Opinion
No. X05 CV084013452 S
July 8, 2009
MEMORANDUM OF DECISION ON DEFENDANTS' MOTION TO STRIKE (#136)
Introduction
On January 21, 2009, the plaintiffs, Pursuit Partners, LLC and Pursuit Investment Management, LLC, filed a thirty-count Second Amended Complaint, on behalf of the investment funds under their control, known as the Pursuit Opportunity Fund I Master Ltd. and the Pursuit Capital Master, (collectively referred to as "Pursuit") stating claims of relief against UBS AG, UBS Securities, LLC, Robert T. Morelli, (collectively referred to as "UBS" or the "UBS defendants"), Moody's Corporation (Moody's) and the McGraw-Hill Companies, Inc., d/b/a Standard and Poor's (S P). The allegations center around a fraud allegedly committed by UBS upon Pursuit in connection with Pursuit's purchase of Notes from UBS in a series of complex financial investment products known generically as collateralized debt obligations (CDOs).
On February 5, 2009, the UBS defendants filed a motion accompanied by a memorandum of law to strike a majority of the Second Amended Complaint, specifically counts one through twelve, eighteen, and twenty-one through thirty on the grounds that these counts are legally insufficient. On February 23, 2009, the plaintiffs filed a memorandum in opposition to the motion. Thereafter, on March 2, 2009, the defendants submitted a reply memorandum of law in support of their motion. The court will first set forth the applicable standard of review, including an analysis of the choice of law issue, followed by an analysis of the specific counts in the second amended complaint.
Legal Standard
"The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). "It is fundamental that in determining the sufficiency of a [pleading] challenged by a [party's] motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted." (Internal quotation marks omitted.) Gazo v. Stamford, 255 Conn. 245, 260, 765 A.2d 505 (2001). "A motion to strike is the proper procedural vehicle . . . to test whether Connecticut is ready to recognize some newly emerging ground of liability." (Internal quotation marks omitted.) Ortiz v. Waterbury Hospital, judicial district of Waterbury, Docket No. CV 99 154112 (March 9, 2000, Pelligrino, J.) ( 26 Conn. L. Rptr. 547).
"A motion to strike . . . does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 588, 693 A.2d 293 (1997). "[The court] construe[s] the complaint in the manner most favorable to sustaining its legal sufficiency . . . [I]f facts provable in the complaint would support a cause of action, the motion to strike must be denied." (Internal quotation marks omitted.) Sullivan v. Lake Compounce Theme Park, Inc., 277 Conn. 113, 117-18, 889 A.2d 810 (2006). "A motion to strike is properly granted if the complaint alleges mere conclusions of law that are unsupported by the facts alleged." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, supra, 262 Conn. 498. Further, our Supreme Court "will not uphold the granting of [a] motion to strike on a ground not alleged in the motion." Blancato v. Feldspar Corp., 203 Conn. 34, 44, 522 A.2d 1235 (1987).
"In ruling on a motion to strike, the court is limited to the facts alleged in the [challenged pleading]." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., supra, 240 Conn. 580. "Where the legal grounds for such a motion [to strike] are dependent upon underlying facts not alleged in the . . . pleadings, the [party that filed the motion] must await the evidence which may be adduced at trial, and the motion should be denied." (Citations omitted; internal quotation marks omitted.) Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 348, 576 A.2d 149 (1990).
In their motion to strike, the defendants repeatedly rely upon the CDO transaction documents, such as the Final Offering Memoranda and Indentures, as support for challenging the legal sufficiency of numerous counts. These documents, however, are not part of the complaint, and thus, cannot be considered by the court on a motion to strike. "It is of no moment that the defendants might prove facts which operate to bar the plaintiff's claim, the sole inquiry at this stage of the pleadings is whether the plaintiff's allegations, if proved, would state a basis for standing . . . [An] argument [that] would require the court to consider facts outside the face of the pleadings . . . would be improper on a motion to strike . . ." (Citations omitted.) Miller v. Insilco Corp., Superior Court, judicial district of New Haven, Docket No. 27 92 67 (May 22, 1990, Schimelman, J.) ( 1 Conn. L. Rptr. 651); Edward J. Smith Co. v. Palmieri, Superior Court, judicial district of Ansonia-Milford, Docket No. CV 07 5003216 (March 14, 2008, Moran, J.) (denying motion to strike because contract was not attached as an exhibit to the original complaint, thereby making the grounds for the motion to strike dependent on facts not in the complaint); R.I. Pools v. Lillien, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 04 4000871 (February 8, 2005, Wilson, J.) (denying motion to strike where defendants attacked the underlying contract that defendants appended to their motion, which is more appropriately accomplished by way of a motion for summary judgment).
As previously stated, for the purposes of a motion to strike, the court must restrict itself to the allegations contained in the Second Amended Complaint, and must accept those allegations as true.fn1
Facts
In count one, Pursuit alleges the following facts and incorporates them into all subsequent counts. In early 2007, UBS solicited Pursuit with CDO Notes for sale. The plaintiffs, not regular investors in sub-prime CDO investments, inquired with UBS about purchasing CDO Notes at a discount that were both "investment grade" and "triggerless." Pursuit informed UBS that although it was willing to make an investment in the mortgage market, it was unwilling to take the extra-market risk of an investment that was subject to unilateral termination by a senior investor. Pursuit further informed UBS that it would only purchase Notes that: (1) were investment grade; (2) "triggerless"; (3) not subject to an over-collateralization test ("O.C. test"); (4) bore a substantial discount from par; and (5) would perform based upon market, rather than extra-market conditions. Pursuit fully disclosed these conditions to UBS prior to the purchase, and that its terms were material and non-negotiable, and that Pursuit was not interested in any investment that could be unilaterally terminated or the cash flow unilaterally diverted.
The complaint defines "CDO" or collateralized debt obligation as a vehicle which allows investors to invest in the future performance of either actual or referenced mortgages that act as collateral. A CDO allows an investor to purchase a position whose return profile is based upon the performance of a security with a defined risk and reward, without actually purchasing the mortgages themselves.
In paragraph 68 of the Second Amended Complaint, the plaintiffs state that "[i]t is generally accepted in the CDO investment community that the term `triggerless' means that the O.C. test [Over-Collateralization test] or Senior Credit test-which otherwise would allow the super-senior Noteholder to trigger or initiate a liquidation of the less senior positions in order to protect the super-senior Noteholder's investment-is inapplicable."
In the spring of 2007, UBS refused to meet Pursuit's conditions. UBS informed Pursuit that based upon the pre-drafted Offering Memoranda, they would not meet Pursuit's conditions for sale of the Notes. Pursuit again informed UBS that in light of the then current conditions of the sub-prime market, these terms were material.
Over the next several months, UBS became aware that, unbeknownst to the market, the sub-prime CDO market was about to collapse. As a result of UBS' special relationship with the ratings agencies Moody's and S P, UBS learned certain nonpublic information regarding a change in ratings methodology that would cause the Notes it had previously sold as investment grade, to no longer receive the same investment grade ratings. Thus, in the summer of 2007, UBS was aware that the Notes they were marketing for sale in their CDOs were Notes for which the ratings agencies would no longer give investment grade ratings. At this time, UBS was holding a significant amount of unsold Notes in inventory that were rated as "investment grade," but would lose that rating in the near future and become worthless. Rather than disclose the information and be stuck with worthless Notes, UBS attempted to use this material non-public information to its benefit.
In late summer 2007, UBS again contacted Pursuit and offered to sell the same Notes that Pursuit had rejected months earlier. UBS, without disclosing the information regarding the rating of the Notes, represented to Pursuit that despite what UBS had initially represented in the Offering Memoranda, UBS would now meet Pursuit's aforementioned terms. UBS represented that: (1) the Notes were and would continue to be rated investment grade; (2) the Notes and the collateral associated with the CDOs had never been downgraded; (3) the Notes were completely "triggerless," and therefore, not subject to the unilateral waterfall payment diversion or liquidation by the senior Noteholder; (4) the Notes were not subject to the diversion of the waterfall based upon an O.C. test or Senior Credit test; and (5) the Notes met the requirements Pursuit had previously advised UBS were necessary in order for Pursuit to purchase Notes in any CDOs. Despite these representations, shortly after selling Pursuit the subject Notes, UBS diverted the cash waterfall payments and triggered a termination and liquidation of the Notes, wiping out Pursuit's entire investment.
UBS' representations were material to Pursuit's agreement to purchase the Notes. It was based on these representations that Pursuit agreed to purchase the Notes. Further, unbeknownst to Pursuit, UBS' representations were false when made. At the time of UBS' representations, UBS was aware that the pending change in ratings methodology would result in the downgrading of the collateral underlying the Notes and that the Notes would no longer be rated "investment grade." Based on prior discussions with Pursuit, UBS knew or should have known that this information would have a material impact on Pursuit's willingness to enter into the subject transactions. Further, had Pursuit known that the Notes being sold would not maintain an investment grade rating, were subject to cash flow diversion triggers, or could be unilaterally terminated and liquidated by UBS, Pursuit never would have agreed to purchase any of the subject Notes.
In July 2007, UBS provided Pursuit with a Preliminary Offering Memorandum which represented that Moody's provided an investment grade rating for the underlying collateral. In August 2007, however, UBS prepared a Final Preliminary Offering Memorandum which removed the Moody's rating representation. UBS never provided Pursuit with the Final Offering Memorandum that made this disclosure. Additionally, as the collateral underlying the CDO was the same or substantially similar to the other CDOs at issue in the present case, UBS knew or should have known that, at least as of August 24, 2007, Moody's would no longer provide an investment grade rating to the underlying collateral for these CDOs. UBS failed to disclose this information to Pursuit. Moreover, UBS knew that the Notes they represented to Pursuit as being "triggerless" and as having no "O.C." test or "Senior Credit" test, actually did contain such tests.
Further, in July 2007, UBS failed to advise Pursuit that it knew that the ratings agencies were going to change the methodology used to rate the Notes from a performance-based rating methodology, to a market-based ratings methodology. Additionally, UBS failed to disclose and actively concealed the fact that based upon this change, the Notes they were marketing were no longer rated investment grade and would lose a significant amount of value. By the time Moody's announced the downgrade, UBS had known for at least three months that Moody's was changing its methodology, and that the collateral underlying the Notes would no longer be rated investment grade. Had Pursuit been aware of this, it would not have invested in the subject Notes.
In sum, UBS sold the Notes to Pursuit without disclosing the following information: (1) that the Notes would no longer carry an investment grade rating, as the ratings agencies intended to withdraw these ratings as a result of a change in methodology; and (2) that once the investment grade rating was withdrawn, the CDO Notes, being valued in the millions of dollars, would be worthless. Pursuit alleges that by the aforementioned conduct, the defendants intentionally and fraudulently made false statements of fact regarding the "triggerless" nature of the deal, the ratings given to the collateral and/or the Notes and CDOs, and the expected duration of the investments in the Notes. (Hereinafter referred to as "the false statements.") These false statements were untrue and were known to the defendants to be untrue at the time they were made. Furthermore, the false statements were made with a reckless indifference to the rights of Pursuit, or with an intentional and wanton violation of the rights of Pursuit.
Choice of Law
The defendants argue that New York law should apply in the present case. The defendants contend that the Indentures governing the transactions between the parties in this case contain a choice of law provision stating that New York law shall govern all matters arising out of or relating in any manner to the Indenture or the Notes. The defendants correctly state that the rights of Noteholders are typically governed by Indentures. Further, the defendants also correctly state that Connecticut courts favor the enforcement of contractual choice of law provisions. See Reichhold Chemicals, Inc., v. Hartford Accident Indemnity Co., 252 Conn. 774, 788, 750 A.2d 1059 (2000); Hertz Commercial Leasing Corp. v. Dynatron, Inc., 37 Conn.Sup. 7, 10, 427 A.2d 872, 875 (1980). Connecticut courts, however, are split in whether it is appropriate to address choice of law issues in ruling on a motion to strike.
In Noble v. Moore, Superior Court, judicial district of Waterbury, Docket No. CV 980148207 (January 7, 2002, Pittman, J.) ( 31 Conn. L. Rptr. 181), the court held "that it was inappropriate to determine the choice of law in the context of a motion to strike" and "premature to conduct the kind of searching case-by-case contextual inquiry" into the significant interests of the competing jurisdictions. (Internal quotation marks omitted.) Id., 182. When the court finally did address the choice of law issue in the context of a motion in limine, the court noted the need to resolve the matter prior to trial, and the fact that the choice of law issue had been extensively briefed by the parties and supported by evidentiary documentation. Id.
