IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

DELAWARE COMMUNITY

REINVESTMENT ACTION

COUNCIL, INC., SHARON

CHANDLER, NICOLE DRAPER,

RUTH CORBIN AND SEWELL

CORBIN

On Their Behalf And On Behalf Of

Those Similarly Situated

Plaintiffs,

v.

STATE OF DELAWARE, JACK

MARKELL, GOVERNOR OF THE

STATE OF DELAWARE, KEN

SIMPLER, TREASURER OF THE

STATE OF DELAWARE, MICHAEL

MORTON, CONTROLLER

GENERAL OF THE STATE OF

DELAWARE

Defendants.

C. A. No. 11773-VCN

PLAINTIFFS’ ANSWERING BRIEF IN OPPOSITION

TO DEFENDANTS’ MOTION FOR JUDGEMENT

BIGGS & BATTAGLIA

Robert D. Goldberg (I.D. No. 631)

921 N. Orange Street

P.O. Box 1489

Wilmington, Delaware 19899

Telephone: (302) 655-9677

Attorneys for Plaintiffs

MARCH 4, 2016

EFiled: Mar 04 2016 03:34PM EST Transaction ID 58667728

Case No. 11773-VCN

i

TABLE OF CONTENTS

PRELIMINARY STATEMENT ............................................................................1

STATEMENT OF FACTS .....................................................................................5

A. Bank of America Was Investigated For Causing Economic

Hardship To A Clearly Defined Community. .........................................5

B. Delaware Attorney General Concluded that Legal Claims

on Behalf of the Clearly Defined Communities Could be Made ............6

C. Delaware Attorney General Had the Authority to Represent

Those Affected by Bank of America’s Actions. .....................................7

D. During Negotiations, Delaware Attorney General Ceded Litigation

Rights on Behalf of a Clearly Defined Community. ...............................7

E. In Exchange, the Attorney General Obtained the Settlement

Agreement from Bank of America. .........................................................7

F. Attorney General Proposed Spending Plan of $31.6 Million

for The Clearly Defined Communities. ................................................... 8

G. The Intended Use of Settlement Funds Was Clearly

Articulated by the Negotiating Parties……………… ............................9

H. State of Delaware Wrongfully appropriated Settlement Fund. .........9

I. One Set of Beneficiaries is Made Whole. Commitment

to One Set of Beneficiaries is Being Monitored. The Third Set of

Beneficiaries Remain Ignored. ...............................................................10

ARGUMENT ..........................................................................................................10

I. The Standard for Judgment on the Pleadings ..........................................10

II. Neither Sovereign Immunity Nor The State Tort Claims

Act Bar Plaintiff Claims ..........................................................................11

ii

III. Plaintiffs’ Have Standing to Challenge The Use or Non-Use

of Settlement Funds................................................................................15

A. Plaintiffs Are Third Party Beneficiaries ...........................................15

B. Under Any Standard, Plaintiffs Have Standing ................................26

IV. The Complaint States a Cause of Action For Breach of Contract ....32

A. Plaintiffs’ Claims Are Ripe ..............................................................32

B. On the Merits, Plaintiffs’ Complaint States a Valid Cause of

Action For Breach of Contract .........................................................34

1. The Settlement Agreement is Not Vague...............................34

2. The State’s Use of Settlement Funds is Inconsistent With

Settlement Agreement................................................................40

V. Defendants’ Actions are Ultra Vires ......................................................42

VI. Defendants Have, In This Limited Instance, Breached Their

Fiduciary Duties ................................................................................46

CONCLUSION ..................................................................................................50

iii

TABLE OF AUTHORITIES

Cases

Page(s)

Amirsaleh v. Board of Trade of the City of New York, Inc., 2008 Del. Ch. LEXIS

131, 2008 WL 4182998 (Del.Ch. Sept. 11, 2008)…………………………….19-21

Blair v. Anderson, 325 A.2d 94 (Del. 1974)………………………………..... 13-14

Bebchuk v. CA, Inc., 902 A.2d 737 (Del. Ch. 2006)…………………………..33-34

Beyers v. Bd. of Educ., 2011 Del. Super. LEXIS 1678, 17-18 (Del. Super. Ct. May

16, 2011)……………………………………………………………………..…..48

Cartanza v. Del. Dep't of Natural Res. & Envtl. Control, 2008 WL 4682653 (Del.

Ch. Oct. 10, 2008) ...................................................................................................26

Cheese Shop International, Inc. v. Steele, 303 A.2d 689 (Del. Ch. 1973). ............46

Christopher v. Sussex County, 77 A.3d 951 (Del. 2013) ........................................40

Cmty. Ass'n Underwriters of Am. v. Rhodes Dev. Group, Inc., 488 Fed. Appx. 547

(3d Cir. Pa. 2012) ....................................................................................................19

Delaware State Troopers' Lodge FOP, Lodge #6 v. State, 1984 Del. Ch. LEXIS

433 (Del. Ch. June 13, 1984)…………………………………………………35-36

Heller v. Kiernan, 2002 Del. Ch. LEXIS 17 (Del. Ch. Feb. 27, 2002) ..................47

Interactive Corp. v. Vivendi Universal, S.A., C.A. No. 20260, 2004 WL 1572932,

at *8 (Del. Ch. June 30, revised July 6, 2004) ........................................................11

Flait v. Mayor & Council of Wilmington, Del. Supr., 97 A.2d 545 (1953) ...........12

Korn v. State, 2012 Del. Super. LEXIS 471 (Del. Super. Ct.

Sept. 28, 2012)…………………………………………………………………… 49

iv

Lechliter v. Del. Dep't of Natural Res. "DNREC", 2015 Del. Ch. LEXIS 294

(Del. Ch. Nov. 30, 2015)……………………………………………................24,26

Lechliter v. Del. Dep’t of Natural Res. “DNREC”, 2015 WL 95919587

(Del. Ch. Dec. 31, 2015) ………………………………………………………29-30

Levy Court of Kent County v. City of Dover 333 A.2d 161 (1975)……………44-45

McMillan v. Intercargo Corp., 768 A.2d 492 (Del. Ch. 2000) ..............................11

McMahon v. New Castle Associates, 532 A.2d 601 (Del. Ch. 1987) ..…..………48

Neumeister v. Herzog, 2007 Del. Ch. LEXIS 99 (Del. Ch. July 12, 2007). ...........48

Pauley v. Reinoehl, 848 A.2d 569 (Del. 2004)………………………………..12-13

Peter Schoenfeld Asset Mgmt. LLC v. Shaw, 2003 Del. Ch. LEXIS 79 (Del. Ch.

July 10, 2003)………………………………………………………………….19,21

Sannini v. Casscells, 401 A.2d 927 (Del. 1979)…………………………….........47

Seth v. State, 592 A.2d 436 (Del. 1991)……………………………………….39-40

State v. American Federation of State, County & Municipal Employees, Div. of

Adult Correction, 298 A.2d 362 (Del. Ch. 1972) ...................................................37

Triple C Railcar Serv. v. City of Wilmington, 630 A.2d 629 (Del. 1993)……24-25

Wilmington v. Lord, 378 A.2d 635 (Del. 1977)…...………………………16-18, 30

Wilmington v. Spencer, 391 A.2d 199 (Del. 1978) .................................................12

York Linings v. Roach, 1999 WL 608850 (Ch. July 28th, 1999) ...........................46

Statutes, Codes and Regulations

D.E. Const. art. XIV……………………………………………………………...1

v

10 Del. C. § 4001 – 4005……………………………………………………3,11, 15

6 Del. C. § 1201 or § 2522 ......................................................................................44

29 Del.C. §2504(1) ................................................................................................39

29 Del.C. §2504 ......................................................................................................43

Rule 12(c)……………………………………………………………………...10-11

Rule 12(b)(6) ...........................................................................................................11

Miscellaneous

BLACK’S LAW DICTIONARY (7th

ed. 2002)…………………………………..43

Investopedia, http://www.investopedia.com/terms/r/rmbs.asp (last visited March 3,

2016)……………………………………………………………………………..6

1

Plaintiffs Delaware Community Reinvestment Action Council, Inc.,

Sharon Chandler, Nicole Draper, Ruth Corbin, and Sewell Corbin, by and

through their undersigned counsel, respectfully submit this brief in

opposition to Defendants’ Motion to Dismiss Plaintiffs’ Verified Complaint

for Declaratory and Injunctive Relief.

