quinn emanuel urquhart & sullivan, llp quinn...
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Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
James R. Asperger (SBN 83188) [email protected] QUINN EMANUEL URQUHART & SULLIVAN, LLP 865 South Figueroa Street, 10th Floor Los Angeles, CA 90017 Tel: 213-443-3000 Fax: 213-443-3100 Michael B. Carlinsky [email protected] Maria Ginzburg [email protected] QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, NY 10010 Tel: 212-849-7000 Fax: 212-849-7100 Attorneys for All Plaintiffs
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
In re COUNTRYWIDE FINANCIAL CORP. MORTGAGE-BACKED SECURITIES LITIGATION AMERICAN INTERNATIONAL GROUP, INC., et al.,
Plaintiffs,
v. BANK OF AMERICA CORPORATION, et al.,
Defendants.
Case No. 11-ML-02265-MRP (MANx) Case No. 11-CV-10549-MRP (MANx) MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS Date: April 4, 2013 Time: 11:00 a.m. Courtroom: 12 Judge: Hon. Mariana R. Pfaelzer
Case 2:11-cv-10549-MRP-MAN Document 254 Filed 03/28/13 Page 1 of 45 Page ID #:16545
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Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
TABLE OF CONTENTS
Page
INTRODUCTION ........................................................................................................... 1
ARGUMENT ................................................................................................................... 7
I. THE LEGAL FRAMEWORK .............................................................................. 7
II. EXTRINSIC EVIDENCE DEMONSTRATES THAT THE APA DID NOT TRANSFER AIG’S TORT CLAIMS ........................................................ 11
A. Testimonial Evidence Demonstrates That The Parties Did Not Intend To Transfer Tort Claims ................................................................ 11
1. AIG Witnesses ................................................................................ 12
2. FRBNY Witnesses .......................................................................... 14
3. Testimony Concerning “Related Instruments” ............................... 17
B. Evidence Of The Parties’ Purpose Demonstrates That The APA Did Not Transfer AIG’s Tort Claims ............................................................... 19
C. Documentary Evidence Demonstrates That The Parties Did Not Intend to Transfer Tort Claims .................................................................. 21
1. Term Sheet And Board Authorizations .......................................... 21
2. Drafting History Of The APA ........................................................ 24
3. Valuation Of The RMBS ................................................................ 25
4. Disclosures To Regulators, Rating Agencies, And The Public ...... 26
5. U.C.C. Statements ........................................................................... 28
6. Press Releases ................................................................................. 29
7. The ML III Transaction .................................................................. 29
D. The Parties’ Post-Closing Conduct Confirms That The APA Did Not Assign Tort Claims ............................................................................ 31
1. AIG Preserved And Pursued The Tort Claims ............................... 32
2. ML II Did Not Object To AIG’s Assertion Of The Tort Claims ............................................................................................. 32
3. ML II Did Not Preserve Or Pursue The Tort Claims, And Instead Asserted Contract Claims ................................................... 34
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4. ML II Confirmed AIG’s Ownership Of The Tort Claims In March 2012 ..................................................................................... 37
5. ML II’s Purported Release Of The Tort Claims In July 2012 ........ 38
CONCLUSION .............................................................................................................. 40
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Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
TABLE OF AUTHORITIES
Page
Cases
Banque Arabe et Internationale D’Investissement v. Maryland Nat’l Bank, 57 F.3d 146 (2d Cir. 1995) ............................................................................. 1, 11, 19
Brooklyn Life Ins. Co. v. Dutcher, 95 U.S. (5 Otto) 269 (1877) ...................................................................................... 31
CDR Creances S.A.S. v. Cohen, 2008 WL 2078673 (N.Y. Sup. Ct. N.Y. Cnty. May 9, 2008) .................................. 11
City of N.Y. v. N.Y.C. Railway Co., 193 N.Y. 543 (1908) ................................................................................................. 31
Compagnia Importazioni Esportazioni Rappresentanze v. L-3 Commc’ns Corp., 703 F. Supp. 2d 296 (S.D.N.Y. 2010) ...................................................................... 30
Con. Edison, Inc. v. N.E. Utilities, 332 F. Supp. 2d 639 (S.D.N.Y. 2004) ...................................................................... 25
Consedine v. Portville Central School District, 12 N.Y.3d 286 (2009) ............................................................................................... 10
Faulkner v. Nat’l Geographic Soc., 452 F. Supp. 2d 369 (S.D.N.Y. 2006) ........................................................................ 8
Fed. Ins. Co. v. Ams. Ins. Co., 258 A.D.2d 39 (1st Dep’t 1999) ............................................................................... 31
Fox v. Hirschfeld, 157 A.D. 364 (1st Dep’t 1913) ................................................................................. 11
The Fund of Funds, Ltd. v. King, 1976 WL 799 (S.D.N.Y. Jun. 29, 1976) ................................................................... 11
Hollywood Foreign Press Ass’n v. Red Zone Capital Partners II, 870 F. Supp. 2d 881 (C.D. Cal. 2012) ........................................................................ 8
IBJ Schroder Bank & Trust Co. v. Resolution Trust Corp., 26 F.3d 370 (2d Cir. 1994) ....................................................................................... 31
Matter of Johnson City Professionall Firefighters Local 921, 18 N.Y.3d 32 (2011) ................................................................................................. 10
Klos v. Lotnicze, 133 F.3d 164 (2d Cir. 1997) ................................................................................. 8, 17
In re Laminated Veneers Co., Inc., 471 F.2d 1124 (2d Cir. 1973) ................................................................................... 29
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In re Med. Capital Sec. Litig., 2011 WL 5067208 (C.D. Cal. Jul. 26, 2011) ..................................................... 31–32
Mobius Mgmt. Sys. Inc. v. Fourth Dimension, 880 F. Supp. 1005 (S.D.N.Y. 1994) ........................................................................... 8
NML Capital v. Republic of Argentina, 17 N.Y.3d 250, 260 (2011) ......................................................................................... 9
Nycal Corp. v. Inoco PLC, 988 F. Supp. 296 (S.D.N.Y. 1997) ............................................................................. 8
Pro Bono Invs., Inc. v. Gerry, 2008 WL 4755760 (S.D.N.Y. Oct. 29, 2008) ........................................................... 11
Royal Mortg. Corp. v. Fed. Deposit Ins. Corp., 20 F. Supp. 2d 664 (S.D.N.Y. 1998) ........................................................................ 11
Stetson v. Pfaltzgraff Co., Inc., 1991 WL 275648 (S.D.N.Y. Dec. 18, 1991) .............................................................. 8
Stewardship Credit Arbitrage Fund LLC v. Charles Zucker Culture Pearl Corp., 31 Misc. 3d 1223(A), (N.Y. Sup. Ct. N.Y. Cnty. May 4, 2011) .............................. 11
Tarantola v. Williams, 48 A.D.2d 552 (2d Dep’t 1975) ................................................................................ 25
Waverly Corp. v. City of New York, 48 A.D.3d 261 (1st Dep’t 2006) ............................................................................... 31
Websters Red Seal Publ’ns Inc. v. Gilberton World-wide Publ’ns Inc., 67 A.D.2d 339 (1st Dep’t 1979) ............................................................................... 31
Wilson Sullivan Co. v. Int’l Paper Makers Realty Corp., 307 N.Y. 20 (1954) ..................................................................................................... 9
Statutes
N.Y. U.C.C. § 9-108(e) .................................................................................................. 28
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-1- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
INTRODUCTION
In its order of January 30, 2013, the Court acknowledged that, under controlling
New York law, “an assignment does not transfer tort claims unless the assigning
contract does so explicitly.”1 The Court then found the sole provision of the Asset
Purchase Agreement (the “APA”) that Bank of America (“BoA”) claims to be an
assignment of AIG’s tort claims—the provision assigning to Maiden Lane II LLC
(“ML II”) all of AIG’s “right, title and interest in the Related Instruments”2—was
“ambiguous.” January 30 Order, at *2. The Court therefore concluded that it was
required to “refer to extrinsic evidence to determine the intent of the parties [to the
APA].” Id. (internal quotation marks omitted). It directed AIG and BoA to engage in
limited discovery of the extrinsic evidence, including evidence of the “‘circumstances
surrounding’ the execution of the [APA and] ‘the purpose of the parties in making the
contract.’”3 Id. (citations omitted). With that discovery now completed, the parties’
intent is crystal clear: They never agreed to transfer AIG’s tort claims to ML II, no
such assignment was intended in the APA, and that is not what the “Related
Instruments” definition was meant to achieve.
The discovery included depositions of the primary lawyer and businessperson
who negotiated the APA on behalf of AIG and the two primary business negotiators
for the Federal Reserve Bank of New York (the “FRBNY”), which created and has at
all times controlled ML II. As detailed below, the testimony of these witnesses 1 See Order Re: Discovery as to Standing, Am. Int’l Grp. v. Bank of Am., No. 11-cv-10549, ECF No. 208, at *1 (C.D. Cal. Jan. 30, 2013) (“January 30 Order”) (citing Banque Arabe et Internationale D’Investissement v. Maryland Nat’l Bank, 57 F.3d 146, 151–52 (2d Cir. 1995)). 2 See APA § 7.01 (Declaration of James R. Asperger (“Asperger Decl.”), Ex. A). Defendants concede that the general assignment language transferring “all rights, title and interest” in residential mortgage-backed securities (“RMBS”) does not transfer fraud claims. BoA’s Reply Br., Am. Int’l Grp. v. Bank of Am., No. 11-cv-10549, ECF No. 188, at 4 (C.D. Cal. Jan. 30, 2013) (if the APA provided that AIG was transferring to ML II “all right, title and interest in securities . . . [the] transfer would not have effected an assignment of the claims”). 3 For the avoidance of doubt, AIG reaffirms and incorporates its previously-stated objections to the Court’s denial of AIG’s motion to stay determination of the assignment issue and the Court-ordered limitations on discovery regarding whether an assignment of AIG’s tort claims was intended in the APA.
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-2- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
unequivocally establishes that an assignment of AIG’s tort claims was never even
discussed by the parties, much less agreed upon.
Christopher Swift, AIG’s lead negotiator, testified: We did not negotiate it; we did not intend to transfer it. And we were working, you know, collaboratively with the Fed and we talked about everything that was significant, we had a transparent discussion, they had their interest, we had ours. But this [the transfer of tort claims] was never, ever discussed.
Q. Did AIG . . . intend to assign its fraud claims to ML II? A. No. Q. What did AIG believe it was selling and intend to sell to ML II? A. The underlying securities.4
Edward Holmes, AIG’s lead lawyer, testified: To the extent you are asking me . . . about rights associated with AIG’s losses at the time AIG owned the securities, and that were—arose as a result of communications relating to the securities in connection with AIG buying them, those claims . . . we never, ever discussed transferring those.
It was my understanding throughout the process that we were transferring title to the securities, and the other ancillary rights that went with the securities, which meant voting rights, the right to enforce documents, the right to receive principal and interest; the types of claims that an owner of the documents or an owner of the securities would have.5
On the other side, Steven Manzari, a Senior Vice President at the FRBNY who
led the team that negotiated the ML II transaction and acknowledged that he “certainly
understood what the terms of the transaction were,”6 testified that he did not recall
“any discussion leading up to the execution of the Maiden Lane II documents about
AIG somehow giving up its rights to try to seek any recovery from anyone for the loss
of the $17 billion” AIG sustained on the RMBS sold to ML II. Id. 99:15–20.
Similarly, James Mahoney, described by himself and Mr. Manzari as the “business
lead,” id. 106:12, for the FRBNY on the ML II transaction, was asked if he could
recall “discussing with AIG the idea of potentially assigning away fraud claims that 4 Deposition Testimony of Christopher J. Swift at 86:19–24, 127:14–21 (Mar. 21, 2013) (“Swift Dep.”) (Asperger Decl., Ex. B) (emphasis added). 5 Deposition Testimony of R. Edward Holmes, Jr. at 57:19–58:3, 59:16–24 (Mar. 19, 2013) (“Holmes Dep.”) (Asperger Decl., Ex. C). 6 Deposition Testimony of Steven Manzari 110:4–8 (Mar. 15, 2013) (“Manzari Dep.”) (Asperger Decl., Ex. D).
