ACA Financial Guaranty Corp., Appellant,v.Goldman, Sachs & Co., Respondent, Paulson & Co., Inc. et al., Defendants.BriefN.Y.March 26, 2015To be Argued by: MARC E. KASOWITZ (Time Requested: 30 Minutes) APL 2014-00114 New York County Clerk’s Index No. 650027/11 Court of Appeals of the State of New York ACA FINANCIAL GUARANTY CORP., Plaintiff-Appellant, – against – GOLDMAN, SACHS & CO., Defendant-Respondent. REPLY BRIEF FOR PLAINTIFF-APPELLANT KASOWITZ, BENSON, TORRES & FRIEDMAN LLP Attorneys for Plaintiff-Appellant 1633 Broadway New York, New York 10019 Tel.: (212) 506-1700 Fax: (212) 506-1800 Dated: September 3, 2014 i TABLE OF CONTENTS Page TABLE OF AUTHORITIES .................................................................................... ii PRELIMINARY STATEMENT .............................................................................. 1 ARGUMENT ............................................................................................................ 6 I. THE COMPLAINT AMPLY PLEADS REASONABLE RELIANCE ........ 6 A. The Complaint Alleges That ACA Took Reasonable Steps To Protect Itself Against Deception ............................................ 6 B. The Allegations Of The Complaint Do Not Establish That ACA Had A Duty To Make Further Inquiries .............................. 9 II. THE APPELLATE DIVISION ERRED IN HOLDING THAT THE COMPLAINT FAILS TO PLEAD REASONABLE RELIANCE AS A MATTER OF LAW ........................... 13 A. The “Prophylactic Provision” Requirement Is Contrary To This Court’s Authority ................................................ 13 B. The Offering Circular Does Not Even Hint, Much Less “Expressly Disclose,” That Paulson Was Not The Equity Investor ......................................188 C. Whether Paulson Would Have Disclosed The Truth If Asked Is A Factual Issue That Cannot Be Resolved On A Motion To Dismiss .......................... 20 D. The Disclaimers Do Not Bar ACA’s Fraud Claims ............................ 23 CONCLUSION ....................................................................................................... 29 ii TABLE OF AUTHORITIES Page(s) Cases 101 Fleet Place Associates v New York Telephone Co., 197 AD2d 27 [1st Dept 1994] ............................................................................ 25 Arfa v Zamir, 76 AD3d 56 [1st Dept 2010], affd 17 NY3d 737 [2011] .............................. 11, 12 Attea v Attea, 30 AD3d 971 [4th Dept], affd 7 NY3d 879 [2006] ............................................ 25 Basis Yield Alpha Fund (Master) v Goldman Sachs Group, Inc., 115 AD3d 128 [1st Dept 2014] .................................................................... 10, 25 In re Bear Stearns Cos., Inc. Securities, Derivative, & ERISA Litigation, 763 F Supp 2d 423 [SD NY 2011) ..................................................................... 24 Black v Chittenden, 69 NY2d 665 [1986] ....................................................................................passim Boyle v McGlynn, 28 AD3d 994 [3d Dept 2006] ............................................................................. 21 Carbon Capital Management, LLC v American Express Co., 88 AD3d 933 [2d Dept 2011] ............................................................................. 21 Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 76 AD3d 310 [1st Dept 2010] ............................................................................ 12 Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 NY3d 269 [2011] ....................................................................................passim Century 21, Inc. v F.W. Woolworth, Co., 181 AD2d 620 [1st Dept 1992] .......................................................................... 21 Channel Master Corp. v Aluminum Ltd. Sales, Inc., 4 NY2d 403 [1958] ............................................................................................. 16 Citibank, N.A. v Plapinger, 66 NY2d 90 [1985] ................................................................................. 16, 24, 27 iii Danann Realty Corp. v Harris, 5 NY2d 317 [1959] ......................................................................................passim Dandong v Pinnacle Performance Ltd., 2011 U.S. Dist. LEXIS 126552, [SD NY Oct. 31, 2011] ................................... 24 DDJ Management, LLC v Rhone Group L.L.C., 15 NY3d 147 [2010] ....................................................................................passim Deerfield Communications Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954 [1986] ..................................................................................... 16, 27 Demarco v Bay Ridge Car World, Ltd., 169 AD2d 808 [2d Dept 1991] ........................................................................... 23 Fundamental Long Term Care Holdings, LLC v Cammeby’s Funding LLC, 20 NY3d 438 [2013] ............................................................................... 15-16, 17 Global Minerals & Metals Corp. v Holme, 35 AD3d 93 [1st Dept 2006]............................................................................... 11 Goshen v Mutual Life Insurance Co., 98 NY2d 314 [2002] ........................................................................................... 20 Graham Packaging Co., L.P. v Owens-Illinois, Inc., 67 AD3d 465 [1st Dept 2009] ............................................................................ 11 Grumman Allied Industries, Inc. v Rohr Industries, Inc., 748 F2d 729 [2d Cir. 1984] ................................................................................ 26 Hobart v Schuler, 55 NY2d 1023 [1982] ................................................................................... 24-25 HSH Nordbank AG v UBS AG, 95 AD3d 185 [1st Dept 2012] .................................................................. 9, 10, 25 JP Morgan Chase Bank v Winnick, 350 F Supp 2d 393 [SD NY 2004] ..................................................................... 10 Littman v Magee, 54 AD3d 14 [1st Dept 2008]............................................................................... 12 iv Loreley Financing (Jersey) No. 3 Ltd. v. Citigroup Global Markets Inc., -- AD3d --, 2014 NY Slip Op 3358 [1st Dept 2014] .................................... 25-26 Manufacturers Hanover Trust Co. v Yanakas, 7 F3d 310 [2d Cir. 1993] .................................................................................... 26 MBIA Insurance Corp. v Royal Indemnity Co., 426 F3d 204 [3d Cir. 2005] .......................................................................... 16, 17 In re Michigan National Bank-Oakland, 89 NY2d 94, 103 [1996] ............................................................................... 27-28 Millerton Agway Cooperative, Inc. v Briarcliff Farms, Inc., 17 NY2d 57 [1966] ................................................................................... 5, 13, 14 Pappas v Tzolis, 20 NY3d 228 [2012] ................................................................................. 3, 12, 25 Property Clerk, New York City Police Department v Seroda, 131 AD2d 289 [1st Dept 1987] .......................................................................... 