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South Carolina
JUDICIAL DEPARTMENT
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2013-02-14-02
STATE OF SOUTH CAROLINA   IN THE COURT OF COMMON PLEAS
     
COUNTY OF RICHLAND   

FOR THE FIFTH JUDICIAL CIRCUIT

     
     
  )  
  )  
THE STATE TREASURER OF  ) Civil Action No. 2011-CP-40-00533
THE STATE OF SOUTH CAROLINA,   )  
Plaintiff, )  
  )  
  )  
  )

 

vs.  ) ORDER DENYING DEFENDANTS’
  )

MOTION TO DISMISS FOR LACK

THE BANK OF NEW YORK MELLON ) OF STANDING

CORPORATION and THE BANK OF

)  
NEW YORK MELLON, f/k/a THE )  
BANK OF NEW YORK,  )  
Defendants. )  
  )  

   

This matter came before the Court on January 23, 2012, upon the Motion to Dismiss the complaint pursuant to Rule 12(b)(6) and Rule 17 of the South Carolina Rules of Civil Procedure filed by defendants The Bank of New York Mellon Corporation and The Bank of New York Mellon, f/k/a The Bank of New York (collectively “Bank”).  Plaintiff, the State Treasurer of the State of South Carolina (“Treasurer”), opposed the Motion to Dismiss, and in response filed a Motion to Amend the Complaint pursuant to Rule 15(a) S.C.R.C.P. which was heard contemporaneously.  The Court heard oral arguments and received memoranda from both parties.  The Treasurer is represented by Attorney General Alan M. Wilson, Chief Deputy Attorney General John W. McIntosh, Mr. Mitchell Willoughby and Ms. Elizabeth Zeck of Willoughby & Hoefer, P.A. and Mr. Michael H. Montgomery of Montgomery Willard, L.L.C.  The Bank is represented by Mr. Marshall Winn, Mr. Wallace K. Lightsey, Mr. Theodore Gentry and Mr. John C. Moylan, III of Wyche, P.A.  and Mr. Damien Marshall of Boies Schiller & Flexner, LLP of New York, New York, appearing pro hac vice.

Defendants base their motion to dismiss on four grounds: (1) that the Plaintiff does not have standing to pursue this action; (2) that the initiation of this lawsuit is an unconstitutional violation of the separation of powers doctrine because it usurps the constitutionally protected, inherent powers of the Attorney General to control and manage litigation on behalf of the State of South Carolina; (3) that the Attorney General is the only constitutional officer empowered to initiate lawsuits to protect the State’s interests, and his recent appearance as co-counsel for the Plaintiff fails to cure Plaintiff’s lack of standing; and (4) that the Plaintiff’s fee agreements with his private counsel further violate the constitutional separation of powers doctrine by infringing upon the Legislature’s sole authority to appropriate public funds.

A. The Bank’s Motion to Dismiss Does not Implicate this Court’s Subject Matter Jurisdiction. 

Defendants’ first three grounds for dismissal all essentially complain of the Treasurer’s alleged lack of standing.  As our Supreme Court has noted, “[t]he right of a plaintiff to maintain a suit, while frequently treated as going to the question of jurisdiction, goes, in reality, to the right of the plaintiff to relief rather than to the jurisdiction of the court to afford it.” Bardoon Properties, NV, v. Eidolon Corp., 326 S.C. 166, 169; 485 S.E.2d 371, 373  (citing 21 C.J.S. Courts § 16 (1990)).  In contrast, subject matter jurisdiction “refers to the court's power to hear and determine cases of the general class to which the proceedings in question belong.  Id., citing Dove v. Goldkist, 314 S.C. 235, 442 S.E.2d 598 (1994); Watson v.Watson, 319 S.C. 92, 460 S.E.2d 394 (1995).  The question in Bardoon was whether standing and real-party-in-interest objections could be raised after default or whether such objections survived default because they implicated the court’s subject matter jurisdiction.  However, South Carolina case law states that "real party in interest" objections could be waived.  See WeSavFinancial Corp. v. Lingefelt, 316 S.C. 442, 450 S.E.2d 580 (1994).  In addition, Rule 17(a),[1] SCRCP, specifically allows ratification by or substitution of the real party in interest.  These factors led our Supreme Court to conclude that questions of standing or real-party-in-interest do not involve subject matter jurisdiction.