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-3- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
AIG may have had in connection with its purchase of those RMBS securities.”7 His
answer: “No, I do not.” Id. 80:23. Nor could he identify anyone else from the
FRBNY who had done so. Id. 80:24–81:8.
Mr. Mahoney, who submitted a December 19, 2012 Declaration in support of
BoA’s Reply Brief, also retreated from his original position in that Declaration—so
much so that it should be disregarded. Specifically, in his Declaration, Mr. Mahoney
asserted that “[t]he FRBNY and ML II intended for ML II to receive all transferrable
and assignable benefits associated with the securities and Related Instruments,
including litigation claims associated with those securities or their acquisition by
AIG.”8 But in his March 18 deposition, he backpedaled, admitting that when the APA
was negotiated, he and the FRBNY were utterly “unaware of any actual [fraud or tort]
claims that may have existed,” Mahoney Dep. 65:10–19 (Asperger Decl., Ex. E), and
he was not “even thinking about the concept that AIG may have had tort claims,” id.
133:10–15. He never discussed with anyone at the FRBNY, ML II, or AIG the idea
that “AIG was somehow giving up its [tort] claims” by reference to “Related
Instruments,” id. 124:3–25, admitting that he never thought “wow, that’s got a lot of
value there and we want that transferred to us,” id. 134:5–8.
Mr. Mahoney also conceded that he did not even conceive that tort claims had
somehow transferred to ML II until an FRBNY attorney suggested that to him in a
draft declaration that the attorney prepared in 2012. Id. 84:10–20. He testified that
he had only a general objective in 2008 to secure all assignable benefits associated
with the RMBS AIG sold. Id. 82:4–10. Moreover, he conceded that he never
discussed that purported objective with his business counterparts at AIG during the
APA negotiations, nor could he identify any other means by which that purported
general intent was made known to AIG. Id. 80:18–23, 82:18–21, 85:7–13, 124:3–12,
7 Deposition Testimony of James M. Mahoney 61:2, 80:18–22 (March 18, 2013) (“Mahoney Dep.”) (Asperger Decl., Ex. E). 8 See Decl. of Richard St. John, Ex. 2, BoA Reply Br. No. 11-cv-10549, ECF No. 191 (C.D. Cal. Dec. 21, 2012) (“Mahoney Decl.”) (emphasis added).
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-4- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
228:2–20. In fact, he never even discussed it with his colleagues at the FRBNY. Id.
80:24–81:8. His purported personal intent thus could not possibly have been the basis
of any agreement, much less an explicit agreement, as required by New York law, to
transfer tort claims.
Critically, and not surprisingly in light of his admissions, Mr. Mahoney made no
claim that his personal intent to acquire for ML II “benefits” beyond the RMBS
themselves was effectuated anywhere in the APA. Asked whether the “Related
Instruments” provision was meant to transfer AIG’s tort claims, Mr. Mahoney
answered: In 2008 . . . I certainly don’t recall, tying the language in this definition [of Related Instruments] with the transfer of those types of rights, litigation rights or tort rights . . . [W]hen I read this, the “Related Instruments” definition, I doubt very much at the time I was thinking, Oh, that’s where we’re going to get these nonstandard rights transferred to us.
Id. 160:5–161:1 (emphasis added). Asked whether he understood “any other
provision of the APA” to assign AIG’s tort claims to ML II, Mr. Mahoney answered
simply “No.” Id. 161:3–10. Asked to explain his understanding of the “Related
Instruments” definition, Mr. Mahoney testified that “[f]rom a business perspective
reading this [i.e., the Related Instruments definition], you would think that this would
include the legal documentation and the governance supporting that is being
transferred in the purchase of these assets over to Maiden Lane II.” Id. 159:7–12.
That testimony, of course, perfectly confirms AIG’s long-expressed position that
“Related Instruments” was intended merely to transfer the underlying documentation
and ancillary contractual rights.9 It confirms, in other words, that the transfer of
AIG’s interest in the “Related Instruments” was not, as BoA contends, a “something
more” transfer of AIG’s tort claims.
9 See AIG Opp. to Mot. to Dismiss at 14–15, Am. Int’l Grp. v. Bank of Am., 11-cv-10549, ECF No. 177 (C.D. Cal. Nov. 27, 2012) (“AIG Opp.”); see also Swift Dep. 80:2–81:10 (Asperger Decl., Ex. B) (“the word ‘fraud’ is not mentioned in this paragraph . . . I interpreted [‘Related Instruments’] to mean the activities, the documents, the stuff that goes with servicing mortgages.”).
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-5- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
The witnesses most knowledgeable about the APA thus agree that the APA did
not transfer AIG’s tort claims, and none of the parties to the APA contend otherwise.
Just three weeks ago, in fact, the FRBNY issued a press release in which it expressly
stated that the assertion in Mr. Mahoney’s Declaration that the FRBNY intended for
ML II to obtain all transferable rights and benefits associated with the RMBS it
acquired from AIG “did not purport to settle the question of who actually owns [AIG’s
tort] claims, which is a matter for the courts.”10 Tellingly, the FRBNY did not
contend that it owns the tort claims at issue. BoA, a stranger to the APA, is thus left
alone in self-interestedly urging an interpretation of the APA that none of the parties to
the contract has endorsed.
The evidence regarding the surrounding circumstances and purpose for the ML
II transaction similarly provides no support for BoA’s lonely position. That evidence
makes clear that: (1) the ML II transaction was a direct response to the 2008 financial
crisis that imperiled AIG and numerous other financial institutions, threatening the
stability of the United States economy, and (2) its purpose was to be part of a package
of additional federal government assistance to provide AIG with a more viable capital
structure following the $85 billion credit facility provided to AIG in September 2008.
Neither the FRBNY nor ML II was seeking any profit. See Mahoney Dep. 120:24–25
(Asperger Decl., Ex. E) (“[W]e did not have a profit motive in entering into Maiden
Lane II.”). Moreover, at all times the FRBNY and its advisers concluded that the
RMBS alone was sufficient to assure that the FRBNY’s loan would be fully repaid,
even in a severe stress scenario. Thus, nothing about the circumstances or the purpose
behind the ML II transaction necessitated an assignment of AIG’s tort claims to ML II
or suggests that such an assignment took place. 10 Statement, FRBNY, Statement Regarding Recent Maiden Lane II Litigation Matters (March 1, 2013) (Asperger Decl., Ex. F). The assertion that the FRBNY commented on in this press release was the one contained in its settlement agreement with BoA, which, as the Court is aware from prior filings in this case, is substantively identical to the assertion in Mr. Mahoney’s Declaration. See Opp. to Ex Parte Application to Expedite Review of Mot. for Limited Stay, Exhibit 1 at 4, Am. Int’l Grp. v. Bank of Am., No. 11-cv-10549, ECF No. 235 (C.D. Cal. Feb. 28, 2013) (the July 2012 “Settlement Agreement”).
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-6- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
The remainder of the evidence further confirms that the parties did not agree to
assign AIG’s tort claims to ML II. BoA’s memorandum will not identify a single
document that so much as references the possibility of such an assignment because no
such document exists among the tens of thousands of pages produced by AIG and the
FRBNY. From beginning to end, the documents are to the contrary. The term sheet
stating the material terms of the transaction makes no reference to tort claims or
“Related Instruments.” The memoranda upon which the parties’ respective boards
based their approval of those terms makes no reference to an assignment of tort claims.
The voluminous analyses by which the parties determined the price ML II paid for the
RMBS neither reference nor attempt to value AIG’s tort claims. The presentations the
parties prepared to explain the ML II transaction to rating agencies and regulators
make no mention of an assignment of tort claims. The press releases the FRBNY
issued before and after the closing of the ML II transaction make no reference to ML
II’s acquisition of tort claims. The closing documents for the ML II transaction do not
include any UCC-1 financing statement for AIG’s tort claims—an important fact
further evidencing that the FRBNY did not intend to acquire tort claims because it
would have been required to file such statements to perfect any security interest in
those claims. Because AIG’s tort claims implicate $18 billion of loss—an amount
roughly equal to the value of the RMBS that AIG sold to ML II—an assignment of
such claims to ML II would have been material to the transaction, and it is
inconceivable that it would not have been specifically discussed in any document
created during the negotiation and approval of the transaction if in fact either party
intended at the time that the claims be transferred.
Finally, the evidence of the parties’ behavior over the four years following the
execution of their contract—often regarded as the best extrinsic evidence of
contractual intent, see infra Section II.D—confirms beyond doubt that no assignment
of AIG’s tort claims was intended. AIG, following an intensive investigation of its
claims, authorized the filing of a highly-publicized lawsuit seeking $10 billion in
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-7- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
damages, including billions with respect to RMBS sold to ML II. The FRBNY, on the
other hand, made no effort whatsoever to investigate or develop tort claims and, even
more tellingly, when AIG filed this widely-publicized lawsuit, the FRBNY lodged no
objection whatsoever. To the contrary, after reviewing AIG’s complaint, the
FRBNY’s General Counsel wrote to AIG demanding that AIG confirm that “consistent
with the plain meaning of the Asset Purchase Agreement,” AIG was not asserting “any
claim for breach of [] contract” against BoA. See infra Section II.D.2, pp. 32–34. In
the correspondence that ensued, AIG acknowledged that ML II owned any contract
claims relating to the RMBS but reminded the FRBNY that nothing in the APA
“precludes AIG from asserting tort or securities law claims arising from
misrepresentations or omissions made in connection with AIG’s purchase of any
RMBS certificates.” Id. The FRBNY took no issue with AIG’s position and, in the
many months that followed, the FRBNY maintained that stance: it actively pursued
various contract claims while allowing AIG to pursue its tort claims completely
unimpeded. It would have been illogical for the FRBNY to have allowed billions of
dollars in tort claims to go not merely unasserted but unexplored if the FRBNY
understood itself to own those claims. It plainly did not. Indeed, to this very day, the
FRBNY has never asserted ownership of AIG’s tort claims, as the above-referenced
press release makes clear.
In short, the extrinsic evidence definitively establishes that there was no
assignment of AIG’s tort claims. Accordingly, BoA’s Motion To Dismiss AIG’s tort
claims for lack of standing must be denied with prejudice.
ARGUMENT I. THE LEGAL FRAMEWORK
Three fundamental legal principles govern resolution of the sole issue before
this Court: whether the parties agreed to transfer AIG’s RMBS tort claims to ML II
through the assignment of “all right, title and interest in . . . Related Instruments.” See
APA § 7.01 (Asperger Decl., Ex. A). Under these principles, clearly they did not.
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-8- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
First, in determining whether the parties intended to assign the tort claims, “it is
the objective intent of the parties that controls. The secret or subjective intent of the
parties is irrelevant.” Klos v. Lotnicze, 133 F.3d 164, 168 (2d Cir. 1997) (emphasis
added, internal citation omitted); see Faulkner v. Nat’l Geographic Soc., 452 F. Supp.
2d 369, 377–78 (S.D.N.Y. 2006) (“[O]nly objective manifestations of intent are
relevant under New York law . . . . [S]tatements of subjective intention
uncommunicated to the other contracting party are immaterial in construing the terms
of the contract.”) (emphasis added, internal citation omitted).11
This principle of blackletter law means that Mr. Mahoney’s Declaration and
testimony that the FRBNY intended to secure all “litigation claims,” including AIG’s
tort claims, for ML II are completely immaterial. As demonstrated below, Mr.
Mahoney admitted that he never communicated that purported desire to anyone at the
FRBNY, ML II, or, most damagingly for BoA, AIG; nor is there any other testimonial
or documentary evidence that the parties intended to, or discussed that they would,
assign AIG’s tort claims to ML II. Since Mr. Mahoney’s testimony reveals that his
Declaration was based on an uncommunicated intent—an inchoate desire to secure
“benefits” that resided purely in his head—his Declaration should be stricken and/or
disregarded altogether as only communicated intent may serve as extrinsic evidence to
aid in the interpretation of a contract. See Hollywood Foreign Press Ass’n v. Red
Zone Capital Partners II, 870 F. Supp. 2d 881, 917 (C.D. Cal. 2012) (statements
during negotiations and communicated intent admissible; undisclosed intent or
understanding not relevant); see also Nycal Corp. v. Inoco PLC, 988 F. Supp. 296,
301–02 (S.D.N.Y. 1997) (only “objective manifestations of the parties’ intent” can be
“germane testimonial evidence”).