18 Regina v Marotta, 67 AD3d 766 [2d Dept 2009] ............................................................................. 10 Richman v Goldman Sachs Group, Inc., 868 F Supp 2d 261 [SD NY 2012] ..................................................................... 24 Sabo v Delman, 3 NY2d 155 [1957] ................................................................................... 6, 26-27 Schron v Troutman Saunders LLP, 20 NY3d 430 [2013] ..................................................................................... 15, 17 SEC v Tourre, Index No. 10 Civ. 3229, 2014 U.S. Dist. LEXIS 1570 [SD NY Jan. 7, 2014] ............................................................................................ 1 SEC v Tourre, Index No. 10 Civ. 3229, 2014 U.S. Dist. LEXIS 32817 [SD NY Mar. 12, 2014] ........................................................................................ 2 v Societe Nationale D’Exploitation Industrielle Des Tabacs Et Allumettes v Salomon Bros. International, Ltd., 268 AD2d 373 [1st Dept 2000] .......................................................................... 28 Sokoloff v Harriman Estates Development Corp., 96 NY2d 409 (2001) ........................................................................................... 21 Swersky v Dreyer & Traub, 219 AD2d 321 (1st Dept 1996) .................................................................... 22, 23 Triton Partners LLC v Prudential Securities Inc. 301 AD2d 411 [1st Dept 2003] .......................................................................... 10 Walker v City of New York, 46 AD3d 278 [1st Dept 2007] ............................................................................ 23 Weinstein v Barnett, 219 AD2d 77 [1st Dept 1996] ............................................................................ 23 Whitebox Concentrated Convertible Arbitrage Partners, L.P. v Superior Well Services, Inc., 20 NY3d 59 [2012] ............................................................................................. 18 Wittenberg v Robinov, 9 NY2d 261 [1961] ............................................................................................. 25 Other Authorities CPLR 3025 ............................................................................................................... 27 CPLR 3211[a][1] .......................................................................................... 10, 18, 20 CPLR 3211[a][7] ........................................................................................................ 9 Edith L. Fisch, Fisch on New York Evidence § 1065 [2d ed 1987] ........................ 18 ACA respectfully submits this reply brief in further support of its appeal from the Decision and in response to Goldman Sachs’s brief in opposition to the appeal (“GS Br.”).1 PRELIMINARY STATEMENT Goldman Sachs does not, as it cannot, argue that its misrepresentations and concealments concerning Paulson’s role in ABACUS were not fraudulent. After all, the federal jury in SEC v Tourre found that Goldman Sachs did commit that fraud -- in a verdict upheld by the district court based on the same allegations and evidence at issue here. (SEC v Tourre, Index No. 10 Civ. 3229, 2014 U.S. Dist. LEXIS 1570, at *15-16 [SD NY Jan. 7, 2014] [the evidence was “more than clear’].2 Instead, Goldman Sachs argues that ACA has not alleged reasonable reliance. But Goldman Sachs’s argument, like the Decision, is based impermissibly on versions of the facts that are wrong or in dispute, as well as on misstatements of well-established New York law. Goldman Sachs also erroneously argues that the SEC v Tourre verdict and decision are not relevant here because reasonable reliance was not at issue in that 1 Unless otherwise defined herein, capitalized terms have the same meaning as set forth in ACA’s opening brief (“ACA Br.”). 2 Even the majority below agreed that ACA adequately pleaded all the elements of fraud. (ACA Br. at 1). 2 case. But Goldman Sachs ignores and cannot refute the fact that that verdict, and the decision upholding it, necessarily depended on findings of fact that flatly contradict the grounds -- particularly with regard to the offering circular -- on which the majority below erroneously held that ACA could not establish reasonable reliance as a matter of law.3 (See ACA Br. at 38-39). Thus, Goldman Sachs does not and cannot refute that the Decision conflicts with this Court’s authority establishing that a motion to dismiss must be denied where, as here, a sophisticated plaintiff alleges fact showing that it took “reasonable steps to protect itself against deception.” DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d 147, 154 [2010]. Instead, Goldman Sachs asserts (GS Br. at 3) that ACA did not reasonably rely on its fraud because ACA -- in addition to repeatedly asking Goldman Sachs -- could have and should have asked Paulson about its investment objectives. In other words, Goldman Sachs contend that it was not reasonable, as a matter of law, for ACA to rely on Goldman Sachs’s own 3 Goldman Sachs’s suggestion that the jury may have concluded the Goldman Sachs defrauded “investors other than ACA” (GS Br. at 16) is false. (SEC v Tourre, Index No. 10 Civ. 3229, 2014 U.S. Dist. LEXIS 32817, at *6 [SD NY Mar. 12, 2014] [the “jury found Tourre liable for participating [with Goldman Sachs] in a scheme to defraud ACA”] [emphasis supplied]; id. at *7 [“the jury determined [Goldman Sachs] to be a co-violator of the securities laws with respect to ACA”] [emphasis supplied].) 3 repeated misrepresentations.4 But that is not the law. There is no duty to inquire where, as here, inquiry would not have produced the truth. Here, if ACA had asked Paulson about its role in ABACUS, Paulson would have lied. That is not “speculation,” as Goldman Sachs contends (GS Br. at 29); it is a reasonable -- in fact, the only reasonable -- inference from the facts alleged in the complaint, and it is an inference that must be drawn in ACA’s favor on a motion to dismiss. (See ACA Br. at 39-41). At the very least, whether ACA could have discovered the truth is a question of fact that, contrary to the Decision, cannot be resolved as a matter of law. Black v Chittenden, 69 NY2d 665, 669 [1986]. Goldman Sachs also asserts that ACA had a duty to exercise “heightened” diligence because it was sophisticated (GS Br. at 34). That too is contrary to this Court’s authority. Even if the plaintiff is sophisticated, a duty of heightened diligence will not be imposed as a matter of law, unless the allegations of the complaint itself establish that the plaintiff was on notice of facts triggering such a duty. Pappas v Tzolis, 20 NY3d 228 [2012]. Here, the allegations of the complaint establish that ACA had no reason to doubt the veracity of Goldman Sachs’s repeated and unequivocal representations. (GS Br. at 12-13). 