Whether or not a party is the "real party in interest" simply does not involve the court's power to hear a case of the general class (in this instance, a breach of contract claim).

We hold the issue of whether a party is a "real party in interest" does not involve subject matter jurisdiction. . . .  To the extent previous case law has indicated to the contrary, it is overruled.

Id. at 171 & n.4, 485 S.E.2d at 374 & n.4.  Here, as in Bardoon, the contract and tort claims advanced against the Bank fall squarely within this Court’s power[2].  Thus, the issue of the Treasurer’s standing does not implicate this Court’s subject matter jurisdiction over this dispute, which exists independent of the named party plaintiff.

B. The Bank’s Motion to Dismiss is Denied, because the Treasurer has Standing to Bring this Action.

Contrary to Defendants’ contentions, South Carolina law clearly invests the Treasurer with standing to bring this action arising from a statutorily approved contract, and therefore this Court must deny Defendants’ motion to Dismiss.

This action alleging four common law causes of action arises out of a relationship created by a contract between Defendants’ predecessor, The Bank of New York, and the Treasurer.  The contract is captioned “Securities Lending Agreement and Guaranty” (“SLA”).  Article II of the SLA states that “[the Treasurer] hereby appoints Bank as its agent to lend Securities in the Account to Borrowers from time to time . . . .”

The Treasurer is one of eight constitutional officers of the State of South Carolina: 

There shall be elected by the qualified voters of the State a Secretary of State, an Attorney General, a Treasurer, a Superintendent of Education, Comptroller General, Commissioner of Agriculture, and an Adjutant General  who shall hold their respective offices for a term of four year, coterminous with that of the Governor.  The duties and compensation of such offices shall be prescribed by law and their compensation shall neither be increased nor diminished during the term for which they have been elected.

S.C. Constitution, Article VI §7 (emphasis added).  Thus, while the Constitution creates the office of the Treasurer, his duties are those set forth in the laws passed by the General Assembly.

Among the express “duties [of the Treasurer] prescribed by law” in the statutes of this State is the authority to enter into securities lending contracts.  The Legislature expressly authorized the Treasurer to enter into such contracts: “[t]he State Treasurer may contract to lend securities invested pursuant to this section [entitled Investment of Funds].”  S.C. Code Ann. § 11-9-660(B).  Since the Constitution requires only that the Treasurer’s duties be as “prescribed by law,” that constitutional requirement is met by Section 11-9-660(B) of the Public Finance Code.

The public finances statute does not in express language recite the remedies available to the Treasurer to enforce contracts he may enter.  However, our State Supreme Court has long held that contracts with the State confer standing upon the contracting parties to bring and prosecute common law actions arising out of those contracts.  In Chesterfield County v. State Highway Department of South Carolina, 181 S. C. 323, 187 S.E. 548 (1936), the Court held:

The statutes of the state (Code 1932, § 5937 et seq.) authorize the county and the highway commission to enter into what are called reimbursement agreements, of the nature of that made between Chesterfield county and the highway commission.  In other words, the parties are authorized to enter into a contractIt is true that the statutes which authorize the making of the contract do not in express language confer upon EITHER contracting party the power to sue the other for breach of contract.  But that right is one of necessary implication; it is a common-law right.  

Id. at 187 S.E.550 (emphasis added).  The Court continued:

Where a statute or the Constitution creates a right, but is silent as to the remedy, the party entitled to the right may resort to any common-law action which will afford him adequate redress. State v. Taylor 224,  Mo. 393, 123 S.W. 892, 895.

Id. [emphasis added]

These principles in were reaffirmed in Kinsey Construction Company, Inc. v. South Carolina Department of Mental Health, 272 S.C. 168, 249 S.E.2d 900 (1978).  There, the Court applied Chesterfield, supra, and held:

[W]here the legislature has by statute authorized the State to enter into certain contracts, the State, by entering such a contract, thereby consents to be sued if it breaches the contract to the damage of the other contracting party.