11 See also Mobius Mgmt. Sys. Inc. v. Fourth Dimension, 880 F. Supp. 1005, 1018 (S.D.N.Y. 1994) (“[a] party’s actual or secret intent is immaterial to the formation of a contract”); Stetson v. Pfaltzgraff Co., Inc., 1991 WL 275648, at *9 (S.D.N.Y. Dec. 18, 1991) (defendant’s belief about meaning of agreement immaterial where the issue was never discussed, and thus plaintiff “would have no way of knowing” of defendant’s belief).
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-9- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
Second, under the controlling law, this Court may not read into a contract or
imply the imposition of an obligation the parties never discussed or negotiated. See
NML Capital v. Republic of Argentina, 17 N.Y.3d 250, 260 (2011) (“It is the role of
the courts to enforce the agreement made by the parties—not to add, excise or distort
the meaning of the terms they chose to include, thereby creating a new contract under
the guise of interpretation.”); see infra Section II.A. As New York courts have
recognized, where “no such term expressly appears, it cannot be supplied by the courts
under the guise of construction or interpretation, their power being limited to giving
effect only to the parties’ expressed intent.” Wilson Sullivan Co. v. Int’l Paper
Makers Realty Corp., 307 N.Y. 20, 25 (1954) (emphasis in original). This principle is
especially critical where, as here, New York law demands explicit language assigning
tort claims yet the APA is admittedly silent. That means that the Court may not
interpret “Related Instruments” to assign AIG’s tort claims when the objective
evidence conclusively shows that the parties never contemplated, discussed, or
negotiated such an assignment, nor made any reference to such an assignment in any of
the documents related to, or securing, the ML II transaction. At the time of the APA,
Mr. Mahoney himself did not believe or understand the “Related Instruments”
provision as having anything to do with the assignment of AIG’s tort claims. See
Mahoney Dep. 159:17–160:9, 160:22–161:10 (Asperger Decl., Ex. E). And Mr.
Manzari had no such intent or understanding. See Manzari Dep. 232:6–10 (Asperger
Decl., Ex. D). Thus, neither of the FRBNY’s negotiators (nor the AIG witnesses)
understood or intended the “Related Instruments” provision to supply the “something
more” that BoA’s entire Motion rests upon.
Finally, although the extrinsic evidence establishes conclusively that the APA
does not transfer tort claims, even if there were any remaining “ambiguity” or doubt
(which there is not), New York law requires the Court to hold as a matter of law that
no transfer occurred. The requirement of an explicit transfer of legal rights under
New York law, see January 30 Order, at *2, is rooted in sound public policy. It
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ensures that victims of fraud and other torts will not be denied their ability to seek
redress without conclusive proof that they have unequivocally given up their right to
do so. See AIG Opp. at 10.
Given these principles of law and policy, the Court’s finding that the APA’s
contractual language is ambiguous should be dispositive. ”Ambiguity,” in other
words, necessarily means the APA is not sufficiently explicit to satisfy the law
requiring an explicit transfer of rights. That conclusion becomes even more
compelling if the Court concludes that the evidence does not resolve this ambiguity.
Two New York Court of Appeals cases illustrate these principles. In the first,
Matter of Johnson City Professional Firefighters Local 921, 18 N.Y.3d 32 (2011), the
court found no waiver of a municipality’s rights to terminate firefighters at will based
solely on ambiguity in the contractual language failing to conclusively establish the
express waiver of such discretion. In the second, Consedine v. Portville Central
School District, 12 N.Y.3d 286 (2009), the court reached the same result based on
ambiguity in both the contractual language and testimonial evidence, neither of which
explicitly conveyed the school district’s intent to abandon its discretion to terminate a
probationary employee at will. In both cases, the legal requirement of an explicit
waiver of rights, combined with the underlying public policy interest in preserving
legal rights that are not explicitly abandoned, required the conclusion that no waiver of
rights occurred.
The reasoning of these cases, which are based on principles similar to those
underlying the requirement of explicit waiver of tort claims, applies with equal force
here—either because the APA’s language is considered insufficiently explicit to
convey a transfer of rights under New York law, as in Matter of Johnson, or because
the contractual language and extrinsic evidence combined fail to convey the requisite
express intent, as in Consedine. In either circumstance, lingering “ambiguity” as to
the parties’ intent to effect a transfer of rights compels the conclusion that they have
not. To hold otherwise would run against the great weight of precedent denying
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-11- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
assignments of rights in the absence of explicit intent. Moreover, AIG has not found a
single case in which a third-party stranger to a contract was able successfully to argue
that the contract effected an assignment of one of the parties’ claims when that party
contended otherwise. 12 Such a decision would be especially remarkable and
unjustified in these circumstances, where the party alleged to have assigned the claims
at issue denies doing so, and the party alleged to have received the assignment does not
contend otherwise.13
In short, separately or together, the legal principles governing the interpretation
of the APA mandate denial of BoA’s Motion. II. EXTRINSIC EVIDENCE DEMONSTRATES THAT THE APA DID NOT
TRANSFER AIG’S TORT CLAIMS
All of the extrinsic evidence—including witness testimony from those most
knowledgeable about the ML II transaction, documents relating to the transaction, and
the pre- and post-contractual conduct of AIG and the FRBNY confirms that the parties
never considered or discussed a transfer of tort claims. A. Testimonial Evidence Demonstrates That The Parties Did Not Intend
To Transfer Tort Claims
All four witnesses deposed in discovery confirmed that a transfer of tort claims
was never once discussed between or among the parties or their advisers during the
two-month period in which the ML II transaction was negotiated.14 The FRBNY
witnesses, moreover, confirmed AIG’s position that the APA did not include an 12 See, e.g., Banque Arabe, 57 F.3d at 151–53 (assignor and assignee agreed that the claims were assigned); Pro Bono Invs., Inc. v. Gerry, 2008 WL 4755760, at *18 (S.D.N.Y. Oct. 29, 2008) (same); Stewardship Credit Arbitrage Fund LLC v. Charles Zucker Culture Pearl Corp., 31 Misc. 3d 1223(A), at *2 (N.Y. Sup. Ct. N.Y. Cnty. May 4, 2011) (same); Fox v. Hirschfeld, 157 A.D. 364, 368 (1st Dep’t 1913) (assignor argued that he did not assign the claims and the court agreed); Royal Mortg. Corp. v. Fed. Deposit Ins. Corp., 20 F. Supp. 2d 664, 668–70 (S.D.N.Y. 1998) (same); CDR Creances S.A.S. v. Cohen, 2008 WL 2078673 (N.Y. Sup. Ct. N.Y. Cnty. May 9, 2008) (same); The Fund of Funds, Ltd. v. King, 1976 WL 799, at *2 (S.D.N.Y. Jun. 29, 1976) (same). 13 See the FRBNY’s March 1, 2013 Press Release, supra p. 5 n.10 (the Settlement Agreement between ML II and Countrywide “did not purport to settle the question of who actually owns the claims, which is a matter for the courts. . .”). 14 Internal FRBNY E-mail Regarding Updated Briefing Document on ML II (Oct. 2, 2008) (Asperger Decl., Ex. G) (reflecting early stage discussions on October 2, 2008); Asperger Decl., Ex. A (final APA dated December 12, 2008).
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-12- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
assignment of the tort claims.15 1. AIG Witnesses
Christopher Swift: Mr. Swift was the CFO of AIG’s Life and Retirement
Services business unit and AIG’s principal businessperson in negotiating the ML II
transaction.16 Swift Dep. 10:3–5, 74:12–21, 35:19–21 (Asperger Decl., Ex. B) (“I
was, I would say, the principal business person quarterback to find the solution.”). He
testified unambiguously that neither he nor anyone else at AIG had any intent to
transfer tort claims, id. 86:15–21, and that such claims were “absolutely not”
transferred, id. 86:4–14, 127:4–10, nor was a transfer ever discussed: We did not negotiate it; we did not intend to transfer it. And we were working, you know, collaboratively with the Fed and we talked about everything that was significant, we had a transparent discussion, they had their interest, we had ours. But this [the transfer of tort claims] was never, ever discussed.
Id. 127:14–21 (emphasis added); see also id. 81:16–84:9 (Swift interacted with James
Mahoney daily, but “never talked to [Mahoney] about litigation claims” or “claims . . .
of any type[]”); id. 75:11–15, 84:10–19 (Swift interacted with Steven Manzari several
times a week but never discussed tort claims or the FRBNY’s intent to acquire them).
Certainly, the parties “did not negotiate a transfer price o[r] terms and conditions for
transferring fraud claims.” Id. 77:8–12. In short, nobody at the FRBNY or its
advisers ever indicated a desire to acquire the tort claims. Id. 84:20–85:4.
Mr. Swift made clear that had the transaction included a transfer of tort claims,
he would have expected that fact to have been disclosed not only within AIG and in
the APA, but also in presentations to AIG’s Board of Directors and insurance
regulators: • Mr. Swift would have disclosed a transfer of tort claims to the Finance
Committee of AIG’s Board of Directors (the Committee designated to 15 In addition to the testimony cited below, AIG has prepared appendices containing other probative testimony from the witnesses’ depositions. These are attached to this brief as Exhibits 1 (Swift), 2 (Holmes), 3 (Manzari), and 4 (Mahoney). 16 Mr. Swift now serves as Executive Vice President and Chief Financial Officer of The Hartford. See http://www.thehartford.com/management-team/biography/chris-swift (last visited March 28, 2013).
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-13- Case No. 11-CV-10549-MRP (MANx)MEMORANDUM OF POINTS AND AUTHORITIES IN FURTHER OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
address the ML II transaction, id. 104:7–12) because it would have been “a significant deal point and an item that people would have and should have known that we were giving up,” id. 106:20–23. But when presenting the ML II transaction, he never mentioned the transfer of tort claims because “it wasn’t a deal point.” Id. 106:12–13. Indeed, a memorandum Mr. Swift and then-AIG CFO David Herzog submitted to the Finance Committee detailing the terms of the ML II transaction stated explicitly that: “The RMBS will be the only assets of the [ML II] LLC.” See Executive Summary: Domestic Securities Lending RMBS Transaction—Maiden Lane II (Dec. 3, 2008), Finance Committee Materials, at 2323–24 (Asperger Decl., Ex. H).
• Mr. Swift was responsible for communications with AIG’s state insurance regulators, id. 99:13–18, and would have disclosed a transfer of tort claims to the regulators because “it would have just been a significant part of the overall transaction we would have talked about.” Id. 102:11–23. Yet, as discussed more fully below, infra at p. 27, there was no mention of such claims.
The omission of any reference to tort claims in these communications speaks volumes,
demonstrating that the parties never transferred AIG’s tort claims to ML II.
Edward Holmes: As the “lead internal counsel representing AIG” on the ML II
transaction, in which capacity he oversaw AIG’s internal and external counsel,
conferred with AIG business people, and interacted with the FRBNY and its advisers,
Mr. Holmes testified similarly. Holmes Dep. 27:18–28:8 (Asperger Decl., Ex. C).
He participated directly in reviewing drafts of the term sheet and the APA. He
testified unambiguously: “[m]y initial reaction and my reaction now are the same,
which is that those claims were never transferred.” Id. 149:6–150:3. Asked by
counsel for BoA to recall “any discussion with anyone about whether AIG would be
transferring legal claims that can be asserted in a lawsuit to Maiden Lane II as part of
the transaction,” Mr. Holmes answered: “To the extent you are asking me . . . about
rights associated with AIG’s losses at the time AIG owned the securities, and that . . .
arose as a result of communications relating to the securities in connection with AIG
buying them, those claims . . . we never, ever discussed transferring those.” Id.
58:23–59:24 (emphasis added).
Importantly, during the APA negotiations, Mr. Holmes “knew from work I [had]
done . . . that to transfer tort claims, they have to be specifically addressed. And there
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are types of form documents out there that specifically addressed transferring tort
claims. We had specific experiences where we [had] done that . . . .” Id. 71:9–72:11.
