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Preston Hollow Capital LLC v. Nuveen LLC

Court of Chancery of Delaware

August 13, 2019


          Date Submitted: June 7, 2019

          R. Judson Scaggs, Jr., Barnaby Grzaslewicz, and Elizabeth A. Mullin, of MORRIS NICHOLS ARSHT & TUNNEL, Wilmington, Delaware; OF COUNSEL: David H. Wollmuth, R. Scott Thompson, Michael C. Ledley, Sean P. McGonigle, William A. Maher, Nicole C. Rende, and Jay S. Handlin, of WOLLMUTH MAHER & DEUTSCH LLP, New York, New York, Attorneys for Plaintiff.

          Peter J. Walsh, Jr., Jennifer C. Wasson, David A. Seal, and Robert J. Kumor, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Eva W. Cole, John E. Schreiber, Molly M. Donovan, Joseph A. Litman, and Mikaela E. Evans-Aziz, of WINSTON & STRAWN LLP, New York, New York, Attorneys for Defendants.



         Equity will not enjoin a libel.

         This Opinion involves a single issue: the Defendants, business competitors of the Plaintiff, made statements about the Plaintiff to third parties. The Plaintiff believes itself traduced. It seeks solely equitable relief for the alleged common-law slander: injunction of future (potential) defamatory utterances by the Defendants.

         The Amended Complaint alleges another tort for which injunctive relief is sought, tortious interference with prospective business relations, which has withstood the Defendants' Motion to Dismiss.[1] The matter is before me on the remainder of that Motion, on which I withheld judgment, concerning the Plaintiff's request that I find common-law defamation, and enjoin future defamatory utterances, as described above.[2] This Opinion considers whether equity will entertain such a request to enjoin future defamatory speech.

         Equity will not enjoin a libel.

         Maxims of equity are legendarily pithy expressions of general Chancery practice. Law (and particularly its more flexible component, equity) is a creature of nuance and fine-but-significant gradations, and pithiness, like garlic, may both enhance the savor of a discourse, and at the same time mask its subtle flavors. Maxims, in other words, are often best defined by their exceptions. It is true, nonetheless, that generally, equity will not enjoin future speech on the ground that such speech, if uttered, may be defamatory.

         The Court of Chancery is a court of limited jurisdiction; when addressing a common-law tort, this Court may act only if equity is required in remedy, due to an insufficiency of remedies at law.[3] Moreover, because of the implications on speech of the application of remedies, legal or equitable, to tortious speech, slander and libel are seen as denizens of the Superior Court, and are subject to the findings made there by juries regarding the speech of their peers. Thus, Chancery is said to have no jurisdiction over libel. This principle was recently affirmed by Vice Chancellor Slights, who dismissed a defamation case (subject to transfer to Superior Court) on that ground.[4]

         A single case in this jurisdiction supports a so-called trade-libel exception to the rule that Chancery will not exercise jurisdiction over a request to enjoin a libel: J.C. Pitman & Sons, Inc. v. Pitman.[5] Pitman has recently been subject to scholarly consideration by Vice Chancellor Laster;[6] nonetheless, I confess I find the Pitman decision somewhat opaque. I conclude, however, that Pitman stands for the following proposition: The general rule is that equity lacks jurisdiction over a request to enjoin common-law defamation. In a limited subset of cases, however, a separate tort (in Pitman, the tort of unfair business competition) is alleged where relief at law is insufficient, and where the equitable remedy sought is, incidentally, an injunction of a "trade libel"-that is, a libelous statement to consumers that falsely disparages a plaintiff's goods or services. In such a case, the matter is within this Court's jurisdiction, because the underlying behavior being examined without a jury is not mere speech, but involves other tortious activity where tradition and constitutional considerations do not require the findings of a jury. Further, this Court may enjoin that tortious behavior, even if the injunction incidentally enjoins the trade libel. In other words, under Pitman, where this Court has jurisdiction over business torts, it may, in an appropriate case, enjoin their threatened continuation, even if the injunction suppresses speech. In this case, for instance, the Plaintiff has adequately pled tortious interference with business relations; if it proves that claim, it may seek equitable remedies, as appropriate.

