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RBC Capital Mkts., LLC v. Education Loan Trust IV

Supreme Court of Delaware

March 5, 2014

RBC CAPITAL MARKETS, LLC, a Minnesota Limited Liability Company, Plaintiff Below, Appellant,
EDUCATION LOAN TRUST IV, a Delaware Statutory Trust; and U.S. EDUCATION LOAN TRUST IV, LLC, a Delaware Limited Liability Corporation, Defendants Below, Appellees and THE DEPOSITORY TRUST COMPANY and CEDE & CO., Nominal Plaintiffs Below, Appellants,

Submitted December 11, 2013.

Case Closed March 21, 2014.

Page 633

[Copyrighted Material Omitted]

Page 634

Court Below: Superior Court of the State of Delaware, in and for New Castle County. C.A. No. N12C-02-015.


Matthew E. Fischer, Jennifer C. Wasson, and Janine L. Hochberg, Esquires, Potter Anderson & Corroon LLP, Wilmington, Delaware; Of Alan J. Stone, Esquire (argued), Milbank, Tweed, Hadley & McCloy LLP, New York, New York for Appellants.

Kurt F. Gwynne (argued), Brian M. Rostocki, and John C. Cordrey, Esquires, Reed Smith LLP, Wilmington, Delaware for Appellee Education Loan Trust IV.

Daniel B. Rath, Rebecca L. Butcher (argued), and K. Tyler O'Connell, Esquires, Landis Rath & Cobb LLP, Wilmington, Delaware for Appellee U.S. Education Loan Trust IV, LLC.

Before HOLLAND, JACOBS and RIDGELY, Justices.


Page 635

JACOBS, Justice:


The plaintiff-below/appellant RBC Capital Markets, LLC (" RBC" ) appeals from a Superior Court judgment dismissing its claims against the defendants-below/appellees U.S. Education Loan Trust IV, LLC (the " Issuer" ) and Education Loan Trust IV (the " Trust" ), (collectively, the " Defendants" ). RBC sued the Defendants in the Court of Chancery in 2011. RBC's complaint alleged that the Defendants had been paying excessive fees from the Trust. The court dismissed the Chancery action as barred by the Trust Indenture's " no-action" clause.

Thereafter, in 2012, RBC commenced the underlying Superior Court action, claiming that the Defendants had unlawfully failed to pay interest owed to RBC under the Issuer notes that RBC held. The Superior Court dismissed that complaint on two grounds: (1) that the complaint failed to state a claim upon which relief can be granted, and (2) that the earlier Court of Chancery judgment of dismissal precluded RBC's claim as res judicata . RBC appealed to this Court.

We conclude, for the reasons next discussed, that the Superior Court erroneously dismissed the action. We hold that RBC's complaint satisfies Delaware's " reasonable conceivability" pleading standard, that the claim is not barred by the Trust Indenture's no-action clause, and that on the current record it cannot be determined as a matter of law that RBC's Superior Court claim is precluded as res judicata .[1] Therefore, we reverse and remand the case to the Superior Court.


A. Facts [2]

RBC is a Minnesota limited liability company with its principal place of business in New York. The Issuer is a Delaware limited liability company. RBC beneficially owns over $450 million of the Issuer's auction rate securities (the " Notes" ). The Notes were issued under an Indenture of Trust dated March 1, 2006 (the " Indenture" ) and amendments thereto, and were collateralized by student (FFELP) loans owned by the Trust, which is a Delaware statutory trust.[3] The amendments to the Indenture include Supplemental Indentures dated March 1, 2006 and September 1, 2006 (together, the " Supplemental Indentures" ).[4] The Bank of New York (" BNY" ) is the designated Indenture Trustee.[5]

Under the Supplemental Indentures, the Notes pay interest at a variable rate fixed by periodic Dutch auctions, usually every 28 days.[6] In the event of a failed auction

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( e.g ., where there are insufficient bids to purchase all the Notes being auctioned), the Notes must pay interest at the lesser of the Net Loan Rate and the Maximum Rate for the relevant period.[7] Since February 2008, the Dutch auctions for the Notes have failed.

The Indenture also limits how and under what circumstances a noteholder may bring an action to enforce claims arising under the Indenture. Section 6.08 of the Indenture--the " no-action" clause--provides that:

[N]o Holder of any Note or Other Beneficiary shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of this Indenture or for the execution of any trust hereof or for the appointment of a receiver or any other remedy hereunder unless [certain conditions are satisfied].

Section 6.09 carves out an exception to Section 6.08--namely, that " the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal of, premium, if any, and interest on such Note . . . and, upon the occurrence of an Event of Default with respect thereto, to institute suit for the enforcement of any such payment . . . ." [8]

In May 2010, the Issuer ceased paying interest on the Notes.

B. The Court of Chancery Action

On March 18, 2011, RBC brought an action in the Court of Chancery against the Issuer and the Trust. The crux of RBC's complaint (the " Chancery Complaint" ) was that the Trust had paid excessive fees to the Issuer and its affiliates in violation of the Indenture, and thereby improperly reduced the amount of interest lawfully owed to RBC and other noteholders. Count One of the Chancery Complaint prayed for an accounting " to determine whether the Trust is being properly administered and to determine what interest is owed to RBC . . . as a result of the [excessive fees]." Count Two claimed that the Defendants had been unjustly enriched by the payment of excessive fees and the resulting reduction in the calculated interest rate. Count Three alleged that the Defendants breached the Indenture and Supplemental Indentures by paying excessive fees and miscalculating the Net Loan Rate. Those breaches, RBC claimed, constituted an Event of Default under Section 6.01 of the Indenture. For relief, RBC sought, inter alia, the payment of interest due after Defendants disgorge all adjudicated excessive fees.

On December 6, 2011, the Court of Chancery dismissed RBC's complaint for failure to state a claim upon which relief may be granted.[9] The court ...

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