Thus, Mr. Holmes stated, “[i]f somebody had asked me . . . are the tort claims
transferring as part of this deal? I would have told them no.” Id. 74:18–75:6; see
also id. 143:15–24, 145:9.
In light of his prior experiences with transfers of tort claims, Mr. Holmes said he
would not have permitted AIG to sign the APA without specific discussion of the
nature of that transfer and AIG’s resulting obligations. See id. 71:9–72:11. In prior
transactions, the purchaser of AIG’s tort claims had later demanded productions of
documents and witnesses from AIG, in order to support the purchaser’s assertion of the
claims in litigation. Id. 71:15–72:11. Compliance with these demands was costly
and burdensome for AIG, which was “not getting any of the value” of the litigation but
was nonetheless powerless to “stop the other party from continuing to pursue [it].” Id.
144:7–145:2; id. 157:17–158:12. Consequently, had the FRBNY requested a transfer
of AIG’s tort claims in connection with the ML II transaction, Mr. Holmes would have
insisted on limitations to the scope of AIG’s ensuing obligations.17 He never did that
because an assignment of tort claims was never part of the deal. 2. FRBNY Witnesses
Far from contradicting any of the foregoing testimony, the FRBNY’s witnesses
confirmed, unambiguously, that they never discussed with anyone a transfer of AIG’s
tort claims and that, indeed, they did not believe the claims were transferred through
the APA’s reference to “Related Instruments.”
Steven Manzari: Mr. Manzari is a Senior Vice President at the FRBNY. He
was the “number two” on the FRBNY’s AIG relationship team starting in September
2008 and, in that role, was involved in creating the ML II transaction. Manzari Dep.
17 See id. 71:9–72:11 (“We would have needed to talk about price, enforcement, . . . [and] how we stop it whenever . . . it’s getting out of hand for us . . . .”); id. 149:6–150:3 (“[t]here were a number of things that needed to be thought through and dealt with in order to . . . transfer those claims in a meaningful way”).
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17:13–14, 146:20–147:7 (Asperger Decl., Ex. D). He testified that he “certainly
understood what the terms of the transactions were,” id. 110:4–8, and that the only
“assets that would be sold . . . was a pool of residential mortgage-backed securities,”
id. 98:3–10 (“Q. Anything else? A. I don’t think so.”). Critically, he recalls no
discussion, whether “within the New York Fed,” or “with anyone from AIG,”
addressing whether AIG was “giving up claims that it might have [against] the banks
that had sold it the RMBS.” Id. 100:18–101:2; see id. 117:23–118:12 (“Q. Have you
ever heard anyone, through today, within the [FRBNY], ever say that in connection
with the [ML II transaction] AIG somehow gave up . . . its claims . . . against the bank
counterparties that initially sold [the] RMBS? A. Oh, I really do not recall this topic
coming up.”).18
James Mahoney: Mr. Mahoney’s testimony confirms that a transfer of the tort
claims was never considered, discussed, or effectuated.
Notwithstanding the statement in his Declaration that the FRBNY intended to
acquire “litigation claims,” Mahoney Decl., ¶ 2, Mr. Mahoney admitted that the
FRBNY was actually “unaware of any actual [fraud or tort] claims that may have
existed,” Mahoney Dep. 65:12–19 (Asperger Decl., Ex. E), and was not “even thinking
about the concept that AIG may have had tort claims . . . .” Id. 133:10–17. Mr.
Mahoney was explicit: “I don’t believe the [FRBNY] business side had in its mind that
if there was a legitimate [tort] claim, that [AIG] couldn’t pursue it.” Id. 126:16–19.
He testified that to his knowledge the FRBNY never discussed or disclosed, internally
or externally, to AIG or to anyone else, an intent to acquire the tort claims. He “was
not involved in any conversations that talked about [the] tort claims,” either within the
FRBNY, with the FRBNY’s lawyers, with AIG, or otherwise. Id. 82:11–83:2. Mr.
Mahoney admitted that, no one “at the [FRBNY] or representing the [FRBNY] ever
told AIG in words or substance that the [FRBNY] expected to receive AIG’s tort
18 See also id. 121:9–14 (confirming that Mr. Mahoney has “never raised the issue with [him] at any point in time.”)
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claims or tort claims as part of the ML II transaction.” Id. 85:7–13. Mr. Mahoney
never even asked the FRBNY’s counsel at Davis Polk preparing the APA to address
such an assignment in the legal documentation. Id. 81:23–82:3 (“I had no specific
conversations with lawyers about any particular terminology—legal terminology, tort
claims, or litigation claims—related to [the assignment of claims].”).
The record now makes clear that the first time Mr. Mahoney ever considered the
possibility that ML II acquired “litigation claims” from AIG through the APA was in
December 2012, when, at the behest of BoA, he was given an already drafted
declaration which contained that phrase. Id. 84:10–20; 181:11–182:2. Mr. Mahoney
then spent less than ten minutes considering or discussing it. Id. 184:21–22. The
language in Mr. Mahoney’s Declaration asserting that the FRBNY intended to acquire
“litigation claims,” was taken verbatim from the July 2012 Settlement Agreement
between the FRBNY and BoA. Mr. Mahoney, however, was not told that and had no
prior knowledge of the BoA-FRBNY July 2012 Settlement Agreement. See id.
101:6–20.
Mr. Mahoney sought to reconcile his Declaration that the FRBNY intended to
acquire “litigation claims” with his testimony that the FRBNY neither knew about nor
considered such claims in 2008 by testifying that he had a more general objective for
ML II to acquire “benefits” to maximize the security available to collateralize the loan
the FRBNY was making to ML II to purchase the RMBS from AIG. Id. 61:6–20,
118:25–119:21. Critically, however, Mr. Mahoney admitted that he never discussed
even this purported general intent with his business counterparts at AIG. As he said,
“I don’t think I ever discussed with them that question. That would have been taking
us far, far, far from the standard conversations we were having about which securities
would be transferred, what date, all the business questions being asked. So our
conversations did not get into questions like that.” Id. at 245:12–19. Since Mr.
Mahoney (similar to Mr. Manzari) failed to identify any other FRBNY employee or
representative who discussed his purported general intent with AIG, the record is
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devoid of any evidence that this inchoate goal was raised with AIG in any fashion, and
it therefore could not have been the basis for any assignment of AIG’s tort claims. In
cases where a court must divine the intent of the parties to an ambiguous contract, “it is
the objective intent of the parties that controls. The secret or subjective intent of the
parties is irrelevant.” Klos, 133 F.3d at 168 (emphasis added, internal citation
omitted).
Because an assignment of tort claims, or even a more general assignment of
AIG’s rights in regard to the $18 billion in losses it was about to incur, was never
discussed between the parties, it is not surprising that Mr. Mahoney made no claim that
any such assignment is provided for in the APA. Indeed, more than that, Mr.
Mahoney affirmatively rebutted BoA’s claim that a transfer of tort claims was intended
by the “Related Instruments” provision. See supra at pp. 1, 3–4. 3. Testimony Concerning “Related Instruments”
The testimony of these four witnesses makes abundantly clear that there was no
intent to transfer AIG’s tort claims to ML II and that any attempt to read such an intent
into the “Related Instruments” provision would be misguided and erroneous. See
APA § 7.01. Mr. Holmes, for example, testified that the purpose of that language was
merely to “create[] additional clarity” that the assets transferred to ML II included the
“ancillary rights in the related instruments.” Holmes Dep. 107:13–19 (Asperger
Decl., Ex. C). He testified that the “Related Instruments” language was not discussed
between AIG and the FRBNY. Id. 85:10–86:13. Mr. Swift similarly testified that he
understood the language to make clear that the assigned assets included the “securities
and all the rights, stuff that back-up the mortgages that make up the RMBS security.”
Swift Dep. 64:5–7 (Asperger Decl., Ex. B).
From the FRBNY side, Mr. Manzari testified that he was “not familiar” with the
language assigning AIG’s interest in the “Related Instruments,” and Mr. Mahoney
testified that he did not consider it in 2008 and had no understanding at that time as to
what it meant. Manzari Dep. 232:8–10 (Asperger Decl., Ex. D); Mahoney Dep. 50:9–
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52:2 (Asperger Decl., Ex. E). Mr. Mahoney could not recall “the definition of
‘Related Instruments’ ever being the subject of any . . . discussion between AIG . . .
and the [FRBNY].” Id. 52:12–53:3. Nor does he recall “discussing what the phrase
. . . ‘Related Instruments’ . . . meant with anyone internally at the [FRBNY],” id.
50:22–51:3, with the FRBNY’s outside advisers, id. 51:4–8, or with AIG, id. 52:12–
53:3. Asked to explain his current understanding of the “Related Instruments”
definition, Mr. Mahoney testified that “[f]rom a business perspective reading this [i.e.,
the “Related Instruments” definition], you would think that this would include the legal
documentation and the governance supporting that is being transferred in the purchase
of these assets over to Maiden Lane II.” Mahoney Dep. 159:7–12 (Asperger Decl.,
Ex. E).
As indicated above, see supra at p. 4 & n.9, that testimony confirms AIG’s long-
expressed position that the “Related Instruments” language was included in the 32-
page APA to make clear that, although AIG would retain a one-sixth residual interest
in the proceeds of MLII, the FRBNY, as sole managing member, would have full
control over the management and disposition of the RMBS, including the contractual
rights appurtenant to the RMBS. See AIG Opp. 7 n.6, 14–15, 18; APA §§ 1.03, 7.01;
see also Holmes Dep. 62:5–14 (Asperger Decl., Ex. C).19 As AIG explained during
oral argument on January 29, 2013, the ML II transaction was a complex transaction
involving billions of dollars. It would have been highly unusual, to say the least, for
the APA to not have included a provision—i.e., the “Related Instruments” provision—
specifically stating that the documentation underlying the RMBS was also being
19 BoA has argued that construing the assignment of AIG’s interest in the “Related Instruments” merely to transfer rights appurtenant to the RMBS renders that language mere surplussage, as such rights would transfer ordinarily in an open market securities transaction. That, of course, overlooks the fact that the APA was not an open market transaction. Indeed, the primary reason for the transaction was that AIG needed to liquidate the securities lending program’s $20 billion of RMBS and could not do so on the open market. Id. 109:22–110:15. AIG and the FRBNY thus negotiated a private transaction and documented it in a contract that detailed all of its terms, including precisely what was being assigned to ML II. See generally id. 141:13–143:4 (explaining the need for the APA).
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assigned to ML II. It would be even more unusual—and highly implausible—that
given the complexity of the transaction, the sophistication of the parties and their
counsel, and the desire for clarity, the parties would have remained silent throughout
the negotiations and in the APA itself on the transfer of tort claims, while somehow
intending for those claims to have been transferred by implication in the definition of
“Related Instruments.” Thus, BoA’s position that the transfer of AIG’s interest in
“Related Instruments” was the “something more” that transferred AIG’s tort claims is
completely unsupported.
B. Evidence Of The Parties’ Purpose Demonstrates That The APA Did Not Transfer AIG’s Tort Claims
It is undisputed that the primary circumstance leading to the ML II transaction
was the federal government’s desire to provide a more viable capital structure for AIG
following the $85 billion credit facility extended in September 2008. Thus, in the
October–November 2008 time frame, the Government—through the FRBNY and the
Treasury—developed a package of assistance to further strengthen AIG financially and
to persuade the credit rating agencies not to lower AIG’s rating. See Mahoney Dep.
271:21–284:7 (Asperger Decl., Ex. E); Manzari Dep. 160:3–162:6 (Asperger Decl.,
Ex. D). At the same time the ML II transaction was approved, the U.S. Treasury
purchased $40 billion of preferred equity in AIG; and both the Treasury and the
FRBNY believed in November 2008 that the additional assistance was sufficient to
maintain AIG as a viable entity going forward. See Mahoney Dep. 282:21–283:6,
283:14–284:7 (Asperger Decl., Ex. E); Manzari Dep. 161:24–162:4 (Asperger Decl.,
Ex. D); Swift Dep. 72:10–73:3 (Asperger Decl., Ex. B); see also Press Release, Board
of Governors of the Federal Reserve, Federal Reserve Board and Treasury Department
Announce Restructuring of Financial Support to AIG (Nov. 10, 2008) (Asperger Decl.,
Ex. I). Nothing about the circumstances or the purpose of the transaction suggests
that AIG gave up its tort claims relating to the RMBS. Indeed, in contrast to cases
such as Banque Arabe, 57 F.3d at 151–52, in which a party’s intent to liquidate and
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cease operations made it logical to infer its intent to assign tort claims, the intent of the
parties in this case to preserve and strengthen AIG cuts strongly against any inference
that an assignment of valuable tort claims was intended.
