United States District Court, N.D. Illinois, Eastern Division
LOUISIANA FIREFIGHTERS' RETIREMENT SYSTEM, THE BOARD OF TRUSTEES OF THE PUBLIC SCHOOL TEACHERS' PENSION & RETIREMENT FUND OF CHICAGO, 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 SYSTEM, on behalf of themselves and all others similarly situated, Plaintiffs,
NORTHERN TRUST INVESTMENTS, N.A. and THE NORTHERN TRUST COMPANY, Defendants.
MEMORANDUM OPINION AND ORDER
JORGE ALONSO, District Judge.
Plaintiffs allege that defendants (collectively, "NT") breached their contracts with and fiduciary duty to plaintiffs by improperly investing plaintiffs' assets. NT has asserted third amended counterclaims against the Board of Trustees of the Public School Teachers' Pension & Retirement Fund of Chicago (the "Board") for breach of express and implied contract (Counts I-II), unjust enrichment (Count III), agency indemnification (Count IV), ratification (Count V), equitable estoppel (Count VI), and account stated (Count VII). The case is before the Court on the Board's Federal Rule of Civil Procedure ("Rule") 12(b)(6) motion to dismiss all of the counterclaims. For the reasons set forth below, the Court grants in part and denies in part the motion.
On October 25, 1989, the Board and NT entered into a Master Custody Agreement that directs NT "[to] establish an account... to hold such assets of the [Board] as are transferred to it from time to time, " and "one or more sub-accounts... for cash, securities and other property of the [Board], " in accordance with the Board's directions. (3d Am. Countercl., Ex. 1, Master Custody Agreement ¶¶ 2-3.) The Master Custody Agreement also states that:
[NT] shall furnish the Board... with monthly statements of account showing all receipts and disbursements and the property in each Sub-account and the value thereof. An account shall be approved by the Board by... failure to object to the account within six months of the date upon which the account was delivered to the Board. To the extent permitted by law, the approval of an account shall constitute a full and complete discharge to NT of all matters set forth in that account.
( Id. ¶ 15.)
On June 28, 1990, the parties entered into a Securities Lending Agreement ("SLA") authorizing NT to lend the Board's securities to pre-approved third parties in exchange for collateral, which NT then invested in other securities to generate revenue for the Board. ( See generally id., Ex. 2, SLA; 5/6/11 Mem. Op. & Order at 2.) When a loan matured or was called back, the borrower returned the securities to NT and NT returned the collateral along with a rebate, i.e., additional payment, to the borrower. (5/6/11 Mem. Op. & Order at 2.) The Board profited if the amount earned by the reinvested collateral exceeded the amount of the rebate. ( Id. ) The Board paid part of the profit to NT as a fee for its services. ( Id. at 3.)
In 1995, the Board directed NT to invest part of the cash collateral from its securities lending in two funds managed by NT, the Short Term Extendable Portfolio ("STEP") and the Short Term Investment Fund ("STIF"), and to hold the STEP and STIF units in a sub-account. (3d Am. Countercl. ¶¶ 26, 29.) STIF is a constant-dollar fund, i.e., a fund designed to maintain a constant net asset value ("NAV") of $1.00 per unit. ( Id. ¶ 27.) STEP is a mark-to-market fund, meaning that its NAV fluctuated daily based on the market value of its holdings. ( Id. ) Thus, the gains and losses of STEP securities were reflected in STEP's NAV and impacted the Board's earnings accordingly. ( Id. ) Though the Board knew that STEP was not a constant-dollar fund, it directed NT to keep the unit value of the STIF/STEP sub-account at a constant $1.00 NAV. ( Id. ¶ 30.) Thus, the Board had to replenish the sub-account whenever reductions in STEP's NAV would otherwise have caused the NAV of the sub-account to fall below $1.00. ( Id. )
Starting in mid-2007, securities held in STEP began to incur losses. ( Id. ¶ 37.) On August 13, 2007, NT sent an email to the Board, saying that "the [Board's] securities lending earnings for the month of July are negative. The net earnings for the month are - $287, 505.21. As we have in the past, we will carry the negative earnings forward to be offset versus future positive earnings unless you request otherwise." (3d Am. Countercl., Ex. 3, Email from Anderson to Huber (Aug. 13, 2007).) The Board never requested otherwise. ( Id. ¶ 40.)
On November 13, 2007, NT wrote a letter to the Board, which states:
I am writing to clarify [NT's] currently existing process relating to treatment of negative earnings in your securities lending program.... With July and August negative earnings reaching higher levels than in the past, we felt it would be timely to re-confirm our process.
Under the securities lending authorization agreement, clients are responsible for a portion of losses incurred due to negative earnings. As an accommodation, we currently offer clients who incur negative earnings, in any given month two options concerning the obligation to repay [NT] for the loss created after we pay the rebates to borrowers for use of their collateral. Clients may elect to repay us as soon as practical in the month following the loss, after the audited earnings are communicated. Alternatively, clients may elect to repay their obligation by carrying forward negative earnings and applying any future months' securities lending earnings against the obligation (the "carryforward option"). A client who opts to no longer use STEP as a part of their collateral reinvestment or who leaves the securities lending program overall must repay their obligation in full at that time.
For those clients requesting that [securities lending] negative earnings be carried forward to be offset by future earnings, [NT] will report the ...