         Contrary to the Plaintiff's argument, addressed below, I do not read Pitman to support a separate count of common-law slander, as the Plaintiff contends, nor does Pitman support the kind of forward-looking suppression of new defamatory statements of the variety sought here.

          The Plaintiff's broad request to enjoin future speech raises substantial state and federal constitutional questions. However, I need not reach these questions, as I find I am without jurisdiction on the basis that equity will not enjoin a libel.

         I explain my reasoning further, below.

         I. BACKGROUND

         At this Motion to Dismiss stage, I assume as true the facts pled in the Amended Complaint.[7]

         A. The Parties

         Plaintiff Preston Hollow Capital LLC ("Preston Hollow") is a Delaware limited liability company.[8] Preston Hollow invests in high-yield municipal bonds.[9]It was formed in 2014 and currently has approximately $1.8 billion in assets and $1.3 billion in equity capital.[10]

         Defendant Nuveen LLC is a Delaware limited liability company.[11]

         Defendant Nuveen Investments, Inc. is a Delaware corporation.[12]

         Defendant Nuveen Securities LLC is a Delaware limited liability company.[13]

         Defendant Nuveen Asset Management LLC is a Delaware limited liability company.[14] I refer to the Defendants, collectively, as "Nuveen." Nuveen is "one of the world's largest institutional investors in municipal bonds, with municipal fixed income assets under management of more than $150 billion."[15]

         B. Factual Background

         1. The Parties' Roles in the Municipal Bond Market

         Municipal bonds are debt securities issued by cities, counties, states, and other governmental or non-profit entities to fund day-to-day obligations, as well as to finance specific projects, such as schools, bridges, and other public works.[16] "The municipal bond market is comprised of over one million distinct municipal securities, issued by more than 50, 000 different issuers, with approximately $3.9 trillion in outstanding securities."[17] Municipal bonds generally pay interest that is exempt from federal income tax, and which may be exempted from state taxes as well.[18] Investment bankers often act as broker-dealers in the municipal bond market, working as intermediaries between issuers and prospective investors.[19]

         Preston Hollow and Nuveen are both investors; investors often have financing relationships with banks and broker-dealers, which allow them to effectively finance the purchase of bonds at tax-exempt rates.[20] These arrangements likewise present attractive revenue opportunities for banks and broker-dealers.[21] Municipal bonds are issued through both public and private offerings.[22]

         Preston Hollow describes itself as a unique player in the municipal bond market. Per the Amended Complaint, it "frequently invests in high yield municipal securities in underwritten limited public offerings in which [it] typically purchases 100% of the offered securities through negotiated agreements with the issuers, borrowers, underwriters, and (where applicable) financial advisors."[23] Because it is "a permanent capital vehicle, not a fund that must provide liquidity to its investors, it is a stable, secure funding source with certainty of execution."[24] Preston Hollow's investments are "bespoke, highly negotiated transactions."[25] Therefore, Preston Hollow's business model is "highly dependent upon its relationship with broker-dealers, since the investment bankers are able to identify which of their issuer clients and transactions will benefit from Preston Hollow's unique positioning and sector expertise."[26] "If broker-dealers do not make Preston Hollow aware of investment opportunities, or if they refuse to serve as underwriter for transactions that Preston Hollow directly originates, Preston Hollow's business of investing in municipal bonds that are the product of its custom-structured solutions will be significantly impaired."[27] Similarly, Preston Hollow alleges that its business will be damaged if lenders and broker-dealers will not provide financing for Preston Hollow investments.[28]