Thus, when a State secures to itself the benefits of a contract, it implicitly assumes the corresponding liabilities. 

Id. at 249 S.E. 2d 902.

The public finance statute expressly authorizing the Treasurer to enter into securities lending contracts like the SLA therefore creates “by necessary implication” the right to assert common-law claims arising out of such contracts.  To hold otherwise would result in the nonsensical situation warned against by the the Kinsey Court Neither the State nor its citizens can be bound, yet not bound, by a single contract.  Id. at 249 S.E.2d 903.  If accepted, Defendants’ standing objection would create just this absurdity – that the Treasurer is bound by the contract and yet not bound because he would lack the ability to enforce it.  Such a holding would result in a deviation from centuries of contract jurisprudence.  In granting the Treasurer the express statutory right to contract, the General Assembly simultaneously granted the implicit right to enforce rights under the contract by any and all common law means including the right to sue, such that the Treasurer was and is a proper party to this litigation.

Moreover, Defendants filed this motion pursuant to Rule 17(a), which expressly provides, inter alia

Every action shall be prosecuted in the name of the real party in interest.  [A] party with whom or in whose name a contract has been made for the benefit of another, or a party authorized by statute may sue in his own name without joining with him the party for whose benefit the action is brought . . . .

All parties agree that the SLA was made for the benefit of the State of South Carolina.  Therefore, the Treasurer clearly qualifies as “a party with whom a contract has been made for the benefit of another.”  On this basis alone, he is a real party in interest and has standing for the purpose of filing and prosecuting this action.  The Treasurer is an interested party with an official stake in the subject matter of the lawsuit.  See, e.g. Baird v. Charleston County, 333 S.C. 519, 530; 511 S.E. 2d 69, 75 (S.C. 1999).  Such an interest provides him a basis for standing.

Both the Rules of Civil Procedure and the Treasurer’s legislative authorization to enter into securities lending contracts confer standing upon the Treasurer to enforce all rights emanating from his lawfully executed contracts, here, the SLA.  As the Treasurer has standing in every legal sense, he is entitled to proceed as the party plaintiff in this action.

C. The Treasurer’s Fee Agreements with Counsel do not violate the Constitution or Statutes

Defendants’ fourth ground for dismissal is “that the Plaintiff’s fee agreements with his private counsel further violate the constitutional separation of powers doctrine by infringing upon the Legislature’s sole authority to appropriate public funds.”  In essence, the Defendants wish to challenge the manner in which counsel was selected and engaged by the Treasurer.[3]  These arguments fail because they misconstrue the proper role of the Attorney General and ignore his active involvement in this matter pursuant to S.C. Code Ann. §§1-7-80 and 1-7-170 (2011).  These statutes authorize the Attorney General to conduct litigation for the State and to hire and approve outside counsel (and their fee agreements) to represent State officials, like the Treasurer, in such litigation.  

Evidence presented to the Court demonstrates that two different Attorneys General have approved the hiring of and contracts with counsel to represent the interests of the State of South Carolina in this matter.  On June 15, 2010, then Attorney General Henry McMaster wrote then Treasurer Converse Chellis as follows:

Dear Treasurer Chellis:

I have received your letter of June 14, 2010 requesting [that] the Attorney General’s Office approve your request to employ outside counsel.  It is my understanding that you conducted a review showing that the Bank of New York (now known as The Bank of New York Mellon) may have violated its March 24, 2000 Securities Lending Agreement with the State Treasurer of South Carolina. 

This is to approve your request to employ outside counsel using the contract agreement that I have used for the State of South Carolina.  Please forward me a copy of the proposed contract at your convenience.  I will review both the proposed contract and your selection of counsel before approval can be granted.

