To be argued by:
JAMES P. ROUHANDEH
(30 Minutes Requested)
No. CTQ-2014-00008
Court of Appeals
of the
State of New York
COMMONWEALTH OF PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES’ RETIREMENT SYSTEM,
together and on behalf of all other similarly situated, et al.,
Plaintiffs,
COMMERZBANK AG, together and on behalf of all others similarly situated,
Plaintiff-Appellant,
vs.
MORGAN STANLEY & CO., INCORPORATED, et al.,
Defendants-Respondents
On Questions Certified by the United States Court of Appeals for the Second Circuit (USCOA
Docket No. 13-2095-cv(L))
BRIEF FOR DEFENDANTS-RESPONDENTS
SATTERLEE STEPHENS
BURKE & BURKE LLP
230 Park Avenue
New York, New York 10169
(212) 818-9200
DAVIS POLK & WARDWELL LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
CAHILL GORDON &
REINDEL LLP
80 Pine Street
New York, New York 10005
(212) 701-3000
GIBSON DUNN & CRUTCHER
LLP
1050 Connecticut Avenue N.W.
Washington, D.C. 20036
(202) 955-8500
Attorneys for Defendants-Respondents
Dated: March 10, 2015
CORPORATE DISCLOSURE STATEMENT
Morgan Stanley
Pursuant to Rule 500.1 of the New York State Court of Appeals Rules of
Practice, the undersigned counsel of record for Defendants-Respondents Morgan
Stanley & Co. Incorporated (n/k/a Morgan Stanley & Co. LLC) and Morgan
Stanley & Co. International Limited (n/k/a Morgan Stanley & Co. International
PLC) hereby state as follows:
Morgan Stanley & Co. Incorporated is now known as Morgan Stanley & Co.
LLC. Morgan Stanley & Co. LLC is a limited liability company whose sole
member is Morgan Stanley Domestic Holdings, Inc., a corporation wholly owned
by Morgan Stanley Capital Management, LLC, a limited liability company whose
sole member is Morgan Stanley.
Morgan Stanley & Co. International Limited is now known as Morgan
Stanley & Co. International PLC. Morgan Stanley & Co. International PLC is an
indirectly wholly owned subsidiary of Morgan Stanley, and no other publicly held
corporation owns 10 percent or more of Morgan Stanley & Co. International PLC’s
stock.
Morgan Stanley is a publicly held corporation that has no parent. Based on
Securities and Exchange Commission Rules regarding beneficial ownership,
Mitsubishi UFJ Financial Group, Inc., 7-1 Marunouchi 2-chrome, Chiyoda-ku,
ii
Tokyo 100-8330, beneficially owns greater than 10% of Morgan Stanley’s
outstanding common stock.
The McGraw-Hill Companies, Inc.
Pursuant to Rule 500.1 of the New York State Court of Appeals Rules of
Practice, the undersigned counsel of record for Defendants-Respondents The
McGraw-Hill Companies, Inc. (n/k/a McGraw Hill Financial, Inc.) and Standard &
Poor’s Ratings Services hereby state as follows:
As of May 1, 2013, The McGraw-Hill Companies, Inc. was renamed
McGraw Hill Financial, Inc. (“McGraw Hill”). Standard & Poor’s Ratings
Services is a wholly owned subsidiary of McGraw Hill. McGraw Hill Financial,
Inc., by and through its undersigned attorneys, hereby certifies that Defendant-
Respondent McGraw Hill has no parent corporation and that no publicly-held
company owns 10% or more of the stock of McGraw Hill.
Moody’s Investors Service
Pursuant to Rule 500.1 of the New York State Court of Appeals Rules of
Practice, the undersigned counsel of record for Defendants-Respondents Moody’s
Investors Service, Inc. and Moody’s Investors Service Ltd. hereby state as follows:
Moody’s Investors Service, Inc. and Moody’s Investors Service Ltd. are
both wholly owned subsidiaries of Moody’s Corporation, a publicly held
iii
company. Berkshire Hathaway, Inc. is the only publicly held company that owns
10% or more of the stock of Moody’s Corporation.
In this brief, the Moody’s defendants-respondents and the McGraw Hill
defendants-respondents will be referred to collectively as the “Rating Agencies.”
TABLE OF CONTENTS
PAGE
QUESTIONS PRESENTED .................................................................................... 1
PRELIMINARY STATEMENT ............................................................................. 1
STATEMENT OF FACTS ...................................................................................... 5
I. Factual Background ............................................................................. 5
A. The Cheyne Structured Investment Vehicle ............................. 5
B. DAF’s Purchase of the Cheyne Notes ...................................... 6
II. Procedural History ............................................................................... 8
A. The Federal District Court’s Dismissal and
Reconsideration of Commerzbank for Lack of Standing ......... 8
B. The Federal District Court’s Dismissal of Primary Fraud
Claims Against Morgan Stanley ............................................. 11
C. Appeal to the Second Circuit Court of Appeals ..................... 13
ARGUMENT ......................................................................................................... 15
I. No Reasonable Trier of Fact Could Find That DAF Validly
Assigned Its Rights to Sue for Common Law Fraud to Dresdner
in Connection with Its Sale of the Cheyne Notes ............................. 15
A. A Sale of a Note Does Not Include Related Tort Claims
Under New York Law ............................................................. 18
1. Under the Longstanding Default Rule in New York,
a Transfer of Contract Rights Does Not Include Tort
Claims ............................................................................. 19
2. The Court Should Not Change New York Law ............. 24
ii
B. DAF’s Transfer of the Cheyne Notes to Dresdner Was
Limited to Contract Rights ...................................................... 27
C. Commerzbank’s Effort to Rely on Extrinsic Evidence Is
Unavailing ............................................................................... 29
1. Where Contract Language Is Unambiguous, New
York Courts Do Not Look to Extrinsic Evidence .......... 30
2. Even If Extrinsic Evidence Were Considered, the
Circumstances of the Transfer Here Do Not Change
the Result ........................................................................ 33
3. The After-the-Fact Declarations Submitted by
Commerzbank Do Not Suffice and Are, in Any
Event, Deficient .............................................................. 36
II. No Reasonable Jury Could Find Morgan Stanley Liable for
Primary Fraud Under New York Law ............................................... 41
A. Morgan Stanley Made No Actionable Misstatement .............. 42
B. Only the Maker of a Statement May Be Liable for
Primary Fraud Under New York Law .................................... 43
1. Assisting in an Alleged Misstatement of Another
Can at Most Amount to Aiding and Abetting – a
Distinct Cause of Action with Different Elements ......... 46
2. New York’s Definition of Fraud Is Consistent with
the Approach of Federal Securities Law ........................ 48
3. Commerzbank’s Argument That New York Law
Recognizes a Claim Based on a Fraudulent
Misstatement Made, Authorized, or Caused by the
Defendant Is Misguided .................................................. 50
C. Morgan Stanley Is Not Liable Under a Scheme Theory ......... 53
D. Morgan Stanley Made No Actionable Omission .................... 55
CONCLUSION ...................................................................................................... 59
iii
TABLE OF AUTHORITIES
PAGE
CASES
Abel v. Paterno,
245 A.D. 285 (1st Dep’t 1935) ............................................................................ 20
Abrahami v. UPC Constr. Co.,
224 A.D.2d 231 (1st Dep’t 1996) ........................................................................ 44
ACLI Int’l Commodity Servs., Inc. v. Banque Populaire Suisse,
609 F. Supp. 434 (S.D.N.Y. 1984) ...................................................................... 23
Allstate Ins. Co. v. Countrywide Fin. Corp.,
824 F. Supp. 2d 1164 (2011) ....................................................................... 51; 53
Aini v. Sun Taiying Co.,
964 F. Supp. 762 (S.D.N.Y. 1997) ...................................................................... 23
Ambassador Factors v. Kandel & Co.,
215 A.D.2d 305 (1st Dep’t 1995) ........................................................................ 47
Argyle Capital Mgmt. Corp. v. Lowenthal, Landau, Fischer & Bring,
261 A.D.2d 282 (1st Dep’t 1999) ....................................................................... 20
Askins v. Doe,
727 F.3d 248 (2d Cir. 2013). ................................................................................ 56
Banque Arabe et Internationale D’Investissement v. Md. Nat’l Bank,
57 F.3d 146 (2d Cir. 1995) ........................................................................... passim
Brackett v. Griswold,
112 N.Y. 454 (1889) ........................................................................................... 52
Brandoff v. Empire Blue Cross & Blue Shield,
183 Misc. 2d 936 (Civ. Ct., N.Y. Cnty., 1999) .................................................... 23
iv
Cal. Public Emps.’ Ret. Sys. v. Shearman & Sterling,
95 N.Y.2d 427 (2000) ................................................................................. passim
Celotex Corp. v. Catrett,
477 U.S. 317 (1986) ............................................................................................. 57
Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.,
511 U.S. 164 (1994) ............................................................................................. 49
Century Pac., Inc. v. Hilton Hotels Corp.,
528 F. Supp. 2d 206 (S.D.N.Y. 2007), aff’d
354 F. App’x 496 (2d Cir. 2009) ......................................................................... 57
Cobalt Partners, L.P. v. GSC Capital Corp.,
97 A.D.3d 35 (1st Dep’t 2012) ............................................................................ 55
CPC Int’l Inc. v. McKesson Corp.,
70 N.Y.2d 268 (1987) ............................................................................. 44, 53, 54
Crigger v. Fahnestock & Co.,
443 F.3d 230 (2d Cir. 2006) ................................................................................. 44
Curiale v. Peat, Marwick, Mitchell & Co.,
214 A.D.2d 16 (1st Dep’t 1995) .......................................................................... 57
Danna v. Malco Realty, Inc.,
51 A.D.3d 621 (2d Dep’t 2008) .................................................................... 53, 54
Dano v. Royal Globe Ins. Co.,
59 N.Y.2d 827 (1983) .......................................................................................... 37
Dexia SA/NV v. Morgan Stanley,
41 Misc. 3d 1214(A) (Sup. Ct., N.Y. Cnty., 2013) ....................................... 20, 26
DiStiso v. Cook,
691 F.3d 226 (2d Cir. 2012) ................................................................................. 37
Easton Capital Partners, L.P. v. Rush,
2011 WL 3809927 (S.D.N.Y. Aug. 26, 2011) ..................................................... 50
v
Eurycleia Partners, LP v. Seward & Kissel, LLP,
46 A.D.3d 400 (1st Dep’t 2007) .................................................................. passim
Fox v. Hirschfeld,
157 A.D. 364 (1st Dep’t 1913) .................................................................... passim
Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC,
479 F. Supp. 2d 349 (S.D.N.Y. 2007) ................................................................ 23
Gaidon v. Guardian Life Ins. Co. of Am.,
94 N.Y.2d 330 (1999) ................................................................................... 44, 56
Gingold v. State Farm Ins. Co.,
168 Misc. 2d 62 (Civ. Ct., N.Y. Cnty., 1996) ...................................................... 23
Greenfield v. Philles Records, Inc.,
98 N.Y.2d 562 (2002) ......................................................................................... 30
Gould v. Winstar Commc’ns, Inc.,
692 F.3d 148 (2d Cir. July 2014) ......................................................................... 47
Griffey v. N.Y. Cent. Ins. Co.,
100 N.Y. 417 (1885) ............................................................................................ 23
Hudson-Port Ewen Assocs., L.P. v. Kuo,
78 N.Y.2d 944 (1991) ......................................................................................... 30
Hunt v. Enzo Biochem Inc.,
530 F. Supp. 2d 580 (S.D.N.Y. 2008). ................................................................ 50
In re Countrywide Fin. Corp Mortg.-Backed Sec. Litig.,
2014 WL 3529677 (C.D. Cal. July 14, 2014) .............................................. 26, 31
In re Estate of Boissevain,
40 Misc. 2d 237 (Sur. Ct., N.Y. Cnty., 1963) ...................................................... 23
In re Optimal U.S. Litig.,
2011 U.S. Dist. LEXIS 46745 (S.D.N.Y. May 2, 2011) ..................................... 50
vi
Innovative BioDefense, Inc. v. VSP Tech., Inc.,
2013 WL 3389008 (S.D.N.Y. July 3, 2013) ....................................................... 25
Int’l Design Concepts, LLC v. Saks Inc.,
486 F. Supp. 2d 229 (S.D.N.Y. 2007) ......................................................... passim
J.P. Morgan Chase Bank v. Winnick,
406 F. Supp. 2d 247 (S.D.N.Y. 2005) ................................................................. 47
Janus Capital Grp., Inc. v. First Derivative Traders,
131 S. Ct. 2296 (2011) .................................................................................. 49, 50
Kolbe v. Tibbetts,
22 N.Y.3d 344 (2013) ......................................................................................... 30
Leon v. Martinez,
84 N.Y.2d 83 (1994) ............................................................................................ 23
Mandarin Trading Ltd. v. Wildenstein,
2007 WL 3101235 (N.Y. Sup. Ct., N.Y. Cnty., Sept. 4, 2007) ........................... 56
Mateo v. Senterfitt,
82 A.D.3d 515 (1st Dep’t 2011) .................................................................. passim
Marsh v. McNair,
99 N.Y. 174 (1885) ............................................................................................. 30
Merrill Lynch & Co. v. Allegheny Energy, Inc.,
500 F.3d 171 (2d Cir. 2007) ................................................................................. 44
Metropolitan Life. Ins. Co. v. Morgan Stanley,
2013 N.Y. Misc. LEXIS 3056 (Sup. Ct. July 8, 2013) .......................... 50, 51; 53
Nearpark Realty Corp. v. City Investing Co.,
112 N.Y.S.2d 816 (Sup. Ct., N.Y. Cnty., 1952) .................................................. 21
Oster v. Kirschner,
77 A.D.3d 51 (2010) ............................................................................................ 47
vii
Pa. Pub. Sch. Emps.’ Ret. Sys. v. Morgan Stanley & Co.,
772 F.3d 111 (2d Cir. 2014) ........................................................................ passim
Pac. Inv. Mgmt. Co. LLC v. Mayer Brown LLP,
603 F.3d 144 (2d Cir. 2010) ................................................................................ 49
Pro Bono Invs., Inc. v. Gerry,
2008 WL 4755760 (S.D.N.Y. Oct. 29, 2008) .............................................. passim
Prop. Asset Mgmt., Inc. v. Chi. Title Ins. Co., Inc.,
173 F.3d 84 (2d Cir. 1999) ..................................................................... 33, 39, 40
S. Rd. Assocs., LLC v. Int’l Bus. Machs. Corp.,
4 N.Y.3d 272 (2005) ..................................................................................... 30, 36
Shapiro v. Cantor,
123 F.3d 717 (2d Cir. 1997) ................................................................................. 49
State Farm Mut. Ins. Co. v. Anikeyeva,
35 Misc. 3d 1203(A) (Sup. Ct., N.Y. Cnty., Mar. 13, 2012) ........................ 21, 39
Tycon Tower I Inv. Ltd. P’ship v. Burgee Architects,
234 A.D.2d 748 (3d Dep’t 1996) ......................................................................... 20
Ultramares Corp. v. Touche ,
255 N.Y. 170 (1931) ............................................................................................ 52
Wells v. Shearson Lehman / Am. Express, Inc.,
72 N.Y.2d 11 (1988) ............................................................................................ 40
Wexler v. Hoffman-LaRoche, Inc.,
198 Misc. 540 (Sup. Ct., Bronx Cnty., 1950) ...................................................... 52
Williams v. Sidley Austin Brown & Wood, L.L.P.,
38 A.D.3d 219 (1st Dep’t 2007) .......................................................................... 56
Wright v. Ernst & Young LLP,
152 F.3d 169 (2d Cir. 1998) ................................................................................. 49
viii
STATUTES & RULES
17 C.F.R. § 270.2a-7
(Securities and Exchange Commission Rule 2a-7) ........................................ 6, 36
17 C.F.R. § 270.17a-9 ....................................................................................... 34, 36
Fed. R. Civ. P. 17(a) ................................................................................................. 33
Fed. R. Civ. P. 17(a)(3) ......................................................................... 10, 11, 14, 40
Rule 17a-9 of the Investment Company Act of 1940 ......................................... 7, 10
Securities and Exchange Commission Rule 10b-5 ........................................... 48, 49
OTHER AUTHORITIES
60A N.Y. Jur. 2d Fraud and Deceit § 124 (2014) .................................................... 52
Richard C. Mason, Civil Liability for Aiding and Abetting,
61 Bus. Law. 1135 (2006) .................................................................................... 50
Restatement (Second) of Torts § 876(b) (1977) ...................................................... 49
QUESTIONS PRESENTED
1. Based on the declarations and documentary evidence presented
by Commerzbank, could a reasonable trier of fact find that DAF
validly assigned its right to sue for common law fraud to
Dresdner in connection with its sale of Cheyne SIV notes?
