IKB
International S.A. in Liquidation and IKB DEUTSCHE INDUSTRIEBANK AG,
Plaintiffs,
against
Morgan Stanley, et al.,
Defendants.
|
653964/2012
Counsel for Plaintiff: Mark S. Arisohn, Labaton Sucharow, 140 Broadway,
New York, NY 10005. Counsel for Defendants: James P. Rouhandeh, Davis Polk &
Wardwell LLP, 450 Lexington Avenue, New York, NY 10017
Marcy S. Friedman, J.
This fraud action arises out of the purchase by plaintiff IKB International S.A. in
Liquidation (IKB SA) of residential mortgage backed securities (RMBS), which were
securitized and sold by the Morgan Stanley defendants (Morgan Stanley). Defendants
move to dismiss the complaint, pursuant to CPLR 3211, on the grounds that it is barred
by the statute of limitations and fails to state a cause of action, and that plaintiffs lack
standing.
Standing
The allegations of the complaint regarding the assignment of plaintiffs' fraud claims
are as follows: IKB SA purchased the 25 certificates at issue between June 2005 and
April 2007, 22 directly from Morgan Stanley at the time of each securitization, and the
remaining three certificates on the secondary market. (Compl., & & 38, Table
1.) On November 20, 2008, IKB SA sold 23 of the certificates to plaintiff IKB Deutsche
Industriebank, AG (IKB AG), its parent company, and "realized the losses at issue in this
litigation." (Id., & 38.)[FN1]
On December 4, 2008, both IKB AG and IKB SA "expressly assigned all claims arising
from the purchase of the Certificates, including claims against the issuers, underwriters
and sellers of the [*2]Certificates," to Rio Debt Holdings
(Ireland) Limited (Rio), concurrently with IKB AG's sale of these certificates to Rio.
(Id.) Rio re-assigned all such claims to IKB AG, without transferring the related
certificates, on May 9, 2012. (Id.)
In moving to dismiss for lack of standing, defendants allege not that the complaint
fails to plead an assignment of fraud claims from Rio to IKB AG but, rather, that the
assignment is void as champertous. Morgan Stanley contends that the "intent and
purpose" of the assignment of the claims, without the certificates themselves, was to
bring suit, and that this purpose may be inferred from the timing of the assignment,
which took place on May 9, 2012, after Morgan Stanley, IKB AG, IKB SA, and Rio
entered into a tolling agreement on November 16, 2011, and seven days before the
tolling agreement expired on May 16, 2012. (Defendants' Memo. in Support at 12,
Rouhandeh Aff. Ex 30, 31.)
Section 489 (1) of the Judiciary Law provides that no corporation shall "take an
assignment of . . . any claim . . . with the intent and for the purpose of bringing an action
or proceeding thereon . . . ." This statute is a codification of the champerty doctrine
which "developed to prevent or curtail the commercialization of or trading in litigation."
(Trust for the Certificate
Holders of the Merrill Lynch Mtge. Invs., Inc. Mtge. Pass-Through Certificates, Series
1999-C1 v Love Funding Corp., 13 NY3d 190, 198-199 [2009] [Love
Funding].) As the Court of Appeals explained, "the prohibition of champerty has
always been limited in scope and largely directed toward preventing attorneys from filing
suit merely as a vehicle for obtaining costs" (id. at 199), although the prohibition
has been extended to claims against non-attorneys. (Id.) Moreover, it "does not
apply when the purpose of the assignment is the collection of a legitimate claim" but,
rather, bars "the purchase of claims with the intent and for the purpose of bringing an
action . . . where such claims would not be prosecuted if not stirred up . . . ." (Id.
at 201 [internal citations and quotation marks omitted].)
