Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-01584/USCOURTS-caed-2_07-cv-01584-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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This matter was determined to be suitable for decision without *

oral argument. L.R. 78-230(h).

All subsequent references to “Rules” are to the Federal Rules 1

of Civil Procedure.

1

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

BANK OF AMERICA, N.A., )

) 2:07-cv-1584-GEB-EFB

Plaintiff and )

Counterdefendant, )

)

v. ) ORDER*

)

HENSLEY PROPERTIES, L.P., ) 

)

Defendant and )

Counterclaimant. )

)

Plaintiff Bank of America (“BoA”) moves to dismiss Defendant

Hensley Properties’ (“Hensley”) counterclaims under Federal Rule of

Civil Procedure 12(b)(6), contending that the counterclaims “are a 1

transparent . . . attempt . . . to avoid . . . obligations under a[n]

. . . executed written interest rate swap contract . . . .” (BoA’s

Not. of Mot. and Mot. to Dismiss Counterclaims (“Mot.”) at 1:4-6.) 

Hensley couunterclaims “for fraud and breach of duty,” arguing that

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BoA fraudulently induced Hensley into entering into the contract and

that BoA thereby breached its duty of care to Hensley.

HENSLEY’S FACTUAL ALLEGATIONS

Hensley is a real estate partnership that owns residential

properties in California. (Hensley’s Ans. and Counterclaims

(“Counterclaims”) ¶ 5.) Hensley was principally owned by Marjorie

Bright until her death in 2005. (Id. ¶ 6.) Cheryl Bright (“Bright”)

succeeded to Marjorie Bright’s interest in Hensley. (Id.) Bright’s

“training and career experience was primarily as a teacher.” (Id. ¶

7.) 

In June 2006, Hensley learned that Bank of the West (“West”)

was threatening to accelerate a $26 million mortgage loan to Hensley

that was secured by three Hensley properties. (Id. ¶ 8.) Hensley

needed to find alternate financing to avoid foreclosure. (Id.) 

In July and August of 2006, Bright met with BoA personnel

several times to discuss the possibility of obtaining a new mortgage

loan from BoA that would replace the West mortgage and the loan would

be secured by the same three properties. (Id. ¶¶ 11-22.) 

Hensley alleges that during these meetings BoA personnel,

including David Yonan (“Yonan”), made a “series of false statements”

to Bright “designed to convince” her that she was merely entering into

a “forward rate lock” agreement, when in fact the purported legal

effect of the documents she eventually signed was far different and

more onerous. (Id. ¶ 16, 22.) Hensley understood “forward rate lock”

to mean that the mortgage interest rate would be “locked (not subject

to market fluctuation) during a defined period of time.” (Id. ¶ 13.) 

If the new loan was completed within the stated time period, the

interest rate would be set at the locked rate. (Id.) On August 9,

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2006, BoA personnel told Bright that it could offer Hensley a “60 day

forward rate lock.” (Id. ¶¶ 11-12.) 

On August 11, 2006, Bright signed a document titled

“Proposed Interest Rate Swap (Forward Rate Lock)” (“the Proposal”). 

(Id. ¶ 11 & Ex. 1.) Hensley alleges that Bright signed the Proposal

“in reliance” on the false statements of BoA personnel that Hensley

was only agreeing to a “forward rate lock.” (Id. ¶ 15, 19.) BoA

personnel had brought a print-out of a slide presentation to the

August 11 meeting called “Interest Rate Hedging Discussion,” but no

slide presentation was made. (Id. ¶ 18.) When Bright signed the

Proposal, BoA was aware that she had neither conducted a “thorough”

and “independent” review of the transaction, nor read the printed-out

slide presentation. (Id.)

Sometime after August 11, Yonan returned to Bright’s office

and insisted that she sign a confirmation letter (“the Confirmation”). 

(Id. ¶ 22; Pls.’ Compl., Ex. A.) Yonan represented the Confirmation

was necessary to effectuate the “forward rate lock.” (Counterclaims ¶

22.) Bright told Yonan that Hensley may not want to go through with

the new mortgage loan, but Yonan insisted that Bright sign the

Confirmation anyway, as it would provide the “forward rate lock.” 

