DocketNumber: No. 08 Civ. 7508(SAS)
Citation Numbers: 910 F. Supp. 2d 543
Judges: Scheindlin, Shiraa
Filed Date: 10/5/2012
Status: Precedential
Modified Date: 11/26/2022
OPINION AND ORDER
I.INTRODUCTION
Plaintiffs are institutional investors asserting claims of fraud, aiding and abetting fraud, and negligent misrepresentation against Morgan Stanley & Co. Incorporated and Morgan Stanley & Co. International Limited (together, “Morgan Stanley”)— the arranger/placement agent of the Structured Investment Vehicle (“SIV’) in which plaintiffs invested — and the agencies that rated the notes issued by the SIV. In my August 17, 2012 summary judgment Opinion and Order, I dismissed plaintiffs’ fraud claims against Morgan Stanley because: (1) plaintiffs had not identified any actionable misstatement attributable to Morgan Stanley; and (2) the existence of an actionable misstatement attributable to Morgan Stanley was an essential element of plaintiffs’ fraud claims against it. Although Morgan Stanley had not yet moved for summary judgment on plaintiffs’ negligent misrepresentation claim, I ordered plaintiffs to show cause as to why their negligent misrepresentation claims against Morgan Stanley should not be dismissed in light-of my finding that Morgan Stanley made no actionable misstatement to plaintiffs. This Order to .Show Cause presented a simple question: under New York law, may a plaintiff maintain a negligent misrepresentation claim against a defendant to whom no actionable misstatement can be attributed? Because the answer to this question is “yes,” plaintiffs’ negligent misrepresentation claim against Morgan Stanley is not dismissed.,
II. BACKGROUND
Familiarity with the facts and the procedural history is assumed.
III. LEGAL STANDARD
As the Court’s Order to Show Cause presented a limited question of law, the applicable legal standard is the same as that for a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). In deciding such a motion, a court must “accept all factual allegations in the complaint as true, and draw all reasonable inferences in the plaintiffs favor.”
IV. DISCUSSION
The New York Court of Appeals’ most recent description of the elements of a negligent misrepresentation claim follows:
It is well settled that “[a] claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.”9
In a prior opinion, I conducted an extensive analysis of the relationship between Morgan Stanley and plaintiffs and determined that plaintiffs had sufficiently alleged the existence of a “special relationship” between the parties.
The description of the elements of negligent misrepresentation set forth in Mandarin Trading Ltd. v. Wildenstein does not include any requirement of an affirmative misrepresentation by a defendant.
Further, because a negligent misrepresentation claim may be based on the breach of a duty to provide accurate information, it may be premised on an omission. For example, in Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., Judge Richard Sullivan held that:
Under New York law, a duty to disclose material facts arises in one of three ways: (1) where the parties stand in a confidential fiduciary relationship, (2) where one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge, or (3) where a party to a business transaction has made a partial or ambiguous statement, on the theory that once a party has undertaken to mention a relevant fact to the other party it cannot give only half of the truth. [A] breach of a duty to disclose can constitute an element of various torts such as ... negligent misrepresentation based on omission, or breach of fiduciary duty16
Thus, because Morgan Stanley had a sufficiently-alleged “special relationship” with plaintiffs, and because Morgan Stanley allegedly had superior non-public information upon which it knew plaintiffs would rely, Morgan Stanley can be liable for negligent misrepresentation.
Morgan Stanley argues that this Court already rejected the possibility that it could be liable for breach of a duty to disclose.
It is not anomalous that a defendant who made no actionable misstatement might be liable for negligent misrepresentation but not fraud. The existence of the special relationship without which a negligent misrepresentation claim cannot proceed creates a duty to impart correct— and complete — information. Whereas plaintiffs had a high bar to establish the existence of a special relationship, upon doing so they have a lower bar to establish that Morgan Stanley’s conduct was negligent. Because intent is an element of a fraud claim, it is essential for a court to determine to whom an allegedly fraudulent statement may be attributed.
To summarize, plaintiffs have sufficiently pled a special relationship with Morgan Stanley such that Morgan Stanley had a duty to make no negligent misrepresentations to them. Plaintiffs have further alleged that Morgan Stanley negligently conveyed to them ratings that it had reason to believe were inaccurate or deeply flawed, omitting facts that would expose the flaws in the ratings.
