Lead Opinion
Judge HALL dissents in a separate opinion.
Louisiana Stadium and Exposition District and the State of Louisiana (together, “LSED”) seek to rescind an agreement to purchase bond insurance from Financial Guaranty Insurance Co. (“FGIC”) and recover its $13 million premium payment. LSED bases its claim on failure of cause, a tenet of Louisiana law that requires all contracts be supported by cause — “the reason why a party obligates himself.” La. Civ.Code Ann. art. 1966, 1967. “Cause” is a broader concept than “consideration,” because cause does not require anything be given in return. Aaron & Turner, L.L.C. v. Perret,
BACKGROUND
LSED owns the Superdome in New Orleans. FGIC is a stock insurance company
In connection with the Bonds being issued, LSED purchased $13 million in bond insurance from FGIC, purchasing both a Municipal Bond New Insurance Policy and Municipal Bond Debt Service Reserve Fund Policies (together, the “Policies”). LSED alleges that it “understood that its future interest payment savings would be substantially greater than the amount of the premium paid to FGIC.” LSED alleges that it expected that the Policies would “wrap” the Bonds with FGIC’s triple-A credit rating, making the Bonds more attractive to investors.
In 2008 — two years after the bonds were issued — FGIC lost its triple-AAA credit rating after it came to light that FGIC invested in risky credit default swaps and subprime mortgage markets. FGIC eventually was stripped of its credit ratings altogether, and was ordered by the N.Y. Insurance Department to stop writing new policies and to “suspend paying any and all claims” against existing policies.
LSED commenced this action in the U.S. District Court for the Eastern District of Louisiana against FGIC. LSED also sued Merrill Lynch, alleging that Merrill Lynch failed to disclose that the success of the proposed bond structure depended on Merrill Lynch’s submitting support bids in every auction for the thirty-year life of the bonds. LSED’s action eventually was transferred to the Southern District of New York by the Judicial Panel on Multidistrict Litigation along with four other actions. See In re Merrill Lynch & Co., Inc., Auction Rate Sec. (ARS) Mkg. Litig.,
DISCUSSION
We review the grant of a motion to dismiss for failure to state a claim de novo. Harris v. Mills,
guided by two working principles. First, although “a court must accept as true all of the allegations contained in a complaint, that tenet is inapplicable to legal conclusions,” and threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. Second, only a complaint that states a plausible claim for relief survives a motion to dismiss, and determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.
Id. (internal quotation marks, citations omitted; omission in the original).
The parties agree that Louisiana law governs the analysis. In re Merrill Lynch,
Under Louisiana’s Civil Law tradition, courts look first and foremost to statutory law. The Louisiana Civil Code instructs that ‘[t]he sources of law are legislation and custom,’ and that ‘legislation is a solemn expression of legislative will.’ ‘[T]he primary basis of law for a civilian is legislation, and not (as in the common law) a great body of tradition in the form of prior decisions of the courts.’ The concept of stare decisis is foreign to the Civil Law, including Louisiana. Therefore, in cases such as this we are guided by decisions rendered by the Louisiana appellate courts, particularly when numerous decisions are in accord on a given issue — the so-called jurisprudence constant — but we are not strictly bound by them.
Transcon. Gas Pipe Line Corp. v. Transp. Ins. Co.,
I. Failure of cause.
The primary issue on this appeal is whether LSED may rescind the bond insurance policy for failure of cause. Louisiana’s Civil Code requires that all contracts be supported by cause — “the reason why a party obligates himself.” La. Civ. Code Ann. art. 1966, 1967. “Cause” is a more expansive concept than consideration, because:
[ujnlike the common law analysis of a contract using consideration, which requires something in exchange, the civil law concept of ‘cause’ can obligate a person by his will only. The difference has been analogized to a civilian contract-consent approach compared to a common law contract-bargain approach. Consideration is an objective element required to form a contract, whereas cause is a more subjective element that goes to the intentions of the parties. Therefore, in Louisiana law, a person can be obligated by both a gratuitous or onerous contract.
Aaron & Turner, L.L. C. v. Perret,
Louisiana law recognizes at least two grounds for failure of cause. “Error can vitiate consent, so that a contract may be rescinded based upon an error.” Cyprien v. Bd. of Supervisors ex rel. Univ. of La.,
While “[clause is the reason why a party obligates” itself, St. Charles Ventures, LLC v. Albertsons, Inc.,
Cyprien is particularly instructive on the issue.of failure of cause. There, plaintiff applied for a job as head coach of the University of Louisiana at Lafayette (“ULL”) basketball team. Cyprien, 5 So.3d at 864. Plaintiff had a student worker at his former university fax a copy of plaintiffs resume to ULL. Id. According to the resume, plaintiff had graduated from the University of Texas at San Antonio (“UTSA”) with a bachelor’s degree, which was false. Id. After ULL hired plaintiff, a newspaper revealed that plaintiff never graduated from UTSA. Id. ULL fired plaintiff the same day the article appeared, and plaintiff sued for breach of contract. Id.