4 One wonders whether Goldman Sachs would like its customers, prospective customers and counterparties to learn that it takes the position that its unequivocal representations cannot be relied on. 4 Nor, contrary to Goldman Sachs’s contention, did the offering circular put ACA on notice that Paulson was not an equity investor. In SEC v Tourre, Goldman Sachs employee Fabrice Tourre’s defense team, bankrolled by Goldman Sachs, repeatedly argued that the offering circular disclosed that there was “no equity” -- an argument that the jury and the district court necessarily rejected. The jury and the district court were correct, and the majority below (and Goldman Sachs) are mistaken. The majority relied on an entry in a chart in the offering circular, entitled “Notes,” which indicates that “$0” in “FL” (first loss a/k/a equity) notes would be issued (R. at 325). The majority mistakenly concluded that that entry meant that “no one was investing in the first-loss tranche” (Decision at 16 [R. at 831]). However, in the very same chart, there was an entry indicating “$0” in “SS” (super senior) notes. Under the majority’s interpretation, that would mean that “no one was investing” in the super senior tranche. But that, of course, was not the case -- ACA itself was taking a $909 million position in the super senior tranche through a credit default swap. (Compl. ¶ 62 [R. at 152]). What the majority and Goldman Sachs ignored is that there were two ways to take positions in these tranches -- by purchasing notes or by entering into a credit default swap. Credit default swaps (including ACA’s) were not recorded in the note offering circular chart relied on by the majority. (See ACA Br. at 35-39). 5 As for the per se “prophylactic provision” requirement announced by the majority, that, as shown (ACA Br. at 32-35), is unprecedented and conflicts with this Court’s authority. Goldman Sachs nonetheless asserts that, if an extra- contractual representation were “truly significant” (GS Br. at 2), a sophisticated party would necessarily obtain that representation in a formal written agreement and, therefore, its failure to do so requires dismissal as a matter of law. But that is, at best, a factual argument for the jury; under the law, even where, unlike here, a plaintiff has a duty to exercise heightened diligence, inserting a “prophylactic provision” in a written contract between the parties is one way, but not the exclusive way, to satisfy such a duty. Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 NY3d 269 [2011]. (See ACA Br. at 33-34). Goldman Sachs’s argument is also contrary to Millerton Agway Cooperative, Inc. v Briarcliff Farms, Inc., 17 NY2d 57 [1966]. In Millerton, this Court reversed the First Department -- rejecting its holding that the plaintiff’s reliance on extra- contractual representations was necessarily “feigned” because those “representations were not included in the [written agreement]” -- holding, as here, that reasonable reliance must be adjudicated “in the lawful and customary way, this is, by a trial where the witnesses can be examined and cross-examined and their demeanor and their versions put under the scrutiny of the triers of the facts.” Id. at 60-64. 6 Goldman Sachs also does not refute that the Decision conflicts with this Court’s seminal decision establishing that, to bar a fraud claim, a disclaimer must specifically disclaim reliance on the particular misrepresentations at issue. Danann Realty Corp. v Harris, 5 NY2d 317, 320 [1959]. Goldman Sachs’s contention (GS Br. at 38 & n.10) that “lower courts” have misconstrued Danann is flatly contradicted by the many subsequent decisions by this Court reiterating and applying the Danann standard. This Court has conclusively and repeatedly rejected Goldman Sachs’s proposed rule that a general disclaimer should bar a fraud claim. Goldman Sachs’s rule would afford a defendant the “power to perpetrate a fraud with immunity, depriving the victim of all redress, if he simply has the foresight to include a [general disclaimer] in the agreement.” Sabo v. Delman, 3 NY2d 155, 161 [1957]. “Such, of course, is not the law.” Id. Accordingly, as shown further below, the Decision should be reversed, and ACA’s fraud claims against Goldman Sachs should be reinstated. ARGUMENT I. THE COMPLAINT AMPLY PLEADS REASONABLE RELIANCE A. The Complaint Alleges That ACA Took Reasonable Steps To Protect Itself Against Deception As shown (ACA Br. at 27-29), the complaint amply pleads reasonable reliance because it pleads facts establishing that ACA took “reasonable steps to protect itself against deception,” DDJ Mgt., 15 NY3d at 154 [reversing dismissal 7 and reinstating a sophisticated plaintiff’s fraud claims], including by soliciting and receiving Goldman Sachs’s representations that Paulson was to be an equity investor -- representations that were knowingly false.5 In response (GS Br. at 3, 27, 31), Goldman Sachs asserts that the steps ACA took -- i.e., soliciting and relying on Goldman Sachs’s oral and written representations -- were not reasonable. Goldman Sachs contends that ACA should have “confirm[ed]” that Goldman Sachs’s representations, purportedly made “in the early stages of the transaction,” remained true later in the transaction because investors “can change their investment objectives as the transaction evolves.” (GS Br. at 3). In other words, Goldman Sachs contends that it was unreasonable, as a matter of law, for ACA to rely on Goldman Sachs’s own representations and on Goldman Sachs’s failure to correct its own representations. That contention ignores ACA’s allegations and, at most, raises questions of fact that cannot be resolved on a motion to dismiss. As alleged in the complaint, on February 23, 2007 -- only days before ACA committed to enter into the financial guaranty at issue -- ACA did ask Goldman Sachs to confirm (Compl. ¶ 47 5 Goldman Sachs’s repeated factual suggestions that it did not make any misrepresentations to ACA (GS Br. at 11-13, 21 n.4, 27, 31, 34, 35), much less any material misrepresentations (id. at 11-13, 21 n.4), are irrelevant to this appeal on a motion to dismiss, as well as wrong. Even leaving aside the federal jury verdict and court decision establishing that Goldman Sachs defrauded ACA, the majority below itself expressly held that, ACA “adequately pleaded all of the requisite elements comprising a fraud claim.” (Decision at 2 [R. at 817]). 8 [R. at 148]) the written representations Goldman Sachs had made six weeks earlier in the January 10 email (Compl. ¶¶ 41, 43 [R. at 145-146]). In response, Goldman Sachs reiterated its representations, again falsely. (Compl. ¶ 47 [R. at 148]).6 It is worth noting that Goldman Sachs’s contention -- besides being contradicted by the complaint’s allegations -- is, to say the least, disingenuous. Goldman Sachs implies (GS Br. at 3, 29, 31, 35) that its representations may have been true when made, but that Paulson’s investment objectives changed over time, thereby rendering Goldman Sachs’s representations false. That is incorrect. Goldman Sachs’s representations were false when made, were never true at any time and were never corrected. Indeed, as Goldman Sachs concedes (GS Br. at 8), Goldman Sachs was fully aware before it even approached ACA to solicit its participation in the transaction that the very purpose of the transaction was to enable Paulson to take “a massive short position on subprime residential mortgage backed securities.” (Comp. ¶ 10 [R. at 135-136]). 