Opinion
12238/09.
Decided on August 19, 2010.
Quinn Emanuel Urquardt Sullivan, LLP, Attorneys for Plaintiffs MBIA Insurance Corporation and LaCrosse Financial Products, LLC, By: Peter E. Calamari, Esq., Philippe Z. Selendy, Esq.
Delbello Donnellan Weingarten Wise Wiederkehr, LLP Attorneys for Plaintiffs MBIA Insurance Corporation and LaCrosse Financial Products, LLC By: Brian T. Belowich, Esq.
Attorneys for Defendants Royal Bank of Canada, RBC Capital Markets Corporation, and Royal Bank of Canada Europe Limited By: Scott S. Balber, Esq. David M. LeMay, Esq., Marc D. Ashley, Esq., Jonathan C. Cross, Esq., Emily Abrahams, Esq.
Bleakley Platt Schmidt, LLP Attorneys for Defendants Royal Bank of Canada, RBC Capital Markets Corporation, and Royal Bank of Canada Europe Limited By: William P. Harrington, Esq.
Defendants Royal Bank of Canada ("RBC"), RBC Capital Markets Corporation ("RBCCMC"), and Royal Bank of Canada Europe Limited ("RBC Europe") (collectively "Defendants") move to dismiss the Complaint pursuant to CPLR 3211(a)(1) and CPLR 3211(a)(7), and move to dismiss the Third Cause of Action pursuant to CPLR 3016. Plaintiffs MBIA Insurance Corporation ("MBIA") and LaCrosse Financial Products, LLC ("LaCrosse") (collectively "Plaintiffs") oppose the motion.
While Defendants' notice of motion does not limit dismissal pursuant to CPLR 3016(a) to any particular cause of action, it is apparent, based on the arguments set forth in Defendants' papers, that the only claim that Defendants are contending fails to meet the specificity requirements of CPLR 3016(b) is the Third Cause of Action for aiding and abetting fraud as interposed against Defendants RBCCMC and RBC Europe. It is claimed that "Plaintiffs have indiscriminately and improperly lumped' together allegations against RBCCMC and RBC Europe" (Dfts' Mem. of Law at 14).
FACTUAL BACKGROUND
MBIA is a highly sophisticated and experienced insurer. It insures, or did insure, billions of dollars worth of risk, including structured securities. It receives multi-millions of dollars in premiums for undertaking those risks. In particular, in the series of transactions at issue here, MBIA wrote credit default swap protection for RBC on a super-senior risk of pools of securities. RBC, and its related entities, are no tyros either, with RBC being one of North America's largest banks, with nearly a half billion dollars of assets, billions in market capitalization, and tens of thousands of employees.
As is well known, during the last decade of the 20th Century and continuing well into the mid-part of the first decade of the 21st Century, investment banks, commercial banks, insurance companies and rating agencies generally acted with some degree of irrational exuberance. Questionable assets, including new forms of derivative securities, were marketed and, in many instances, that marketing was made possible by the availability of insurance to mitigate the substantial risks involved in these transactions — risks which were perceived at the time as being more theoretical than real. But, starting a few years ago, the houses of sand collapsed, leading to the collapse of venerable financial institutions and economic dislocation that has had catastrophic impacts on millions of individuals and on both the national and world economies.
This action, like others brought by MBIA, involves claims that MBIA misunderstood the substantial risks it was insuring and which came to pass, a misunderstanding that MBIA claims was produced by fraud on the part of RBC and its affiliates. RBC and its entities rejoins that this action is nothing more than an effort by MBIA to cast back onto RBC the very risks that RBC paid MBIA to take. According to RBC, MBIA is trying to use the courts to avoid billions of dollars of contractual obligations that MBIA willingly assumed, its collective eyes wide open, only a few years ago, as part of its business of assuming large risks in exchange for large fees. MBIA protests that RBC was not without its own responsibilities, including the obligation to provide legitimate "high grade" collateral with a minimum credit rating and a minimum level of subordination protection. These matters are important because the amount of risk assumed, and the premium charged therefor, is dependent upon the quality of the collateral and the protections built into the structure of the deal. MBIA charges that RBC adversely selected deteriorating collateral which eviscerated the subordination and procured inflated credit ratings.
A.Procedural History
This action was initiated by the filing of a Summons with Notice on May 22, 2009.
At its essence, this case involves Plaintiffs' contention that Defendants misrepresented the quality of collateral that was underlying the parties' credit default swap contracts, which caused Plaintiffs to suffer losses in excess of $145 million.
Within a week of Plaintiffs' filing of the Summons with Notice, Defendants removed the action to the United States District Court, Southern District of New York, based on a claim of diversity of citizenship. Defendants argued that Plaintiffs' joinder of non-diverse Defendant RBCCMC was improper and done for the sole purpose of defeating diversity jurisdiction. Plaintiffs moved to remand the action to this Court and for an award of their attorneys' fees. The federal district court judge assigned to the action, Judge Kenneth M. Karas, in a well-reasoned, 33-page Opinion and Order dated December 30, 2009, granted remand but denied the request for attorneys' fees.
Plaintiffs then filed an Amended Summons and Complaint on January 21, 2010 with this Court. Defendants requested a Commercial Division Rule 24 pre-motion conference incident to their effort to seek dismissal of causes of action. The Court held the pre-motion conference on February 19, 2010 and set a briefing schedule. After Defendants filed their moving papers, the Court held another conference, on March 5, 2010, this one for the purpose of determining whether discovery should be stayed pending the determination of the motion to dismiss. Since it appeared that at least some aspects of the Complaint would likely survive the motion, which is now the case, the Court directed that the parties engage in paper discovery. But, because the precise parameters of the case would not be known until this motion was decided, the Court stayed all depositions pending this decision.
B. The Factual Allegations of the Complaint
Based on the allegations of the Complaint, which the Court must deem true for purposes of this motion, Plaintiff MBIA "is a monoline credit insurer and provides financial guaranty insurance and other forms of credit protection predominately on financial obligations that are newly issued and sold or otherwise sold and transferred in secondary markets. Monoline insurers provide insurance on banks against the risk of nonpayment of principal and/or interest by the issuer, or other defined loss" (Affirmation of Scott S. Balber, Esq., sworn to March 2, 2010 ["Balber Aff."], Ex. C ["Complaint"] at ¶ 7).
Plaintiff LaCrosse is a subsidiary of MBIA established "to act as counterparty for structured derivative products, primarily credit default swaps [ CDS']. MBIA Insurance, through financial guaranty policies, guarantees the obligations of LaCrosse under its credit default swaps" ( id. at ¶ 8). Defendant RBC is a chartered bank incorporated under the laws of Canada and "Royal Bank of Canada, London Branch is the counterparty to LaCrosse on [the contracts at issue in this litigation]" ( id. at ¶ 9).
Plaintiffs allege that RBC
originates residential loans. . . . services the loans, and securitizes them . . . through the creation of mortgage-backed securities' . . . [and] [t]hrough its mortgage origination, servicing, and securitization businesses, as well as through its investment banking and trading operations, RBC had access to representative loan-level performance data relevant to the hundreds of thousands of underlying loans and other collateral that made up the RMBS and CDO securities on RBC's balance sheet and trading book, including the securities referenced by the Logan CDOs (Complaint at ¶ 17).
Defendant RBCCMC is a wholly-owned subsidiary of RBC, is a broker-dealer and investment advisor registered with the SEC and a member of the Financial Industry Regulatory Authority, which does business under name RBC Capital Markets ( id. at ¶ 10). Defendant RBC Europe is also a wholly-owned subsidiary of RBC, also doing business under the name RBC Capital Markets ( id. at ¶ 11). RBC Capital Markets is "the group that conducted all of the international corporate and investment banking business'" of RBC (Complaint at ¶ 16). As noted in more detail herein, RBCCMC and RBC Europe are alleged to have been integrally involved in the transaction as they are alleged to have acted as the manager (RBCCMC), arranger (RBC Europe) and marketer (RBCCMC and RBC Europe) of the credit swap transactions (Complaint at ¶¶ 117-118).
According to the Complaint, LaCrosse and RBC entered into three credit default swap ("CDS") contracts involving collateralized debt obligations ("CDO") on September 26, 2005 — Logan CDO I, Ltd. ("Logan I"), May 4, 2006 — Logan CDO II, Ltd. ("Logan II") and July 5, 2007 — Logan CDO III, Ltd. ("Logan III") (Complaint at ¶ 18). As explained by Plaintiffs, "the Logan CDOs do not actually purchase or hold their underlying collateral but instead enter into swaps with RBC which specify reference pools of securities and receive returns (or suffer losses) as if they owned these securities" (Complaint at ¶ 19). Plaintiffs explicate a CDS as
a trade in which one party, the credit protection seller, agrees to assume the risk of loss or defined credit event for a "reference" asset (or pool of assets, as in the case of the Logan CDS) in exchange for a stream of premium payments from the other party — the protection buyer — during the period of the swap. The risk assumed by the protection seller depends directly upon the risk of loss of the reference assets. When, as here, the pool of reference assets is comprised of CDOs, [Residential Mortgage-Backed Securities] RMBS, and other structured finance products, the protection seller's risk — and hence the amount of premium charged under the swap — depends on the quality of the collateral and protections against loss built into the structure of the CDO. If the arranging bank (here, RBC) misrepresents the credit characteristics of the collateral by inflating its value and/or credit quality, the premiums charged will not adequately cover the risk of loss inherent in the credit default swap ( id. at ¶ 18).
It is undisputed, for the purposes of this motion, that each Logan CDS contract was documented by an ISDA Master Agreement, a Schedule, and a Confirmation. According to Plaintiffs, the Confirmation set out the negotiated terms of the swap, and to the extent there was any inconsistency with the ISDA Master Agreement, the Confirmation's terms would govern. RBC and MBIA also entered into Verification Agency Agreements with Deutsche Bank AG ("Deutsche Bank") (Balber Aff., Exs. I, N, S) whereby Deutsche Bank was responsible for issuing Verification Notices which verified the Credit Event Notices ("CE Notices") issued by RBC. LaCrosse was the credit protection seller with regard to Logan I, II and III and MBIA entered into three corresponding Financial Guaranty Insurance Policies ("Financial Guaranties") that provided financial guaranty insurance coverage to RBC in the event LaCrosse failed to pay its contractual obligations under the Logan CDS contracts when a qualifying event occurred (Complaint at ¶ 21).
According to Plaintiffs, MBIA's "payment obligations arise only to the extent conditions to payment under the swaps are satisfied" and "none of the waivers of defenses to payment in the policies limit MBIA's right to enforce the terms of the swaps" (Complaint at ¶ 21).
The signatories to the Logan CDS contracts are LaCrosse and RBC (Balber Aff., Exs. E, F, G, J, K, L, O, P, Q) and the signatories to the Financial Guaranties are MBIA and RBC (Balber Aff., Exs. H, M, R). Thus, neither RBCCMC nor RBC Europe were signatories to the contracts at issue in this litigation. Plaintiffs base their effort to implicate RBCCMC and RBC Europe in the underlying CDS contracts on these facts:
(1) RBCCMC and RBC Europe ( i.e., executives of RBC Capital Markets, the business named used by RBCCMC and RBC Europe) marketed the Logan Transactions to MBIA and negotiated the terms of the Logan CDS (Complaint at ¶¶ 25, 26);
Plaintiffs allege that Defendants sent e-mails through e-mail addresses associated with RBC Capital Markets (name@rbccm.com) and that these executives allegedly "prepared and delivered deal documents, Pitchbooks, collateral lists, modeling analyses, rating agency letters, and other marketing materials. . . ." (Complaint at ¶ 26).
(2) Their business name and logo "RBC Capital Markets," appear on each of the Pitchbooks' pages as well as on other key transaction documents, including the first page of the Logan I and II Confirmations and a January 18, 2006 marketing presentation for Logan II in which RBC represented that its structured financial products unit, RBC PF, would "purchase[] tranched protection on portfolio from Super Senior counterparty [i.e., MBIA] and Logan II." Representing that it was the true party in interest to the Logan CDS and intended to be bound to them, "RBCCMC stated on the first page of the Pitchbooks that RBC' (an acroynym defined there to include RBCCMC but not Royal Bank of Canada) reserved the right to take actions under the credit default swaps'. . . ." ( id. at ¶ 27).
According to Plaintiffs, the CE Notices confirmed the occurrence of a credit event through at least two publically available sources of information, one of which was a Trustee Report (the "Public Information Notice") (Complaint at ¶ 22).
"Under their swap contracts, the Logan CDOs, in exchange for premium payments by RBC, issue credit protection in the event the referenced assets on RBC's trading book (Reference Obligations' in the terminology of the Logan CDS) default or suffer a defined credit event. To the extent that the referenced securities perform well, the Logan CDOs are entitled to premium payments from RBC without having any payment obligations in return. However, in the event that the referenced securities default or suffer a defined credit event, then the Logan CDOs (and ultimately its investors) bear the risk of loss and owe payment to RBC" ( id. at ¶ 20).
Plaintiffs assert that each Logan CDS provided that the collateral must be "high grade" quality ( i.e., superior to investment grade) and that MBIA's exposure would attach only at "super-senior" "Participation Thresholds" ( i.e., at a risk level more remote than AAA) with structural subordination protection in the amounts of $200 million, $150 million, and $225 million, for Logan I, II and III, respectively ( id. at ¶¶ 31, 64). Plaintiffs claim that MBIA would be under no payment obligation until there were substantial defaults in the "high grade" collateral up to the defined Participation Threshold for each transaction ( id.). According to Plaintiffs, MBIA trusted RBC as a CDO arranger because in addition to the Logan I and Logan II transactions, MBIA and RBC had entered into "similarly structured CDS transactions written against the super senior risk in two high grade CDOs the 2001 Maple VII and 2002 Maple XVI CDOs arranged by RBC" ( id. at ¶ 29).
Plaintiffs claim that this requirement is found in, among other places: (1) the Logan II CDS which required that all securities in the reference pools as of the closing date and when later added to the collateral pools would be trading at a dollar price of a minimum of 98% par; (2) Annex 1 to the Logan I and II Confirmations which represented that the securities comprising the collateral pool referenced by each CDS would be high grade; (3) the Annexes which listed each of the securities and represented that each had credit quality sufficient to qualify for a rating of A-or above (Complaint at ¶ 32). Plaintiffs further contend that from time to time following the closing of the Logan I and II Transactions, RBC provided MBIA with updated Annexes "which confirmed the high grade' credit quality of each of the securities in the collateral pools" (id.).
Plaintiffs contend that, to induce them to enter into Logan III, Defendants misrepresented (1) that Logan III had the same high quality collateral and structural protections as Logan I and II, and (2) that RBC's positions were not declining and that Logan I and II retained par value despite the adverse market environment. The specific misrepresentations were: (1) that on a market-to-market basis, Logan I and II were worth nearly 100% of par value and had not deteriorated in credit quality (Complaint at ¶ 42); (2) that the overall credit quality of the collateral referenced by Logan III was high grade — a level even higher than investment grade ( id.); (3) that S P and Moody's had assigned AAA/Aaa ratings, respectively, to the Logan III CDS and those ratings reflected its true credit quality ( id.); (4) that MBIA's exposure would attach at a super-senior threshold and that the Participation Threshold amount of $225 million would exceed industry standards for AAA-rated securities ( id.); (5) that Logan III and its collateral were comparable to securities exhibiting extremely low defaults with low loss severity in the event of default ( id.); and (6) that MBIA's high subordination protection would only be eroded upon the occurrence of strictly defined credit events and upon the fulfillment of contractually mandated conditions precedent ( id.; see also Pltfs' Opp. Mem. at 5-6). It is Plaintiffs' position that the Logan's III's collateral's ratings of AAA/Aaa were grossly overstated based on Defendants' misrepresentations and nondisclosures of the deteriorating loan-level performance of Logan III's collateral pool knowing that the rating agencies did not analyze loan-level performance data (Complaint at ¶ 60). Plaintiffs thus contend that RBC knew that the ratings materially understated the risks of the Logan III CDS ( id. at ¶¶ 52-53, 60). Plaintiffs assert that RBC knew that these representations were material to MBIA's decision to assume the risk of credit events arising in the Logan III collateral pool and RBC and further knew that these representations were false (Complaint at ¶ 44).