The Louisiana Supreme Court determined that ULL properly rescinded the contract based on failure of cause. Id. at 867-68. After considering affidavits from university officials stating that (1) a degree from an accredited four-year university was a job requirement; and (2) ULL would not have hired Cyprien if it knew he did not have a degree from UTSA, the court granted summary judgment to the university, finding:
These affidavits establish that ULL would not have incurred the obligation if it had known that Mr. Cyprien did not have a degree from an accredited university. Mr. Cyprien clearly knew or should have known that his academic qualifications were an important factor in ULL’s decision to hire him. Under these circumstances, we find ULL has established that it had a valid ground to rescind Mr. Cyprien’s contract based on error in the cause. Thus, Mr. Cyprien will be unable to establish a bad faith breach of contract claim. The district court erred in denying ULL’s motion for summary judgment on this claim.
Finally, the error in cause must be reasonable to support a claim under Louisiana law. See Quality Design and Constr., Inc. v. Capital Glass Co.,
The commitment letters entered into between the parties referenced the “Official Statement Disclosure Language,” which LSED was required to include in the Bonds. The disclosure language stated that FGIC’s triple-A ratings reflected the “ratings agencies’ current assessments of the insurance financial strength ■ of [FGIC].... These ratings are not recommendations to buy, sell or hold the Insured Bonds, and are subject to revision or withdrawal at any time by the rating agencies.” The disclosure language also explicitly stated that the Policies did “not insure any risk other than Nonpayment by the Issuer.” Plainly, LSED was aware that (1) there were no guarantees attached to FGIC’s credit rating over the life of the Bonds and (2) the Bonds’ only intended purpose was to insure the bondholders against the risk of nonpayment by LSED.
This case turns on what LSED purchased from FGIC. As the disclosure language makes clear, LSED purchased bond insurance, not credit enhancement. The distinction is critical. LSED argues that the failure of cause was not FGIC’s inability to maintain a guaranteed triple-A rating, but FGIC’s failure to operate its business in a careful and prudent manner. The problem with LSED’s argument is that it cannot sue based on a failure to pay out on the bonds, because it is undisputed that no bonds were ever presented for payment. Even if a failure to pay occurred, it is not clear that LSED would have standing to press that claim, which would appear to belong to the bondholders in the first instance. That leaves lack of credit enhancement as LSED’s only harm, and while credit enhancement may have been a hoped for benefit of the bonds, it cannot be said to be their primary cause.
LSED’s failure to receive the hoped-for credit enhancement is a failure of motive, not a failure of' cause. Indeed, every court to have considered the issue has found that absent an express contractual obligation, bond insurance policies cannot form the basis for a claim based on an insurer’s ruined credit rating. See Ambac Assurance Corp. v. Adelanto Pub. Util. Auth., No. 09 Civ. 5087(JFK),
The Fifth Circuit’s recent decision in Dameware Development, L.L.C. v. American General Life Insurance Co.,
We find nothing in Louisiana law that would allow a party to recover damages based on a belief that certain conditions would be maintained by the other party when the contract explicitly disclaimed any guarantee of a continuance of those conditions. The underlying transaction here is similar to buying title insurance when obtaining a mortgage to buy a house. The mortgagor buys a title insurance policy that provides coverage to the bank as mortgagee. The fact the mortgagor pays a lower interest rate, or even that the title insurance entices the bank to make the loan, is the benefit the mortgagor receives from purchasing the policy. But the purpose of the policy itself is to provide the bank with insurance in case title turns out to be flawed. The contract is fulfilled when the premium is paid and the insurer agrees to pay if the title is later found flawed. The only breach is if the insurer refuses to pay in accordance with the terms of the policy.
On a much grander scale, that is what happened here. LSED bought bond insurance from FGIC. The purpose of buying the bond insurance was to protect the bondholders in event of a default by LSED. A side benefit may have been a lower interest rate — credit enhancement— but it was not part of the contract. The contract is explicit that it protects only the bondholders, and that there is no guarantee that FGIC will maintain any particular credit rating.
Further, there is a line of Louisiana cases indicating that a party’s “error in judgment founded upon its own evaluation of future market conditions” does not permit rescission based on an error of cause. Hanover Petroleum Corp. v. Tenneco Inc.,
The facts here are similar. LSED argues that had it known FGIC would act to denigrate its own credit rating, it would never have paid the $13 million premium up front. However, as detailed above, the commitment letters specifically disclaimed any guarantee to maintain a AAA-credit rating agency. This explicit disclaimer language — of which LSED was well aware — placed LSED on notice of the possibility that FGIC’s credit rating would be reduced in the future. LSED took a calculated commercial risk that did not perform as it hoped. Even under Louisiana’s civil law, it is not the role of this court to relieve LSED of its bad bargain.
II. Implied breach of contract.
For the same reasons, LSED fails to state a viable claim for a breach of an implied obligation. Article 2054 of Louisiana’s Civil Code provides:
When the parties made no provision for a particular situation, it must be assumed that they intended to bind themselves not only to the express provisions of the contract, but also to whatever the law, equity, or usage regards as implied in a contract of that kind or necessary for the contract to achieve its purpose.
By its very nature, Article 2054 is a gapfiller, used to infer obligations into a contract only “[w]hen the parties made no provision for a particular situation.” No such gapfiller is necessary here. The one obligation FGIC assumed was the obligation to pay on the bonds in the event of a default by LSED. In the absence of a default, that obligation does not come due. Moreover, the failure to pay on a properly presented bond would be a breach of an explicit obligation, not an implied obligation.
