The plaintiff-below/appellant RBC Capital Markets, LLC ("RBC") appeals from a Superior Court judgment dismissing its claims against the defendants-below/appellees U.S. Education Loan Trust IV, LLC (the "Issuer") and Education Loan Trust IV (the "Trust"), (collectively, the "Defendants"). RBC sued the Defendants in the Court of Chancery in 2011. RBC's complaint alleged that the Defendants had been paying excessive fees from the Trust. The court dismissed the Chancery action as barred by the Trust Indenture's "no-action" clause.
Thereafter, in 2012, RBC commenced the underlying Superior Court action, claiming that the Defendants had unlawfully failed to pay interest owed to RBC under the Issuer notes that RBC held. The Superior Court dismissed that complaint on two grounds: (1) that the complaint failed to state a claim upon which relief can be granted, and (2) that the earlier Court of Chancery judgment of dismissal precluded RBC's claim as res judicata. RBC appealed to this Court.
We conclude, for the reasons next discussed, that the Superior Court erroneously dismissed the action. We hold that RBC's complaint satisfies Delaware's "reasonable conceivability" pleading standard, that the claim is not barred by the Trust Indenture's no-action clause, and that on the current record it cannot be determined as a matter of law that RBC's Superior Court claim is precluded as res judicata.
RBC is a Minnesota limited liability company with its principal place of business in New York. The Issuer is a Delaware limited liability company. RBC beneficially owns over $450 million of the Issuer's auction rate securities (the "Notes"). The Notes were issued under an Indenture of Trust dated March 1, 2006 (the "Indenture") and amendments thereto, and were collateralized by student (FFELP) loans owned by the Trust, which is a Delaware statutory trust.
Under the Supplemental Indentures, the Notes pay interest at a variable rate fixed by periodic Dutch auctions, usually every 28 days.
The Indenture also limits how and under what circumstances a noteholder may bring an action to enforce claims arising under the Indenture. Section 6.08 of the Indenture—the "no-action" clause—provides that:
Section 6.09 carves out an exception to Section 6.08—namely, that "the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal of, premium, if any, and interest on such Note ... and, upon the occurrence of an Event of Default with respect thereto, to institute suit for the enforcement of any such payment ...."
In May 2010, the Issuer ceased paying interest on the Notes.
On March 18, 2011, RBC brought an action in the Court of Chancery against the Issuer and the Trust. The crux of RBC's complaint (the "Chancery Complaint") was that the Trust had paid excessive fees to the Issuer and its affiliates in violation of the Indenture, and thereby improperly reduced the amount of interest lawfully owed to RBC and other noteholders. Count One of the Chancery Complaint prayed for an accounting "to determine whether the Trust is being properly administered and to determine what interest is owed to RBC ... as a result of the [excessive fees]." Count Two claimed that the Defendants had been unjustly enriched by the payment of excessive fees and the resulting reduction in the calculated interest rate. Count Three alleged that the Defendants breached the Indenture and Supplemental Indentures by paying excessive fees and miscalculating the Net Loan Rate. Those breaches, RBC claimed, constituted an Event of Default under Section 6.01 of the Indenture. For relief, RBC sought, inter alia, the payment of interest due after Defendants disgorge all adjudicated excessive fees.
On December 6, 2011, the Court of Chancery dismissed RBC's complaint for failure to state a claim upon which relief may be granted.
RBC did not appeal from the Court of Chancery judgment of dismissal, which is now final.
On February 1, 2012, RBC filed the underlying Superior Court action against the Defendants. The Superior Court complaint contained two counts, the first alleging breach of contract, and the second alleging breach of the implied covenant of good faith and fair dealing. On August 20, 2012, after oral argument on Defendants' motions to dismiss, RBC filed an amended complaint (the "Amended Complaint"), that added DTC and Cede & Co. as nominal plaintiffs and withdrew the initial claim for breach of the implied covenant of good faith and fair dealing.
The Amended Complaint alleges that the Defendants breached the Indenture and Supplemental Indentures by failing to pay interest lawfully owed to RBC since May 2010. Applying the relevant formula to information contained in quarterly investor reports and trustee statements, RBC claims that for the period May 1, 2011 through April 30, 2012, the Defendants owe RBC $920,689 in interest. For the period May 2010 through April 30, 2011, RBC estimates that the Defendants owe RBC additional interest in an unspecified amount.
On May 31, 2013, the Superior Court dismissed the Amended Complaint for failure to state a claim upon which relief may be granted, and also because the claim was barred as res judicata.
The court also determined that the requirements for the application of res judicata were satisfied.
RBC is basing its "interest" claim on the same mismanagement allegations upon which it sought an accounting in the Court of Chancery. RBC is not saying that under the formula for calculating interest there is money owing. RBC is, yet again, accusing Defendants of having acted in a way, whatever way that was, that left no interest money available under the formula.
Even if RBC's present claim for interest were grounded on a different theory than the claim it asserted in the Court of Chancery (the court continued), both claims arose out of the same transaction—the Indenture and the Defendants' course of conduct.