Similarly, the court in Ffolkes v. Pasko, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 960154395 (May 13, 1997, Karazin, J.) ( 19 Conn. L. Rptr. 442), determined that it was inappropriate to decide the choice of law issue on a motion to strike. The court stated that "there appear to be additional factors which may be relevant to the court's choice of law analysis, but that are not contained in pleadings. In light of the `searching case-by-case contextual inquiry' that is encouraged under the Restatement [Second of Conflict of Laws], it would be inappropriate to decide the choice of law issue at this stage in the proceedings in the absence of a more complete set of facts." Id.; see also Gangi v. Sears Roebuck Co., 33 Conn.Sup. 81, 84, 360 A.2d 907 (1976); Kolpa-Acker v. Hertz Rent-A-Car, Superior Court, judicial district of Litchfield, Docket No. CV 930064111 (August 7, 1995, Pickett, J.) ( 15 Conn. L. Rptr. 9) (the ultimate decision of which state's law should be applied is best left to the trial judge); Siebold v. Hurley, Superior Court, judicial district of Fairfield, Docket No. CV 96 269217 (September 11, 1990, Thim, J.) ( 2 Conn. L. Rptr. 396) (noting that it is unusual to determine a choice of law issue on a motion to strike).
Applying the reasoning set forth in Ffolkes v. Pasko, supra, 19 Conn. L. Rptr. 443-44, the court in Dimauro v. Aiardo, Superior Court, judicial district of New Haven, Docket No. 97 0401576 (April 20, 1998, Hartmere, J.), stated that "[w]here a choice of law issue is present on a motion to strike, as it is in the present case, it is unusual to determine the issue at this procedural stage . . . The extensive case-by-case analysis encouraged by the Restatement in conflict of law cases cannot be accomplished if the complaint does not allege with specificity the representative interests of the states whose laws may apply to the plaintiff's case." (Citations omitted.) In denying the motion to strike, the court held that "this court cannot know from the pleadings which state's interests are more significant to the resolution of the present matter" and quoted Ffolkes v. Pasko, supra, 443, that "there appear to be additional factors which may be relevant to the court's choice of law analysis, but that are not contained in the pleadings." (Internal quotation marks omitted.) Id.
In the present case, the court is faced with a similar situation as in Ffolkes v. Pasko, supra, Superior Court, 19 Conn. L. Rptr. 442, in that "there appear to be additional factors which may be relevant to the court's choice of law analysis, but that are not contained in pleadings." Id., 443-44. The defendants maintain that the Indentures covering the subject Notes contain a choice of law provision stating that New York law shall govern all matters arising out of or relating in any manner to the Indenture or the Notes. As previously discussed, the alleged Indentures relied upon by the defendants are not part of the complaint, and thus, cannot be considered by this court in ruling on the motion to strike. Thus, in light of the `searching case-by-case contextual inquiry' that is encouraged under the Restatement, the court will apply Connecticut law, as it finds it would be inappropriate to decide the choice of law issue at this stage, in the absence of a more complete set of facts. The court will now turn to the specific allegations in the Second Amended Complaint that are the subject of the defendant's motion to strike.
Count One — Fraud in the Inducement
With respect to count one sounding in common law fraud in the inducement, the defendants argue that the plaintiffs failed to allege facts to show that the defendants made any misrepresentations to the plaintiffs. Specifically, the defendants argue that the statements cited by the plaintiffs regarding the "triggerless" nature of the CDO transactions correspond to the terms of the controlling transaction documents. Further, as to the alleged ratings misrepresentations, the defendants argue that the plaintiffs failed to allege facts to show that UBS misrepresented the "investment grade" rating of the collateral underlying the CDOs, and, alternatively, that the plaintiffs could not have reasonably relied on its interpretation of the statements from UBS regarding the investment grade rating of the CDO collateral. Additionally, the defendants contend that the plaintiffs failed to allege that UBS knew or could have known months before a change in ratings methodology was announced, that such a change would result in a downgrade to the specific collateral underlying the Notes purchased by the plaintiffs.
The court notes that much of the defendants' argument challenging the legal sufficiency of the first count relies on the CDO transaction documents. As previously discussed, said documents are not part of the complaint, and thus, cannot be considered by the court on this motion. Therefore, the defendants' arguments that the alleged statements made were not in fact misrepresentations, but were accurate and consistent with the "controlling transaction documents," cannot properly be addressed by the court.
"A cause of action for fraud in the inducement is the same as a common law claim [for] fraudulent misrepresentation . . . Fraud consists in deception practices in order to induce another to part with property or surrender some legal right, and which accomplishes the end designed . . . The essential elements of a cause of action in fraudulent misrepresentation are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon the false representation to his injury." (Citations omitted; internal quotation marks omitted.) Tamborino v. Velocity Express, Inc., Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 05 05000234 (June 6, 2008, Tierney, J.).
The defendants are misplaced in their argument that in a cause of action alleging fraudulent inducement, the plaintiffs are required to plead "reasonable reliance." "`[R]easonable reliance,' is not an element of fraud. See Presta v. Monnier, 145 Conn. 694, 700-01, 146 A.2d 404 (1958); Clark v. Haggard, 141 Conn. 668, 673, 109 A.2d 358 (1954); Ford v. Dubiske Co., Inc., 105 Conn. 572, 577, 136 A. 560 (1927); Gallon v. Burns, 92 Conn. 39, 42, 101 A. 504, (1917); O'Neill v. Conway, CT Page 11362 88 Conn. 651, 654-55, 92 A. 425 (1914)." Goldstein v. Unilever, Superior Court, judicial district of Fairfield, Docket No. CV 397881 (May 3, 2004, Levin, J.) ( 37 Conn. L. Rptr. 158, 163-64).
"The rule in actions for fraud and deceit was stated . . . in the early case of Sherwood v. Salmon, 5 Day, 439, 448 [1813]: `[The court] apprehend[s] no authority can be found to warrant the doctrine, that a man must use diligence to prevent being defrauded, otherwise he shall be entitled to no remedy. The truth is, redress is most commonly wanted for injuries arising from frauds, which might have been prevented by due diligence . . . In such impositions and deceits where common prudence may guard persons against the suffering from them, the offense is not indictable, but the party is left to his civil remedy for redress of the injury that has been done him.' We cited this with approval in Gallon v. Burns, 92 Conn. 39, 42, 101 A. 504 [(1917),] and added: `It is possible that that statement of the law might not be regarded as correct in other jurisdictions, and it has sometimes been said that where a party deceived can protect himself by ordinary care, it is his duty to do so; but it is with this qualification, that he must have equal means of knowledge and be equally able to judge of the matter for himself and to stand upon an equal footing with the one using deceit or making the representations; then if he acts without exercising the means of knowledge open to him, he does so at his own peril.'" (Emphasis added.) Ford v. Dubiske Co., Inc., supra, 105 Conn. 577-78.
The plaintiffs allege that the defendants made false statements that were untrue and known to be untrue by UBS at the time they were made. Specifically, that UBS represented that: (1) the Notes were and would continue to be investment grade; (2) the Notes and the collateral associated with the CDOs had never been downgraded; (3) the Notes were "triggerless," and therefore, not subject to the unilateral waterfall payment diversion or liquidation by the senior Noteholder; (4) the Notes were not subject to the diversion of the waterfall based upon an "O.C." test or "Senior Credit" test; and (5) the Notes met the requirements the plaintiffs had previously advised UBS were necessary in order for Pursuit to purchase Notes in any CDOs.
The plaintiffs further allege that UBS knew that they would not purchase the subject CDOs if Pursuit's terms were not met, and had the plaintiffs known that the Notes being sold would no longer maintain an investment grade rating, were subject to cash flow diversion triggers, or could be unilaterally terminated and liquidated by UBS, the plaintiffs never would have agreed to purchase any of the subject Notes.
Based upon these allegations, the plaintiffs have sufficiently alleged the elements necessary to state a cause of action for fraud in the inducement. Accordingly, the defendants' motion to strike the first count is denied.
Count Two — Fraudulent Concealment
In count two, the plaintiffs incorporate the aforementioned allegations and further allege that the defendants knowingly, intentionally, and fraudulently omitted certain facts regarding: (1) UBS' position as super-senior Noteholder; (2) UBS' ability to accelerate the Notes; (3) UBS' ability to liquidate the collateral, thereby triggering a diversion and liquidation of the Notes; (4) the effects of an acceleration, diversion and liquidation of the Notes; (5) the actual credit rating that Moody's gave or would give to the collateral underlying the Notes; (6) the influence over the issuer's election to declare a credit event under the credit default swaps; and (7) the ability of the collateral to meet Pursuit's investing criteria and eligibility requirements. The plaintiffs additionally allege that UBS was aware of the fraudulent omissions and that they were concealed from Pursuit with a reckless indifference to Pursuit's rights, or with an intentional and wanton violation of Pursuit's rights, and that the defendants knew that had Pursuit known of the fraudulent omissions, it would not have purchased the Notes.
It must be noted that the parties differ as to what elements must be pleaded to sufficiently allege a cause of action for fraudulent concealment. The defendants argue that the plaintiffs failed to plead the elements necessary for fraudulent nondisclosure. The defendants claim that "to be actionable for fraud, the nondisclosure must be by a person intending or expecting thereby to cause a mistake by another to exist or to continue, in order to induce the latter to enter into, or refrain from entering into, a transaction." Bridge-Mile Shoe Corp. v. Ligget Drug Co., 142 Conn. 313, 319, 113 A.2d 863 (1955). Thus, the defendants move to strike count two on the grounds that: (1) the plaintiffs fail to allege facts that show that UBS possessed an intent to deceive the plaintiffs; and (2) the plaintiffs could not have justifiably relied on any alleged misrepresentation.
The plaintiffs, however, frame this count as alleging fraudulent concealment of a cause of action, and claim that the "[t]he elements necessary for a plaintiff to succeed on a fraudulent concealment theory have been set out . . . in Bartone v. Robert L. Day Co., 232 Conn. 527, [ 656 A.2d 221] (1995). They are: (1) a defendant's actual awareness, rather than imputed knowledge, of the facts necessary to establish the plaintiff's cause of action, (2) the defendant's intentional concealment of such facts from the plaintiff, and (3) the concealment of the facts was for the purpose of obtaining delay on the plaintiff's part in filing a complaint." (Internal quotation marks omitted.) World Wrestling Entertainment, Inc. v. THQ, Inc., Superior Court, complex litigation docket at Stamford, Docket No. X05 CV 065002512 (August 29, 2008, Adams, J.).
Upon considering the positions advanced by both parties, the court finds that the allegations contained in count two appear to address a claim for fraudulent nondisclosure, and thus the court will read it in this light. As previously stated, "[t]he essential elements of a cause of action in [fraud] . . . are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon the false representation to his injury." Tamborino v. Velocity Express, Inc., supra, Superior Court, Docket No. CV 05 05000234. "An action will lie for a fraudulent [nondisclosure] which causes one to continue in a course of action . . . Furthermore, the [nondisclosure] must be by a person intending or expecting thereby to cause a mistake by another to exist or to continue, in order to induce the latter to enter into or refrain from entering into a transaction." (Citations omitted; internal quotation marks omitted.) Caltabiano v. L L Real Estate Holdings II, LLC, Superior Court, judicial district of Fairfield, Docket No. CV 07 4019729 (March 20, 2009, Arnold, J.) "Usually, mere nondisclosure does not amount to fraud . . . Nondisclosure may, however, amount to fraud when there is a failure to disclose known facts under circumstances that impose a duty to speak . . ." (Internal quotation marks omitted.) Docker v. Slowik, 91 Conn. App. 448, 458, 881 A.2d 479, cert. denied, 276 Conn. 919, 888 A.2d 87 (2005).
In count two, the plaintiffs explicitly allege that UBS' nondisclosures were made with the intent of inducing Pursuit to purchase approximately $50 million of Notes in the subject CDOs. The plaintiffs further allege that UBS knew that had Pursuit known of the fraudulent omissions, Pursuit would not have invested in the Notes. Thus, the plaintiffs clearly allege that UBS intended to deceive Pursuit with the hope that their nondisclosures would induce Pursuit to purchase Notes in the CDOs. The defendants' alternative argument that the plaintiffs failed to sufficiently allege justifiable or reasonable reliance is misplaced, as reasonable reliance is not an element of fraud. Goldstein v. Unilever, supra, 37 Conn. L. Rptr. 163-64. Accordingly, the defendants' motion to strike the second count is denied.
Count Three — Civil Theft
In the third count, the plaintiffs seek damages under General Statutes § 52-564 for civil theft. Section 52-564 provides that: "Any person who steals any property of another, or knowingly receives and conceals stolen property, shall pay the owner treble his damages." The defendants move to strike count three on the grounds that: (1) the plaintiffs fail to allege facts that show that UBS made any false representations regarding the CDOs, especially in light of the extensive disclosures the plaintiff received in the CDO transaction documents; and (2) the plaintiffs fail to allege facts that show the defendants acted "wrongfully," as the defendants merely exercised their contractual rights authorized in the CDO transaction documents.