These representations were allegedly made in the Logan III Pitchbook dated April 18, 2007 at 28-31 (Balber Aff., Ex. U). It is Plaintiffs' position that at the time these representations were made, the expected recovery value of the Logan II collateral was approximately 93% of par and the expected recovery value of the Logan I collateral was only 96.5% of par (Complaint at ¶ 48).
Plaintiffs point to page 5 of the Pitchbook for this alleged misrepresentation. It is Plaintiffs' position that at the time RBC made this representation as to the high grade quality of the collateral, the expected recovery value of the Logan III collateral was approximately 82% of par, which Plaintiffs contend rendered the collateral akin to a pool of junk-grade securities (Complaint at ¶ 50).
Plaintiffs assert that because of the embedded losses of the Logan III collateral at the time of the transaction "amount[ed] to at least 18% of its value (or approximately $270 million)," this embedded loss effectively wiped out the subordination threshold exposing MBIA to an immediate risk of loss — i.e., MBIA was left with none of the first-loss Participation Threshold protection it was promised and the risk profile of the Logan III CDS was fundamentally different than that which RBC represented (Complaint at ¶ 55).
Plaintiffs allege that sections 4 and 5 of the Confirmations to each Logan CDS
govern the process by which defaults or write downs of securities within the collateral pool (i.e. Credit Events) are brought to the attention of MBIA and then valued. Section 4, entitled "Conditions of Settlement," includes the terms under which CE Notices and other notices confirming the occurrence of credit events are to be issued. Section 4 provides that a CE Notice is to be accompanied by a Public Information Notice, which must include a Trustee Report. Section 4 also requires the issuance of a Verification Notice from Deutsche Bank. Section 5, entitled "Settlement Terms," sets forth the means by which defaulted Reference Obligations are valued and cash settlement amounts — effectively, loss — are determined. As each of the Confirmations provides, the satisfaction of the Conditions to Settlement and Settlement Terms are conditions precedent to any obligation to pay arising between MBIA and RBC (Complaint at ¶ 36).
The allegations supporting Plaintiffs' claims of fraud and negligent misrepresentation are, in essence, that RBC had superior knowledge and expertise regarding the collateral's value and performance ( id. at ¶ 31) and had exclusive access to representative loan-level performance data of the mortgages which were securitized ( id. at ¶ 37). Plaintiffs contend that at the time of the Logan III transaction (April 2007), "RBC knew that the increases in the rates of mortgage default and delinquencies had caused its CDO and RMBS positions (including those referenced in Logan I and II) to lose value and that those securities faced increasing risks of default well in excess of the historic rates of default implied by their credit ratings. RBC further knew that it was only a matter of time before the rating agencies took into account the problems in the underlying loans in their ratings of the securities on RBC's trading book and in the Logan Transactions" ( id.).
Plaintiffs allege that MBIA's reliance was justified, especially considering the industry standard due diligence MBIA performed prior to entering into Logan III, which involved:
(a) due diligence on the expertise and integrity of the arranger and collateral manager; (b) in-depth review of the characteristics of the reference collateral, including its sector distribution, vintage, and credit quality as represented by its ratings; and (c) cash-flow ratings-based modeling and stress testing of the CDO tranches and collateral (Complaint at ¶ 67).
Specifically, MBIA claims that it performed:(a) a portfolio analysis that focused on the sector distribution and credit ratings of the collateral; (b) a cash-flow analysis that took into account default rates of the collateral based on its credit ratings as well as the subordination structure of the deal as a whole; and (c) a through review of RBC as the collateral manager through interviews and background checks (id. at ¶ 73).
According to Plaintiffs, "it was not the industry standard for a credit protection provider at a super-senior' level to perform a complete loan-level, forensic revaluation of a complex CDO by assessing the hundreds of underlying securities and tens of thousands of loans that made up the collateral of a CDO (including inner CDOs) in order to verify the representations of the arranger" ( id. at ¶ 68). Moreover, MBIA "often lacked first-hand access to such data" ( id.) which made a first hand review overly time consuming and expensive. Plaintiffs further contend that "RBC knew that it was customary and reasonable for monoline insurers and other investors at the super-senior' levels of high grade deals to rely upon the truthfulness of the representations of arranging banks as to the credit quality of the CDOs' collateral" ( id. at ¶ 70).
For their breach of contract claims, Plaintiff contend that RBC and RBCCMC issued CE Notices and Public Information Notices (via e-mail from RBC employees using RBC Capital Markets e-mail addresses) that were in breach of the Logan CDSs. According to Plaintiffs, the conditions precedent to be satisfied "before losses on a Reference Obligation (referred to in the CDS as a Cash Settlement Determination) may be included in the aggregate Cash Settlement Determination for the purpose of determining whether MBIA's subordination protection is breached and payment under the swap is required" are:
(a) a defined Credit Event must have occurred; (b) RBC must fulfill the notification procedures set forth in the Conditions to Settlement; and (c) RBC must fulfill the valuation procedures set forth in the Settlement Terms ( id. at ¶ 76).
Plaintiffs contend that RBC failed to comply with the Conditions of Settlement based on
(a) RBC's failure to provide required information and reasonable detail in the CE Notices to support the determination that a Credit Event ha[d] occurred; (b) RBC's issuance of purported CE Notices falsely declaring credit events; (c) RBC's failure to issue valid Public Information Notices which included at least two qualifying sources of information, one of which must be a Trustee Report; and (d) RBC's failure to notify MBIA of Credit Events or notify MBIA of Credit Events in a timely manner (Complaint at ¶ 83).
Plaintiffs further allege that RBC failed to conduct proper dealer polling procedures following credit events, "including conducting valuations on contractually mandated dates to derive Final Prices" ( id. at ¶ 88).
As to the Verification Notices sent out by Deutche Bank, Plaintiffs contend that RBC failed to procure compliant Verification Notices based upon, inter alia, its failure to supply the information necessary for Deutsche Bank to carry out its duties. Plaintiffs further contend that because RBC paid Deutsche Bank for the duties it performed as Verification Agent, it acted as a rubber stamp to the CE Notices and improperly favored RBC and violated its obligations to verify and confirm the CE and Public Information Notices ( id. at ¶ 85). Plaintiffs allege that MBIA notified RBC and Deutsche Bank of the impropriety of the notices provided ( id. at ¶ 89).
C. The Specific Causes of Action
The First Cause of Action, interposed against all Defendants, asserts a claim of fraud in the inducement in the Logan III Transaction based on the above-referenced misrepresentations. Plaintiffs seek to rescind the Logan III CDS and seek as damages, inter alia, a return of all payments made under the Logan III CDS and Financial Guaranty. Plaintiffs also seek an award of punitive damages based on RBC's alleged willful, malicious and reckless conduct.
In their Second Cause of Action, interposed against all Defendants, Plaintiffs assert that RBC committed fraud by failing to disclose the above-referenced material facts, that RBC knew that MBIA was relying on the false information and the omitted material, that MBIA reasonably relied on the misrepresentations and on the absence of the facts omitted, and that, but for these misrepresentations and omissions, MBIA would not have entered into the transaction. Plaintiffs further allege that MBIA has been damaged as a result of entering into the contracts. Plaintiffs seek rescission and/or damages and punitive damages for RBC's alleged willful, malicious and reckless conduct.
Plaintiffs' Third Cause of Action for aiding and abetting a fraud is asserted against RBCCMC and RBC Europe and is based on the intentional and substantial assistance they allegedly provided RBC in the commission of the fraud through their arranging and managing each of the Logan CDOs, their negotiating and marketing of the Logan III Transaction ( e.g., the Pitchbook and other marketing materials), their access to loan level performance data and their service as broker-dealer of the collateral and CDO notes. Based on this assistance as well as the parent/subsidiary relationship with RBC and the overlap of personnel, Plaintiffs contend that RBCCMC and RBC Europe knew of the fraudulent statements and omissions. Plaintiffs contend that MBIA's damages were proximately caused by RBCCMC's and RBC Europe's substantial assistance (Complaint at ¶ 118). In addition to rescission and damages, Plaintiffs seek punitive damages based on Defendants' alleged intentional and reckless conduct.
Plaintiffs' Fourth Cause of Action for negligent misrepresentation is asserted against all Defendants and is based on RBC's making the following alleged misrepresentations that it knew or was negligent in not knowing were false, i.e., (1) the performance of the Logan I and II collateral; (2) the high grade quality of the Logan III collateral; (3) the creditworthiness of the Logan III collateral as AAA/Aaa quality; (4) the protection from loss that would be afforded MBIA based on the alleged subordination threshold of $225 million; (5) the past performance of securities of comparable quality to the Logan III; and (6) the strict conditions precedent for the presentation and settlement of Credit Events that would protect MBIA against loss. Further, Plaintiffs contend that based on RBC's superior knowledge, expertise, as well as the parties' long-standing relationship, "RBC knew that MBIA's entry into the Logan CDS was predicated on its trust and confidence in RBC's expertise and integrity" and RBC owed a duty to MBIA to "disclose material facts about Logan III on which the Logan III CDS was based" (Complaint at ¶ 125). Plaintiffs again assert MBIA's reliance and damage insofar as it would not have entered into the transaction but for RBC's negligent misrepresentations.
The Fifth Cause of Action is for breach of contract under the Logan III CDS contract and is asserted against all Defendants. Plaintiffs allege that Defendants RBCCMC and RBC Europe are liable as parties to Logan III contracts because during the course of its negotiations (as well as the negotiations of Logan I and II), they manifested their intent to be bound by its terms based on (1) the imprint of their business name and logo ( i.e., "RBC Capital Markets") on the Logan marketing materials, Pitchbooks, and deal documents including the Logan I and III Confirmations as well as the CE Notices and Public Information Notices; (2) RBCCMC's reservation in the Pitchbooks to take action under the Logan CDS; and (3) the delivery of the defective CE Notices, Public Information Notices and dealer polling notices by RBCCMC and RBC Europe employees (though signed by RBC) using RBC Capital Markets' e-mail addresses (Complaint at ¶ 130). Plaintiffs contend that despite MBIA's performance of all the material conditions, RBC breached the Logan III CDS by failing to deliver a high grade collateral meriting a minimum rating of A-and a Participation Threshold protection in the amount of $225 million and that these breaches constitute a material failure of consideration under the Logan III CDS. Plaintiffs seek rescission of the Logan III CDS and an award of damages to recover the payments made under the Logan III CDS and Financial Guaranty.
The Sixth Cause of Action also asserts a breach of contract with regard to all of the Logan CDS contracts and is asserted against all Defendants based on RBC's failure to follow the conditions precedent to Settlement and Settlement terms by issuing defective or false CE Notices and Public Information Notices, procuring defective Verification Notices, and proposing valuations obtained through procedures that failed to comply with the conditions precedent contained in the Confirmations. Plaintiffs rely on the same facts set forth in their Fifth Cause of Action for why RBCCMC and RBC Europe should be held liable for breach as parties to the Logan CDS contracts. Plaintiffs claim the failure to comply with these conditions precedent "results in the exclusion of the Reference Obligation that is the subject of the CE Notice, Public Information Notice, and Verification Notice from the aggregate Cash Settlement Determination and/or from a payment demand once the aggregate Cash Settlement Determination equals or exceeds the Participation Threshold" (Complaint at ¶ 140). Plaintiffs seek a declaration that: (1) the CE Notices, Public Information Notices and Verification Notices that RBC served to date are ineffective and cannot be cured; (2) none of the Reference Obligations referenced in the CE Notices satisfied the Conditions to Settlement and Settlement Terms in Sections 4 and 5 of the Confirmations; (3) none of the Reference Obligations that have been the subject of a CE Notice can be the subject of a Cash Settlement Determination under the Logan CDS; and (4) none of the Reference Obligations may be included in the calculation of the aggregate Cash Settlement Determination ( id. at ¶ 145). Alternatively, Plaintiffs seek an award of damages.
Plaintiffs' Seventh Cause of Action asserts a breach of the implied covenant of good faith and fair dealing as against all Defendants regarding all of the Logan CDS contracts. Plaintiffs contend that implied in each of the Logan CDS contracts is a covenant that the parties would deal with each other in good faith and not engage in conduct that would deprive the other of the benefits of these agreements and that Defendants breached it by: (1) knowingly selecting collateral that, as of the day of the closing, had the effect of destroying the high grade quality of the collateral and the subordination protection; and (2) in bad faith, persistently and willfully breaching the Conditions to Settlement and Settlement Terms so as to pierce the subordination thresholds and subject MBIA to payment demands at the earliest possible opportunity. Plaintiffs seek damages which include, at a minimum, all payments made under the Logan CDS and financial guaranties.
The Eighth Cause of Action is predicated upon promissory estoppel as against Defendants RBCCMC and RBC Europe based on the alleged misrepresentations they made in the Pitchbooks and other deal documents, as well as in telephone and face-to-face discussions as set forth above, that they knew or should have known were false and would induce action or forbearance on the part of MBIA. Further, that MBIA relied to its detriment on the false representations and promises made by entering into the Logan CDSs, which it would not have entered into had it known the true set of facts. Plaintiffs contend that "[e]quity and good conscience require that RBCCMC and RBC Europe be held liable for any injuries they have caused to MBIA by failing to fulfill the contractual promises they made in connection with Logan CDS, and that they be estopped from claiming an excuse for the failure to honor those promises" (Complaint at ¶ 156).
The Ninth Cause of Action seeks to enforce the terms of the Financial Guaranty Insurance polices that MBIA issued, which insures only defined Insured Amounts that the Obligor, LaCrosse, is obligated to pay to the Beneficiary RBC under each Logan CDS. It is Plaintiffs' position that because LaCrosse had no payment obligation, MBIA had no payment obligation. RBC seeks damages, which would include at a minimum, the amount of money it paid under the Financial Guaranty.
DEFENDANTS' MOTION TO DISMISS
A. The Parties' Contentions Regarding Defendants' Motion to Dismiss the Fifth (Breach of Logan III CDS Contract), Sixth (Breach of Logan I and II CDS Contracts), Seventh (Breach of the Implied Covenant of Good Faith and Fair Dealing) and Eighth (Promissory Estoppel) Causes of Action
1. The Claims as Asserted Against RBCCMC and RBC Europe
Defendants move to dismiss the Fifth, Sixth, and Seventh Causes of Action as against RBCCMC and RBC Europe on the grounds that they are not alleged to have signed and did not sign any of the contracts at issue and under English law (the law applicable to Plaintiffs' breach of contract claims) only parties to a contract may be liable for its breach. Defendants argue that Plaintiffs are misguided in their position that RBCCMC and RBC Europe are liable under the contracts based on the theory that such Defendants intended to be bound by them because (1) English law governs and there is no such theory recognized and (2) even if New York law applied, the cases upon which Plaintiffs rely involve a parent company's liability for its alter-ego, and not an affiliates' liability for its affiliated company. Defendants further point out that the Complaint does not contain any allegations for piercing the corporate veil of RBC, RBC Europe and RBCCMC on the grounds that they are alter egos of each other. Likewise, Defendants argue that since RBCCMC and RBC Europe were not parties to the contracts, there is also no basis for Plaintiffs' breach of the implied covenant of good faith and fair dealing and promissory estoppel claims. Further, Defendants argue that the promissory estoppel claim is deficient because Plaintiffs do not allege that RBCCMC and RBC Europe made any promises. Defendants say that it is uncontested that Plaintiffs signed controlling written contracts with RBC on the same subject matter and the existence of such contracts precludes any claim resting in a quasi contract theory. Defendants argue that the breach of implied covenant of good faith and fair dealing claim also fails because such a claim does not exist under English law.