(Id.) Bright signed the Confirmation. (Id. ¶¶ 22, 26.) The

Confirmation states that it incorporates the “Form 2002 ISDA Master

Agreement” (“the ISDA”). Bright did not see the ISDA until it was

given to her on October 13, 2006, long after Bright signed the

Confirmation. (Id. ¶¶ 24-26.) 

The Proposal and the Confirmation did not constitute a

“forward rate lock,” but instead constituted an “exotic and risky form

of derivative security” called an “interest rate swap.” (Id. ¶¶ 16-

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The parties use the term “LIBOR,” which according to Black’s 2

Law Dictionary, stands for “London Interbank Offered Rate.”

BoA originally sued in federal court in New York. See Bank of 1

Am., N.A. v. Hensley Props., LP, 495 F. Supp. 2d 435 (S.D.N.Y. 2007).

The New York district court transferred venue to the Eastern District of

California because there was no personal jurisdiction over Hensley and

venue was improper in New York. Id. at 439–40.

4

17.) The “interest rate swap” purports to obligate BoA to pay Hensley

the prevailing “LIBOR” interest rate and Hensley to pay BoA a fixed 2

interest rate of 7.39% every month for 10 years, with both amounts

calculated as a percentage of twenty-six million dollars. (Id., Ex.

1.) Hensley alleges that the “interest rate swap” is essentially a

“bet on the direction of interest rates over the next 10 years.” (Id.

¶ 17.) Hensley further alleges that BoA was aware that Bright was

“not equipped to understand and evaluate the risks inherent in an

interest rate swap.” (Id. ¶ 18.)

In September or October 2006, Hensley learned that West had

determined not to accelerate its mortgage loan, so there was no longer

any need to go through with the new BoA mortgage loan. (Id. ¶ 28.) 

BoA then informed Hensley that, even though Hensley would not need the

new mortgage loan, Hensley had already agreed to the 10-year “interest

rate swap.” (Id. ¶ 29.) 

When Hensley did not pay the first installment under the

“interest rate swap,” BoA filed suit, claiming that Hensley had

breached the contract and that BoA was entitled to “early termination”

penalties of more than one million dollars. (Pls.’ Compl. ¶¶ 11-15.)1

///

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28 The Rule 12(b)(6) dismissal motion standards are well known 2

and need not be repeated here.

5

DISCUSSION2

I. Choice of Law

The parties dispute whether New York or California law

controls. (Hensley’s Opp’n to Pls.’ Mot. to Dismiss Counterclaims

(“Opp’n”) at 11 n.5.; BoA’s Reply at 3 n.1.) 

The Confirmation contains a choice-of-law clause stating:

“Governing law: the laws of the State of New York (without reference

to the conflict of the laws provisions thereof).” (BoA’s Compl., Ex.

A.) Whether this choice-of-law clause is enforceable is governed by

California law. See ABF Capital Corp. v. Osley, 414 F.3d 1061, 1065

(9th Cir. 2005) (applying California law to determine enforceability

of choice-of-law clause). The choice of law clause is enforceable

unless “(1) [New York] has no substantial relationship to the parties

or their transaction, and there is no other reasonable basis for the

parties’ choice,” or “(2) [New York] law is contrary to a fundamental

policy of [California], and [California] has a materially greater

interest in the matter than does [New York].” Frontier Oil Corp. v.

RLI Ins. Co., 153 Cal. App. 4th 1436, 1451 (2007), citing Nedlloyd

Lines B.V. v. Superior Court, 3 Cal. 4th 459, 464-466 (1992). 

Hensley argues that California law governs because the

counterclaims are tort claims. (Opp’n at 11 n.5.) However, where

tort claims arise from a contract containing a choice-of-law clause,

the choice-of-law clause governs the tort claims as well as any

contract claims. Olinick v. BMG Entm’t, 138 Cal. App. 4th 1286,

1299-1300 (2006) (holding that choice-of-law clause governed both tort

and contract claims because “the legal relationship between [the]

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parties emanate[d] from th[e] [a]greement [containing the choice-oflaw clause] and the interpretation of the [a]greement will be a

central issue in the . . . case”). 

