the EDC regarding the 38 Studios transaction; Antonio Afonso, Jr. (Afonso) was the attorney assigned to EDC matters.¹ Id. ¶ 13. Wells Fargo Securities, LLC (Wells Fargo) and Barclays Capital, Inc. (Barclays) acted as placement agents for the issuance of the Bonds. Id. ¶¶ 4-5. 38 Studios is not a defendant in this action; it currently is the subject of a bankruptcy proceeding in the United States Bankruptcy Court for the District of Delaware and a receivership proceeding in this Court. Id. ¶ 16. Four individuals formerly associated with 38 Studios, however, are defendants. Curt Schilling (Schilling) was majority stockholder and chair of the 38 Studios Board of Directors (38 ...