RBC timely appealed to this Court from the dismissal of its Superior Court complaint.
On appeal, RBC claims that the Superior Court erred by dismissing the action, because the Amended Complaint (1) states a legally cognizable claim that (2) is not barred as res judicata. In support of its first claim of error, RBC advances two arguments. First, RBC contends that the Amended Complaint pleads facts sufficient to support a claim that Defendants breached their contractual obligation to pay interest owed to RBC. In concluding otherwise, RBC urges, the Superior Court improperly applied a heightened pleading standard. Second, because the claim for unpaid interest falls squarely within the exception carved out by Section 6.09 of the Indenture, the Superior Court erroneously dismissed RBC's claim as barred by the Indenture's no-action clause.
In support of its second claim of error, RBC advances four arguments. First, RBC urges that because the Court of Chancery dismissed the Chancery Complaint for lack of standing rather than on
The Defendants vigorously contest all four of these claims of error.
RBC's first claim of error raises two issues: (1) does the Amended Complaint satisfy Delaware's liberal notice pleading standard, and (2) if it does, is RBC's claim for interest nonetheless barred by the Indenture's no-action clause? RBC's second claim of error raises three issues: First, did the dismissal of the Chancery Complaint constitute a final judgment for purposes of res judicata? Second, is RBC's present claim for unpaid interest the same as the claim RBC alleged in its Chancery Complaint? Third, if the first two questions are answered affirmatively, did the Defendants' failure to pay interest owed to RBC for the period after the Chancery Complaint was filed generate a new, separate claim not barred by res judicata?
This Court reviews a trial court's grant of a motion to dismiss de novo.
Having carefully reviewed the record, we conclude that the Superior Court erred in holding that the Amended Complaint failed to state a cognizable claim for relief. We determine that it is reasonably conceivable that RBC has stated a claim for interest due under Section 6.09 of the Indenture, which is not barred by the no-action clause contained in Section 6.08.
RBC's Amended Complaint alleges that, applying the relevant rate formulas, interest was due to RBC, which Defendants failed to pay for the period May 2010 through April 2012. Accordingly (RBC urges), the pled facts make it reasonably
The Amended Complaint avers that if an auction fails, the Notes bear interest at a rate equal to either the Net Loan Rate or the Maximum Rate.
It is difficult to imagine how RBC could plead more clearly that interest is actually owed under the terms of the Indenture. Although the Amended Complaint's allegations relating to the period May 2010 through April 30, 2011 are less precise than those that concern the period May 1, 2011 through April 30, 2012, those allegations permit the reasonable inference that, irrespective of any claimed mismanagement, interest is owed. The Amended Complaint states that the Net Loan Rate is based on "a formula that is directly tied to the cash flows of the underlying student loan collateral,"
We next address whether RBC's claim, even though legally cognizable, is nonetheless barred by the Indenture's no-action clause. The Superior Court concluded that it was, because "the Net Loan Rate equation undeniably involves management decisions." We disagree. No-action clauses are a "standard feature of indenture agreements [and] require compliance by bondholders to prevent dismissal of their suit."
RBC's Amended Complaint claims that interest is owed but remains unpaid. Specifically, RBC alleges that "interest is owed to RBC based on the actual cash flows into and out of the Trust regardless of whether the outflows, including fees, were authorized."
The Defendants advance two arguments to support their position that the Amended Complaint fails to state a claim and is barred by the no-action clause. Neither has merit.
The Defendants first contend that the source documents RBC used for its interest calculations contradict and negate RBC's position that its claim is only for interest due under the Indenture. Defendants insist that (1) those documents contain no information about the income the Trust received—information that is needed to calculate the applicable interest rate, and (ii) the documents show that the expenses the Trust actually paid affirmatively establish that no interest is due. Those documents compel the conclusion (Defendants
We are unpersuaded by this argument. As RBC points out, the "source documents" to which the Defendants refer are not claimed to be all the documents RBC used to calculate the amount of interest due. Nor do the documents upon which Defendants rely "effectively negate" the pivotal allegations in the Amended Complaint. Those referenced documents are extensive—they include approximately 200 pages of financial statements—yet nowhere have the Defendants identified a specific line item or other provision that contradicts RBC's claim that interest is due. In essence, what Defendants ask this Court to do is analyze 200 pages of statements, together with a summary that Defendants have prepared. To perform that exercise would require us to wade through the evidence and engage in fact-finding, merely to decide whether or not RBC's allegations are contradicted. That is not an exercise which this Court or any court should be required to undertake in reviewing a grant of a motion to dismiss.
Defendants next argue that RBC was required to (but did not) specify precisely how it calculated the interest allegedly due, in order to establish that its claim falls within Section 6.09 of the Indenture. More specifically, the Defendants insist that RBC must establish in its complaint that it did not manipulate or cap the fee inputs in calculating the Net Loan Rate. In effect, Defendants contend that the Indenture's no-action clause creates a particularized factual pleading standard that RBC must satisfy to properly allege a claim for interest due.