The Third Amended Complaint cannot be fairly read as creating an issue as to whether “the need to maintain a credit rating of any kind” was an implied contractual obligation. LSED pleaded that “to fulfill its obligation to provide credit enhancement, FGIC needed to issue LSED an insurance policy ... and maintain its ‘triple-A’ rating over the 30-year life of the Bonds.” See A290, ¶293; see also A153, ¶ 78 (“[i]f FGIC’s credit rating fell below triple-A at any time after the Bonds were issued, LSED — not investors holding the Bonds — would bear the cost in the form of higher interest rates”); A230, ¶ 294 (“LSED was paying for FGIC’s triple-A rating”); id. at ¶296 (“FGIC knew that LSED was relying on FGIC’s credit enhancement — accomplished through FGIC’s maintaining its ‘triple-A’ rating ... for the life of the Bonds”); A231, ¶297 (“FGIC’s loss of its ‘triple-A’ rating ...”). While LSED argues that “[t]his case is not simply about FGIC’s credit rating,” that argument loses its force when one reads the pleadings. The pleadings identify FGIC’s
III. Anticipatory breach of contract.
LSED also argues that FGIC anticipatorily breached its contract by rendering itself unable to pay claims. Under Louisiana law, the doctrine of anticipatory breach “applies when an obligor announces he will not perform an obligation which is due sometime in the future. The obligee need not wait until the obligor fails to perform for the contract to be considered in breach.” Gulf Coast Bank & Trust Co. v. Rick Granger Enters.,
FGIC counters that LSED lacks standing to press this claim, because LSED is not a bondholder. The contract between the parties required only that FGIC issue the policies, and once FGIC did, it argues, all of its obligations to LSED ended. Any future obligations are only to the bondholders, not LSED. See A349, “As used herein, the term ‘Bondholder’ means, as to a particular Bond, the person other than the Issuer who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof.” Thus, because LSED’s rights are not affected by any breach of the Policies, either now or in the future, FGIC argues it cannot be found to have anticipatorily breached the policies.
The district court declined to reach the issue of whether LSED had standing, instead finding that because FGIC did not yet expressly renounce its obligations under the contract, there is no anticipatory breach. We agree. Louisiana law requires “a definitive refusal to perform” before a claim for anticipatory breach can stand. Andrew Dev. Corp. v. West Esplanade Corp.,
IV. Detrimental reliance.
The Louisiana Code permits a party to state a claim for detrimental reliance:
A party may be obligated by a promise when he knew or should have known that the promise would induce the other party to rely on it to his detriment and the other party was reasonable in so relying. Recovery may be limited to the expenses incurred or the damages suffered as a result of the promisee’s reliance on the promise. Reliance on a gratuitous promise made without required formalities is not reasonable.
La. Civ.Code Ann. art. 1967. A plaintiff alleging detrimental reliance must establish (1) a representation by conduct or word, (2) justifiable reliance on the representation, and (3) a detrimental change in position because of the reliance. Babkow v. Morris Bart, P.L.C.,
We find no error in the district court’s dismissal. Bethea’s allegation of reasonable reliance on the O’Brien letter and St. Paul’s brochures as a promise that St. Paul would provide unconditional free tail coverage, or at least that St. Paul would renew Bethea’s policy until the doctors could take advantage of the free tail coverage, is belied by the clarity of the insurance policy and the content of the documents at issue. The insurance policy, which is indisputably valid and not breached, provides that either party may non-renew at any time and that tail coverage will be provided for no additional premium only upon retirement during the policy’s term. Both the contract’s integration clause and Louisiana law require that any change to the policy be in written form and incorporated into the policy. One could not reasonably rely on a renewal letter explaining policy changes and marketing brochures as a promise to provide free tail coverage without limit, especially considering that such a promise is not mentioned in the documents and would directly conflict with the policy. Given that the insurance policy unambiguously defines the parties’ rights and limits the way to alter the policy, it was unreasonable to rely on informal documents as modifying material aspects of the policy.
Id. at 404-05 (footnote omitted).
LSED argues that the Commitment Letters do not reflect a complete and unambiguous agreement because certain terms (including the pricing) were not included in the contract. Further, LSED argues, the contract here does not include an integration clause, while the contract in Bethea did, again making it distinguishable. FGIC argues that detrimental reliance usually only comes into play when there is no written contract, or when the contract is unenforceable. Jackson v. Lare,
The district court correctly concluded the contract at issue here was unambiguous. The issue of the missing integration clause is not particularly relevant to our analysis. The integration clause was important in Bethea because the plaintiffs were arguing other documents changed the terms of the insurance policy. Under Louisiana law, “[p]arol or extrinsic evidence is generally inadmissible to vary the terms of a written contract unless the written expression of the common intention of the parties is ambiguous.” Campbell v. Melton,
CONCLUSION
We have examined the remainder of LSED’s arguments and find them to be without merit for the reasons set forth in the district court’s carefully considered opinion. The decision of the district court is affirmed in all respects.
Notes
. FGIC is currently operating under an Order of Rehabilitation, issued by the Supreme Court of the State of New York on June 28, 2012, available at http://www.fgicrehabi litation.com/pdflib/FGIC_Order_of_ Rehabilitation.pdf. Both parties, in supplemental briefing, asserted that the order did not bar this Court from issuing a decision because the appeal was fully submitted and argued before the Rehabilitation Order issued. We agree.