2. If so, based on the record established in the summary judgment
proceedings in the district court, could a reasonable trier of fact
find Morgan Stanley liable for fraud under New York law?
PRELIMINARY STATEMENT
The central issue in this appeal is one that many New York courts –
including this Court – have addressed previously: whether a sale of notes
encompasses tort claims when the language of the relevant transfer document
refers only to the notes themselves and evinces no intent to transfer tort claims.
For over one hundred years, the answer under New York law has been no. Under
New York law, a whole interest in a contract does not include tort claims absent
specific language manifesting the assignor’s intent to also include tort claims. In
2000, this Court explicitly endorsed this rule, holding that the assignment of all
rights under certain loan documents did not assign tort claims where the claims did
not arise from the loan documents themselves. As explained below, resolving the
first issue raised by the appeal requires no more than an application of this
established rule.
Allianz Dresdner Daily Asset Fund (“DAF”) was allegedly induced to
purchase certain investment instruments (the “Cheyne Notes”) by the allegedly
2
fraudulent credit ratings assigned to those instruments by the Rating Agencies.
Plaintiff-Appellant Commerzbank claims to have acquired those claims by
assignment. More specifically, it alleges that the claims were assigned by DAF to
its affiliate, Dresdner Bank AG (“Dresdner”) in 2007, and that the claims
subsequently passed to Commerzbank when it acquired Dresdner in 2009. The
fatal defect in this chain of title is that DAF never assigned any tort claims to
Dresdner, and thus they were never acquired by Commerzbank. The transfer of
Cheyne Notes from DAF to Dresdner was recorded in an October 2007 letter (the
“Purchase Letter”), which states simply that Dresdner purchased the Cheyne
Notes, identified by CUSIP number, from DAF and makes no reference
whatsoever to tort claims. Under well-settled New York law, the tort claims were
therefore never assigned to Dresdner, and Commerzbank – having received only
those rights held by Dresdner – accordingly lacks standing to pursue this action.
In this appeal, Commerzbank asks the Court to abandon the clarity of this
settled law and to reverse a century of New York jurisprudence. In essence,
Commerzbank asks this Court to hold that an assignment of contractual rights –
such as the Cheyne Notes – should automatically transfer tort claims, absent
limiting language to the contrary. See Pl.-App. Br. 28, 31 (arguing that “assignor’s
relinquishment of control over the whole interest [in the notes] suffices” to transfer
tort claims “[u]nless qualified in some manner”). This argument – which
3
effectively concedes that the Purchase Letter lacks any express language evincing
an intent to transfer tort claims – is entirely devoid of support in New York law
and simply ignores the myriad New York cases that have required an explicit
manifestation of an intent to assign tort claims, treating them as distinct from
contract claims. Commerzbank does not even attempt to explain why a departure
from existing law is warranted, and indeed, as explained below, sound public
policy counsels strongly in favor of affirming existing New York law.
Seemingly recognizing that its “automatic transfer” argument has no support
under New York law, Commerzbank also argues that this Court should ignore the
unambiguous language transferring only the Cheyne Notes themselves, and instead
infer an intent by the parties to transfer tort claims based on the alleged
circumstances surrounding the transfer and other extrinsic evidence. Among many
other flaws, each of these arguments fails for the simple fact that none of them
address the actual language of the transfer from DAF to Dresdner. Commerzbank
effectively asks this Court to consider extrinsic evidence even when the relevant
transfer document is unambiguous, which would supplant the administrable and
longstanding New York rule with one that would overturn precedent, violate the
settled expectations of parties who have relied upon New York’s longstanding
default rule, and create massive uncertainty as to the ownership of tort claims.
4
Commerzbank identifies no justification for such a sweeping change in the law or
for the disruption and uncertainty it would entail.
Accordingly, the Second Circuit’s first certified question must be answered
in the negative: a reasonable trier of fact could not find that Commerzbank has
standing to pursue DAF’s tort claims based on the record below because the
unambiguous language transferring the Cheyne Notes from DAF to Dresdner did
not evidence an intent to include tort claims.
The Second Circuit also certified the question of whether, if Commerzbank
has standing, a reasonable trier of fact could find Morgan Stanley liable for
primary fraud based on the alleged misstatements that were, as a factual matter,
attributable only to the rating agencies that rated the Cheyne SIV. The Court need
not reach this question, because Commerzbank lacks standing to assert any claims
related to the Cheyne Notes. New York law is in any event clear that a party
cannot be liable for primary fraud based on statements attributable solely to third
parties. The only alleged misstatements in this case are the credit ratings
attributable to the rating agencies. Morgan Stanley did not make any alleged
misstatement and cannot be liable for primary fraud under New York law. Any
other holding would destroy the clear distinction between primary fraud and aiding
and abetting fraud, two otherwise distinct causes of action with distinct elements
under New York law.
5
STATEMENT OF FACTS
I. Factual Background
A. The Cheyne Structured Investment Vehicle
This case concerns notes issued by a structured investment vehicle (“SIV”),
an actively managed entity that purchased and sold longer-term assets with funds
raised through the issuance of shorter-term debt. The SIV at issue in this case, the
“Cheyne SIV,” was managed by Cheyne Capital Management. A187. Cheyne
Capital Management engaged Morgan Stanley to act as structurer and as one of
four placement agents of the Cheyne SIV’s notes. See A48; A187. Two rating
agencies, Moody’s and S&P, were engaged to rate the Cheyne SIV.1 A48-49.
The Cheyne SIV launched in August 2005 and issued several classes of
notes on a rolling basis at various times between 2005 and 2007. See A187. The
notes at issue in this appeal are senior notes (commercial paper (“CP”) and
medium-term notes (“MTNs”)) (together, the “Cheyne Notes”).
Due to the complexity of the SIV, the Cheyne Notes could be purchased
only by highly sophisticated institutional investors. Id. Many of the investors
were affiliated with, or were themselves, large financial institutions with
multibillion dollar portfolios and investment banking and advisory services. See
1 Neither the investment manager nor the Cheyne SIV itself is a party to the appeal before
the Court of Appeals for the Second Circuit that resulted in the certification of the questions
presented here to this Court.
6
A16-17.
B. DAF’s Purchase of the Cheyne Notes
The investments at issue in the questions certified to this Court were
originally made by DAF, a money market fund that bought approximately $45
million of Cheyne CP and $75 million of Cheyne MTNs in four purchases dating
from April to June 2007. See Pl.-App. Br. 13. DAF was managed by a subsidiary
of Dresdner, the third largest bank in Germany at the time, with billions of dollars
in assets.2 Plaintiff’s corporate witness, an employee of Commerzbank, testified
that the investment decision was made by DAF’s portfolio managers, but that he
did not consult with them and had no knowledge of their investment decision or
what they relied on. Suppl. App’x 2-6 at 31:15-35:5, 39:12-40:7, 44:22-47:2. At
no time has Commerzbank offered any evidence from DAF’s portfolio managers
on any issue.
On October 9, 2007 – after the Cheyne Notes had already been downgraded
– DAF sold its Cheyne Notes to Dresdner. Suppl. App’x 22 (citing A419; Suppl.
App’x 38, 70-71); A422 ¶ 4; A436 ¶ 4. Under SEC Rule 2a-7, which governs
money market funds, DAF was no longer permitted to hold the Cheyne Notes after
the ratings were downgraded. A422 ¶ 4; A436 ¶ 4. As a result, Dresdner
2 Dresdner had significant experience with SIVs, as it managed its own from 1999 until
early 2008 when its SIV collapsed. See, e.g., Suppl. App’x 7 at 161:17-25.
7
purchased the Cheyne Notes from DAF for cash “at par,” which was the purchase
price required by Rule 17a-9 of the Investment Company Act of 1940 in the event
of an affiliate purchase. A422 ¶ 4; A436 ¶ 4. Nearly a year later, in August 2008,
DAF ceased operations, and it was dissolved on January 15, 2009. A424 ¶ 6. In
January 2009, Plaintiff-Appellant Commerzbank acquired Dresdner and then
merged Dresdner into Commerzbank in May 2009. A424 ¶ 7.
As noted by the federal district court, Commerzbank produced no
contemporaneous evidence of DAF’s intent to transfer any tort claims along with
the transfer of the Cheyne Notes to Dresdner. A64-65. The sale of the Cheyne
Notes from DAF to Dresdner was documented by the October 8, 2007 Purchase
Letter, which makes no mention of an assignment or intent to assign tort claims
along with the Cheyne Notes. A419. The Purchase Letter simply stated that
Dresdner “agreed to purchase . . . each of the Cheyne Holdings” for cash. Id. It
defined “Cheyne Holdings” as a list of four specific securities identified by CUSIP
number. A419-20. Apparently recognizing that the language of the Purchase
Letter was legally inadequate to effect the assignment of tort claims,
Commerzbank elected not even to submit the Purchase Letter to the federal district
court on summary judgment or on appeal to the Second Circuit Court of Appeals.
8
II. Procedural History
This action, commenced as a putative class action, was brought to recover
losses stemming from the liquidation of the notes issued by the Cheyne SIV, which
plaintiffs alleged resulted from defendants knowing or recklessly ignoring that the
various classes of notes were riskier than the ratings that had been assigned by the
Rating Agencies suggested.3 After class certification was denied, twelve additional
plaintiffs (including Commerzbank) joined the action.