         2. Nuveen's Alleged Misconduct

         Preston Hollow alleges that it recently closed two municipal bond investments; "because these investments were made available by broker-dealers through limited public offerings that were negotiated and structured by Preston Hollow as 100% placements, Nuveen was unable to participate in the purchase of the municipal bonds."[29] As Nuveen missed out on that opportunity, John V. Miller, Nuveen's head of municipal finance, and his staff have purportedly initiated phone calls and meetings with representatives of "substantially all of the leading broker-dealers covering the municipal bond market."[30] In those calls, "Miller threatened to use Nuveen's considerable market power . . . to withhold business from any broker-dealer that engaged in limited public offerings with Preston Hollow and to retaliate in other ways if the institutions refuse to cooperate with Nuveen in eliminating or limiting activity with Preston Hollow."[31]

         Specifically, Preston Hollow contends that Miller called Deutsche Bank, Preston Hollow's primary lender, on December 20 and 21, 2018, demanding that Deutsche Bank unwind its current financing transactions with Preston Hollow and to not engage in business with Preston Hollow in the future.[32] If Deutsche Bank did not comply, Miller threatened that Nuveen would no longer do business with Deutsche Bank.[33] Miller also represented that other financial institutions had already agreed not to do one hundred percent placements with Preston Hollow.[34]

         Preston Hollow also contends that in his call with Deutsche Bank, Miller made "demonstrably false and defamatory statements" about Preston Hollow.[35] Miller told Deutsche Bank that Preston Hollow "charged excessive rates for its investments, causing public issuers to overpay for public works projects backed by the bonds."[36]Miller also told Deutsche Bank that Preston Hollow's recent placement was a "rushed, corrupt deal."[37]

         Per Preston Hollow, following Miller's phone call with Deutsche Bank, Nuveen moved more than $500 million of tender option bond financing from Deutsche Bank to Barclays.[38]

         Subsequently, Miller and his team made calls to other financial institutions, all of which Preston Hollow "had a reasonable prospect of doing business with . . . in the future."[39] On February 25, 2019, one financial institution informed Preston Hollow that it would not engage in one hundred percent placements in the future, apparently as the result of Nuveen's "threats and its superior bargaining position."[40]On the same day, another financial institution informed Preston Hollow that in the future, it would limit certain kinds of issuances it engaged in with Preston Hollow, "based upon Nuveen's threats."[41]

         On January 15, 2019, Preston Hollow sent a cease and desist letter to Nuveen, demanding that Nuveen stop all unlawful communication; that it undertake an internal investigation to identify what people and institutions Nuveen's employees contacted regarding Preston Hollow, and communicate the results to Preston Hollow; that it take steps to undo the harm already caused; and that it adopt supervisory procedures to prevent similar incidents in the future.[42] On February 22, 2019, Nuveen issued a letter to the legal department at each financial institution Preston Hollow had identified as having been contacted by Nuveen, disavowing any agreement between Nuveen and the financial institutions regarding Preston Hollow, and noting that Nuveen "reserves the right to conduct its trading business with firms within its lawful discretion and to hold and express its views and judgments in pursuing its investment advisory and trading activities."[43]

         C. Procedural Posture

         Unsatisfied with Nuveen's response to its cease and desist letter, Preston Hollow filed suit in this Court on February 28, 2019. The Complaint pled four counts: (1) tortious interference with contract; (2) tortious interference with prospective business relations; (3) violation of New York State's Donnelly Antitrust Act; and (4) defamation.[44] Preston Hollow sought solely injunctive relief, both preliminary and permanent-it does not seek damages. Along with its Complaint, Preston Hollow also filed a Motion for Preliminary Injunction and the requisite Motion to Expedite. Nuveen contested expedition; on March 14, I granted the Motion to Expedite and directed the parties to proceed to trial in July on the request for permanent injunctive relief; trial on Counts II and III was held on July 29 and 30, 2019.

         Preston Hollow filed an Amended Complaint on March 20, 2019, which pled the same four counts as the original Complaint. On April 3, 2019, Nuveen filed a Motion to Dismiss the Amended Complaint. Argument on the Motion to Dismiss was held on April 30, 2019. In light of the impending trial, I issued a partial bench decision on May 14, 2019. I granted the Motion to Dismiss as to Count I, tortious interference with contract, and denied it as to Counts II and III, tortious interference with prospective business relations and violation of the Donnelly Act, respectively.[45]I withheld decision on whether Count IV, defamation, should be dismissed, and I asked the parties to file supplemental submissions regarding whether final injunctive relief may issue to enjoin defamation. This Opinion, addressing that limited issue, follows.