Dissenting Opinion
dissenting:
Louisiana Stadium and Expositions District (“LSED”) argues on appeal that the district court improperly dismissed for failure to state a claim under Louisiana law LSED’s four claims against Financial Guaranty Insurance Company (“FGIC”)— failure of cause, breach of an implied obligation, detrimental reliance, and unjust enrichment. Although I would hold that LSED has adequately and plausibly pleaded the above claims so as to survive a motion to dismiss under Rule 12(b)(6) of federal procedure, our de novo review requires us to interpret several provisions of the Louisiana Civil Code which, having undergone a revision in 1984, lack sufficient clarity for common law jurists to render an authoritative answer on the adequacy of the pleadings in this case. Thus, for reasons that follow, I cannot join the majority opinion, and I would vacate the judgment of the district court or, preferably, certify the following question to the Louisiana Supreme Court:
Under the Louisiana Civil Code, has the plaintiff LSED adequately pleaded causes of action for failure of cause and breach of implied obligation with respect to the bond insurance policies purchased from FGIC such that if the relevant obligations were proven at trial, LSED would be entitled to rescind the obligation?1
Although certification should be done “sparingly” and not “merely because state law permits its use,” Runner v. N.Y. Stock Exchange, Inc.,
Louisiana courts, too, have struggled with the distinction between actionable failure of cause claims and non-actionable failure of motive claims. Since the disappearance of the word “motive” from the Louisiana Civil Code’s provisions regarding “failure of cause” claims, state courts in Louisiana have been unsure about the role “failure of motive” can play in a “failure of cause” claim. See, e.g., Hanover Petroleum Corp. v. Tenneco, Inc.,
The status of breach of implied obligation causes of action is also unclear, especially as to when an obligation may be implied. Article 2054 of the Louisiana Civil Code provides that “[w]hen the parties made no provision for a particular situation, it must be assumed that they intended to bind themselves not only to the express provisions of the contract, but also to whatever the law, equity, or usage regards as implied in a contract of that kind or necessary for the contract to achieve its purpose.” The Louisiana Supreme Court, interpreting the predecessor statute to article 2054, stated that this language stands for two propositions. First, because “not all obligations arising out of contract need be explicitly stated ... good faith performance is implied.” National Safe Corp. v. Benedict & Myrick, Inc.,
Given the “anomalous” state of case law on failure of cause and breach of implied covenant claims, I reject the majority’s implicit conclusion that LSED’s claims are easy to resolve on the face of the complaint as a matter of law. The majority, as the district court did, ignores the unique characteristics of the issues presented and advances an unsound analysis — even relying on precedent of common law jurisdictions — in its attempt to resolve questions specific to Louisiana civil law. See Maj. Op. at 44-45. Moreover, as it stands now, the majority’s and the district court’s reasoning, which I believe is faulty, only perpetuates confusion over Louisiana’s unique failure of cause and breach of implied obligation claims. See also City of New Orleans v. Ambac Assurance Corp., No. 08-3949 (E.D. La. 2010). I am mindful that this Court’s task is to predict how the Louisiana Supreme Court would resolve the case before us, and frankly, were I forced to do so, I would vacate the decision below and permit LSED’s claims to proceed. My analysis of Louisiana law and the rationale suggesting certification of these two principal issues follows.
I. Failure of Cause
The majority overlooks several errors made by the district court in dismissing LSED’s failure of cause claim in this case. First, the district court incorrectly determined that Louisiana law has a presumption against failure of cause claims where “the error concerns an event that is expected to take place in the future,” i.e., where the error asserted is with respect to events occurring after the formation of the contract. In re Merrill Lynch Auction Rate Sec. (“ARS”) Litig., No. 09 MD 2030,
A. LSED’s Failure of Cause Claim
LSED’s failure of cause claim, viewed in the light most favorable to LSED, is best characterized as follows: FGIC purported
The majority does not see it this way. Drawing on language from a disclaimer related only to FGIC’s AAA rating, not its general creditworthiness, the majority concludes that there “were no guarantees attached to FGIC’s credit rating” and that the policies’ “only intended purpose was to insure the bondholders against the risk of nonpayment by LSED.” See Maj. Op. at 45. This, the majority believes, shows that LSED could therefore not have been purchasing credit enhancement as its “primary cause.” Despite allegations and record support to the contrary, and armed only with precedent relying on common law contract interpretations, the majority then classifies LSED’s-“failure to receive the hoped-for credit enhancement” as- a non-cognizable “failure of motive.” See Maj. Op. at 44-45.
Further illustrating the confusion, the majority then likens bond insurance to title insurance and suggests such an analogy forecloses LSED’s claim under Louisiana law. My colleagues observe that title insurance primarily insures against risk of flawed title and only incidentally allows a mortgagee to benefit in the form of a lower interest rate charged by the bank. I do not quarrel with the conclusion, based on the hypothetical, that the “only breach is if the insurer refuses to pay in accordance with the terms of the policy.” See Maj. Op. at 45-46. Based on my understanding of Louisiana’s action for failure of cause, however, -I cannot agree with my colleagues that rescission is inappropriate simply because FGIC has not yet breached the strict terms of the policies.