A. The Federal District Court’s Dismissal and Reconsideration of
Commerzbank for Lack of Standing
On January 23, 2012, following approximately three years of discovery,
defendants moved for summary judgment. In an opinion dated August 31, 2012,
the federal district court held, inter alia, that several of plaintiffs’ claims could
proceed (those claims were eventually settled), but that Commerzbank lacked
standing to pursue tort claims against the defendants based on DAF’s purchase of
certain Cheyne Notes.4 A64-65. The federal district court explained that
Commerzbank had failed to create a disputed issue of material fact as to its
3 Commerzbank’s brief recites at length allegations that the ratings assigned to the
Cheyne Notes are fraudulent. See Pl.-App. Br. 6-9. Because those allegations are irrelevant to
issues presented on appeal, Defendants-Respondents simply note their vigorous disagreement
with Commerzbank’s mischaracterizations of the record and its decision to burden the Court
with unnecessary allegations.
4 Commerzbank also sued on notes issued by the Cheyne SIV that it purchased directly.
However, only the Cheyne Notes purchased by DAF, which were eventually transferred to
Commerzbank, are at issue before this Court.
9
standing to sue with respect to the Cheyne Notes purchased by DAF. Id. Under
New York law, the court noted, because the Cheyne Notes were originally
purchased by DAF, which then transferred the Cheyne Notes to Dresdner (which
was subsequently purchased by Commerzbank), Commerzbank needed to establish
that DAF’s tort claims had been assigned to Dresdner. A64. “Although
Commerzbank offer[ed] evidence that it ha[d] acquired any potential rights of
action possessed by Dresdner, it ha[d] provided no evidence that DAF assigned its
rights of action to Dresdner.” Id. (emphasis added). Because Commerzbank did
not provide any evidence that it had standing to bring a fraud claim based on
DAF’s purchase of the Cheyne Notes, its claims were dismissed. A65.5
On August 31, 2012, Commerzbank moved for reconsideration of its
dismissal for lack of standing. In support of its motion, months after the close of
discovery, Commerzbank attempted to supplement the record with a declaration
from Christopher Williams, who acted as Senior Counsel to various Dresdner
entities (the “Williams Declaration”). A422-23. In his declaration, which did not
claim that he played any role in the DAF-Dresdner transaction, Williams stated it
was not “in the ordinary course of business” for DAF to enter into purchase and
5 Defendants also moved for summary judgment with respect to the DAF claims because
there was no evidence that DAF reasonably relied on the ratings on the Cheyne Notes in making
its investment decisions. Because the federal district court dismissed Commerzbank’s claims for
lack of standing, it did not reach defendants’ argument that dismissal was also required for
failure to offer any evidence of actual or reasonable reliance by DAF.
10
sale or assignment agreements when purchasing or selling securities. A423 ¶ 5.
Williams further stated that it was “[his] belief that it was understood and believed
by all parties” that the tort claims would “automatically be transferred from DAF
to [Dresdner]” along with the notes. Id. Moreover, the Williams Declaration
noted that under SEC Rule 2a-7, DAF, as a money market fund, was prohibited
from holding the Cheyne Notes after they were downgraded to “Not Prime” on
October 4, 2007. A422 ¶ 4. Dresdner purchased the Cheyne Notes from DAF “at
par,” which (as noted above) was the purchase price required by Rule 17a-9 under
the Investment Company Act of 1940. Id.
Ten days after filing for reconsideration, Commerzbank attempted to file yet
another new declaration (the “Shlissel Declaration”) and a “ratification” of its
claims under Federal Rule of Civil Procedure 17(a)(3). A436; A426-32. The
Shlissel Declaration, submitted by the President and CEO of AGIMAT – another
related entity – does not claim that Shlissel played any role in the DAF-Dresdner
transaction. Nonetheless, like the Williams Declaration, the Shlissel Declaration
stated that “it was understood and believed” by the parties in the transaction that
any tort claims “would automatically be transferred” from DAF to Dresdner along
with the transfer of the Cheyne Notes themselves. A436-37. Shlissel also offered
an alternative justification for Commerzbank’s alleged standing. He claimed that,
if DAF did not assign tort claims to Dresdner, such claims would have reverted to
11
AGIMAT upon DAF’s termination in August 2008. A437 ¶ 6. The Shlissel
Declaration then purported to authorize Commerzbank to pursue recovery for its
own benefit to recoup losses related to the notes that DAF purchased, through a
ratification under Federal Rule 17(a)(3). Id.; A427.
The federal district court denied Commerzbank’s motion for reconsideration,
finding that Commerzbank failed to submit any evidence regarding the terms of the
DAF-Dresdner transaction, specifically with regard to an intent to transfer tort
claims. A158-59. The court noted that Commerzbank did not submit any
assignment agreement executed by DAF contemplating a transfer of tort claims as
part of a dissolution plan or any evidence suggesting that the terms of the sale were
broad enough to include an assignment of tort claims. A159.6
B. The Federal District Court’s Dismissal of Primary Fraud Claims
Against Morgan Stanley
In its summary judgment opinion, the federal district court also held that
Morgan Stanley was not primarily liable for common law fraud in connection with
the alleged misstatements – the ratings of the notes issued by the Cheyne SIV,
6 The federal district court also rejected as untimely the Williams and Shlissel
Declarations, as well as Commerzbank’s purported 17(a)(3) ratification, because Commerzbank
had failed to explain why it did not file its submission six months earlier when it was opposing
defendants’ summary judgment motion. A157. Under FRCP 17(a)(3), the court held,
Commerzbank’s ratification attempt was deficient because it was not filed “within a reasonable
time” as required by the Rule. Id. As the court explained, Commerzbank’s arguments and late-
filed declarations were “attempts to ‘plug the gaps’ in its summary judgment submissions.”
A159.
12
which were attributable solely to the Rating Agencies. A66-76. While the court
noted that it had previously denied defendants’ motion to dismiss the fraud claims
even though plaintiffs had not identified any actionable misstatements specifically
attributable to Morgan Stanley, it did so on the basis of the group pleading
doctrine, which “provides an exception ‘to the requirement that the fraudulent acts
of each defendant be identified separately in the complaint.’” A66-67. With the
benefit of fact discovery, and relying on controlling New York law, the court held
in its summary judgment opinion that “although some of the statements in the IMs
[Information Memoranda] may be attributable to Morgan Stanley, the ratings are
attributable only to the Rating Agencies that issued them.” A74. Thus, “[e]ven if
Morgan Stanley had actual knowledge that the ratings were false, it could only be
liable for aiding and abetting fraud.” Id.
In dismissing plaintiffs’ claim for primary fraud against Morgan Stanley, the
court also rejected plaintiffs’ arguments that Morgan Stanley could be liable for
primary fraud in this context based on allegations that it had knowingly
participated in a scheme to defraud. A68-71. The court rejected plaintiffs’
argument that Morgan Stanley could be liable for fraud even if it made no
actionable misstatement, acknowledging that this position would “obliterat[e] the
distinction” between fraud and aiding and abetting fraud. A70. Moreover, the
court noted that plaintiffs had not cited a single New York case in which a
13
common law fraud claim against a defendant who made no actionable
misstatement survived summary judgment. Id.7
C. Appeal to the Second Circuit Court of Appeals
On May 23, 2013, Commerzbank appealed the federal district court’s
decision to the Second Circuit Court of Appeals.8 In its briefing, Commerzbank
raised the same arguments that it had relied on at the federal district court level
with regard to standing. It also relied on the same fraud arguments but raised for
the first time on appeal the argument that Morgan Stanley might be liable for fraud
under New York’s “special facts doctrine.” Following briefing and oral argument,
the Second Circuit issued an opinion on October 31, 2014. In its opinion, the
Second Circuit held that the federal district court had erred in refusing to consider
the late-filed declarations. Pa. Pub. Sch. Emps.’ Ret. Sys. v. Morgan Stanley &
Co., 772 F.3d 111 (2d Cir. 2014) (“PSERS”). The Second Circuit then certified to
7 On March 6, 2013, after the close of expert discovery, defendants filed renewed
motions for summary judgment on the issue of loss causation. Plaintiffs’ own expert attributed
all of plaintiffs’ purported losses to the market value declines of the SIV’s underlying assets, a
decline that took place over a year and was caused, in his own opinion, by a variety of
macroeconomic and market-wide factors. Those motions were pending when the claims against
the remaining plaintiffs were dismissed with prejudice following an out-of-court settlement by
the remaining parties.
8 Another plaintiff, the Commonwealth of Pennsylvania Public School Employees’
Retirement System (“PSERS”), also appealed the federal district court’s decision dismissing its
claim on diversity-destroying grounds. Pa. Pub. Sch. Emps.’ Ret. Sys. v. Morgan Stanley & Co.,
772 F.3d 111, 117 (2d Cir. 2014). Both Commerzbank and PSERS also appealed the federal
district court’s denial of class certification. Id. at 119. The Second Circuit affirmed the
dismissal of PSERS’s claims and the federal district court’s denial of class certification. Id. at
119-21. Neither of these holdings is relevant to the Certified Questions before this Court.
14
this Court the question of whether, based on the declarations and documentary
evidence presented by Commerzbank, a reasonable trier of fact would find that
DAF validly assigned its tort claims to Dresdner in connection with its sale of the
Cheyne Notes. Id. at 123.9 The Second Circuit noted that it was unaware of any
controlling precedent from this Court that would allow it to make such a
determination based on the facts of this case. Id. Specifically, it asked this Court
whether the “intent of parties to transfer a whole interest, combined with the
absence of limiting language, suffices to transfer an assignor’s tort claims, or
whether an additional, more specific statement of an intent to transfer tort claims is
required.” Id.
The Second Circuit also certified the question of whether, if Commerzbank’s
claim is allowed to proceed, a reasonable trier of fact could find Morgan Stanley
primarily liable for fraud under New York law. Id. at 123-24.10 It pointed out that
some New York Supreme Court decisions allowing for liability to be imposed on
9 The Second Circuit did not reach Commerzbank’s alternative theory of standing –
namely, the alleged reversion of the tort claim to, and subsequent ratification by, AGIMAT – but
suggested that the federal district court properly rejected the Shlissel declaration as insufficient
to effect a ratification under Rule 17(a)(3) because the Shlissel declaration was not filed within a
“reasonable time.” PSERS, 772 F.3d at 122 n.5.
10 The Second Circuit’s original slip opinion dated October 31, 2014, included an error
stating that Commerzbank had no claim of aiding-and-abetting liability. Following notification
by the parties, the Second Circuit corrected its opinion on November 12, 2014, acknowledging
that the federal district court had denied summary judgment with respect to plaintiffs’ aiding-
and-abetting fraud claims.
15
parties who “make, authorize or cause a [fraudulent] representation to be made”
may be in conflict with New York appellate court decisions that “foreclose suits
against third parties based on the misrepresentations of another, even where that
party was alleged to have known about the misstatement.” Id. at 124. Because the
federal district court noted that plaintiffs had presented “some evidence” that
Morgan Stanley had manipulated or influenced the rating process, the Second
Circuit asked whether a reasonable trier of fact could find that Morgan Stanley was
liable for primary fraud under New York law. Id.
ARGUMENT
I. No Reasonable Trier of Fact Could Find That DAF Validly
Assigned Its Rights to Sue for Common Law Fraud to
Dresdner in Connection with Its Sale of the Cheyne Notes
The first issue presented by this appeal requires application of well-
established law to the facts in this case. The sole question is whether DAF’s
transfer of its contractual rights in the Cheyne Notes – memorialized in the
Purchase Letter, which clearly transferred only the Cheyne Notes themselves –
included the assignment of tort claims. As explained below, the answer to this
question is plainly no, based on century-old principles of New York law.
The controlling legal precepts have been clearly articulated by this Court.
For more than one hundred years, New York courts have held that the transfer of a
whole interest in a contract – such as the sale of a note – does not include tort
16
claims unless the language of the assignment evinces a contemporaneous intent to
also transfer the tort claims. See Fox v. Hirschfeld, 157 A.D. 364, 365-68 (1st
Dep’t 1913). Over one hundred years of jurisprudence show that this is more than
just a “trend”: it is a bedrock principle of New York law governing assignments.
Indeed, this Court has explicitly endorsed this rule, holding that the assignment of
“all” rights under loan documents did not assign tort claims where the claims did
not arise under the loan documents themselves. Cal. Public Emps.’ Ret. Sys.v.
Shearman & Sterling, 95 N.Y.2d 427, 435-36 (2000) (“CalPERS”).
Application of this rule requires this Court to answer the Second Circuit’s
first certified question in the negative. Here, the language of the relevant transfer
document – the Purchase Letter – “confirm[s]” only that Dresdner “agreed to
purchase . . . each of the Cheyne Holdings” – i.e., the Cheyne Notes. A419. The
language in the Purchase Letter is even narrower than the language that this Court
held in CalPERS was insufficient as a matter of law to transfer tort claims. See
CalPERS, 95 N.Y.2d at 432, 435-36 (transfer of “all” of the transferor’s “right,
title and interest in, to and under the [loan] documents” to transferee did not assign
tort claims).