In opposition, Plaintiffs contend that whether a non-party may be held liable under an agreement is not governed by the choice of law clause of the contracts (Pltfs' Opp. Mem. at 22, n. 18, citing Impulse Mktg. Group, Inc. v National Small Bus. Alliance, Inc., 2007 WL 1701813 [SD NY 2007]; Rondout Valley Cent. School Dist. v Coneco Corp., 339 F Supp 2d 425 [ND NY 2004]). Plaintiffs argue that English law only governs the contract claims, not Plaintiffs' quasi contract claim of promissory estoppel (Pltfs' Opp. Mem. at 25, n 21, citing Finance One Public Co. Ltd. v Lehman Bros. Special Fin., Inc., 414 F3d 325, 333 [2d Cir 2005], cert denied 548 US 904). With regard to the viability of the contract claims against RBCCMC and RBC Europe, Plaintiffs counter Defendants' arguments by stating that the legal principle that a parent may become liable for its subsidiary's contracts if it manifests an intent to be bound applies equally to the liability of an affiliate company (Pltfs' Opp. Mem. at 22, citing Loral Space Communications Holdings, Corp. v Rainbow DBS Holdings, Inc. 2007 WL 3236190 [Sup Ct NY County 2007], lv dismissed 48 AD3d 296 [1st Dept 2008], lv denied 10 NY3d 715; RUS, Inc. v Bay Indus., Inc., 2004 WL 1240578 [SD NY 2004], affd 128 Fed Appx 798 [2d Cir 2005]). To support their argument that RBCCMC and RBC Europe manifested their intent to be bound, Plaintiffs rely on the allegations that (1) RBC Capital Market's business name and logo appeared on the marketing materials (Pitchbook) and deal documents including the Logan I and III Confirmations, (2) RBC Capital Markets' employees' issuance of the CE Notices and dealer polling notices, and (3) RBCCMC's express reservation in the Logan pitchbooks of the right to take action under the Logan CDS.
Plaintiffs reiterate the roles that RBC Europe and RBCCMC played: RBCCMC acted as the collateral manager; RBC Europe acted as the arranger; and RBC Capital Markets, their companies' doing business name, was the entity that conducted the negotiations of the Logan CDS contracts. Further, in a footnote and without any citations to allegations in the Complaint, Plaintiffs argue that RBCCMC and RBC Europe may be liable for breach of contract in that they assumed the obligations under the contract (Pltfs' Opp. Mem. at 23, n. 19). With regard to the promissory estoppel claim, Plaintiffs assert that the Complaint at paragraph 153 alleges promises made by these Defendants and the existence of the CDS contract does not foreclose a promissory estoppel claim since Plaintiffs may plead contract and estoppel in the alternative, particularly where there is a question of whether the contract governs the subject matter at issue.
In reply, Defendants point out that Plaintiffs have not rebutted "the incontrovertible English law standard that only parties to a contract may be liable for its breach" (Dfts' Reply Mem. at 13) and, in any event, the cases cited by Plaintiffs for the proposition that a non-party affiliate may be liable for a breach of contract if it manifests an intent to be bound are factually distinguishable as they all either involved parent corporations being responsible for affiliates' contracts or piercing the corporate veil situations. Defendants respond that Plaintiffs' promissory estoppel claim fails because neither paragraph 153 nor any other paragraph in the Complaint contains allegations of clear and unambiguous promises being made by either RBCMMC or RBC Europe. In any event, say Defendants, precedent from the Appellate Division, Second Department requires the dismissal of the promissory estoppel claim as the "contract between [the signatory defendant] and plaintiff governing the subject matter of the plaintiff's claim also bars any quasi-contractual claims against [the] third-party nonsignatory'" (Dfts' Reply Mem. at 15, quoting Bellino Schwartz Padob Adv., Inc. v Solaris Mktg. Group, Inc., 222 AD2d 313 [1st Dept 1995]).
2. The Claims as Asserted Against RBC
The Fifth Cause of Action is against all Defendants under the Logan III CDS. Defendants move to dismiss this Cause of Action as against RBC because they claim "based on the face of the allegations in the Complaint . . . RBC fulfilled its contractual obligations under the Logan Contracts" (Dfts' Mem. of Law at 21-22) to include in the reference portfolio collateral securities with specified credit ratings (minimum A-) assigned by independent ratings agencies. Defendants claim that Plaintiffs thus admit in their Complaint that RBC met its contractual obligations and argue that RBC had no obligation to look behind the independent ratings to ascertain if they were legitimate. Thus, according to Defendants, Plaintiffs seek to impose extra-contractual obligations on RBC in the guise of a breach of contract claim. Similarly, Defendants contend that Plaintiffs' assertion that RBC did not deliver the Participation Threshold protection of $225 million in the collateral cannot support a breach of contract claim because there was no obligation to ensure that the market value of the underlying collateral remained static. Finally, as to the defective CE Notices, Defendants contend that Plaintiffs are seeking to impose an obligation on RBC that falls on a non-party to this action — Deutsche Bank — since as Verification Agent, Deutsche Bank was obligated to verify the contents of the CE Notice and Notice of Publicly Available Information including the determination that a credit event occurred and that Deutsche Bank's determination was binding on the parties absent manifest error.
While Defendants also seek dismissal of this cause of action as to the other Defendants, RBCCMC and RBC Europe, because there are other reasons, hereinafter stated, to dismiss the Complaint as to these two Defendants, the Court, for purposes of analysis of the parties' contentions with respect to the Fifth Cause of Action, will focus on the allegations as against RBC.
Defendants reiterate their argument that Plaintiffs' claim of breach of the implied covenant of good faith and fair dealing does not exist under English law and even if New York law applied, the claim must still be dismissed as duplicative of Plaintiffs' breach of contract claims.
In their opposition, Plaintiffs respond by detailing the many allegations found in their Complaint as predicates for their breach of contract claims, i.e., that Defendants failed to strictly satisfy conditions precedent to payment based on the defective CE Notices, Public Information Notices, their use of improper calculations to falsely declare Irreversible Loss Writedown Credit Events, and their failure to use the settlement procedures. Plaintiffs argue Defendants' use of Deutsche Bank's Verification Notices as a shield to Plaintiffs' breach of contract claims is misguided since under New York and English law, there is no verification exception to strict compliance with conditions precedent. And, Plaintiffs argue, "the validity of the verification is itself a condition precedent, and MBIA alleges that Deutsche Bank's verifications were not valid. . . . No verification can retroactively validate' RBC's invalid notices under English law. Nor can there be third-party verification' if the third party materially departs from its instructions . . . or, as RBC acknowledges . . . commits manifest error" (Pltfs' Opp. Mem. at 17).
Plaintiffs respond to Defendants' contention that they fulfilled the contractual requirements regarding the quality of the collateral by arguing that "RBC (1) adversely selected collateral with approximately $270 million of day-one embedded losses, (2) deliberately procured inflated credit ratings on collateral that did not meet the minimum requirements of high grade' credit quality, and (3) thereby deliberately eviscerated the promised subordination protection to the so-called super-senior risk in the Logan III transaction" (Pltfs' Opp. Mem. at 17). Plaintiffs cite to a number of relevant cases in support of their breach of contract claims ( see, e.g., MBIA Ins. Corp. v Merrill Lynch, Pierce, Fenner Smith, Inc., 2010 NY Slip Op 51027[U], 22 Misc 3d 1233[A] [Sup Ct NY County 2010] [hereinafter " Merrill"]; HSH Nordbank, AG v UBS AG and UBS Sec., LLC, 2008 WL 4819599 [Sup Ct NY County 2008] [" HSH Nordbank I"]). In HSH Nordbank I, Justice Lowe denied a motion to dismiss both a breach of contract claim and a breach of the implied covenant of good faith and fair dealing claim where defendant delivered collateral securities far below the represented credit quality at closing (Pltfs' Opp. Mem. at 18).
Alternatively, Plaintiffs argue that RBC's contention "raises an ambiguity in the Logan III CDS as to whether RBC's representations of high grade' A-credit quality could be satisfied by delivering collateral with inflated credit ratings. That issue is one for discovery, not dismissal" ( id.).
Plaintiffs contend that Defendants waived any right to assert the application of English Law to the claim of breach of the implied covenant of good faith and fair dealing by asserting a counterclaim for breach of the implied covenant of good faith and fair dealing in the federal action which was based on the same facts as its breach of contract counterclaim and by citing New York case law in their opposition to Plaintiffs' remand motion. Alternatively, Plaintiffs argue that under recent English authority, "the test . . . for implied terms is not a rigid one but depends on whether the implied term would spell out in express words what the instrument read against the relevant background, would reasonably be understood to mean'" (Pltfs' Opp. Mem. at 19, citing Attorney of Belize v Belize Telecon Ltd. 1 WLR 1988, ¶ 21).
Plaintiffs dispute that, under New York law, their breach of the implied covenant of good faith and fair dealing is duplicative of their contract claim. Rather, Plaintiffs argue that their claim is viable because they alleged that Defendants deprived them of the benefits of the contract and "whether the claims are redundant is a fact-intensive inquiry that is not the proper subject of a motion to dismiss" ( id.).
In reply, Defendants again assert that Plaintiffs are seeking to hold RBC liable for breaches of extra-contractual obligations ( i.e., that RBC had to verify Deutsche Bank's Verification Notices, which the parties agreed would be binding absent manifest error and that RBC had to warrant that the ratings supplied by the independent ratings organizations were accurate). Defendants contend that HSH Nordbank I is distinguishable since in that case, there was a provision in a side agreement that imposed a specific duty to oversee the quality of the assets whereas here, no such agreement exists (Dfts' Reply at 11-12 n. 9). Similarly, Defendants argue that the court's denial of a motion to dismiss in Merrill, supra, is inapposite because in that case, unlike here, there was "a purported promise by defendant to deliver notes "not merely nominally rated AAA[,] but ones exhibiting the credit quality of an AAA rating was supposed to represent'" ( id. at 12, n 10, quoting Merrill at * 10). According to Defendants, Plaintiffs' contention that "they did not receive the promised levels of subordination' protection fails where, as here, they have not shown where they were promised certain levels of subordination, or how [Defendants] failed to provide that protection'" ( id. at 12, quoting Merrill at 11).
Defendants cite to pages 47-68 of the Logan III CDS Confirmation and argue that there is "[n]othing in the detailed descriptions of the ratings methodologies employed by the ratings agencies [that] requires RBC to provide its own opinions regarding the ratings issued by the ratings agencies" (Dfts' Reply at 11).
Defendants point out that Plaintiffs have cited no authority for the proposition that by asserting a breach of implied covenant of good faith and fair dealing counterclaim and by citing to New York case law in their opposition to Plaintiffs' remand motion, RBC waived its right to argue that English law governs the implied covenant claims (Dfts' Reply Mem. at 12). Defendants argue that Plaintiffs' English law expert admits that there is no cause of action under English law for breach of an implied covenant of good faith and fair dealing ( see Affidavit of Tim Lord QC, sworn to March 24, 2010 at ["Lord Aff."] at ¶ 14). In addition, Defendants rely on admissions made by Plaintiffs' counsel, Mr. Selendy, in a recent law review article he wrote wherein he acknowledged that "under U.S. law, unlike in England, claims may be asserted for breach of the implied covenant of good faith and fair dealing'" (Dfts' Reply Mem. at 12-13, quoting P. Selendy, Risk Mispricing of Structured Products Under New York Law, 5 Capital Markets L.J., 30, 38 [2010] [hereinafter "Selendy"] [emphasis in original]).
B. The Parties' Contentions Regarding the Dismissal of the Ninth Cause of Action
Defendants argue that Plaintiffs' Ninth Cause of Action to enforce contractual rights is not cognizable, and to the extent it seeks a declaration that MBIA should not be held liable under the Financial Guaranty Insurance polices, it merely restates Plaintiffs' deficient contract claims. Plaintiffs provide no opposition to the dismissal of this cause of action, which Defendants point out in their reply.
C. The Parties' Contentions Regarding the Dismissal of the First (Affirmative Fraud), Second (Fraudulent Omission), Third (Aiding and Abetting Fraud) and Fourth Negligent Misrepresentation) Causes of Action
1. Plaintiffs' Affirmative Misrepresentations Claims
The crux of Defendants' arguments in support of the dismissal of Plaintiffs' fraud causes of action is that, given MBIA's level of sophistication in transactions of this nature (a level of sophistication evidenced on MBIA's 10-K filings with the SEC [Dfts' Mem. of Law at 3]) and the admissions it made in a presentation cited in the Complaint ( id. at 4), as well as the risk disclosures and disclaimers found in the contracts at issue ( id. at 7), "Plaintiffs' claim that they did not — and could not — understand the risks of these transactions is simply not believable" (Dfts' Mem. of Law at 1). Alternatively, Defendants argue that Plaintiffs' fraud claims fail because they are duplicative of Plaintiffs' breach of contract causes of action which are "subsumed by the terms of the detailed, comprehensive and extensively negotiated agreements between Plaintiffs and RBC" (Dfts' Mem. of Law at 2).
With regard to the disclosures and disclaimers that Defendants contend eviscerate Plaintiffs' claims, Defendants point to the following statements made in the marketing materials for the Logan III transaction that expressly disclosed the risks associated with CDOs and the economic trends that increased the likelihood of defaults in the underlying securities:
Credit risk is an important issue in asset-backed securities because of the significant credit risks inherent in the underlying collateral . . . [h]olders of RMBS bear various risks including credit, market, interest rate, structural and legal risks. As a result of these or other risks, such portfolio of RMBS Securities may experience increased losses . . . [m]arket interest rates have been increasing and accordingly . . . borrowers are . . . increasingly likely to default on their payment obligations (Balber Aff. Ex. T at 18-19 [emphasis added]).
Defendants also cite to two disclaimers which they contend show that the parties "explicitly represented that they each were relying on their own expertise and diligence in entering into a complex transaction, fully cognizant of the attendant risks" (Dfts' Mem. of Law at 7). Defendants argue that "[a]ny claim that Plaintiffs justifiably relied on statements made by the RBC Defendants is fatally undercut, as a matter of law, by the plain language of the disclaimers . . . [and] Plaintiffs were on full notice that they were required to do their own due diligence with respect to the risks of the transaction; could not rely on RBC with respect to the suitability of the deal; and were not assured of any particular financial results" ( id. at 8 [emphasis in original]).
The two disclaimers cited provide:
Non-Reliance. [Each party represents that it] is acting for its own account, and it has made its own independent decisions to enter into this Transaction and as to whether this Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into this Transaction. . . . (Balber Aff., Ex. Q at 21.)
Assessment and Understanding. [Each party represents that it] is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of this Transaction. It is also capable of assuming, and assumes, the risks of this Transaction . . . [LaCrosse] hereby represents and warrants to [RBC] that is has carefully read the "Risk Factor" section in the LOGAN CDO III pitchbook and is fully aware of the risk relating to the Reference Obligation Portfolio [and] the embedded leverage within the Transaction ( id. at 21-22.)
Defendants argue that even if these disclaimers do not render Plaintiffs' fraud claims fatally defective, "the transactional risks that Plaintiffs now claim were misrepresented were themselves plainly disclosed in the pitchbooks, Offering Memorandum, ISDA Master Agreement and Confirmation" (Dfts' Mem. of Law at 9).
Defendants also argue that Plaintiffs' fraud claims are legally insufficient as they are duplicative of their breach of contract claims. Defendants explain that Plaintiffs' fraud claims are based on six misrepresentations found in the Logan III Pitchbook, which, by Plaintiffs' own contention, were "memorialized" in the Logan III contracts (Dfts' Mem. of Law at 10, citing Complaint at ¶ 65). Thus, because Plaintiffs allege that the misrepresentations were incorporated by reference into the Logan III contract, these representations became contractual representations/warranties, and, if untrue, can only give rise to a breach of contract claim.