There is also no question that the FRBNY believed it would get paid back, based
solely on the valuable RMBS that AIG was selling to ML II. Specifically, the FRBNY
“spen[t] a lot of resources to ensure” that its loan was fully secured, Mahoney Dep.
70:17–23 (Asperger Decl., Ex. E), including by “hir[ing] a set of outside advisers with
legal counsel as well as three different types of advisers externally,” id. 71:2–5; Swift
Dep. 82:7–16 (Asperger Decl., Ex. B) (“The Fed . . . was intent on having its loan
repaid, and it used BlackRock and us to give them comfort that, under various
economic conditions and scenarios, their loan would be repaid.”). None of these
advisers considered, assessed, or modeled the value of the tort claims at issue on this
Motion as part of their assessment of the FRBNY’s ability to get paid back. Mahoney
Dep. 78:22–80:2 (Asperger Decl., Ex. E); Manzari Dep. 67:10–20 (Asperger Decl., Ex.
D). Instead, each concluded that the FRBNY was secured, in spades, based solely on
the value of the RMBS themselves. Id. 238:18–239:24; Mahoney Dep. 71:6–14,
213:11–21 (Asperger Decl., Ex. E). Those RMBS, and nothing more, were sufficient
to convince the FRBNY, at all relevant times, that “even under the wors[t] stress case
scenario . . . the Fed’s loan would be repaid in full,” id. 72:2–10 (emphasis added),
and was “unlikely to take any losses . . . even in severe stress scenarios,” id. 71:6–14;
Swift Dep. 84:3–4 (Asperger Decl., Ex. B) (“The downside risk . . . was pro[vided]
with the collateral performance in ML II.”).20 This evidence rebuts any suggestion
that an assignment of AIG’s tort claims was necessary to secure the loan to ML II.
20 Documents corroborate this conclusion. For example, a BlackRock analysis dated October 8, 2008 concluded that there was a “very low likelihood of [default] even under extremely severe stress scenarios.” BlackRock Presentation to the FRBNY (Oct. 8, 2008) (Asperger Decl., Ex. J); Mahoney Dep. 194:24–195:18 (Asperger Decl., Ex. E). An FRBNY presentation dated October 25, 2008 reiterated that view. See RMBS Solution Discussion Document (Oct. 25, 2008) at 2 (Asperger Decl., Ex. K); Mahoney Dep. 213:11–21; see also Swift Dep. 116:22–119:3, 125:19–126:16 (Asperger Decl., Ex. B) (noting that the FRBNY had little risk of loss).
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C. Documentary Evidence Demonstrates That The Parties Did Not Intend to Transfer Tort Claims
The documentary evidence further demonstrates that the parties never intended
to assign AIG’s tort claims. The FRBNY effectively concedes as much, admitting the
absence of “any document . . . anywhere” evincing an intent to “obtain AIG’s rights”
in tort claims, Mahoney Dep. 200:4–19 (Asperger Decl., Ex. E); see also id. 248:18–
249:22. For this reason too, BoA’s Motion should be denied. 1. Term Sheet And Board Authorizations
Between November 5 and November 9, 2008, AIG and the FRBNY exchanged
term sheets intended to reflect “the material terms of the transaction” to which the
parties had agreed. See Drafts of Term Sheets Exchanged Between AIG and the
FRBNY (Asperger Decl., Ex. L). Mr. Swift, the principal negotiator for AIG,
explained that he would have expected the ML II term sheet to discuss a transfer of tort
claims if such a transfer had been agreed to, because: it would have been a significant . . . deal point that we would have . . . negotiated, discussed, tried to value and would have been . . . dealing with . . . . It would have been self evident that was the intent and we would have documented it and talked through the terms and conditions of how we would transfer it.
Swift Dep. 96:22–97:7 (Asperger Decl., Ex. A). Although the FRBNY concedes that
the “[t]erm sheet . . . was intended to reflect the material terms of the transaction,”
Mahoney Dep. 219:24–220:4 (Asperger Decl., Ex. E), significantly, no term sheet—
draft or final—anywhere mentions an assignment of tort claims; all term sheets refer
only to a transfer of RMBS, see Term Sheet for AIG Board of Directors Meeting at
2423–30 (Nov. 9, 2008) (Asperger Decl., Ex. M).
Mr. Holmes, AIG’s lead internal lawyer on the transaction, testified that he was
involved in negotiating the term sheet and reviewed it “thoroughly” and “in detail.”
Holmes Dep. 133:2, 133:21 (Asperger Decl., Ex. C). Examining the term sheet that
was presented to the AIG Board of Directors at the November 9, 2008 meeting, see
Asperger Decl., Ex. M, he testified “[W]hat’s being stated here is that the securities
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that would be listed on Schedule A is—is what’s transferring, less principal and
interest payments that accrue between October 31st and the Closing Date . . . .”
Holmes Dep. 134:14–19 (Asperger Decl., Ex. C).21 Mr. Holmes also confirmed that,
to his understanding, the scope of what was transferred through the transaction did not
change between the time the term sheet was agreed upon and the execution of the final
agreement. Holmes Dep. 135:9–16 (Asperger Decl., Ex. C).22
The term sheet’s omission of any reference to tort claims takes on added
importance because it was presented to both the AIG Board of Directors and the
Federal Reserve Board of Governors and was the basis for their respective
authorizations for the ML II transaction. See Board Minutes at 2389–2445 (Asperger
Decl., Ex. M) (reflecting Board deliberations); Swift Dep. 94:23–95:2 (Asperger Decl.,
Ex. B) (final term sheet presented to Board did not reflect transfer of tort claims); id.
109:9–15 (memorandum referred to “individual securities that were being sold” and
not tort claims); Manzari Dep. 116:13–21 (Asperger Decl., Ex. D) (Board of
Governors formally authorized ML II in early November); Memorandum to FRBNY
Board of Governors (Nov. 6, 2008) (Asperger Decl., Ex. N) (memorandum seeking
Board of Governors authorization for, among other things, ML II). Specifically, as
the lead ML II negotiator, Mr. Swift prepared the materials for the November 9, 2008
AIG Board of Directors meeting at which the terms of the ML II transaction were
presented. Swift Dep. 90:13–19 (Asperger Decl., Ex. B). He testified clearly that
these materials would have informed the Board that tort claims were transferring to
ML II if he had believed that to be the case since it would been a “significant . . . deal
point that we would have . . . negotiated, discussed, [and] tried to value.” Id. 96:17–
25. The Board materials did not mention tort claims because they were not 21 See AIG Board of Directors Meeting Minutes (Nov. 9, 2008) at 2423–2424 (Asperger Decl., Ex. M) (“Board Minutes”) (laying out terms of sale of “RMBS Assets” and defining “RMBS Assets” as “Collectively, the RMBS issues listed in Schedule A hereto for each Seller . . .”). 22 See also Swift Dep. 93:9–14 (Asperger Decl., Ex. B) (term sheet reference to “certain pool of RMBS” means “the RMBS assets that were backing the securities lending obligations”).
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transferred as part of the deal. Id. 94:15–17. Representatives of both the FRBNY,
and its counsel, Davis Polk & Wardwell LLP (“Davis Polk”), attended the AIG Board
meeting, and there is no record of them raising any objections or clarifications to the
presentation of the ML II term sheet. See id. 89:6–90:2; see also Board Minutes at
2389 (Asperger Decl., Ex. M).
At its November 9 meeting, the AIG Board delegated further action on the ML
II transaction to the Finance Committee of the AIG Board of Directors. Mr. Swift
personally presented the final terms of the ML II transaction to the Finance Committee
on December 9, 2008. See Minutes of the AIG Finance Committee Meeting (Dec. 9,
2008) at 2446 (Asperger Decl., Ex. H). When he did so, he again did not mention tort
claims because that was not part of the deal. See Swift Dep. 106:2–13 (Asperger
Decl., Ex. B). Nor did the FRBNY or Davis Polk, both of which sent representatives
to that meeting, raise tort claims as an issue. See AIG Finance Committee Minutes
(Dec. 9, 2008) at 2299 (Asperger Decl., Ex. H). Mr. Swift and Mr. Herzog, AIG’s
then-CFO, also prepared a memorandum for the Finance Committee, dated December
3, 2008, explaining the final deal terms for the ML II transaction. See Executive
Summary: Domestic Securities Lending RMBS Transaction—Maiden Lane II (Dec. 3,
2008) at 2323–24 (Asperger Decl., Ex. H). That memorandum stated expressly that
“[t]he RMBS will be the only assets of the [ML II] LLC.” Id. (emphasis added).
Again, had tort claims been included, Mr. Swift would have raised such a material
issue for consideration by the Finance Committee.
Similarly, Mr. Mahoney, who was “present . . . in the prep[arations]” for the
presentation to the Board of Governors for the Federal Reserve seeking approval of the
ML II transaction, Mahoney Dep. 83:11–20 (Asperger Decl., Ex. E), recalls no
discussion during those meetings “about seeking to obtain or receive from AIG its
right to pursue tort or fraud claims against the banks that sold [AIG] the RMBS
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securities,” id. 83:21–84:5.23 The fact that the Board of Governors, in approving the
ML II transaction, was not advised by the FRBNY that AIG would be assigning away
$18 billion in tort claims is telling. 2. Drafting History Of The APA
After the business executives reached a final agreement on deal terms, they
instructed their lawyers to draft the APA to reflect that agreement. Mahoney Dep.
138:23–139:2 (Asperger Decl., Ex. E). The APA, in other words, was not intended to
contain any material terms that the business negotiators had not agreed to; the lawyers
were simply scriveners. And, as scriveners, at no time were they told by Mr.
Mahoney to document or provide for the assignment of AIG’s tort claims. See id.
81:23–82:3; 137:7–10.
As with the term sheet, there is no draft of the APA that references or provides
for an assignment of AIG’s tort claims or a more general assignment of extra-
contractual rights relating to the RMBS, as Mr. Mahoney seems to have imagined.24
AIG received a first draft of the APA from the FRBNY’s counsel on December 6,
2008 and signed it six days later.25 Neither the assignment clause, nor the definitions
of “RMBS Issue” or “Related Instruments,” were ever substantively modified during
this period. Compare Asperger Decl., Ex. R; with Asperger Decl., Ex. A. That is no
23 Likewise, in congressional testimony, a Board of Governors representative described the ML II transaction as involving the “purchase[], at market prices, [of] RMBS,” with no mention of tort claims. S. COMM. ON BANKING, HOUS., AND URBAN AFFAIRS (March 5, 2009) (statement of Donald L. Kohn, Vice Chairman, Board of Governors, Federal Reserve) at 3 (Asperger Decl., Ex. O). FRBNY representatives testified identically. See The [FRBNY’s] Involvement with AIG (May 26, 2010) (Joint Written Testimony of Thomas C. Baxter and Sarah Dahlgren before the Congressional Oversight Panel) (Asperger Decl., Ex. P) (ML II “purchased, at market prices, RMBS with a par value of $39.3 billion”); see also Press Release, FRBNY, AIG RMBS LLC Facility: Terms and Conditions (Dec. 16, 2008) (Asperger Decl., Ex. Q) (“[ML II] LLC borrowed approximately $19.8 billion from the New York Fed and used the proceeds to purchase RMBS assets . . . with an estimated fair market value of $20.8 billion.”). 24 Twenty drafts of the APA were produced in discovery. AIG has not included them all in its submission to the Court but they are available for review upon request. AIG includes in the Asperger Declaration (Ex. R) the first draft of the APA it received from the FRBNY’s counsel on December 6, 2012. 25 See E-mail from Eli James Vonnegut (Dec. 6, 2008) (Asperger Decl., Ex. R); E-mail from Eli James Vonnegut (Dec. 12, 2008) (Asperger Decl., Ex. S).