PRELIMINARY STATEMENT

This is a case in which the government of this State has broken faith

with the people and communities it is sworn to protect. It has diverted

desperately needed funds, designated for the poorest and neediest of its

citizens and turned its back on their pleas for assistance. In so doing, the

individual defendants have violated their oaths of office1 and have abdicated

their roles as public servants. Instead of performing their duties, they have

permitted the work of the Attorney General’s office and its solemn promise

to use settlement funds (“Settlement Funds”) obtained from Bank of

America to repair broken communities to be violated.

1 An integral part of the oath of elected government officials in Delaware is

their commitment to “…place the public interests above any special or

personal interests, and to respect the right of future generations to share the

rich historic and natural heritage of Delaware.” (Delaware State

Constitution, Article XIV)

2

Plaintiffs in this action are a coalition of affected citizens2 and a

community organization who have brought this suit against the State of

Delaware (the “State”) and certain of its executive officials (the “Individual

Defendants”) seeking declaratory relief and an injunction prohibiting the

State from appropriating or spending funds obtained by the Attorney

General of the State in an agreement (the “Settlement Agreement”) that the

Attorney General entered into with Bank of America and others. The

Settlement Agreement was executed by the United States acting through the

United States Department of Justice along with the States of California,

Delaware, Illinois, Maryland, New York, the Commonwealth of Kentucky

(all of whom acted through their respective Attorneys’ General) and Bank of

America Corporation, Bank of America, N.A., and Banc of America

Mortgage Securities, as well as their current and former subsidiaries

(collectively, “Bank of America”).

2 Throughout this brief the term “citizen” is used as being synonymous with

“taxpayer.” Plaintiffs contend that, as citizens, they have the same rights as

taxpayers under the circumstances of the case at bar and have not therefore

amended their complaint to allege their taxpayer status as well.

3

The purpose of the Settlement Agreement was to settle claims against

Bank of America for alleged violations of both federal and state law3 in

connection with its conduct in the packaging, origination, marketing, sale,

structuring, arrangement and issuance of residential mortgages in, among

other places, the State of Delaware. Bank of America was alleged to have

violated both state and federal law by inflating home appraisals, fraudulently

selling loans to the Federal National Mortgage Association (“Fannie Mae”)

and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and

misrepresenting the quality of the loans it issued.

Although Defendants make various pro forma statements to the

effect that they have not violated the Settlement Agreement, they instead

rely exclusively on technical defenses to avoid a ruling that they have, in

fact, violated the Settlement Agreement.

Even though the Complaint does not claim a tortious injury,

Defendants nonetheless adopt the doctrine of Sovereign Immunity and the

State Tort Claims Act, 10 Del. C. § 4001 – 4005, as their first line of

defense. Their argument – which is mirrored in the other defenses posited

by them in their Brief – is that, whatever the merits of the claims set forth

3 The laws that were violated included non-compliance with underwriting

guidelines established for the protection of homeowner borrowers against

abusive lending. (Settlement Agreement, Annex 1, 18-20)

4

in the Complaint, suit is nonetheless barred by a jurisdictional defense and

that there is therefore no need for the Court to address the merits or

adjudicate whether the State is obligated to spend the funds obtained in the

Settlement Agreement in accordance with the terms of that agreement. As

shown herein, the claims made in the Complaint are not tort claims and

neither Sovereign Immunity nor the Tort Claims Act bar a lawsuit of the

nature set forth in the Complaint.

Defendants other jurisdictional defenses are similarly lacking. For

instance, Defendants disavow any purpose in the Settlement Agreement to

aid persons and communities affected by the mortgage crisis. Despite the

explicit language of the Settlement Agreement, Defendants claim that the

agreement itself evinces no purpose to aid those who were affected by the

mortgage crisis. Defendants claim that the Plaintiffs in this case therefore

have no right to enforce the Settlement Agreement, because they are not

parties to the settlement nor are they intended beneficiaries. Apparently the

Defendants do not believe that any citizen of the State of Delaware was

intended to be the beneficiary of the Settlement Agreement. Of course, that

is not the case. Any fair reading of the Settlement Agreement shows

unequivocally that the intended beneficiaries of the Settlement Agreement

are investors who lost through the State’s pension fund, homeowners with

5

existing mortgages with Bank of America, and indeed those communities

affected by the mortgage crisis. The Plaintiffs, in particular, are affected by

the failure of the State to live up to its obligations. If anyone has standing

as a beneficiary of the Settlement Agreement, it is these Plaintiffs. If they

have no standing, then no one does. If the Defendants are correct, then no

one can challenge them and they have unfettered power to ignore the

solemn promises made by the Attorney General in the Settlement

Agreement and to spend the Settlement Funds for whatever purposes they

please. Thankfully, that is not the case. The Settlement Agreement, like

any other agreement made by the State is enforceable by its terms and for

the reasons shown herein Plaintiffs are ideally suited to enforce it.

STATEMENT OF FACTS

A. Bank of America Was Investigated For Causing

Economic Hardship To A Clearly Defined Community.

The Settlement Agreement was executed to settle claims … for

alleged violations … in connection with Bank of America’s conduct in …

issuance of residential mortgages. (Complaint, ¶ 10) Bank of America’s

actions caused harm to homeowners in Delaware … leaving them saddled

with mortgages they could not afford and properties with little or even

6

negative equity. (Complaint, ¶ 11) One result of these actions was to

destabilize lower income neighborhoods … by creating conditions which led

to increases home vacancies and concomitant increases in deterioration and

crime. (Id.)

B. Delaware Attorney General Concluded that Legal Claims on

Behalf of the Clearly Defined Communities Could be Made.

Bank of America’s practices of packaging, origination, marketing,

sale, structuring, arrangement, and issuance of Collateralized Debt

Obligations (“CDOs”) and residential mortgage backed securities

(“RMBS4”) are investigated by United States Attorney’s Offices for the

District of New Jersey, Western District of North Carolina, Northern District

of Georgia and Central District of California. The investigation produced the

potential for legal claims against Bank of America and the United States

Attorney’s Office for the Western District of North Carolina filed a civil

action against the bank. (Complaint, ¶¶24-25) Delaware Attorney General

4 A type of mortgage-backed debt obligation whose cash flows come from

residential debt, such as mortgages, home-equity loans and subprime

mortgages. A residential mortgage-backed security is comprised of a pool of

mortgage loans created by banks and other financial institutions. The cash

flows from each of the pooled mortgages is packaged by a special purpose

entity into classes and tranches, which then issues securities and can be

purchased by investors. (“What is a 'Residential Mortgage-Backed Security

(RMBS) Investopedia, http://www.investopedia.com/terms/r/rmbs.asp (last

visited March 3, 2016)

7

Biden found that legal claims could be made against Bank of America so he

participated in negotiations and with Bank of America along with several

other attorneys general. (Complaint, ¶ 26)

C. Delaware Attorney General Had the Authority to Represent

Those Affected by Bank of America’s Actions.

The Attorney General of the State of Delaware has the full powers of

the Constitution and law, including parens patriae, to represent citizens and

communities of Delaware. (Complaint, ¶ 27) Under this authority, the

Attorney General began negotiations.

D. During Negotiations, Delaware Attorney General Ceded

Litigation Rights on Behalf of a Clearly Defined Community.

In order to conclude the settlement negotiations and obtain an

agreement with Bank of America, the Attorney General released it from any

future suits that the State could bring on behalf of those of its citizens who

were harmed by the unlawful actions of Bank of America. (Complaint, ¶

52)

E. In Exchange, the Attorney General Obtained the

Settlement Agreement from Bank of America.

On August 21, 2014, then Delaware Attorney General Biden issued a

press release announcing the payment of $45 million to be paid by Bank of

8

America to address the harms caused by its actions. Bank of America also

agreed to provide certain additional direct benefits to homeowners affected

by Bank of America’s conduct. There, he outlined how the funds were to be

distributed: a) $31.6 million to remediate harm to the communities that

suffered as a result of the housing crisis, b) $13.4 million to Delaware for

losses it suffered, and c) direct financial benefit to affected homeowners.

(Complaint, ¶ 37)

F. Attorney General Proposed Spending Plan of $31.6

Million for The Clearly Defined Communities.