6 Goldman Sachs’s characterization of its own representations as “vague” (GS Br. at 12) is incorrect; indeed, they were not vague to the federal jury and court. (See ACA Br. at 14-18). In any event, this factual characterization is not relevant on a motion to dismiss. And, its assertion that ACA did not memorialize this telephone conversation with Goldman Sachs “until at least three days after the conversation” (GS Br. at 13) is immaterial. Goldman Sachs does not, as it cannot on a motion to dismiss, dispute that the conversation took place or that the complaint accurately transcribes ACA’s notes of that conversation. (Compl. ¶ 47 [R. at 148]). 9 Moreover, whether the steps ACA took were reasonable in the circumstances -- because, for example, those steps were entirely consistent with the customary practice of similarly situated parties in comparable transactions at the time -- is precisely the type of “fact-intensive” issue that this Court has cautioned should be “resolved by the trier of fact.” DDJ Mgt., 15 NY3d at 155-56; Black v Chittenden, 69 NY2d 665, 669 [1986] [whether plaintiff “could have discovered the truth [] through the exercise of ordinary intelligence” cannot be resolved as a matter of law]. B. The Allegations Of The Complaint Do Not Establish That ACA Had A Duty To Make Further Inquiries As shown (ACA Br. at 29-31), the Decision is contrary to this Court’s authority establishing that, on a CPLR 3211[a][7] motion to dismiss, a court cannot properly hold that the plaintiff had a duty to exercise heightened diligence, much less that the plaintiff failed to satisfy any such duty, unless the complaint itself pleads facts “triggering” such a duty.7 Here, as also shown (ACA Br. at 31), 7 While Goldman Sachs asserts that “the reasonableness of reliance can be decided on a motion to dismiss” (GS Br. at 22 n.5), the cases Goldman Sachs cites confirm that dismissal is proper only where, unlike here, the facts alleged in the complaint establish that the plaintiff had a duty to exercise heightened diligence and that, had the plaintiff done so, it would have uncovered the fraud. Centro Empresarial, 17 NY3d at 279 [“as alleged here, [plaintiffs] [had] actual knowledge that [defendants] [were] not being entirely forthright”] [emphasis supplied]; HSH Nordbank AG v UBS AG, 95 AD3d 185, 188-189 [1st Dept 2012] [“the allegations of the [] complaint itself establish that [plaintiff] could have uncovered [the] misrepresentation.”] [emphasis supplied]. Goldman Sachs does not address, much 10 nothing in the complaint suggests that ACA had any reason to doubt the veracity of Goldman Sachs’s repeated and unequivocal representations -- much less that Goldman Sachs’s representations “were so transparently false . . . that no reasonable [party] would have [entered into the financial guarantee] without conducting further inquiry into their accuracy.” DDJ Mgt., 15 NY3d at 156 (quoting with approval JP Morgan Chase Bank v Winnick, 350 F Supp 2d 393 [SD NY 2004]).8 Goldman Sachs nonetheless asserts that First Department authority establishes that, as a sophisticated party, ACA had a duty to exercise “heightened” diligence, even though it had no reason to doubt the veracity of Goldman Sachs’s representations. (GS Br. at 29; see also id. at 31 [heightened diligence required less attempt to explain, the fact that, in Basis Yield Alpha Fund (Master) v Goldman Sachs Group, Inc., (115 AD3d 128 [1st Dept 2014]), the First Department recently distinguished HSH Nordbank precisely because, unlike here or in Basis Yield, “the allegations of the complaint itself established that HSH could have uncovered any misrepresentation.” (Id. at 140 [emphasis supplied].) The other two cases Goldman Sachs cites (GS Br. at 22 n.5) are not to the contrary. (Regina v Marotta, 67 AD3d 766, 766-67 [2d Dept 2009] [holding without analysis or discussion of the allegations at issue that “plaintiff failed to adequately allege justifiable reliance”]; Triton Partners LLC v Prudential Sec. Inc., 301 AD2d 411, 411 [1st Dept 2003] [reasonableness of reliance on alleged oral “promise to proceed with the transaction” conclusively refuted by express contractual right to “terminate without cause”].) 8 As also shown (ACA Br. at 35-39; see also infra Argument, Section II.B.), the majority’s factual determination that the offering circular “should have alerted” ACA that Paulson was not taking an equity position in ABACUS (Decision at 6 [R. at 821]) is incorrect and, in any event, does not satisfy the exacting standard for dismissal based on documentary evidence under CPLR 3211[a][1]. 11 even “without notice of potential misrepresentations”] and 33 [heightened diligence required “regardless of whether [ACA] was on notice”]). In other words, Goldman Sachs contends that sophisticated parties have a duty to exercise heightened diligence simply by virtue of their sophistication. First Department cases establish no such thing. To the contrary, the First Department in Global Minerals & Metals Corp. v Holme, 35 AD3d 93 [1st Dept 2006], cited by Goldman Sachs (GS Br. at 29-32, 34), expressly stated that “sophisticated businessmen ha[ve] a duty to exercise ordinary diligence” (Global Mins., 35 AD3d at 100 [emphasis supplied] [citation omitted]), but held that, in that case, unlike here, the plaintiff had “more than a hint of the falsity of [defendant’s] representation, requiring heightened diligence” (id. [emphasis supplied]). Here, there was no such “hint,” let alone “more than a hint.” Likewise, in Arfa v Zamir, 76 AD3d 56 [1st Dept 2010], affd 17 NY3d 737 [2011], cited by Goldman Sachs (GS Br. at 31-32), the First Department held that the plaintiffs had a duty to exercise a “heightened degree of diligence,” not by virtue of their sophistication, but because they “had, by their own account, clear notice of [the defendant’s] alleged dishonesty.” Arfa, 76 AD3d at 60. Furthermore, the dissent below correctly distinguished Graham Packaging Co., L.P. v Owens-Illinois, Inc., 67 AD3d 465, 465 [1st Dept 2009], also cited by Goldman Sachs (GS Br. at 30- 31), on the ground that, in that case, unlike here, the parties were “adversarial.” 12 (Decision at 5 [R. at 820]). As the First Department itself has held, where the parties “develop[] an adversarial, even hostile, relationship,” that too can trigger a duty to exercise heightened diligence. Arfa, 76 AD3d at 58-59 (quoting Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 76 AD3d 310, 320- 321 [1st Dept 2010]). First Department precedent not only fails to support Goldman Sachs’s contention that sophisticated parties “by definition” have a duty to exercise heightened diligence, it refutes that contention. See, e.g., Littman v Magee, 54 AD3d 14, 18-19 [1st Dept 2008] [reversing dismissal of sophisticated plaintiff’s complaint because the “allegations [were] insufficient to warrant imposition of [a] duty of additional inquiry as a matter of law”].9 In any event, this Court has held and reiterated -- in cases that Goldman Sachs does not even attempt to distinguish or explain -- that, even where the plaintiff is sophisticated, a duty of heightened diligence will not be imposed on a motion to dismiss, unless the complaint pleads facts “triggering” such a duty. Pappas v Tzolis, 20 NY3d 228, 232-33 [2012] [stating that, in Centro Empresarial, the sophisticated plaintiffs “knew that defendants had not supplied them with the financial information to which they 9 This Court abrogated Littman in part on a proposition not relevant here -- i.e., that a “sophisticated principal is [not] able to release its fiduciary from claims,” Centro Empresarial, (17 NY3d at 278) -- but otherwise cited Littman with approval in the same decision (id. at 279). 