V. CONCLUSION
For the reasons stated above, plaintiffs have shown cause as to why their negligent misrepresentation claims against Morgan Stanley should not be dismissed.
SO ORDERED.
. Wilson v. Merrill Lynch & Co., 671 F.3d 120, 128 (2d Cir.2011).
. 556 U.S. 662, 678-80, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
. Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir.2010) (quoting Iqbal, 556 U.S. at 679, 129 S.Ct. 1937) Accord Ruston v. Town Bd. for Town of Skaneateles, 610 F.3d 55, 59 (2d Cir.2010).
.Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citing Bell Atl. Corp, v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
. Id. at 679, 129 S.Ct. 1937. Accord Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111, 124 (2d Cir.2010).
. Twombly, 550 U.S. at 564, 127 S.Ct. 1955.
. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quotation marks omitted).
. Id. (quotation marks omitted).
. Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 180, 919 N.Y.S.2d 465, 944 N.E.2d 1104 (2011) (quoting J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148, 831 N.Y.S.2d 364, 863 N.E.2d 585 (2007)).
. See May 4 Order (Docket No. 404), referring to King County, Washington v. IKB Deutsche Industriebank AG, 863 F.Supp.2d 288, 310-12 (S.D.N.Y.2012), reconsideration denied, 863 F.Supp.2d 317 (S.D.N.Y.2012).
. See Plaintiffs’ Response to Order to Show Cause Regarding Negligent Misrepresentation Claims, at 10-12 (quoting Mandarin Trading, 16 N.Y.3d at 180, 919 N.Y.S.2d 465, 944 N.E.2d 1104).
. See Mandarin Trading, 16 N.Y.3d at 180, 919 N.Y.S.2d 465, 944 N.E.2d 1104.
. Century Pac., Inc. v. Hilton Hotels Corp., No. 03 Civ. 8258, 2004 WL 868211, at *8 (S.D.N.Y. Apr. 21, 2004) (citing, inter alia, Kimmell v. Schaefer, 89 N.Y.2d 257, 264-65, 652 N.Y.S.2d 715, 675 N.E.2d 450 (1996)) (emphasis added).
. See Memorandum of Law in Support of Defendant Morgan Stanley & Co. Incorporated’s and Morgan Stanley & Co. International Limited’s Reply to Plaintiffs’ Response to Order to Show Cause ("Def. Mem.”), at 4.
. See Ninth Amended Complaint for Common Law Fraud, Negligent Misrepresentation, Negligence, Breach of Fiduciary Duty, and Aiding and Abetting ("NAC”), ¶¶219-227.
. Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F.Supp.2d 162, 201 (S.D.N.Y.2011) (citing Lerner v. Fleet Bank, N.A., 459 F.3d 273, 292 (2d Cir.2006); Brass v. American Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993)) (emphasis added).
. The very nature of a privity-like "special relationship” is that it entails a duty to provide accurate information. See Mandarin Trading, 16 N.Y.3d at 180, 919 N.Y.S.2d 465, 944 N.E.2d 1104 (requiring "the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff”). Thus, my prior holding that plaintiffs have sufficiently alleged a "special relationship” with Morgan Stanley is tantamount to a holding that plaintiffs have sufficiently alleged Morgan Stanley’s duty to provide accurate information.
. See Def. Mem. at 4.
.Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc:, No. 08 Civ. 7508, 888 F.Supp.2d 431, 451 n. 96, 2012 WL 3584278, at *7 n. 96 (S.D.N.Y. Aug. 17, 2012) (quoting Cobalt Partners, L.P. v. GSC Capital Corp., 97 A.D.3d 35, 944 N.Y.S.2d 30, 35 (1st Dep’t 2012)). I have already determined that Morgan Stanley did not have a fiduciary relationship with plaintiffs. See May 4 Order, referring to King County, 863 F.Supp.2d at 314 (“[T]he relationship between the parties is too attenuated to give rise to a fiduciary duty”).
. I also note that there are limited circumstances in which an omission may constitute fraud under New York law absent a fiduciary relationship. However, plaintiffs did not argue in their summary judgment briefing that such circumstances were present here.
. See Abu Dhabi, 888 F.Supp.2d at 448-53, 2012 WL 3584278, at *7-9.
. See NAC ¶¶ 219-227.