On January 21, 2015, Attorney General Biden’s successor, Attorney

General Denn presented his plan for spending the $31.6 million allocated for

remediating harm to the communities hit hardest by the mortgage crisis. His

plan was titled “Lifting Up Delaware’s Communities” and was targeted to

address ongoing harm in the most devastated neighborhoods and

communities throughout the State. (Complaint ¶¶39-40)

Attorney General Denn’s plan for spending the $31.6 million included

funds for Delaware’s Emergency Mortgage Assistance Program, Strong

Neighborhoods Housing Fund, Downtown Development District, Down

Payment and Settlement Assistance for Homebuyers, Neighborhood

Building Blocks, Substance Abuse Treatment, After-School and Summer

9

Programs, Prison Re-Entry Programs, and High Poverty Schools.

(Complaint, ¶41)

G. The Intended Use of Settlement Funds Was

Clearly Articulated by the Negotiating Parties.

Indeed, the settling bank specifically demanded, and obtained, a

concession from enforcement agencies negotiating the agreement that one

portion of the funds to be paid to the federal government would be

considered penalty funds, but that the entirety of the payments to the states,

including all funds paid to Delaware, were not to be treated as penalties or

fines, but were instead to be considered a payment to remediate harms.

(Complaint, ¶ 35)

H. State of Delaware Wrongfully appropriated Settlement Fund.

In the past, the Attorney General of the State of Delaware exercised

common law authority to spend funds received by the State in settlement

agreements and lawsuits. (Complaint, ¶ 46) In this instance, Attorney

General Denn proposed to use the Settlement Funds in accordance with the

Settlement Agreement. When he consulted with the General Assembly it

instead seized the Settlement Funds and used them to fund unrelated

expenses such as farmland preservation and to balance the State’s budget.

(Complaint, ¶ 47) Delaware Governor Markell, a public supporter of

10

Attorney General’s proposal, signed the budget that disregarded the

Attorney General’s proposal. (Complaint, ¶ 47)

I. One Set of Beneficiaries is Made Whole; Commitment to One

Set of Beneficiaries is Being Monitored. The Third Set of

Beneficiaries Remain Ignored.

The State of Delaware has received reimbursement for losses it incurred

in the amount of $13.4 million. Under the Settlement Agreement, the

commitment to specific homeowners is to be performed under the

supervision of a monitor. The last obligation of the State, assisting

communities affected by the actions of Bank of America has yet to be

addressed. 5 Over a year and a half has passed and communities affected by

the mortgage crisis remain largely ignored.

ARGUMENT

THE GOVERNMENT HAS NOT MET THE

STANDARD FOR JUDGMENT ON THE PLEADINGS

I. The Standard for Judgment on the Pleadings

Court of Chancery Rule 12(c) provides that, “[a]fter the pleadings

are closed but within such time as not to delay the trial, any party may move

5 Defendants claim that roughly $3 million of the $31.6 million has been

allocated (DB - 10-11) and that $2.1 million of such allocations comply with

the Settlement Agreement. (DB - 33-34) They tacitly admit that the balance

of funds were not used in accordance with the Settlement Agreement, but

were instead used to balance the State’s Budget. (DB -12)

11

for judgment on the pleadings.” Ch. Ct. R. 12(c); Interactive Corp. v.

Vivendi Universal, S.A., C.A. No. 20260, 2004 WL 1572932, at *8 (Del. Ch.

June 30, revised July 6, 2004). The standard of review on a Rule 12(c)

motion parallels that which applies to a motion to dismiss for failure to state

a claim under Chancery Rule 12(b)(6). See id.; McMillan v. Intercargo

Corp., 768 A.2d 492, 500 (Del. Ch. 2000). Accordingly, dismissal should

only be granted when, accepting as true all of the non-moving party’s well-

pleaded factual allegations, “‘there is no material fact in dispute and the

moving party is entitled to judgment as a matter of law.’” Interactive Corp.,

2004 WL 1572932, at *8 (citation omitted). Here, for the reasons set forth

below, Defendants have not met this standard.

II. Neither Sovereign Immunity Nor The State

Tort Claims Act Bar Plaintiffs’ Claims

Defendants contend that the doctrine of sovereign immunity as well as

the State Tort Claims Act, 10 Del. C. § 4001et. seq., bar suit in this case. In

making this argument, Defendants misconstrue the legal basis for the

complaint as well as the applicability of both the doctrine of sovereign

immunity and the Tort Claims Act.

Any analysis of the doctrine of sovereign immunity must begin with

the fact that it is not favored by the Courts of Delaware. Wilmington v.

12

Spencer, 391 A.2d 199 (Del. 1978). There the Court registered its distaste

for sovereign immunity, using the following language:

...sovereign immunity is an unjust legal concept of

constitutional origin, and our Courts have

repeatedly criticized its unfairness and urged

corrective action by the General Assembly.

(Id. at 201)

As a result of their distaste for this doctrine, the Courts in Delaware

are reluctant to enforce it. The Spencer Court, citing Flait v. Mayor &

Council of Wilmington, Del. Supr., 97 A.2d 545 (1953), spoke approvingly

of the Courts’ “extreme reluctance to apply the doctrine.” (Id at 202)

Not only is sovereign immunity disfavored by the Courts, as an unjust

doctrine, but also its applicability in the case at bar is unsupported by

precedent. Defendants rely upon Pauley v. Reinoehl, 848 A.2d 569 (Del.

2004) for the proposition that “neither the State nor a State agency can be

sued without its consent.” (DB - 14; id., at 573) In Pauley, the question

before the Court was the limitation of the State’s statutory waiver of

immunity in a tort case. There, the State and certain employees were the

subject of tort claims resulting from injuries suffered in a police chase. The

Supreme Court held that sovereign immunity was waived only to the extent

that the State had procured insurance – in that case the limit was $1 million -

and that, above that limit, the State was immune from suit.

13

Unlike Pauley, the Plaintiffs in this case are not seeking funds from

the State nor are they challenging a mere discretionary act. While the State

may indeed be immune from tort claims to the extent it has not specifically

insured against them or statutorily waived them, it is not immune from

challenges seeking to enforce contracts. It would be an anomalous situation

indeed if the State were permitted to enter into contracts, but neither the

other contracting party nor third party beneficiaries had any power to

enforce the State’s obligations. Thankfully, that is not the law.

In Blair v. Anderson, 325 A.2d 94 (Del. 1974), a federal prisoner

housed in a State facility pursuant to an agreement between the Federal

Government and the State was held to be a third party beneficiary of that

agreement and was therefore able to sue the State for injuries he suffered

while in the State’s custody. After finding that the State waived sovereign

immunity when it entered into the contract with the United States the Court

held:

…plaintiff was the very subject of the agreement

between governments. He was the person (for

present purposes) whom the State contracted to

safekeep, to care for and to provide with

subsistence. Under these circumstances he has

not only a direct interest in the contract but a right

to enforce it as against the State if it fails to

provide the requisite minimums.

(Id, at 97)

14

As in Blair, the State in this case has entered into a contract with Bank

of America and the Plaintiffs, as well as those they sue on behalf of, are the

defined third party beneficiaries (i.e., members of communities harmed by

the unlawful conduct of the Released Entities as described in the Settlement

Agreement). Accordingly, the State may not rely on the doctrine of

sovereign immunity to prevent enforcement of the Settlement Agreement.

As beneficiaries of the Settlement Agreement, Plaintiffs challenge the

right of the Legislature to arrogate unto itself the power to spend monies that

were designated by the Settlement Agreement to be spent for the purpose of

alleviating harms to those adversely affected by the acts of Bank of America.

The acts complained of in Plaintiffs’ Complaint are breaches of duties to

third party beneficiaries, breaches of fiduciary duties, ultra vires acts, and

breaches of contract. The plaintiffs here do not seek damages or funds from

the State as did the plaintiff in Blair. Instead, they are seeking only to

compel the State to honor its contractual obligations and to follow the law.

Accordingly, sovereign immunity is not a bar to their lawsuit.

For these reasons as well, the Tort Claims Act is equally inapplicable.

Simply put, this is not a tort claim. Not surprisingly, the Tort Claims Act is

designed to protect the State from tort claims where appropriate, such as

where there is no insurance or where the State or its officers have acted

15

within their discretionary authority. In such circumstances, the Tort Claims

Act provides that “no judgment, damages, penalties, costs or other money

entitlement shall be awarded or asserted against the State or any public

officer...” 10 Del. C. § 4001. Not only by its name, but also by the specific

language contained within it, the State Tort Claims Act is designed to protect

the State and its officers from certain types of tort claims. Here as noted

above, there is no tort claim asserted and therefore the State Tort Claims Act

is inapplicable as a bar to the complaint.