The Supreme Court has held that "[s]tatutory theft for civil damages [under § 52-564] is synonymous with larceny as defined by . . . [General Statutes] § 53a-119 of our criminal laws." Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 44, [ 761 A.2d 1268] (2000); Suarez-Negrete v. Trotta, 47 Conn. App. 517, 520-21, [705 A.2d 2015] (1998). Section 53a-119 provides that "[a] person commits larceny when, with intent to deprive another of property or to appropriate the same to himself or a third person, he wrongfully takes, obtains or withholds such property from an owner." "Under § 53a-119, the alleged wrongdoer must not only intentionally take, obtain, or withhold the property in question but must do so with the aim of wrongfully depriving another of its use or appropriating the property to himself, that is, the property must be acquired or held with the knowledge that the person has no right to it . . . If the possessor genuinely believes that he or she has a legal right to possession, however erroneous that belief, no larceny occurs (Citations omitted; internal quotation marks omitted.) Pelizari v. Pisciotta, Superior Court, judicial district of Tolland, Docket No. CV 08 5002792 (May 8, 2009, Sferrazza, J.).
The defendants move to strike this count on the grounds that: (1) the plaintiffs fail to allege facts that show UBS made false representations regarding the CDOs, especially in light of the extensive disclosures that Pursuit received in the CDO transaction documents; and (2) the plaintiffs fail to allege facts that show that UBS acted "wrongfully," since UBS merely exercised its contractual right as authorized in the CDO transaction documents.
In addressing the defendants' assertion that the plaintiffs fail to allege facts that show that UBS made any false statements of material facts to the plaintiffs, the court incorporates and adopts the reasoning used in its analysis of count one. Here, as in count one, the court finds that the plaintiffs have sufficiently alleged that the defendants made false statements of material fact.
The defendants' second argument that the plaintiffs failed to allege facts that UBS acted "wrongfully," as UBS merely exercised its contractual right as authorized in the CDO transaction documents, similarly fails, as the defendant's argument relies on documents and facts that are not part of the complaint. Such documents are not appropriately before the court on a motion to strike, and thus, cannot be considered. Accordingly, the defendants' motion to strike count three is denied.
Count Four — Negligent Misrepresentation
In count four, the plaintiffs allege that the defendants negligently made false statements of material fact regarding (1) the "triggerless" nature of the deal and the investment grade rating of the collateral underlying the CDO Notes purchased by the plaintiffs; (2) the defendants role in the Notes and CDOs; and (3) the expected duration of the investments in the Notes. The plaintiffs further allege that these false statements were made with the intent of inducing the plaintiffs to rely on the false statements and that the plaintiffs did in fact reasonably and justifiably rely on the false statements, resulting in damages to Pursuit.
The defendants move to strike count four on the grounds that: (1) the plaintiffs fail to allege facts that show that the defendants made any false statements of material facts to the plaintiffs; and (2) the plaintiffs fail to allege facts that show that the plaintiffs, as sophisticated investors, could have justifiably relied on any of the alleged misrepresentations from UBS.
"[Connecticut courts have] long recognized liability for negligent misrepresentation. [The courts] have held that even an innocent misrepresentation of fact may be actionable if the declarant has the means of knowing, ought to know, or has the duty of knowing the truth . . . The governing principles are set forth in similar terms in § 552 of the Restatement Second of Torts [1979]: One who, in the course of his business, profession or employment . . . supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information . . . Traditionally, an action for negligent misrepresentation requires the plaintiff to establish (1) that the defendant made a misrepresentation of fact (2) that the defendant knew or should have known was false, and (3) that the plaintiff reasonably relied on the misrepresentation, and (4) suffered pecuniary harm as a result . . . There must be a justifiable reliance on the misrepresentation for a plaintiff to recover damages . . . The basic element of a claim for misrepresentation, however, is whether there was a misstatement . . . Without a misrepresentation, there can be no justifiable reliance." (Citations omitted; internal quotation marks omitted.) WE 470 Murdock, LLC v. Cosmos Real Estate, LLC, Superior Court, judicial district of New Haven at Meriden, Docket No. CV05 4003327 (May 31, 2007, Rubinow, J.), reversed in part on other grounds, 109 Conn.App. 605, 952 A.2d 106, cert. denied, 289 Conn. 938, 958 A.2d 1248 (2008).
The defendants first argue that the plaintiffs' claim for negligent misrepresentation should be stricken because the plaintiffs have not alleged that the defendants made any false statements of material fact. In addressing this aspect of the defendants' motion, the court again incorporates and adopts the reasoning used in its discussion of count one, and finds that the plaintiffs have sufficiently alleged that the defendants made false statements of material fact.
The defendants next argue that the plaintiffs fail to allege facts that show that the plaintiffs, as sophisticated investors, could have justifiably relied on any of the alleged misrepresentations by UBS. It is the defendants' position that it was unreasonable for the plaintiffs to rely on e-mails between the parties regarding the subject transactions, as the e-mails themselves instruct recipients not to rely on them. Further, the defendants assert that as a matter of law, sophisticated investors like Pursuit cannot claim that they reasonably relied on informal marketing information, vague e-mails and unspecified oral representations, particularly when Pursuit's interpretation of that information conflicts with the plain terms of the formal transaction documents. In their objection, the plaintiffs argue that the issue of reliance is a question of fact, not law, and that the allegations in the complaint clearly set out a factual basis for reasonable reliance.
In Williams Ford, Inc. v. Hartford Courant Co., 232 Conn. 559, 577, 657 A.2d 212 (1995), the defendant argued that "liability for negligent misrepresentation does not exist between two sophisticated commercial parties with full access to information concerning a business transaction." The Appellate Court, however, held that negligent misrepresentation is not to be precluded as a matter of law solely because the parties were both sophisticated and commercial. Id. 578.
In the present case, the plaintiffs have not alleged that they had full access to information concerning the transaction at issue, as was the case in Williams Ford, Inc. v. Hartford Courant Co. On the contrary, the plaintiffs claim that material information was withheld from them. Further, the plaintiffs have not alleged facts that support the defendants' argument that this was between two sophisticated parties in regards to the particular transactions. In fact, the plaintiffs allege that they were "not a regular investor in sub-prime ABS or CDO investments." As such, the court finds unpersuasive the defendants' argument that the plaintiffs could not have justifiably relied on the defendants' statements because of the sophisticated and commercial nature of the plaintiffs in the subject transactions.
The question then turns to whether the plaintiffs sufficiently allege facts that their reliance was justifiable or reasonable, even with a lack of sophistication regarding the subject transactions. "In order to successfully bring a claim of negligent misrepresentation, the plaintiff must allege and prove that the reliance on the misstatement was justified or reasonable. We have consistently held that reasonableness is a question of fact for the trier to determine based on all of the circumstances . . . [T]he case law in numerous jurisdictions suggest that courts liberally construe pleadings in a way so as to sustain [a claim of negligent misrepresentation] . . . Courts have generally held that any allegations of reliance by a party [are] sufficient to sustain a claim of negligent misrepresentation. See DiMartino v. Ernst Young, Superior Court, judicial district of New Britain, Docket No. CV 970481835 (March 20, 2003, Aurigemma, J.) (denying motion to strike because allegations that plaintiffs relied on defendant's misrepresentations, without specifically naming the nature of the reliance for each plaintiff, was nevertheless sufficient to bring a claim of negligent misrepresentation); Protasewich v. Combustion Engineering, Inc., Superior Court, judicial district of [Hartford,] Docket No. CV 95 0552146 (March 3, 1997, Lavine, J.) (denying motion to strike because allegations of reliance on defendant's misrepresentations were sufficient to support a cause of action of negligent misrepresentation). Such claims are only struck when they lack allegations of reliance. See Castellano v. United States Surgical Corp., Superior Court, judicial district of Fairfield, Docket No. CV 05 4008844 (February 27, 2006, Rodriguez, J.) (granting motion to strike because plaintiff's count does not indicate on its face that the plaintiff relied on the defendant's alleged misrepresentation to his detriment); Bank of New York v. American Mortgage Services, Superior Court, judicial district of Ansonia-Milford, Docket No. CV 01 0075051 (November 4, 2002, Lager, J.) (granting motion to strike because [t]here are no allegation[s] in the first, second or third counts that [plaintiff] relied on [defendant's] disclosure or lack of disclosure and that its reliance was reasonable or justified) . . .
"This reasoning is in line with the court's general policy of construing the allegations in a way most favorable to sustaining legal sufficiency . . . If a plaintiff were to allege reliance of some sort, it is reasonable to infer that the plaintiff meant justified reliance, especially in light of the fact that the reasonableness of the reliance is a question for the jury." (Citations omitted; internal quotation marks omitted.) Crosby v. HSBC North American Holdings, Inc., Superior Court, judicial district of Ansonia-Milford, Docket No. CV 06500378 (June 30, 2008, Ronan, J.T.R.).
In the present case, the plaintiffs allege that they "reasonably and justifiably relied on the false statements to [their] detriment by investing $48,033,279 in the Notes that have since become worthless." The plaintiffs further allege that "had Pursuit known that the Notes being sold would no longer maintain an investment grade rating, were subject to cash flow diversion triggers, or could be unilaterally terminated and liquidated by UBS at their own discretion such that the market risks and conditions would not dictate whether the investment succeeded or failed, Pursuit would never have agreed to purchase any of the Notes from UBS." Through such allegations the plaintiffs have sufficiently alleged justifiable reliance on the defendants' misrepresentations.
As the plaintiffs have sufficiently pled that the defendants made false statements of material fact and justifiable reliance, the defendants' motion to strike count four is denied.
Count Five — Innocent Misrepresentation
In count five, the plaintiffs allege that the defendants innocently made false statements of material fact regarding the "triggerless" nature of the deal and the investment grade rating of the collateral underlying the Notes in connection with the plaintiffs' purchase of Notes in the CDOs, UBS' role in the Notes and CDOs, and the expected duration of the investment in the Notes. The plaintiffs further allege that the defendants had the means of knowing or ought to have known the truth of the statements, that the plaintiffs justifiably relied on the statements, that this reliance was foreseeable and that the plaintiffs suffered damages as a result.
The defendants move to strike count five on the grounds that: (1) the plaintiffs failed to allege facts that show the defendants made any false statements of material fact; and (2) that the plaintiffs, as sophisticated investors, could not justifiably have relied on any of the alleged misrepresentations.
"[A]n innocent misrepresentation of fact may be actionable if the declarant has the means of knowing, ought to know, or has the duty of knowing the truth." (Internal quotation marks omitted.) Barton v. Bristol, 291 Conn. 84, 102, 967 A.2d 482 (2009). "In Connecticut, a claim of innocent misrepresentation . . . is based on principles of warranty, and . . . is not confined to contracts for the sale of goods . . . A person is subject to liability for an innocent misrepresentation if in a sale, rental or exchange transaction with another, [he or she] makes a representation of a material fact for the purpose of inducing the other to act or to refrain from acting in reliance upon it . . . even though it is not made fraudulently or negligently . . . [Our Supreme Court] ha[s] held that an innocent misrepresentation is actionable, even though there [is] no allegation of fraud or bad faith, because it [is] false and misleading . . ." (Citations omitted; internal quotation marks omitted.) Gibson v. Capano, 241 Conn. 725, 730, 699 A.2d 68 (1997).
"The elements of [a] cause of action [for innocent misrepresentation] are (1) a representation of material fact (2) made for the purpose of inducing the purchase, (3) the representation is untrue, and (4) there is justifiable reliance by the plaintiff on the representation by the defendant and (5) damages." (Internal quotation marks omitted.) Matyas v. Minck, 37 Conn.App. 321, 333, 655 A.2d 1155 (1995).
The defendants first argue that the plaintiffs' claim for innocent misrepresentation should be stricken because the plaintiffs have not alleged that the defendants made any false statements of material fact. In addressing this aspect of the defendants' motion, the court incorporates and adopts the reasoning used in responding to the defendants' arguments in count one. Here, as in count one, the court finds that the plaintiffs have sufficiently alleged that the defendants made false statements of material fact.
The defendants next argue that the claim for innocent misrepresentation is insufficient because as sophisticated investors, Pursuit could not justifiably have relied on any of the alleged misrepresentations. In addressing this aspect of the defendants' motion, the court incorporates and adopts the reasoning used in its discussion of count four. Here, as in count four, the court finds that the plaintiffs have sufficiently alleged that their reliance on the defendants' statements was justifiable. Accordingly, the defendants' motion to strike count five is denied.
Count Six — Negligent Concealment
In count six, the plaintiffs allege that the defendants owed a duty of care to Pursuit to exercise the degree of skill normally expected of the creators, marketers, sellers of, or advisors to, certain investments. In negligently omitting certain facts, the defendants failed to exercise reasonable care or competence in negligently concealing the omissions from Pursuit. The defendants move to strike count six on the ground that this count is duplicative, as negligent concealment is not an independent cause of action from negligent misrepresentation. The court agrees. Negligent concealment does not constitute an independent cause of action. Franco v. Mediplex Construction, Inc., Superior Court, judicial district of New Haven, Docket No. CV 96 0390458 (May 12, 1998, Levin, J.). Accordingly, the defendants' motion to strike count six is granted.
Count Seven — Negligent Supervision
In count seven the plaintiffs allege that the defendant's UBS and UBS Securities had a duty to supervise their employees. The plaintiffs claim that employees of UBS and UBS Securities, including Morelli, along with a Mr. Malik and a Mr. Menzel, engaged in tortious conduct by communicating false statements of material fact and by fraudulently omitting certain material facts. The plaintiffs further allege that UBS and UBS Securities failed to properly supervise their employees to ensure that such false statements were not made and also "knew or should have known" or it was "reasonably foreseeable" that the conduct of their employees would have caused injury of the general nature suffered by the plaintiffs.