Since Hensley has not demonstrated that the choice-of-law

clause should not be enforced, New York law is applied to the

dismissal motion sub judice.

II. Fraud Counterclaim

BoA seeks dismissal of Hensley’s fraud counterclaim, arguing

that Hensley’s reliance on BoA’s alleged misrepresentations was not

reasonable because the Proposal and the Confirmation expressly stated

that the transaction was an “interest rate swap.” (Mot. at 12:12-

14:2.)

To state a claim for fraud, Hensley must allege that it

reasonably relied on BoA’s misrepresentations. Wynn v. AC Rochester,

273 F.3d 153, 156 (2d Cir. 2001). Hensley argues that whether its

reliance was reasonable is an issue of fact that cannot be decided on

a Rule 12(b)(6) dismissal motion. (Opp’n at 14:1-17:6.) However, 

“[u]nder New York law, reasonable reliance is precluded when ‘an

express provision in a written contract contradicts a prior alleged

oral representation in a meaningful fashion.’” Republic Nat. Bank v.

Hales, 75 F. Supp. 2d 300, 315 (S.D.N.Y. 1999) (quoting Villa Marin

Chevrolet v. Gen. Motors Corp., 1999 WL 1052494, at *5 (E.D.N.Y.

Nov.18, 1999); see Village On Canon v. Bankers Trust Co., 920 F. Supp.

520, 531 (S.D.N.Y. 1996) (dismissing fraud claim under Rule 12(b)(6)

since plaintiff’s “allegations [we]re flatly contradicted by the[]

express terms” of the written agreement).

Hensley argues that it was entitled to rely on BoA’s

misrepresentations because Hensley was in a special relationship with

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BoA. (Opp’n at 14:12-14.) However, “even if [Hensley meets] its

burden of presenting sufficient facts to show that a special

relationship existed between the parties,” Hensley cannot reasonably

rely on BoA’s misrepresentations because those misrepresentations are

contradicted by the Proposal and the Confirmation. See Burroughs

Corp. v. Datacap, Inc., 507 N.Y.S.2d 882, 884 (N.Y. App. Div. 1986);

see also Dorsey Products Corp. v. U.S. Rubber Co., 251 N.Y.S.2d 311,

313 (N.Y. App. Div. 1964) (“[Even if] there is merit in plaintiffs’

contention that a relationship does exist which implies a closer

degree of trust and reliance than the ordinary buyer-seller

relationship, that fact is of no moment in this connection [since]

[t]he very instrument which creates the relationship . . . negatives

the right to rely on statements.”).

Since Hensley has not alleged facts demonstrating reasonable

reliance, BoA’s motion to dismiss Hensley’s fraud counterclaim is

granted.

III. Breach of Duty Counterclaim

BoA seeks dismissal of Hensley’s counterclaim for breach of

duty, arguing that BoA does not owe any fiduciary duty to Hensley. 

(Mot. at 7:9-11.) Hensley counters that it “has not claimed that the

duty owed by BoA was fiduciary in nature.” (Opp’n at 11:7.) Instead,

Hensley argues that “BoA as advisor and seller of a financial product

had a tort duty to make accurate statements.” (Opp’n at 11:7-17.) 

“Courts have stated that banks owe a duty of care to their customers.” 

Dubai Islamic Bank v. Citibank, N.A., 126 F. Supp. 2d 659, 667

(S.D.N.Y. 2000); Bank Brussels Lambert, S.A. v. Intermetals Corp., 779

F. Supp. 741, 747 (S.D.N.Y. 1991)(finding that “it is true without

question that [bank] had a duty to exercise reasonable skill and care

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in carrying out its activities for its customer”). Accordingly, BoA’s

motion to dismiss Hensley’s breach of duty counterclaim is denied.

CONCLUSION

For the foregoing reasons, BoA’s dismissal motion is granted

as to Hensley’s fraud counterclaim, and denied as to Hensley’s breach

of duty counterclaim. Hensley is granted ten days leave from the date

on which this order is filed to file amended counterclaims in which

the dismissed counterclaim is amended.

IT IS SO ORDERED.

Dated: December 28, 2007

 

GARLAND E. BURRELL, JR.

United States District Judge

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