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Louisiana Firefighters' Retirement System, Public School Teachers v. Northern Trust Investments

February 23, 2012

LOUISIANA FIREFIGHTERS' RETIREMENT SYSTEM, PUBLIC SCHOOL TEACHERS' PENSION & RETIREMENT FUND OF CHICAGO, THE BOARD OF TRUSTEES OF THE PONTIAC POLICE & FIRE RETIREMENT SYSTEM, AND THE BOARD OF TRUSTEES OF THE CITY OF PONTIAC GENERAL EMPLOYEES RETIREMENT SYSTEM, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
NORTHERN TRUST INVESTMENTS, N.A., AND THE NORTHERN TRUST COMPANY, DEFENDANTS.
NORTHERN TRUST INVESTMENTS, N.A., AND THE NORTHERN TRUST COMPANY, THIRD-PARTY PLAINTIFFS,
v.
LOUISIANA FIREFIGHTERS' RETIREMENT SYSTEM, PUBLIC SCHOOL TEACHERS' PENSION & RETIREMENT FUND OF CHICAGO, THE BOARD OF TRUSTEES OF THE PONTIAC POLICE & FIRE RETIREMENT SYSTEM, AND THE BOARD OF TRUSTEES OF THE CITY OF PONTIAC GENERAL EMPLOYEES RETIREMENT SYSTEM, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER

Plaintiffs Louisiana Firefighters' Retirement, System, Public School Teachers' Pension & Retirement Fund of Chicago, the Board of Trustees of the Pontiac Police & Fire Retirement System, and the Board of Trustees of the City of Pontiac General Employees Retirement System, on behalf of themselves and all others similarly situated, have brought an amended putative class action complaint against defendants Norther Trust Investments, N.A. ("NTI") and the Northern Trust Company ("NTC") alleging breach of fiduciary duties and breach of contract. All of plaintiffs' claims arise out of their investment, either directly, indirectly, or both in defendant NTC's securities lending program ("SLP"). According to plaintiffs' complaint, through that program, NTC arranges loans of securities owned by its customers and/or sponsored funds to pre-approved borrowers, who use the securities for a variety of purposes. The borrowers pledge collateral equal to 102% of the market value of the loaned securities, usually in cash. NTC then invests the cash into fixed-income securities, which pay interest, generating revenue for the participants in the program. When the loans are terminated the collateral is returned to the borrowers, along with an additional payment or "rebate" as compensation for the use of the collateral. If the value of the borrowed securities increases, more collateral must be posted. If the value of the securities decreases, collateral is returned to the borrower.

The collateral is invested in commingled pools operated by defendants (the "Collateral Pools"). Because the amount of cash collateral held by defendants must be adjusted and the collateral must be repaid when the loan is terminated, at least some of the collateral must be held in conservative short-term liquid investments to preserve capital while generating nominal return.*fn1

After the court denied defendants' motion to dismiss, defendants answered the amended complaint, raised 31 separate affirmative defenses, brought a third-party complaint asserting claims for contribution and indemnification against the Board of Trustees of the Louisiana Firefighters Retirement System, the Board of Trustees of the Public School Teachers and Pension and Retirement Fund of Chicago (the "CTPF Board"), the Board of Trustees of the City of Pontiac Police & Fire Retirement System, and the Board of Trustees of the City of Pontiac General Employees Retirement System, and brought a counterclaim for breach of contract against Public School Teachers and Pension and Retirement Fund of Chicago ("CTPF"). The third-party defendants have moved to dismiss the third party complaint, CTPF has moved to dismiss the counterclaim, and plaintiffs have moved to strike some of the affirmative defenses. For the reasons explained below, the motion to dismiss the third party complaint is granted, the motion to dismiss the counterclaim is denied, and the court strikes all 31 affirmative defenses.

DISCUSSION

1. Motion to Dismiss Third-Party Complaint The two count third-party complaint purports to bring claims for: (1) equitable and

implied indemnification (Count I); and/or (2) contribution (Count II) against the third party defendants who are the Boards of Trustees of the individual plaintiff retirement funds (the "Boards"). The Boards have moved to dismiss on a number of grounds including that defendants' claims are not properly brought in a third-party complaint, and that neither indemnification nor contribution is available for claims of breach of fiduciary duty.

The third-party complaint is brought under Fed. R. Civ. P. 14(a)(1), which provides that: A defending party may, as third-party plaintiff, serve a summons and complaint on a nonparty who is or may be liable to it for all or part of the claim against it.

"[T]he distinguishing characteristic of a claim brought under Rule 14(a) is that the defendant is attempting to transfer to the third-party defendant the liability asserted against the defendant by the original plaintiff." Forum Ins. Co. v. Ranger Ins. Co., 711 F. Supp. 909, 915 (N.D. Ill. 1989). "A third-party defendant's liability must be derivative of the impleading party's liability." Beale v. Revolution Portfolio, LLC, 2009 WL 1285527 at *2 (N.D. Ill. 2009) (citing U.S. Gen., Inc. v. City of Joliet, 598 F.2d 1050, 1053 (7th Cir. 1979)). Liability is derivative where it is dependent on the determination of liability in the original action. U.S. Gen. Inc., 598 F.2d at 1053.

In the instant case, the Boards argue that defendants' third-party complaint pursues a "blame the victim strategy." According to the Boards defendants are essentially alleging that if they are liable to plaintiffs for imprudently investing, then the Boards are more liable for hiring defendants and not stopping them from breaching their fiduciary duty.

Defendants' response is to repeat throughout their brief*fn2 that the third party complaint alleges that it was the Boards that chose to participate in the SLP, selected their own investment guidelines, knew precisely how defendants were implementing the guidelines and made the affirmative decision to "stay the course." For example, defendants' brief argues:

The Northern defendants do not believe the investment choices were imprudent. . . . But if plaintiffs are right that the collateral investment strategies the Boards chose were obviously imprudent, then they and their trustees bear sole responsibility for that imprudence because they made the choice to accept a certain level of risk in return for the potential investment rewards. [p. 2; emphasis in the original.]

Although the Boards now contend that Northern Trust failed to follow those guidelines, the Third Party Complaint alleges exactly the opposite (¶16) and claims that it was the Boards that affirmatively decided to adopt the very strategies they now say were imprudent . . . . [p. 8]

Based on these factual allegations, the Northern defendants seek equitable and implied indemnification against the Boards in Count I of the their Third Party Complaint on the ground that the Boards alone are responsible for the investment choices they ...


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