The defendants move to strike count seven on the ground that the plaintiffs fail to allege facts that show that UBS knew or should have known prior to the plaintiffs' alleged injury that UBS's employees possessed a "propensity" to misrepresent or withhold information from potential investors.
"Under Connecticut law, an employer may be held liable for the negligent supervision of employees . . . In order to plead a cause of action sounding in negligent supervision, a plaintiff must plead injury by an employee whom the defendant had a duty to supervise, failed to supervise and whom the defendant knew or should have known would cause the injury." (Citation omitted; internal quotation marks omitted.) Doe v. Nelson, Superior Court, judicial district of Waterbury, Docket No. CV 05 5000575 (April 25, 2008, Alvord, J.) ( 45 Conn. L. Rptr. 428, 429); see also Seda v. Maxim Healthcare Services, Superior Court, judicial district of Hartford, Docket No. CV 07 5010811 (April 8, 2008, Elgo, J.).
"Whether the claim is for negligent hiring, negligent supervision or negligent retention, a plaintiff must allege facts that support the element of foreseeability . . . An essential element to the tort of negligent supervision is that the conduct of the employee whom the employer is accused of failing to supervise was itself tortious." (Citation omitted; internal quotation marks omitted.) Engle v. Bosco, Superior Court, judicial district of New Britain, Docket No. CV 05 4006996 (September 14, 2006, Robinson, J.). "Our Superior Court has interpreted this foreseeability requirement as one in which the employer knew or should have known of the employee's propensity to engage in the alleged harmful conduct . . . [A] plaintiff must allege facts that support the element of foreseeability . . . Accordingly, a simple conclusion that the harm to the plaintiff was foreseeable cannot by itself mandate a determination that a legal duty exists." (Citations omitted; internal quotation marks omitted.) Ritacco v. Archila, Superior Court, judicial district of New London, Docket No. CV 08 5006526 (December 31, 2008, Martin, J.).
In Ritacco v. Archila, supra, the court found that the plaintiff failed to allege facts that supported the element of foreseeability in her claims of negligent hiring, training and supervision. The court stated that "the plaintiff has merely alleged conclusions of law, unsupported by the facts, stating that [the] defendant . . . knew or should have known of [its employees'] propensities to engage in the alleged harmful conduct. Accordingly, the court finds that the plaintiff's claims of negligent hiring, training and supervision are insufficient as a matter of law, and the motion to strike is granted . . ."
Similarly, in Meade v. Orthopedic Associates of Windham County, Superior Court, judicial district of Windham, Docket No. CV 06 4005043 (December 27, 2007, Booth, J.), the court held that the plaintiff failed to sufficiently allege a cause of action in negligent supervision. The court reasoned that "[n]early all the Superior Court decisions . . . have required the plaintiff in a negligent supervision action to plead and prove injury by the defendant's negligence in failing to properly supervise an employee who the defendant had a duty to supervise and who the defendant knew or should have known would cause the injury . . . The plaintiff has not alleged that [the defendant] knew or should have known of any employee's propensity for tortious conduct . . . [J]udges of the Superior Court have granted motions to strike in cases where the pleadings in question fail to allege facts that the employer knew or should have known of the employee's propensity for tortious conduct. [See] Doe v. Nelson, Superior Court, judicial district of Waterbury, Docket No. CV 05 5000575 (August 1, 2006, Matasavage, J.) ( 41 Conn. L. Rptr. 745, 747); see also Ahern v. Kappalumakkel, judicial district of Ansonia-Milford at Milford, Docket No. CV 01 0075617 (December 1, 2004, Carroll, J.) ( 38 Conn. L. Rptr. 315), aff'd, 97 Conn.App. 189, 903 A.2d 266 (2006); Zides v. Quinnipiac University, Superior Court, judicial district of New Haven, Docket No. CV 020470131 (December 15, 2003, Arnold, J.); Perry v. SBC/SNET, Superior Court, judicial district of Ansonia-Milford at Milford, Docket No. CV 04 085367 (September 12, 2005, Moran, J.T.R.)." (Citation omitted; internal quotation marks omitted.) Id.
In the present case, as in Ritacco v. Archila and Meade v. Orthopedic Associates of Windham County, the court finds that the plaintiffs have failed to allege facts that support the element of foreseeability in their claim of negligent supervision. The plaintiffs have merely alleged conclusions of law, unsupported by the facts, stating that UBS and UBS Securities knew or should have known that its employees would have caused injury of the general nature of the kind suffered by the plaintiffs. The plaintiffs do not allege that the defendants' employees had a propensity to engage in the alleged harmful conduct, nor do they allege that their employee's actions were more then an isolated incident. Accordingly, the court finds that the plaintiffs' claims of negligent supervision are insufficient as a matter of law, and the motion to strike count seven is granted.
Count Eight — Negligence
In count eight, the plaintiffs allege that the defendants owed them a duty of care and that the defendants breached this duty by failing to provide the plaintiffs with material information and by making false representations regarding the transactions at issue. The plaintiffs claim that they reasonably and justifiably relied on the information and statements provided by the defendants in deciding to purchase the Notes. In addition, they claim that it was reasonably foreseeable to the defendants that investors such as the plaintiffs would rely upon and act upon information and statements provided by the defendants in deciding to invest in the Notes. The plaintiffs further allege that they were damaged as a result of the defendants' conduct.
The defendants move to strike count eight on the grounds that: (1) the plaintiffs' allegations are vague and conclusory and do not identify sufficient facts to place UBS on notice of the specific circumstances underlying the plaintiffs' claims; (2) the plaintiffs fail to allege facts that show that the defendant UBS made any false statements of material facts to the plaintiffs; (3) the plaintiffs fail to allege facts that show that the plaintiffs could have reasonably relied on their mistaken interpretation of UBS's alleged misrepresentations in light of the disclosures in the CDO transaction documents; and (4) the plaintiffs have failed to satisfy the elements of a negligence claim by failing to allege facts to show that their alleged injuries were reasonably foreseeable.
"The essential elements of a cause of action in negligence are well established: duty; breach of that duty; causation; and actual injury . . . Duty is a legal conclusion about relationships between individuals, made after the fact, and [is] imperative to a negligence cause of [action.] . . . Thus, [t]here can be no actionable negligence . . . unless there exists a cognizable duty of care . . . The test for determining legal duty is a two prong analysis that includes: (1) a determination of foreseeability, and (2) public policy analysis." (Citations omitted; internal quotation marks omitted.) Doe v. Nelson, supra, 45 Conn. L. Rptr. 429.
As the defendants only attack the issue of foreseeablilty within their motion to strike, this court will only address the foreseeability prong of the duty of care test. "The ultimate test of the existence of the duty to use care is found in the foreseeability that harm may result if it is not exercised . . . By that is not meant that one charged with negligence must be found actually to have foreseen the probability of harm or that the particular injury which resulted was foreseeable, but the test is, would the ordinary [person] in the defendant's position, knowing what he knew or should have known, anticipate that harm of the general nature of that suffered was likely to result?" Biron v. Gem Manufacturing, Superior Court, judicial district of Waterbury, Docket No. CV 08 5010887 (May 28, 2009, Brunetti, J.).
"This does not mean foreseeability of any harm whatsoever or foreseeability that the particular injury which resulted would occur. It is, in short, the foreseeablilty or anticipation that harm of the general nature of that suffered would be likely to result, which gives rise to a duty to use due care, breach of which might constitute negligence." (Internal quotation marks omitted.) Doe v. Nelson, supra, 45 Conn. L. Rptr. 429.
In the present case, the plaintiffs allege that the defendants knew, yet failed to inform the plaintiffs, that: (1) UBS held and retained the super-senior Noteholder position; (2) UBS believed they retained the right to trigger a diversion and liquidation at their sole discretion; (3) the result of any diversion and liquidation would be to consolidate all of the UBS waterfall positions and wipe out the entire investment of Pursuit and any other mezzanine investors; (4) UBS and Morelli already knew at the time of the sale that the Notes would end up in default and that UBS would have the right to keep all the money paid for the Notes by Pursuit without paying Pursuit anything for its investment; (5) the collateral did not meet certain testing requirements and eligibility criteria; and (6) the certification issued by the collateral manager was invalid and/or was false when made. The plaintiffs claim that that defendants represented "that the Notes had no triggers" and that the defendants failed to "properly inform the plaintiffs of the true facts regarding the Franchise Programs." The plaintiffs further allege that they reasonably and justifiably relied on the information and statements provided by the defendants in deciding to invest in the Notes and that it was reasonably foreseeable to the defendants that investors such as the plaintiffs would rely and act upon information and statements provided by the defendants in deciding to invest in the Notes.
"The court's inquiry is whether a reasonable person in the defendants' position, knowing what the defendants knew, would be able to anticipate that harm of the general nature of that suffered was likely to result." (Citation omitted; internal quotation marks omitted.) Baker v. Spinney, Superior Court, judicial district of Windham, Docket No. CV 07 5001737 (June 2, 2008, Booth, J.). The court finds, based upon plaintiffs' allegation, that it is reasonably foreseeable that providing false information and omitting material facts about an investment, thereby making that investment seem more valuable and potentially profitable than it was in actuality, would induce an investor to purchase Notes it would not have purchased if the investor had known all of the pertinent information regarding the prospective investment. Similarly, while almost all investments carry risk, it is foreseeable that a person who purchases Notes that are not of the quality and caliber represented to them would suffer financial loses much greater than anticipated. Because the defendants could have anticipated the result their actions would have on the plaintiffs, and it was reasonably foreseeable that such harm would occur, the defendants owed a duty of care to the plaintiffs. Accordingly, the plaintiffs have satisfied the elements of a negligence claim by alleging facts to show that their alleged injuries were reasonably foreseeable.
The defendants further assert that the plaintiffs fail to allege facts that show that UBS made any false statements of material fact to the plaintiffs. In addressing this aspect of the defendants' motion, the court incorporates and adopts the reasoning used in responding to the defendants' arguments in count one. Here, as in count one, the court finds that the plaintiffs have sufficiently alleged that the defendants made false statements of material fact.
The defendants next argue that the plaintiffs fail to allege facts that show that the plaintiffs could have reasonably relied on their mistaken interpretation of UBS's alleged misrepresentations in light of the disclosures in the CDO transaction documents. These transaction documents, however, are not part of the plaintiffs' pleadings and, therefore, cannot be addressed at this time. As to whether the plaintiffs could have reasonably relied on UBS's alleged misrepresentations, the court incorporates and adopts the reasoning used in responding to the defendants' arguments in count five. Here, as in count five, the court finds that the plaintiffs have sufficiently alleged that their reliance on the defendants' statements was reasonable.
Additionally, it is the defendants' position that the plaintiffs' allegations are vague and conclusory and do not identify sufficient facts to place UBS on notice of the specific circumstances underlying the plaintiffs' claims. The court finds the argument unpersuasive and holds that the plaintiffs have sufficiently pleaded facts necessary to support a cause of action in negligence. Accordingly, the defendants' motion to strike count eight is denied.
Count Nine — Connecticut Uniform Securities Act (CUSA,)
In count nine, the plaintiffs incorporate the prior allegations and further allege that the defendants offered the securities by means of untrue statements of material fact and omissions of material facts. Specifically, the oral misrepresentations regarding the "triggerless" nature of the CDOs, that the CDOs were investment grade, as well as the misrepresentations contained in e-mails made at and immediately before the CDO Notes were sold to the plaintiffs. Additionally, the plaintiffs allege that the defendants concealed material facts known to UBS regarding the intended downgrades by the ratings agencies of the CDO Notes sold to the plaintiffs.
The defendants move to strike count nine on the grounds that the plaintiffs fail to allege facts that satisfy the elements of an actionable claim under CUSA. Specifically, that the plaintiffs have not shown that UBS made any false statements or omissions of material fact, as the alleged misrepresentations were not material in light of the extensive disclosures in the CDO transaction documents. General Statutes § 36b-29 provides in relevant part: "(a) Any person who . . . (2) offers or sells or materially assists any person who offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, who knew or in the exercise of reasonable care should have known of the untruth or omission, the buyer not knowing of the untruth or omission, and who does not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission, is liable to the person buying the security . . .
Thus, the plaintiffs must allege "an untrue statement of a material fact or any omission to state a material fact necessary" and that it "did not know, and in the exercise of reasonable care could not have known, of the untruth or omission." As previously discussed in count one, based on the allegations contained in the complaint and the documents available to the court on the motion to strike, the plaintiffs have sufficiently alleged that the defendants made false statements and omissions of material fact regarding the investment grade status and "triggerless" nature of subject Notes. Accordingly, the defendants' motion to strike count nine is denied.