Defendants contend that the alleged misrepresentations regarding — (1) the high quality of the Logan III collateral; (2) the creditworthiness of the Logan III transaction based on the credit rating provided by the ratings agencies; and (3) the alleged $225 million Participation Threshold — are entirely duplicative of Plaintiffs' breach of contract claims regarding these same representations (Dfts' Mem. of Law at 11, citing Complaint at ¶¶ 131-34 [regarding collateral quality governed by contract]; Complaint at ¶ 133 [regarding failure to deliver collateral actually worthy of the A-rating]; Complaint at ¶ 132 [regarding the failure to deliver the $225 million in Participation Threshold protection]).
Defendants argue that "Plaintiffs' fifth alleged misrepresentation — that the RBC Defendants' representations about historic high grade' CDO and RMBS securities were false and did not apply to Logan III because the collateral's degradation had effectively lowered its credit quality to the point where it was no longer performing as a pool of high grade' securities which could support a AAA rating" (Complaint at ¶ 56) — is simply a restatement of Plaintiffs' second and third alleged misrepresentations ( i.e. that the RBC Defendants misrepresented the quality of the collateral in and the creditworthiness of Logan III), which Defendants claim they have already established are duplicative of the contract claims (Dfts' Mem. of Law at 12).
Defendants contend that Plaintiffs' sixth alleged misrepresentation — that "RBC knew that as part of its scheme to offload to MBIA the risks from its rapidly deteriorating portfolio, it would submit purported Credit Event Notices for non-qualifying events, and fail to satisfy the Conditions to Settlement and the represented valuation processes. . . .'" — i.e., that RBC did not intend to comply with the terms of Logan III — "is legally deficient because a mere misrepresentation of an intention to perform under the contract is insufficient to allege fraud'" (Dfts' Mem. of Law at 12, quoting Yenrab, Inc. v 794 Linden Realty, LLC , 68 AD3d 755 , 758 [2d Dept 2009]).
Defendants argue that the aiding and abetting claim against RBCCMC and RBC Europe should also be dismissed because: (1) Plaintiffs' fraud claims are legally deficient; (2) Plaintiffs have failed to allege actual knowledge of the fraud by RBCCMC and RBC Europe since a close business affiliation, without more, is insufficient and the remaining allegations concerning their active involvement in the negotiations merely constitute constructive knowledge; and (3) Plaintiffs have not alleged that RBCCMC or RBC Europe provided substantial assistance to RBC since all Plaintiffs allege is that they helped "conceal [RBC's] misrepresentations and omissions, and failed to correct them, thereby substantially assisting in carrying out the fraud'" (Dfts' Mem. of Law at 14, quoting Complaint at ¶ 118). These allegations fail, argue Defendants, because there is no duty to disclose unless there is a fiduciary relationship or other independent duty owed to Plaintiffs, which does not exist here ( id.). Defendants assert that the aiding and abetting a fraud cause of action must be dismissed as Plaintiffs have not sufficiently particularized the allegations against each Defendant individually ( id., n 4).
Plaintiffs' primary arguments in opposition are that: (1) the affirmative pre-closing misrepresentations alleged by Plaintiffs "were contained in documents collateral to the Logan III CDS, including the Logan III Pitchbook and rating agency letters, which were delivered to MBIA to induce its entry into the Logan III contract" (Pltfs' Opp. Mem. at 7 [emphasis in original]); (2) the "boilerplate" disclaimers do not negate as a matter of law Plaintiffs' ability to allege justifiable reliance to support their claim of fraud; and (3) the risk disclosures in the offering materials are likewise ineffective to bar Plaintiffs' fraud claims because MBIA is not complaining of events that occurred after the closing and, instead, is claiming that RBC knew its statements were false at the time it made the representations as to the present value of Logan I and II and the credit quality of Logan III.
Plaintiffs assert that "RBC fails to identify any specific disclaimers in the contract or offering documents regarding its misrepresentations as to: (1) the value and performance of Logan I and Logan II; (2) the credit quality of the Logan III collateral; (3) the credit quality of the Logan III CDS; or (4) the subordination protecting MBIA" (Pltfs' Opp. Mem. at 9). Plaintiffs further cite to cases involving disclaimers similar to the ones present here wherein they contend that the courts found the claims of fraud were not precluded by the disclaimers (Pltfs' Opp. Mem. at 8, citing Caiola v Citibank, N.A., NY, 295 F3d 312, 330 [2d Cir 2002]; Eternity Global Master Fund Ltd. v Morgan Guar. Trust Co. of NY, 2002 WL 31426310 [SD NY 2002]; HSH Nordbank AG v UBS AG and UBS Sec. LLC, Index No. 600562/08 [Sup Ct NY County September 28, 2009] [Justice Richard B. Lowe, III] [" HSH Nordbank II"]; M T Bank Corp. v Gemstone CDO VII, Ltd., 2009 NY Slip Op 50590[U], 23 Misc 3d 1105[A] [Sup Ct Erie County 2009], affd as modified 68 AD3d 1747 [4th Dept 2009]; Great Neck Car Care Center, Inc. v Artpat Auto Repair Corp., 107 AD2d 658 [2d Dept 1985], lv dismissed 65 NY2d 897).
Alternatively, Plaintiffs argue that even if the disclaimers were specific so as to track the substance of the alleged misrepresentations, the fraud claim would still survive since "the facts concerning the fraud were peculiarly within RBC's knowledge" (Pltfs' Opp. Mem. at 10, citing Complaint at ¶¶ 59-63 and DIMON Inc. v Folium, Inc., 48 F Supp 2d 359, 368 [SD NY 1999]). Plaintiffs contend that "peculiar knowledge' does not mean exclusive knowledge'; if the undisclosed information is that which theoretically might have been discovered, though only with extraordinary effort or great difficulty,' then reliance is justified" ( id. at 11 [citations omitted]). Plaintiffs assert that MBIA could not have reasonably acquired RBC's knowledge of the credit quality of the underlying collateral and MBIA's due diligence, which involved stress-testing, cash flow modeling, an assessment of the underlying securities, and an in-depth analysis of the expertise and integrity of RBC as arranger and collateral manager, met the industry standards and was therefore, reasonable.
Plaintiffs further argue that MBIA could not have reasonably acquired RBC's knowledge of the credit quality of the underlying collateral given that the due diligence MBIA performed which followed the industry practice did not reveal the misrepresentations regarding the quality of the collateral and the subordination protection (Pltfs' Opp. Mem. at 11-12).
Plaintiffs also assert that "justifiable reliance is generally not suitable for resolution on a motion to dismiss, and the allegations in the Complaint are more than sufficient to defeat the reliance-based arguments made by RBC" (Pltfs' Opp. Mem. at 12).
On June 30, 2010, Plaintiffs were authorized, under Commercial Division Rule 18, to submit a letter in reference to a recent decision of the New York Court of Appeals, DDJ Mgt., LLC v Rhone Group LLC ( 2010 WL 2516811 [2010]), which Plaintiffs contend is relevant to Defendants' argument that Plaintiffs have failed to sufficiently allege the element of justifiable reliance. The Court disagrees with Plaintiff that DDJ Mgt. is pertinent. The essence of Defendants' argument concerning the lack of justifiable reliance centers on the disclaimers found in this case. By contrast, no such disclaimers were involved in DDJ Mgt., LLC.
Plaintiffs also assert that, if this Court concludes that RBC Europe and RBCCMC are not parties to the contracts, then these Defendants "are precluded from defending against the fraud claims on the grounds of contractual disclaimers" (Pltfs' Opp. Mem. at 10, n 5).
In reply, Defendants rely on Justice Fried's recent decision in Merrill, for their argument that the disclaimers and risk disclosures found in this case were found by Justice Fried to bar MBIA's fraud and negligent misrepresentation claims. Defendants further distinguish Caiola, supra, and Eternity Global, supra, as involving general disclaimers whereas here, the disclaimers specifically stated that MBIA had reviewed the risk factors outlined in the Logan III Pitchbook, which had "warned [Plaintiffs] regarding the circumstances that led to increased defaults and lower recoveries within the mortgage portfolios that underpin Logan III, including that defaults on the Logan III collateral were increasing, would likely continue to increase, and that the recoveries in the event of default were declining, and that concerns regarding components of the Logan III collateral pool were particularly acute at this time'" (Dfts' Reply Mem. at 4, citing Pitchbook, Balber Aff., Ex. T at 19). Defendants further assert that the representations were not as to present facts and instead were statements regarding "expected' losses and recoveries, [which], by their nature, are forward-looking statements that concern future events" ( id. at 6). And, according to Defendants, the statement that the collateral supporting Logan III would be high grade is not a misrepresentation of present fact since the language is written in a future tense ( id.)
Defendants reiterate their arguments that the fraud claims are duplicative of the breach of contract claims as the representations were not collateral, and, instead, they were incorporated into the Logan III CDS contract by reference ( id.). Defendants argue that "ratings assigned by the nonparty ratings agencies are predictive statements of opinion — which cannot form the basis for a fraud here" (Dfts' Reply Mem. at 7, n. 4, citing N.J. Carpenters Vacation Fund v Royal Bank of Scotland Group, PLC, ___ F Supp 2d ____, 2010 WL 1172694 [SD NY 2010]). Defendants further distinguish two cases upon which Plaintiffs rely — MBIA Ins. Corp. v Countrywide Home Loans, Inc., 2009 NY Slip Op 31627[U], 2009 WL 2135167 [Sup Ct NY County 2009] and MBIA Ins. Co. v Residential Funding Co., LLC, 2009 NY Slip Op 52662 [U], 26 Misc 3d 1204[A] [Sup Ct NY County 2009]) — on the grounds that in those cases, "MBIA's fraud claims were based on allegations that those defendants provided to MBIA highly specific then-existing, i.e., not prospective, loan data" (Dfts' Reply Mem. at 8). And Defendants contend that Plaintiffs' fraud claims based on representations about Logan I and II are deficient because "Plaintiffs had detailed information regarding the collateral and were privy to regular reports regarding Logan I and II . . . [and] Plaintiffs cannot show reasonable reliance" ( id.).
Plaintiffs were authorized by this Court, pursuant to Commercial Division Rule 18, to submit a Supplemental Memorandum to address Justice Fried's Decision in Merrill. In it, Plaintiffs argue that because Defendants raise for the first time in their Reply that the disclaimer language of the Financial Guaranty likewise bars Plaintiffs' fraud claims, this Court should disregard the disclaimer language of the Financial Guaranty for the purposes of deciding this motion (Pltfs' Supp. Mem. at 2, n. 3). Plaintiffs further argue that Merrill decision supports their claims of breach of contract because Justice Fried found that MBIA and LaCrosse had stated a claim for breach of contract despite Defendants' contention that it delivered the requisite AAA rated collateral (Pltfs' Supp. Mem. at 1).
In addition to arguing that Merrill is distinguishable since it was dependent upon the disclaimer language found in the Financial Guaranty, which may not be considered here based on Defendants' failure to raise this argument in their initial moving papers, Plaintiffs further argue that Merrill is not controlling because it "is inconsistent with and fails to consider recent decisions recognizing that Plapinger ( Citibank, N.A. v Plapinger, 66 NY2d 90) is not a bar to a fraud in the inducement claim unless the disclaimers are sufficiently specific and address the substance of the alleged misrepresentation at issue" (Pltfs' Supp. Mem. at 2) (citation added).
Plaintiffs assert if this Court were to consider the disclaimer language of the Financial Guaranty, it nevertheless does not foreclose Plaintiffs from pursuing affirmative claims since it provides that "none of the general or specific waivers contained therein shall be construed to limit or otherwise affect MBIA's right to pursue recovery or claims (based on contractual or other legal rights) against any person" ( id., citing Ex. 20 at § 12). Plaintiffs assert that even if this Court finds that the disclaimers in this case are specific enough, Merrill is still distinguishable since Justice Fried did not consider the argument Plaintiffs make herein — whether Defendants' peculiar knowledge barred its reliance on the disclaimers as a defense to the tort claims. Plaintiffs reiterate that the disclaimers are of no use to RBCCMC and RBC Europe if this Court finds that they are not bound by the Logan III CDS contract. Finally, Plaintiffs contend that the "bespeaks caution' doctrine relied on by [Justice Fried] does not . . . insulate RBC from liability with regard to the false representations of fact alleged here" ( id. at 3).
2. Plaintiffs' Claims of Fraudulent Omission and Negligent Misrepresentation
Defendants assert that Plaintiffs' fraudulent omission and negligent misrepresentation claims fail as a matter of law because Plaintiffs cannot successfully plead a fiduciary relationship or RBC Defendants' superior knowledge of essential facts.
According to Defendants, the lack of a fiduciary relationship was expressed in the contracts wherein each side acknowledged and agreed that the other party was not acting as a fiduciary or advisor ( see Balber Aff., Ex. P at 9 ¶ 2[b][ii][4] and Ex. Q at 21 ¶ 11[c] [d]). Further, even without these disclaimers, Defendants argue that Plaintiffs have alleged nothing more than an arms-length relationship, which, by definition, is not fiduciary in nature.
With regard to Defendants' allegedly superior knowledge, Defendants contend that not only must the information be peculiarly solely within Defendants' knowledge, but also that the information was "such that [it] could not have been discovered by [plaintiff] through the exercise of ordinary intelligence' or by reasonable investigation" (Dfts' Mem. of Law at 16). Defendants point out that Plaintiffs admit that they could have obtained the information but chose not to do so because it would have been expensive and time consuming ( id.). Accordingly, Defendants contend that Plaintiffs may not rely on such misrepresentations through non-disclosure since they could have discovered the truth through due diligence.
Defendants argue that Plaintiffs' cause of action for negligent misrepresentation is defective because Plaintiffs have failed to allege a special relationship and reliance on a long-standing relationship of trust and confidence is insufficient.
In opposition, Plaintiffs contend that the allegations of the Complaint support three different bases for Plaintiffs' fraudulent omission and negligent misrepresentation claims: (1) RBC's misleading half-truths, (2) its unique and superior knowledge, and (3) the parties' relationship of trust and confidence based on their prior business dealings. Further, whether Defendant owed such a duty is ordinarily a question of fact not capable of resolution on a motion to dismiss.
In reply, Defendants reiterate the arms-length nature of this transaction and the lack of a special relationship ( e.g., the parties' disclaimed a fiduciary relationship so there can be no claim of negligent misrepresentation) (Dfts' Reply Mem. at 9). Defendants assert that Plaintiffs' half truth argument is not controlling since courts uniformly reject such a doctrine where "Plaintiffs were put on notice of potential risks . . . but do not allege that they made any inquiry" ( id. at 10). Defendants further distinguish the cases upon which Plaintiffs rely.
THE LEGAL STANDARDS ON A MOTION TO DISMISS
The legal standards to be applied in evaluating a motion to dismiss pursuant to CPLR 3211(a)(7) are well-settled. In determining whether a complaint is sufficient to withstand a motion to dismiss pursuant to CPLR 3211(a)(7), the sole criterion is whether the pleading states a cause of action ( Cooper v 620 Prop. Assoc., 242 AD2d 359 [2d Dept 1997], citing Weiss v Cuddy Feder, 200 AD2d 665 [2d Dept 1994]). If from the four corners of the complaint factual allegations are discerned which, taken together, manifest any cause of action cognizable at law, a motion to dismiss will fail ( 511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 152; Cooper, supra, 242 AD2d at 360). The court's function is to "accept . . . each and every allegation forwarded by the plaintiff without expressing any opinion as to the plaintiff's ability ultimately to establish the truth of these averments before the trier of the facts'" ( id., quoting 219 Broadway Corp. v Alexander's, Inc., 46 NY2d 506, 509). The pleading is to be liberally construed and the pleader afforded the benefit of every possible favorable inference ( 511 West 232nd Owners Corp., supra).