As the Court of Appeals also explained, in order for an assignment of rights to a
claim to be champertous, the purchaser's or assignee's "intent to sue on that claim must at
least have been the primary purpose for, if not the sole motivation behind, entering into
the transaction." (Bluebird Partners, L.P. v First Fidelity Bank, N.A., 94 NY2d
726, 736 [2000].) The Court emphasized that "the question of intent and purpose of the
purchaser or assignee of a claim is usually a factual one to be decided by the trier of
facts." (Id. at 738 [internal citations and quotation marks omitted].) Thus,
consistent with the limited scope of the champerty doctrine, the Court has been hesitant
to find that an action is champertous as a matter of law. (Id. at 735 [reversing
grant of motion to dismiss based on holding that developed record was needed to
determine primary purpose of acquisition of certificates, where there was some evidence
that purchaser acquired certificates in order to gain leverage in settlement of action
involving other tranches of related certificates]; see also Love Funding, 13 NY3d
at 195 [holding, in answer to a certified question from the US Court of Appeals, Second
Circuit, that an assignment of a claim is not champertous "if its purpose is to collect
damages, by means of a lawsuit, for losses on a debt instrument in which it holds a
preexisting proprietary interest"]; Fairchild Hiller Corp. v McDonnell Douglas
Corp., 28 NY2d 325, 330 [1971] [holding, on summary judgment motion, that
assignment was non-champertous where claim was acquired as "an incidental part of a
substantial commercial transaction" and not for the "sole and primary purpose of
bringing an action on the assignment"].)
Here, the acquisition of the claims shortly before the expiration of the tolling
agreement does not, without more, demonstrate that the claims were acquired for the
primary purpose of [*3]commencing litigation. The
acquisition of the claims without the certificates presents a more difficult question.
Morgan Stanley has not, however, shown on this record that IKB AG's primary or sole
purpose was not to enforce a legitimate claim, or that the claim was not acquired as part
of a larger transaction or for leverage in other disputes between the parties. (See generally SB Schwartz &
Co., Inc. v Levine, 82 AD3d 742 [2d Dept 2011].)[FN2]
Given that the "question of intent and purpose of the purchaser or assignee of a claim is a
factual one," (Bluebird Partners, 94 NY2d at 738), the record must be factually
developed as to IKB AG's intent. This intent cannot be determined without evidence as
to specific terms of the assignment, which has not been provided on the record, and the
business dealings between the parties, including other RMBS purchases. Morgan Stanley
must also address the relationship between IKB AG and Rio. Accordingly, Morgan
Stanley's motion to dismiss for lack of standing will be denied with respect to the fraud
claims brought by IKB AG as the assignee of Rio, which relate to 23 of the 25
certificates at issue.
Statute of Limitations
Under CPLR 202, New York's borrowing statute, where a non-resident sues on a
cause of action accruing outside New York, "the cause of action [must] be timely under
the limitation periods of both New York and the jurisdiction where the cause of action
accrued." (Global Fin. Corp. v Triarc Corp., 93 NY2d 525, 528 [1999].) The
parties disagree as to whether the cause of action accrued in Germany, and is therefore
subject to Germany's three year statute of limitations, or whether it accrued in
Luxembourg, which has a thirty year statute of limitations. In cases involving purely
economic loss, "the place of injury usually is where the plaintiff resides and sustains the
economic impact of the loss," which would typically be a corporation's place of
incorporation or principal place of business. (Global Fin. Corp., 93 NY2d at 529;
Portfolio Recovery Assocs.,
LLC v King, 14 NY3d 410, 416 [2010], rearg denied 15 NY3d 833.)
Although there is authority that a court "can properly consider all relevant factors in
determining where the loss is felt" (Lang v Paine, Webber, Jackson & Curtis,
Inc., 582 F Supp 1421, 1424-1426 [SD NY 1984]), this exception has been applied
only in extremely rare cases. (See Metropolitan Life Ins. Co. v Morgan Stanley
(2013 WL 3724938, * 7 [Sup Ct, NY County June 8, 2013] [and authorities cited
therein]; Global Fin Corp., 93 NY2d at 530 [summarizing Lang as
involving a "Canadian plaintiff [who] intentionally maintained separate financial base in
Massachusetts; under the circumstances, injury of losing Massachusetts funds was felt in
Massachusetts, not Canada"].)
Here, the complaint pleads that IKB SA, a commercial bank incorporated in
Luxembourg, purchased certificates in reliance on defendants' misrepresentations, and
suffered losses as a result. The complaint does not contain allegations about the price or
terms of the sale of the certificates from IKB SA to IKB AG, but specifically alleges that
the certificates had [*4]already declined in market value
at the time of the sale to IKB AG. (See Compl. & & 38, 260-261, 270.)