Count Ten — Unjust Enrichment
In count ten, the plaintiffs incorporate the prior allegations and further allege that the defendants benefited from the money invested by the plaintiffs in the CDOs and that they were unjustly enriched as a result of their fraudulent conduct. The defendants move to strike count ten on the grounds that: (1) the plaintiffs' allegations are vague and conclusory and fail to allege facts to satisfy the elements of unjust enrichment; (2) the plaintiffs' claim fails because UBS merely exercised its contractual rights authorized in the CDO transaction documents; and (3) the claim is duplicative, as the plaintiffs cannot bring an unjust enrichment claim when an express contract covers the same subject matter. As to the defendants' argument that the plaintiffs' unjust enrichment claim must fail because UBS merely exercised its contractual rights authorized in the CDO transaction documents, the court again notes that the "CDO transaction documents" are not part of the complaint and may not be considered by the court in deciding this motion to strike.
"Unjust enrichment is a legal doctrine to be applied when no remedy is available pursuant to a contract . . . Recovery is proper if the defendant was benefited, the defendant did not pay for the benefit and the failure of payment operated to the detriment of the plaintiff . . . Although restitution for unjust enrichment often applies to situations in which there is no written contract, it can also apply to situations in which there is a written contract and the party seeking restitution has breached the contract." (Citations omitted; internal quotation marks omitted.) The Final Cut, LLC v. Sharkey, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 085007365 (May 5, 2009, Adams, J.).
"Unjust enrichment applies wherever justice requires compensation to be given for property or services rendered under a contract, and no remedy is available by an action on the contract . . . A right of recovery under the doctrine of unjust enrichment is essentially equitable, its basis being that in a given situation it is contrary to equity and good conscience for one to retain a benefit which has come to him at the expense of another . . . With no other test than what, under a given set of circumstances, is just or unjust, equitable or inequitable, conscionable or unconscionable, it becomes necessary in any case where the benefit of the doctrine is claimed, to examine the circumstances and the conduct of the parties and apply this standard . . . Unjust enrichment is, consistent with the principles of equity, a broad and flexible remedy . . . Plaintiffs seeking recovery for unjust enrichment must prove (1) that the defendants were benefited, (2) that the defendants unjustly did not pay the plaintiffs for the benefits, and (3) that the failure of payment was to the plaintiffs' detriment . . ." (Citations omitted; internal quotation marks omitted.) Vertex, Inc. v. Waterbury, 278 Conn. 557, 573, 898 A.2d 178 (2006).
First, the court will address the defendants' argument that this count is duplicative, as the plaintiffs cannot bring an unjust enrichment claim when an express contract covers the same subject matter. This argument is misplaced. "Under our pleading practice, a plaintiff is permitted to advance alternative and even inconsistent theories of liability against one or more defendants in a single complaint." Drejer v. Upjohn Co., 196 Conn. 242, 245, 492 A.2d 164 (1985). "Parties routinely plead alternative counts alleging breach of contract and unjust enrichment, although in doing so, they are entitled only to a single measure of damages arising out of these alternative claims. See, e.g., Banks Building Co. v. Malanga Family Real Estate Holding, LLC, 92 Conn. App. 394, 395 n. 2, 885 A.2d 204 (2005) (`plaintiff alleged breach of contract and, alternatively, unjust enrichment') . . . Under this typical belt and suspenders approach, the equitable claim is brought in an alternative count to ensure that the plaintiff receives some recovery in the event that the contract claim fails. See, e.g., United Coastal Industries v. Clearheart Construction Co., 71 Conn.App. 506, 511, 802 A.2d 901 (2002) (`[c]ounts two and three of the complaint, which seek damages for unjust enrichment and quantum meruit are meant to provide an alternative basis for recovery in the event of a failure to prove the breach of contract claim in count one')." (Citations omitted; internal quotation marks omitted.) J N Electric, Inc. v. Notkins, Superior Court, judicial district of New Haven, Docket No. CV 08 5020144 (May 20, 2009, Keegan, J.); see The Final Cut, LLC v. Sharkey, supra, CV 08 5007365 (stating that pursuant to Practice Book § 10-25, a party is permitted to plead unjust enrichment as an alternative to breach of contract).
Some Superior Courts have stricken a party's unjust enrichment count where that party pleads both unjust enrichment and breach of contract, and the party's unjust enrichment count incorporates by reference the breach of contract allegations. See Bridgeport Harbor Place v. Ganim, I, LLC, Superior Court, complex litigation docket at Waterbury, Docket No. X06 CV 040184523 (October 5, 2007, Stevens, J.); Silktown Roofing v. Haynes Construction, Superior Court, judicial district of Middlesex, Docket No. CV 054004864 (August 3, 2006, Dubay, J.) ( 41 Conn. L. Rptr. 770, 771) (precluding a party from claiming unjust enrichment within the same count that incorporates allegations of breach of an express contract); Burke v. The Boatworks, Inc., Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 04 4001838 (July 26, 2005, Jennings, J.) (granting a motion to strike because allegations of breach of an express contract were incorporated into the same count alleging unjust enrichment). In the present case, the plaintiffs do not incorporate their breach of contract count into their unjust enrichment count. As such, the plaintiffs are free to plead both unjust enrichment, and in the alternative, breach of contract.
As the plaintiffs are entitled to bring both an unjust enrichment claim and a breach of contract claim, the court will now address the defendants' argument that the plaintiffs' one-sentence allegation is vague and conclusory and fails to allege facts to satisfy the elements of unjust enrichment. In order to sufficiently plead a cause of action for unjust enrichment the plaintiffs must allege: "(1) that the defendants were benefited, (2) that the defendants unjustly did not pay the plaintiffs for the benefits; and (3) that the failure of payment was to the plaintiffs' detriment . . ." (Citation omitted; internal quotation marks omitted.) Vertex, Inc. v. Waterbury, supra, 278 Conn. 573.
The court notes that the plaintiffs' unjust enrichment count incorporates by reference the allegations contained in the prior nine counts.
In their complaint, the plaintiffs allege that the defendants benefited from their misrepresentations that induced the plaintiffs to purchase certain CDO Notes. As the defendants knew of the collateral's pending ratings downgrade, the defendants attempted to minimize their losses by selling the subject Notes to the plaintiffs with the knowledge that once the collateral was downgraded, the defendants could accelerate, liquidate the collateral and allow UBS to keep the plaintiffs' investment. Thus, UBS represented that they were selling an investment in a coupon payment that would pay out regularly. In reliance on the defendants' misrepresentations, the plaintiffs invested $48 million in the subject CDOs. Shortly thereafter, the defendants terminated the entire investment, keeping both the purchase price of the notes and the waterfall payments due on the Notes for itself. Pursuit allegedly lost $104.5 million in both principal and investment gain, based on a scenario in which the Notes would have performed as UBS represented. Based on the aforementioned allegations, the plaintiffs have sufficiently pleaded the elements necessary to state a claim for unjust enrichment. Accordingly, the defendants' motion to strike the tenth count is denied.
Count Eleven — Breach of Contract
In count eleven, the plaintiffs allege that the plaintiffs and UBS entered into valid and enforceable contracts for the sale of Notes in the CDOs and that the express terms of the contract were memorialized in writing in e-mails exchanged at the time the Notes were sold to the plaintiffs. The plaintiffs claim that they fully performed under the contract and that contrary to the parties' agreement, UBS breached the contract or anticipatorily breached the contract by declaring baseless events of default and by triggering a complete liquidation of the CDOs; and that UBS breached the contract by preventing the issuer from declaring a credit event under the credit default swaps, which could have prevented an "event of default" (EOD) from occurring. The plaintiffs further allege that UBS' actions were knowing, willing, wanton, malicious, and/or taken in reckless indifference to investors such as Pursuit and the plaintiffs were damaged as a result of such conduct.
The defendants move to strike count eleven on the grounds that: (1) the plaintiffs' allegations are vague and conclusory and fail to identify the substance of the alleged contracts or the circumstances under which they were executed; (2) the plaintiffs' claim conflicts with the express terms of the Offering Memoranda, Indentures, and Notes that govern and/or describe the transactions at issue and describe the rights and obligations of the parties; and (3) the plaintiffs rely on e-mails that: (i) explicitly state that they do not constitute the terms of those transactions; (ii) are consistent with the controlling transaction documents; (iii) are parole evidence that cannot be considered absent ambiguity in the contract which has not been alleged by the plaintiff; and (iv) sound in fraudulent inducement and not breach of contract.
"The elements of an action based upon breach of contract are, the formation of an agreement, performance by one party, breach of the agreement by the other party and damages." (Citations omitted; internal quotation marks omitted.) Oddo v. Warren, Superior Court, judicial district of Waterbury, Docket No. CV 075003533 (January 3, 2008, Trombley, J.). "When a plaintiff pleads a cause of action for breach of contract by setting forth a specific contractual obligation and alleges that it has not been met, this is sufficient to sustain a motion to strike. It is not necessary to allege specific terms of the contract . . . Whether the terms of the contract support that allegation is a factual question to be determined by the fact finder and, therefore, is not at issue when the trial court considers a motion to strike . . ." (Citations omitted; internal quotation marks omitted.) Golek v. St. Mary's Hospital, Superior Court, judicial district of Waterbury, Docket No. CV 08 5007118 (August 22, 2008, Roche, J.).
The crux of the defendants' argument rests on their position that the "contract" that has allegedly been breached is contained in the Offering Memoranda, Indentures, and Notes that govern the transactions at issue and that the e-mails cited by the plaintiffs do not constitute a "contract." The plaintiffs, however, have not incorporated into their complaint the Offering Memoranda or Indentures. In Edward J. Smith Co. v. Palmieri, Superior Court, supra, Docket No. CV 07 5003216, the court faced a similar circumstance in which the defendants' entire argument was based on language contained in an underlying contract. The contract, however, was not attached as an exhibit to the original complaint. In addressing the defendants' motion to strike, the court stated that "the court is specifically limited to a consideration of the facts alleged in the complaint . . . [A] motion to strike is essentially a procedural motion that focuses solely on the pleadings . . . It is, therefore, improper for the court to consider material outside of the pleading that is being challenged by the motion . . . Where the legal grounds for . . . a motion [to strike] are dependent upon underlying facts not alleged in the plaintiff's pleadings, the defendant must await the evidence which may be adduced at trial, and the motion should be denied." (Citations omitted; internal quotation marks omitted.) Id. The court reasoned that the defendants' argument was "based entirely on consideration of language in a contract that is not part of the original complaint." Id. The court held that "the legal grounds for the defendants' motion to strike [were] entirely dependant on facts not in the . . . complaint" and as such, the motion to strike must be denied. Id.
In the present case, the Offering Memoranda, Indentures, and Notes cited by the defendants are not part of the plaintiffs' complaint. As such, in determining whether a breach of contract occurred, this court is limited to what is contained within the complaint, and not the other documents referenced by the defendants. The plaintiffs base their breach of contract argument on a series of e-mails between the parties. Therefore, in order to determine whether the plaintiffs have sufficiently alleged a claim for breach of contract, it must first be determined whether the plaintiffs have sufficiently pleaded that a valid contract existed.
"The rules governing contract formation are well settled. To form a valid binding contract in Connecticut, there must be a mutual understanding of the terms that are definite and certain between the parties . . . [A]n agreement must be definite and certain as to its terms and requirements . . . So long as any essential matters are left open for further consideration, the contract is not complete . . . It is true . . . that in order to form a contract, generally there must be a bargain in which there is a manifestation of mutual assent to the exchange between two or more parties . . ." (Citation omitted; internal quotation marks omitted.) BioCapital, LLC v. BioSystem Solutions, Inc., Superior Court, judicial district of Stamford-Norwalk at Stamford, (June 1, 2009, Pavia, J.).
In the present case, the plaintiffs have merely made vague allegations of the existence of a contract between the parties. Although the plaintiffs claim that the e-mails attached to the complaint memorialize the terms of a contract, these same e-mails contain a disclaimer that the communications within cannot be relied upon as express contract terms. Mere vague allegations of the formation of a "contract" without factual support to such a legal conclusion are legally insufficient. Without the allegation of a valid and enforceable agreement, the plaintiffs have failed to sufficiently plead a cause of action for breach of contract. Accordingly, the defendants' motion to strike count eleven is granted.
Count Twelve — Breach of Duty of Good Faith Fair Dealing
In count twelve, the plaintiffs allege that they entered into valid and enforceable contracts for the sale of the Notes in the CDOs and that the implied covenant of good faith and fair dealing in the contracts between the plaintiffs and UBS required UBS to deal fairly with the plaintiffs and in good faith during the course of their contractual dealings. The plaintiffs further allege that UBS engaged in conduct that injured the plaintiffs' right to receive its contractual benefits, and by engaging in such conduct, UBS acted with dishonest purpose and bad faith.
The defendant moves to strike count twelve on the grounds that: (1) the plaintiffs fail to allege facts to show that a valid and enforceable contract existed between the parties; and (2) UBS could not have breached any duty to the plaintiffs by exercising its contractual rights under the CDO transaction documents.