13 were entitled, triggering ‘a heightened degree of diligence’”] [quoting Centro Empresarial, 17 NY3d at 279]].10 II. THE APPELLATE DIVISION ERRED IN HOLDING THAT THE COMPLAINT FAILS TO PLEAD REASONABLE RELIANCE AS A MATTER OF LAW A. The “Prophylactic Provision” Requirement Is Contrary To This Court’s Authority As shown (ACA Br. at 32-35), the majority’s holding that sophisticated parties must, in all instances, insist upon formal written agreements with their counterparties, and that those agreements contain “prophylactic provisions” (Decision at 4, 5 [R. at 819, 820]), is without precedent. Goldman Sachs argues that, if an extra-contractual representation was “truly significant” (GS Br. at 2; see also id. at 3, 22-23, 29), a sophisticated party would necessarily obtain that representation in a formal written agreement and, therefore, its failure to do so requires dismissal as a matter of law. That is not so in law or in practice, and this Court’s decision in Millerton Agway Cooperative, Inc. v Briarcliff Farms, Inc., 17 NY2d 57 [1966] disposes of that erroneous argument. In Millerton, the plaintiff sought to enforce a written guarantee of a corporation’s debt. The defendants, who were sophisticated (id. at 59), argued that the guarantee 10 The majority’s holding (Decision at 5 [R. at 820]), as paraphrased by Goldman Sachs (GS Br. at 32 n.7), that contracting parties “by definition have adverse interests” underscores the unprecedented scope of the majority’s holding, which would sweep aside the “triggers” required by established New York law. 14 was not enforceable because it had been “fraudulently induced by plaintiff through false oral representations” that the plaintiff would extend additional credit of “up to $1,000,000 and would not press for payment until the indebtedness was at least $1,000,000.” Id. at 60, 62. The First Department granted summary judgment, enforcing the guarantee, on the basis that, “it must be considered unusually strange that the alleged representations were not included in the guarantees.” Millerton, 17 NY2d at 60-61. This Court expressly rejected that holding: “[i]t might be considered implausible that defendants would sign unconditional million-dollar guarantees containing no mention of plaintiff’s promise, but it is not impossible.” Id. at 63. The Court therefore reversed summary judgment because “[t]he truth as to these matters must be arrived at in the lawful and customary way, this is, by a trial where the witnesses can be examined and cross-examined and their demeanor and their versions put under the scrutiny of the triers of the facts.” Id. at 64.11 None of the authority Goldman Sachs cites (GS Br. at 22-25) is even remotely to the contrary. In Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 NY3d 269 [2011], unlike in Millerton or here, there was a duty to exercise heightened diligence because, as the complaint itself alleged, the 11 See also Black v Chittenden, 69 NY2d 665, 669 (1986) (reversing summary judgment where “the fact that plaintiffs solicited and received assurances from defendant that the [business property purchased was] in ‘good repair and operating condition’ can hardly be deemed so implausible as to permit the conclusion that plaintiffs’ allegations are necessarily feigned”) (citing Millerton). 15 plaintiff had “actual knowledge that [defendants] [were] not being entirely forthright.” Id. at 279 [emphasis supplied]. In any event, as this Court in Centro Empresarial made clear, even where a plaintiff has a duty to exercise heightened diligence, inserting a “prophylactic provision” in a written contract between the parties is -- contrary to the unqualified requirement announced by the majority in the Decision (Decision at 4, 5 [R. at 819, 820]) -- one way, but not the exclusive way, to satisfy such a duty. Centro Empresarial, 17 NY3d at 279. The other New York cases Goldman Sachs cites do not even involve fraud claims, much less hold that the viability of a fraud claim depends on the inclusion of a “prophylactic provision” in a formal written agreement between the parties.12 Rather, those two cases stand for the unremarkable proposition, irrelevant here, that, in a breach of contract action, evidence of extra-contractual representations ordinarily will not be considered in construing the terms of the contract. Schron v Troutman Saunders LLP, 20 NY3d 430, 436 [2013] [“Parol evidence -- evidence outside the four corners of the document -- is admissible only if a court finds an ambiguity in the contract.”]; Fundamental Long Term Care Holdings, LLC v Cammeby’s Funding LLC, 20 NY3d 438, 445 [2013] [refusing to construe the 12 Likewise, the secondary sources Goldman Sachs cites (GS Br. at 24-25) discuss the law of contract, not fraud. 16 contract at issue in light of a “separate contract[]”].13 In contrast, in a fraudulent inducement action, such as this, evidence of extra-contractual representations is routinely admitted to prove the fraud. Citibank, N.A. v Plapinger, 66 NY2d 90, 94 [1985] [“a general merger clause is ineffective to exclude parol evidence of fraud in the inducement”]; Danann Realty Corp. v Harris, 5 NY2d 317, 320 [1959] [“the parol evidence rule is not a bar to showing the fraud”]. Indeed, the alleged misrepresentation must be “collateral” to the contract. Deerfield Communications Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954, 956 [1986]. This is no surprise. A fraudulent inducement claim is “entirely independent of contractual relations between the parties.” Channel Master Corp. v Aluminum Ltd. Sales, Inc., 4 NY2d 403, 408 [1958]. Moreover, as shown (ACA Br. at 34-35), apart from the fact that ACA did request and obtain “prophylactic” representations from Goldman Sachs orally and in emails, there was no written agreement between ACA and Goldman Sachs into which ACA could have inserted any “prophylactic provision.” (Compl. ¶ 61 [R. at 158]). In response (GS Br. at 25-27), Goldman Sachs does not identify any such agreement because there is no such agreement. Instead, Goldman Sachs resorts to 13 The only other case Goldman Sachs cites (GS Br. at 23) does not even construe New York law, much less support Goldman Sachs’s argument. (MBIA Ins. Corp. v Royal Indem. Co., 426 F3d 204, 218 [3d Cir. 2005] [where a disclaimer “unambiguously covers the fraud that actually occurs, Delaware’s highest court will enforce it to bar a subsequent fraud claim”].) 