In an attempt to evade the result called for by clear New York precedent,
Commerzbank first advocates a different rule, whereby the assignment of
contractual rights would automatically encompass tort claims unless such claims
17
are excluded. In other words, Commerzbank urges this Court to adopt a rule that is
the exact opposite of current New York law. This argument should be rejected.
Adopting the rule advocated by Commerzbank would upend both a century of
unbroken New York jurisprudence and the well-settled expectations of the parties
who have structured their contractual agreements in reliance on New York’s
default rule.
In an attempt to save its claims, Commerzbank next argues that the requisite
intent to transfer tort claims can be discerned from the facts surrounding the
transaction, as well as belated declarations from two individuals who do not
purport to have played any role in the DAF-Dresdner transaction. More
specifically, Commerzbank argues that an intent to transfer tort claims is
demonstrated by (1) Dresdner’s purchase of the Cheyne Notes at par value;
(2) DAF’s dissolution more than a year after the sale of the Cheyne Notes; and
(3) the belated declarations of Williams and Shlissel, neither of which suggests that
any party manifested in any way an intent to transfer tort claims. Among other
defects, the flaw in these arguments is that they ask this Court to alter the
unambiguous terms of the assignment in clear violation of New York law and
ordinary principles of contract interpretation. Additionally, Commerzbank’s
position – namely, that the Court should consider extrinsic evidence, including
post-hoc declarations regarding subjective, unmanifested intent, to determine
18
whether tort claims were assigned – would have troubling consequences. This is
especially true where, as here, the parties to the transaction are related, increasing
the risk of gamesmanship. Effectively, Commerzbank asks this Court to supplant
the clear and administrable rule of Fox and CalPERS with a test that has no basis
in New York case law, is unwise in theory, and hopelessly problematic in practice
because it will alter the rights of parties who previously relied upon the default
rule. Because there is no reason to upend longstanding and practical tenets of New
York law, this Court should answer the first certified question in the negative.
A. A Sale of a Note Does Not Include Related Tort Claims Under
New York Law
Commerzbank asks this Court to reverse the longstanding default rule in
favor of a new rule under which tort claims would be transferred automatically
unless an assignment of contract rights is “qualified in some manner.” See, e.g.,
Pl.-App. Br. 28; see also id. at 33 (arguing that a relinquishment of control over the
whole interest in the Cheyne Notes suffices); id. at 29 (relying on argument that
Dresdner “purchase[d] . . . the entirety of DAF’s notes . . . without . . . qualification
or reservation”); A423 ¶ 5 (stating belief that claims “would automatically be
transferred . . . along with the transfer of the Notes”); A437 ¶ 5 (same). Indeed,
Commerzbank’s lead argument on the first certified question is that “DAF’s Entire
Interest in the Rated Notes . . . by Definition Includes Any Related Tort Claims.”
Pl.-App. Br. 31 (emphasis in original). That contention is flatly incorrect under
19
New York law. In fact, as explained below, it is the exact opposite of the law
articulated by lower New York courts, federal courts applying New York law, and
most critically, this Court itself in CalPERS.
1. Under the Longstanding Default Rule in New York, a
Transfer of Contract Rights Does Not Include Tort Claims
It has been the law in New York for at least one hundred years that the
assignment of contractual rights does not automatically transfer tort claims. See
Fox, 157 A.D. at 368. Applying this longstanding rule, this Court has held that a
sale of a note does not include tort claims unless the language of the transfer
evinces a contemporaneous intent to also transfer tort claims. CalPERS, 95
N.Y.2d at 435-36; see also Fox, 157 A.D. at 368. The question of whether a tort
claim has been assigned is a matter of contract interpretation governed by the
words of the relevant agreement. See CalPERS, 95 N.Y.2d at 435-36.
The seminal case on this issue is Fox v. Hirschfeld, 157 A.D. 364 (1st Dep’t
1913). In Fox, the First Department considered whether a husband’s assignment of
a contract to his wife also transferred tort claims related to the husband’s decision
to enter into the contract. Id. at 365-66. The court in Fox focused its analysis on
the language in the assignment, which provided that the husband would “sell,
assign, transfer, and set over unto [his wife] all [his] right, title, and interest in and
to the within contract.” Id. at 366. The court found that, although the cause of
action was itself freely assignable, “the language employed in the assignment of
20
the contract” was insufficient to assign claims that did not arise from the contract.
Id. at 368. That the assignment plainly transferred the entirety of those contract
rights – “all right, title, and interest in and to the within contract” – did not change
the result. A whole interest in a contract does not, under New York law, include a
right to sue for fraud. The court explained that in the absence of an explicit
assignment of a cause of action based on fraud, only the assignor of the contract
may rescind or sue for damages for fraud and deceit. Id. at 366.
Since 1913, courts in New York have followed this rule. See, e.g., Tycon
Tower I Inv. Ltd. P’ship v. Burgee Architects, 234 A.D.2d 748, 749 (3d Dep’t
1996) (holding that any assignment of contractual rights “would not include an
assignment [of] fraud or negligent misrepresentation without express language to
that effect in the assignment”); Argyle Capital Mgmt. Corp. v. Lowenthal, Landau,
Fischer & Bring, 261 A.D.2d 282, 283 (1st Dep’t 1999) (holding that a tort claim
did not transfer with a contract for the assignee’s ownership interest when “there
[was] no indication in the assignment that the transfer of any claim, much less one
for fraud, was contemplated by the parties”); Abel v. Paterno, 245 A.D. 285, 290
(1st Dep’t 1935); Dexia SA/NV v. Morgan Stanley, 41 Misc. 3d 1214(A), at *4-5
(Sup. Ct., N.Y. Cnty., 2013) (“The central holding of Fox remains good law. . . . If
21
FSAM had intended to assign fraud claims which they had not yet discovered, it
could have included express language to that effect.”).11
In 2000, this Court endorsed the rule announced in Fox when it considered
whether the unqualified transfer of a whole interest in a promissory note from one
party to another encompassed tort claims relating to conduct from the transaction
under which the note was created. See CalPERS, 95 N.Y.2d at 432, 435-36. In
CalPERS, this Court focused its analysis on the specific language of the
assignment, which purported to transfer “all” of the assignor’s “right, title and
interest in, to and under the [loan] documents.” Id. at 432. This Court found that
the language in the assignment clause in CalPERS was insufficient to transfer tort
claims relating to the mortgage transaction because it referred only to rights and
interests under the loan documents (which included the promissory note) and did
not refer to all rights in the overall transaction. Id. at 435-36. As such, the
assignment “did not include a cause of action arising outside the loan documents
themselves.” Id. at 436 (citing Fox, 157 A.D. at 368).
11 See also State Farm Mut. Ins. Co. v. Anikeyeva, 35 Misc. 3d 1203(A), at *5 (Sup. Ct.,
Nassau Cnty., 2012) (“[T]he assignment of contractual claims does not automatically entail the
right to assert tort claims arising from the contract. . . . Whether such an assignment includes
additional rights depends, inter alia, on the language of the assignment instrument.”); Nearpark
Realty Corp. v. City Investing Co., 112 N.Y.S.2d 816, 817 (Sup. Ct., N.Y. Cnty., 1952) (holding
that absent an explicit assignment of a cause of action based on fraud, “only the . . . assignor may
rescind or sue for damages for fraud and deceit”).
22
Federal courts have taken a similar approach in interpreting New York
assignment law, recognizing that although causes of action may be freely
assignable, the “assignment of the right to assert contract claims does not
automatically entail the right to assert tort claims arising from that contract.” See
Banque Arabe et Internationale D’Investissement v. Md. Nat’l Bank, 57 F.3d 146,
151 (2d Cir. 1995) (emphasis added). Rather, whether tort claims have been
transferred turns on the words of the assignment. See Int’l Design Concepts, LLC
v. Saks Inc., 486 F. Supp. 2d 229, 236 (S.D.N.Y. 2007). The only three decisions
Commerzbank cites in which a court found a valid transfer of tort claims – all of
which are federal cases – each rested on specific language in the assignment that
reflected an intent to transfer such claims. See Banque Arabe, 57 F.3d at 152, Int’l
Design, 486 F. Supp. 2d at 237; Pro Bono Invs., Inc. v. Gerry, 2008 WL 4755760,
at *10 (S.D.N.Y. Oct. 29, 2008).12 Thus, far from supporting Commerzbank’s
12 Commerzbank cites the above cases for the proposition that any “act or words” can
suffice to evince an intent to transfer tort claims. As an initial matter, this only proves
Defendants-Respondents’ point – i.e., that all courts (including federal courts) to have considered
the question have required a contemporaneous manifestation of intent before finding that tort
claims were assigned. To the degree that Commerzbank is suggesting that federal authority
considers “acts” alone sufficient when determining whether the requisite intent has been shown,
that proposition is belied by a plain reading of the cases, each of which held that the
unambiguous terms of the assignments themselves indicated an intent to transfer tort claims. See
Banque Arabe, 57 F.3d at 152; Int’l Design, 486 F. Supp. 2d at 237; Pro Bono, 2008 WL
4755760, at *10. Notably, Defendants-Respondents are not aware of any decision that has found
that acts alone, rather than words, sufficed to transfer tort claims, or any New York state court
decision that has considered “acts” in determining whether tort claims were assigned, and
Commerzbank has cited none. Such a reading of those cases would be, in any event, inapposite
23
position, these cases instead underscore that an assignment does not encompass
tort claims absent express words to the contrary.
Tellingly, Commerzbank fails to cite a single case in which tort claims were
automatically assigned along with contract rights. Because this position is wholly
unsupported, Commerzbank retreats to a mischaracterization of inapposite New
York cases discussing the law of assignment generally, with no reference
whatsoever to the transfer of tort claims alongside contract rights. See Pl.-App. Br.
32-33 (citing Brandoff v. Empire Blue Cross & Blue Shield, 183 Misc. 2d 936,
937-38 (Civ. Ct., N.Y. Cnty., 1999) (assignment of benefit rights under a contract);
Griffey v. N.Y. Cent. Ins. Co., 100 N.Y. 417, 421-23 (1885) (transfer of insurance
policy); Leon v. Martinez, 84 N.Y.2d 83, 87-89 (1994) (assignment of settlement
proceeds); Gingold v. State Farm Ins. Co., 168 Misc. 2d 62, 63-64 (Civ. Ct.,
Queens Cnty., 1996) (assignment of breach of contract claim)).13 Those cases are
because there is no evidence here of any contemporaneous act reflecting an intent to transfer tort
claims.
13 All other cases cited by Commerzbank, as well as those cited in the Second Circuit’s
opinion, either found that the tort claims at issue had not been assigned or did not address the
assignment of tort claims. See Fox, 157 A.D. at 368; Fraternity Fund Ltd. v. Beacon Hill Asset
Mgmt., LLC, 479 F. Supp. 2d 349, 374 (S.D.N.Y. 2007) (holding that the complaint failed to
plead plaintiff’s standing because it alleged only the transfer of shares, not of the related tort
claims); ACLI Int’l Commodity Servs., Inc. v. Banque Populaire Suisse, 609 F. Supp. 434, 442-
47 (S.D.N.Y. 1984) (transfer of accounts receivable did not constitute transfer of related tort
claims not expressly transferred in the agreement at issue); Aini v. Sun Taiyang Co., 964 F.
Supp. 762, 778-79 (S.D.N.Y. 1997) (assignment of a trademark); In re Estate of Boissevain, 40
Misc. 2d 237, 244 (Sur. Ct., N.Y. Cnty., 1963) (assignment of trust income).
24
therefore irrelevant to the issue on appeal here. The law is clear that the transfer of
a whole interest in a contract is insufficient to assign tort claims under New York
law. See CalPERS, 95 N.Y.2d at 435-36; see also Fox, 157 A.D. at 368; Banque
Arabe, 57 F.3d at 152 (noting that language transferring “all of [the assignor’s]
rights, title and interest” in a contract did not include tort claims (emphasis
added)).
2. The Court Should Not Change New York Law
The rule Commerzbank seeks from this Court – that a sale of a note by
definition includes tort claims, unless qualified – would represent a complete
reversal of the longstanding default rule under New York law. For several reasons,
no such change in the law is warranted.
First, the rule advocated by Commerzbank would violate the settled
expectations of all commercial parties who entered into contracts in reliance on the
longstanding rule. Indeed, the right to assert countless fraud claims would be
instantly reallocated by judicial action: rather than remaining with the allegedly
defrauded party unless expressly transferred, see, e.g., CalPERS, 95 N.Y.2d at 435-
36; Fox, 157 A.D. at 368, related tort claims would be lost unless expressly
retained. Parties often choose New York law for its predictability and stability and
the resulting clarity as to which party owns a tort claim. There is no justification
for such an extraordinarily disruptive change in the law.
25
Second, as a matter of logic, it makes little sense to construe a grant of
contractual rights as encompassing tort claims. Fraud is a non-contractual claim
that arises outside of the contract itself. See Fox, 157 A.D. at 368; see also
Innovative BioDefense, Inc. v. VSP Tech., Inc., 2013 WL 3389008, at *6
(S.D.N.Y. July 3, 2013) (“[C]laims of fraud are non-contractual in nature . . . .”).
