Commercial Division Rules that U.S. Treasury Secretary’s Access to a Company’s Detailed Financial Information in His Role as a Board Member Is Insufficient to Establish Liability for Fraud
Members of a company’s board who are also investors in the company often have access to detailed information about the company’s finances and its lending facilities. But what happens when an investor-board member could, through access to the company’s financial information, potentially determine that funds from a lending facility are not being used for the purpose that the company and its agents had previously represented that they would be used for? Is the investor-board member potentially liable for fraud merely on the basis of his access to or awareness of financial information about the company? Justice Charles E. Ramos’s recent decision in RKA Film Fin., LLC v. Kavanaugh, No. 652592/2015, 2017 BL 222658, 2017 N.Y. Misc. LEXIS 2459, 2017 NY Slip Op 50846(U) (Sup. Ct. June 27, 2017), suggests that the answer may be no. According to the Commercial Division, without personal involvement in the alleged fraud itself or a special duty to disclose to the plaintiff, an investor-board member is likely not liable for fraud to a plaintiff creditor.
In PMC Aviation 2012-1 LLC et al. v. Jet Midwest Group, LLC et al., No. 654047/2015, BL221447 (Sup. Ct. Jun. 21, 2017), Commercial Division Justice Shirley Kornreich denied a motion to dismiss a fraudulent inducement claim by an LLC member against its business partner. The court found that it could not find any “controlling, on-point authority” on the issue of reasonable reliance at issue in the case. The case relates to the scope of due-diligence obligations of LLC members when they rely upon the representations of business partners concerning the affairs of a jointly owned company.
Commercial Division Justice Eileen Bransten recently concluded that plaintiff bondholders lacked standing to bring fraud claims against the bond obligor and trustee after having sold their interests in the bonds. One William St. Capital Mgmt. L.P. v. U.S. Educ. Loan Tr. IV, LLC, No. 652274/2012, 2017 BL 1700030 (Sup. Ct. N.Y. Co. May 16, 2017), involved a group of investment firms that purchased $10 million in notes backed by government-guaranteed student loans from the U.S. Education Loan Trust IV (“ELT”). The notes were part of a larger $30 million package.
Justice Shirley Kornreich recently issued one of the few New York state court decisions that address the Computer Fraud and Abuse Act (“CFAA”). Spec Simple, Inc. v. Designer Pages Online LLC, No. 651860/2015, 2017 BL 160865 (N.Y. Sup. Ct. May 10, 2017). The CFAA criminalizes both accessing a computer without authorization and exceeding authorized access and thereby obtaining information from any protected computer. Id. at *3 (citing 18 U.S.C. § 1030(a)(2)(C)). The CFAA also provides a civil cause of action to any person who suffers damage or loss because of a violation of the CFAA. Id. at *4 (citing 18 U.S.C. § 1030(g)). As discussed below, the decision provides a helpful look into the interpretation of CFAA claims in the future.
Suppose you’ve entered into a financial arrangement that resembles a lending agreement, but it is not formally designated as such, and you think you’re paying too much. Do you (a) sue for misrepresentation, on the grounds that you thought you were entering into a lending agreement and not some other kind of an agreement, or (b) sue on the theory that the agreement is a lending agreement, but it is usurious and therefore unlawful?
Fraud and Fraudulent Conveyance Claims for $686 Million Allowed To Proceed Against Hedge Fund in Long-Running Dispute over Failed Securitization
On March 13, 2017, Justice Marcy Friedman of the New York Commercial Division denied a motion for summary judgment seeking to dismiss claims of fraud, breach of the covenant of good faith and fair dealing, and fraudulent conveyance brought against a hedge fund, Highland Capital Management, and related entities. The case, UBS Securities LLC v. Highland Capital Management, No. 6500097/09, 2017 BL 98450 (Sup. Ct. Mar. 13, 2017), is a long running dispute arising from a failed securitization of collateralized loan obligations (CLOs) and credit default swaps (CDS) that dates to the early days of the Great Recession. The denial of summary judgment means that the next step in this eight-year long saga will be a jury trial where $686 million in damages will be at stake.