Where the plaintiff submits evidentiary material, the Court is required to determine whether the proponent of the pleading has a cause of action, not whether he or she has stated one ( Leon v Martinez, 84 NY2d 83; Simmons v Edelstein , 32 AD3d 464 [2d Dept 2006]; Hartman v Morganstern , 28 AD3d 423 [2d Dept 2006]; Meyer v Guinta, 262 AD2d 463 [2d Dept 1999]). On the other hand, a plaintiff may rest upon the matter asserted within the four corners of the complaint and need not make an evidentiary showing by submitting affidavits in support of the complaint. A plaintiff is at liberty to stand on the pleading alone and, if the allegations are sufficient to state all of the necessary elements of a cognizable cause of action, will not be penalized for not making an evidentiary showing in support of the complaint ( Kempf v Magida , 37 AD3d 763 [2d Dept 2007]; see also Rovello v Orofino Realty Co., 40 NY2d 633, 635-636).
Affidavits may be used to preserve inartfully pleaded, but potentially meritorious claims; however, absent conversion of the motion to a motion for summary judgment, affidavits are not to be examined in order to determine whether there is evidentiary support for the pleading ( Rovello, supra; Pace v Perk, 81 AD2d 444, 449-450 [2d Dept 1981]; see Kempf, supra; Tsimerman v Janoff , 40 AD3d 242 [1st Dept 2007]). Affidavits may be properly considered where they conclusively establish that the plaintiff has no cause of action ( Taylor v Pulvers, Pulvers, Thompson Kuttner, P.C. , 1 AD3d 128 [1st Dept 2003]; M L Provisions, Inc. v Dominick's Italian Delights, Inc., 141 AD2d 616 [2d Dept 1988]; Fields v Leeponis, 95 AD2d 822 [2d Dept 1983]).
Here, because Plaintiffs did not offer any evidentiary affidavits, the Court will treat Plaintiffs as having elected to stand on their pleading alone. However, Plaintiffs did produce documentary evidence to counter Defendants' motion to dismiss pursuant to CPLR 3211(a)(1).
To succeed on a motion to dismiss pursuant to CPLR 3211(a)(1) on the ground that a defense is founded on documentary evidence, the documentary evidence that forms the basis of the defense must be such that it resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff's claim ( AG Cap. Funding Partners, L.P. v State Street Bank and Trust Co. , 5 NY3d 582, 590-591; 511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 152; Held v Kaufman, 91 NY2d 425, 430-431; Leon v Martinez, 84 NY2d 83, 88; Fontanetta v Doe , 73 AD3d 78 [2d Dept 2010]); Cohen v Nassau Educators Fed. Credit Union , 37 AD3d 751 [2d Dept 2007]; Sheridan v Town of Orangetown , 21 AD3d 365 [2d Dept 2005]; Teitler v Max J. Pollack Sons, 288 AD2d 302 [2d Dept 2001]; Museum Trading Co. v Bantry, 281 AD2d 524 [2d Dept 2001]; Jaslow v Pep Boys — Manny, Moe Jack, 279 AD2d 611 [2d Dept 2001]; Brunot v Joe Eisenberger Co., 266 AD2d 421 [2d Dept 1999]). To qualify as "documentary," the evidence relied upon must be unambiguous and undeniable, such as judicial records and documents reflecting out-of-court transactions such as mortgages, deeds, and contracts. Letters, affidavits, notes, and deposition transcripts are generally not documentary ( Fontanetta v Doe, supra).
If the documentary evidence disproves an essential allegation of the complaint, dismissal is warranted even if the allegations, standing alone, could withstand a motion to dismiss for failure to state a cause of action ( Snyder v Voris, Martini Moore, LLC , 52 AD3d 811 [2d Dept 2008]; Peter F. Gaito Architecture, LLC v Simone Dev. Corp. , 46 AD3d 530 [2d Dept 2007]).
To the extent that Plaintiffs' claims turn on a contract, the actual provisions of the contract — rather than Plaintiffs' characterization of the terms in their pleading — are controlling ( see 805 Third Ave. Co. v M.W. Realty Assoc., 58 NY2d 447, 451; Marosu Realty Corp. v Community Preserv. Corp. , 26 AD3d 74, 82 [1st Dept 2005]). Therefore, "[w]here a written contract . . . unambiguously contradicts the allegations supporting the breach of contract, the contract itself constitutes the documentary evidence warranting the dismissal of the complaint under CPLR 3211(a)(1)" ( 159 Broadway NY Assocs. L.P. v Bodner , 14 AD3d 1 [1st Dept 2004]; see also Taussig v Clipper Group, L.P. , 13 AD3d 166 , 167 [1st Dept 2004], lv denied 4 NY3d 707 [on a CPLR 3211(a)(1) motion to dismiss, "[t]he interpretation of an unambiguous contract is a question of law for the court, and the provisions of a contract addressing the rights of the parties will prevail over the allegations in a complaint"]).
ENGLISH LAW CONTROLS THE VIABILITY OF PLAINTIFFS' CONTRACT CLAIMS
From the parties' submissions, it appears that the parties agree that English law governs the viability of Plaintiffs' claims of breach of contract as against RBC. The disagreement is whether the application of English law also extends to Plaintiffs' claim of breach of the implied covenant of good faith and fair dealing and to the viability of Plaintiffs' breach of contract claims against the non-signatories to the Logan CDS contracts, RBCCMC and RBC Europe.
It is undisputed that the parties contractually agreed that the Logan CDS contracts would "be governed by and construed in accordance with the laws of England" ( see, e.g., Balber Aff., Ex. P at Part 4). Choice of law clauses are accorded prima facie validity and are to be enforced absent a strong showing that the clause resulted from fraud or overreaching, that it is unreasonable or unfair, or that enforcement would contravene some strong public policy of the forum ( Hirschman v National Textbook Co., 184 AD2d 494,495 [2d Dept 1992]; DiRuocco v Flamingo Beach Hotel Casino, Inc., 163 AD2d 270, 271-272 [2d Dept 1990]; see also Hunt v Landers, 309 AD2d 900 [2d Dept 2003]). Thus, a New York Court will not enforce a choice of law provision only if: (1) the chosen state has no substantial relationship to the parties; or (2) application of the chosen state's law would be "contrary to a fundamental policy of a state with a materially greater interest" ( American Express Tr. Related Serv. Co. v Assih , 26 Misc 3d 1016 , 1025 [NY City Civ Ct 2009]).
Here, given that RBC was based in London, there is a substantial relationship to the chosen jurisdiction's law and the parties have not provided anything to suggest that the application of English law would violate any fundamental policy of this State.
Plaintiffs claim that Defendants waived the application of English law to their breach of the implied covenant of good faith and fair dealing claim because Defendants: (1) asserted a counterclaim for breach of the implied covenant of good faith and fair dealing against Plaintiff LaCrosse while the action was pending in federal court and, thus, acknowledged the legal viability of such a theory; and (2) briefed New York law in their opposition papers to Plaintiffs' motion to remand the federal court action.
The first prong to Plaintiffs' waiver argument — the pleading by Defendants of an implied covenant of good faith and fair dealing counterclaim — is readily disposed of. Causes of action (including counterclaims) and defenses may be pleaded alternatively and hypothetically (CPLR 3014). Since Plaintiffs asserted an implied covenant cause of action, Defendants can scarcely be faulted for asserting such a cause of action themselves, without waiver of their affirmative defense that Plaintiffs had failed to state a claim upon which relief could be granted. While in federal court, the action was subject to the Federal Rules of Civil Procedure and Defendants were confronted with the federal rule that makes counterclaims mandatoryif they arise out of the transaction or occurrence that is the subject matter of plaintiff's claim ( see FRCP 13[a]). While Defendants may have mightily believed that none of the parties could assert viable implied covenant claims, they could not know for certain whether the federal court would agree with them and, therefore, this Court cannot conclude that Defendants, being forced to assert a counterclaim or else forfeit it forever, intentionally waived their argument that English law applies and does not sanction implied covenant claims.
The second prong of Plaintiffs' waiver argument — that Defendants briefed New York law to the federal court — is a bit more involved. Even where there is a choice-of-law provision in the underlying contract, the parties to litigation may consent by their conduct to the law to be applied ( Walter E. Heller Co. v Video Innovations, Inc., 730 F2d 50, 52 [2d Cir 1984]; see also Martin v City of Cohoes, 37 NY2d 162, 165 ["parties to a civil litigation, in the absence of a strong countervailing public policy, may consent, formally or by their conduct, to the law to be applied"]). Thus, where the parties litigated the case in both the trial and appellate courts on the basis of the application of the law of a state different from the state named in the choice-of-law provision of the contract, the court may acquiesce in the parties' expectation that the case be decided on the basis of the law actually argued, rather than the law of the place named in the contract ( Cargill, Inc. v Charles Kowsky Resources, Inc., 949 F2d 51, 55 [2d Cir 1991]).
In reviewing Defendants' opposition memorandum to Plaintiffs' motion to remand to state court (Selendy Aff., Ex. 4), it is evident that Defendants argued that Plaintiffs' case against RBCCMC was limited to the four corners of the Summons, that Plaintiffs' case against RBCCMC was confined to a breach of contract claim, and that RBCCMC was not a party to the relevant contracts. It was in that context that Defendants cited to federal and New York state authority. In granting remand, Judge Karas applied "principles of New York contract law" in deciding that Defendants had failed to met their burden of showing "that there is no possibility that Plaintiffs can prevail in their contract claim against RBCCMC" (Selendy Aff., Ex. 6 at 29).
The issue before Judge Karas was simply a preliminary round in which the parties fought about whether the substance of their dispute would be decided in federal court or in state court. While Judge Karas did give some consideration to Plaintiffs' Proposed Complaint and other documents submitted (Selendy Aff., Ex. 6 at 23), Judge Karas specifically stated that the result would have been the same even if he had not done so ( id). Since that time, Plaintiffs' Complaint has ripened into an actual, filed document and the contours of Plaintiffs' claims have become better known. The Court cannot conclude that Defendants' failure to cite to English law during the preliminary jurisdictional skirmish gives rise to full intentional and knowing waiver of the application of English law as required by the relevant agreements. This is certainly not a case where the parties proceeded on a motion to dismiss and through discovery and on summary judgment and on trial on the basis that New York law applied and further argued New York law on appeal, as was the case in Cargill. Nor can it be said that Defendants, by arguing New York law and withholding any argument based on English law, procured a favorable result which should estop them from now arguing English law ( see Bono v Cucinella, 298 AD2d 483 [2d Dept 2002]).
It is not clear what these other documents were. While Judge Karas' decision refers to the Logan CDS contracts and to the Financial Guaranty Insurance Policies, it is not clear whether these documents were actually submitted to the Court, as distinguished from the characterizations of them provided in the Proposed Complaint or otherwise. It is simply unclear whether the potential applicability of English law was ever brought to Judge Karas' attention.
Additionally, Plaintiffs do not take their argument so far as to contend that Defendants waived the application of English law to the straight breach of contract claims. It would be quite anomalous, if not entirely confounding, to apply English law to the agreement that the parties made but yet apply New York law for determining the parties' obligations to use good faith in carrying out their English contract.
For these reasons, the Court holds that Defendants' litigation activities in federal court fall short of an intentional and knowing waiver of the application of English law in contravention of the parties' bargained-for choice-of-law provision. Accordingly, the Court finds that English law controls the viability of Plaintiffs' breach of the implied covenant of good faith and fair dealing claim.
With regard to which law governs the viability of Plaintiffs' claims of breach of contract against the non-signatories, the Court does not find the cases cited by Plaintiffs to be directly on point. Nevertheless, the Court need not resolve this issue because, as set forth below, regardless of whether New York or English law controls this issue, Plaintiffs' breach of contract claims against the non-signatories are not legally viable under either New York or English law.
PLAINTIFFS' CLAIMS FOR BREACH OF CONTRACT AGAINST NON-SIGNATORIES TO THE LOGAN CDSS — RBC AND RBCCMC
Plaintiffs argue that New York law applies in deciding whether non-signatories to the Logan CDS contracts — RBCCMC and RBC Europe — may be held liable for the alleged breaches based on their manifestation of their intent to be bound by the contract.
The elements of a claim for breach of contract are (1) the existence of a contract, (2) due performance of the contract by plaintiff, (3) breach of the contract by defendant, and (4) damages resulting from the breach ( JP Morgan Chase v J.H. Elec. of NY, Inc. , 69 AD3d 802 , 803 [2d Dept 2010]; Coastal Aviation, Inc. v Commander Aircraft Co., 937 F Supp 1051, 1060 [SD NY 1996], affd 108 F3d 1369 [2d Cir 1997]).
Because neither Plaintiffs' nor Defendants' experts on English law provided this Court with authority in England with respect to the elements of a breach of contract cause of action, the Court will assume, for the purposes of this Decision and Order, that there is no difference between New York and English law in this regard.
It is well settled, under New York law, that one who is not a party to an agreement cannot be bound by it ( Valisa Mfg., LLC v The 54 Group, Ltd., 2008 NY Slip Op 51017[U],19 Misc 3d 1136 [A] at *5 [Sup Ct Westchester County 2008] [Scheinkman, J.]). Thus, in New York, it is axiomatic that if a party is not a party to a contract, it cannot be sued for its breach unless there is a separate basis for the non-parties' liability such as piercing the corporate veil or Plaintiffs' theory of a manifestation of an intent to be bound ( Pacific Carlton Dev. Corp. v 752 Pacific, LLC , 62 AD3d 677 [2d Dept 2009]; HDR, Inc. v International Aircraft Parts, Inc., 257 AD2d 603 [2d Dept 1999]; National Survival Game of New York, Inc. v NSG of LI Corp., 169 AD2d 760 [2d Dept 1991]; see Affidavit of Marcus Smith, sworn to March 2, 2010 at ¶¶ 9-10, citing Smith, The Law of Assignment, 1st ed (2007), paras 4.01 to 4.02, 4.06; Tweddle v Atkinson (1861) 1 B S 393 at 398, 122 ER 762 at 764; Dunlop Penumatic Gyre Co Ltd v Selfridge Co Ltd AC 847 (HL) at 853). But these are New York, not English, principles.
When it is necessary to establish the law of a foreign country, the foreign law must be proved as a matter of fact ( Fitzpatrick v International Ry. Co., 252 NY 127, 138 [1929]). Defendants offer the affidavit of Marcus Smith, Q.C. who attests that, under English law, only the parties to a contract may be liable for its breach (Affidavit of Marcus Smith, dated March 2, 2010 ["Smith Aff."] at ¶¶ 9-11). Mr. Smith says that there are no exceptions to this rule, as there are in New York. In particular, according to Mr. Smith, English law does not recognize an exception predicated upon a non-party's manifestation of an intent to be bound. Plaintiff's expert, Mr. Lord, though disagreeing with certain aspects of Mr. Smith's opinion (principally relating to implication of terms in contracts and good faith in performance) does not take issue with Mr. Smith's opinion that only the parties to a contract may be held bound to it (Affidavit of Tim Lord, Q.C., sworn to March 24, 2010 ["Lord Aff."]). Accordingly, for purposes of this decision, the Court must accept that, under English law, there are no circumstances under which a non-party to a contract may be held liable for its breach and, therefore, if English law applies, there is no basis to hold RBCCMC and RBC Europe liable on the relevant contracts.
But, even if New York law controls this issue, the cases upon which Plaintiffs rely are readily distinguishable since all involved a parent company being responsible for a subsidiary's contract based on the parent company's involvement in the negotiations. Furthermore, in most of the cases, the subsidiary was a mere shell established for the purpose of entering into the contract ( see, e.g., Horsehead Indus., Inc. v Metallgesellschaft AG, 239 AD2d 171 [1st Dept 1997]; Matter of Sbarro Holding, Inc. v Yuan, 91 AD2d 613 [2d Dept 1982]; Loral Space Communications Holdings Corp. v Rainbow DBS Holdings, Inc., 2007 WL 3236190 [Sup Ct NY County 2007], lv dismissed 48 AD3d 296 [1st Dept 2008], lv denied 10 NY3d 715; Warnaco Inc. v VF Corp., 844 F Supp 940 [SD NY 1994]). There is no showing, or even an allegation, that RBCCMC and RBC Europe are alter egos of RBC or sham entities whose independent corporate existence must be pierced or disregarded. Moreover, Plaintiffs seem to be trying to use cases in which courts have looked through subsidiaries to get to parent corporations as a means for doing the reverse: looking through the parent, who is on the contract, to get to affiliates who are not.