To hold that the grant of contractual rights automatically encompasses rights that
are by default non-contractual would defy the fundamental nature of tort claims as
non-contractual.
Third, as far as Defendants-Respondents are aware, there is not a single case
suggesting that a change in New York’s rule is warranted, nor is this Court’s
intervention warranted to reconcile competing strands of New York law. Although
the Second Circuit identified what it viewed as separate “strain[s]” of New York
authority, the principles of New York law that it cited are in fact entirely
consistent. See PSERS, 772 F.3d at 123. New York holds that tort claims are
freely assignable; at the same time, New York law treats tort and contract claims
distinctly when considering the scope of an assignment and requires an explicit
expression of an intent to include tort claims in a transfer of contract rights. These
rules are entirely consonant. Although tort claims may be freely assigned, they do
not transfer automatically. Instead, a contemporaneous manifestation of intent to
transfer such claims is required.
26
Fourth, Commerzbank’s only attempted justification for its rule – i.e., its
suggestion that there is no other party available to bring DAF’s tort claims – is an
attempt by Commerzbank to reverse engineer a rule to achieve a certain result. Its
argument is based on the faulty premise that claims must always continue to exist,
with a party standing ready to bring the claim. Pl.-App. Br. 34 (“With both DAF
and Dresdner gone, any existing litigation claims associated with the Notes
belonged to Commerzbank . . . .”). Of course, that is not the law. There is nothing
under the law that prevents a party from affirmatively retaining a claim and either
intentionally deciding not to assert it or unintentionally neglecting to assert it.14 In
any event, there is no reason for this Court to reverse a century of New York law
simply so that a party can assert tort claims that were, intentionally or not and
wisely or not, retained by the transferor. 15
Finally, a clear, explicit indication of an intent to transfer a tort claim is also
important to allow defendants to ascertain who holds a potential claim against
them, particularly where the “securities at issue have changed hands several
14 Indeed, only a small minority of Cheyne SIV investors have ever elected to sue based
on their investments.
15 Moreover, to the extent that the alleged fraud was not discoverable until after the
assignment, as alleged here, see A227 ¶¶14, 194, 203, 209, 248, no fact finder could conclude
that the assignor intended to convey fraud claims of which it was not aware. See Fox, 157 A.D.
at 368 (“It is manifest that the plaintiff did not intend to assign the cause of action . . . because
neither at the time of the assignment, nor of the execution of the conveyance, had the plaintiff
discovered the fraud.”); Dexia, 41 Misc. 3d 1214(A) at *4.
27
times.” See In re Countrywide Fin. Corp Mortg.-Backed Sec. Litig., 2014 WL
3529677, at *4 (C.D. Cal. July 14, 2014) (“The difficulty with [the] argument [that
plaintiff is the only possible assignee of claims], of course, lies in eliminating all
possible alternatives. . . . New York law does not require such speculation. The
Court must instead consider whether there was an explicit agreement showing that
the party seeking relief owns the right to sue.”).
Because the default rule in New York is – and should remain – that tort
claims are not automatically assigned along with a transfer of contract rights, the
only question left for this Court is whether the transfer of the Cheyne Notes from
DAF to Dresdner included language that evinced a specific intent to assign tort
claims. Because there is no such language here, the Second Circuit’s question
should be answered in the negative.
B. DAF’s Transfer of the Cheyne Notes to Dresdner Was Limited to
Contract Rights
As noted above, the transfer of the Cheyne Notes from DAF to Dresdner
was documented in the Purchase Letter from Dresdner to DAF dated October 8,
2007. See A419-20. Despite the clear law in New York that the language of the
transfer document controls, see supra § I. A, Commerzbank has previously avoided
this document, failing to submit it at all in the record below and never once
mentioning it in its filings before the Second Circuit or the federal district court.
28
Commerzbank’s prior failures to address the Purchase Letter are
understandable because it forecloses Commerzbank’s argument that tort claims
were transferred to Dresdner. The Purchase Letter provides as follows:
This [letter] is to confirm that [Dresdner] has agreed to purchase on
or before 2:00 p.m. (New York time) on October 9, 2007 each of the
Cheyne Holdings in the Fund for cash (in U.S. Dollars) at a purchase
price equal to the amortized cost of each such Cheyne Holding (in
each case, including accrued interest through October 8, 2007), with
same day settlement, in accordance with Rule 17a-9 under the 1940
Act.
A419 (emphasis added). The “Cheyne Holdings” are defined as the four securities
listed by CUSIP number in a spreadsheet attached to the Purchase Letter. A419-
220. Under this plain and unambiguous language, DAF transferred only its
contract rights (i.e., the Cheyne Notes themselves); nothing in the Purchase Letter
suggests any intent by DAF to transfer any tort claims related to the Cheyne Notes.
Indeed, Commerzbank concedes that the transfer was limited to the Cheyne
Notes themselves. As Commerzbank candidly states, there was “not . . . an explicit
assignment of DAF’s common law fraud claims at the time of the Notes’ purchase
by Dresdner.” See Pl.-App. Br. 44. Moreover, throughout its brief, Commerzbank
refers to Dresdner’s purchase of DAF’s Cheyne Notes, see, e.g., Pl.-App. Br. 13,
20, 31, and argues only that DAF transferred its “[e]ntire [i]nterest in the Rated
Notes,” see Pl.-App. Br. 31 (emphasis added); see also id. at 28 (noting the
“unqualified passage of control over the entirety of the DAF-purchased Notes”
29
(emphasis added)); id. at 33 (“DAF relinquished all control over the Notes, selling
to Dresdner ‘one whole interest’ in the Notes . . . .” (emphasis added)).
Commerzbank’s argument that a simple, unqualified sale of notes “by
definition . . . includes related torts” is flatly incorrect. See CalPERS, 95 N.Y.2d at
436; Banque Arabe, 57 F.3d at 152.16
Because New York law is clear that sale of a note does not include tort
claims unless the language of the transfer evinces a contemporaneous intent to do
so, and because DAF transferred only the Cheyne Notes to Dresdner, a reasonable
trier of fact could not find that DAF transferred its tort claims to Dresdner.
C. Commerzbank’s Effort to Rely on Extrinsic Evidence Is
Unavailing
In a fallback attempt to demonstrate standing, Commerzbank asks the Court
to ignore the plain, unambiguous language of the transferring document and
instead infer an intent to assign tort claims from the purported circumstances
surrounding the transfer, as well as two belated declarations submitted by
individuals who described no role in the DAF-Dresdner transaction. Such a result
16 Tellingly, Commerzbank fails to address Banque Arabe’s holding that the transfer of
all interest in a contract was insufficient to transfer tort claims. See Banque Arabe, 57 F.3d at
152. Instead, Commerzbank cites Banque Arabe for the proposition that a transfer of all rights in
a “transaction [is] construed to be broader than an interest in the contract alone.” Pl.-App. Br.
44 (emphasis added) (internal quotation marks omitted). This statement of New York law, even
if accurate, is irrelevant. The Purchase Letter unequivocally transfers only DAF’s interest in the
Cheyne Notes – i.e., the contract alone – and makes no reference whatsoever to any interest in
the overall “transaction” through which DAF purchased the Cheyne Notes.
30
would be at odds with New York law and, in any event, is unsupported by the
record below.
1. Where Contract Language Is Unambiguous, New York
Courts Do Not Look to Extrinsic Evidence
The determination of whether an assignment encompasses tort claims is a
matter of contract interpretation. Int’l Design, 486 F. Supp. 2d at 236.
Accordingly, extrinsic evidence relating to the parties’ intent and the circumstances
of the transfer is inappropriate where the language of the assignment is clear on its
face. New York law enforces the terms of a “written agreement that is complete,
clear and unambiguous on its face . . . according to the plain meaning of its terms.”
See Kolbe v. Tibbetts, 22 N.Y.3d 344, 353 (2013) (quoting Greenfield v. Philles
Records, Inc., 98 N.Y.2d 562, 569 (2002)); see also Marsh v. McNair, 99 N.Y.
174, 178 (1885) (refusing to apply extrinsic evidence offered to explain and vary
the terms of an assignment contract). Unless a contract’s language is ambiguous,
evidence of the parties’ intent need not be considered. See Hudson-Port Ewen
Assocs., L.P. v. Kuo, 78 N.Y.2d 944, 945 (1991); see also S. Rd. Assocs., LLC v.
Int’l Bus. Machs. Corp., 4 N.Y.3d 272, 278 (2005) (“[E]xtrinsic evidence may not
be considered unless the document itself is ambiguous.”).
Here, the language of the Purchase Letter transferring the Cheyne Notes
from DAF to Dresdner is not ambiguous, and there is no need for the Court to look
at the surrounding circumstances to interpret the language of the assignment. See
31
Countrywide, 2014 WL 3529677 at *3 (“It is true that an agreement, with the
benefit of hindsight, can sometimes better effectuate the parties’ commercial
interests when interpreted in a certain light. But this does not mean that the parties
intended that interpretation at the time of the agreement. New York law instead
requires an explicit assignment of fraud claims. In the absence of a written
agreement, ‘[t]he Court must not imply a transfer of fraud claims when the parties
have not done so. . . . This is particularly true where, as here, the parties are
sophisticated investors who routinely engage in complex financial transactions.”
(citations omitted)).
Ignoring this authority, Commerzbank argues that “the circumstances
surrounding the transfer matter greatly” when considering whether there was an
intent to assign tort claims. See Pl.-App. Br. 40. This contention is inexplicable.
The cases cited by Commerzbank all held that the words of the assignment on their
own indicated an intent to transfer tort claims. The few cases cited by
Commerzbank that even address the circumstances surrounding the transfer (all of
which are federal cases) simply noted that those circumstances were consistent
with the courts’ readings of the express contract language at issue. See Banque
Arabe, 57 F.3d at 152-53; Int’l Design, 486 F. Supp. 2d at 237; Pro Bono, 2008
32
WL 4755760, at *10.17 Each of these cases turned on specific language in an
assignment that reflected an intent to transfer tort claims. See Banque Arabe, 57
F.3d at 152; Int’l Design, 486 F. Supp. 2d at 237; Pro Bono, 2008 WL 4755760, at
*10. In other words, none of these cases support Commerzbank’s position –
namely, that the surrounding circumstances can be used to alter the terms of a grant
that unambiguously does not transfer tort claims.
Nor should the Court, from a policy perspective, consider extrinsic evidence
in the face of unambiguous written language documenting the transfer. Beyond
violating bedrock principles of contract interpretation, the rule urged by
Commerzbank would discard a straightforward matter of textual interpretation with
a messy analysis of, inter alia, whether a party had a “reason to retain the litigation
rights.” See Pl.-App. Br. 45. Moreover, where – as here – the extrinsic evidence
includes self-serving, after-the-fact, inadmissible statements regarding the parties’
17 In International Design Concepts LLC v. Saks, Inc., a federal court interpreted an
assignment that purported to transfer “all assets of [the assignor], without limitation . . . all rights
of possession in and to the Collateral.” 486 F. Supp. 2d at 237 (emphasis in original). Even if
correctly decided, International Design’s holding that the assignment in that case included tort
claims is inapposite. There is no such language here. DAF did not transfer “all [of its] assets” to
Dresdner “without limitation,” but instead transferred only four specific securities to Dresdner.
SA420. Commerzbank’s reliance on Pro Bono Investments, Inc. v. Gerry is misplaced for the
same reasons. 2008 WL 4755760, at *10 (S.D.N.Y. Oct. 29, 2008) (noting transfer of “all
assets”). Here, there is no evidence that DAF ever transferred “all assets” to Dresdner – the
grant under the Purchase Letter is limited to contractual rights. Commerzbank argues that DAF
transferred “all assets bound up with the Notes.” Pl.-App. Br. 31 (emphasis added). This
argument simply assumes the result it seeks to support and is inconsistent with the language of
the transfer itself, which referred only to the securities at issue and not to any other rights or
claims associated or “bound up” with them. See A419.