On June 23, 2010, Chief Deputy Attorney General McIntosh wrote as follows:

Dear Treasurer Chellis:

We have reviewed your letter of June 18, 2010 requesting the Attorney General’s office approve the selection of Willoughby and Hoefer, P.A. to serve as special counsel in representing the State of South Carolina and the State Treasurer’s Office in the above captioned matter.

You have forwarded a copy of the Attorney General’s contract that has been used by this office with the necessary minor changes for your engaging the services of Willoughby and Hoefer.  We find this to be appropriate and approve the engagement of Willoughby and Hoefer in accordance with the contract you forwarded to this office.

On January 20, 2011, current Attorney General Alan Wilson wrote the following letter to current Treasurer Curtis Loftis:

Dear Treasurer Loftis:

I have received your letter of January 20, 2011 requesting that you and Special Counsel Mitch Willoughby be allowed to add Michael H. Montgomery as Special Counsel to the above–captioned matter.  I recognize the importance and complexity of this litigation and hereby approve the addition of Michael H. Montgomery, as evidenced by the attached Addendum to Litigation Retention Agreement for Special Counsel Appointed by the South Carolina State Treasurer.

Should any need arise to make any additional revisions, additions or changes to the Litigation Retention Agreement, please notify me for my consideration and approval.

By copy of this letter, I am asking Special Counsel to keep my office informed of developments in this litigation.

The requirement that the Attorney General “conduct” litigation for the State is met if the Attorney General appears as a named party, if he serves as the attorney for the State in actions brought in the name of the affected agency or officer, if he appears as attorney of record on the pleadings for the State or agency or officer, even though other counsel are appearing and acting for the state entity, or even if he merely hires and supervises other lawyers to handle civil litigation on behalf of the State or its agencies or officers.  As the Attorney General himself stated,  here, the Attorney General initially chose to “conduct” this litigation by hiring other lawyers to represent the State Treasurer as the affected state officer. 

The involvement of the Attorneys General and their approvals of both the hiring of counsel to pursue this litigation and of the relevant fee agreements satisfies every statutory, constitutional and common-law requirement for the Attorney General’s involvement in and approval of this litigation.  This is true even without consideration of the Attorney General’s active role as counsel and potential party plaintiff in this action.  The Attorney General has conducted this litigation, which chose to be brought in the name of the State Treasurer.  Consequently, there has been no unconstitutional infringement of the Legislature’s sole authority to appropriate funds in the engagement of outside counsel to pursue this litigation as contemplated by inter alia S.C. Code Ann. §1-7-80 and §1-7-170.[4] 

Based upon the foregoing findings and conclusions, IT IS THEREFORE ORDERED:

(1)  That the Bank’s Motion to Dismiss is denied on all grounds. 

(2)  That the fee agreements with Plaintiff’s Counsel are legally entered with the express approval of the Attorney General and do not violate any constitutional provision.

AND IT IS SO ORDERED:

__________________________
Clifton B. Newman
Circuit Court Judge

February 14, 2013
Columbia, South Carolina

 

[1] "No actions shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed, after objection, for ratification of commencement of the action by, or ... substitution of the real party in interest...."

[2] Unlike federal courts, which have but limited jurisdiction, South Carolina circuit courts are courts of general jurisdiction.  S. C. Constitution Article V, §11.  Thus, defendants’ citation of federal authorities on the question of subject matter jurisdiction are inapposite. 

[3] The Court notes without deciding the objections raised by plaintiff Treasurer and his counsel (including the Attorney General) to the Bank’s standing to raise an issue contesting the validity of the Treasurer’s contractual arrangements with counsel.  The Court notes that this is a relationship to which the Bank is a mere stranger and an adversary.  Due to the patent nature of the Attorney General’s involvement in and approval of this litigation, as contained in the record, the Court  denies defendants’ motion on this ground without addressing plaintiff’s  objection to the Bank’s standing to even raise this issue.

[4] The Court notes that the Bank’s stated concern for “public funds” is at odds with its denials that any money is owed to the State for losses in the securities lending program.  The Court further notes that until a trier of fact determines that funds are owed and that such funds are in fact recovered – no public funds are involved in this matter.