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accident: As noted above, the assignment provision and relevant definitions, like the
tort claims generally, were never discussed or negotiated at all. It is inconceivable
that sophisticated entities like the FRBNY, ML II, and AIG, and their respective
boards, attorneys, and advisers, would see fit to transfer tort claims arising from an $18
billion loss through a back-handed reference to “Related Instruments,” with absolutely
no indication that the term encompassed such claims—particularly when the parties
and their lawyers knew or should have known, that New York law requires an explicit
transfer of such claims, and every other material term in the transaction, including
price, number of RMBS tranches, and delivery date was exhaustively detailed. 3. Valuation Of The RMBS
A key aspect of the APA negotiation was the determination of the price at which
the RMBS would be sold. Here, too, the documents make clear that no transfer of
AIG’s tort claims was contemplated. They demonstrate that the parties and their
experts made no effort to value the claims and assigned them no value in settling on
the purchase price. See Con. Edison, Inc. v. N.E. Utilities, 332 F. Supp. 2d 639, 649
(S.D.N.Y. 2004) (“It is inconceivable that sophisticated parties informed by counsel
would bargain away such a claim [in the context of a release] without monetary
consideration, and the terms of the release cannot reasonably be read to require such a
result.”); id. at 650 (“Particularly in the context of a $1.1 billion claim, the failure of
the [settling] parties to discuss or even consider the impact of the release on this action
clearly demonstrates that they did not intend for the release to be as broad as Con Ed
now claims.”).26 In October and November 2008, BlackRock, acting as financial
adviser to the FRBNY, performed a valuation of the RMBS that were to be transferred
pursuant to the ML II transaction. Manzari Dep. 60:16–19 (Asperger Decl., Ex. D).
The “values . . . that BlackRock came up with . . . became the actual prices at which 26 See also Tarantola v. Williams, 48 A.D.2d 552, 554 (2d Dep’t 1975) (“[I]t is not reasonable to include within the terms of the general release [the right to implead for indemnity, contribution, or apportionment]” because “[n]o part of the consideration for the release was related to the extinguishment of this claim . . . . The [right to implead] was neither bargained for nor discussed.”).
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the RMBS were sold . . . into [ML II].” Mahoney Dep. 78:22–79:3 (Asperger Decl.,
Ex. E). The valuation reflected solely and “in the totality” the “underlying interest
and principal payments that flow through the [underlying] mortgage pools,” Manzari
Dep. 63:8–13, 67:17–20 (Asperger Decl., Ex. D), i.e., “the expected future cash flows
generated by the underlying mortgages with some discount factor being applied back,”
id. 67:10–16.27
BlackRock did not include the tort claims (or even consider them) in its
valuation—confirming that the FRBNY did not bargain for or purchase those claims
and that AIG did not receive any consideration for them had it transferred them. See
Swift Dep. 115:25–116:8 (Asperger Decl., Ex. B) (noting that the BlackRock valuation
was based upon the cash flow from the underlying mortgages in the RMBS). Indeed,
Mr. Mahoney, who “was involved with . . . the prices at which things would be
transferred,” Mahoney Dep. 139:3–14 (Asperger Decl., Ex. E), confirmed that “[t]here
was no particular price or value that was associated with the” tort claims, id. 79:4–11
(emphasis added); see also id. 79:19–80:17. Additionally, none of the documents
reflecting BlackRock’s pricing of assets suggest any consideration for the value of the
tort claims. See BlackRock Presentation to the FRBNY (Oct. 8, 2008) (Asperger
Decl., Ex. J); Mahoney Dep. 193:12–18 (Asperger Decl., Ex. E) (BlackRock
presentation concerning the FRBNY’s “objectives” and “structure,” with no discussion
of assignment of the tort claims).28 4. Disclosures To Regulators, Rating Agencies, And The Public
The AIG insurance subsidiaries that entered into the APA are highly-regulated
entities, subject to oversight by the insurance departments of various states. If they 27 See also Mahoney Dep. 79:11–14 (Asperger Decl., Ex. E) (“the price estimates were based solely on the cash flows generated by the securities . . . purchased into [ML II]”); id. 77:20–78:10 (The “valuations . . . by BlackRock were arrived at by projecting the future cash flows from the underlying mortgages in each of the [RMBS.]”). 28 The same is true of an analysis that Morgan Stanley conducted at the FRBNY’s request. See Morgan Stanley Capital Structure Discussion Materials (Oct. 26, 2008) (Asperger Decl., Ex. T); Mahoney Dep. 230:2–233:12 (Asperger Decl., Ex. E) (Morgan Stanley presentation reflecting “structure” of the transaction and referring only to a transfer of RMBS).
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had transferred billions of dollars in tort claims pursuant to the APA, they would have
been required to disclose in advance that transfer to their insurance regulators.
Holmes Dep. 137:22–138:5 (Asperger Decl., Ex. C). Yet AIG’s presentation of the
ML II transaction to insurance regulators, dated November 10, 2008, mentioned only a
sale of RMBS—not a sale of tort claims. See AIG Domestic Securities Lending
Proposed Permanent Solution for State Insurance Departments (Nov. 10, 2008)
(Asperger Decl., Ex. U); Holmes Dep. 139:17–140:25 (Asperger Decl., Ex. C) (no
reference in presentation to transfer of tort claims, which was something that “would
have needed to be in this document”). The FRBNY received a draft of this
presentation, see FRBNY Internal E-mail Regarding State Insurance Presentation
(Nov. 10, 2008) (Asperger Decl., Ex. V), but never objected to its omission of the
purported transfer of tort claims.
Similarly, in October 2008, AIG made presentations to the major rating agencies
regarding the ML II transaction and other assistance then being provided to AIG.
AIG sought to avoid a ratings downgrade, by assuring the rating agencies that it was
addressing its liquidity challenges with the support of the FRBNY. Yet the
presentations, which describe a transfer of RMBS, nowhere mention or discuss a
transfer of tort claims.29 The FRBNY received drafts of these presentations from AIG
and commented on both of them, but did not comment or object to the presentations’
failure to discuss a transfer of tort claims.30 The parties’ public statements similarly
did not mention a transfer of tort claims. For instance, in a November 10, 2008 press
release announcing the creation of ML II, the Federal Reserve Board of Governors
noted that its loan to ML II would be used to purchase “residential mortgage-backed
securities” and would be “secured by all of the assets of the LLC and [would] be
29 See AIG U.S. Securities Lending Rating Agency Update Presentation at 8–9 (Oct. 15, 2008) (Asperger Decl., Ex. W); AIG U.S. Securities Lending Rating Agency Update Presentation (Oct. 28, 2008) (Asperger Decl., Ex. X). 30 See E-Mail Exchange between AIG and the FRBNY (Oct. 14, 2008) (Asperger, Decl., Ex. Y); E-mail Exchange between AIG and the FRBNY (Oct. 28, 2008) (Asperger Decl., Ex. Z); E-mail from the FRBNY to AIG (Oct. 15, 2008) (Asperger Decl., Ex. AA).
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repaid from the cash flows produced by these assets as well as proceeds from any sales
of these assets.” Nov. 10, 2008 Press Release (Asperger Decl., Ex. I). The press
release did not indicate that ML II or the FRBNY were secured by, or would be able to
obtain repayment from, tort claims associated with the RMBS, as would be expected if
such claims had been transferred to ML II. Id. Indeed, on the same day, AIG
provided the FRBNY with a draft set of questions and answers for an upcoming AIG
earnings call, which also did not mention tort claims. See Federal Reserve Solution
for RMBS AIG Q & A (Nov. 10, 2008) (Asperger Decl., Ex. BB). Id. Once again,
the FRBNY did not object. 5. U.C.C. Statements
As part of the ML II transaction, the parties executed a security agreement
identifying the assets that had been designated as collateral for the FRBNY’s $19.5
billion loan to ML II. See Security Agreement between ML II, FRBNY, AIG, and The
Bank of New York Mellon (Dec. 12, 2008) (“Security Agreement”) (Asperger Decl.,
Ex. CC). Although the New York Uniform Commercial Code requires commercial
tort claims to be specifically identified in order to attach as secured collateral,31 the
ML II Security Agreement did not do so. See Security Agreement § 2(a)-(xi).
Particularly given Mr. Mahoney’s assertion that the reason ML II would have acquired
AIG’s tort claims would have been to provide security for the loan made by the
FRBNY, see Mahoney Dep. 129:8–14 (Asperger, Decl., Ex. E), only one reasonable
inference can be drawn from this omission: Neither the FRBNY (which was under a
statutory duty to make certain that its loan was fully secured), nor the FRBNY’s 31 See N.Y. U.C.C. § 9-108(e) (embodying U.C.C. § 9-108(e)) (“A description only by type of collateral defined in this chapter is an insufficient description of: (1) a commercial tort claim . . . ”); see also N.Y. U.C.C. Law § 9-108, cmt. 5 (“Subsection (e) requires greater specificity of description in order to prevent debtors from inadvertently encumbering certain property. Subsection (e) requires that a description by defined ‘type’ of collateral alone of a commercial tort claim . . . is not sufficient.”); Eldon H. Reiley, 1 Sec. Interests in Pers. Prop. § 10:14 (2012) (“For commercial tort claims, § 9-108 (rev) requires a specific description.”); N.Y. U.C.C. Law § 9-109 cmt. 15 (McKinney 2001) (noting that “a description of collateral in a security agreement as ‘all tort claims’ is insufficient to meet the requirement for attachment”) (citing N.Y. U.C.C. Law § 9-108(e)).
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sophisticated lawyers, believed that ML II owned the tort claims. See In re Laminated
Veneers Co., Inc., 471 F.2d 1124, 1125 (2d Cir. 1973) (“[T]he security agreement
embodies the intention of the parties” and is the document which creates the security
interest). 6. Press Releases
The FRBNY and AIG both issued press releases after ML II was signed. The
FRBNY’s press releases stated that it was “fund[ing] the purchase of [RMBS] from
. . . AIG.”32 Likewise, the AIG press release referred solely to “interests in a pool of
$39.3 billion face amount of [RMBS].”33 Neither press release mentioned the tort
claims or discussed their transfer. 7. The ML III Transaction
Contemporaneous with the parties’ efforts to alleviate the liquidity pressures in
the AIG securities lending program, AIG and the FRBNY were also addressing the
liquidity pressures at AIG Financial Products (“AIG-FP”), which had written credit
default swaps (“CDS”) to various third-party financial institutions protecting multi-
sector CDOs. As part of the coordinated package of assistance provided in the
October–November 2008 time frame, AIG and the FRBNY eventually created another
SPV called Maiden Lane III (“ML III”) that would resolve the liquidity strain imposed
by AIG-FP’s CDS. See Capital Structure Materials at 3, 7 (Asperger Decl., Ex.
T). ML III was funded by a loan from the FRBNY and an equity contribution from
AIG. Id. at 7. With that capital, it purchased effectively at par from the third-party
financial institutions the CDOs that were protected by AIG-FP’s CDS. Id. At the
same time, AIG-FP and the CDS counterparties executed agreements that terminated
the CDS (the “Termination Agreements”).
Davis Polk “orchestrat[ed] the legal documentation for both ML II and ML
III.” Mahoney Dep. 242:12–16. Under the ML III Termination Agreements, AIG 32 Dec. 16, 2008 Press Release (Asperger Decl., Ex. Q) (emphasis added). 33 See AIG Sells Residential Mortgage-Backed Securities Portfolio and Terminates U.S. Securities Lending Program, BUSINESS WIRE (Dec. 15, 2008) (Asperger Decl., Ex. DD).