         Given the approaching trial date, I informed the parties from the bench that I intended to dismiss the defamation claim, and that I would later issue a written opinion. Since then, this matter has been tried. While the facts at trial differ to some extent, I consider for purposes of this Opinion only the facts as pled in the Amended Complaint.

          II. ANALYSIS

         A. Legal Standards

         1.Motion to Dismiss Standard

         When faced with a motion to dismiss under Court of Chancery Rule 12(b)(6), failure to state a claim, "the court must assume the truthfulness of all well-pled allegations in the complaint and view those facts, and all reasonable inferences drawn from them, in a light most favorable to the plaintiff."[46] The motion "will be granted where it appears with 'reasonable certainty' that the plaintiff could not prevail on any set of facts that can be inferred from the pleadings."[47]

         Equitable jurisdiction is a predicate issue for every matter in this court of limited jurisdiction.[48]

         2. Defamation Standard

         "Defamation is generally understood as 'a false publication calculated to bring one into disrepute.'"[49] Ordinarily, the elements of defamation are: (1) defamatory communication; (2) publication; (3) reference to the plaintiff; (4) third party's understanding of the communication's defamatory character; and (5) injury.[50] "Under Delaware law there is no liability for defamation when a statement is determined to be substantially true."[51] While at this motion to dismiss stage, I must accept the Plaintiff's allegations as true, a plaintiff would bear the burden of proof for each of these elements at trial.[52]

         At common law, defamation consists of the "twin torts" of libel and slander.[53] In Spence v. Funk, the Delaware Supreme Court noted that these so-called twins are fraternal, not identical:

In shortest terms, libel is written defamation and slander is oral defamation. The two have vastly different historical bases and have been treated differently by the common law courts but, in general, the scope of liability is greater for libel, and the pleading requirements for libel are less strict. . . . [W]hile all slanderous statements would be libelous if written, not all libelous statements would be slanderous if spoken.[54]

         Unlike libel, slander is generally not actionable unless the plaintiff provides proof of special damages.[55] There is good reason for this difference between slander and libel: the written word leaves a more permanent blot on one's reputation, the written word is capable of wider circulation, and reducing a defamation to writing requires greater deliberation and intention on the part of the one who records it.[56] However, at common law, there have historically been four categories of slander, collectively called slander per se, that do not require proof of special damages.[57] One category of slander per se, relevant here, includes statements that malign one in a trade, business, or profession.[58]

         The purportedly-defamatory statements at issue here were oral communications, which Nuveen allegedly made, in the form of phone calls to banks. Thus, if proven, the defamation would constitute slander-that is, oral defamation. Preston Hollow has not argued special damages, nor has it alleged slander per se, nor has it addressed the heightened standard for slander (as compared to libel) at all. Nevertheless, the communications here appear to meet the requirements for slander per se, because assuming (as I must) that they were uttered as alleged, they malign Preston Hollow in its business as an investor in municipal bonds. Therefore, for purposes of this Opinion, I assume that the slander per se requirements are satisfied, and that Preston Hollow need not allege special damages. As a result, I consider the Motion to Dismiss under the above five-factor standard for defamation. The Complaint alleges that Nuveen communicated false statements to Preston Hollow's potential business partners, in a manner that those parties understood were of a defamatory character, to Preston Hollow's detriment. This states a claim for defamation; the sole issue remaining is whether this Court possesses jurisdiction over a defamation claim that seeks to enjoin future utterances.

         B. Equity Will Not Enjoin Defamation

         In considering the jurisdictional issue presented, it is important to note the precise relief Preston Hollow seeks here: an order "preventing [Nuveen] from engaging in further unlawful and tortious communications with lenders, broker-dealers and other participants in the high yield municipal bond market."[59] Thus, given the facts as stated above, the question before me is this: will equity enjoin future defamation? The answer is no.

         1. The ...

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