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Sandza v. Barclays Bank PLC

United States District Court, D. Columbia.

December 22, 2015

BARCLAYS BANK PLC, et al., Defendants

          For Elizabeth B Sandza, Plaintiff: Martin F. McMahon, LEAD ATTORNEY, MARTIN F. MCMAHON & ASSOCIATES, Washington, DC USA.

         For Barclays Bank Plc, Sally Martin, Andrew Johnman, Defendants: Jonathan Mark Shaw, LEAD ATTORNEY, BOIES, SCHILLER & FLEXNER, LLP, Washington, DC USA.

         For Iain Worsley, Defendant: Jonathan Mark Shaw, LEAD ATTORNEY, BOIES, SCHILLER & FLEXNER, LLP, Washington, DC USA; Richard Henry Gordin, LEAD ATTORNEY, BUTZEL LONG, Washington, DC USA.


         ELLEN SEGAL HUVELLE, United States District Judge.

         Plaintiff, a former partner at the now-defunct law firm Dewey & LeBoeuf LLP (" D& L" or " the Firm" ), brings this suit against Barclays Bank PLC (" Barclays" ) and three of its employees (the " individual defendants" ). She alleges that defendants conspired with the Firm's management to fraudulently induce her and other non-management partners to take out capital loans with Barclays, the proceeds of which were used to prop up the failing Firm and effectively securitize the Firm's own loans with Barclays. ( See Compl. [ECF No. 1] at 1-4.) Central to the alleged scheme was a concerted effort to " keep the non-management partners in the dark as to the Firm's financial affairs," which encouraged partners to take out the capital loans and forestalled a mass exodus from the Firm. ( See id. at 2-3.) As a result, she alleges that she was injured when the Firm filed for bankruptcy in May 2012, as she was unable to recover her capital contributions and other deferred compensation, which she would not have agreed to defer had she known of the Firm's condition. ( See id. at 2.)

         She asserts one claim against the individual defendants for participation in a RICO violation under 18 U.S.C. § 1962(c). ( Id. ¶¶ 56-75.) She also asserts nine claims against Barclays: (1) respondeat superior under RICO ( id. ¶¶ 76-79); (2) deriving income from a RICO violation under 18 U.S.C. § 1962(a) ( id. ¶¶ 80-93); (3) conspiracy to commit a RICO violation under 18 U.S.C. § 1962(d) ( id. ¶¶ 94-103); (4) fraud ( id. ¶¶ 104-10); (5) criminal conspiracy ( id. ¶¶ 111-19); (6) aiding and abetting ( id. ¶¶ 120-26); (7) negligence ( id. ¶¶ 127-46); (8) breach of fiduciary duty ( id. ¶¶ 147-70); and (9) declaratory relief that plaintiff's loan agreement with Barclays is unenforceable ( id. ¶¶ 171-79).

         Defendants have moved to dismiss on a variety of grounds. ( See Defs.' Mot. to Dismiss [ECF No. 7]; Def. Martin's Mot. to Dismiss [ECF No. 9] (joining co-defendants' motion to dismiss).) The Court need not address many of those arguments,[1] because for several alternative reasons, plaintiff's complaint cannot survive.


         Plaintiff Elizabeth Sandza was a partner at LeBoeuf, Lamb, Greene & MacRae, LLP (" LeBoeuf" ) from 1989 until 2007, when that firm merged with Dewey Ballantine LLP (" DB" ) to form D& L. (Compl. ¶ 1.) Throughout Ms. Sandza's tenure as a D& L partner, the Firm carried a significant amount of debt, dating back to LeBoeuf's merger with DB. ( See id. ¶¶ 24, 40.) Plaintiff alleges that, in 2005, DB began requiring increased capital contributions from its partners as a result of its debt burden, which grew from approximately $32 million in 2005 to $145 million soon after the 2007 merger, and by 2010, D& L owed approximately $160 million. ( Id. ¶¶ 9-10, 24, 40.) DB (and post-merger D& L) facilitated these capital contributions by directing partners to Barclays, which had established a capital loan program that gave partners access to the necessary funds. ( Id. ¶¶ 11, 25.)