"[I]t is axiomatic that the . . . duty of good faith and fair dealing is a covenant implied into a contract or a contractual relationship . . . In other words, every contract carries an implied duty requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement . . . The covenant of good faith and fair dealing presupposes that the terms and purpose of the contract are agreed upon by the parties and that what is in dispute is a party's discretionary application or interpretation of a contract term." (Citation omitted; internal quotation marks omitted.) Renaissance Management Co. v. Connecticut Housing Finance Authority, 281 Conn. 227, 240, 915 A.2d 290 (2007). "Essentially, it is a rule of construction designed to fulfill the reasonable expectations of the contracting parties as they presumably intended. The principle, therefore, cannot be applied to achieve a result contrary to the clearly expressed terms of a contract, unless, possibly, those terms are contrary to public policy." (Citation omitted; internal quotation marks omitted.) LaSalle National Bank v. Freshfield Meadows, LLC, 69 Conn.App. 824, 834, 798 A.2d 445 (2002).
The defendants argue that the plaintiffs fail to allege facts to show that a valid and enforceable contract existed between the parties. In addressing this aspect of the defendants' motion, the court incorporates and adopts the reasoning used in responding to the defendants' arguments in count eleven. Here, as in count eleven, the court finds that the plaintiffs fail to sufficiently allege that a valid and enforceable contract existed between the parties. As the court has determined that the plaintiffs' allegations are insufficient on this ground, it will not address the defendants' second ground in its motion to strike count twelve. Accordingly, the defendants' motion to strike count twelve is granted.
Count Eighteen Civil Conspiracy Connecticut Unfair Trade Practices Act (CUTPA)
In the eighteenth count, the plaintiffs incorporate the prior allegations and further allege that the defendants agreed by words or conduct to accomplish the unlawful goal of defrauding the plaintiffs into investing in CDOs they were told were investment grade, but which the defendants knew were not. Further, the plaintiffs allege that the defendants and Moody's worked in concert to create a CDO investment vehicle that, although not investment grade, was represented to the plaintiffs as being investment grade. UBS allegedly paid Moody's and S P significant consulting fees over and above their ratings fee for their services. Additionally, the plaintiffs allege that without the active participation of Moody's and S P, which falsely rated the Notes as investment grade, the defendants would not have been able to market the Notes as such, and thus, the plaintiffs would not have purchased the Notes . . ."The [elements] of a civil action for conspiracy are: (1) a combination between two or more persons, (2) to do a criminal or an unlawful act or a lawful act by criminal or unlawful means, (3) an act done by one or more of the conspirators pursuant to the scheme and in furtherance of the object, (4) which act results in damage to the plaintiff.
There is, however, no independent claim of civil conspiracy. Rather, [t]he action is for damages caused by acts committed pursuant to a formed conspiracy rather than by the conspiracy itself . . . Thus, to state a cause of action, a claim of civil conspiracy must be joined with an allegation of a substantive tort . . . [T]he essence of a civil conspiracy . . . [is] two or more persons acting together to achieve a shared goal that results in injury to another . . .
"Thus, the purpose of a civil conspiracy claim is to impose civil liability for damages on those who agree to join in a tortfeasor's conduct and, thereby, become liable for the ensuing damage, simply by virtue of their agreement to engage in the wrongdoing. Implicit in this purpose, and in the principle that there must be an underlying tort for the viability of a civil conspiracy claim, is the notion that the coconspirator be liable for the damages flowing from the underlying tortious conduct to which the coconspirator agreed. This reasoning, however, does not extend so as to impose civil liability on a coconspirator for damage caused by the actual wrongdoer before the civil coconspirator even joined the conspiracy. By that time, the underlying tort had already been completed. The purpose of civil liability is to allocate the loss between persons who may be in some legal sense responsible for that loss. We can see no reason to extend that purpose to a defendant who could not have been in any sense responsible for a loss because it had not begun to participate in the civil conspiracy resulting in that loss until long after the loss was incurred." (Citations omitted; internal quotation marks omitted.) Macomber v. Travelers Property Casualty Corp., 277 Conn. 617, 635-37, 894 A.2d 240 (2006).
The defendants move to strike count eighteen on the grounds that: (1) to the extent that the plaintiffs rely on CUTPA, Connecticut law holds that CUTPA does not apply to the purchase and sale of securities; and (2) civil conspiracy is not a separate and independent cause of action.
Connecticut Unfair Trade Practices Act, General Statutes § 42-110 et seq. "provides that [n]o person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce . . . In order to enforce this prohibition, CUTPA provides a private cause of action to [a]ny person who suffers any ascertainable toss of money or property, real or personal, as a result of the use or employment of a [prohibited] method, act or practice . . . Thus, in order to prevail in a CUTPA action, a plaintiff must establish both that the defendant has engaged in a prohibited act and that, as a result of this act, the plaintiff suffered an injury." (Citations omitted; emphasis in original; internal quotation marks omitted.) Stevenson Lumber Co.-Suffield, Inc. v. Chase Associates, Inc., 284 Conn. 205, 213-14, 932 A.2d 401 (2007).
"The Connecticut statute that expressly governs the purchase and sale of securities is CUSA, which in General Statutes § 36-498 [§ 36b-29] provides a private remedy for a buyer who has suffered injury because of allegedly deceptive sales practices by someone who offers or sells a security. That statute affords the defrauded buyer the right to recover restitutionary damages, interest and attorneys fees." Russell v. Dean Witter Reynolds, Inc., 200 Conn. 172, 175-76, 510 A.2d 972 (1986).
"The crucial question is not whether CUSA transactions are exempt from CUTPA but whether CUTPA itself can fairly be interpreted to encompass such transactions in the first instance. We recognize the sweeping nature of the reference in § 42-110b(a) to `deceptive acts or practices in the conduct of any trade or commerce . . .' and the breadth of the definition of `trade' and `commerce' in [General Statutes] § 42-110a(4). This statutory language must, however, be reconciled with the equally unconditional statutory language that, in construing § 42-110b(a), "the commissioner and the courts of this state shall be guided by interpretations given by the Federal Trade Commission and the federal courts to Section 5(a)(1) of the Federal Trade Commission Act ( 15 U.S.C. 45(a)(1)), as from time to time amended." Id., 178-79.
"Consequently, we must construe CUTPA as not purporting to cover transactions for the purchase and sale of securities. This conclusion finds support in the totality of the legislative and administrative patterns regulating deceptive practices in this state . . . CUSA unequivocally provides a private cause of action for injuries caused by deceptive purchases and sales of securities . . . Although this uniform statute was not enacted in Connecticut until 1977, four years after the passage of CUTPA in 1973, its predecessors in Connecticut law had established the existence of a private cause of action in Connecticut; General Statutes (Sup. 1969) §§ 36-338 and 36-346; well before the enactment of CUTPA. Consistently, the commissioner of consumer protection, who bears administrative responsibility for the enforcement of CUTPA, has never sought to enforce CUTPA in the context of a security transaction. The commissioner has promulgated no regulation pertaining to the deceptive sale of securities; Regs., Conn. State Agencies §§ 42-110b-1 through 42-110b-28; and, to the best of our knowledge, has obtained not one order or injunction relating thereto. This history demonstrates that, following the lead of the FTC, Connecticut has long separated regulation of the purchase and sale of securities from the regulation of unfair trade practices in other industries." (Citations omitted.) Id., 180-83.
Thus, it is clear that CUTPA does not apply to transactions for the purchase and sale of securities. CUSA defines the term "security" to include "any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness . . . or, in general, any interest or instrument commonly known as a `security' . . ." General Statutes § 36b-3(19). Accordingly, as the plaintiffs' allegations focus on the alleged misrepresentations and fraudulent omissions of the defendants that induced the plaintiffs to purchase the subject Notes, which are "securities" as defined by CUSA, the court must grant the defendants motion to strike count eighteen, as CUTPA does not apply to the deceptive practices in the purchase and sale of securities. Accordingly, the defendants' motion to strike count eighteen is granted.
Count Twenty-One — Common Law Fraud — RLN Program
In count twenty-one, the plaintiffs allege that in addition to the claims set forth above, they were also defrauded by UBS' wrongful conduct relating to two other investments known as Reference Link Note (RLN) investments (North Street CDO and Brooklands CDO). The plaintiffs allege that UBS structured, sold and managed an investment product known as the RLN Program for the purposes of acquiring credit protection. The RLN provided for credit default swaps between UBS, as buyer of protection on part of the risk, and issues of RLNs as sellers of protection. In order to induce the plaintiffs to purchase Notes in the RLN Program, UBS represented that the assets chosen for the RLN Program would be selected based upon the stability of their credit profiles, that the assets would be carefully monitored, and that UBS would take proactive measures with respect to the reference credits to avoid downturn credit migration. UBS further represented that the principal objective for these Notes was to select credit backed by assets with no foreseeable credit problems and credits that are viewed as stable. Additionally, UBS represented that the assets chosen were "conservative" and that the assets of the investment would consist of seventy percent investment grade/government-backed bonds and thirty percent of the U.S. housing markets (RMBS). The plaintiffs allege that the above representations were false.
In addition, the plaintiffs allege that UBS, in furthering their interest to sell poor investments of Dillon Read Capital Management (Dillon Read), a UBS wholly-owned subsidiary, transferred substantial portions of Dillon Read's portfolio of U.S. sub-prime mortgage Notes to the RLN Program. This allowed UBS to limit the losses of Dillon Read, and increase the value of UBS' position as the credit default swap counterparty in the RLN Program. In transferring Dillon Read's sub-prime mortgage Notes into the RLN Program, UBS acted in direct contravention of the promises and representations made by UBS to the plaintiffs. The actual exposure to the risk of the U.S. housing market was in excess of the thirty percent that was represented to the plaintiffs, and in reality was closer to forty percent. Additionally, in contravention of UBS' representations that the program's assets would be "conservative," the program's assets consisted of substantial exposure to high-risk sub-prime mortgages within the U.S. housing market.
Moreover, UBS' representations as to the management and investment criteria that would be employed after the Notes were sold were false. Specifically, UBS failed to properly choose assets with stable credit profiles, failed to carefully monitor the assets they purchased, and exposed the investors to significant losses due to downturn credit migration. Further, UBS failed to manage the RLN portfolio in line with their "prudent investment objectives" and put its own interests ahead of the interest of its investors.
In sum, the collateral UBS represented to plaintiffs as representative of the RLN Program was not in fact representative of the assets UBS was actually purchasing and placing within the program. The plaintiffs reasonably relied on UBS' representations as to what assets were being purchased for the program and how they would manage the program. As a result of UBS' mismanagement of the RLN Program, the plaintiffs' investments in North Street and Brooklands CDO Notes have lost value. The plaintiffs further allege that the RLN Program would not have lost value if UBS had not mismanaged the assets and if the composition of the asset mix was as originally represented by UBS at the time of sale.
Additionally, the plaintiffs allege that UBS knowingly, intentionally, and fraudulently made false representations of fact regarding its role in the programs and that UBS knew the statements were false at the time they were made. Further, the false statements were made with the intent of inducing the plaintiffs to rely on said false statements in order to purchase interest in both the North Street and Brooklands CDOs.
The defendants move to strike count twenty-one on the grounds that: (1) the plaintiffs' allegations are too vague and conclusory to satisfy the general pleading standard in Connecticut, much less the heightened standard for pleading fraud; (2) the plaintiffs' claim must fail because UBS merely exercised its contractual rights authorized in the CDO transaction documents; and (3) the plaintiffs have failed to allege facts that show any statements by UBS concerning the RLN Program were false when made.
As previously stated: "A cause of action for fraud in the inducement is the same as a common law claim [for] fraudulent misrepresentation . . . Fraud consists in deception practices in order to induce another to part with property or surrender some legal right, and which accomplishes the end designed . . . The essential elements of a cause of action in fraudulent misrepresentation are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon the false representation to his injury." (Citations omitted; internal quotation marks omitted.) Tamborino v. Velocity Express, Inc., Superior Court, supra, Docket No. CV 05 05000234.
The defendants initially move to strike count twenty-one on the ground that the allegations contained therein are too vague and conclusory to satisfy the heightened standard for pleading fraud. "Because the standard of proof at trial is heightened, so too is the standard for pleading a cause of action. Thus, [w]here a claim for damages is based upon fraud, the mere allegation that a fraud has been perpetrated is insufficient; the specific acts relied upon must be set forth in the complaint. Maruca v. Phillips, 139 Conn. 79, 81, 90 A.2d 159 (1952). A plaintiff cannot make general assertions of fraudulent misrepresentations, but must plead particular facts demonstrating what the representations were and how they were false. Plotkin v. Barot, Superior Court, judicial district of [Fairfield], Docket No. [CV 97 0346547] (June 15, 1999, Skolnick, J.) (striking fraudulent misrepresentation count for failure to specifically allege what the statements were or the reason they were false.); Chestnut v. Kent, [Superior Court, judicial district of Fairfield, Docket No. CV 970346653 (April 17, 1998, Skolnick, J.)] ( 22 Conn. L. Rptr. 29)." (Internal quotation marks omitted.) St. Denis v. De Toledo, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 00 0180606 (April 5, 2002, Downey, J.), aff'd, 90 Conn.App. 690, 879 A.2d 503, cert. denied, 276 Conn. 907, 884 A.2d 1028 (2005). The court finds that the plaintiffs sufficiently allege the specific acts and misrepresentations that they claim were false and how they were false.