33
purported intent, Commerzbank’s approach would create uncertainty as to the
ownership of tort claims as well as the potential for gamesmanship. The Second
Circuit, in interpreting New York law, articulated precisely this concern, noting
that “it is easy to see how recognizing unrecorded assignments based on
retrospective testimony about intent alone would, in many cases, permit the unfair
manipulation of contract rights.” See Prop. Asset Mgmt. Inc. v. Chi. Title Ins. Co.,
173 F.3d 84, 87 (2d Cir. 1999).
2. Even If Extrinsic Evidence Were Considered, the
Circumstances of the Transfer Here Do Not Change the
Result
As explained below, the extrinsic evidence put forward by Commerzbank,
even if considered, does not evince any intent to transfer tort claims and therefore
fails to raise a triable issue of fact regarding Commerzbank’s standing. In support
of its position, Commerzbank raises several arguments, none of which has merit.18
18 In an apparent attempt to distract from the fact that the Purchase Letter plainly did not
include tort claims, Commerzbank’s brief also recites an array of irrelevant facts that have no
bearing on the narrow issue certified by the Second Circuit: whether a reasonable finder of fact
could conclude that DAF assigned its tort claims to Dresdner. See supra § I.A; A205. First,
Commerzbank argues that the claim would have passed from Dresdner to Commerzbank by
operation of the German Transformation Act, see Pl.-App. Br. 28, but the sufficiency of that
assignment is not at issue in this appeal. There were two separate transfers of DAF’s notes. The
first transfer was from DAF to Dresdner in October 2007, as discussed above. The second
transfer was from Dresdner to Commerzbank in 2009, when Commerzbank acquired Dresdner
and the two banks merged. Only the first transaction is at issue here. See supra Statement of
Facts § I I.B. Second, Commerzbank argues that if DAF did not assign tort claims to Dresdner,
those claims would have reverted to another party, AGIMAT, which it claims ratified
Commerzbank’s right to sue under Rule 17(a) of the Federal Rules of Civil Procedure. See Pl.-
App. Br. 34-36 & n.24. That issue is also not before this Court.
34
Commerzbank’s primary argument is that an intent to transfer tort claims
should be inferred from the fact that Dresdner purchased the Cheyne Notes “at
par.” See Pl.-App. Br. 34. In Commerzbank’s apparent view, the sale of
downgraded notes at par value makes sense only if the Court assumes that the
transfer included tort claims. That argument fails for multiple reasons. First, it
runs directly contrary to CalPERS, where this Court held that the transfer did not
include tort claims notwithstanding the fact that the plaintiff paid full value for the
loan, leaving the transferor with no injury. See CalPERS, 95 N.Y.2d at 436
(finding tort claims were not transferred even though “CALPERS paid Equitable
[the transferor] in full for the part it played in the negotiation and sale of the
Sersons loan. There was no discount to Equitable in the value of the Sersons loan
notwithstanding the alleged patent defect in [the loan documents]”). Second,
Commerzbank has conceded that once Dresdner chose to bail out its affiliated
money market fund, it was required under applicable regulations to purchase the
notes “at par.” See 17 C.F.R. § 270.17a-9; A422 ¶ 4; A436 ¶ 4. No intention
whatsoever can be inferred from the purchase at par. It was, according to
Commerzbank and its declarants, a legal requirement, not a decision. Third, there
could, in any event, be a host of reasons that a party would pay full value for a
seemingly impaired note, especially where the parties to the transaction are related
entities. Here, for example, Dresdner’s desire to avoid the consequences of the
35
failure of DAF, its money market fund, provided ample reason to pay full value for
the Cheyne Notes even absent any intent to assign tort claims. See Suppl. App’x
80 at 30:24-31:13.
Commerzbank also points to the fact that DAF was wound down in August
2008, nearly a year after its sale of the Cheyne Notes to Dresdner in October 2007.
That fact does not assist Commerzbank. As noted above, each of the cases (again,
only federal cases) cited by Commerzbank, turned on specific language in an
assignment that, by itself, transferred all of the assignor’s assets (including tort
claims). See Int’l Design, 486 F. Supp. 2d at 237; Pro Bono, 2008 WL 4755760 at
*17-18. In each of these cases, the courts looked to the assignor’s impending
dissolution only to confirm their reading of the text of the assignment. See supra
§ I. A 1 and note 12. Here, in contrast, DAF did not assign all of its assets to
Dresdner, see supra I.B, and Commerzbank essentially asks this Court to consider
DAF’s dissolution to contravene the plain terms of the DAF-Dresdner Purchase
Letter.
Moreover, unlike the federal cases relied on by Commerzbank, there is no
evidence whatsoever that DAF was defunct or in the process of dissolution at the
time that it transferred its notes to Dresdner. To the contrary, DAF transferred its
notes almost one year before it ceased operations and ultimately dissolved.
Moreover, Commerzbank further conceded that the Cheyne Notes at issue were not
36
transferred because DAF was winding down, but because DAF was no longer
permitted to hold the securities under applicable regulations. See A422¶ 4.)
In a final attempt to adduce support for its argument that it has standing,
Commerzbank points to SEC Rule 2a-7, arguing that the Court should infer an
intent to transfer tort claims alongside DAF’s transfer of securities in accordance
with that Rule. This argument, too, fails. Although SEC Rule 2a-7 required DAF
to sell its Cheyne Notes when it did, nothing within the Rule required DAF to
dispose of any tort claims it might have had at the time or precluded it from
retaining such claims. See generally 17 C.F.R. § 270.2a-7.19
3. The After-the-Fact Declarations Submitted by
Commerzbank Do Not Suffice and Are, in Any Event,
Deficient
Unable to point to any contemporaneous evidence of an assignment of tort
claims, Commerzbank asks this Court to ignore the plain language of the Purchase
Letter and find a valid transfer of DAF’s tort claims based on two declarations
created more than four and a half years after the assignment took place. See A425,
A438. But, even if the Court considers the declarations – which it should decline
to do given the transferring document’s lack of ambiguity, see S. Rd. Assocs., 4
N.Y.3d at 278 – they do not change the result.
19 Commerzbank points to no legal support whatsoever for its position that the Court
should infer an intent to transfer tort claims based on the sale in accordance with SEC Rule 2a-7.
37
Only admissible evidence can create an issue of fact in opposition to a
motion for summary judgment. See Dano v. Royal Globe Ins. Co., 59 N.Y.2d 827,
829 (1983). As described more fully below, the Shlissel and Williams declarations
do not create an issue of fact for at least three reasons. First, neither of the
declarants affirmed any personal knowledge of the transfer of the Cheyne Notes
from DAF to Dresdner, and they therefore lack personal knowledge about the facts
at issue. See DiStiso v. Cook, 691 F.3d 226, 230 (2d Cir. 2012). Second, the
declarants are incompetent as a matter of law to testify as to the understanding
and/or beliefs of others involved in the transfer of the Cheyne Notes from DAF to
Dresdner. Id. Finally, even if the declarants were competent to provide such
testimony, the declarations would at most establish an unexpressed subjective
intent to transfer tort claims, which as described above is insufficient under New
York law. See supra § I.A. Neither declarant points to any words (or even acts) at
the time of the transfer that would evidence an intent to transfer tort claims.
Neither Mr. Shlissel nor Mr. Williams claims to have participated in the
transfer of the Cheyne Notes to Dresdner. Mr. Williams states only that he was
Senior Counsel to Dresdner at the time of the transfer, see A423 ¶ 5, and Shlissel
states only that he was President and CEO of AGIMAT, the entity to which DAF’s
assets purportedly reverted following its dissolution months later and which is not
claimed to have had any role in the transfer of the Cheyne Notes from DAF to
38
Dresdner, see A437 ¶¶ 5-6. More fundamentally, neither Williams nor Shlissel
provides any factual basis for his belief that DAF and Dresdner intended a transfer
of the tort claims. Williams states only “to the best of [his] knowledge,” “it is [his]
belief” that DAF and Dresdner intended to transfer the tort claims. See A423 ¶ 5.
Shlissel likewise says nothing about the factual basis of his “belief” as to what
“was understood and believed by all parties involved in the transaction,” averring
only (and without any support whatsoever) that the entirety of his affidavit is
“based upon my personal knowledge and recollection and my previous positions at
AGI.” See A437-38 ¶¶ 5, 6 (emphasis added). Nothing in the Williams or Shlissel
declaration establishes personal knowledge of what was in the mind of the relevant
individuals at DAF or Dresdner at the time of the transfer.
Even if these declarations were based on Williams’s and Shlissel’s
participation in the transfer of the Cheyne Notes and even if these individuals were
competent to testify as to the intent of others, their statements do not demonstrate
that anyone at DAF or Dresdner expressed any intention to transfer tort claims.
Rather, they both make conclusory assertions regarding intent but do not point to
any contemporaneous manifestation of such intent. See A423-24 ¶ 5; A437 ¶ 5. In
fact, neither declaration even references – much less purports to interpret or expand
upon – the language of the document that transferred DAF’s interest in the Cheyne
Notes.
39
Finally, the language in both the Williams and Shlissel declarations proves
their insufficiency under New York law: Williams and Shlissel both asserted that
the parties believed the tort claims “would automatically be transferred from DAF
to Dresdner.” A423 ¶ 5; A437 ¶ 5 (emphasis added). New York law is clear,
however, that absent explicit language, tort claims do not automatically transfer
with a contract, regardless of the parties’ uncommunicated intent. See supra § I. A;
Banque Arabe, 57 F.3d at 151 (“Under New York law, the assignment of the right
to assert contract claims does not automatically entail the right to assert tort claims
arising from the contract.” (emphasis added)); State Farm, 35 Misc. 3d 1203(A) at
*5 (“[T]he assignment of contractual claims does not automatically entail the right
to assert tort claims arising from the contract.” (citing Fox, 157 A.D. at 368)).
Williams’s and Shlissel’s stated belief that the claims would transfer
“automatically” effectively concedes that no affirmative steps were taken to
express or memorialize any intended transfer of tort claims from DAF to Dresdner.
At bottom, these late-filed, self-serving declarations would not permit a
rational finder of fact to find that DAF transferred its tort claims to Dresdner.
Even if credited by the finder of fact, at best they would “express only the
uncommunicated subjective understanding” of the parties, which is insufficient
under New York law. See Prop. Asset Mgmt., 173 F.3d at 87. “Under New York
contract law, ‘[u]ncommunicated subjective intent alone cannot create an issue of
40
fact when otherwise there is none.’” Id. (quoting Wells v. Shearson Lehman/Am.
Express, Inc., 72 N.Y.2d 11, 24 (1988)).
As the Second Circuit explained:
The reason for not permitting assignments based on unmemorialized
intentions is especially strong in cases like this one, where the putative
assignor and assignee are sister corporations. If intent alone were
enough to assign, and to do so retroactively, then the holder of a
contract could choose at will which of its corporate personalities
would be the beneficiary of any given contract on any given day. This
could be accomplished simply by adducing insider officers’ testimony
that they had meant to assign the contract from its nominal holder to
the appropriate corporate shell before the relevant date. . . . [E]ven if
we assume that the present plaintiff had no manipulative motive, it is
easy to see how recognizing unrecorded assignments based on
retrospective testimony about intent alone would, in many cases,
permit the unfair manipulation of contract rights.
Id.20 The potential for such gamesmanship is contrary to the fundamental
principles of contract law.
The Court should thus hold that no reasonable juror could, based on the
evidence in the record, find that DAF assigned its tort claims to Dresdner when it
transferred the Cheyne Notes.
20 The question of Commerzbank’s purported ratification in 2012 after these claims were
dismissed at summary judgment is not relevant to this Court’s analysis of the 2007 transfer and
is, in any event, a question of federal law – Commerzbank argued below that this was a
ratification under Rule 17(a)(3) of the Federal Rules of Civil Procedure. See Suppl. App’x 87.
The federal district court properly ruled that this ratification was untimely. See A157-59. As
noted above, supra note 9, while the Second Circuit has not explicitly ruled on this issue, it
suggested that the federal district court acted within its discretion in rejecting this ratification,
which Commerzbank filed more than a year after the issue of its standing was first raised by
Defendants-Respondents. See PSERS, 772 F.3d at 122 n.5. No similar ratification is available
under New York law.
41
II. No Reasonable Jury Could Find Morgan Stanley Liable for
Primary Fraud Under New York Law
Because no reasonable trier of fact could find that DAF validly assigned its
right to sue in fraud in connection with its transfer of the Cheyne Notes to
Dresdner, the Court need not reach the second certified question of whether, in
light of the record below, a reasonable jury could find Morgan Stanley liable for
primary fraud under New York law. That question, in any event, must be
answered in the negative.
New York law is clear that only the maker of a statement can be primarily
liable for fraud based on an alleged misrepresentation. Assisting in an another’s
misstatement amounts at most to aiding and abetting fraud. This bright line
approach mirrors that taken by federal securities law. It is not disputed that the
only misstatements alleged in this case are the ratings assigned to the Cheyne
Notes, which were made by and were solely attributable to the Rating Agencies.
See A67; A74. Morgan Stanley accordingly cannot be held primarily liable for
fraud based on the credit ratings. There is also no evidence that Morgan Stanley
made an actionable omission, an argument that in any event Commerzbank failed
42
to preserve below. For these and other reasons, no reasonable jury could find
Morgan Stanley liable for primary fraud.21
A. Morgan Stanley Made No Actionable Misstatement
The only alleged misstatements in this case are the credit rating opinions
issued by the Rating Agencies. See A65.22 New York law is clear, and
Commerzbank does not dispute, that, for purposes of analyzing fraud allegations,
one who incorporates another’s alleged misstatement is not deemed to have made
the misstatement. See Mateo v. Senterfitt, 82 A.D.3d 515, 517 (1st Dep’t 2011)
(alleged misstatements made by a third party and incorporated into transactional
documents drafted by defendant were attributable to the third party, not
defendants); Eurycleia Partners, LP v. Seward & Kissel, LLP, 46 A.D.3d 400, 401
(1st Dep’t 2007) (alleged misstatements concerning fund’s investment strategy
21 Even if the Court here were to find that a claim of primary fraud could be pursued
against Morgan Stanley despite the fact that it made no misrepresentation to Commerzbank, the
Second Circuit’s second question cannot be answered in the affirmative because there are other
independent grounds that would prevent a reasonable trier of fact from finding Morgan Stanley
liable for fraud under New York law: a lack of any evidence of reasonable and justifiable
reliance on the part of DAF – an element not reached by the federal district court as to DAF –
and a lack of evidence of loss causation – an element that was the subject of a pending motion
for summary judgment before the federal district court below. See Suppl. App’x 94-115; A199-
201.