An “obligation” — Louisiana’s civil law equivalent of a contract — “cannot exist without a lawful cause.” La. Civ.Code art. 1966. “Cause is the reason why a party obligates himself.” Id. art. 1967 (emphasis added). “[T]he civil law concept of ‘cause’ can obligate a person by his will only, [ujnlike the common law analysis of a contract using consideration.” Aaron & Turner, L.L.C. v. Perret, 22 So.3d 910, 915 (La.Ct.App.2009). This willful “consent” to an obligation “may be vitiated by error, fraud or duress.” La. Civ.Code art. 1948 (emphasis added). Consent will be vitiated by error when “it concerns a cause without which the obligation would not have been incurred- and that cause was known or should have been known to the other party.” La. Civ.Code art. 1949 (em
The majority opinion searches the contract documents, which the district court noted were “not entirely clear,” In re Merrill Lynch ARS Litig.,
Instead, “a line of cases where error as to cause has been recognized and contracts rescinded” often “concern error with respect to the nature of the thing sold and its suitability for its intended use.” See St. Charles Ventures,
First, it seems to me that the majority does not clearly recognize LSED’s real complaint, to wit, FGIC knowingly embarked on a reckless course of guaranteeing assets without regard for their integrity or risk. That the ratings agencies downgraded FGIC based on this behavior is arguably true, but this does not change the fact that LSED bought FGIC’s policies based on a good faith belief — if false premise — that FGIC would remain a creditworthy enterprise. To focus on the actions of third parties, the ratings agencies, without discussing the allegations that FGIC knew parties such as LSED relied on its general
Again, the majority opinion also mistakenly relies on FGIC’s disclaimer to wash away the numerous instances in the complaint in which FGIC, without reference to its AAA rating, represented itself as providing credit enhancement. See Third Am. Compl. ¶¶ 83, 85 (“Our long-term goal is to continue to maintain a low risk book ... ”); id. ¶ 88 (purchasing bond insurance will “lower cost of funds” to LSED). The majority thus cannot seriously contend that the limited disclaimer as to the AAA rating also disavowed FGIC’s broader obligation to remain a company that can pay claims or appear to be a company that can pay claims. Certainly the obligation of an insurance company to refrain from driving itself off a cliff need not be found in the express terms of the contract, especially when it makes contrary pre-obligation representations. I am not satisfied, therefore, to determine as a matter of law that FGIC did not knowingly and carelessly endanger its purported conservative investment practices.
The majority cites the Fifth Circuit’s recent decision in Dameware Dev., L.L. C. v. Am. Gen. Life Ins. Co.,
In Dameware a pension plan purchased life insurance policies with the understanding that those policies would yield certain tax benefits. When the pension plan did not receive the favorable tax treatment it had intended to acquire, it sued for rescission of its purchase based on failure of cause. Id. at 205. The Fifth Circuit, however, held that there was no failure of cause, noting that the life insurer expressly disclaimed any “tax consequences and/or planning concepts” that it may have used in “describing the benefits of using life insurance in connection” with the policy. Id. at 206. In Dameware, the disclaimer and party representations were in fact comprehensive, showing that the parties “acknowledged that they understand” that the life insurer “operates solely in the capacity of a product provider and that any sales presentations” or even its description of “benefits of using life insurance in connection with [its product] cannot be relied upon as tax or legal advice.” Id. at 210 (emphasis added). In acquiring the life insurance policies, Dameware even acknowledged that it was “not relying upon any representation, warranty, or guarantee beyond those contained within the insurance policy contract itself, including any riders or amendments thereto.” Id.
Here, in stark contrast to the disclaimer and representations in Dameware, there was no express disclaimer of FGIC’s explicit representations about its credit-enhancing bond insurance products, nor did FGIC specifically assert that (a) its role was solely as product provider and it had no responsibility for the benefits it represented such products to have, or (b) that its conservative financial practices and stringent underwriting procedures were subject to radical change such that no customer could rely on them. Had there been in this case this sort of Dameware
Dameware also provides further guidance on the scope of an effective disclaimer, for it demonstrates that sophisticated parties know how expressly to disclaim that which they intend. The disclaimer here relates solely to FGIC’s AAA-credit rating, asserting that third-party credit-ratings agencies may modify the rating. LSED neither disputes that this limited disclaimer was made, nor does it assert, as the sole basis for failure of cause, that FGIC lost its AAA rating. But that limited disclaimer, which surely FGIC could have expanded to match the full and multifaceted scope of the disclaimer in Dame-ware, is insufficient to bar LSED’s claim for failure of cause based on (1) FGIC’s representations regarding the benefits of its bond insurance products, (2) FGIC’s ongoing responsibility for such products, and (3) FGIC’s mode of conservative fiscal management. Based on the complaint’s allegations viewed in the light most favorable to the plaintiff, I must conclude that there was an error in fact affecting the suitability of FGIC’s insurance policies as FGIC represented them and as LSED understood them. Given those allegations, coupled with the nature of a “cause” under Louisiana law, I am of the opinion that LSED has, at least at this stage, pleaded a plausible claim for relief for failure of cause.
