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First Nat'l Bank & Trust Co., of Rochelle v. McGraw-Hill Cos., Inc.

United States District Court, N.D. Illinois, Eastern Division

March 27, 2015

First National Bank and Trust Company of Rochelle, Illinois, Plaintiff,
v.
The McGraw-Hill Companies, Inc., et al., Defendants

Page 964

For First National Bank and Trust Company of Rochelle, Illinois, Plaintiff: Derek Sebastian Witte, LEAD ATTORNEY, Talcott Franklin P.C. (Of Counsel), Grand Rapids, MI; Howard Brian Prossnitz, Law Offices of Howard Prossnitz, Chicago, IL.

For The McGraw Hill Companies, Inc, Standard & Poor's Financial Services LLC, Defendants: Susan Buckley, LEAD ATTORNEY, Cahill Gordon & Reindel LLP, New York, NY; Andrew C Boldt, Dawn Marie Canty, Gil M. Soffer, Katten Muchin Rosenman, LLP, Chicago, IL; Floyd Abrams, Jason M. Hall, PRO HAC VICE, Cahill Gordon & Reindel LLP, New York, NY; Sheldon Toby Zenner, Katten Muchin Rosenman LLP, Chicago, IL.

For Moody's Investors Service, Inc., Moody's Corporation, Defendants: Dawn Marie Canty, Katten Muchin Rosenman LLP, Chicago, IL; Glenn Edwards, Joshua M. Rubins, PRO HAC VICE, Satterlee Stephens Burke & Burke LLP, New York, NY; James J. Coster, PRO HAC VICE, Satterlee, Stephens, Burke & Burke, New York, NY; Michael Paul Kornak, Freeborn & Peters, Chicago, IL.

For Standard & Poor's Ratings Services, Defendant: Dawn Marie Canty, Katten Muchin Rosenman LLP, Chicago, IL.

Page 965

MEMORANDUM OPINION AND ORDER

John Robert Blakey, United States District Judge.

This matter is before the Court on Defendants' motion to dismiss [36]. For the reasons set forth below, the Court grants Defendants' motion to dismiss [36] and dismisses the First Amended Complaint in its entirety, with prejudice.

BACKGROUND

On July 3, 2013, Plaintiff, First National Bank and Trust Company of Rochelle, Illinois (" FNBR" ), filed suit in the Circuit Court of Cook County against two credit rating agencies, S& P and Moody's (the " RAs" ).[1] On August 9, 2013, the action was removed to this Court on diversity grounds. The First Amended Complaint (" FAC" ), the operative complaint, was filed on August 12, 2013.[2]

Plaintiff alleges that the RAs issued inflated ratings on residential mortgage backed securities (" RMBS" ), failed to correct those ratings as the market deteriorated, and misrepresented their own independence and objectivity. [10] FAC at ¶ 1, 15, 24, 113-129. This led to Plaintiff's injury when the RMBS it purchased, relying on the RAs' statements, were downgraded. Id. ¶ ¶ 1, 113-129, 178, 186.

According to the FAC, the RAs are nationally recognized statistical rating organizations that assess the credit quality of, and assign credit ratings to, RMBS and other securities. Id. ¶ 28. The RAs' ratings are a virtual prerequisite to the sale or purchase of RMBS because, under federal

Page 966

regulations, the ratings directly influence the amount of capital a bank must have in reserve -- i.e. holding higher rated RMBS requires less capital reserves than holding lower rated RMBS. Id. ¶ 55. As such, entities like the Plaintiff will not purchase RMBS without a rating, Id. ¶ ¶ 49, 54, 58, essentially making the process of rating an RMBS a sine qua non for its purchase/sale. Plaintiff explained the arrangement as follows:

" Financial institutions that are issuers, or sponsors, of RMBS . . . pay credit rating agencies to issue ratings. They do so because they need investment grade ratings from the RAs to facilitate sales of the certificates, especially to banks . . ." Id. ¶ 46.
" Investment grade credit ratings, thus . . . ensured some investors, such as FNBR and members of the putative class, could make a purchase . . . In short, sales of RMBS would be impractical without ratings and impossible on the scale to which they rose without ratings." Id. ¶ 47.

Put otherwise, AAA ratings are " essential to sell [RMBS] to community banks." Id. pg. 24.

Plaintiff claims that -- given the centrality of the RAs to the process of buying/selling RMBS and the RAs' own representations about their independence and objectivity -- it relied on the RAs' inflated ratings, misrepresentations, and omissions by buying RMBS certificates rated AAA. [10] ¶ ¶ 15, 22. Plaintiff contends that it would not have bought those RMBS certificates without the high ratings given by the RAs. Id. ¶ 24. But, relying on the RAs' various representations, Plaintiff bought several tranches of RMBS between December 2007 and February 2008. Id. ¶ 22. Plaintiff subsequently suffered damages when the market collapsed and the RMBS ratings were downgraded. Id. ¶ 186. When that happened, Plaintiff was forced to write down the market value of the RMBS it purchased, pay higher FDIC and OCC fees, default on its holding company loan, and sustain increased regulatory supervision. Id.

Based on the foregoing factual allegations, the FAC advances four causes of action: (1) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (" CFA" ); (2) violation of the Uniform Deceptive Trade Practices Act (" UDTPA" ); (3) fraudulent misrepresentation and omission; and (4) negligent misrepresentation. Id. pp. 73-85. Plaintiff seeks remedies including declaratory judgment, actual damages, costs/fees, and injunctive relief. Id. pp. 85-86.

LEGAL STANDARD

" To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation omitted). " A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citation omitted). Though statute of repose arguments are affirmative defenses plead in the defendant's answer, and the plaintiff need not pre-emptively state facts countering such arguments in its complaint, Rice v. United States, No. 14 CV 3278, 2014 WL 6704577, at *3 (N.D. Ill. Nov. 26, 2014), dismissal under a statute of repose is ...


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