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“forever release[d]” CDO Counterparties from “any and all Claims and Unknown
Claims of any nature whatsoever that AIG . . . ever had, now has or can, shall or may
have, by reason of any matter, cause or thing occurring at any time up to the
Termination Date that arises out of or in any way relates to obligations (whether
present or future, fixed or contingent or otherwise),” under the portion of the
transactions that were being terminated. See, e.g., ML III Termination Agreement
between ML III, AIG, and Barclays at § 1(b)(ii) (Asperger Decl., Ex. EE) (emphasis
added). The Agreement defined “Claims” as specifically including litigation claims
such as “fraud” and “security law” violations: “any action . . . of any nature
whatsoever, including but not limited to claims based on breach of fiduciary duty or
other legal duty, . . . negligence, negligent misrepresentation, . . . contract, fraud,
aiding and abetting fraud . . . , any securities law or any other theory.” Id. at 1(b)(vii)
(emphasis added). The parties’ inclusion of this language in ML III (and abject
failure to include comparable explicit language in the ML II APA) further confirms
that when AIG and FRBNY intended to address litigation claims, they knew how to do
so clearly and explicitly. See, e.g., Compagnia Importazioni Esportazioni
Rappresentanze v. L-3 Commc’ns Corp., 703 F. Supp. 2d 296, 311 (S.D.N.Y. 2010)
(defendant’s evidence of previous contracts was probative because the evidence
demonstrated that “when the parties wanted to include a one-year limitation . . . they
knew how to do so”). The notion that these same parties intended by their silence to
assign AIG’s tort claims as a “something more” through the APA’s definition of
“Related Instruments” is baseless, illogical and implausible.
* * *
In sum, the documentary evidence confirms—without a single exception—that
no one at AIG, the FRBNY, their Boards, or their advisers, ever discussed the
possibility of assigning AIG’s tort claims, or its intent or agreement to do so. This
evidence alone defeats BoA’s Motion.
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D. The Parties’ Post-Closing Conduct Confirms That The APA Did Not
Assign Tort Claims
It is well settled as a matter of New York law that “[t]he best evidence of the
intent of parties to a contract is their conduct after the contract is formed.” Waverly
Corp. v. City of New York, 48 A.D.3d 261, 265 (1st Dep’t 2006); see also Websters
Red Seal Publ’ns Inc. v. Gilberton World-wide Publ’ns Inc., 67 A.D.2d 339, 341 (1st
Dep’t 1979), aff’d 53 N.Y.2d 643 (1981) (the “most persuasive evidence of the agreed
intention of the parties in those circumstances is what the parties did when the
circumstances arose”); Fed. Ins. Co. v. Ams. Ins. Co., 258 A.D.2d 39, 44 (1st Dep’t
1999) (“[T]he parties’ course of performance under the contract is considered to be the
most persuasive evidence of the agreed intention of the parties.”) (internal quotation
marks omitted).34
The same is true in federal courts: “For over a century, courts have looked to
the conduct of the parties in resolving ambiguities in contractual language . . . . There
is no surer way to find out what parties meant, than to see what they have done.” IBJ
Schroder Bank & Trust Co. v. Resolution Trust Corp., 26 F.3d 370, 374 (2d Cir. 1994)
(quoting in part Brooklyn Life Ins. Co. v. Dutcher, 95 US (5 Otto) 269 (1877)); In re
Med. Capital Sec. Litig., 2011 WL 5067208, at *5 (C.D. Cal. Jul. 26, 2011) (collecting
cases for the proposition that the conduct of parties after executing of contract is the
most reliable evidence of their intent).
Here, the conduct of AIG and the FRBNY after the APA’s execution
overwhelmingly confirms their mutual understanding that the tort claims had not been
transferred to ML II.
34 See also City of N.Y. v. N.Y.C. Railway Co., 193 N.Y. 543, 548 (1908) (“When the parties to a contract of doubtful meaning, guided by self-interest, enforce it for a long time by a consistent and uniform course of conduct, so as to give it practical meaning, the courts will treat it as having that meaning.”).
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1. AIG Preserved And Pursued The Tort Claims
In August 2011, AIG filed this $10 billion suit against BoA. AIG did so with
the belief and understanding that it, and not ML II, owned the claims at issue. See
Holmes Dep. 148:2–17 (Asperger Decl., Ex. C) (testifying that he reviewed AIG’s
complaint against BoA before it was filed and had no objection to proceeding). 2. ML II Did Not Object To AIG’s Assertion Of The Tort Claims
The AIG v. BoA complaint was widely reported in the press, and was known to
the FRBNY. See, e.g., Louise Story and Gretchen Morgenson, A.I.G. Sues Bank of
America Over Mortgage Bonds, N.Y. TIMES (Aug. 8, 2011); BlackRock, Maiden Lane
II Q3 2011 Portfolio Review Meeting at 16 (Nov. 2, 2011) (Asperger Decl., Ex. FF).
Yet the FRBNY did not object to AIG’s prosecution of the tort claims, as would be
expected had the FRBNY believed it owned the claims. Far from it, the FRBNY—
through Thomas Baxter, the FRBNY’s General Counsel who was directly involved in
negotiating the ML II transaction in 2008, see Manzari Dep. 111:23–24 (Asperger
Decl., Ex. D)—instead engaged in extensive correspondence with AIG in the fall of
2011, in which it acceded to AIG’s explicit assertion of its right to pursue the tort
claims, and merely sought to clarify that AIG was not asserting contract claims
relating to the RMBS at issue. In Mr. Baxter’s initial September 26, 2011 letter to
AIG, he directly quotes the definitions of “RMBS Issue” and “Related Instruments”
from the APA, and then asserts that according to these provisions “ML II owns any
and all contract-based claims relating to the RMBS and the various offering
documents and related agreements.”35 Nowhere in this letter does Mr. Baxter object
to AIG’s assertion of tort claims as one would expect if the FRBNY believed such
claims belonged to ML II, and instead he simply asks AIG to confirm, “consistent with
the plain meaning of the Asset Purchase Agreement,” that AIG is not asserting “any
claim for breach of [] contract,” that it was not seeking rescission on the RMBS that
35 Letter from Thomas C. Baxter, Jr., FRBNY, to Michael Carlinsky, on behalf of AIG (Sept. 26, 2011) at 1–2 (Asperger Decl., Ex. GG) (emphasis added).
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had been sold to ML II, and to amend its complaint accordingly. Id. In fact, the
FRBNY overtly threatened that if AIG did not confirm that it did not “retain the right
to assert any claim for breach of a contract,” “ML II reserves the right to take any steps
necessary to protect its interests, including seeking prompt judicial action.” Id. at 2.
There was no discussion of any “steps” ML II would take in relation to tort claims.
Had the FRBNY truly believed it owned AIG’s tort claims, this letter would have been
dramatically different.
Subsequent correspondence further confirms that the FRBNY did not believe
that ML II acquired tort claims from AIG. • AIG responded to Mr. Baxter’s letter on October 3, 2011. Thomas A.
Russo, AIG’s Executive Vice President and General Counsel informed Mr. Baxter that “AIG has not asserted any contractual mortgage purchase claims for [RMBS] that it does not own” and that it “will not assert contractual mortgage repurchase claims for RMBS” it sold to ML II.36
• Mr Baxter’s October 11, 2011 letter again asks AIG to confirm that “AIG will not assert any claim for breach of a contract under which the RMBS were created, pooled, securitized, issued, sold, serviced, enhanced, insured or guaranteed.”37 As with his initial letter, Mr. Baxter refers to the definition of “Related Instruments” in asserting that ML II possesses the contract claims. Moreover, Mr. Baxter again fails to object to AIG’s assertion of tort claims and instead concedes that the FRBNY “agree[s] that AIG has the right to seek damages under Section 12(a)(2) of the Securities Act of 1933 for those RMBS that it sold to ML II.” Id. (emphasis added).
• AIG’s November 10, 2011 letter again confirms that “AIG will not assert any cause of action for breach of a provision of a Related Instrument (as defined in the Asset Purchase Agreement).”38 This letter also states that “AIG seeks rescission on its Section 12(a)(2) and common-law fraud claims with respect to only those RMBS that it continues to own and rescissory damages for RMBS that it has sold, including those RMBS sold to ML II.” Id. (emphasis added).
• A November 23, 2011 fax from Mr. Baxter which seeks to “eliminate any ambiguity or perceived ambiguity with respect to the assignment rights set forth in the Asset Purchase Agreement” asks AIG to agree that “[f]or those RMBS that AIG sold to Maiden Lane II, LLC, AIG will not assert any cause of action for breach of a provision of a Related Instrument (as defined in
36 Letter from Thomas A. Russo, AIG, to Thomas C. Baxter, Jr., FRBNY (Oct. 3, 2011) at 1 (Asperger Decl., Ex. HH). 37 Letter from Thomas C. Baxter, Jr., FRBNY, to Thomas A. Russo, AIG (Oct. 11, 2011) at 1 (Asperger Decl., Ex. II) (emphasis added). 38 Letter from Thomas A. Russo, AIG, to Thomas C. Baxter, Jr., FRBNY (Nov. 10, 2011) at 1 (Asperger Decl., Ex. JJ).
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the Asset Purchase Agreement . . . ).”39 Yet again, Mr. Baxter expresses concern only toward contractual rights and points to the definition of “Related Instruments” as having transferred such rights. Id.
• Lastly, on December 1, 2011, AIG agrees to Mr. Baxter’s proposed language, but also states “that nothing in this agreement or the Asset Purchase Agreement precludes AIG from asserting tort or securities law claims arising from misrepresentations or omissions made in connection with AIG’s purchase of any RMBS certificates.”40 Mr. Baxter and the FRBNY as a whole entirely failed to object to AIG’s clear reservation of the right to assert tort claims.
This correspondence between AIG and Mr. Baxter confirms (a) that the FRBNY
did not believe it obtained tort claims from AIG, and (b) that the FRBNY’S General
Counsel did not view “Related Instruments” as including such claims and instead
believed that this term only included contract rights.41
3. ML II Did Not Preserve Or Pursue The Tort Claims, And Instead Asserted Contract Claims
In contrast to AIG’s prompt investigation and prosecution of the tort claims, the
FRBNY did not investigate, preserve, or pursue those claims. Mr. Mahoney cannot
recall any discussion “with or among ML II’s advisers,” from 2008 or thereafter, about
“pursuing recoveries with respect to any AIG-assigned tort claims.” Mahoney Dep.
169:14–24 (Asperger Decl., Ex. E). Mr. Manzari testified that he was unaware of the
subject matter ever being raised within FRBNY at any time. Manzari Dep. 117:23–
118:12 (Asperger Decl., Ex. D) (“Q. Have you ever heard anyone, through today,
39 Facsimile from Thomas C. Baxter, Jr., FRBNY, to Thomas A. Russo, AIG (Nov. 23, 2011) at 2 (Asperger Decl., Ex. KK) (emphasis added). 40 Letter from Thomas A. Russo, AIG, to Thomas C. Baxter, Jr., FRBNY (Dec. 1, 2011) (Asperger Decl, Ex. LL) (emphasis added). 41 At the time these letters were exchanged, ML II had already intervened in In re Bank of New York Mellon, No. 651786/2011, ECF No 14 (N.Y. Sup. Ct. N.Y. Cnty. June 29, 2011) to support a proposed settlement which would resolve contractual repurchase claims in 530 different Countrywide RMBS including many of the RMBS that at issue in BoA’s motion. ML II—which was represented by Gibbs & Bruns LLP in its intervention—supported the settlement as a reasonable settlement of contractual repurchase claims, yet ML II never sought to assert or protect any tort claims and instead relied solely on its contractual rights. Having already sought to protect its contract rights in this proceeding, Mr. Baxter’s failure to object to AIG’s assertion and retention of tort claims is even more blatant. In fact, it appears that the purpose of Mr. Baxter’s initial letter on September 26, 2011 (Asperger Decl., Ex. GG) was to resolve any question concerning ML II’s ability to intervene in this settlement proceeding.
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within the New York Fed, ever say that in connection with the Maiden Lane II
transaction, AIG somehow gave up or gave away its claims to pursue against the bank
counterparties that initially sold it its RMBS? . . . . A. Oh, I really do not recall this
topic coming up.”). Likewise, an FRBNY representative stated in a declaration earlier
this year that “ML II . . . believes that applicable statutes of limitation have run against
any such tort claims unless they have been the subject of current tolling agreements
(which ML II does not have in place).”42
The FRBNY’s failure to investigate, preserve, or pursue the tort claims stands in
contrast not only to AIG’s actions, but also to the FRBNY’s own repeated prosecution
of certain contractual rights that all parties agree were transferred to ML II pursuant to
the APA’s “Related Instruments” provision. See Holmes Dep. 120:7–18 (Asperger
Decl., Ex. C).