The district court’s analysis, which my colleagues adopt, displays several additional errors worthy of discussion. Failure of cause most often occurs when an error of fact exists at the time the contract (obligation) is incurred. In other words, there is a “failure of cause” where one party conceals, obfuscates, or lies about a particular fact that, had the truth been known to the other contracting party, would have stopped that other party from entering into the obligation; and so, cause may fail due to a “unilateral” error. St. Charles Ventures, LLC v. Albertsons Inc.,
Contrary to the district court’s suggestion that Louisiana courts “are hesitant to vitiate a contract when error concerns an event that is expected to take place in the future,” In re Merrill Lynch ARS Litig.,
More recently, in Bluebonnet Hotel Ventures, LLC v. Wachovia Bank, N.A., 10-489-JJB-DLD (Ruling on Motion to Dismiss) (M.D.La. Sept. 29, 2011), the United States District Court for the Middle District of Louisiana, in applying Louisiana law, held that “changed circumstances may constitute failure of cause when the ‘cause’ is within the control of the party seeking to enforce the contract.” Id. There, Bluebonnet Hotel Ventures, LLC was formed for the purpose of constructing a hotel. Bluebonnet sought to finance the project through the issuance of bonds and needed a letter of credit to make its bonds more marketable and attractive to investors. Wells Fargo and Bluebonnet exchanged a letter of intent regarding the letter of credit, and Wells Fargo tentatively agreed to underwrite and market the bonds. Wells Fargo also coaxed Bluebonnet into entering into a swap agreement “whereby the anticipated bonds Bluebonnet planned to issue at variable interest rates could be hedged by essentially adjusting the bonds to a fixed rate based on the interest rate swap.” Id. When it came time to issue the letter of credit, Wells Fargo issued one with terms differing from those proposed in the letter of intent. Bluebonnet balked and issued the bonds without the letter of credit. Without the letter of credit, Bluebonnet sold only a small portion of the bonds. It then initiated an action for failure of cause to rescind the swap agreement with Wells Fargo. On Wells Fargo’s motion to dismiss, the district court concluded that Louisiana courts routinely recognize claims for failure of cause where circumstances have changed as result of actions on the part of the party seeking to enforce the contract. Id. It denied Wells Fargo’s motion on the basis that Bluebonnet had stated a valid claim for failure of cause because the complaint alleged that the operative contract, the credit swap agreement, failed for cause “due to Wells Fargo’s failure to issue the letter of credit, which doomed the bond issuance for the hotel, the obvious reason why Bluebonnet contemplated the swap agreement in the first place.” Id.
The majority cites Bluebonnet for purposes of defining failure of motive and failure of cause. Their opinion, however, notably fails to recognize Bluebonnet’s clear pronouncement that, although less obvious but “no less important,” “a fact which a party or both parties assumed would come into existence, but in fact did not based on changed circumstances, results in failure of cause.” Id. at 9.
In opining that “Louisiana courts are likewise hesitant to vitiate a contract due to error when the error concerns an event that is expected to take place in the future,” In re Merrill Lynch ARS Litig.,
The district court’s analysis of the failure of cause claim was further compromised by the way in which it characterized the failure of cause claim and by attributing LSED’s ignorance about FGIC’s creditworthiness or investment practices to “inexcusable ignorance, neglect, and want of care.” In re Merrill Lynch ARS Litig.,
While true that Louisiana courts will not rescind contracts based on failure of cause where the unilateral error of fact is due to the plaintiffs “inexcusable ignorance, neglect, and want of care,” nothing pleaded in the complaint suggests that LSED was aware or should have been aware that FGIC had altered its business practices in a manner going to the very reason why LSED spent millions of dollars to purchase FGIC’s bond insurance namely, FGIC’s creditworthiness derived from conservative, remote-loss practices. The fact that LSED understood that FGIC could not guarantee its AAA rating, as suggested by the disclaimer on which the majority relies, does not mean that it also knew or should have known that FGIC was embarked on an affirmative course to engage in business practices that would put its creditworthiness at so much risk as to render its bond insurance unsuitable for the reason it was purchased. This is particularly so where FGIC had not disclosed its increased risk portfolio despite its alleged representations to the contrary. In short, without discovery concerning LSED’s reading and understanding of its agreement with FGIC, it is premature to rely, as the district court and the majority do, on the bare terms of the agreement as a basis for concluding that LSED exhibited “inexcusable ignorance, neglect, and want of care.” See Bluebonnet, (“the [contract] provisions only have force if the [contract] itself is found valid: Bluebonnet’s failure of cause claim attacks the validity of the agreement by attacking the cause. Logic dictates that the inquiry into the agreement’s validity (and thus into “cause”) precedes any inquiry into the interpretation and the construction of the agreement itself.”)
Additionally, given that “failure of cause” is not a cause of action recognized by common law jurisdictions, the majority and the district court erred in relying on
B. “Failure of Cause” and “Failure of Motive”
I turn now to explain why I would certify this matter to the Louisiana Supreme Court. In holding that it was not reasonable for LSED to believe that its contract with FGIC would guarantee thirty years of credit enhancement, the district court failed to distinguish between cause and motive. Juxtaposed to failure of cause is what, under Louisiana law, is termed “failure of motive.” While failure of “cause” can be a basis for rescinding an obligation, a failure of “motive” cannot. That is, changed circumstances going to motive rather than cause are not sufficient to vitiate consent. Noting the revision of the Civil Code in 1984, which removed the word motive from the relevant articles addressing failure of cause, St. Charles Ventures explained that unlike cause, which goes to “the nature of the thing sold and its suitability for its intended use” or, put differently, “the suitability of the thing purchased in relation to the reason or cause of the purchaser so doing,” motives “rest in the subjective sphere of the individual” so that “an error in the motive does not annul the contract even though it exerts a decisive influence on the obligation.” Id. at 689-91 (quoting La. Civ. Code art. 1950 cmt. f). For example, holding that the purported “cause” underlying the obligation at issue was really a motive for entering the contract, i.e., the improbability that another retailer would open a store in a particular New Orleans neighborhood, the court in St. Charles Ventures rejected the plaintiffs failure of cause claim, noting that there was nothing different in fact about the suitability of the leased premises, other than the arrival of another retailer in the neighborhood. Id. at 694-95; see also Superior Oil Co. v. Transco Energy Co.,
In applying St. Charles Ventures’ analysis of failure of motive to its analysis of LSED’s failure of cause claim, the district court here conflated what should have been separate analytical undertakings. As I understand the distinction between failure of cause and failure of motive as explained in St. Charles Ventures, I would hold that it is possible to distinguish between a cause and a motive in the present situation — LSED’s motive in paying a $13 million premium for bond insurance was to achieve lower interest rates on the bonds. It is not suing FGIC simply because the motive in purchasing the bond insurance failed to materialize despite FGIC’s best efforts. Rather, as discussed supra at I.A., LSED’s principal cause was to purchase a credit enhancement from a credible, creditworthy insurer.