In claiming that the German statute of limitations is applicable, defendants argue that all
of IKB SA's "alleged losses flowed to its controlling parent" IKB AG, and were
sustained in Germany where it is incorporated, notwithstanding that IKB SA, its wholly
owned subsidiary, maintained its principal office in Luxembourg and purchased the
certificates there. (See Ds.' Memo. In Support at 6.)
In support of the motion, defendants claim that IKB AG and IKB SA were
"closely financially intertwined." (Ds.' Memo. in Support at 6; Memo. in Reply at 4-5.)
Defendants offer excerpts of IKB SA's Management Report for 2007/2008, which state
that IKB SA's "continued existence" depended on whether IKB AG could achieve
unsecured long-term refinancing; that its Annual Financial Statements were included in
the Consolidated Financial Statement of IKB AG; and that IKB AG made capital
increases to and submitted a "letter of comfort" for IKB SA. (Rouhandeh Aff., Ex. 3 at
20, 28.) On the reply, defendants submit excerpts from IKB AG's Annual Financial
Statements and Management Report for 2008/2009, referring to a � million
loss at IKB SA which "had an impact on the investment valuation of IKB SA."
(Rouhandeh Reply Aff., Ex. 2 at 28.)
The evidence that defendants produce for the first time on the reply, to
which plaintiffs had no opportunity to respond, is not properly considered by the court.
(See McDonald v Edelman
& Edelman, P.C., 118 AD3d 562 [1st Dept 2014].) Even if all of the
evidence were considered, however, it is not the type of evidence on which a motion to
dismiss may be based because — unlike, for example, an unambiguous contract
— it does not "conclusively establish[] a defense to the asserted claims as a matter
of law." (Leon v Martinez, 84 NY2d 83, 88 [1994].) The management reports or
financial statements are not self-explanatory. There is no discussion of the accounting
standards under which they were prepared, or the reporting obligations imposed on the
IKB AG and IKB SA by the laws of Germany and Luxembourg, respectively. Moreover,
defendants do not claim, let alone demonstrate, that IKB SA, although wholly owned by
IKB AG, was not a separate entity with its own losses.
Defendants also do not cite any authority for their contention that the losses
of this wholly owned subsidiary "flowed" to the parent and were therefore incurred by
the parent for statute of limitations purposes. Baena v Woori Bank (2006 WL
2935752 [SD NY Oct. 11, 2006] [Castel, J.]), the sole case on which defendants rely,
held that the Belgian parent's place of incorporation (which was also its principal place of
business) was the location of economic injury and therefore the place of accrual for
statute of limitations purposes. There, however, the parent used funds from its own
corporate treasury in Belgium to make the payments — namely, capital
contributions to the Korean subsidiary and earn-out payments in connection with the
acquisition of the subsidiary — which the parent claimed were its damages as a
result of a fraud aimed at the parent. Here, in contrast, the subsidiary made the payments
for the securities which resulted in the losses, claims for which were only later assigned
to the parent. Moreover, there is nothing in the record to establish the terms of the
assignment or that IKB SA did not sustain losses on the certificates prior to the
assignment.
Defendants accordingly fail on this record to establish as a matter of law that
the cause of action accrued in Germany. (See IKB Deutsche Industriebank AG v
Credit Suisse Secs. (USA) LLC, 2014 WL 859355, * 5-6 [Mar. 3, 2014]
[IKB] [this court's prior decision denying similar claim].) In view of this holding,
the court need not decide whether plaintiffs' claims are barred [*5]by the German statute of limitations.
Defendants also contend that claims related to four certificates (MSAC
2005-HE3 BI, MSAC 2005-WMC6 M4, ACCR 2005-3 M4 and M5), which were
purchased prior to November 16, 2005 and more than six years before the parties entered
into their tolling agreement, are untimely under New York law. (See Ds.' Memo.
in Support at 7.) These claims are barred by the two year discovery rule imposed by the
New York statute of limitations. (CPLR 213 [8].) On the authority and reasoning relied
on by this court in prior RMBS decisions, based on publicly available evidence,
including the downgrades of the certificates and bankruptcies of and litigation against
major originators of the underlying loans, plaintiffs could with reasonable diligence have
discovered the fraud prior to November 16, 2009, the date two years before entry into the
tolling agreement. (See Deutsche Zentral Genossenschaftsbank AG v Credit
Suisse, Index No., 650967/2013, Decision on the Record, May 1, 2014; Deutsche
Zentral-Genossenschaftsbank AG, New York Branch v Morgan Stanley, Index No.
