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Healey Alternative Investment Partnership v. Royal Bank of Canada and Rbc Dominion Securities Corporation A/K/A

December 2, 2010


The opinion of the court was delivered by: Bumb, United States District Judge:




Plaintiff Healey Alternative Investment Partnership ("Plaintiff" or "Healey") filed a Complaint alleging eight causes of action arising out of an option contract purchased from the defendants Royal Bank of Canada and RBC Dominion Securities Corporation (collectively, "Defendants" or "RBC"). This Court has jurisdiction pursuant to 28 U.S.C. § 1332 because Plaintiff and Defendants are citizens of different states and the amount in controversy exceeds $75,000. Defendants now move for a dismissal of Plaintiff's Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).


The facts relevant to this Rule 12(b)(6) motion are those drawn from the complaint, the attached exhibits, and matters of public record. See Sands v. McConnick, 502 F.3d 263 (3d Cir. 2007). Defendants request that the Court take judicial notice of various documents submitted with their motion on the grounds that the documents are either integral to the complaint, relied upon by the complaint, or their authenticity is not in dispute. (Defs.' Br. 6 n.6.) Plaintiff objects to the request, arguing that the documents are not relied upon or integral to the complaint; Plaintiff also disputes their authenticity. (Pl.'s Opp. 10-13.) The Court agrees with Plaintiff. The documents address the merits of Plaintiff's claims, are not relied upon or integral to the Complaint, and are of disputed authenticity and relevance. Accordingly, the facts relevant to this motion are those drawn from the complaint, the attached exhibits, and matters of public record.

Plaintiff, a New Jersey partnership with no partners being citizens of either New York or Canada, purchased a call option from RBC, a Canadian bank and its wholly owned New York subsidiary. (Compl. ¶¶ 5, 6, 8.) The parties memorialized the option's terms in a Cash-Settled Equity Barrier Call Option agreement (the "Agreement"), dated November 22, 2002. (Id. ¶ 8 and Ex. A). The Agreement is governed by New York law (Id. Ex. A at 17), a point the parties do not contest.

Essentially the Agreement states that Healey purchased an option to buy a "Basket" of investments in various hedge funds and other investment vehicles at a set price called the "Strike Price."*fn1 (Id. Ex. A §§ 1 & 2.) Traditionally, when exercised, an option requires the buyer to pay the seller the price set forth in the option and the seller to transfer the underlying property, e.g., an equity investment, to the purchaser. Healey's option, however, is denoted as a "Cash- Settled" option, meaning that if the value of the underlying hedge fund investments exceed the Strike Price, RBC can settle the option by paying Healey an amount of cash equal to that difference, rather than transfer the hedge fund investments to Healey. (Id. Ex. A § 5.) This difference is described in the Agreement as the "Option Value." (Id.)

As alleged in the Complaint, Healey and RBC negotiated a Cash Settled Option because RBC would not own the investments Healey was purchasing an option on. (Id. ¶ 14; Ex. A § 11 at 15.) However, the Agreement also contemplated that RBC could hedge its risk that the investments would increase in value substantially - and thus require a substantial payment to Healey - by actually investing in the hedge funds in the Basket. (Id.) RBC did in fact invest in the hedge funds. (Id. ¶¶ 39-40.)

Determining the Option Value was less than straightforward. Periodically, RBC determined the Option Value and reported the value to Healey. (Id. ¶¶ 29-37.) This value was determined by RBC, in its sole judgment . . . based in whole or in part upon, among other things, verbal or written statements produced by the Hedge Fund[s], and/or estimates of such valuation by [RBC] in its sole judgment, and which may include adjustments by [RBC] to reflect valuation uncertainty, liquidity restrictions and/or any and all other factors determined by [RBC] in its sole judgment to be necessary or appropriate to accurately reflect the estimated liquidation value . . . (Id. Ex. A § 5 at 5.)

A different valuation would be determined, however, upon termination and exercise of the option. To establish the "Final Option Value," RBC was to determine, in its sole discretion, [the amount] that actually would be received upon complete and final settlement of liquidation or redemption by a hypothetical beneficial owner thereof assuming such beneficial owner properly submitted a notice of full liquidation or redemption to such Hedge Fund on the [Termination] Date with instructions to liquidate or redeem such Hedge Fund as soon as possible . . . (Id. Ex. A § 6.) Although RBC was free to exercise its judgment and discretion in calculating both the Option Value and Final Option Value, according to definitions incorporated by reference, such judgment and discretion was to be exercised "in good faith and in a commercially reasonable manner." (Id. ¶ 28, Ex. A Preamble and §§ 5 & 6.) RBC was not obligated to settle the option until it had determined the Final Option Value. (Id. Ex. A §§ 6 & 7.)

As alleged, Healey could exercise the option at any point by written notice to RBC. (Id. Ex. A § § 1& 4.) Healey asserts that it provided such written notice via email, which Defendants acknowledged, on September 19, 2008. In other words, Plaintiff alleges it terminated the Agreement as of September 19, 2008, which triggered RBC's obligation to determine the Final Option Value. (Id. ¶ 18.) RBC disputes that Healey terminated the Agreement on this date, contending instead that Healey did not terminate the Agreement until June of 2009. Because this matter is before the Court on a motion to dismiss, however, Healey's allegation will be accepted as true.

The next dispute concerns RBC's settlement of the option, principally RBC's manner of calculating the Final Option Value. Healey alleges that, under the Agreement, the total owed to Plaintiff is the Option Value on September 19, 2008. (Id. ¶ 35). As of August 29, 2008, Plaintiff alleges, RBC had determined the Option Value to be $27,906,962.90. (Id. ¶ 29.) Healey alleges RBC owes it this amount.*fn2

(Id. ¶ 19.) Yet, Healey alleges, RBC has paid only $7,599,000. (Id.) Heally further alleges that RBC has refused to substantiate both the Option Value calculations and the source of the approximately $7.6 million paid to Healey. (Id. ¶¶19-20, 30-34, 36 & 38.) Healey also alleges RBC has linked the option's value to "side pockets" without authorization and in breach of the Agreement. (Id. ¶ 37.) In the meantime, RBC continued to provide Healey with monthly interim Option Values through at least March 2010. (Id. ¶ 35; Ex. H.)

Based on the foregoing, Healey asserts the following claims: Breach of Contract (id. ¶¶ 46- 60); Breach of Fiduciary Duty (id. ¶¶ 61-75); Unjust Enrichment, Pled in the Alternative (id. ¶¶ 76-83); Breach of the Covenant of Good Faith and Fair Dealing (id. ¶¶ 84-94); Equitable Accounting and Constructive Trust (id. ¶¶ 95-102); Negligence (id. ¶¶ 103-107); Securities Fraud in ...

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