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Goldman, Sachs & Co. v. City of Reno

United States District Court, D. Nevada

January 4, 2017

GOLDMAN, SACHS & CO., Plaintiff,
v.
CITY OF RENO, Defendant.

          ORDER

          ROBERT C. JONES United States District Judge

         This case arises out of an alleged breach of fiduciary duty in connection with Defendant City of Reno's (“Reno”) issuance of approximately $211 million in complex securities in order to fund various city projects in 2005 and 2006. Pending before the Court are Reno's motion to dismiss counterclaim-in-reply (ECF No. 91), Plaintiff Goldman, Sachs & Co.'s (“Goldman”) cross-motion for summary judgment (ECF No. 108), and Reno's motion to disqualify Goldman's counsel (ECF No. 120). For the reasons given herein, the Court grants the motion to dismiss and denies the other motions.

         I. FACTS AND PROCEDURAL BACKGROUND

         In October 2005, Reno issued $73.45 million in auction rate securities (“ARS”), in order to fund various city projects, to be underwritten and brokered by Goldman pursuant to an October 19, 2005 agreement (the “2005 Underwriter Agreement”) and an October 26, 2005 agreement (the “2005 Broker-Dealer Agreement”). (Compl. ¶¶ 12-13, June 18, 2012, ECF No.1). The 2005 Broker-Dealer Agreement contains a forum selection clause, designating the District of Nevada as the required forum for all “actions and proceedings arising out of this Broker-Dealer Agreement or any of the transactions contemplated hereby, ” as well as a merger clause. (See 2005 Broker-Dealer Agreement §§ 5.04, 5.09, ECF No. 1-6 at 16-17.)

         In May 2006, Reno and Goldman entered into substantially identical agreements (the “2006 Underwriter Agreement” and the “2006 Broker-Dealer Agreement”) when Reno issued an additional $137.43 million in ARS for similar purposes. Neither the 2005 nor the 2006 Broker- Dealer Agreement contains an arbitration clause, and neither Underwriter Agreement contains either a forum selection or arbitration clause.

         On February 10, 2012, Reno filed a claim against Goldman with the Financial Industry Regulatory Authority (“FINRA”), alleging wrongdoing with respect to the 2005 and 2006 agreements. (Compl. ¶¶ 27-29). Goldman then sued Reno in this Court, seeking a declaratory judgment that FINRA was an inappropriate forum for Reno's claims based on the mandatory forum selection clauses in the Broker-Dealer Agreements, and that claims arising out of those Agreements may only be heard in this District.

         On November 26, 2012, the Court denied Goldman's motion for a preliminary injunction of the FINRA arbitration proceedings. The Court concluded that Reno was entitled to arbitration under the FINRA Rules, and that the forum selection clauses in the 2005 and 2006 Broker-Dealer Agreements did not supersede Reno's right to pursue FINRA arbitration. (See Order 5-8, ECF No. 41.) After stipulating to the entry of final judgment in Reno's favor, Goldman appealed to the Ninth Circuit, and the Court of Appeals reversed the Court's order and final judgment. (See Mem. Op., ECF No. 51.) The Court of Appeals stated:

“[W]e will give full effect to the all-inclusive breadth of the forum selection clauses (‘all actions and proceedings'), their mandatory nature (‘shall'), and their reference to a judicial forum (‘the United States District Court for the District of Nevada'). We therefore conclude that the forum selection clauses superseded Goldman's default obligation to arbitrate under the FINRA Rules and that, by agreeing to these clauses, Reno disclaimed any right it might otherwise have had to the FINRA arbitration forum.”

(Id. at 26 (emphasis added).)

         Following remand, Reno answered the Complaint filed in this action and asserted counterclaims against Goldman for breach of fiduciary duty, fraud, and negligent misrepresentation (three of the six claims Reno had previously asserted in the FINRA arbitration). (ECF No. 67.) Goldman then answered Reno's counterclaims and asserted a counterclaim-in-reply for contract damages based on Reno's alleged breach of the forum selection clauses in the 2005 and 2006 Broker-Dealer Agreements. (ECF No. 88.) Goldman alleges damages “in an amount equal to the costs and attorneys' fees [it] incurred as a result of Reno's breach of the forum selection clauses . . . .” (Id. at 22.)

         The Court is now faced with three motions centered on Goldman's counterclaim-in-reply. First, Reno has moved to dismiss the counterclaim-in-reply on the basis that attorneys' fees and litigation costs are not proper elements of contract damages under the laws of New York, which adheres to the American Rule. In response, Goldman moved for summary judgment on the same issue, arguing that New York's intermediate appellate court has opined that awarding damages based on attorneys' fees in an action for breach of a forum selection clause does not contravene the American Rule. Lastly, Reno moved to disqualify Goldman's attorneys because they are “necessary witnesses” with respect to the damages element of Goldman's contract claim.

         II. LEGAL STANDARDS

         a. Dismissal for Failure to State a Claim

         Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief” in order to “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Conley v. Gibson, 355 U.S. 41, 47 (1957). Federal Rule of Civil Procedure 12(b)(6) mandates that a court dismiss a cause of action that fails to state a claim upon which relief can be granted. A motion to dismiss under Rule 12(b)(6) tests the complaint's sufficiency. See N. Star Int'l v. Ariz. Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). When considering a motion to dismiss under Rule 12(b)(6) for failure to state a claim, dismissal is appropriate only when the complaint does not give the defendant fair notice of a legally cognizable claim and the grounds on which it rests. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In considering whether the complaint is sufficient to state a claim, the court will take all material allegations as true and construe them in the light most favorable to the plaintiff. See NL ...


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