Finally, it is important to note that the Defendants rely wholly upon

their assumption, unsupported by the facts alleged in the Complaint, that

they were merely exercising a discretionary duty at the time they decided to

breach the Settlement Agreement and seize the funds intended to assist

communities impacted by the mortgage crisis. This breach of the Settlement

Agreement and violation of Defendants’ fiduciary duties to its citizens is no

mere discretionary act and therefore is not protected by either the doctrine of

sovereign immunity or the State Tort Claims Act.

III. Plaintiffs Have Standing To Challenge

The Use Of The Settlement Funds.

A. Plaintiffs Are Third Party Beneficiaries.

Underlying the Defendants’ standing defense is their blanket assertion

that neither Plaintiff nor the Delaware residents they purport to represent

16

were “implied and express beneficiaries of the settlement agreement.” (DB -

16) Not surprisingly, Defendants make no attempt to identify what persons

or groups would have standing to enforce the rights of “communities” under

the Settlement Agreement, if not the Plaintiffs. One can only guess that any

group or individual would be found to lack standing under Defendants’

undefined definition of “community.” In contrast, Plaintiffs submit that the

most appropriate persons or organizations to sue on behalf of Delaware

communities, as defined in the Settlement Agreement, are precisely those

who appear before the Court in this case, i.e., members of impacted

communities and DCRAC, an organization located in an impacted

community and dedicated to assisting members of such communities. If

Plaintiffs do not have standing, then the impacted communities would have

no right to enforce the Settlement Agreement, even though they are express

beneficiaries of the Settlement Agreement.

Just as the Delaware Supreme Court has an explicit distaste for unjust

exercises of the doctrine of sovereign immunity, so too are Courts in

Delaware reluctant to leave citizens without standing to seek redress for

government abuses. In Wilmington v. Lord, 378 A.2d 635 (Del. 1977),

taxpayers of the City of Wilmington affected by actions of the City were

expressly granted standing to enforce deed restrictions which they claimed

17

prohibited certain uses by the City of a golf course property. In so holding

the Court stated:

…because of the direct interest of taxpayers of a

municipality in the use of lands held in public

trust, and because of the impracticality of any

other form of enforcement of that trust, the line of

cases granting a taxpayer standing to sue to

enjoin the misuse of public monies or public

property sets forth the better rule of law.

Therefore, we hold that a taxpayer must be

accorded standing to sue to challenge the misuse

of property held in trust for the public.

(Id. at 638)

The language of the Lord Court is instructive here. The Lord Court

recognized that unless affected members of the community had standing to

challenge the City's actions, those actions could never be challenged.

Undoubtedly the Lord Court was aware of the mischief that could result if

the City had unfettered discretion to use property it held in trust without the

counterweight of citizens able to police any excesses. Here, the same logic

applies. Without specific members of the community having standing to

challenge the State, it would have the unfettered ability to spend the

proceeds of the Settlement Funds in any way it saw fit, free of challenge.

That is the precise abuse that the Lord Court recognized and sought to

foreclose when it gave standing to members of the local community to

enforce the terms of a trust. Just as in Lord, a trust has been created by the

18

Settlement Agreement. As shown in footnote 5 supra, the Defendants have

already spent some of the funds for purposes inconsistent with the

Settlement Agreement. The “better rule of law” espoused by the Lord Court

is directly applicable here. Plaintiffs do have standing to challenge the

misuse and nonuse of the Settlement Funds.

Defendants rely heavily on the provision of the Settlement Agreement

which disclaims any third party beneficiaries. They cite paragraph 21 of the

Settlement Agreement which states that the “Agreement is intended to be for

the benefit of the parties only and does not create any third party rights.”

(DB at 17) In so doing, Defendants ignore the express language in the

Settlement Agreement itself which directly provides benefits for

“communities.” Thus, the Settlement Agreement expressly provides that the

funds paid by Bank of America are to be used to benefit impacted

communities. Moreover, as shown in the Complaint, the Settlement

Agreement trades away the rights of the State to protect these communities

in return for the payment from Bank of America. (Complaint, ¶¶ 64-66)

Indeed, the very existence of this disclaimer indicates that the State

recognized that the Settlement Agreement was intended to benefit third

parties, otherwise there would be no reason to insert such a provision.

Plaintiffs submit that the real question is not whether the Settlement

19

Agreement created third party beneficiaries – because it clearly did - but

instead, whether those third party beneficiaries, not only under the

Settlement Agreement, but also as taxpayers and citizens of the State, have

any enforceable rights. Clearly they have such rights and the case law does

not forbid them from exercising them.

As shown above, it is clear that the Settlement Agreement was

expressly intended to benefit impacted communities. Thus, cases such as

Peter Schoenfeld Asset Mgmt. LLC v. Shaw, 2003 Del. Ch. LEXIS 79 (Del.

Ch. July 10, 2003 and Cmty. Ass'n Underwriters of Am. v. Rhodes Dev.

Group, Inc., 488 Fed. Appx. 547 (3d Cir. Pa. 2012) upon which Defendants

rely are inapplicable here. In both those cases the Courts held that there was

no evidence of an intent to create a third party beneficiary. Here, in the case

at bar, the express language of the agreement defines the third party

beneficiaries as “communities” harmed by the unlawful conduct of the

Released Entities and provides that they are to receive specific benefits.

(Complaint, ¶ 14)

The one case Defendants cite which is possibly applicable in this case

is Amirsaleh v. Board of Trade of the City of New York, Inc., 2008 Del. Ch.

LEXIS 131, 2008 WL 4182998 (Del.Ch. Sept. 11, 2008). In that case, as

here, there was a third party disclaimer by the contracting parties. However,

20

the challenged agreement specifically granted benefits to third parties and

therefore the Court held that they were entitled to enforce the agreement,

despite the existence of the disclaimer language. (Id. at 12) Here as in

Amirsaleh, the Plaintiffs are express beneficiaries of the Settlement

Agreement because they reside in communities impacted by the mortgage

crisis and those communities are express beneficiaries under the Settlement

Agreement.

Defendants cite Amirsaleh test as bar to standing:

(i)the contracting parties . . . intended that the

third party beneficiary benefit from the contract,

(ii) the benefit [was] intended as a gift or in

satisfaction of a pre-existing obligation to that

person, and (iii) the intent to benefit the third-

party [was] a material part of the parties' purpose

in entering into the contract.

Amirsaleh at *14, *15

In fact, Plaintiffs have met the Amirsaleh test. The first part of that

test is “intent.” Claiming that the Plaintiffs have not met this part of the test,

Defendants rely upon the third-party disclaimer language set forth in the

Settlement Agreement. In so doing, they ignore the overwhelming and

undeniable fact that the agreement itself calls for a $31.6 million benefit to

go to impacted communities. Even if one were to ignore the facts that a

primary purpose of the Settlement Agreement is to aid these communities

21

and that the lion’s share of the funds secured by the Attorney General were

to be used for that very purpose, there is no ironclad rule that compels the

Court to ignore the clear purpose of the Settlement Agreement. The

Schoenfeld case and Underwriters of America case provide no support for

the argument made by Defendants. In both of those cases, the Court found

that the plaintiffs were not third party beneficiaries. Here, in stark contrast,

there is no doubt that the impacted communities, for which the Settlement

Aggreement reserves $31.6 million were meant to be beneficiaries.

Statements made by the Attorney General at the time the Settlement

Agreement was signed reinforce this conclusion. As stated by Attorney

General Biden, the mortgage crisis…devastated families and neighborhoods

throughout Delaware…our work is not done” (Complaint, ¶ 38) There can

be no doubt that Attorney General Biden intended to use the Settlement

Funds to aid distressed communities.

The second part of the Amirsaleh test requires that the benefit be

intended as a gift or in satisfaction of a pre-existing obligation. Here again,

the language of the Settlement Agreement as well as that of the Attorney

General at the time the Settlement Agreement was executed is instructive.

The, $31.6 million to be spent to assist impacted communities were not

generated by any charitable motives on the part of Bank of America.