A careful reading of relevant provisions of the Louisiana Civil Code and accompanying state court decisions reveals that the difference between “cause” and “motive”' is oftentimes subtle and certainly can lead to confusion. A significant source of the confusion between what the Louisiana courts recognize as “cause” (the failure of which provides a basis for rescission) and what they deem to be “motive” (not a basis for rescission) appears to have arisen from the 1870 Code provisions defining the cause of action for failure of cause. For example, Article 1823 of the 1870 Code states that “[e]rrors may exist as to all circumstances and facts which relate to a contract, but it is not every error that will invalidate it. To have that effect, the error must be in some point, which was a principal cause for making the contract, and it may be either as to the motive for making the contract, to the person with whom it is made, or to the subject matter of the contract itself.” (emphasis added). Article 1825 states further that “[t]he error in the cause of a contract to have the effect of invalidating it, must be on the principal cause, when there are several; this principal cause is called the motive, and means that consideration without which the contract would not have been made.” (emphasis added). Finally, Article 1826 states that “[n]o error in the motive can invalidate a contract, unless the other party was apprised that it was the principal cause of the agreement, or unless from the nature of the transaction it must be presumed that he knew it.” (emphasis added). Accordingly, it would appear that under the 1870 Civil Code, failure of motive could provide a basis for rescinding the contract, but only if certain conditions were met, i.e., motive was a principal cause of the contract and the other party was aware, or should have been aware, of it. The difficulties raised by defining a cause of action in terms of a word that in some instances adequately describes the viable cause of action and in other instances bars such action are readily appreciated.
The drafters of the 1984 Civil Code apparently sought to remedy the confusion, by removing the term “motive” altogether from the relevant provisions addressing failure of cause. Article 1950 of the 1984 Code states that “[ejrror may concern a cause when it bears on the nature of the contract, or the thing that is the contractual object or a substantial quality of that thing, or the person or the qualities of the other party, or the law, or any other circumstance that the parties regarded, or should in good faith have regarded, as a cause of the obligation.” That is, the rele
The removal of “motive” from the failure of cause provision in the 1984 revision to the Civil Code appears understandably to have created some confusion in the Louisiana courts. See, e.g., Hanover Petroleum Corp.,
In these cases the parties entered a contract assuming certain facts or conditions to exist. When the assumed fact or condition was found not to exist or did not come into existence even through the act of third parties ([the employer] in this case), the contracts have been rescinded. With these cases in mind, we find that the principal, and only, cause or motive Williams had for entering into the buy-sell agreement with Carpenter was to comply with [the employer’s] orders.
Id. at 1318 (emphasis added). In my view, Carpenter plainly relied on the 1870 Code language for failure of cause when it rescinded the contract on the basis of a failure of motive, i.e., the subjective reason for entering the contract, a job relocation. Compounding the problem, courts have cited Carpenter as purporting to set forth the correct analysis for failure of cause claims notwithstanding the fact that, first, Carpenter was decided prior to the 1984 Code revision and, second, it might well be decided differently under the revised Code given that the failure of cause upon which the Carpenter Court rescinded the contract was ostensibly better described as a failure of motive unrelated to the principal cause for entering the obligation. See, e.g., In re Cajun Elec. Power Co-op. Inc.,
II. Breach of an Implied Obligation
Equally unpersuasive is the majority’s contention that LSED does not state a valid claim for breach of implied obligation under Louisiana law. LSED asserts that FGIC breached its contract by (1) impairing its own creditworthiness and (2) rendering itself unable to pay claims. The district court rejected this claim, holding that absent an express clause guaranteeing that FGIC would maintain its AAA rating, the court would not imply such a term in the contract. In re Merrill Lynch ARS Litig.,
A. LSED’s Breach of Implied Obligation Claim
Again, rather than viewing the allegations in the complaint in the light most favorable to the plaintiff, the district court and the majority have characterized the claim for breach of implied obligation in a manner that does not present LSED’s cause of action in the strongest terms possible based on the pleadings. Their rationales focused solely on whether FGIC had an obligation to maintain an AAA rating. Finding no express language requiring FGIC to maintain such rating, and relying on the decisions in NPS and Water Works, which held that there was no breach of contract against a bond insurer for letting its rating slip from AAA to AA, the district court held that there was no breach of contract when FGIC lost its credit rating. Characterizing the implied obligation as one to maintain a credit rating, the district court declined to read such an obligation into the contract.