Commercial Division Dismisses Claim Against Major Chinese Securities Firm Due to Lack of Personal Jurisdiction
In Lantau Holdings, Ltd. v. Orient Equal International Grp., No. 653920/2016, 2017 BL 77469 (Sup. Ct. Mar. 6, 2017), Judge Anil C. Singh of the New York County Commercial Division dismissed several claims by the plaintiff, Tarrytown-based lender Lantau Holdings, Ltd. (“Lantau”), against defendant Haitong International Securities Company Limited (“Haitong”), a member of the Haitong Group, one of China’s largest securities businesses.
Commercial Division Rejects Collateral Promise Argument as a Basis for a Fraudulent Inducement Claim
In a recent decision, Justice Anil Singh of the Commercial Division dismissed a counterclaim asserted by Visa against Wal-Mart for fraudulent inducement. According to Justice Singh, Visa’s allegations failed to satisfy the collateral promise rule as its fraud claim did not concern misrepresentations of present material fact that were collateral to the contract. Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., No. 652530/2016, 2017 BL 65006 (Sup. Ct. Feb. 27, 2017).
In a pair of recent decisions, Justices Shirley W. Kornreich and Lawrence K. Marks of the Commercial Division ruled that creditors could proceed on their fraudulent conveyance claims seeking reversal of asset transfers made by debtors under New York’s Debtor and Creditor Law (“DCL”). The decisions highlight two basic theories of fraudulent conveyance claims permitted by the DCL: intentional fraud claims, which require a showing that the debtor made the transfer with the intent defrauding its creditor, and constructive fraud claims, which do not require a showing of fraudulent intent.
In Norddeutsche Landesbank Girozentrale v. Tilton, No. 651695/15, 2017 BL 55790 (App Div, 1st Dep’t Feb. 23, 2017), a divided panel of the Appellate Division, First Department, affirmed a Commercial Division order that denied a motion to dismiss a $45 million fraud claim against Lynn Tilton, Patriarch Partners LLC (“Patriarch”), and two Patriarch affiliates, stemming from their management of two collateralized debt obligation (“CDO”) funds. Justices Richard T. Andrias and David B. Saxe dissented in part, opining that the majority should have dismissed the fraud claim as time-barred because the plaintiffs-investors were on notice of the alleged fraud more than two years before they filed suit.
Investor’s Relocation to New York after Structuring a Financing Deal in Hong Kong Does Not Provide a Basis for Suit Against Swiss Bank UBS in New York, Holds Commercial Division
In Ace Decade Holdings Ltd. v. UBS AG, No. 653316/2015, 2016 BL 413780 (N.Y. Sup. Ct. Dec. 7, 2016), Justice Eileen Bransten of the Commercial Division dismissed a $500 million fraud suit brought by an investment holding company incorporated in the British Virgin Islands, Ace Decade Holdings Ltd. (“Ace Decade”), against the Swiss Bank UBS AG for lack of personal jurisdiction and inconvenient forum. Justice Bransten found no basis to exercise jurisdiction over UBS for alleged fraud in connection with a financing deal negotiated in Hong Kong to purchase shares of a firm listed on the Hong Kong Stock Exchange. Justice Bransten further held that, even if the court could exercise jurisdiction over UBS, the causes of action lack a substantial nexus with New York and, thus, dismissal is also warranted based upon the doctrine of forum non conveniens.
Fraud Pleading Standard: Specificity Not Required to Plead Scienter of Corporate Defendants in Alleged Corporate Fraud Conspiracy
What facts must a fraud plaintiff plead, pursuant to the heightened pleading standard under CPLR § 3016(b), to cognizably allege scienter among corporate entity defendants in the context of an alleged multi-corporation fraud conspiracy?