17 arguing that ACA could have inserted a prophylactic provision in an agreement with another party (id. at 26), or directed its subsidiary, ACAM, to insert a prophylactic provision in an agreement with Goldman Sachs (id.), or even “insist[ed] upon an entirely new agreement” with Goldman Sachs (id. at 27). But there is no precedent for any such requirement, and Goldman Sachs does not cite any.14 Indeed, even the majority below would only require a “prophylactic provision in the agreement governing the transaction.” (Decision at 4 [R. at 819] [emphasis supplied]). Here, as Goldman Sachs concedes (GS Br. at 10), the agreement governing the transaction into which ACA was fraudulently induced ACA was a credit default swap with ABN AMRO Bank, not Goldman Sachs (Compl. ¶ 62 [R. at 152]).15 14 The cases cited by Goldman Sachs (GS Br. at 23), like the cases cited by the majority (ACA Br. at 34 & n.23), all involved existing contracts between the parties. (Centro Empresarial Cempresa S.A., 17 NY3d at 272 [construing a release between the parties]; Schron, 20 NY3d at 432 [construing an option contract between the parties]; Fundamental, 20 NY3d at 441 [same]; MBIA, 426 F3d at 218 [“we are called upon to construe a series of contracts” among the parties].) 15 Goldman Sachs’s attempt to conflate the “separate agreements” relating to the ABACUS transaction (GS Br. at 26) is unavailing. As established by authority relied on by Goldman Sachs (id. at 23), New York courts construe “separate contracts to be read as one” only where the contracts are so “inextricably intertwined” that the breach of one would “undo the obligations imposed by the other.” (Fundamental, 20 NY3d at 445.) That is not the case here, and Goldman Sachs does not claim that it is. 18 B. The Offering Circular Does Not Even Hint, Much Less “Expressly Disclose,” That Paulson Was Not The Equity Investor As shown (ACA Br. at 35-39), the offering circular does not even hint, much less “expressly disclose,” that Paulson was not the equity investor. In any event -- as evidenced by the conflicting interpretations articulated by the majority and dissenting opinions in the Decision, and the jury’s rejection of the majority’s interpretation in SEC v Tourre16 -- the offering circular is, at a minimum ambiguous and, therefore, not a proper documentary basis for dismissal under CPLR 3211[a][1]. Whitebox Concentrated Convertible Arbitrage Partners, L.P. v Superior Well Servs., Inc., 20 NY3d 59, 64 [2012]. In response (GS Br. at 34-35), Goldman Sachs does not dispute the exacting standard for CPLR 3211[a][1] dismissal based on documentary evidence. Nor does Goldman Sachs attempt to explain how, as the majority 16 As shown (ACA Br. at 39 n.26), Goldman Sachs’s assertion that the jury verdict in SEC v Tourre and the district court decision upholding that verdict, are irrelevant because the SEC did not have to prove reliance (GS Br. at 41) is incorrect. The verdict and decision are relevant because, among other reasons, they confirm what the sharply conflicting majority and minority opinions already establish -- i.e., that the offering circular is, at a minimum, ambiguous. Goldman Sachs’s bald assertion that the jury did not consider whether the offering circular precludes any fraud (GS Br. at 42 n.13) is contrary to the public record of that trial (ACA Br. at 38, 39 n.26), which this Court can and should consider. (Property Clerk, New York City Police Dept. v Seroda, 131 AD2d 289, 294 [1st Dept 1987] [taking judicial notice of evidence in the record in a federal action]; Edith L. Fisch, Fisch on New York Evidence § 1065, at 603 [2d ed 1987] [“judicial notice of proceedings in other courts has been taken when one or more of the parties were the same or the subject matter closely connected”].) 19 erroneously held (Decision at 6-7 [R. 821-22]), the offering circular “expressly disclosed” that there was no equity investor. The offering circular does not do so. Instead, Goldman Sachs makes the specious assertion -- not asserted by Goldman Sachs in its appeal to the First Department, much less adopted by the majority in the Decision -- that there was some illusory “inconsistency” between the offering circular and the January 10 email, which supposedly should have alerted ACA to Goldman Sachs’s fraud. There is no such “inconsistency.” Goldman Sachs’s January 10 email does not state, as Goldman Sachs suggests (GS Br. at 35), that the “certificates” for ABACUS notes were pre-committed. Rather, the January 10 email indicates that Paulson -- the only investor even aware of the bespoke transaction at the time -- had pre-committed to invest in the equity tranche of ABACUS, without specifying one way or the other whether Paulson intended to do so by purchasing notes or by entering into a credit default swap. (Compl. ¶¶ 41, 43 [R. at 145-46]).17 ACA’s understanding that Paulson would take a long position in the transaction through a credit default swap -- which was entirely consistent with the offering circular (ACA Br. at 35-39) -- is no mere “theory of misrepresentation.” (GS Br. at 34). 17 Goldman Sachs does not and cannot dispute that, as alleged in the complaint (Compl. ¶ 18 [R. at 138]), investors can take short or long positions in a CDO either by purchasing notes or by entering into credit default swaps. 20 As memorialized in contemporaneous documents quoted in the complaint (Compl. ¶¶ 40-42 [R. at 117]), it is precisely what ACA in fact believed. And, even assuming arguendo that there was any such “inconsistency,” Goldman Sachs’s strained argument comes nowhere near “conclusively establishing,” as required for dismissal under CPLR 3211[a][1] (Goshen v Mut. Life Ins. Co., 98 NY2d 314, 326 [2002]), that Goldman Sachs’s representations were “so transparently false [] that no reasonable [plaintiff] would have [entered into the transaction at issue] without conducting further inquiry into their accuracy.” DDJ Mgt., 15 NY3d at 156 [citation and quotation omitted]. C. Whether Paulson Would Have Disclosed The Truth If Asked Is A Factual Issue That Cannot Be Resolved On A Motion To Dismiss As shown in (ACA Br. at 39-40), assuming arguendo that ACA had a reason to ask Paulson to confirm Goldman Sachs’s unequivocal and apparently truthful representations -- and ACA did not -- the majority’s holding that ACA “could have, upon further inquiry, uncovered [Paulson’s] actual position” (Decision at 6 [R. at 821]) is contrary to this Court’s authority establishing that whether a plaintiff “could have discovered the truth [] through the exercise of ordinary intelligence” 21 cannot be resolved as a matter of law. Black, 69 NY2d at 669; see also DDJ Mgt., 15 NY3d at 154.18 In response (GS Br. at 28; see also id. at 3), Goldman Sachs asserts that ACA “could have asked Paulson about [its] investment objectives at any time.” But “unfettered access” to Paulson (id. at 5, 21) is not the same as unfettered access to the truth. If asked about its role and position in ABACUS, Paulson would have lied. That is not “speculation,” as Goldman Sachs contends (id. at 3, 29); it is a reasonable inference from the facts alleged in the complaint (ACA Br. at 40; Compl. ¶¶ 36, 37 [R. at 143-144]) -- an inference that must be drawn in ACA’s favor on a motion to dismiss. Sokoloff v Harriman Estates Dev. Corp., 96 NY2d 409, 414 [2001].19 The majority’s refusal to draw that inference, and its entirely unsupported finding of fact that Paulson “would have likely” disclosed the truth if 18 This is so, including with respect to fraud claims asserted by sophisticated parties. (See, e.g., Carbon Capital Mgt., LLC v Am. Express Co., 88 AD3d 933, 938 [2d Dept 2011] [even though the plaintiff was a “sophisticated investor, [] we cannot say, as a matter of law, that [his] alleged reliance on [the defendant’s] representations was unjustified”] [citing DDJ Mgt., supra]; Boyle v McGlynn, 28 AD3d 994, 996 [3d Dept 2006] [even though “sophisticated” plaintiff supposedly “could have readily discovered” the truth, reasonable reliance is “a factual question for the jury to decide”]; Century 21, Inc. v F.W. Woolworth, Co., 181 AD2d 620, 625 [1st Dept 1992] [reversing summary judgment and reinstating a sophisticated plaintiff’s fraud claim because “questions of fact exist[ed] … as to whether [the plaintiff] could have determined the [truth] through means of ‘ordinary intelligence’”] [citing Black, supra].) 