That argument is misguided. On review of a motion to dismiss, this Court "accept[s] all well pleaded factual allegations as true, [and] accept[s] even vague allegations as "well pleaded" if they give the opposing party notice of the claim...."
RBC's claim is not based on a challenge of management decisions. Rather, it is a straightforward claim to recover unpaid interest owed, for which RBC was not required affirmatively to plead compliance with the no-action clause.
Having determined that the Amended Complaint states a legally cognizable claim that interest was due but unpaid and that the claim is not barred by
RBC concedes that elements 1, 2, and 4 are satisfied. Accordingly, the issues reduce to elements 3 and 5, i.e., whether: (i) the Court of Chancery Judgment was a final decree, and (ii) the cause of action asserted in the Court of Chancery was the "same" as that later asserted in the Superior Court. We conclude that the answer to the first question is yes. Regarding the second issue, we find that the current record does not permit a determination, as a matter of law, that RBC's Superior Court claim is the "same" as its previously dismissed Chancery claim. Although RBC's Chancery claim and its current claim arose out of the same transaction, it is not possible to determine, on this record, whether RBC knew or could have known of that claim, such that RBC could have asserted the claim in its Chancery Complaint. What we can (and do) conclude is that, to the extent that RBC's claim arises from Defendants' failure to pay interest after the Chancery Complaint was filed, that portion of its claim is not barred as res judicata.
The Superior Court correctly determined that the Court of Chancery order dismissing the Chancery Complaint was a final judgment. In general, a dismissal with prejudice constitutes a final decree for res judicata purposes.
RBC contends, nonetheless, that because the Court of Chancery judgment addressed only RBC's standing to bring suit, that judgment was not a "final" decree on the merits for res judicata purposes. Ordinarily, a dismissal for lack of subject matter jurisdiction or for lack of standing will not operate as a final decree that bars later claims.
RBC claims that the Superior Court erred by concluding that RBC's Superior Court claim was identical (for res judicata purposes) to RBC's Court of Chancery claim. We agree, because on the current record no such determination can be made as a matter of law. We do not foreclose the possibility that on remand the Superior Court could find, on an expanded record, that RBC's Superior Court claim (to the extent it arose before the Chancery Complaint was filed) is identical to RBC's earlier Court of Chancery claim.
In determining whether two claims constitute the "same" cause of action for res judicata purposes, Delaware follows a transactional approach.
Here, both RBC's current claim and its earlier Court of Chancery claim arose out of the same contractual instruments—the Indenture and Supplemental Indentures. The Court of Chancery claim (that excessive fees were paid out of the Trust) arose out of an alleged violation of Section 7 of the Supplemental Indentures. RBC's current claim (for unpaid interest owed to RBC) arose out of an alleged breach of the interest payment terms of
What the existing record does not disclose is whether RBC knew, or could have known, of its current claim for interest, owed but unpaid, at the time of the Court of Chancery litigation. RBC argues that only after the Defendants had failed to pay interest for a "sustained period" was RBC put on notice that the nonpayment was due not to market conditions, but to a breach of the interest payment terms of the Indenture and Supplemental Indentures. Specifically, RBC claims that "it was not until well after briefing had been completed on Appellees' motion to dismiss the Chancery Action that RBC was able to possess the data and analysis that allowed it to confirm that Appellees were wrongfully withholding interest payments in violation of the Indenture provisions governing the payment of interest."
Defendants point to various items of extrinsic evidence, including a letter from RBC to the Issuer dated October 30, 2009, that (Defendants say) show that in fact RBC knew of its claim for unpaid interest when it commenced its Chancery action.
It is clear, if only from the parties' need to resort to extrinsic evidence, that any determination of what RBC knew or could have known at the time of the Chancery litigation requires a factual inquiry that is inappropriate at this procedural stage. At some later stage the Superior Court might determine that RBC knew or could have known of its claim for unpaid interest (dating back to May 2010) when RBC litigated in the Court of Chancery. But no such determination is possible on this appeal.
The final issue is whether that portion of RBC's claim that relates to Defendants' nonpayment of interest due after the Chancery Complaint was filed, is barred by res judicata, even if RBC knew or could have known of its claim for unpaid interest when it filed its Chancery litigation. We conclude that such a claim would not be barred.
The res judicata doctrine operates to bar only later claims that could have been brought at the time of an earlier asserted claim.
Under the Supplemental Indentures, interest on the Notes must be paid the "first Business Day following the end of each Auction Period for interest accrued through the end of such Auction Period."
The Defendants argue that even the portion of RBC's claim arising from breaches that occurred after the Chancery Complaint was filed is barred by res judicata, because the alleged misconduct relates back to events that occurred at the time the Chancery litigation was commenced. That theory fails to take into account that the Indenture and Supplemental Indentures created separate, recurring obligations. At the end of each Auction Period, the Defendants must decide whether or not to pay accrued interest to noteholders. Only on each occasion where Defendants do not pay interest that is owed will a discrete breach occur.
For the foregoing reasons, the Superior Court judgment dismissing the complaint is reversed and the case is remanded to the Superior Court for further proceedings in accordance with this Opinion. Jurisdiction is not retained.