22

Instead, as the Settlement Agreement recites and as the Attorney General

reiterated, Bank of America, through its actions, damaged both the State,

whose pension funds suffered as a result of its actions, as well as

communities in the State. (Complaint, ¶ 38) Bank of America was therefore

indebted to those communities and it paid the Settlement Funds to satisfy

that obligation in exchange for the release it obtained. Part two of the

Amirsaleh test is therefore met.

The third part of the Amirsaleh test is that the intent to benefit the

party is material to the agreement. Certainly, the fact that a majority of the

Settlement Funds paid by Bank of America, i.e., $31.6 million, was

designated for the purpose of aiding impacted communities is material. Not

only is $31.6 million a not inconsequential sum, it is a major part of the

entire Settlement Funds. Accordingly, the requirement of materiality is

easily met.

The Plaintiffs here are members of communities affected by the

mortgage crisis. In fact, as alleged in the complaint, the communities they

represent are those most severely impacted by the mortgage crisis and

indeed these communities continue to suffer from the effects of this crisis.

(See, eg., Complaint, ¶ 2) Accordingly, there can be no doubt that they

should be accorded standing.

23

Defendants’ further argument is that the Settlement Agreement was

meant to address only securities violations by Bank of America and that the

State and Federal investigations which led to the Settlement Agreement were

not focused on Bank of America’s activities in originating mortgages.

Relying on Recitals A and B of the Settlement Agreement, Defendants

contend that the investigations were not focused “…on individual claims,

such as claims by residential mortgagees” and that, as a result, the definition

of “Covered Conduct” excluded any actions by Bank of America in

servicing residential mortgages. (DB - 21) At the root of the investigations

and as recognized in the Settlement Agreement is the fact that investors,

homeowners, and communities were all affected by Bank of America’s

actions in originating subprime mortgages and in packaging the RMB’s and

other securities which it sold. The Settlement Agreement therefore provided

relief to all three of these groups.

Defendants’ argument ignores two other salient points. First, and

foremost, regardless of any recitals, the Settlement Agreement itself

provides for specific benefits not only for individual mortgagors of Bank of

America – which are not the subject of the Complaint – but also to

communities impacted by the mortgage crisis – which are the subject of this

Complaint. Second, the Settlement Agreement expressly recognized that the

24

various security law violations had a direct effect on communities. This is

what provided the impetus to include relief for impacted communities in the

Settlement Agreement.

Defendants also claim that the beneficiaries of the Settlement

Agreement are so poorly defined that they are merely members of a class of

incidental beneficiaries. (DB - 19) Defendants seek to blunt the force and

effect of Amirsaleh by arguing that the Settlement Agreement is nonspecific

and that it was not intended to benefit Plaintiffs, as distinct from any other

individuals or groups of citizens within Delaware. (DB - 19)

According to Defendants “even accepting, for purposes of this

motion, that…the plaintiffs are members of communities injured by the

mortgage crisis,” they are “at most part of a “poorly defined” group of

incidental beneficiaries and therefore lack standing to enforce the

Agreement. (DB - 19-20) In so contending, Defendants mistakenly rely

upon Triple C Railcar Serv. v. City of Wilmington, 630 A.2d 629 (Del. 1993)

and Lechliter v. Del. Dep't of Natural Res. "DNREC", 2015 Del. Ch. LEXIS

294 (Del. Ch. Nov. 30, 2015), both of which are inapposite.

The Plaintiff in Triple C claimed that it suffered damages as a result

of the City of Wilmington’s failure to maintain certain tidegates. Nine years

prior to the damage occurring, Wilmington entered into an agreement with

25

the Federal Government relating to the maintenance of the tidegates. That

agreement contained a provision that the City would follow federal

regulations and Triple C claimed it suffered damage as a result of

Wilmington’s failure to do so. In rejecting Triple C’s claim, the Court

stated:

At the time the City received federal approval

of its application, Triple C did not occupy the

property affected by the tidegates and,

accordingly, was not a third-party beneficiary at

the formation of the contract. Thus, the

"surrounding circumstances" at the time did not

include consideration of Triple C's interests.

Triple C Railcar Serv. v. City of Wilmington, 630 A.2d 629, 634 (Del. 1993)

Only after it opined that there were no surrounding circumstances to

indicate that Triple C was a third-party beneficiary, did the Triple C Court

state that it was part of a "poorly defined" group of incidental beneficiaries

and therefore lacked standing to bring suit on the contract. (Id. at 634)

In contrast to the factual background in Triple C, the “surrounding

circumstances” at the time the Attorney General entered into the Settlement

Agreement and the intent to benefit communities in Delaware who were

impacted by the mortgage crisis was crystal clear. Not only the Settlement

Agreement itself, but also the press releases of Attorney General Biden and

the plans formulated by Attorney General Denn indicate beyond question

26

that the Settlement Agreement was intended to benefit impacted

communities in Delaware. They, and the Plaintiffs who have sued on their

behalf are undoubtedly third-party beneficiaries of the Settlement

Agreement.

Lechliter v. Del. Dep't of Natural Res. "DNREC", 2015 Del. Ch.

LEXIS 294 (Del. Ch. Nov. 30, 2015) (“Lechliter I”) does not change this

analysis. In Lechliter I the issue was whether the Plaintiff could assert

standing as a member of the public where an agreement provided that

property leased to DNREC should remain open to the general public.

Plaintiff complained that a proposed dog park would disturb his peace of

mind. In finding that the plaintiff did not have standing, the Court found

that this very general language did not evidence a specific intent by the

parties to benefit anyone other than the public at large. For the very same

reasons set forth above, Lechliter I and the contract the plaintiff therein

sought to enforce are not comparable to the Settlement Agreement, which

provides expressly for the use of the Settlement Funds to address the

problems caused by the mortgage crisis.

B. Under Any Standard, Plaintiffs Have Standing.

Relying upon Cartanza v. Del. Dep't of Natural Res. & Envtl. Control,

2008 WL 4682653 (Del. Ch. Oct. 10, 2008) Defendants contend that

27

Plaintiffs must show: (1) an injury in fact; (2) a causal connection between

the injury and the conduct of which plaintiff complains; and (3) that a

favorable decision is likely to redress the injury. (DB - 21-22)

Focusing on the “injury” element of this test, Defendants state that

Plaintiffs cannot identify any “concrete” or “particularized” right to any

portion of the Settlement Funds. (DB - 22) They conclude therefore that

Plaintiffs can not claim that they are being – or will be – deprived of any

benefit from the expenditure of the Settlement Funds. Defendants’ argument

is premised on their assertion that the vast majority of the Settlement Funds

have not been allocated and remain subject to appropriation through the

political process. (Id.) According to Defendants, even if the Settlement

Funds are spent in a manner wholly consistent with the Settlement

Agreement, one or all of the Plaintiffs may not “directly benefit.” (Id.) As a

result, Defendants conclude that any injury to the Plaintiffs is “speculative”

and “hypothetical”. (DB - 23)

In making this argument, Defendants misconstrue the thrust of

Plaintiffs’ complaint in two respects. First, the benefit which Plaintiffs seek

to obtain is not a direct payment to any one of them or even to any specific

28

community in which they reside.6 No matter how the Settlement Funds are

spent, Plaintiffs will benefit so long as they are spent in accordance with the

Settlement Agreement. Second, as set forth in the Complaint, the Settlement

Funds have been designated to be spent for certain, specific uses, and the

hijacking of these funds for uses other than those designated in the

Settlement Agreement, combined with the failure to spend them for the

purposes defined in the Settlement Agreement constitutes the wrong

complained of here. There is no need to subject these funds to the political

process as the Attorney General has full, historic authority to spend them in

accordance with the Settlement Agreement.

Even if Defendants are correct and the political process does

somehow govern allocation of the Settlement Funds, the Settlement

Agreement nonetheless governs their expenditure and the Settlement Funds

must be spent in the manner agreed to by the State, through its Attorney

General. This is all that Plaintiffs seek in their Complaint, and the

expenditure of the Settlement Funds as required by the Settlement

Agreement is the direct benefit Plaintiffs seek.

6 Given the communities in which Plaintiffs reside and the mortgage crisis

related problems they have suffered, it is difficult to conceive of any

scenario where none of these communities would receive any benefit.

(Complaint, ¶¶ 1-4)

29

As set forth in the Complaint, Plaintiffs clearly articulated their

injuries. For example, DCRAC staff, clients, and stakeholders continue to be

harmed by the violence occurring in the Eastside. (Complaint, ¶ 1) Nicole

Draper, also a resident of the Eastside and mother of two, continues to be

plagued by violence, drugs and ongoing harm in her community. Fearful of

their safety, she must keep the children inside her house. (Complaint, ¶ 3)

These problems are typical of communities impacted by the mortgage crisis.