         Plaintiff took out two loans with Barclays: a $38,000 partner capital loan in 2009 and a second loan for $125,000 in March 2010, a month before she left the firm. ( Id. ¶ 1.) The proceeds of plaintiff's capital loan were deposited with the Firm in her capital account, and she alleges that, upon her departure in April 2010, the Firm was obligated to repay the loan from her capital account and transfer the remaining balance to her. ( See id. ¶¶ 1, 13-14.) However, when she sought the return of her capital account balance, the Firm refused to release those funds, instead suggesting she take out the second, $125,000 loan with Barclays. ( See id. ¶ 46.) Having been assured by the Firm that it would repay the loan, she executed the agreement. ( Id. ¶ 47.)[2] She also agreed with the Firm to accept deferred compensation of $850,000, payable over 11 years starting in 2011, to make up for amounts she had been underpaid in previous years. ( Id. ¶ 1.)

         Separately, Barclays was also a creditor of D& L, having extended it an unsecured $5 million loan in August 2007 and an unsecured $30 million credit facility in 2008. ( Id. ¶¶ 22, 34.) It is these loans that plaintiff alleges gave Barclays the motive to conspire with the Firm, for, having extended $35 million in unsecured loans to a failing Firm, Barclays sought to protect itself by inducing the partners to take out capital loans, which would be used by the Firm to pay off its own loans with Barclays. ( See Compl. at 2-3.) In other words, according to plaintiff's theory, the unsuspecting partners would be left holding the bag for the Firm, remaining personally liable for their capital loans while the Firm's own loans were fully repaid as of December 2010. ( See id. at 2-3, ¶ 42.)

         The alleged scheme depended upon keeping non-management partners in the dark about the Firm's troubles, thus inducing partners to make additional capital contributions and preventing a mass exodus from the partnership ranks, which in turn allowed the Firm to remain viable for a longer period. ( See id. at 3.) Plaintiff alleges that defendants (1) excused the Firm's defaults under departed partners' loan agreements and failed to inform partners about those defaults, and (2) failed to disclose to plaintiff and other partners the Firm's poor financial condition. ( See id. at 2-3.) As to the defaults, she alleges that the Firm failed to repay departing partners' capital loans, and when the Firm's growing indebtedness under those loans reached a certain amount, a default was triggered affecting every partner loan agreement. ( See id. ¶¶ 13, 17-18.) She does not allege that the defaults themselves caused her any injury, but rather that their disclosure by Barclays would have alerted her to the Firm's dire financial straits, allowing her to make " better decisions or at least take[] steps to mitigate her damages." ( See id. ¶ 73.)

         Plaintiff also alleges that Barclays and Firm management committed " approximately 114 instances of mail and wire fraud," with Firm management " disseminating false and misleading financial statements . . . to non-management partners," and Barclays " providing the means whereby these partners could make capital . . . contributions to the Firm." ( See id. at 1-2.) She makes very few specific allegations as to the individual defendants, claiming only that they each worked for Barclays on the D& L account ( id. ¶¶ 3-5); that they had " superior knowledge of the Firm's financial situation" ( id. at 4); and that they formed an association-in-fact that " engaged in a pattern of racketeering activity, inter alia, by continuing to offer the capital loan program" without disclosing the Firm's dire financial condition ( id. ¶¶ 59, 63).

         In the end, the Firm filed for bankruptcy in May 2012, and plaintiff alleges that it was not until that time that she learned of the Firm's defaults and its underlying financial problems. ( Id. at 3, ¶ 118.) The Firm's bankruptcy prevented her from recovering any of her deferred compensation, and in January 2014, she agreed to repay Barclays her outstanding loan balance of approximately $134,000, while reserving the right to bring suit against Barclays. ( Id. ¶¶ 1, 92.)


         I. LEGAL STANDARD: RULE 12(b)(6)

         To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), a complaint " must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face,'" such that a court may " draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). The plausibility standard " asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678. Thus, " [f]actual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Twombly, 550 U.S. at 555 (citations omitted). In ruling on a 12(b)(6) motion, a court may consider facts alleged in the complaint, documents attached to or incorporated in the complaint, matters of which courts may take judicial notice, and documents appended to a motion to dismiss whose authenticity is not disputed, if they are referred to in the complaint and integral to a claim. U.S. ex rel. Folliard v. CDW Tech. Servs., Inc., 722 F.Supp.2d 20, 24-25 (D.D.C. 2010).


