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California Earthquake Authority v. Metropolitan West Securities, LLC

United States District Court, E.D. California

July 2, 2014

CALIFORNIA EARTHQUAKE AUTHORITY, Plaintiff,
v.
METROPOLITAN WEST SECURITIES, LLC; WACHOVIA BANK, NATIONAL ASSOCIATION; and DOES 1-25, Defendants.

MEMORANDUM AND ORDER

MORRISON C. ENGLAND, Jr., Chief District Judge.

Through this action, Plaintiff California Earthquake Authority (the "CEA") seeks relief from Defendants Metropolitan West Securities, LLC ("MetWest") and Wells Fargo, N.A., successor by merger to Wachovia Bank, N.A. ("Wachovia") (collectively, "Defendants") for the alleged loss of some $47 million resulting from Defendants' investment on behalf of the CEA in commercial paper issued by Mainsail II LLC ("Mainsail") and that investment's subsequent collapse. Based on this loss, the CEA asserts claims against Defendants for: (1) breach of contract; (2) breach of fiduciary duty; (3) constructive fraud; and (4) unfair business practices in violation of California Business and Professions Code §§ 17200 et seq.

Presently before the Court is the CEA's motion for summary judgment on the issue of the amount of damages which it will be entitled to, should it prevail on its breach of contract claim and/or its breach of fiduciary duty claim. CEA Mot., ECF No. 186. Defendants timely opposed the motion. Def. Opp'n., ECF No. 193. Defendants also filed a cross-motion on the same issue, Def. Mot., ECF No. 194, to which the CEA filed a timely reply. CEA Opp'n, ECF No. 194.

BACKGROUND[1]

The CEA was created by the California Legislature in the wake of the 1994 Northridge earthquake and the ensuing homeowners insurance crisis. The legislation creating the CEA was passed in 1995, 1995 Cal. Legis. Serv. Ch. 944 (A.B. 13) (approved by Governor October 16, 1995), and the CEA formally commenced operations in 1996. The CEA operates as a public instrumentality on a not-for-profit basis and issues earthquake insurance policies for California homes.

The CEA initially received capital from participating insurance companies in the form of earthquake insurance premiums and invested that money according to the CEA's investment philosophy, which prioritized portfolio safety, liquidity and yield. These priorities were intended to allow CEA's assets to be quickly liquidated and therefore available in the event of an earthquake. CEA later received additional contributions from insurance companies that were added as participants. The CEA also receives revenue through premiums paid on the earthquake insurance policies it issues, as well as through income earned on its invested capital.

It is undisputed that in October 1996, the CEA Governing Board, comprised of California's Governor, Treasurer, and Insurance Commissioner as its three voting members, approved a document entitled "Investment Policies." This document set forth specific limitations on CEA investments, including commercial paper investments. The restrictions for commercial paper investments contained therein are as follows:

1) Maximum maturity:
2) Maximum par value, total portfolio:
a) If over 15% of the portfolio is invested in commercial paper, the dollar-weighted average maturity of the entire portfolio cannot exceed 31 days. Dollar-weighted average maturity means the sum of the amount of each outstanding commercial paper investment multiplied by the days to maturity, divided by the total amount of outstanding commercial paper.
3) Maximum par value per name:
4) Maximum par value per maturity
None
5) Credit
a) Rated A1/P1 or equivalent quality as defined by a nationally recognized organization that rates such securities.
b) Organized and operating with the United States.
c) Have total assets in excess of five hundred million dollars ($500, 000, 000).

CEA investments are also governed by California Government Code section 16430. As set forth in the California Insurance Code, "[t]he board [of the CEA] may cause moneys in the fund to be invested and reinvested, from time to time, ... subject to subdivision (b) of Section 10089.6." Cal. Ins. Code § 10089.22. Section 10089.6 in turn states that "[t]he investments of the authority shall be limited to those securities eligible under Section 16430 of the Government Code." Cal. Ins. Code § 10089.6(b)(1). California Government Code section 16430 provides guidelines as to "[e]ligible securities for the investment of surplus moneys, " and contains certain requirements for investments in commercial paper. Cal. Gov't Code §16430(f)(1). Specifically, section 16430(f) provides:

Eligible securities for the investment of surplus moneys shall be any of the following:
(f)(1) Commercial paper of "prime" quality as defined by a nationally recognized organization that rates these securities, if the commercial paper is issued by a corporation, trust, or limited liability company that is approved by the Pooled Money Investment Board [("PMB")] as meeting the conditions specified in either subparagraph (A) or subparagraph (B):
(A) Both of the following conditions:
(i) Organized and operating within the ...

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