When announcing the spending plan for the Settlement Funds,

Attorney General Denn stated:

We believe that this ambitious investment in Delaware’s

economically impacted communities has the potential to transform

parts of our state and we have faith it will have a real impact on

people who desperately need help. (Complaint, ¶ 43)

This is the type of remedy the Plaintiffs seek in this case.

Defendants also claim that Plaintiffs cannot proceed under a theory of

taxpayer standing because, as Defendants allege, taxpayers have standing

only in a narrow set of circumstances involving challenges either to

expenditure of public funds or use of public lands. (DB - 23) Citing

Lechliter v. Del. Dep't of Natural Res., 2015 WL 9591587 (Del. Ch. Dec. 31,

2015) (Lechliter II). Defendants argue that Plaintiffs are attempting to

attack the political process and they claim that such broad attacks are near

30

limitless and therefore prohibited. In so arguing Defendants misconstrue the

limited nature of the Plaintiffs’ complaint.

Here, Plaintiffs are not attacking the political process but are instead

attacking the fact that Defendants have commandeered the Settlement Funds

which should be held in trust for the benefit of impacted communities as

defined in the Settlement Agreement. Plaintiffs are not attacking the

political process, but are instead attempting to preserve trust funds dedicated

to aid impacted communities, a purpose for which Lechliter II specifically

provides that standing should be accorded. It is important to note here that

damage has already occurred as a result of the diversion of the Settlement

Funds and their use for purposes other than those prescribed in the

Settlement Agreement. (Complaint, ¶ 47) Accordingly, the “better rule of

law” to determine standing is that which is set forth in the Lord case where

the Court found standing to “challenge the misuse of property held in trust

for the public.” (Id.at 638) Again, this is what the Plaintiffs here seek.

Finally, it must be noted that, despite Defendants’ claims to the

contrary, Plaintiffs do not claim that allocation of the Settlement Funds

through the normal political process is inconsistent with their interpretation

of the Settlement Agreement. Instead, Plaintiffs contend that the Defendants

are violating the Settlement Agreement itself, which contains a clear

31

mandate to use the Settlement Funds for impacted communities. Defendants

admit that they are fully aware of the intended uses for the Settlement Funds,

going so far as to state that about $2 million of the Settlement Funds have

been appropriated, consistent with the purposes of the Settlement

Agreement. (DB - 34) Thus, Defendants have explicitly acknowledged that

they understand the Settlement Agreement and that they are aware of how

the Settlement Funds are to be spent. It is now time for them to use the

Settlement Funds as required under the Settlement Agreement.

This could have and should have happened already. The Attorney

General was fully empowered to spend the Settlement Funds for the

purposes set forth in the Settlement Agreement. When the State seized the

Settlement Funds, its actions did not nullify the Settlement Agreement.

Instead, to the extent the State has exercised control of these Settlement

Funds, it is nonetheless required to adhere to the terms of the Settlement

Agreement. In fact, it has failed to do so and it has therefore violated its

contract and forsaken the beneficiaries of the Settlement Agreement.

IV. THE COMPLAINT STATES A CAUSE OF

ACTION FOR BREACH OF CONTRACT.

Somewhat inconsistently, Defendants contend that there has been no

breach of the Settlement Agreement, and that it is too early to even consider

32

this question because the issue is not yet ripe for consideration. Although the

Settlement Agreement undoubtedly creates a contractual obligation which

has not been fulfilled and although the damage to communities occasioned

by the failure of the Defendants to honor the contract continues, Defendants

nonetheless claim that there is no breach of the Settlement Agreement. Here

however, there is a definite contractual obligation, a breach of that obligation

and resulting damage. Therefore, the breach of contract claim is viable.

A. Plaintiffs’ Claims Are Ripe.

Although the Settlement Agreement was entered into in August of

2014, only $2 million of the $31.6 million targeted for impacted

communities has been allocated thus far. Defendants attribute this one and a

half year delay to the normal political process for allocating these Settlement

Funds. According to Defendants the political process has yet to play itself

out and therefore the issues raised by Plaintiffs are not yet ripe. (DB - 26)

Surely, however a one and a half year delay in spending Settlement Funds,

when their proper purpose and usage is clearly delineated by the Settlement

Agreement is not a part of the normal political process, nor is the use by the

State of these Settlement Funds to balance its budget. One budget year has

already come and gone with no progress in spending the Settlement Funds

and there isn’t even a plan for the bulk of the funds to be spent in accordance

33

with the Settlement Agreement. The Defendants cannot divert the

Settlement Funds from the Attorney General who is authorized to spend

them, delay unconscionably long, misspend $900,000.00 and then claim that

there is no ripe dispute. Here, after many delays, it is clear that litigation is

unavoidable and therefore sooner is better than later.

Defendants claim that the Court should postpone reviewing how the

Settlement Funds are spent because the interests of the Court and justice

weigh in favor of postponing a decision until the question arises in a more

concrete and final form. (DB - 26) This argument is based on the faulty

assumption that there is no concrete and explicit plan for spending the

money. In fact, however, the Settlement Agreement specifically lays out

how the Settlement Funds are to be spent and the Attorney General,

consistent with his undertakings in the Settlement Agreement has proposed

to spend those Settlement Funds in accordance with that agreement.

This case is not governed by Bebchuk v. CA, Inc., 902 A.2d 737 (Del.

Ch. 2006) upon which Defendants premise their “ripeness” argument. In

Bebchuk, a corporate case, plaintiffs sought a ruling on the legality of a

proposed by- law. Because the by- law had not yet been enacted, the Court

correctly found that the dispute before it was not ripe and declined to issue

34

what in essence would have been an “advisory opinion.” Bebchuk v. CA,

Inc., 902 A.2d 737, 745 (Del. Ch. 2006).7

The difference here is that there is an executed Settlement Agreement,

with defined terms and with a plan for spending the Settlement Funds in

accordance with those terms. The State here has halted the expenditure of

the Settlement Funds for over a year and a half and has diverted the funds to

balance its budget. Moreover, the very act of holding up the expenditure of

the Settlement Funds is causing damage to the communities these funds

were designated to assist. (Complaint, ¶ 48) Accordingly, this issue is ripe

for decision by the Court.

B. On the Merits, Plaintiffs’ Complaint States a

Valid Cause of Action For Breach of Contract.

1. The Settlement Agreement is Not Vague.

Defendants allege that the language of ¶9 of the Settlement

Agreement is too vague to be enforced by the Court. Initially, it must be

noted that Defendants’ vagueness argument is belied by their admission that

some of the Settlement Funds have already been expended in accordance

with and consistent with the Settlement Agreement. (DB - 27) Clearly, then

7 Even then, aware that the case could ripen, the Court declined to dismiss

the complaint. (Id. at 745)

35

Defendants understand not only what the Settlement Agreement says but

also how it should be spent.

Plaintiffs have no agenda other than to see that the Settlement Funds

are spent consistently with the Settlement Agreement. Thus, while Plaintiffs

have endorsed the plan of the Attorney General, they recognize that there are

other, different ways to spend the Settlement Funds that would be consistent

with the Settlement Agreement. Defendants however have not proposed any

plan for spending the bulk of the Settlement Funds in a manner consistent

with the Settlement Agreement. After a year and a half, the only plan

Defendants propose is to fill budget gaps in the upcoming fiscal year.8

Thus, this is not a dispute over competing plans to fulfill the State’s

obligations under the Settlement Agreement. Instead, the issue here is

whether the State will honor its obligations under the Settlement Agreement

at all. So far, other than one small appropriation, it has not done so.

This is not a case similar to Delaware State Troopers' Lodge FOP,

Lodge #6 v. State, 1984 Del. Ch. LEXIS 433 (Del. Ch. June 13, 1984), a

summary judgment case in which Plaintiffs sought to elevate a “best efforts”

commitment to provide a pay raise to the State Police into an actual pay

8 As Defendants point out, the majority of the Settlement Funds remain

locked up in the State’s coffers. (DB - 23)

36

raise, regardless of whether funds were appropriated. There, the

implementation of that Agreement was “…dependent upon funds being

provided by the General Assembly". ( Id. at *15-16) As a result, the Court

in that case correctly stated that there was no standard by which to judge

whether the Secretary of Public Safety had used his best efforts to lobby for

a pay increase for the State police.