654035/2012, Decision on the Record, June 10, 2014.)
Sufficiency of Pleadings
This court discussed the extensive legal authority on the sufficiency of
substantially similar pleadings in Allstate Ins. Co. v Credit Suisse Secs. (USA)
LLC, 2014 WL 432458 (Jan. 24, 2014) (Allstate), HSH Nordbank AG v
Barclays Bank PLC, 2014 WL 841289 (Mar. 3, 2014) (HSH Nordbank), and
IKB. The cases considered fraud claims based, as here, on representations as to
loan to value ratios and appraised values for the underlying loans, owner occupancy of
the mortgaged properties, loan originators' compliance with underwriting standards,
credit ratings, and assignment of the loans to the trusts. On the authority and reasoning
set forth in these cases, the court again holds that the allegations of the complaint
adequately plead actionable material misrepresentations that support the fraud cause of
action, but that the fraud cause of action should be dismissed to the extent based on
allegations regarding the transfer of notes and mortgages to the trusts. As further held in
the above decisions, the second cause of action for fraudulent concealment and the fourth
cause of action for negligent misrepresentation should also be dismissed.
Certificates Purchased on Secondary Market
Morgan Stanley also argues that plaintiffs' fraud claims are not maintainable
with respect to three certificates that IKB SA purchased on the secondary market,
because IKB SA did not receive an assignment of fraud claims from the original
purchasers of the certificates. (Ds.' Memo. In Support at 12.) In the alternative, Morgan
Stanley contends that IKB SA could not have reasonably relied on defendants' statements
made in the offering documents for each securitization, some 16 to 32 months prior to
the purchase. (Id. at 17, n 26.) In opposition, plaintiffs claim that these fraud
claims are not based on assignments but, rather, on reliance on defendants'
representations in the offering materials. (Ps.' Memo. In Opp. at 7 n 12.)
Defendants have not, however, cited any authority that purchasers in a
secondary market are barred as a matter of law from relying on offering materials. Under
these circumstances, the court adheres to its holding in prior RMBS decisions that the
pleadings are sufficient to withstand this motion to dismiss. As the court has observed in
previous RMBS cases, however, in light of the duty of a sophisticated plaintiff investor
to exercise due diligence, significant issues of fact and law exist as to the reasonableness
of plaintiffs' reliance on defendants' representations. (See HSH Nordbank, 2014
WL 841289 at * 20-21; Allstate, 2014 WL 432458 at * 12.)
The court has considered defendant's remaining contentions and finds them
to be without merit.
It is accordingly hereby ORDERED that the motion of defendants to dismiss
the complaint is granted to the following extent: The first cause of action for fraud and
the third cause of action for aiding and abetting fraud are dismissed in their entirety only
as to claims related to the four certificates purchased prior to November 16, 2005, and
with respect to all other certificates are dismissed only to the extent that they are based on
alleged misrepresentations regarding transfer of notes and mortgages to the trusts. The
second cause of action for fraudulent concealment and the fourth cause of action for
negligent misrepresentation are dismissed.
This constitutes the decision and order of the court.
Dated:New York, New York
October 28, 2014
___________________________
MARCY FRIEDMAN, J.S.C.
Footnotes
Footnote 1:IKB SA retains tort
claims against the issuers and underwriters of the two remaining certificates, ACCR
2004-3 (2M3) and NCHET 2005-C (M7). These tort claims were not transferred as a part
of IKB SA's sale of the two certificates, allegedly "at a substantial loss," to an
unidentified third party. (Id., n 4.)
Footnote 2:Defendants also fail to
address the separate body of law holding that where an assignment transfers title to a
claim, and not merely a power of attorney to prosecute the claim, the assignee has
standing to sue even if the assignment provides for remission of the proceeds obtained
upon collection of the claim to the assignor. (See Cortlandt Street Recovery Corp. v
Hellas Telecommunications, S.A.R.L., 2014 WL 4650231 [Supreme Court, NY
County, Sept. 16, 2014] [and authorities cited therein]; Sprint Communications Co.,
L.P. v APPC Services, Inc., 554 US 269, 285 [2008].)