22 Commerzbank’s claim is premised on the assertion that the credit ratings on the
Cheyne Notes were fraudulent statements of fact, an allegation that Defendants-Respondents
vigorously dispute. The federal district court held that the issue was not appropriate for
resolution on summary judgment and set the issue for trial. See A86-87. That holding is not
before this Court. Defendants-Respondents assume, solely for the purposes of this appeal, that
the ratings may serve as the basis for a fraud claim.
43
contained in offering memorandum were not attributable to defendant S & K,
which prepared offering memorandum).
Here, after considering New York law and the factual record, which
included concessions by plaintiffs that each understood the credit ratings to be the
views only of the applicable Rating Agency, the federal district court correctly held
that the ratings are “attributable only to the rating agencies that issued them,”
notwithstanding Morgan Stanley’s alleged incorporation of the ratings into the IMs
and similar materials. A74. Commerzbank’s theory of fraud liability as to Morgan
Stanley thus is not that it made any misstatements itself to DAF (the purchaser of
the Cheyne Notes at issue), but rather that it assisted and encouraged the Rating
Agencies to make false statements (the credit ratings) and participated in a scheme
with the Rating Agencies to issue the allegedly false credit ratings.23 That theory
does not state a primary fraud claim under New York law.24
B. Only the Maker of a Statement May Be Liable for Primary Fraud
Under New York Law
A plaintiff asserting a fraud claim under New York law must establish:
(1) that the defendant made a misrepresentation of existing material fact; (2) with
23 Although Morgan Stanley did have communications with, and make statements to,
certain Cheyne SIV investors, neither Commerzbank nor any other plaintiff could point to any
misstatement made by Morgan Stanley. A67.
24 Because Commerzbank’s primary fraud claim against Morgan Stanley is defective as a
matter of law, its derivative aiding and abetting claim against the Rating Agencies, see Pl.-App.
Br. 3 n.1, fails as well.
44
knowledge of falsity and (3) an intent to defraud the plaintiff; (4) plaintiff
reasonably and justifiably relied on that statement; and (5) plaintiff suffered
damages that were caused by plaintiff’s reliance on defendant’s false statement.
Crigger v. Fahnestock & Co., 443 F.3d 230, 234 (2d Cir. 2006). Each of these
elements is “narrowly defined” and “requir[es] proof by clear and convincing
evidence.” Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330, 349-50
(1999); see also Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 181
(2d Cir. 2007). The “clear and convincing” standard “forbids the awarding of
relief whenever the evidence is loose, equivocal or contradictory.” Abrahami v.
UPC Constr. Co., 224 A.D.2d 231, 233 (1st Dep’t 1996) (internal quotation marks
omitted).
Under New York law, in a fraud claim based upon a misstatement, a
defendant cannot be liable for fraud for misstatements made by, and attributable
only to, a third party. See Mateo, 82 A.D.2d at 517; Eurycleia, 46 A.D.3d at 401
(dismissing fraud claims where plaintiffs complained solely about representations
made by another); see also CPC Int’l Inc. v. McKesson Corp., 70 N.Y.2d 268, 285
(1987) (fraud requires showing that “defendant knowingly uttered a falsehood”
(emphasis added)). Influencing or participating in a misstatement of another
amounts, at most, to a claim for aiding and abetting fraud – an entirely separate and
45
distinct cause of action with its own elements. Mateo, 82 A.D.3d at 517; see also
Eurycleia, 46 A.D.3d at 401.
The First Department’s decision in Mateo is particularly instructive in light
of its similarity to the facts here. In Mateo, plaintiffs alleged that defendant had
incorporated false statements by defendant’s client into transactional documents
drafted by defendant. 82 A.D.3d at 517. The court held that plaintiffs failed to
state a cause of action for fraud because these statements were “misrepresentations
attributable to [the client],” not to the defendant, and that plaintiff’s fraud-related
allegations thus amounted at most to a claim for aiding and abetting. Id.
Accordingly, the federal district court correctly concluded that Morgan Stanley
cannot be held liable for primary fraud, but at most for aiding and abetting the
Rating Agencies’ alleged misstatements.
The First Department’s decision in Eurycleia is strikingly similar. 46
A.D.3d at 401. There, the law firm Seward & Kissel (“S & K”) allegedly prepared
a hedge fund’s offering memorandum, listing itself as counsel therein, and “invited
prospective investors to rely on its legal opinions.” Id. Plaintiffs alleged that
S & K knowingly made material misrepresentations of fact, and omitted other
material facts, of which they had superior knowledge, to induce plaintiffs to invest
in or remain invested in the fund. Id. The court held that plaintiffs had failed to
state a cause of action for fraud, disposing of plaintiffs’ misrepresentation-based
46
theory on the ground that “plaintiffs do not allege that S & K made any
representation, fraudulent or otherwise, to them.” Id. Rather, the alleged
misrepresentations were attributable to others. See id. Although, as here, the
plaintiff alleged that the defendant invited reliance on the alleged
misrepresentations by disseminating them to potential investors, see id.; Pl.-App.
Br. 60-61, the Eurycleia court held that such involvement with the underlying
investment does not give rise to liability for primary fraud under New York law for
statements made by a different party.
Knowing that it cannot dispute the clear holdings in Mateo and Eurycleia,
Commerzbank attempts to limit their holdings to their facts. Neither court,
however, expressly or implicitly limited its holding to the facts of the case. New
York law is clear that only the maker of a statement may be held liable for primary
fraud based on the statement. Commerzbank’s primary fraud claim against
Morgan Stanley fails in light of this bedrock principle.
1. Assisting in an Alleged Misstatement of Another Can at
Most Amount to Aiding and Abetting – a Distinct Cause of
Action with Different Elements
Under New York law, aiding and abetting is a distinct cause of action, with
distinct elements. See, e.g., Mateo, 82 A.D.3d at 517; see also Eurycleia, 46
A.D.3d at 401-02 (holding that plaintiffs also failed to allege any facts from which
it could be inferred that S & K provided “substantial . . . assistance” to the fund).
47
In order to establish a claim for aiding and abetting fraud, a plaintiff must establish
clear and convincing evidence that a defendant knowingly and substantially
assisted a fraud. Oster v. Kirschner, 77 A.D.3d 51, 55 (2010). Aiding and abetting
is subject to a higher standard of scienter, requiring “actual knowledge” of the
underlying fraud. JP Morgan Chase Bank v. Winnick, 406 F. Supp. 2d 247, 253,
n.4 (S.D.N.Y. 2005). Mere recklessness – which may in some cases suffice to
establish the scienter requirement of a fraud claim, see Ambassador Factors v.
Kandel & Co., 215 A.D.2d 305, 308 (1st Dep’t 1995); cf. Gould v. Winstar
Commc’ns, Inc., 692 F.3d 148, 158 (2d Cir. July 2014) (federal securities law) – is
insufficient to support a claim for aiding and abetting, see Winnick, 406 F. Supp.
2d at 253 n.4.
Although pleading theories of fraud and aiding and abetting fraud in the
alternative might be allowed under some circumstances – as the federal district
court allowed here – no basis exists under New York law for claims of both direct
fraud and aiding and abetting fraud to survive summary judgment where they are
based on precisely the same statement. A party can either make the misstatement
or aid another’s making of it: potential liability may exist for either, but not both.
See, e.g., Mateo, 82 A.D.3d at 517. The federal district court recognized this fact
in holding at summary judgment, based on its review of the full record in this case,
48
that Morgan Stanley could not, as a matter of New York law, be liable for fraud,
but only potentially aiding and abetting. A74.
Commerzbank, however, seeks to pursue claims of both fraud and aiding
and abetting fraud against each of the Defendants-Respondents based on exactly
the same alleged misstatement: the credit ratings issued by the Rating Agencies on
the Cheyne Notes. That result is not permitted under New York law.
Commerzbank’s reference to reinstating the aiding and abetting claim
against the Rating Agencies illustrates the absurdity of its position. See Pl.-App.
Br. 3 n.1. As an initial matter, reinstating aiding and abetting claims is outside the
scope of the Second Circuit’s certified questions. In addition, Commerzbank asks
this Court to rule that Morgan Stanley may be held primarily liable for fraud based
on the assistance it allegedly provided the Rating Agencies and, accordingly, that
the Rating Agencies may be held liable as aiders and abettors to Morgan Stanley’s
alleged primary fraud. In this looking-glass world, the Rating Agencies would
somehow be liable for aiding and abetting the making of their own alleged
misstatements. This circular result defies reason and is not supported by New
York law.
2. New York’s Definition of Fraud Is Consistent with the
Approach of Federal Securities Law
The well-developed case law in the federal securities fraud context is
informative here. Under Securities and Exchange Commission Rule 10b-5, only
49
the maker of an alleged misstatement may be liable in a private civil action for the
misstatement.25 See Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct.
2296, 2301 (2011). The rule is part of a cleanly drawn scheme – derived from the
common law – that separates primary liability for securities fraud and secondary
liability for aiding and abetting, which the Supreme Court has defined as
knowingly “giv[ing] substantial assistance or encouragement to the other.” Cent.
Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 181
(1994) (citing Restatement (Second) of Torts § 876(b) (1977)); see also Janus, 131
S. Ct. at 2302 (“If persons or entities without control over the content of a
statement could be considered primary violators who ‘made’ the statement, then
aiders and abettors would be almost nonexistent.”).
Both before and after Janus, the Second Circuit has likewise employed a
“bright line” test and rejected “substantial participation” as a basis for asserting a
primary fraud claim under Rule 10b-5. See Wright v. Ernst & Young LLP, 152
F.3d 169, 175 (2d Cir. 1998) (“[A] defendant must actually make a false or
misleading statement in order to be held liable for [fraud]. Anything short of such
conduct is merely aiding and abetting.”); Pac. Inv. Mgmt. Co. v. Mayer Brown
LLP, 603 F.3d 144, 156-58 (2d Cir. 2010); Shapiro v. Cantor, 123 F.3d 717, 720-
25 Suits under Rule 10b-5 for aiding and abetting may be brought by the SEC. Janus, 131
S. Ct. at 2302.
50
21 (2d Cir. 1997) (allegations of assistance, participation, complicity, or similar
involvement do not support an allegation that a defendant has made a false
statement).
As discussed above, New York courts have employed the same approach
articulated by the Supreme Court in Janus when formulating common law fraud
claims. See Mateo, 82 A.D.3d at 517; Eurycleia, 46 A.D.3d at 401-02.26 New
York and federal courts have preserved this distinction between primary and
secondary liability regardless of whether there are allegations of assistance,
collaboration, or even a “uniquely close relationship” between the speaker and
third parties. Janus, 131 S. Ct. at 2304; see also Eurycleia, 46 A.D.3d at 401-02.27
3. Commerzbank’s Argument That New York Law
Recognizes a Claim Based on a Fraudulent Misstatement
Made, Authorized, or Caused by the Defendant Is
Misguided
Citing Metropolitan Life Insurance Co. v. Morgan Stanley, Index No.
651360/2012, 2013 N.Y. Misc. LEXIS 3056 (Sup. Ct., N.Y. Cnty., July 8, 2013)
26 The majority of other states also consider fraud and aiding and abetting fraud as
separate causes of action. See Richard C. Mason, Civil Liability for Aiding and Abetting, 61
Bus. Law. 1135, 1146 (2006) (“Under the law of most states, a party may be regarded as an
‘aider and abettor’ of fraud if [same elements as New York] are satisfied . . . .”).
27 Federal courts also often look to New York law in considering federal securities
claims, applying an “identical analysis” in considering the “substantially identical” elements of
New York common law fraud and claims under Section 10(b). See In re Optimal U.S. Litig.,
2011 U.S. Dist. LEXIS 46745, at *76 (S.D.N.Y. May 2, 2011); see also Easton Capital Partners,
L.P. v. Rush, 2011 WL 3809927, at *16 (S.D.N.Y. Aug. 26, 2011); Hunt v. Enzo Biochem Inc.,
530 F. Supp. 2d 580, 592 (S.D.N.Y. 2008).
51
and Allstate Insurance Co. v. Countrywide Financial Corp., 824 F. Supp. 2d 1164
(C.D. Cal. 2011) – a trial court decision and an out-of-state federal case –
Commerzbank argues that New York law recognizes a “tripartite” scheme of fraud
liability for making, authorizing, or causing a misstatement to be made. Pl.-App.