Whether considered individually, or in their totality, Plaintiffs' assertions that: (1) the imprint of the RBCCMC and/or RBC Europe logo and business names imprinted on marketing materials; (2) RBCCMC's "reservation" in the Pitchbooks to the "right to take action" under the Logan CDS; and (3) the CE Notices and dealing polling notices issued to employees of "RBC Capital Markets", are simply insufficient to plead a breach of contract claim as against these non-parties ( see MBIA Ins. Corp. v Countrywide Home Loans, Inc., 2009 NY Slip Op 31527[U], 2009 WL 2135167 [Sup Ct NY County 2009]). While it is true that the Complaint alleges that: (1) RBC Europe was the arranger and RBCCMC was the collateral manager; (2) both RBC Europe and RBCCMC conduct business under the name RBC Capital Markets; and (3) RBC Capital markets executives "conducted the negotiations" of the contracts, this, too, falls short of showing that RBCCMC and/or RBC Europe intended to be bound by the contracts.
Furthermore, while Plaintiffs allude to the idea that RBCCMC and RBC Europe may also be liable because they assumed the obligations under the contracts, Plaintiffs' Complaint is bereft of any allegations supporting such an assumption.
Significant, too, is the fact that MBIA is a sophisticated insurer, well versed in the ways of the world. There are no allegations to the effect that MBIA was confused about the role of RBC's representatives — RBCCMC and RBC Europe — or that any misrepresentations were made about who these representatives worked for. The contract documents are complex, detailed legal instruments. No matter how convoluted or intricate the deal was, MBIA was, or should have been, well aware of who the other party to the contracts was. Indeed, MBIA utilized its own subsidiary, LaCrosse, as a counter-party in certain instances, indicating that MBIA, too, was careful to use a related entity for certain purposes. The Complaint simply fails to allege facts sufficient to allow MBIA to hold RBCCMC and RBC Europe liable as parties for the breach of contract claims.
Accordingly, Plaintiffs' contract claims (including the breach of the implied covenant of good faith and fair dealing claim) to the extent asserted against RBCCMC and RBC Europe shall be dismissed.
PLAINTIFFS' BREACH OF CONTRACT CLAIMS AS AGAINST RBC
In the Third and Fourth Causes of Action, Plaintiffs assert various breaches by RBC of the Logan III CDS contract (Third Cause of Action) and the Logan I and II CDS contracts (Fourth Cause of Action). Defendants' primary arguments for dismissal of these claims as against RBC are: (1) RBC fulfilled its obligations under the Logan CDS contracts because it delivered collateral with the requisite high quality and AAA/Aaa ratings; and (2) any failings in the presentment of the CE Notices were overcome by the verification by the independent Verification Agent — Deutsche Bank.
These same arguments were raised by Merrill Lynch in the recent decision by my Commercial Division colleague, Justice Bernard Fried, in Merrill, supra . In denying the motion to dismiss the breach of contract claims, Justice Fried remarked:
plaintiffs allege, among other things, that the various agreements, including especially the confirmations to the CDSs, indicated that plaintiffs were entering into a transaction in which Merrill Lynch would be delivering notes not merely "nominally" rated AAA (S P)/Aaa (Moody's) . . . but ones exhibiting the credit quality an AAA rating was supposed to represent . . . Plaintiffs maintain that, while rated AAA, the insured or wrapped notes in the CDOs were, in actuality, not of the quality an AAA rating should have indicated (that is, the rating was, essentially, bogus) amounting to a breach of contract. The confirmations (which are the only documents upon which plaintiffs provide as a basis for the alleged promise of AAA/Aaa ratings), only state that the notes would be rated "AAA(S P)/Aaa(Moody's)," which, apparently, they were. However, plaintiffs had a right to expect that the AAA ratings were backed by intelligence which could verify that the notes were actually of the "credit quality" an AAA rating implied. Plaintiffs may claim that the wrapped notes were not qualified to be AAA rated, as promised, regardless of the label they carried, as a claim for breach of contract ( Merrill, supra, 2010 NY Slip Op 51027[U] at * 6).
The Court does not agree with Defendants' effort to distinguish Merrill. According to Defendants, Merrill is different because the agreement in that case required that the defendant deliver notes not merely nominally rated AAA but ones exhibiting the credit quality of an AAA rating was supposed to represent. But Justice Fried specifically stated that the confirmations "only state that the notes would be rated AAA(S P)/Aaa(Moody's)." As Justice Fried found in Merrill, the Court finds that Plaintiffs' allegations concerning Defendants' provision of collateral that was not qualified to be AAA rated, as promised, sufficiently state a cause of action for breach of the Logan CDS contracts.
Moreover, there are additional allegations supporting Plaintiffs' breach of contract claims. First, Plaintiffs are alleging that the parties agreed that MBIA would only be liable to RBC for losses in the reference portfolio in excess of $225 million — the Participation Threshold Amount, which allegedly did not occur, based on the embedded losses in the collateral (Complaint at ¶¶ 131-133). The Court finds that these allegations sufficiently allege a claim of breach of contract ( Merrill;, supra; HSH Nordbank AG v UBS AG and UBS Sec. LLC, 2008 NY Slip Op 32952[U], 2008 WL 4819599 [Sup Ct NY County 2008]).
Plaintiffs are allege that RBC breached the conditions precedent to the presentment of the CE Notices. The Court does not agree with Defendants that Deutsche Bank's actions as Verification Agent vitiates Plaintiffs' breach of contract claims as a matter of law. As noted by Plaintiffs's expert, "if Deutsche Bank did not follow its instructions as verification agent or if there were manifest error, its verifications would not preclude LaCrosse from challenging RBC's notices" (Lord Aff. at ¶ 5[a]). Thus, the fact that Deutsche Bank was responsible for verifying these CE Notices did not relieve RBC of its obligations under the agreements and, in any event, Plaintiffs are alleging manifest error. Accordingly, as this is a motion to dismiss and all that is required is for the Court to determine if the Complaint states a cause of action — not that one actually exists — the Court finds the Complaint adequately alleges breaches of the Logan CDS contracts by the counterparty to those contracts, RBC, and the branch of Defendants' motion to dismiss the Fourth and Fifth Causes of Action as against RBC shall be denied.
PLAINTIFFS' CAUSES OF ACTION FOR FRAUD, FRAUDULENT CONCEALMENT, AND AIDING AND ABETTING A FRAUD
It is well settled that the essential elements of a fraud cause of action are: (1) the defendant made a material representation that was false; (2) the defendant knew the statement was false and made it with the intention of deceiving the plaintiff; (3) the plaintiff believed the representation to be true and justifiably acted in reliance on it, and was deceived; and (4) the plaintiff was damaged thereby ( Small v Lorillard Tobacco Co., Inc., 94 NY2d 43; 60A NY Jur 2d Fraud and Deceit § 232).
To allege a claim of fraudulent concealment, in addition to the elements for fraud, a party "must allege a duty to disclose material information . . . [which] must be based upon a special relationship between the parties" ( Albion Alliance Mezzanine Fund, L.P. v State Street Bank and Trust Co. , 8 Misc 3d 264, 269 [Sup Ct NY County 2003], affd 2 AD3d 162 [1st Dept 2003]) — i.e., that the other party "had a duty to disclose the disputed information" ( Spencer v Green , 42 AD3d 521 , 522 [2d Dept 2007]; Swersky v Dreyer and Traub, 219 AD2d 321 [1st Dept 1996]). This requirement may be met either by the party alleging that there existed a fiduciary relationship between the parties or that there was some other reason that the party had a duty to disclose the fact either because the defendant had special or superior knowledge not available to the other party or because the defendant has communicated a half truth or made a misleading partial disclosure ( Dembeck v 220 Cent. Park S., LLC , 33 AD3d 491 [1st Dept 2006]). Under the Special Facts doctrine, "a duty to disclose arises where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair'" ( Swersky, supra, 219 AD2d at 327 [citations omitted]; see also Barrett v Freifeld , 64 AD3d 736 [2d Dept 2009]). Thus, "where one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge,' there is a duty to disclose that information'" ( Stevenson Equip. Inc. v Chemig Constr. Corp., 170 AD2d 769, 771 [3d Dept 1991], affd 79 NY2d 989, quoting Aaron, Ferer Sons v Chase Manhattan Bank, Natl. Assn, 731 F2d 112, 123 [2d Cir 1984]). "[T]he doctrine requires satisfaction of a two-prong test: that the material fact was information peculiarly within the knowledge' of [Defendant], and that the information was not such that could have been discovered by [Plaintiff] through the exercise of ordinary intelligence'" ( Jana L. v West 129th Street Realty Corp. , 22 AD3d 274 , 278 [1st Dept 2005], quoting Black v Chittenden, 69 NY2d 665, 669, quoting Schumaker v Mather, 133 NY 590, 596 [1892]).
To plead a claim of aiding and abetting a fraud, a plaintiff must allege: "(1) the existence of a fraud; (2) a defendant's knowledge of the fraud; and (3) that the defendant provided substantial assistance to advance the fraud's commission" ( JP Morgan Chase Bank v Winnick, 406 F Supp 2d 247, 252 [SD NY 2005]). Allegations of mere inaction or silence are insufficient to sustain a claim for aiding and abetting unless the defendant owes an independent duty to the plaintiff ( Jebran v LaSalle Bus. Credit, LLC , 33 AD3d 424 , 424 [1st Dept 2006]; Sterling Natl. Bank v Ernst Young, LLP, 2005 NY Slip Op 51850[U], 9 Misc 3d 1129[A] [Sup Ct NY County 2005]). A claim of conscious disregard is insufficient to meet the high scienter necessary for a claim of aiding and abetting ( International Strategies Group, Ltd. v ABN AMRO Bank, N.V. , 49 AD3d 474, 475 [1st Dept 2008]; National Westminster Bank v Weksel, 124 AD2d 144, 149 [1st Dept 1987], lv denied 70 NY2d 604).
Defendants' primary arguments for dismissal of the fraud causes of action are: (1) Plaintiffs' claim of reasonable reliance is precluded as a matter of law as a result of the disclaimers and risk disclosures set forth in the Logan III CDS Contract and Financial Guaranty; and (2) they are duplicative of Plaintiffs' breach of contract claims. With regard to the fraudulent concealment and negligent misrepresentations claims, the crux of Defendants' arguments is that Defendants were neither in fiduciary relationship with Plaintiffs nor were they under a duty to disclose based on their superior knowledge of facts that could not have been readily obtained by Plaintiffs.
As an initial matter, the Court does not agree with Defendants that Plaintiffs' claims of fraud are simply breach of contract claims cloaked in fraud clothing. "A fraud claim does not lie where the only fraud alleged arises from the breach of a contract . . . A present intent to deceive must be alleged and a mere misrepresentation of an intention to perform under the contract is insufficient to allege fraud. Conversely, a misrepresentation of material fact that is collateral to the contract and serves as an inducement for the contract is sufficient to sustain a cause of action alleging fraud'" ( Selinger Enter., Inc. v Cassuto , 50 AD3d 766, 768 [2d Dept 2008], quoting WIT Holding Corp. v Klein, 282 AD2d 527 [2d Dept 2001]; see also The Hawthorne Group, LLC v RRE Ventures , 7 AD3d 320, 322-323 [1st Dept 2004]). "Where a fraud claim arises out of the same facts as plaintiff's breach of contract claim with the addition only of an allegation that defendant never intended to perform the precise promises spelled out in the contract between the parties, the fraud claim is redundant and plaintiff's sole remedy is for breach of contract" ( Sudul v Computer Outsourcing Serv., 868 F Supp 59, 62 [SD NY 1994]). However, "a representation of present fact, not of future intent, collateral to, but which was the inducement for the contract, [is] . . . neither duplicative of the [contract claim] nor barred by [a] general merger clause contained in the contract" ( Deerfield Communications Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954, 956). Thus, "if a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, the plaintiff has stated a claim for fraud even though the same circumstances give rise to the plaintiff's breach of contract claim . . . Unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract (though it may have induced the plaintiff to sign the contract) and therefore involves a separate breach of duty" ( First Bank of Am. v Motor Car Funding, Inc., 257 AD2d 287, 291-292 [1st Dept 1999]).
Here, while some of Plaintiffs' claims of misrepresentations are not misrepresentations of present facts and therefore, are indistinguishable from Plaintiffs' breach of contract claims — e.g., the claim that Defendants misrepresented that they would follow strict conditions precedent prior to presenting CE Notices — other misrepresentations are collateral, constituted misrepresentations of present facts and may form the basis for a fraud cause of action even though they also provide a basis for Plaintiffs' breach of contract claims. At a minimum, the allegations are sufficient to sustain the fraud claim for the purposes of this motion to dismiss ( see, e.g., M T Bank Corp. v Gemstone CDO VII, Ltd., 2009 NY Slip Op 50590[U], 23 Misc 3d 1105[A] [Sup Ct Erie County 2009], affd as modified 68 AD3d 1747 [4th Dept 2009]; HSH Nordbank II, supra; MBIA Ins. Corp. v Countrywide Home Loans, Inc., supra).
The Court rejects Defendants' attempts to cast the representations claimed by Plaintiffs as statements/promises of future actions rather than present facts. The representations concerning the quality of the collateral and its AAA credit rating were both as to the collateral's value at the closing and in the future. Further, the Court disagrees that the ratings were simply predictions and not actionable and agrees with Justice Curran's reasoning in M T Bank Corp., supra, wherein he held that the alleged misrepresentations concerning credit ratings were not statements of predictions or opinions and instead were "facts constituting the actual evaluation by reputable independent entities concerning the creditworthiness of the Notes. Plaintiff alleges that these ratings were false because the Defendants provided false information to the ratings agencies. The ratings by Moody's and S P are not just predictions of future valuation but a present analysis of current valuation" ( id. at 12).
As Justice Fried remarked in a recent relevant case:
the fraud cause of action survives here, because it is premised on allegations that [defendant] misrepresented various statistics and other existing facts about the underlying mortgage loans that [defendant] contributed to the mortgage loans polls . . . This cannot be characterized merely as an insincere promise of future performance. The alleged fraud is that [defendant] intentionally misrepresented material existing facts about the credit risks of the underlying mortgage loans so that they would appear to satisfy [defendant's] contractual representations and warranties, inducing [plaintiff] to issue the Policies. "[A] fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim" ( MBIA v Residential Funding Co., LLC, 2009 NY Slip Op 52662[U] at *4, 26 Misc 3d 1204[A] [Sup Ct NY County 2009], quoting First Bank of Am. v Motor Car Funding Inc., 257 AD2d 287, 292 [1st Dept 1999]).
Turning to the issue of whether the risk disclosures and disclaimers preclude Plaintiffs from being able to allege justifiable reliance as a matter of law, this defense only applies to the counterparty to the Logan CDS contracts, RBC. Because Defendants raised the issue of the disclaimer language found in the Financial Guaranty for the first time in their reply papers, the Court will not rely on this disclaimer language in determining whether the Plaintiffs' fraudulent inducement claim as against MBIA is barred thereby.
Thus, these disclaimers have no impact, for the purposes of this Decision and Order, on the sufficiency of the fraud allegations against the non-parties to the Logan CDS contracts, Defendants RBCCMC and RBC Europe (see Wittenberg v Robinov, 9 NY2d 261 [1961]; Troiano v Tuccio, 227 AD2d 467 [2d Dept 1996]).
A court should not consider an argument raised for the first time in a reply because the party opposing the motion will have had no opportunity to address the argument in its opposition. While Plaintiffs arguably had an opportunity to address the issue in their supplemental memorandum, given that they were under a page limitation and were further directed to limit their discussion to distinguishing the Merrill decision, the Court will not deem the supplemental memorandum as a sufficient opportunity to address the disclaimer language belatedly cited by Defendants. Because MBIA, as guarantor, is entitled to raise any defenses properly asserted by LaCrosse, and because the documents delivered to LaCrosse contained extensive specific disclaimers, it is not dispositive that the Court is not considering the disclaimer language found in the Financial Guaranty. In any event, because the Court is finding that Plaintiffs have sufficiently alleged that the information concerning these alleged misrepresentations/fraudulent concealments were particularly within Defendants' knowledge, even if the Court were to consider the specific disclaimer found in the Financial Guaranty in deciding this motion, the result would be no different.