Here, in contrast to Delaware State Troopers' Lodge, there are explicit

standards set out in the Settlement Agreement and, perhaps more

importantly, the funds have been obtained. They have already been paid by

Bank of America expressly for the uses set forth in the Settlement

Agreement. Thus, the State is obligated to use the Settlement Funds, to the

maximum extent possible to aid communities impacted by the mortgage

crisis.

Paragraph 9 of the Settlement Agreement necessarily contemplates

that the State of Delaware will do what the Attorney General has pledged to

do in the Settlement Agreement. Defendants read this paragraph as

necessarily contemplating that the State will, “…through its elected officials,

determine how the Settlement Funds will be allocated consistent with the

Settlement Agreement.” (DB - 30) Of course, the Settlement Agreement

contains no such language or requirement. It makes no mention of

37

legislation being necessary before the funds can be spent and in fact,

Plaintiff’s contend that legislative action is not a necessary predicate to using

the Settlement Funds for the purposes for which they are intended.

(Complaint, ¶ 46)

In that respect, this case is far more similar to State v. American

Federation of State, County & Municipal Employees, Div. of Adult

Correction, 298 A.2d 362 (Del. Ch. 1972). There, the Court rejected a

defense by the Department of Corrections that it did not have to provide

health insurance benefits to its employees - even though it had pledged to do

so in its collective bargaining agreement – unless the funds to do so were

appropriated. In so holding the Court stated:

It is plain that the Department has not done what

it said it would do in the agreement; that is, it has

not provided the agreed upon health insurance. It

is equally plain that this court is without power to

order the expenditure of funds for such insurance

without appropriation. However, I am satisfied

that the Department is in a position to provide the

payment of insurance premiums, in conformity

with the constitution, by the simple

administrative act of including those payments as

a "priority item" in its budget.

(Id. at 368)

Here, as in State v. American Federation of State, County &

Municipal Employees, Div. of Adult Correction, the State has made a pledge

38

to provide a benefit to communities impacted by the acts of Bank of

America. The funds are there to be spent and there is no need to appropriate

them. Here the State has not done what it said it would do in the Settlement

Agreement. There is no good reason why, with or without legislative action,

it cannot honor its commitments.

The Attorney General has a long history of settling disputes, obtaining

funds in those settlements, and using them without them being part of the

State budget. As set forth in the Complaint, in past years the Attorney

General’s office independently exercised its authority to distribute funds it

obtained in lawsuits. (Complaint, ¶ 46) In this instance, perhaps because of

the amount of the Settlement Funds, the Attorney General consulted with the

General Assembly. However, instead of collaborating with the Attorney

General as contemplated, the General Assembly ignored the language of the

Settlement Agreement, failed to aid impacted communities as the Settlement

Agreement pledged and instead used the Settlement Funds for wholly

unrelated purposes. (Complaint, ¶ 47) This wrong was compounded when

Defendant, Governor Markell, signed the budget legislation, despite his

previous statements endorsing use of the Settlement Funds to address the

impacts of the mortgage crisis. (Complaint, ¶ 48)

39

Defendants’ claim that the Settlement Agreement contemplated that

the Settlement Funds would be spent using the normal legislative processes,

is incorrect. That was not the intent of the Attorney General. Thus, as shown

in the Complaint, Attorney General Denn developed and announced a plan,

supported by the Governor to spend the Settlement Funds on impacted

communities. (Complaint, ¶¶ 40-44) The lack of any participation by the

General Assembly in the negotiations indicates that the Settlement Funds

were not to be spent as part of the normal legislative process, as Defendants

contend. It is important to note that historically the Attorney General has

entered into agreements of this type without the participation of the General

Assembly and has spent Settlement Funds in accordance with those

agreements, without first seeking its approval.

The Attorney General’s authority to do so derives from common law

parens patriae powers as well as statutory authority to pursue specific types

of litigation. On a broader level, the Attorney General has statutory

authority, “To continue to exercise the powers and perform the duties by the

Constitution, statutes and common law vested in and imposed upon the

Attorney General prior to January 1, 1969.” 29 Del.C. §2504(1) “Absent

legislative restriction, the Attorney General may exercise all such power and

authority as the public interests may from time to time require.” Seth v.

40

State, 592 A.2d 436 (Del. 1991) See also Christopher v. Sussex County, 77

A.3d 951 (Del. 2013) (reaffirming Seth v. State as the law of Delaware)

2. The State’s Use of Settlement Funds is

Inconsistent with the Settlement Agreement.

Defendants claim that the status of the Settlement Funds is consistent

with the Settlement Agreement. This argument is incorrect for two reasons.

First, as set forth in ¶ 47 of the Complaint, the Plaintiffs have alleged that

the Settlement Funds have been used to balance the State budget and have

been used for purposes inconsistent with the Settlement Agreement, such as

farmland preservation. Plus, as Defendants point out, some of the funds

(approximately $900,000.00) have been spent for purposes other than those

prescribed in the Settlement Agreement. (DB - 12) Thus, as a factual matter

the State has not used the Settlement Funds in a manner consistent with the

Settlement Agreement. Perhaps even more important, this argument misses

the thrust of the Complaint which is that the State has not used the

Settlement Funds. Instead, it is holding the Settlement Funds while

communities who desperately need them are suffering from increased crime

and other effects of the mortgage crisis.

Defendant's contention that the Settlement Funds would be spent

consistent with the Settlement Agreement even if they just went to the

general fund is inconsistent with the terms of the Settlement Agreement

41

itself. The Settlement Agreement provides for three distinct categories of

beneficiaries. One beneficiary is the State of Delaware which received $13.4

million to address its pension losses as a result of the mortgage crisis. The

State has already taken those Settlement Funds and presumably used them

for the intended purpose. In any event, they're not the subject of this lawsuit.

The second purpose of the Settlement Agreement was to provide assistance

to specific homeowners who were injured in the mortgage crisis. To fulfill

this commitment, Bank of America agreed to assist certain homeowners

affected by the mortgage crisis by giving them direct relief. Those efforts are

being overseen by a special monitor who evaluates Bank of America’s

conduct. That part of the Settlement Agreement is also not the subject of this

lawsuit.

The third purpose of the Settlement Agreement, which is the subject

of this lawsuit is the payment by Bank of America of the $31.6 million to aid

impacted communities. Despite the fact that the Settlement Agreement

defines three separate beneficiaries, the Defendants mistakenly argue that

paragraph 9 applies to all of the Settlement Funds and that it gives the State

unfettered discretion to spend all of those Settlement Funds as it sees fit,

even in a manner inconsistent with the Settlement Agreement. (DB - 33)

42

Thus, the Defendants argue that even if the General Assembly

determined to use the Settlement Funds for a totally unrelated purpose, that

would still be a permissible judgment on their part that it was not “possible”

to use all the Settlement Funds in some other way. (DB - 33) According to

Defendants, any way that the General Assembly appropriated the Settlement

Funds would be permissible.

Defendants argument that, even if the State spent the Settlement

Funds in a manner entirely inconsistent with the Settlement Agreement, that

action would nonetheless be entirely consistent with the agreement and

would constitute a use of those Settlement Funds to the “maximum extent

possible.” (DB - 33) This argument if accepted would render the language

of the Settlement Agreement a nullity and its terms and solemn pledges to

assist impacted communities illusory.

V. Defendants Action Was Ultra Vires

Defendants acted ultra vires by allocating Settlement Funds in a

manner inconsistent with the Settlement Agreement and contrary to Attorney

General Denn’s spending plan. The Settlement Funds are not “general

funds” subject to the sole discretion of the Legislative Process. Therefore,

Defendants do not have authority to order allocation of the funds

inconsistent with the Settlement Agreement, and without regard for the very

43

communities in which funds are intended to be used to remediate harms

suffered.

The definition of an ultra vires act is: “unauthorized; beyond the

scope of power allowed or granted by a corporate charter or by law”.

BLACK’S LAW DICTIONARY 1525 (7TH

ed. 2002) Defendants’ actions

were indeed beyond the scope of power granted by law. There is no

authority in the Delaware Constitution that grants the power to appropriate

settlement funds at the sole discretion of the Legislature without regard to

the governing Settlement Agreement. The office of the Attorney General

was created under the Constitution with the authority to perform duties

vested in the Office by the Constitution and Common Law, including the

authority to investigate matters of public peace, safety, and justice. (29 Del.