Br. 61. Commerzbank misinterprets these cases, however, and in turn
misinterprets New York law.
First, in both Allstate and MetLife, plaintiffs alleged that the defendants
themselves made false statements about the investments at issue, and that the
defendants should be liable for fraud based on their own misrepresentations. See,
e.g., Allstate, 824 F. Supp. 2d at 1184; Suppl. App’x 119-20 ¶ 242. These cases
are accordingly consistent with New York’s rule that only the maker of a
misstatement may be liable for fraud.
Additionally, the treatment of New York fraud law in Allstate and MetLife
is not well-developed and should not be given substantial weight. Allstate cites a
single treatise entry for its view that “[a] party may be liable under New York state
law if it ‘makes,’ ‘authorizes,’ or ‘causes’ a misrepresentation to be made.” 824 F.
Supp. 2d at 1186 (citing 60A N.Y. Jur. 2d Fraud and Deceit § 188 (2014)).
MetLife, in turn, cites only Allstate for the same principle. 2013 N.Y. Misc.
LEXIS 3056, at *34. Yet, the case cited by the treatise on this point merely refers
in dicta to a much narrower proposition inapplicable to the facts here: that one
52
may be liable for fraud “[i]f he authorize[s] and cause[s] [a false representation] to
be made.” Brackett v. Griswold, 112 N.Y. 454, 467 (1889) (emphasis added).
Commerzbank does not – and cannot – even argue that Morgan Stanley authorized
the alleged misstatements: the credit ratings on the Cheyne Notes.
Commerzbank also cites a different section of the same treatise, § 124,
which states: “If one authorizes and causes a false representation to be made by
another, it is the same as if he or she made it personally.” 60A N.Y. Jur. 2d Fraud
and Deceit § 124 (2014); see Pl.-App. Br. 52. Yet the cases cited by this section –
as the treatise itself goes on to clarify – stand for a very discrete proposition, again
inapposite here, that one who makes a misstatement to an intermediary who then
conveys that misstatement to a third party may be liable to the third party. See,
e.g., Ultramares Corp. v. Touche, 255 N.Y. 170, 173-76, 189-90 (1931)
(accounting firm could be liable to investors for providing allegedly misleading
certifications to business, which then distributed them); Wexler v. Hoffman-
LaRoche, Inc., 198 Misc. 540, 541 (Sup. Ct., Bronx Cnty., 1950) (defendant drug
manufacturer allegedly misrepresented drug risks to doctors, one of whom
prescribed drug to plaintiff). Thus, taken together, the cases cited by the two
sections of the treatise require that one make a misstatement to be held liable for
fraud.
53
In short, Allstate and MetLife, decided by a California federal district court
and a lone New York Supreme Court justice, respectively, misunderstood and
overextended New York precedent, as Commerzbank seeks to do here. Their
conflict with the Appellate Division’s clear rulings in Mateo and Eurycleia
highlights this fact.28
C. Morgan Stanley Is Not Liable Under a Scheme Theory
This Court has held that liability for fraud – even under what Commerzbank
characterizes as a scheme theory – requires a showing that a “defendant knowingly
uttered a falsehood intending to deprive the plaintiff of a benefit and that the
plaintiff was thereby deceived and damaged.” CPC Int’l Inc. v. McKesson Corp.,
70 N.Y.2d 268, 285 (1987). Morgan Stanley did not “utter a falsehood” and thus
cannot be liable under a scheme theory.
28 Both Allstate and MetLife, furthermore, misquoted and misapplied the treatise’s
statement that liability may be imposed on one who – having made the misstatement itself –
“authorizes and causes [that] false representation to be made by another,” 60A N.Y. Jur. 2d
Fraud and Deceit § 188 (2014) (emphasis added), holding instead that liability may be imposed
on one who does not make a misstatement but either “authorizes or causes” a misrepresentation
to be made, see Allstate, 824 F. Supp. 2d at 1186; MetLife, 2013 N.Y. Misc. LEXIS 3056, at
*34. As much as it stretches to imply that Morgan Stanley caused the Cheyne SIV’s ratings to
be issued, Commerzbank does not even attempt to argue that Morgan Stanley “authorized” the
ratings – and it cannot. As plaintiffs below repeatedly conceded, the credit ratings on the Cheyne
Notes were understood by everyone involved to have been statements by, and attributable only
to, the Rating Agencies. See A75; Suppl. App’x 9 ¶ 1 (citing plaintiffs’ deposition concessions
that they understood the Cheyne SIV credit ratings to reflect only the views of the respective
rating agency that issued them and that not one of the plaintiffs testified that it had a contrary
understanding at the time it invested).
54
In support of its argument, Commerzbank mischaracterizes the holdings in
CPC and Danna v. Malco Realty, Inc., 51 A.D.3d 621 (2d Dep’t 2008). Contrary
to Commerzbank’s suggestion, CPC does not hold that a defendant may be liable
for primary fraud based on participation in a scheme in the absence of making a
fraudulent statement. Rather, CPC held that the plaintiff in that case had stated a
cause of action for fraud against defendants alleged to have made misstatements.
See 70 N.Y.2d at 286 (noting particular alleged misstatements made by defendant);
see also id. at 285 (implying that “defendant knowingly uttered a falsehood”
(emphasis added)).29 Danna’s holding, on the other hand, is most plausibly read as
upholding, at the pleading stage, allegations of fraud under an implied aiding and
abetting or conspiracy theory rather than a primary fraud theory. The Danna
court’s statement of the law, after all, implied that the defendant-appellant’s
“participation in a scheme to defraud . . . [did] not by itself suffice to constitute . . .
fraud.” See 51 A.D.3d at 622.30 Commerzbank’s alternative interpretation of these
29 The importance of the fact that the relevant defendants were alleged to have made
misstatements is further underscored by CPC’s emphasis that the court’s holding was based on
the complaint “read as a whole” given that the appeal was from a grant of a motion to dismiss.
Id. at 286. As the federal district court noted, the procedural posture also makes it plausible that
CPC’s holding was influenced by considerations underlying the “group pleading” doctrine – that
before discovery, it can be difficult for a plaintiff to specifically plead each defendant’s role in a
fraudulent scheme. See A69.
30 Like CPC, the opinion in Danna also concerned a motion to dismiss, therefore raising
the same considerations with regard to the group pleading doctrine that the federal district court
noted about CPC. Furthermore, the Danna plaintiffs adequately alleged that the appellant-
55
cases would destroy the distinction between fraud, on the one hand, and aiding and
abetting, on the other.
The federal district court’s finding, at the summary judgment stage, based on
the fully-developed factual record before it, that Commerzbank had provided no
evidence that Morgan Stanley made a misrepresentation is dispositive. See A67;
A74-76. Commerzbank has not cited and cannot cite a single New York case in
which a primary fraud claim survived summary judgment despite the lack of an
actionable misstatement attributable to the defendant.
D. Morgan Stanley Made No Actionable Omission
Commerzbank’s last remaining theory is that Morgan Stanley may be found
liable for alleged omissions under the exceptional “special facts” doctrine. This
argument too fails, both because Commerzbank waived it by not raising it
previously and because Commerzbank has no evidence in support of the basic
elements of the doctrine.
Under New York law, an omission generally cannot constitute fraud unless
there is a fiduciary relationship between the parties. Cobalt Partners, L.P. v. GSC
Capital Corp., 97 A.D.3d 35, 42 (1st Dep’t 2012). Commerzbank does not argue
defendant “took advantage of a fiduciary relationship,” 51 A.D.3d at 622, whereas here, no
fiduciary relationship existed between Commerzbank and any defendant-respondent. See A72
n.96 (“I have already determined that Morgan Stanley did not have a fiduciary relationship with
plaintiffs.”).
56
that Morgan Stanley had a fiduciary relationship with DAF, the original purchaser
of the Cheyne Notes at issue here. Instead, Commerzbank seeks to rely on an
exception to this rule: the “special facts” doctrine.
Under the “special facts” doctrine, liability for an omission may arise if a
defendant (i) has superior knowledge of certain information (ii) that is not
attainable by the other, and (iii) the defendant knows the other is acting on the
basis of mistaken knowledge. See Williams v. Sidley Austin Brown & Wood,
L.L.P., 38 A.D.3d 219, 220 (1st Dep’t 2007); Mandarin Trading Ltd. v.
Wildenstein, 2007 WL 3101235, at *5 (N.Y. Sup. Ct., N.Y. Cnty., Sept. 4, 2007).
Commerzbank must establish each of these elements by clear and convincing
evidence. See Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330, 349-50
(1999).
As an initial matter, by failing to raise this argument, Commerzbank has
waived it under the procedural rules governing this action. See Askins v. Doe, 727
F.3d 248, 252 (2d Cir. 2013). Commerzbank failed to argue, let alone meet the
requirements of, this doctrine at or before summary judgment, raising it for the first
time in its appeal to the Second Circuit.
Additionally, Commerzbank’s only support for its “special facts” argument
is a recitation of findings of the federal district court that it says suggest Morgan
Stanley knew that “each plaintiff lacked access to all of the information available
57
to the Rating Agencies.” Pl.-App. Br. 59-60. This is not nearly enough.
Commerzbank must have evidence that DAF acted on the basis of this supposed
mistaken knowledge and that Morgan Stanley had knowledge of DAF’s supposed
reliance. See Williams, 38 A.D.3d at 220.
Commerzbank has no evidence that the credit ratings were a “substantial
factor” in DAF’s specific investment decision, much less that Morgan Stanley had
knowledge of such alleged reliance. See Curiale v. Peat, Marwick, Mitchell & Co.,
214 A.D.2d 16, 27 (1st Dep’t 1995); see also A98-99 (holding plaintiffs’
generalized evidence that they lacked access to information available to the Rating
Agencies insufficient to prove reliance). Commerzbank has offered no evidence
whatsoever of what DAF considered in making its investment decision. See Suppl.
App’x 22 ¶ 83.31 Commerzbank’s corporate representative, in fact, could not
identify a single factor considered by the individuals who made the investment
decision for DAF. Id. (citing Suppl. App’x 3-6).32
31 Indeed, Commerzbank provided no testimony or affidavits of any DAF personnel to
show that DAF relied on the credit ratings at all. Commerzbank’s claim fails for that
independent reason: there is no evidence in the record below that DAF, as the original purchaser
of the Cheyne Notes, actually and justifiably relied on the ratings when it purchased the Cheyne
Notes. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
32 The only evidence Commerzbank put forward was the deposition testimony of Sascha
Klaus, its 30(b)(6) witness, who admittedly did not have personal knowledge of reliance on the
part of DAF. See Suppl. App’x 5-6. Nor did Klaus speak with any DAF employees responsible
for making these investment decisions, see id., rendering his testimony entirely irrelevant. See,
e.g., Century Pac., Inc. v. Hilton Hotels Corp., 528 F. Supp. 2d 206, 215 n.5 (S.D.N.Y. 2007)
(testimony of 30(b)(6) deponent without personal knowledge must be “supported by admissible
58
Absent evidence of what DAF relied on in purchasing the Cheyne Notes,
there is no evidence (much less clear and convincing evidence) showing that
Morgan Stanley knew of such reliance. Moreover, Commerzbank could not
identify any relevant communications between DAF and Morgan Stanley, Suppl.
App’x 11 (citing Suppl. App’x 5-6 at 42:18-46:12), and thus could not show that
Morgan Stanley was aware of DAF’s purchase decisions when they were made,
much less that it had knowledge of what was considered in making those decisions.
Further, as Defendants-Respondents have repeatedly pointed out in this
litigation, no plaintiff has offered any evidence that any of the Defendants-
Respondents disbelieved the Cheyne SIV credit ratings. See, e.g., Suppl. App’x
138-40. Morgan Stanley’s financial stake in the success of the Cheyne SIV, and
Morgan Stanley’s own enormous losses from the collapse of the subprime
residential mortgage security market, Suppl. App’x 13-14 ¶¶ 31-32 (citing Suppl.
App’x 167-71), reinforce this conclusion. See Banque Arabe et Internationale
D’Investissement v. Md. Nat’l Bank, 57 F.3d 146, 155-56 (2d Cir. 1995)
(defendant arranger of investment could not have known that plaintiff investor was
acting on basis of mistaken information; fact that defendant shared a stake in the
venture showed that the information unavailable to plaintiff was considered
evidence to be considered for summary judgment purposes”), aff’d, 354 F. App’x 496 (2d Cir.
2009).
59
insignificant by defendant). Thus, Morgan Stanley could not have “known” that
DAF was acting on the basis of mistaken knowledge: it had no reason to believe
that DAF’s knowledge was mistaken.
CONCLUSION
For all of the foregoing reasons, the Second Circuit’s certified questions:
Based on the declarations and documentary evidence presented by
Commerzbank, could a reasonable trier of fact find that DAF validly
assigned its right to sue for common law fraud to Dresdner in
connection with its sale of Cheyne SIV notes?
If so, based on the record established in the summary judgment
proceedings in the district court, could a reasonable trier of fact find
Morgan Stanley liable for fraud under New York law?
should be answered in the negative.
Dated: New York, New York
March 10, 2015