19 Goldman Sachs is not entitled to the counter-factual inference it posits (GS Br. at 29 n.6) in its favor. 22 asked (Decision at 7 [R. at 822]), thus conflicts with this Court’s authority establishing that such an issue cannot be decided as matter of law (see, e.g., Black, 69 NY2d at 669).20 Evidently aware that whether Paulson would have disclosed the truth if asked is a factual issue that cannot be resolved on a motion to dismiss, Goldman Sachs attempts to reframe the issue (GS Br. at 29) as whether ACA had “any basis to believe that the Paulson employees would be untruthful.” But that is not the legally relevant issue, and Goldman Sachs cites no authority suggesting that it is. To the contrary, in Swersky v Dreyer & Traub, 219 AD2d 321 [1st Dept 1996], although a sophisticated plaintiff had not inquired as to the source of information, the First Department reversed dismissal of the fraud claim on the ground that it was unclear how much information the source had -- and also on the ground, dispositive here, that it was unclear, “given the alignment of economic interests, 20 Goldman Sachs’s attempt (GS Br. at 5, 7, 9, 10 n.2, 11 & 28) to minimize Paulson’s role in the portfolio selection process is disingenuous (and its assertion [GS Br. at 4] that it made no admission in its SEC settlement is false). In that $500 million settlement, Goldman Sachs already has admitted that “it was a mistake [to fail to] disclose[] the role of Paulson & Co., Inc. in the portfolio selection process [.]” [R. at 784]. Permitting the purported Transaction Sponsor, which Goldman Sachs misrepresented Paulson to be (Compl. ¶ 41 [R. at 145]), to have an “influential role” in the portfolio selection process (Compl. ¶ 56 [R. at 150]) did not, as Goldman Sachs suggests (GS Br. at 10 n.2), breach ACAM’s contractually- defined Standard of Care [R. at 169] -- because it was entirely “consistent with industry standards” and ACAM’s own “customar[y]” practices. 23 how candid he would have been.” Id. at 327.21 In fact, as in Swersky, at a minimum, it is “unclear” whether Paulson would have told the truth. Id. 22 Based on ACA’s allegations, a reasonable jury certainly could conclude that Paulson would not have told the truth. D. The Disclaimers Do Not Bar ACA’s Fraud Claims As shown (ACA Br. at 41-42), New York law is clear that only where a “plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded” will a disclaimer bar a fraud claim. Danann Realty Corp. v Harris, 5 NY2d 317, 320 [1959] [emphasis supplied]. Here, the “approximately 200 pages of detailed disclosures” in the offering circular (GS Br. at 39) contain no 21 In futilely attempting to distinguish Swersky (GS Br. at 32 n.8), Goldman Sachs ignores the second ground for the Decision. 22 A contemporaneous email quoted in the SAC eliminates any doubt that Paulson would have lied. The email reflects that Paulson routinely “play[ed] the role of the equity investor” to induce other financial institutions to participate in transactions that Paulson in fact intended to short and that, if asked, Paulson would, in its own words, “stick to the script.” (SAC ¶ 44). Goldman Sachs’s contention that the Court must ignore the SAC (GS Br. at 19 n.3), which ACA submitted to the First Department (ACA Br. at 23), is baseless. The Court can and should take judicial notice of the SAC. (Demarco v Bay Ridge Car World, Ltd., 169 AD2d 808, 809 [2d Dept 1991] [“Subsequent to the filing of the notice of appeal, the plaintiff served an amended complaint of which we take judicial notice.”].) The cases Goldman Sachs cites (GS Br. at 19 n.3) are not to the contrary. (Walker v City of New York, 46 AD3d 278, 282 [1st Dept 2007] [recognizing that material dehors the record “may be judicially noticed”]; Weinstein v Barnett, 219 AD2d 77 [1st Dept 1996] [no indication that material at issue was subject to judicial notice].) 24 reference to Paulson whatsoever, much less an express disclaimer of Goldman Sachs’s representations concerning Paulson’s role and economic interest in the transaction. Goldman Sachs has admitted, and cannot now dispute, this fact.23 (Consent Of Defendant Goldman, Sachs & Co., in SEC v Tourre, ¶ 3 [R. at 784]).24 Instead, Goldman Sachs contends (GS Br. at 38) that “[s]ome lower courts” have misread Danann. That contention is frivolous. This Court has repeatedly reiterated and applied the specificity rule articulated in Danann. See, e.g., Citibank, N.A. v Plapinger, 66 NY2d 90, 94 [1985] [In Danann, “we held that . . . a specific disclaimer of reliance” bars a fraudulent inducement claim];25 Hobart v 23 Goldman Sachs’s assertion that it did not make “any admission” (GS Br. at 4; see also id. at 15) is “eviscerated by its concession that ‘it was a mistake [to fail to disclose among other things] that Paulson’s economic interests were adverse to CDO investors.’” (Richman v Goldman Sachs Group, Inc., 868 F Supp 2d 261, 278 [SD NY 2012].) 24 That the offering circular states, as Goldman Sachs points out (GS Br. at 8), that Goldman Sachs “may” (or may not) transfer its short position to some unspecified third-party at some unspecified time -- when Goldman Sachs always intended to transfer its entire short position to Paulson (Compl. ¶ 33 [R. at 142-143]) -- in no way mitigates Goldman Sachs’s fraud; if anything, it makes it worse. (Dandong v Pinnacle Performance Ltd., 2011 U.S. Dist. LEXIS 126552, at *12 [SD NY] [Oct. 31, 2011] [“boilerplate” language in prospectus cautioning that defendant “may” have interests adverse to investors insufficient to defeat plaintiffs’ allegation that Morgan Stanley designed a CDO to fail]; In re Bear Stearns Cos., Inc. Sec., Derivative, & ERISA Litig., 763 F Supp 2d 423, 495 [SD NY 2011] [“[T]o warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.”].) 25 The fraud claim in Plapinger was barred but only because “it cannot be said, as in Danann, that the [party claiming fraud] have ‘in the plainest language 25 Schuler, 55 NY2d 1023, 1024 [1982] [sustaining fraudulent inducement defense to the enforcement of a contract because the misrepresentations were “not specifically contradicted” by disclaimers in the contract] [citing Danann]. Indeed, a decision of this Court case cited by Goldman Sachs (GS Br. at 36) also confirms the rule. Wittenberg v Robinov, 9 NY2d 261, 263 [1961] [dismissing fraud claim because the “alleged misrepresentations here were disclaimed with sufficient specificity”] [citing Danann].26 Thus, as other panels of the First Department have correctly held since the Decision -- not once, but twice: “The law is abundantly clear in this state that a [] disclaimer of reliance cannot preclude a claim of justifiable reliance on [the] misrepresentations or omissions unless [] the disclaimer is made sufficiently specific to the particular type of fact misrepresented or undisclosed.” Basis Yield Alpha Fund (Master), 115 AD3d at 137 [citing Danann, supra]; see also Loreley Fin. (Jersey) No. 3 Ltd. v Citigroup Global Mkts. Inc., -- AD3d --, announced and stipulated that [they were] not relying on any representations as to the very matter . . . as to which [they] now [claim they were] defrauded.’” (Plapinger, 66 NY2d at 95 [quoting Danann, supra] [brackets supplied by the Plapinger court]; see also Pappas, 20 NY3d at 233 [same] [citing Danann, supra].) 