The law is well settled that "[w]hile a general merger clause is ineffective to exclude parol evidence of fraud in the inducement, a specific disclaimer destroys the allegations in plaintiff's complaint that the agreement was executed in reliance upon these contrary oral [mis]representations'" ( Weiss v Shapolsky, 161 AD2d 707, 707 [2d Dept 1990], lv dismissed 76 NY2d 889, quoting Danann Realty Corp., supra, 5 NY2d at 320-321). The rationale for the rule is that a "person claiming to have been defrauded has by his own specific disclaimer of reliance upon oral representations himself [has] been guilty of deliberately misrepresenting [his] true intention" ( Citibank N.A. v Plapinger, 66 NY2d 90, 94, quoting Danann Realty Corp., supra, 5 NY2d at 323). In Danann, the New York Court of Appeals held that plaintiff's claim of fraud in the inducement could not stand because plaintiff had "in the plainest language announced and stipulated that it [was] not relying on any representations as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiff's complaint that the agreement was executed in reliance upon these contrary oral representations. . . ." ( Danann Realty Corp., supra, 5 NY2d at 320-321). In Plapinger, the New York Court of Appeals dismissed a claim of fraud in the inducement of a multimillion dollar personal guaranty negotiated by sophisticated business people, based on the disclaimer in the guaranty that provided it was absolute and unconditional and irrespective of any lack of validity of the Restated Loan Agreement or any other circumstance which might otherwise constitute a defense to the guaranty ( Plapinger, 66 NY2d at 95). The Second Circuit has explained Plapinger and distinguished the language in that guaranty on the ground that it waived defenses as to the guaranty's own validity — not simply to the underlying obligations ( Manufacturers Hanover Trust Co. v Yanakas, 7 F3d 310, 317 [2d Cir 1993]) and that is the case here.
"[W]here a party specifically disclaims reliance upon a representation in a contract, that party cannot, in a subsequent action for fraud, assert it was fraudulently induced to enter into the contract by the very representation it has disclaimed" ( Grumman Allied Indus., Inc. v Rohr Indus., Inc., 748 F2d 729, 734-735 [2d Cir 1984]). Cases since Plapinger and Danann have made clear that the disclaimer must show "a clear indication that the disclaiming party has knowingly disclaimed reliance on the specific representations that form the basis of the fraud claim" ( JP Morgan Chase Bank v Liberty Mut. Ins. Co., 189 F Supp 2d 24, 27 [SD NY 2002]). Thus, a "disclaimer is generally enforceable only if it tracks the substance of the alleged misrepresentation. . . .'" ( Caiola v Citibank, N.A., NY, 295 F3d 312, 330 [2d Cir 2002], quoting Grumman Allied Indus., Inc., supra, 748 F3d at 735). "In assessing the reasonableness of a plaintiff's alleged reliance, [a court] should consider the entire context of the transaction, including factors such as its complexity and magnitude, the sophistication of the parties, and the content of any agreements between them" ( Emergent Cap. Inv. Mgt., LLC v Stonepath Group, Inc., 343 F3d 189, 195 [2d Cir 2003]). Thus, the specificity requirement is somewhat relaxed for transactions involving sophisticated parties, but some level of specificity is still required ( Aetna Cas. Sur. Co. v Aniero Concrete Co., 404 F3d 566, 576 [2d Cir 2005]).
Based on a review of the numerous disclaimers found in the Logan III CDS contracts, as well as risk disclosures found in the Pitchbook, the Court finds that Plaintiffs' claims of fraudulent inducement would be barred absent some exception because the disclaimers vitiate Plaintiffs' ability to allege justifiable reliance ( see HSH Nordbank AG, supra; Merrill, supra). The risk disclosures and disclaimers found in Merrill are virtually indistinguishable from the risk disclosures and disclaimers found here. For example, in Merrill, the pitchbook provided that investors were required to conduct their own due diligence before entering into the transaction and specifically declared Merrill Lynch's lack of responsibility if plaintiffs fail to act accordingly. Likewise, here, the pitchbook provided that "Risk Factors . . . Each person contemplating making an investment in the Notes must make its own investigation and analysis of the creditworthiness of the issuer and the Reference Portfolio and its own determination of the suitability of any such investment . . . A prospective investor who is in any doubt whatsoever as to the risks involved in investing in the Notes should consult its own independent professional advisors" (Logan III Pitchook at 1, Balber Aff., Ex. T). And LaCrosse specifically stated in the Logan III contract that it had "carefully read the Risk Factor' section in the LOGAN CDO III pitchbook and is fully aware of the risk relating to the Reference Obligation Portfolio. . . ." thereby disclaiming any reliance on Defendants concerning the risks in the underlying collateral.
The Pitchbook also made disclosures as to the ratings of the notes by the ratings agencies (Logan III Pitchook, Balber Aff., Ex. T at 16) and specifically described risks involved with the collateral (i.e., asset backed securities and residential mortgage-backed securities) (id. at 18). It is clear that the risk disclosures themselves would not bar Plaintiffs' fraud claims since the judicial doctrine of "bespeaks caution," which provides that such disclosures in offering materials bars claims of fraud as to opinions, projections or predictions that fail to materialize, has no application to the material misrepresentations or omissions as to present facts which Plaintiffs allege Defendants "knew . . . were false when made" (Matter of Prudential Sec. Inc. Ltd. Partnerships Litig., 930 F Supp 68, 72 [SD NY 1996]).
In deciding the disclaimers and risk disclosures precluded MBIA's fraudulent inducement claim in Merrill, Justice Fried stated:
In the present case, the guarantees, and the CDSs they guaranteed, were the product of intensive negotiations among the parties, whose sophistication and business acumen and experience cannot be overstated. MBIA and LaCrosse specifically stated that they were able to evaluate the validity of the CDOs, and were specifically warned that the transaction was appropriate only for sophisticated investors capable of analyzing the risks, including the risk related to the type of collateral involved in the transaction.
In the guarantees, Schedule and confirmations, plaintiffs represented that, not only were they able to assess the integrity of the CDOs, but actually would evaluate the underlying collateral from which the CDOs originated. It is this very ground-level assessment that plaintiffs now say they were not responsible for, and could not be expected to do.
The plaintiffs represented to Merrill Lynch that they were aware of the need to, and were fully capable of, acquiring the knowledge sufficient to assess the worth of the overall transactions for themselves, including the nature of the collateral, and that they represented that they would do so. To allow them to now disavow their express and specific promise not to raise the affirmative defense of fraud would be to allow them to "condone [plaintiffs'] own fraud in deliberately misrepresenting [their] true intention' ( Danann Realty Corp v. Harris [ 5 NY2d 317, 323 (1959)]) when putting their signatures to their absolute and unconditional' guarantee." Citibank, N.A. v Plapinger, 66 NY2d at 95. As such, plaintiffs cannot now bring a claim for fraud in the inducement, fraud by omission, or negligent misrepresentation, all of which require a claim of reasonable reliance on representations plaintiffs expressly stated they were not relying on. LaCrosse, as signatory to the disclaimers in the Schedule and confirmations is likewise barred by language alerting LaCrosse to respond with care to transaction effected by documents (such as the pitch books and offering circulars) that "bespeak caution" about the very disclaimers LaCrosse would now disavow. . . . ( Merrill, supra, 2010 NY Slip Op 51027[U] at *5).
While Plaintiffs rely heavily on the Second Circuit's decision in Caiola, supra, Court finds the facts of that case distinguishable since plaintiff was claiming that defendant "had offered false assurances that after the Travelers merger the parties' existing trading relationship would not change and that [defendant] would continue to act as a delta hedging counterparty" and the general disclaimer that neither party was relying "on advice, statements or recommendation (whether written or oral) of the other party" was not specific enough to bar plaintiff's claim of detrimental reliance ( Caiola, 295 F3d at 330). Here, while there was a similar disclaimer in the Logan III CDS contracts, there were also many more detailed disclaimers and risk disclosures which fatally undercut Plaintiffs' ability to allege justifiable reliance.
For similar reasons, the Court finds Eternity Global Master Fund Ltd. v Morgan Guaranty Trust Co. of NY, 2002 WL 31426310 [SD NY 2002] inapposite. In that case, the fraudulent inducement was based on representations that plaintiff would have a liquid secondary market for the credit swaps and that defendant would provide plaintiff with a continuing flow and supply of secondary market pricing to offset plaintiff's risk of investment. Relying on Caiola, the court held that the merger clause and disclaimers in the ISDA to the effect that neither was relying on the advice of the other, that plaintiff was evaluating the transaction and was making its own decision to enter into the transaction and that defendant was not acting as a fiduciary or financial advisor, were not specific enough to bar plaintiff's allegations of justifiable reliance on the representations concerning a secondary market.
However, simply because the disclaimers were specific with regard to the risks inherent in the collateral does not necessarily bar Plaintiffs' fraud claims because Plaintiffs have raised the argument that "even where the parties have executed a specific disclaimer of reliance on a seller's representations, a purchaser may not be precluded from claiming reliance on any oral misrepresentations if the facts allegedly misrepresented are peculiarly within the seller's knowledge" ( Tahini Inv., Ltd. v Bobrowsky, 99 AD2d 489, 490 [2d Dept 1984]; see also HSH Nordbank II). The peculiar knowledge exception applies "not only where the facts allegedly misrepresented literally fall within the exclusive knowledge of the defendant, but also where the truth theoretically might have been discovered, though only with extraordinary effort or great difficulty" ( DIMON Inc., supra , Inc., 48 F Supp 2d at 368). In HSH Nordbank II, supra, Justice Lowe, decided a second motion to dismiss after he granted Plaintiff leave to file an amended complaint. In the second decision, he allowed the newly asserted claims of fraud to stand because
In DIMON, despite the purchaser's sophistication, the purchaser's access to the defendant's books and records, and the likelihood that an intensive review of those records would have revealed that which was discovered later, the Court declined to dismiss the fraud claim since the test was "whether it can now be said with certainty that plaintiff could prove no facts under this pleading that would permit a recovery" (DIMON, 48 F Supp 2d at 369).
[t]he difference between the first complaint and the second is [plaintiff's] reference to documents which it claims show present knowledge, specifically, an undisclosed economic motivation' (Amended Complaint, ¶ 52), that, at the time the closing was taking place, [defendant] intended the transaction to be other than a vehicle for [plaintiff's] gain. For example, the claim that while representing to [plaintiff] that the reference pool would hold assets which would realize steady, long-term gain, an "internal approval memorandum" dated January 23, 2002, shows that, rather than expecting to hold the assets long-term, [defendant] intended that "[t]he economic driver of the [NS-4] transaction is the below market purchase of credit default protection" . . . Unlike a mere intention not to perform a contractual obligation, this allegation professes to show that [defendant] had structured the deal from day one with only its own benefit in mind, with the intent to thwart [plaintiff's] expectation for a low-level, but reliable, risk investment ( HSH Nordbank II at 4, Balber Reply Aff., Ex. 4).
Justice Lowe found that these allegations, among others, were specific enough to show the defendant's intent to defy the contract predated its inception and that such allegations "may overcome even specific disclaimers in a contract if the allegations suggest that there was a present intent to commit fraud, as opposed to merely the existence of rights under the contract which might inure to the benefit of the defendant to an extent not anticipated by the plaintiff. A defendant may not invoke even specific disclaimer clauses in order to preclude evidence of . . . misrepresentations if the facts allegedly misrepresented are peculiarly within the [defendant's] knowledge. . . .'" ( id., quoting Yurish v Sportini, 123 AD2d 760, 761 [2d Dept 1986]).
Plaintiffs' allegations concerning RBC's access to crucial loan information, which Plaintiffs may been able to discover but only though extraordinary effort or great difficulty, are sufficient to bring Plaintiffs' complaint within the peculiar knowledge exception to a disclaimer bar, at least for purposes of a motion to dismiss. Under this exception, a duty to disclose arises where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair ( P.T. Bank Cent. Asia v ABN AMRO Bank, N.V., 301 AD2d 373, 378 [1st Dept 2003]; see also Swersky v Dreyer Traud, supra, 219 AD2d at 328-329). In this regard, Plaintiffs allegations that (1) "it was not the industry standard for a credit protection provider at a super-senior' level to perform a complete loan-level, forensic revaluation of a complex CDO by assessing the hundreds of underlying securities and tens of thousands of loans that made up the collateral of a CDO (including inner CDOs) in order to verify the representations of the arranger" (Complaint at ¶ 68) and (2) MBIA "often lacked first-hand access to such data" ( id.) which made a first hand review overly time consuming and expensive — more than adequately allege the peculiar knowledge exception to the disclaimer bar. While the evidence might ultimately demonstrate that the Defendants did not have any special knowledge upon which they relied or which Plaintiffs could not have ascertained by exercising reasonable diligence, "these are issues which are inappropriate to determine . . . as a matter of law based solely on the allegations of [the] complaint" ( P.T. Bank Cent. Asia, supra, 301 AD2d at 378; see also MBIA Ins. Corp. v Credit Suisse Sec. (USA), LLC, Sup Ct, NY County, July 30, 2010, Kornreich, J., Index No. 603751/09).
Based on the foregoing, the Court finds that Plaintiffs have sufficiently alleged their claims of fraud (both affirmative fraud and fraudulent concealment) as against all of the Defendants. The Court also concludes that Plaintiffs have sufficiently alleged a cause of action for aiding and abetting RBC's fraud as against Defendants RBCCMC and RBC Europe and that these allegations are sufficiently specific as to each Defendant to satisfy CPLR 3016(b). Plaintiffs have not simply alleged that RBC fraudulently concealed certain facts and that RBC Europe and RBCCMC simply stood back and failed to alert Plaintiffs to the true state of the collateral and the subordination protection. Rather, Plaintiffs have alleged RBC Europe's and RBCCMC's actual knowledge of fraudulent misrepresentations ( i.e., their knowledge of the losses that were occurring in the collateral and the consequent deterioration in the subordination protection, as well as their knowledge that the ratings did not accurately reflect the credit quality of the collateral) being made in the marketing materials and transaction documents and their substantial assistance through their active roles as manager, arranger and marketer of the Logan III transaction. Accordingly, the branch of Defendants' motion which seeks to dismiss the First, Second and Third Causes of Action shall be denied.
PLAINTIFFS' FOURTH CAUSE OF ACTION FOR NEGLIGENT MISREPRESENTATION
The elements for a claim of negligent misrepresentation are that "(1) the defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant made a false representation that he or she should have known was incorrect; (3) the information supplied in the representation was known by the defendant to be desired by the plaintiff for a serious purpose; (4) the plaintiff intended to rely and act upon it; and (5) the plaintiff reasonably relied on it to his or her detriment" ( Hydro Inv., Inc. v Trafalgar Power, Inc., 227 F3d 8, 20 [2d Cir 2000]; J.A.O. Acquisition Corp. v Stavitsky , 8 NY3d 144 , 148). "To establish liability for negligent misrepresentation arising out of a commercial transaction, a party must demonstrate that the person making the misrepresentation possessed specialized or unique experience, or the persons involved are in a special relationship of confidence and trust such that reliance on the negligent misrepresentation is justified" ( Salesian Socy., Inc. v Nutmeg Partners Ltd., 271 AD2d 671 [2d Dept 2000], citing Kimmell v Schaefer, 89 NY2d 257; see also Fresh Direct, LLC v Blue Martini Software, Inc., 7 AD3d 487 [2d Dept 2004]). The special relationship is limited to situations involving a "fiduciary relationship or a position of trust or confidence . . . [and] [c]ommercial parties acting at arms' length in negotiating a contract are not in a special relationship" ( Mitsubishi Power Sys. of Am., Inc. v Babcock Brown Infrastructure Group US, LLC, 2010 WL 303492 [Del Ch Ct 2010] [applying New York Law], citing H R Project Assoc. v City of Syracuse, 289 AD2d 967 [4th Dept 2001]; Fleet Bank v Pine Knoll Corp., 290 AD2d 792 [3d Dept 2002]; see also HSH Nordbank AG v UBS AG and UBS Sec. LLC, 2008 WL 4819599 at 5 [Sup Ct NY County 2008]).