Louisiana recognizes implied obligations. Article 2054 of the Civil Code states that “[w]hen the parties made no provision for a particular situation, it must be assumed that they intended to bind themselves not only to the express provisions of the contract, but also to whatever the law, equity, or usage regards as implied in a contract of that kind or necessary for the contract to achieve its purpose.” Article 2054 is the successor to article 1903 of the Civil Code of 1873, in effect prior to 1984. In National Safe Corp. v. Benedict & Myrick, Inc.,
Under applicable Louisiana law, LSED argues that a bond insurer without a credit rating or the ability to pay claims would not be able to sell bond insurance. For that reason, there is an implied obligation on the part of the insurer to maintain creditworthiness and the ability to pay claims under the contract. Put differently, demonstrating creditworthiness and the ability to pay claims — neither of which FGIC can currently do — are an implied
Significantly, nowhere in its decision does the district court address the concept set forth in Louisiana Civil Code article 2054 that under Louisiana law there is an implied obligation to undertake whatever conduct is necessary to carry out the express provisions of a contract. To this point LSED argues that it has adequately pleaded FGIC breached an implied obligation on the part of any bond insurer maintaining creditworthiness and an ability to pay claims as they are made. Without those attributes, FGIC is unable to carry out its express agreement. FGIC, on the other hand, seeks to characterize LSED’s argument slightly differently — asserting that the contract is not ambiguous and that LSED should not be permitted to introduce extrinsic materials to explain the intent of the contract, which can be determined on its face to disclaim any guarantee to maintain AAA ratings. In doing so, however, FGIC does not contest the thrust of those extrinsic materials — that they “stand only for the basic uncontroversial proposition that bond insurance, by guaranteeing payment on the bonds in the event of a default by the issuer, is a form of credit enhancement.... because it promises to cover the issuer’s obligations in the event of a payment default.” FGIC attempts to distinguish National Safe on the ground that it also involved allegations that the defendant breached the implied obligation of good faith and fair dealing. Although that case did involve a question of a breach of good faith, I do not read National Safe’s interpretation of article 1903 as limited to that particular implied obligation.
While I would agree with the district court and the majority that there is no express requirement in the contract that FGIC maintain a AAA rating, there is merit in the plaintiffs’ argument that there is at least an issue of fact whether the need to maintain a credit rating of any kind, and not be banned by the New York State Insurance Department from paying out claims, is a breach of an implied obligation that is necessary for achieving the express provisions of the contract, i.e., to provide bond insurance. The district court and the majority have, again, overlooked the unique facets of the Louisiana Civil Code — to wit, to find an implied obligation under article 2054 does not require a determination that the contract is otherwise ambiguous. For these reasons, I would vacate the district court’s dismissal of LSED’s claim for breach of implied and remand for further proceedings.
B. Ban on Unjust Enrichment or More Expansive Principle of Equity
Given the lack of clarity on when Louisiana law permits an obligation to be implied, LSED’s claim cannot be resolved on the face of the complaint as a matter of law. I note again that federal and state courts analyzing breach of implied obligation claims remain conflicted over whether article 2054 is an equitable principle greater than a simple ban on unjust enrichment. Owl Constr. Co. v. Ronald Adams Contractor, Inc.,
III. Conclusion
This case involves causes of action unique to the State of Louisiana — failure of cause and breach of an implied obligation. It cannot be denied that the Louisiana Supreme Court is the final arbiter in interpreting the Louisiana Civil Code. The varied holdings in case law defining both types of claims has created confusion as to the scope of those claims and limited the confidence with which common law-trained jurists may divine how Louisiana law would bear on the facts alleged in this complaint. As the highest court of the only jurisdiction in the United States to have a civil law system, the Louisiana Supreme Court can bring clarity to these issues, which would then be dispositive of this appeal and, going forward, would minimize misinterpretation of Louisiana’s laws by the courts in the other 49 states.
Accordingly, I cannot join the majority’s opinion affirming the district court’s dismissal of LSED’s amended complaint in this action as I believe the district court overlooked significant nuances in the pleading of claims for failure of cause and breach of implied obligation, nuances which undoubtedly would benefit from clarification by the Louisiana Supreme Court. For the reasons stated, I respectfully dissent.
. The Louisiana Supreme Court could reformulate or expand upon this question as it sees fit, based on the record in this case.
. Louisiana law and our own local rules permit us to certify "questions or propositions of [Louisiana law] to the Supreme Court of Louisiana for rendition or a judgment or opinion concerning certain questions or propositions of Louisiana law" in a case where it appears that there are "questions or propositions of law of [Louisiana] which are determinative of said cause independently of any other ques-lions involved in said case and that there are no clear controlling precedents in the decisions of the [Supreme Court of Louisiana].” Rule XII, § 1, Rules of Sup.Ct. of La. See also 2d Cir. L.R. 27.2(a) ("If state law permits, the court may certify a question of state law to that state's highest court. When the court certifies a question, the court retains jurisdiction pending the state court's response to the certified question.”).
. It is worth noting that, once again, jurists contemplating what does and does not constitute failure of cause find diametrically opposed answers in the same case. Surely this exemplifies the need for the Louisiana Supreme Court to resolve the legal question before us here.