With respect to the defendants' second ground that the plaintiffs' claim must fail because UBS merely exercised its contractual rights authorized in the CDO transaction documents, the court has previously noted that these documents are not part of the complaint, and thus, cannot be considered by the court on this motion. Thus, the defendants' argument that UBS merely exercised its contractual rights authorized in the CDO transaction documents fails, as it relies on facts and documents not part of the complaint.
Lastly, the defendants move to strike count twenty-one on the ground that the plaintiffs have failed to allege facts that show any statements by UBS concerning the RLN Program were false when made. The plaintiffs, however, allege that UBS represented that certain assets would be purchased and placed within the Franchise Programs and that such representations were untrue and known to be untrue at the time they were made. Thus, the plaintiffs sufficiently allege that the defendants knew that the statements were false when made. Accordingly, the defendants' motion to strike count twenty-one is denied.
Count Twenty-Two — Fraudulent Concealment
As with count two, the plaintiffs in their brief mischaracterize the allegations contained in this count. The court reads count twenty-two as alleging fraudulent nondisclosure, not fraudulent concealment of a cause of action. The defendants move to strike count twenty-two on the grounds that: (1) the plaintiffs fail to allege facts that show that the defendant UBS possessed an intent to deceive the plaintiffs; and (2) the plaintiffs could not have justifiably relied on any alleged misrepresentation.
As previously stated, "[t]he essential elements of a cause of action in [fraud] . . . are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon the false representation to his injury . . ." (Citation omitted; internal quotation marks omitted.) Tamborino v. Velocity Express, Inc., supra, Superior Court, Docket No. CV 05 05000234. "An action will lie for a fraudulent [nondisclosure] which causes one to continue in a course of action . . . Furthermore, the `[nondisclosure] must be by a person intending or expecting thereby to cause a mistake by another to exist or to continue, in order to induce the latter to enter into or refrain from entering into a transaction . . . Usually, mere [nondisclosure] does not amount to [fraud.] . . . Nondisclosure may . . . amount to fraud when there is a failure to disclose known facts under circumstances that impose a duty to speak . . ." (Citations omitted; internal quotation marks omitted.) Caltabiano v. L L Real Estate Holdings II, LLC, supra, Superior Court, Docket No. CV 07 4019729.
In count twenty-two, the plaintiffs explicitly allege that UBS' nondisclosures were made with the intent of inducing Pursuit to purchase interests in both the North Street and Brooklands CDOs. The plaintiffs further allege that UBS knew that had Pursuit known of the fraudulent omissions, Pursuit would not have invested in either the North Street or Brooklands CDOs. These allegations clearly state that UBS intended to deceive Pursuit with the hope that their nondisclosures would induce Pursuit to purchase interests in the Notes. Additionally, the defendants' argument that the plaintiffs failed to sufficiently allege justifiable or reasonable reliance is misplaced. "`[R]easonable reliance,' is not an element of fraud . . ." (Citations omitted.) Goldstein v. Unilever, supra, 37 Conn. L. Rptr. 163-64. Accordingly, the defendants' motion to strike count twenty-two is denied.
Count Twenty-Three — Innocent Misrepresentation
In count twenty-three, the plaintiffs allege that the defendants negligently made false statements of material fact regarding UBS' involvement and failed to exercise reasonable care or competence in obtaining or communicating the false statements to the plaintiffs. The plaintiffs claim that these false statements were made with the intent of inducing the plaintiffs to rely on the false statements in order to purchase interests in both the North Street and the Brooklands CDOs and that the plaintiffs reasonably and justifiably relied on the false statements to their detriment by investing in both the North Street and Brooklands CDOs. The plaintiffs further allege that it was reasonably foreseeable to the defendants that investors such as Pursuit would rely upon and act upon the false statements in deciding to invest in both the North Street and the Brooklands CDOs. The plaintiffs also claim that they suffered damages as a result.
Although the defendants have labeled this count a claim for "innocent misrepresentation," the elements allege a cause of action in negligent misrepresentation. The elements of innocent misrepresentation and negligent misrepresentation, however, are similar, and the elements which the defendants base their motion to strike upon are the same for both. Further, although the count sets forth the elements of negligent misrepresentation, the elements of innocent misrepresentation are satisfied within said allegations. Because neither party has addressed this issue, this court will treat this count as setting forth a cause of action sounding in innocent misrepresentation.
The defendants move to strike count twenty-three on the ground that the plaintiffs fail to allege: (1) facts that show the elements of a false misrepresentation of material fact; and (2) justifiable reliance. The elements needed for a claim of innocent misrepresentation are stated in the court's discussion of count five. The defendants first argue that the plaintiffs' claim for innocent misrepresentation should be stricken because the plaintiffs failed to allege that the defendants made any false statements of material fact. In addressing this aspect of the defendants' motion, the court incorporates and adopts the reasoning used in responding to the defendants' arguments in count twenty-one. Here, as in count twenty-one, the court finds that the plaintiffs have sufficiently alleged that the defendants made false statements of material fact.
The defendants next argue that the claim for innocent misrepresentation is insufficient because the plaintiffs, as sophisticated investors, could not justifiably have relied on any of the alleged misrepresentations. In addressing this aspect of the defendants' motion, the court incorporates and adopts its discussion of the requirements for sufficiently pleading justifiable reliance as set forth in count four. Here, as in count four, the court finds that the plaintiffs have sufficiently alleged that their reliance on the defendants' statements was justifiable. The plaintiffs allege that they "purchased Notes in the North Street DCO and Brooklands CDO based upon UBS's representations." The plaintiffs further allege that they "relied on the false statements to [their] detriment by investing funds in both the North Street and Brooklands CDOs." Additionally, the plaintiffs allege they "reasonably relied upon UBS' representations as to what assets they were purchasing for the Franchise Programs and what investment objectives they would apply managing the Franchise Programs" and that they "further reasonably relied upon UBS' representation as to how they would manage the Franchise Programs." Further, the plaintiffs allege that "Pursuit reasonably and justifiably relied on the false statements to its detriment by investing in both the North Street and the Brooklands CDOs, which investments have since fallen in value." Finally, the plaintiffs allege that "Pursuit has been damages as a result of [the] [d]efendants' conduct." Through such allegations the plaintiffs have sufficiently alleged justifiable reliance on the defendants' misrepresentations.
As the plaintiffs have sufficiently pled that the defendants made false statements of material fact and justifiable reliance, the defendants' motion to strike count twenty-three is denied.
Count Twenty-Four — Negligent Concealment
In count twenty-four, the plaintiffs allege that the defendants owed Pursuit a duty of care to exercise the degree of skill normally expected of the creators, marketers, sellers of, or advisors to, certain investments. In negligently omitting certain aforementioned facts regarding UBS' involvement with and position in the North Street and Brooklands CDOs, the defendants failed to exercise reasonable care or competence in negligently concealing the omissions from Pursuit. The defendants move to strike count twenty-four on the grounds that: (1) this count is duplicative, as negligent concealment is not an independent cause of action from negligent misrepresentation; and (2) the plaintiffs failed to allege facts showing the elements of a false misrepresentation of material fact and justifiable reliance.
As previously stated, negligent concealment does not constitute an independent cause of action. Franco v. Mediplex Construction, Inc., supra, Docket No. CV 96 0390458. Accordingly, the defendants' motion to strike count twenty-four is granted.
Count Twenty-Five — Negligent Supervision
In count twenty-five of the complaint, the plaintiffs allege that UBS had a duty to supervise their employees including Morelli, Malik and Menzel and that these employees engaged in tortious conduct by communicating false statements of material fact and by fraudulently omitting certain material facts. The plaintiffs further allege that these defendants failed to properly supervise their employees to ensure that such false statements were not made and also "knew or should have known" or it was "reasonably foreseeable" that the conduct of their employees would have caused injury of the general nature suffered by the plaintiffs. The defendants move to strike count twenty-five on the grounds that the plaintiffs fail to allege facts that show that the defendant UBS knew or should have known prior to the plaintiffs' alleged injury that UBS' employees possessed a "propensity" to misrepresent or withhold information from potential investors.
In addressing this aspect of the defendants' motion, the court incorporates and adopts the reasoning used in discussing count seven. Here, as in count seven, the court finds that the plaintiffs have failed to allege facts that support the element of foreseeability in their claim of negligent supervision. The plaintiffs have merely alleged conclusions of law, unsupported by the facts, stating that defendants, UBS and UBS Securities, knew or should have known that its employees would have caused injury of the general nature of the kind suffered by the plaintiffs. The plaintiffs fail to allege that the defendants' employees had a propensity to engage in the alleged harmful conduct, nor do they allege that their employee's actions were more then an isolated incident.
Accordingly, the court finds that the plaintiffs' claims of negligent supervision are insufficient as a matter of law, and the motion to strike is granted as to count twenty-five.
Count Twenty-Six — Negligence
In count twenty-six of the complaint, the plaintiffs allege that the defendants owed them a duty of care and that the defendants breached this duty by failing to inform the plaintiffs of certain material information regarding the transactions at issue. The plaintiffs claim that they reasonably and justifiably relied on the information and statements provided by the defendants in deciding to invest in the Notes and that it was reasonably foreseeable to the defendants that investors such as the plaintiffs would rely upon and act upon information and statements provided by the defendants in deciding to invest in the Notes. The plaintiffs further allege that they were damaged as a result of the defendants' conduct.
The defendants move to strike count twenty-six on the grounds that: (1) the plaintiffs' allegations are vague and conclusory and do not identify sufficient facts to place UBS on notice of the specific circumstances underlying the plaintiffs' claims; (2) the plaintiffs fail to allege facts that show that any statements by UBS concerning the RLN Program were false when made; (3) the plaintiffs fail to allege facts that show that the plaintiffs could have reasonably relied on its interpretation of the alleged informal statements from UBS in light of the disclosures in the transaction documents for the RLN Program Notes; and (4) the plaintiffs have failed to satisfy the elements of a negligence claim by failing to allege facts to show that its alleged injuries were reasonably foreseeable.
As previously stated in addressing count eight, "[t]he essential elements of a cause of action in negligence are well established: duty; breach of that duty; causation; and actual injury . . . Duty is a legal conclusion about relationships between individuals, made after the fact, and [is] imperative to a negligence cause of action . . . Thus, [t]here can be no actionable negligence . . . unless there exists a cognizable duty of care . . . The test for determining legal duty is a two prong analysis that includes: (1) a determination of foreseeability, and (2) public policy analysis . . ." (Citations omitted; internal quotation marks omitted.) Doe v. Nelson, supra, 45 Conn. L. Rptr. 429. As the defendants are only attacking the issue of foreseeability within their motion to strike, this court will only address the foreseeability prong of the duty of care test. A discussion of foreseeability is found in the court's ruling as to count eight.
In the present case, the plaintiffs allege that the defendants knew, yet failed to inform the plaintiffs: (1) of the true facts regarding the Franchise Programs; (2) that they were not carefully selecting and monitoring the assets chosen for the RLN Program; (3) that they were not taking proactive measures to avoid downturn credit migration; (4) that they were not selecting credits that were backed by assets with no foreseeable credit problems and credits that were stable or having potential for improvement over time; (5) that they were not selecting assets for the RLN Program that were conservative; (6) that they were not conservatively managing the assets and investments in the RLN Program; (7) that the RLN Program was not comprised of [seventy percent] investment grade/government-backed bonds and [thirty percent] of the RMBS; (8) that the RLN Program's exposure to the risk of the U.S. housing market was in excess [forty percent]; (9) that they held the position of credit default swap counterparty in the Franchise Programs; (10) that they were dumping the poorly performing assets of Dillon Read into the RLN Program; (11) that they were putting their interests ahead of Pursuit's interests in using the RLN Program to rid UBS of poorly performing assets which benefited UBS as the credit default swap counterparty, and hurt Pursuit because the assets placed in the RLN Program from the portfolio of Dillon Read did not meet the performance or stability criteria for the RLN Program; (12) that they were placing poorly performing, high-risk, sub-prime mortgages into the RLN Program; (13) that they were betting against the performance of the RLN Program in their capacity of credit default swap counterparty; and (14) that they were in a conflict of interest with regard to the RLN Program as a result of their status as both the manager of the RLN Program and the credit default swap counterparty to that same Program.
The plaintiffs further allege that they reasonably and justifiably relied on the information and statements provided by the defendants in deciding to invest in the Notes and that it was reasonably foreseeable to the defendants that investors such as the plaintiffs would rely and act upon information and statements provided by the defendants in deciding to invest in the Notes.