First, BlackRock, which was “under contract with the [FRBNY] . . . to manage
the assets held in [ML II],” see Mahoney Dep. 22:21–23:5 (Asperger Decl., Ex. E),
was “aggressively pursing [sic] a variety of ways of maximizing cash flows” from the
RMBS following the closing of the ML II transaction, id. 148:4–6. 43 Yet in
BlackRock’s multiple quarterly presentations to the FRBNY’s Investment
Committee—whose responsibility it was to manage ML II—BlackRock never once
suggested that ML II pursue RMBS tort claims, and instead solely focused on ML II’s
pursuit of contractual remedies. For example, the November 2010 BlackRock
quarterly presentation dedicates six full pages to a discussion and analysis of the
strengths, weaknesses, and value of ML II’s contractual repurchase rights, yet fails to
make a single mention of any tort claims.44 BlackRock, Maiden Lane II Q3 2010
42 Decl. of Stephanie Heller, Am. Int’l Grp. v. Bank of Am., 11-cv-10549, ECF No. 229, Ex. A (C.D. Cal. Feb. 19, 2013). 43 See also id. 165:6–9 (BlackRock was “aggressively pursuing a variety of different avenues to ensure we were getting all our expected rights, cash flows, title and interest”). 44 The absence of tort claims from this presentation is particularly notable given that BlackRock spends an entire page discussing the difficulties investors face in causing a trustee to assert repurchase claims, as tort claims would have been owned outright by ML
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Portfolio Review Meeting at 38–43 (Nov. 4, 2010) (Asperger Decl., Ex. MM).
Notably, even Mr. Mahoney conceded that “[t]o the extent that [BlackRock] believed
or came to understand that [ML II] had received an assignment of AIG’s tort claims,”
he would have expected BlackRock to “explor[e] ways to pursue those claims.”
Mahoney Dep. 168:3–13 (Asperger Decl., Ex. E). Mr. Mahoney confirmed that in
“the period post-closing of ML II,” he “[n]ever ha[d] a discussion with BlackRock . . .
where . . . BlackRock . . . discussed the issue of whether AIG had assigned or given up
its tort or fraud claims to ML II.” Id. 150:7–17.45
Second, following the closing of ML II, the FRBNY joined two “clearing
houses” focused on pursuing contractual repurchase claims in connection with the
RMBS that had been sold to ML II. See Asperger Decl., Ex. MM at 4, 42. These
clearing houses never pursued tort claims.
Third, ML II intervened in a New York State Court proceeding seeking approval
of a proposed settlement of contractual repurchase claims in 530 Countrywide RMBS
arising from misrepresentations of loan quality in those securities.46 In doing so, ML
II expressly avoided raising any tort claims, noting in its motions to intervene that
“[t]he claims covered by this Settlement are exclusively those arising under the
Governing Agreements and do not include individual investor claims arising under the
securities or anti-fraud laws of the United States or of any state.” Id. at 3 n.2.47
Fourth, ML II pursued and settled, apparently in 2010 and 2012, claims against II and would have presented an avenue for ML II to “maximiz[e] cash flows” that ML II could fully control. 45 Even if BlackRock’s failure to ever once mention tort claims as an avenue of recovery for ML II was not itself dispositive of BlackRock’s belief that ML II did not possess such claims, in BlackRock’s November 2, 2011 quarterly update it specifically mentioned that “AIG sued [Bank of America] to recover more than $10 [billion] of losses on $28 [billion] notional RMBS instrument on claims of misrepresentation,” see Asperger Decl., Ex. FF at 16, but failed to suggest any manner that such claims may belong to ML II. Surely, the adviser retained by the FRBNY to “aggressively” pursue cash flows for ML II would not have ignored such an obvious usurpation of rights. 46 See Pet. to Intervene, In re Bank of New York Mellon, No. 651786/2011, ECF No. 14 (N.Y. Sup. Ct. N.Y. Cnty. Jun. 29, 2011). 47 See also Settlement Agreement, supra at p. 5 n.10 (settling only contract claims); In re Bank of New York Mellon, No. 651786/2011, ECF No. 3 (N.Y. Sup. Ct. N.Y. Cnty. Jun. 29, 2011).
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BoA for problems in the contractual “waterfall” provisions in two RMBS sponsored by
IMPAC. Notably absent from that settlement was any discussion of tort claims. See
Mahoney Dep. 162:9–163:9 (Asperger Decl., Ex. E); Asperger Decl., Ex. MM at 4
(“BlackRock continues to pursue opportunities to maximize cash flows to the [ML II]
portfolio,” including by “[p]ursuing [contract] remedies against Impac and
underwriters,” a “verbal agreement with JPMorgan,” and “ongoing negotiations with
Bank of America.”); see generally Settlement Agreement, supra at p. 5 n.10.
Finally, the FRBNY obtained a recovery from a monoline insurer for insurance
payments associated with a JP Morgan transaction. BlackRock, Maiden Lane II Q1
2011 Portfolio Review Meeting at 26 (May 1, 2011) (Asperger Decl., Ex. NN).
BlackRock appears to have advised the FRBNY to pursue those claims—but, again,
failed to advise concerning potential recoveries on tort claims, as would be expected if
ML II owned those claims. 4. ML II Confirmed AIG’s Ownership Of The Tort Claims In
March 2012
In February 2012, ML II sold at auction all of the RMBS it had purchased from
AIG. Shortly thereafter, ML II sent a letter to AIG, signed by Mr. Mahoney, stating
that “all the RMBS Issues [had] been disposed of” in the auction. See Letter from
the FRBNY to AIG at 2 (Mar. 12, 2012) (Asperger Decl., Ex. OO) (emphasis added).
Because the FRBNY concedes that tort claims were not disposed of in the auction,48
this letter is conclusive proof that the FRBNY had always intended and understood the
term “RMBS Issue,” which, of course, also incorporates the “Related Instruments”
provision, to refer solely to the RMBS—not related tort claims. As Mr. Mahoney
acknowledged, the letter, which adopted the defined terms of the APA, stated only that
the “[RMBS] had been . . . sold.” See Mahoney Dep. 30:11–32:21 (Asperger Decl.,
Ex. E). Indeed, Mr. Mahoney, who was asked to sign the letter because of his
48 See Settlement Agreement at 4 (ML II conducted “customary secondary market sales for which . . . there were no accompanying contracts . . . providing for the assignment of litigation claims.”).
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“historical knowledge of [ML II] from the 2008 time frame,” id. 29:11–12,
“review[ed] it carefully” before signing, and “ma[d]e sure that any statements in it that
related to [his] historical knowledge were . . . accurate,” id. 29:16–30:5. 5. ML II’s Purported Release Of The Tort Claims In July 2012
In July 2012, as an incident to the settlement of an unrelated dispute between the
FRBNY and BoA concerning the contractual waterfall provisions in two IMPAC
RMBS, the FRBNY purported to release all of AIG’s tort claims. Settlement
Agreement at 2–3. The Settlement Agreement, which was signed nearly a year after
AIG had filed this lawsuit but just three weeks before BoA’s Motion To Dismiss,
undercuts BoA’s argument that “Related Instruments” should be read to imply that
AIG assigned its tort claims.
First, in the Settlement Agreement, which the FRBNY and BoA kept
undisclosed and confidential until last month, ML II purported to release all claims—
which includes the billions of dollars of tort claims that AIG has been asserting against
BoA—in exchange for a mere $43 million payment from BoA. Id. at 1. Taken at
face value, the Settlement Agreement released the tort claims for fractional pennies on
the dollar. Such a result is inconsistent with the FRBNY’s purported belief that it
owned the tort claims.
Second, the Settlement Agreement contains a representation and warranty by
Zachary Taylor, who signed the agreement on behalf of ML II that, in executing the
APA, ML II’s “intent was to receive all transferrable and assignable benefits
associated with the securities and related instruments” that ML II acquired, “including
litigation claims associated with those securities or their acquisition by AIG.” Id. at 4,
11. But Mr. Taylor had no personal knowledge of ML II’s contemporaneous intent.
See Manzari Dep. 235:21–236:12 (Asperger Decl., Ex. D). By contrast, neither Mr.
Manzari, who was the more senior FRBNY official, nor Mr. Mahoney, who was
supposedly “the person most knowledgeable about the [supposed] transfer,” Mahoney
Dep. 99:18–100:4 (Asperger Decl., Ex. E), was ever consulted, id. 105:14–25
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(“[n]ever . . . consulted by anyone at the [FRBNY]” concerning “what was or was not
intended at the time [ML II was] entered into”); Manzari Dep. 143:23–144:5, 234:3–13
(Asperger Decl., Ex. D). Indeed, after the transaction closed, Mr. Mahoney never
discussed the purported assignment of tort claims with anyone at the FRBNY or its
advisers; the topic “never came up,” Mahoney Dep. 136:22–137:14 (Asperger Decl.,
Ex. E), and the request in “late 2012” that he sign a declaration in this action was the
first time that he “ever ha[d] discussions . . . with anyone within the [FRBNY] about
seeking to obtain or receive from AIG its rights to pursue tort or fraud claims,” id.
84:10–20.
Third, the Settlement Agreement casts further doubt on the credibility of Mr.
Mahoney’s December 2012 Declaration, which states that the FRBNY intended to
retain all litigation claims relating to the RMBS at issue. Far from reflecting Mr.
Mahoney’s own words, that Declaration had been copied and pasted, verbatim, from
the above-cited representation and warranty in the Settlement Agreement—a
representation and warranty that BoA had demanded. Compare Settlement
Agreement at 4 with Mahoney Decl. ¶ 2. Indeed, Mr. Mahoney “did not draft” the
text of the Declaration, Mahoney Dep. 99:8–9 (Asperger Decl., Ex. E), “do[es] not”
know who drafted it, id. 101:21–24, and signed it with just “a single set of [changes],”
id. 102:10–21, following a conversation with in-house counsel that lasted “less than 10
minutes,” id. 184:21–22. He was not informed that the words he was signing had
been copied from the Settlement Agreement, see id. 184:21–22—a document that he
had “[n]ever seen” and with which he was “not familiar,” id. 100:20–101:16;
nonetheless, he was required by the FRBNY to provide “written declaration[s] and/or
oral testimony,” “[a]s needed [by BoA]” and “as requested [by BoA],” see Settlement
Agreement at 4–5.49
49 The FRBNY’s lack of belief that ML II owned the tort claims is also evident in the indemnity provisions of the Settlement Agreement. ML II agreed to indemnify BoA if AIG obtains a judgment on two IMPAC RMBS relevant to the Settlement Agreement. Id. at 5–6. It did not agree to indemnify ML II if AIG obtains a judgment on the billions
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CONCLUSION
Taken together, the testimonial and documentary evidence overwhelmingly
establishes that the APA did not effectuate a transfer of AIG’s tort claims through the
APA. Any “ambiguity” the Court found in the contractual language has been
conclusively resolved: The extrinsic evidence irrefutably establishes that the parties
never contemplated, discussed, negotiated, or quantified the assignment of AIG’s tort
claims. Not even the FRBNY disputes these material facts. Accordingly, under
fundamental interpretive principles, the Court may not read into the definition of
“Related Instruments” a meaning the parties never intended. For the foregoing
reasons, BoA’s Motion To Dismiss should be denied.
DATED: March 28, 2013 RESPECTFULLY SUBMITTED, By /s/ James R. Asperger James R. Asperger (SBN 83188)
[email protected] QUINN EMANUEL URQUHART & SULLIVAN, LLP 865 South Figueroa Street, 10th Floor Los Angeles, CA 90017 Tel: (213) 443-3000 Fax: (213) 443-3100 Michael B. Carlinsky [email protected] Maria Ginzburg [email protected] QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, NY 10010 Tel: (212) 849-7000 Fax: (212) 849-7100 Attorneys for All Plaintiffs
in additional tort claims that AIG is pursuing in this litigation. Had the FRBNY truly believed that it owned those claims, and that they were worth a mere $43 million, it surely would not have limited its indemnity in this manner.
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