         At the outset, defendants argue for dismissal on the ground that Ms. Sandza's overarching theory of liability strains credulity. ( See Defs.' Mot to Dismiss at 7-9; see also Iqbal, 556 U.S. at 678.) The gravamen of her complaint is that Barclays conspired with Firm management to induce her and other non-management partners to take out capital loans, the proceeds of which would " eliminate[] Barclays' exposure on the Firm's credit facilities." ( See Compl. at 3.) At first glance, this theory has some intuitive appeal--Barclays overextended itself to a troubled Firm and then, upon learning of its dangerous exposure, figured out a way to use non-management partners to effectively securitize the Firm's loans. The problem for plaintiff is that her own allegations seriously undercut this theory.

         First, the lynchpin of the alleged scheme, Barclays' capital loan program, was put into place nearly two years before Barclays faced any exposure on its first loan for $5 million to the Firm. ( See id. ¶¶ 9, 11, 22.) Next, plaintiff alleges that Barclays learned of the Firm's difficulties in 2007, when it received financial information from the Firm that it " knew was false and misleading." ( See id. ¶ 48 ; see also id. ¶ 99 (" In late 2007 and early 2008, management developed a scheme, with the knowledge of Barclays . . . to inject capital into the Firm and keep the Firm viable." ).) According to plaintiff, rather than cutting off all ties upon learning of the misrepresentation and underlying financial woes, however, Barclays extended the Firm a second unsecured $30 million line of credit in 2008. ( Id. ¶ 34.) Even if Barclays only learned of the Firm's troubles in late 2007, after it extended the August loan, Barclays would still have had to extend an unsecured $30 million line of credit with full knowledge that the Firm was both in financial trouble and lying about it.[3]

         That improbability does not mean, however, that dismissal is warranted. See Iqbal, 556 U.S. at 681 (" To be clear, we do not reject these bald allegations on the ground that they are unrealistic or nonsensical. . . . It is the conclusory nature of respondent's allegations, rather than their extravagantly fanciful nature, that disentitles them to the presumption of truth." ). The plausibility standard looks to the factual sufficiency of the complaint, rather than the probability that plaintiff can ultimately prove those facts. See Twombly, 550 U.S. at 556 (" [A] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely." ) (internal quotations omitted). Therefore, it is immaterial if defendants are correct that " [n]o bank, concerned enough about a $5 million exposure that it would hatch a byzantine plot to eliminate it, would in the midst of that plot increase its credit exposure seven-fold." (Defs.' Mot. to Dismiss at 8.)


         At bottom, all of Ms. Sandza's claims and legal theories rest on two central allegations: (1) defendants failed to disclose that, at the time she took out her capital loans, the Firm had already defaulted on its obligations to repay capital loans of previously departed partners, which caused her own loans to immediately go into default ( see Compl. at 1-4); and (2) defendants failed to disclose that the Firm was facing dire financial difficulties. ( See id. at 4 (" The Defendants all had numerous opportunities to educate the Plaintiff about what was going on at the Firm, but chose not to disclose the Firm's true financial condition and the fact that the Firm was already in a default status on its Barclays' debt obligations." ).)[4] Even these allegations overlap, in that the " defaults" themselves had no financial consequences for plaintiff, but disclosing their existence would have revealed to her the Firm's financial troubles. ( See Pl.'s Opp'n at 4 (" Plaintiff's injury does not stem from whether the Firm was in default on a certain date . . . [but rather] is a direct result of Barclays' failure to disclose material facts [about the Firm's finances] . . . ." ).) Had defendants made these disclosures to Sandza, she alleges that she " would not have enrolled in the Barclays capital loan program, and would have withdrawn from the Firm unless adequate measures were taken to reform management and its practices." ( Id. ¶ 74.)

         Because there were no unremedied defaults for Barclays to disclose, and because Sandza fails to allege a cognizable duty requiring defendants to disclose the Firm's financial condition (even assuming they had notice of this condition), all of her claims fail as a matter of law.

         A. ...

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