Here, not only did the parties disclaim in the Logan CDS contracts that there was a fiduciary relationship between the parties, there is nothing to indicate that this was anything other than a commercial transaction between two sophisticated parties ( Conwill v Arthur Andersen LLP, 2006 NY Slip Op 51142[U], 12 Misc 3d 1171[A] at *11 [Sup Ct NY County 2006]). The fact that MBIA and RBC had prior dealings does not elevate this arms-length transaction into a relationship of trust and confidence. Further, "a party's unique or special expertise' alone is insufficient to create an issue of fact concerning the existence of a special relationship" ( M T Bank Corp. v Gemstone CDO VII, Ltd., 68 AD3d 1747, 1747 [4th Dept 2009].
Accordingly, Plaintiffs' Fourth Cause of Action for negligent misrepresentation shall be dismissed ( M T Bank Corp., supra; HSH Nordbank AG, 2008 WL 4819599 at * 5; MBIA Ins. Corp. v Countrywide Home Loans, Inc., 2009 NY Slip Op 31527[U], 2009 WL 2135167 at 15 [Sup Ct NY County 2009]; Eternity Global Master Fund Ltd. v Morgan Guar. Trust Co., 2002 WL 31426310 [SD NY 2002]).
PLAINTIFFS' SEVENTH CAUSE OF ACTION FOR BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
As discussed above, this Court has determined that English law governs the viability of Plaintiffs' claim for breach of the implied covenant of good faith and fair dealing. Based on the affidavits submitted by Plaintiffs' and Defendants' experts, as well as the Selendy Article, it is clear that English law does not recognize a claim of breach of an implied covenant of good faith and fair dealing. Since English law does not support a distinct cause of action for breach of an implied covenant of good faith and fair dealing, the Seventh Cause of Action fails.
In his affidavit, Plaintiffs' expert Mr. Lord, admits that "English law does not recognize any general doctrine of good faith' or a breach of covenant of good faith and fair dealing. . . ." and that English law "does not recognise a distinct cause of action for breach of the covenant of good faith and fair dealing . . ." (Lord Aff. at ¶¶ 14, 17).
However, it may be that, as part of its separate contract claim against RBC, Plaintiffs may be able to show, under English law, that RBC used bad faith in the performance of its contractual obligations (Lord Aff., ¶ 17).
Even if New York law applied, Plaintiffs' cause of action for breach of the implied covenant of good faith and fair dealing should still be dismissed as duplicative of Plaintiffs' breach of contract claim.
Under New York law, within every contract is an implied covenant of good faith and fair dealing ( 511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144; Dalton v Educational Testing Serv., 87 NY2d 384; Rowe v Great Atl. Pac. Tea Co., 46 NY2d 62; Aventine Inv. Mgt., Inc. v Canadian Imperial Bank of Commerce, 265 AD2d 513 [2d Dept 1999]; Components Direct, Inc. v European Am. Bank and Trust Co., 175 AD2d 227 [2d Dept 1991]; La Barte v Seneca Resources Corp., 285 AD2d 974 [4th Dept 2001]; Tapps of Nassau Supermarkets, Inc. v Linden Blvd., L.P., 269 AD2d 306 [1st Dept 2000]). The covenant is breached when a party acts in a manner that deprives the other party of the right to receive benefits under their agreement ( 511 West 232nd Owners Corp., supra; Aventine Inv. Mgt., Inc., supra). The covenant encompasses any promises which a reasonable person in the position of the promisee would be justified in understanding were included ( 511 West 232nd Owners Corp., supra).
In order to survive a motion to dismiss, the plaintiff must allege facts that tend to show that the defendant sought to prevent performance of the agreement or withhold its benefits from the plaintiff ( see Aventine Inv. Mgt. Inc., supra, 265 AD2d at 514; Jaffe v Paramount Communications, Inc., 222 AD2d 17 [1st Dept 1996]; Dvoskin v Prinz, 205 AD2d 661, 662 [2d Dept 1994]). A breach of the implied covenant of good faith claim can survive a motion to dismiss "only if it is based on allegations different than those underlying the accompanying breach of contract claim" ( Siradas v Chase Lincoln First Bank, N.A., 1999 WL 787658 at * 6 [SD NY 1999]). When the relief sought by the plaintiff in the claim for a breach of the implied covenant of good faith is "intrinsically tied to the damages allegedly resulting from [the] breach of contract," there is no separate and distinct wrong that would give rise to an independent claim ( see Canstar v J.A. Jones Constr. Co., 212 AD2d 452 [1st Dept 1995]; Casalino Interior Demolition Corp. v Custom Design Data, Inc., 235 AD2d 514 [2d Dept 1997], lv dismissed 89 NY2d 1085; Alter v Bogoricin, 1997 WL 691332 [SD NY 1997]).
As Defendants correctly point out, since the obligations alleged to have been breached are the obligations expressly provided for in the Logan CDS contracts, the breach of the implied covenant of good faith and fair dealing does not provide a separate cause of action from Plaintiffs' breach of contract claims and must be dismissed as duplicative ( see Deer Park Enter., LLC v Ail Sys., Inc. , 57 AD3d 711 [2d Dept 2008]; R.I. Island House, LLC v North Town Phase II Houses, Inc. , 51 AD3d 890 [2d Dept 2008]; Hall v EarthLink Network, Inc., 396 F3d 500 [2d Cir 2005]; Canstar, supra; Computech Intl., Inc. v Compaq Computer Corp., 2002 WL 31398933 [SD NY 2002]; MBIA Ins. Corp. v Credit Suisse Sec. (USA), LLC, Sup Ct, NY County, July 30, 2010, Kornreich, J., Index No. 603751/09). Here, not only is Plaintiffs' breach of the implied covenant of good faith and fair dealing premised on the same conduct that gives rise to their breach of contract claim, it is also "intrinsically tied to the damages resulting from" the alleged breach of contract ( The Hawthorne Group, LLC v RRE Ventures , 7 AD3d 320 [1st Dept 2004]; but see HSH Nordbank AG v UBS AG and UBS Sec. LLC, 2008 NY Slip Op 32952 [U], 2008 WL 4819599 at 6-7 [Sup Ct NY County 2008] [court upholds breach of implied covenant of good faith and fair dealing because "while UBS was authorized to maintain the Reference Pool, it was obligated to do so in a manner that did not destroy HSH's opportunity to realize the benefit of its bargain, to receive a steady stream of income from a well-functioning investment strategy. UBS could not, as a matter of good faith, deliberately act so as to defeat the purpose of the Reference Pool by manipulating it in its own interest"]; MBIA Ins. Corp. v Countrywide Home Loans, Inc., supra [same]).
Accordingly, Plaintiffs' Seventh Cause of Action shall be dismissed.
PLAINTIFFS' EIGHTH CAUSE OF ACTION FOR PROMISSORY ESTOPPEL
In their Eighth Cause of Action, Plaintiffs assert a claim of promissory estoppel as against Defendants RBCCMC and RBC Europe based on their having made misrepresentations in the Pitchbooks, deal documents, other correspondence and oral communications. The alleged misrepresentations regarding the Logan III transaction were the credit quality of the Logan II collateral as high grade, the credit quality of the collateral underlying Logan III as AAA/Aaa quality, that MBIA's risk was protected by the $225 Participation Threshold, and that there were strict conditions precedent to the presentation and settlement of credit events (Complaint at ¶ 153). The alleged misrepresentations as to the Logan I and II Transactions were that there were strict conditions precedent to the presentation and settlement of credit events (Complaint at ¶ 154). Plaintiffs claim that as a direct and proximate result of RBCCMC's and RBC Europe's failure to honor their promises and representations, "MBIA has been injured . . . [and] equity and good conscience require that RBCCMC and RBC Europe be held liable for any injuries they have caused to MBIA by failing to fulfill the contractual promises they made in connection with the Logan CDS, and that they be estopped from claiming an excuse for the failure to honor those promises" ( id. at ¶ 156).
The Court agrees with Defendants that Plaintiffs have failed to allege a clear and unambiguous promise being made by RBCCMC and RBC Europe that caused Plaintiffs to detrimentally rely since all of the contractual promises came from the counterparty to the contract, RBC. Moreover, the existence of a contract claim as against RBC precludes the assertion of a quasi contract claim as to non-parties RBCCMC and RBC Europe.
It is well settled that the existence of a valid and enforceable written contract governing a particular subject matter precludes quasi contract recovery on events arising out of the same subject matter ( Clark-Fitzpatrick, Inc. v Long Island R.R. Co., 70 NY2d 382, 388). Thus, it is only in cases where there is a bona fide dispute as to the existence of a contract that plaintiff may plead alternative theories of recovery (contract and quasi contract) ( see Hochman v LaRea , 14 AD3d 653 [2d Dept 2005]; Zuccarini v Ziff-Davis Media, Inc., 306 AD2d 404 [2d Dept 2003]). And this principle applies to bar quasi contract claims not only against parties to a contract, but also as against non-parties to a contract as well ( see Feigen v Advance Cap. Mgt. Corp., 150 AD2d 281, 283 [1st Dept 1989], lv dismissed in part, denied in part, 74 NY2d 874; Bellino Schwartz Padob Adv., Inc. v Solaris Mktg. Group, Inc., 222 AD2d 313 [1st Dept 1995]; Paragon Leasing, Inc. v Mezei , 8 AD3d 54 [1st Dept 2004]; Spectacolor Media v Ebony Media, 2007 NY Slip Op 31523[U], 2007 WL 2175873 [Sup Ct NY County 2007]; A V 425 LLC Contr. Co. v RFD 55th Street LLC, 15 Misc 3d 196 [Sup Ct NY County 2007]; Micro Bio-Medics, Inc. v Westchester Med. Ctr., 2004 NY Slip Op 51710[U], 6 Misc 3d 1003[A] [Sup Ct Westchester County 2004]).
Plaintiffs' reliance on Seiden Assoc., Inc. v ANC Holdings, Inc. ( 754 F Supp 37 [SD NY 1991]) is misplaced as the rule pronounced in that case — i.e., that the existence of a written contract governing the same subject matter did not preclude quasi contract recovery from non-parties — "has fallen out of favor in New York Courts" and the weight of authority in this area is that "a quasi-contractual claim against a third party must be dismissed when an undisputedly valid and enforceable written contract governs the same subject matter" ( Air Atlanta Aero Eng'g Ltd. v SP Aircraft Owner I, LLC, 637 F Supp 2d 185, 196 [SD NY 2009]).
Because the Logan CDS contracts cover the same subject matter of the claims set forth in this cause of action, Plaintiffs' Eighth Cause of Action for promissory estoppel shall be dismissed.
PLAINTIFFS' NINTH CAUSE OF ACTION
Plaintiffs' Ninth Cause of Action is defined as an "action to enforce contract rights." Justice Fried dismissed a similar claim in Merrill finding that "the nebulous claim for an action to enforce contract rights' was not a recognizable cause of action" ( Merrill, 21 Misc 3d 1233[A] at *6). Because Plaintiffs have provided no opposition to this branch of Defendants' motion and because this Court agrees with Justice Fried that it is not a recognizable cause of action and to the extent it seeks a declaration that MBIA is not liable under the Financial Guaranties, it is subsumed within Plaintiffs' other breach of contract claims, the Court shall dismiss Plaintiffs' Ninth Cause of Action.
MBIA is asserting that its obligations under the guaranty only arise if the Logan III CDS is enforceable and if the CE Notices, Public Information Notices and Verification Notices and related Cash Settlement Determinations were effective, which Plaintiffs claim did not occur. Plaintiffs contend that Defendants, by requiring payment, have injured MBIA and that MBIA should be awarded as damages all payments it has made under the Logan CDS and financial guaranties.
CONCLUSION
The Court has considered the following papers in connection with this motion:
1) Notice of Motion to Dismiss dated March 2, 2010; Affirmation of Scott S. Balber, Esq. dated March 2, 2010, together with the exhibits annexed thereto; Affidavit of Marcus Smith, sworn to March 2, 2010, together with the exhibits annexed thereto;
2) Memorandum of Law in Support of Defendants' Motion to Dismiss dated March 2, 2010;
3) Affirmation of Phillipe Z. Selendy, Esq. in Support of Plaintiffs' Opposition to Defendants' Motion to Dismiss the Complaint dated March 26, 2010, together with the exhibits annexed thereto; Affidavit of Tim Lord QC in Support of MBIA Insurance Corporation's and LaCrosse Financial Products, LLC's Opposition to Defendants' Motion to Dismiss Plaintiffs' Complaint, sworn to March 24, 2010, together with the exhibits annexed thereto;
4)MBIA Insurance Corporation's and LaCrosse Financial Products, LLC's Memorandum in Opposition to Defendants' Motion to Dismiss Plaintiffs' Complaint dated March 26, 2010;
5)Reply Affirmation of Scott S. Balber, Esq. in Further Support of Defendants' Motion to Dismiss dated April 12, 2010, together with the exhibits annexed thereto;
6)Reply Memorandum of Law in Further Support of Defendants' Motion to Dismiss dated April 12, 2010;
7)MBIA Insurance Corporation's and LaCrosse Financial Products, LLC's Supplemental Memorandum of Law in Opposition to Defendants' Motion to Dismiss Plaintiffs' Complaint dated April 19, 2010;
8)Supplemental Compendium of Federal and Unreported Authorities Cited in Supplemental MBIA Insurance Corporation's and LaCrosse Financial Products, LLC's Supplemental Memorandum of Law in Opposition to Defendants' Motion to Dismiss Plaintiffs' Complaint Memorandum dated March 25, 2010;
9)Letter dated June 30, 2010 from Peter Calamari, Esq., Quinn Emanuel, to Hon. Alan D. Scheinkman, J.S.C. and attached decision; and .
10)Letter dated July 2, 2010 from Scott S. Balber, Esq., Chadbourne Parke LLP to Hon. Alan D. Scheinkman, J.S.C..
Based upon the foregoing papers, and for the reasons set forth above, it is hereby
ORDERED that the motion of Defendants Royal Bank of Canada, RBC Capital Markets Corporation, and Royal Bank of Canada Europe Limited to dismiss the Complaint of Plaintiffs MBIA Insurance Corporation and LaCrosse Financial Products, LLC is granted in part, and denied in part, as set forth herein; and it is further
ORDERED that the branches of the motion of Defendants Royal Bank of Canada, RBC Capital Markets Corporation, and Royal Bank of Canada Europe Limited to dismiss the Fifth and Sixth Causes of Action as against Defendants RBC Capital Markets Corporation and Royal Bank of Canada Europe Limited is granted and the Fifth and Sixth Causes of Action, to the extent they are asserted against Defendants RBC Capital Markets Corporation and Royal Bank of Canada Europe Limited, are dismissed; and it is further
ORDERED that the branches of the motion of Defendants Royal Bank of Canada, RBC Capital Markets Corporation, and Royal Bank of Canada Europe Limited to dismiss the Fourth, Seventh, Eighth and Ninth Causes of Action are granted and the Fourth, Seventh, Eighth and Ninth Causes of Action are dismissed; and it is further
ORDERED that in all other respects the motion of Defendants Royal Bank of Canada, RBC Capital Markets Corporation, and Royal Bank of Canada Europe Limited is denied; and it is further
ORDERED that counsel shall appear before this Court, Courtroom 105, on September 10, 2010 at 9:30 a.m. for a Preliminary Conference in this action; and it is further
ORDERED that no adjournment of the Preliminary Conference shall be granted without further order of this Court.
The foregoing constitutes the Decision and Order of the Court.