"The court's inquiry is whether a reasonable person in the defendants' position, knowing what the defendants knew, would be able to anticipate that harm of the general nature of that suffered was likely to result . . ." (Citation omitted; internal quotation marks omitted.) Baker v. Spinney, Superior Court, supra, Docket No. CV 07 5001737. The court finds, based on the allegations of the plaintiffs, that it is reasonably foreseeable that failing to provide material facts about an investment, thereby making the investment seem more valuable and potentially profitable than it actually was, would induce an investor to purchase Notes it would not have purchased if the investor had known all of the pertinent information. Similarly, it is foreseeable that a person who purchases Notes that were not of the quality and caliber represented to them, would suffer financial losses much greater than anticipated. Because the defendants could have anticipated the result their actions would have on the plaintiffs and it was reasonably foreseeable that such harm would occur, the defendants owed a duty of care to the plaintiffs. Accordingly, the defendants' argument that the plaintiffs have failed to satisfy the elements of a negligence claim by failing to allege facts to show that their alleged injuries were reasonably foreseeable, fails.
The defendants further assert that the plaintiffs fail to allege facts that show that the defendant UBS made any false statements of material facts to the plaintiffs. In addressing this aspect of the defendants' motion, the court incorporates and adopts its earlier reasoning. Here, as in count twenty-one, the court finds that the plaintiffs have sufficiently alleged that the defendants made false statements of material fact.
The defendants additionally argue that the plaintiffs do not allege facts that show that the plaintiffs could have reasonably relied on its interpretation of the informal statements from UBS in light of the disclosures in the transaction documents for the RLN Program Notes. These transaction documents, however, are not part of the plaintiffs' pleadings and, therefore, cannot be addressed at this time. As to whether the plaintiffs could have reasonably relied on UBS' alleged misrepresentations, the court incorporates and adopts its earlier reasoning. Here, as in count twenty-three, the court finds that the plaintiffs have sufficiently alleged that their reliance on the defendants' statements was reasonable.
It is also the defendants' position that the plaintiffs' allegations are vague and conclusory and do not identify sufficient facts to place UBS on notice of the specific circumstances underlying the plaintiffs' claims. The court finds the argument unpersuasive and holds that the plaintiffs have sufficiently plead facts necessary to support a cause of action in negligence. Accordingly, the defendants' motion to strike count twenty-six is denied.
County Twenty-Seven — Connecticut Uniform Securities Act
In count twenty-seven, the plaintiffs allege that the defendants offered securities for sale by means of untrue statements of material fact and omissions of material facts that were necessary in order to make the statements made true, in light of the circumstances under which they were made. The defendants move to strike this count on the grounds that the plaintiffs fail to allege facts that satisfy the elements of an actionable claim under CUSA. Specifically, that the plaintiffs have not shown that UBS made any false statements or omissions of material fact, as the alleged misrepresentations were not material in light of the extensive disclosures in the transaction documents for the RLN Program Notes.
As previously stated, § 36b-29 provides in relevant part: "(a) Any person who . . . (2) offers or sells or materially assists any person who offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, who knew or in the exercise of reasonable care should have known of the untruth or omission, the buyer not knowing of the untruth or omission, and who does not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission, is liable to the person buying the security . . ."
In addressing this aspect of the defendants' motion, the court incorporates and adopts its earlier reasoning. Here, as in count nine, the court finds that the plaintiffs have sufficiently alleged that the defendants made false statements of material fact. As previously discussed, on a motion to strike, the court is limited to the facts alleged in the complaint; Faulkner v. United Technologies Corp., supra, 240 Conn. 580; and said facts are taken as admitted. Gazo v. Stamford, supra, 255 Conn. 260. Thus, based on the allegations found in the complaint and the documents that may properly be considered on a motion to strike, the plaintiffs have sufficiently alleged that the defendants made false statements and omissions of material fact. Accordingly, the defendants' motion to strike count twenty-seven is denied.
Count Twenty-Eight Unjust Enrichment
In count twenty-eight, the plaintiffs incorporate the prior allegations and further allege that the defendants benefited from the monies invested by Pursuit in the North Street and Brooklands CDOs. Additionally, the plaintiffs allege that the defendants were unjustly enriched as a result of their wrongful conduct. The defendants move to strike count twenty-eight on the ground that the plaintiffs' one-sentence allegation is vague and conclusory and fails to allege facts to satisfy the elements of unjust enrichment.
As previously stated, the plaintiffs must plead that: "(1) that the defendants were benefited, (2) that the defendants unjustly did not pay the plaintiffs for the benefits, and (3) that the failure of payment was to the plaintiffs' detriment . . ." (Citations omitted; internal quotation marks omitted.) Vertex, Inc. v. Waterbury, supra, 278 Conn. 573. The court disagrees with the defendants' contention that the plaintiffs failed to sufficiently plead a claim for unjust enrichment. The plaintiffs allege that as a result of the defendants' misrepresentations, the plaintiffs invested in the North Street and Brooklands CDOs. Thus, the plaintiffs allege that the defendants used misrepresentations to induce Pursuit to invest in CDOs which UBS structured, sold and managed. Further, the plaintiffs allege that UBS, as a credit default swap counterparty, benefited from the transfer of failing sub-prime mortgage Notes into the RLN Program. Additionally, the plaintiffs allege that UBS' placement of cheap sub-prime mortgages in the Program, not only minimized the cost, but also maximized UBS' profits from selling and managing the Program. Thus, as a direct result of UBS' misrepresentations and mismanagement of the Program, Pursuit's investment lost significant value, while UBS benefited.
Based on the allegations, the plaintiffs have sufficiently pleaded the elements necessary required to state a claim for unjust enrichment. Accordingly, the defendants' motion to strike count twenty-eight is denied.
Count Twenty-Nine — Breach of Fiduciary Duty
In count twenty-nine, the plaintiffs allege that the defendants acted as an advisor to the plaintiffs in the purchase of or investment in the North Street and/or Brooklands CDOs and as the manager of the RLN Program. The plaintiffs claim that the defendants, in their capacity as advisor and manager owed the plaintiffs a fiduciary duty, and that the plaintiffs relied on the defendants to conduct themselves in accordance with their fiduciary obligations. The plaintiffs further allege that they relied on the advice, counsel, guidance, managerial judgment and prudence of the defendants, and by engaging in self-dealing, concealment, fraud, negligence, breach of contract and the other acts complained of, the defendants breached their fiduciary duty, causing damage to the plaintiffs. The defendants move to strike count twenty-nine on the grounds that: (1) the plaintiffs have failed to allege facts to show that a valid and enforceable contract existed between the parties; and (2) UBS could not have breached any duty to the plaintiffs by exercising their contractual rights under the CDO transaction documents.
"To assert a claim for breach of a fiduciary duty the plaintiff has the burden of proving the existence of a fiduciary relationship . . . In the context of discussing a claim of breach of fiduciary duty, the Supreme Court has observed that [i]t is well settled that a fiduciary or confidential relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other . . . Although this court has refrained from defining a fiduciary relationship in precise detail and in such a manner as to exclude new situations we have recognized that not all business relationships implicate the duty of a fiduciary . . . In particular instances, certain relationships, as a matter of law, do not impose upon either party the duty of a fiduciary . . .
"In the seminal cases in which this court has recognized the existence of a fiduciary relationship, the fiduciary was either in a dominant position, thereby creating a relationship of dependency, or was under a specific duty to act for the benefit of another . . . On the other hand, [i]n the cases in which this court has, as a matter of law, refused to recognize a fiduciary relationship, the parties were either dealing at arm's length, thereby lacking a relationship of dominance and dependence, or the parties were not engaged in a relationship of special trust and confidence . . . Furthermore, [t]he law will imply [fiduciary responsibilities] only where one party to a relationship is unable to fully protect its interests [or where one party has a high degree of control over the property or subject matter of another] and the unprotected party has placed its trust and confidence in the other . . .
"It is inappropriate to decide a question of fact on a motion to strike . . . It is appropriate, however, for this court to decide whether the plaintiff . . . has [pleaded] sufficient facts to allege a fiduciary relationship." (Citations omitted; internal quotation marks omitted.) Golek v. St. Mary's Hospital, supra, Superior Court, Docket No. CV 08 5007118. "A fiduciary duty rests on the validity of an underlying contract . . . A review of the Restatement (Third) of Agency supports this conclusion stating that, `[a]n agent has a duty to act in accordance with the express and implied terms of any contract between the agent and principal.'" (Citation omitted). Webster Financial Corp. v. McDonald, Superior Court, judicial district of Waterbury, Docket No. CV 08 4016026 (January 28, 2009, Brunetti, J.).
The defendants argue that they could not have breached any duty to the plaintiffs by exercising their contractual rights under the CDO transaction documents. As previously discussed, the CDO transaction documents are not part of the plaintiffs' pleadings and, therefore, the defendants cannot rely on contractual rights contained within such documents in support of their motion to strike this count. The defendants further argue that the plaintiffs have failed to allege facts to show that a valid and enforceable contract existed between the parties. The elements necessary for a valid contract are presented in this court's discussion of count eleven.
The plaintiffs state in their complaint that they "entered into valid and enforceable contracts." The plaintiffs, however, have not attached contracts nor provided the factual basis for them. Rather, the plaintiffs base their breach of contract argument on a series of e-mails between the parties. Although the plaintiffs claim that e-mails attached to the complaint memorialize the terms of a contract, these e-mails explicitly contain a disclaimer to the contrary. Mere vague allegations of the formation of a "contract" without factual support for such a conclusion are legally insufficient. Without the allegation of a valid and enforceable agreement, the plaintiffs have failed to sufficiently plead a cause of action for breach of fiduciary duty, as a "fiduciary rests on the validity of an underlying contract." Webster Financial Corp. v. McDonald, supra, Superior Court, Docket No. CV 08 4016026. Accordingly, the defendants' motion to strike count twenty-nine is granted.
Count Thirty — Breach of Duty of Good Faith Fair Dealing
In count thirty, the plaintiffs allege that Pursuit and UBS entered into valid and enforceable contracts for the sale of Notes in the North Street and Brooklands CDOs and that the implied covenant of good faith and fair dealing within these contracts required UBS to deal fairly with Pursuit and in good faith during the course of their contractual dealing. The plaintiffs claim that under the terms of the contract, Pursuit reasonably expected to receive certain benefits and that UBS engaged in conduct that injured Pursuit's right to receive such benefits. The plaintiffs further allege that UBS acted with dishonest purpose and in bad faith, resulting in damage to the plaintiffs.
The defendants move to strike count thirty on the grounds that: (1) the plaintiffs fail to allege facts to show that a valid and enforceable contract existed between the parties; (2) UBS could not have breached any duty to the plaintiffs by exercising its contractual rights pursuant to the transaction documents for the RLN Program Notes; and (3) the duty of good faith and fair dealing does not reach the plaintiffs' allegations that UBS induced it into purchasing the Notes, as the duty applies to the performance, not the formation, of contracts. The elements of a cause of action for a breach of the duty of good faith and fair dealing are presented in this court's discussion of count twelve.
The defendants argue that the plaintiffs have failed to allege facts to show that a valid and enforceable contract existed between the parties. The elements necessary for a valid contract are presented in this court's discussion of count eleven. The plaintiffs allege that they "entered into valid and enforceable contracts." The plaintiffs, however, base their argument on the same series of e-mails that the court has previously found wanting. Without the allegation of a valid and enforceable agreement, the plaintiffs have failed to sufficiently plead a cause of action for breach of the duty of good faith and fair dealing. Accordingly, the defendants' motion to strike count thirty is granted.
Although the defendants also move to strike this count on additional grounds, the court will not address these arguments, as it is striking this count for the reasons stated above.
Conclusion
The following chart is a summary of the court's rulings as to the counts in the plaintiffs' Second Amended Complaint which were the subject of the defendants' motion to strike.
TBTABLE Second Amended Complaint Order Count 1: COMMON LAW FRAUD IN THE INDUCEMENT DENIED Count 2: FRAUDULENT CONCEALMENT DENIED Count 3: CIVIL THEFT DENIED Count 4: NEGLIGENT MISREPRESENTATION DENIED Count 5: INNOCENT MISREPRESENTATION DENIED Count 6: NEGLIGENT CONCEALMENT GRANTED Count 7: NEGLIGENT SUPERVISION GRANTED Count 8: NEGLIGENCE DENIED Count 9: VIOLATION OF CUSA DENIED Count 10: UNJUST ENRICHMENT DENIED Count 11: BREACH OF CONTRACT GRANTED Count 12: BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING GRANTED Count 18: CIVIL CONSPIRACY TO COMMIT FRAUD AND MISREPRESENTATIONAND TO VIOLATE CUTPA GRANTED Count 21: COMMON LAW FRAUD AND MISREPRESENTATION DENIED Count 22: FRAUDULENT CONCEALMENT DENIED Count 23: INNOCENT MISREPRESENTATION DENIED Count 24: NEGLIGENT CONCEALMENT GRANTED Count 25: NEGLIGENT SUPERVISION GRANTED Count 26: NEGLIGENCE DENIED Count 27: VIOLATION OF CUSA DENIED Count 28: UNJUST ENRICHMENT DENIED Count 29: BREACH OF FIDUCIARY DUTY GRANTED Count 30: BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING GRANTED TB/TABLE