C. §2504) The Office of the Attorney General investigated Bank of

America’s actions, and exercised duties vested in the Office by signing the

Settlement Agreement on behalf of Delaware. The authority to direct

spending is therefore vested in the Office of the Attorney General.

The Governor acted in an ultra vires manner when he approved the

State of Delaware Operating Budget in July, 2015 which included the

allocation of Settlement Funds that were only to be used in accordance with

the Settlement Agreement. Because the Governor previously supported the

44

Attorney General’s plan, he was well aware that the Settlement Funds were

being used for purposes other than those specified in the Settlement

Agreement. The Controller General and State Treasurer also acted in an

ultra vires manner by complying with the Budget set forth by the Legislature

appropriating funds it had no right to spend in a manner inconsistent with the

Settlement Agreement.

As Defendants correctly state in their brief, the Legislature is limited

only by the Constitution. (DB - 35) Indeed, the Constitution does not

provide for the Legislature to reach into the escrow account of the Attorney

General to allocate funds which are not General Funds and not free to be

used for any purpose whatsoever. As provided in the Settlement Agreement,

“no portion of the funds… is received as a civil penalty or fine, including,

but not limited to any civil penalty or fine imposed under 6 Del. C. § 1201 or

§ 2522. (Settlement Agreement, ¶ 9) Therefore, the funds obtained from the

settlement with Bank of America are not considered fees and therefore not

General Funds.

The Supreme Court of Delaware in Levy Court of Kent County v. City

of Dover 333 A.2d 161 (1975) held that Kent County acted in an ultra vires

manner when it entered into an agreement to leave sewer and water facility

decisions to the City of Dover. The Court based this decision on

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considerations of public policy and fairness. There, the County inhabitants

of areas left to the City’s discretion would have no alternative to receive

water services other than to go through the process of voting to annex the

land into the County to be eligible for water services. The Court considered

the great lengths the residents would have to go to in order to obtain water

services from the County and therefore found the agreement “against public

policy and void”. Levy Court of Kent County v. City of Dover 333 A.2d 161

(1975) Here, the actions of the Defendants are ultra vires, because the

Defendants do not have unfettered discretion to use the Settlement Funds

without complying with the Settlement Agreement. Public policy and

fairness considerations weigh heavily against the Defendants’ actions.

The Settlement Funds in question here were meant to go to the

remediation of harms suffered by the communities. Instead, the Defendants

have chosen to use the funds for wholly unrelated purposes. The

communities impacted by the mortgage crisis, as a result of the investigated

conduct of Bank of America which resulted in this Settlement Agreement,

are indeed the communities intended to benefit from the funds. Unlike in

Levy Court, where the affected communities had an inconvenient but

possible course of action to address their issue of obtaining water services,

the Plaintiffs and communities impacted by the mortgage crisis have no

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redress. For this reason, on the grounds of fairness and public policy, in

addition to the fact that Settlement Funds are not General Funds,

Defendants’ actions were ultra vires when they appropriated Settlement

Funds for general budget purposes.

VI. The Defendants Have, In This Limited

Instance, Breached Their Fiduciary Duties

Under Delaware law, a Plaintiff can show a breach of fiduciary duty if

there exists (1) a fiduciary duty and (2) a breach of that duty. York Linings v.

Roach, 1999 WL 608850, at *2 (Ch. July 28th, 1999). Defendants contend

that they cannot commit a breach of their fiduciary duties because the State

and its officials have no fiduciary duty to the State’s citizens. In the

ordinary case, they would be correct.

Defendants recognize that in cases where there is a special trust,

fiduciary relationships can arise. According to Defendants, a fiduciary

relationship can arise “…where a special duty exists on the part of one

person to protect the interests of another” (DB - 37, citing Cheese Shop

International, Inc. v. Steele, 303 A.2d 689, 690 (Del. Ch. 1973)). As shown

in the Complaint, that is exactly what the Plaintiffs here are contending, ie.,

that the Attorney General created a fund for the benefit of impacted

communities and that in return for that fund, the Attorney General

relinquished the State’s right to sue on their behalf in the future. (Complaint,

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¶ 64) Stated another way, the Attorney General, on behalf of the State

exercised its parens patriae powers and created a trust on behalf of those it

was seeking to protect. This gives rise to a fiduciary duty on the part of the

Defendants.

Cases such as Heller v. Kiernan, 2002 Del. Ch. LEXIS 17 (Del. Ch.

Feb. 27, 2002) and Neumeister v. Herzog, 2007 Del. Ch. LEXIS 99 (Del.

Ch. July 12, 2007) do not require a different result. In Heller, the Chancery

Court declined to impose a constructive trust on a property purchased by a

real estate agent whose firm was showing properties, including the one

purchased by the agent to the plaintiff. In declining to impose a constructive

trust on the property purchased by the real estate agent, the Court held that:

“The relationship between a realtor and customer is not one that ordinarily

qualifies as a fiduciary relationship until an agent/principal relationship

arises. (Heller, at *10, emphasis added). In the case at bar, the Attorney

General’s actions in seeking and obtaining a fund to redress the wrongs

committed by Bank of America, created a trust relationship.

In contrast to Heller, the Court in Sannini v. Casscells, 401 A.2d 927,

928 (Del. 1979) did find a trust relationship and imposed a constructive trust

on property purchased by a real estate agent whose firm was representing a

client seeking to purchase the same property.

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The Neumeister decision, also cited by Defendants, is not to the

contrary. There, the Court merely refused to impose a trust based on its

factual findings regarding the intent of the parties and their credibility.

Implicit in all the decisions cited above is the assumption that, based on a

proper factual showing, the Court will find a fiduciary duty and will find that

the fiduciary owes a duty to the complaining party. Here, the facts as

already recited herein, support such a finding.

Defendants, relying upon Beyers v. Bd. of Educ., 2011 Del. Super.

LEXIS 1678, 17-18 (Del. Super. Ct. May 16, 2011) and McMahon v. New

Castle Associates, 532 A.2d 601, 605 (Del. Ch. 1987) contend, in essence,

that governments can not owe fiduciary duties to their constituencies. They

state that Beyer implicitly recognized their position when the Court there

declined to recognize a fiduciary duty between a school district and its

students.

The fallacy of Defendants’ argument is that in Beyers the Plaintiffs

attempted to elevate the failure of a governmental body to fulfill its ordinary

governmental duties into a breach of that body’s fiduciary duties. Holding

that the relationship between organizational entities such as school districts

and the thousands of students they serve was “…akin to the relationship of

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trust and vulnerability that any citizen has with the government.” The

Beyers Court declined to find a fiduciary relationship. (Id. at *18)

Similarly, in McMahon, the Plaintiff there sought to turn a simple

commercial relationship into one of trust. In declining to find that the

defendant was a fiduciary, the Court expressed its concern that, if it did so,

the scope of fiduciary relations would be wide open, extending to “…every

contractual undertaking. (Id. at 605)

Here, the Attorney General, on behalf of those communities and

persons within them who were impacted by the mortgage crisis negotiated a

fund to be used on their behalf. In exchange, Bank of America was given a

broad release by the State. The funds which resulted from the Settlement

Agreement and the special relationship created by that agreement, with

funds dedicated to impacted communities created the special trust

relationship which gives rise to the fiduciary duties of the Defendants.

Defendants’ final argument is that even if a fiduciary obligation

exists, Plaintiffs only redress is in the political arena. As shown above

however, this is not an ordinary political dispute where a taxpayer’s

complaint is only tenuously related to the acts complained of. Korn v. State,

2012 Del. Super. LEXIS 471, 6-7 (Del. Super. Ct. Sept. 28, 2012). Here,

there is a very real harm to impacted communities, some of the funds meant

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for them have already been misspent and the harm continues as long as the

State refuses to fulfill its obligations under the Settlement Agreement.

CONCLUSION

For the reasons stated herein, Defendants’ Motion for Judgment on

the Pleadings should be denied.

Dated: March 4, 2016 BIGGS & BATTAGLIA

/s/Robert D. Goldberg

Robert D. Goldberg (I.D. No. 631)

921 N. Orange Street

P.O. Box 1489

Wilmington, Delaware 19899

Telephone: (302) 655-9677

Attorneys for Plaintiffs