26 The remaining authority Goldman Sachs cites (GS Br. at 36-40) is not to the contrary. (HSH Nordbank, 95 AD3d at 204 [dismissing fraud claim where contract “expressly disclosed the potential for conflicts of interests”]; see also id. at 191 [contract “replete with detailed disclosures [concerning] the conflicts of interest”]; Attea v Attea, 30 AD3d 971, 973 [4th Dept], affd 7 NY3d 879 [2006] [no fraudulent inducement claim, much less disclaimer, at issue]; 101 Fleet Place Assocs. v New York Tel. Co., 197 AD2d 27, 30 [1st Dept 1994] [same].) 26 2014 NY Slip Op 3358, at *6 [1st Dept 2014] [disclaimers fell “well short of tracking the particular misrepresentations and omissions alleged by plaintiff”].27 All but conceding that the specificity rule articulated by this Court in Danann is the law of New York, Goldman Sachs asserts that it “should not be the law of New York.” (GS Br. at 39) (emphasis supplied). Indeed, Goldman Sachs proposes a radical departure from Danann -- i.e., that a general disclaimer of “any matters outside of the [contract]” should, according to Goldman Sachs (id. at 36) (emphasis in original), bar any fraud claim “regardless of whether the disclaimer expressly enumerates” the extra-contractual representations at issue. (See also id. at 39 [“A complete disclaimer of reliance means any reliance on an extracontractual statement, and requires no itemization.”]). This Court rejected that proposal long ago and has rejected it repeatedly since. For example, in Sabo, this Court held that a general disclaimer, of the kind proposed by Goldman Sachs, that “no verbal undertakings or conditions not contained in the writing were to be binding on either party -- sometimes termed a merger clause [--] is ineffectual to exclude evidence of fraudulent representations.” 27 See also Manufacturers Hanover Trust Co. v Yanakas, 7 F3d 310, 316 (2d Cir. 1993) (“[I]n order to be considered sufficiently specific to bar a defense of fraudulent inducement under Danann, a [contract] must contain explicit disclaimers of the particular representations that form the basis of the fraud-in-the- inducement claim.”); Grumman Allied Indus., Inc. v Rohr Indus., Inc., 748 F2d 729, 735 (2d Cir. 1984) (noting the “Danann rule operates where the substance of the disclaimer provisions tracks the substance of the alleged misrepresentations”). 27 Sabo v Delman, 3 NY2d 155, 161 [1957]. “Indeed, if it were otherwise, a defendant would have it in his power to perpetrate a fraud with immunity, depriving the victim of all redress, if he simply has the foresight to include a merger clause in the agreement.” Id. “Such, of course, is not the law.” Id. [citations omitted].28 In any event, as shown (ACA Br. at 42-43), the disclaimers in the offering circular for ABACUS notes do not even apply to ACA, much less to ACA’s claim that it was fraudulently induced to enter into the financial guaranty. In response (GS Br. at 41), Goldman Sachs argues that, “[e]ven if ACA bought the notes for the accounts of CDOs it managed” -- as Tourre testified in SEC v Tourre (ACA Br. at 43 n.30)29 -- the disclaimers still would apply because the offering circular states 28 See also Deerfield, 68 NY2d at 956 (fraudulent inducement claim “[not] barred by the general merger clause”); Danann, 5 NY2d at 320 (it is a “fundamental principle that a general merger clause is ineffective to exclude parol evidence to show fraud in inducing the contract”); Plapinger, 66 NY2d at 94 (same). 29 ACA, which has been and is in runoff, omitted the note-based claims asserted in its original complaint, not for any improper purpose, as Goldman Sachs falsely and improperly suggests (GS Br. at 17), but because trade confirmations proffered by Goldman Sachs in support of its motion to dismiss that complaint [R. at 601-603] established that ACAM, not ACA, purchased ABACUS notes on behalf of three CDOs it managed, not on behalf of itself or ACA. (ACA Br. at 21, 42-43). ACA thus conformed the complaint to the evidence, which is expressly authorized by CPLR 3025(c). There is, therefore, no basis for judicial estoppel. (GS Br. at 40). Goldman Sachs, however, cleaves to its factually incorrect assertion that ACA purchased ABACUS notes despite contrary evidence that Goldman Sachs itself proffered to the trial court. “It would be unseemly, to say the least, to permit 28 that a note purchaser may purchase notes “for its own account or the account of another.” (GS Br. at 41) (emphasis supplied by Goldman Sachs). That argument fails for three basic reasons. First, ACA’s subsidiary, ACAM, not ACA, purchased the notes on behalf of the CDOs. (ACA Br. at 21, 42-43). Second, although the offering circular recognizes that a purchaser may purchase notes for the account of another, as ACAM did, the representations and disclaimers are, by their express terms, attributable solely to “purchaser[s] of a beneficial interest in [an ABACUS] Note.” (R. at 437). Third, every disclaimer in the offering circular is expressly limited to claims asserted “[i]n connection with the purchase of the Notes.” (Offering circular at 115 [R. at 437]). As Goldman Sachs concedes (GS Br. at 17), even if ACA had purchased notes, which it did not, ACA does not assert any claims in connection with any purchase of any notes.30 [Goldman Sachs] to renege on its court-submitted evidence.” In re Michigan Natl. Bank-Oakland, 89 NY2d 94, 103 [1996]. 30 Goldman Sachs’s assertion that the disclaimers in the offering circular applied to the financial guarantee because those two separate contracts “related to the same transaction” (GS Br. at 41 n.12) is meritless -- because, among other things, it is contrary to the plain language of the disclaimers -- and finds no support in Societe Nationale D’Exploitation Industrielle Des Tabacs Et Allumettes v Salomon Bros. Intl, Ltd., 268 AD2d 373, 375 [1st Dept 2000] [enforcing disclaimer in contract “governing the parties’ transactional relationship”]. CONCLUSION For the foregoing reasons and those set forth in ACA's opening brief, the Decision should be reversed and ACA's fraud claims against Goldman Sachs reinstated. Dated: New York, New York September 3, 2014 Respectfully submitted, KASOWITZ, BENSON, TORRES & FRIEDMAN LLP \ "' #~ . l/'l . '~ l~f' By. !V\\Jr,, _,. ( Marc E. Kasowltz Daniel R. Benson Andrew K. Glenn Trevor J. Welch Kara F. Headley 1633 Broadway New York, New York 10019 (212) 506-1700 (212) 506-1800 (fax) Attorneys for Plaintiff Appellant ACA Financial Guaranty Corp. 29