First Department dismisses 626(c) claim in split decision.

In Goldstein v Bass, 2016 NY Slip Op 03060 (First Dept., April 21, 2016), in a split decision, the First Department  affirmed the lower court’s decision and dismissed the Plaintiff’s derivative action.  The Plaintiff failed to make a demand on the Board pursuant to BCL § 626(c), arguing in the complaint that doing so would be futile. However, on appeal, Plaintiff argued that the demand requirement had been fulfilled.

The case involved the sale of cooperative units being sold at below market rates.   In 1995, the co-op obtained more than 300 units after a failed conversion.  The board approved the sale of 71 units at below market rates and in addition, agreed to pay above market rates to a managing agent for a period of ten years.

The lower court dismissed the complaint on the grounds that the Plaintiff failed to comply with BCL 626(c) and failed to plead demand futility.  Under BCL 626(c), “the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort”.  The Court citing Marx v Akers, 88 NY2d 189, 66 N.E.2d 103, 644 N.Y.S.2d 121, stated the Plaintiff must plead with “particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgement in approving the transaction” (internal citations omitted).

Here,  the Plaintiff failed to establish any of the elements that would satisfy demand futility.  The complaint failed to specify that any of the directors were interested in the direction; that the directors failed to apply any due diligence and failed to inform themselves about the transaction or that the directors were acting in bad faith or self-dealing with respect and therefore violating the business judgment rule.

The dissent had some interesting points.  First it agreed with the majority that the the Plaintiff failed to make a demand on the board and the various communication indicating that such demand had been made was not sufficient.  Secondly, while the lower court did not consider the other causes of action, the dissent also agreed that the cause of action for aiding and abetting breach of fiduciary duty and the cause of action and unjust enrichment would have been dismissed against the Leifer defendant.  The Plaintiff had failed to plead with particularity that Lefier had actual knowledge as opposed to constructive knowledge for any breaches of fiduciary duty.

However, the dissent disagreed with the majority in that making a demand would have been futile (agreeing wth the Plaintiff’s original position in the complaint).  Contrary to the majority’s position, the dissent was persuaded that it would have been futile because; (1) board approved the sale of 43 units at lower market rates to defendants, Leifer; 27 units were sold to Monarch that also happened to be a principal of a managing agency thereby perpetuating a potential conflict of interest; and finally, the board also approved a sale of one unit to a board member, which makes at least one member an interested member.  In addition, the board paid an above market rate of $288,000 a year in a ten year non-cancellable contract to a managing agent which would make a justified cause of action for corporate waste as well.  Considering the totality of the circumstances, the dissent agreed that it would have been futile to make a demand on the board.


Royal Bank of Canada prevails against Balanced Return Fund.

In Balanced Return Fund Ltd. v Royal Bank of Can., 2016 N.Y. Slip Op. 02928 (First Dept., April 19th, 2016), the First Appellate Division affirmed the lower court’s order granting summary judgment to Royal Bank of Canada (“RBC”), thereby dismissing Balanced Fund’s claims for breach of fiduciary duty, fraud, aiding and abetting breach of fiduciary duty and aiding and abetting fraud.

The Court held that there was no fiduciary relationship between the parties.  The relationship was more of a debtor-creditor relationship as RBC was merely a depository bank for investors in the transaction.  The Court emphasized that the fiduciary relationship must exist at the onset of the transaction and “not as a result of it”.

The fraud clam was also dismissed as RBC lacked a duty to disclose the “overvaluation and illiquidity of investment assets”.  In any case, RBC was not directly transacting with the plaintiff and again, had no fiduciary relationship with the plaintiff.

Finally, the aiding and abetting claim was dismissed as the plaintiff failed to establish the elements of the cause of action, namely, substantial assistance and actual knowledge.  Here, the plaintiff failed to establish that RBC “knew it was structuring the transaction to plaintiff’s detriment in order to benefit the non-party primary wrongdoer”.  Furthermore, the Court noted that inaction was not sufficient to establish such a claim as it would not be considered as actual knowledge.

First Appellate Division grants Akon reprieve in breach of contract case.

In Belgium v. Mateo Prods., 2016 NY Slip Op 02730, (April 12th, 2016, First Department), the Plaintiff, Lofraco Belgium (Front Row Entertainment) entered a contract with Defendant, Kon Live Touring (KLT), who was also Akon’s management company.  Akon was scheduled to perform at a concert in Belgium.  However, on the day of the concert, Akon claimed he was too sick to perform.  The plaintiff filed a breach of contract claim against Akon for the $125,000 advance given.  Subsequently, both parties filed motions for summary judgment.  In a split decision, the Court held that there was a triable issue of fact as to the ther there was a breach of contract and denied both motions.

On August 7th, 2009, the parties entered into an agreement whereby Akon was to perform on October 16th, 2009 at a concert.  The plaintiff paid $125,000 to Akon’s management team.  The concert was re-scheduled to December 9th, 2009, but on the day of the concert, Akon stated he wasn’t going to appear due to illness.  Akon claimed he was still suffering symptoms from his surgery that took place on November 16th, 2009 and thus could not perform.

The agreement signed between the parties had a force majeure clause whereby it stated that “If ARTIST is unable to perform in the event of sickness or accident then this will be considered Force Majure’ [sic] by ARTIST and ARTIST shall not be subject to any liability…Monies will be returned for any nonperformance that is not covered under the scope of force Force Majure’ [sic].”

A force majeure clause is enforceable where the “expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties” quoting United Equities Co. v First Natl. City Bank, 52 AD2d 154, 157 [1st Dept 1976], affd 41 NY2d 1032 [1977].  The burden remains on the defendant to prevail on a force majeure defense .

KLT moved for summary judgment and submitted two key pieces of evidence: (1) records from Akon’s surgery and (2) testimony from Akon’s surgeon that claimed the symptoms suffered by Akon were “consistent with tearing of scar tissue following the surgery he had undergone a few weeks before the concert date.”   The lower court denied the motion for summary judgment as KLT failed to meet the burden on numerous grounds.  Firstly, despite testimony from the surgeon, KLT failed to submit any evidence that Akon was ill on that particular day.  Furthermore, the Court held that the lack of an explanation as to  why such medical records were not submitted, despite being in KLT’s control, was a factor in denying the summary judgment motion.

The majority also reversed the lower court’s ruling granting summary judgment to the plaintiff.  In order to prevail on the summary judgment motion, the Court stated that two elements needed to be satisfied: (1) Akon was able to perform and (2) Akon was not sick and thus was in a position to perform.  Here, the plaintiff only argued that the lack of medical records provided by Akon was enough to show that Akon was not sick.  However, the majority disagreed and stated a trial was needed.

The dissent agreed in part with the majority in that KLT should have been denied summary judgment, but dissented on the grounds that the plaintiff should have been granted summary judgment.

The dissent disagreed with majority and put forth many persuasive arguments as to why the plaintiff should have prevailed on the summary judgment motion.  First, the elective procedure was on November 16th, 2009 even though Akon knew he was going to perform in Belgium a few weeks later; Akon admitted in his affidavits that he was recovering from surgery quite well; he travelled to Puerto Rick for a promotional event only a few days before the Belgium concert; admittedly, Akon was ill for a period of time in Puerto Rico, but continued to appear at the promotional event and in any case such illness did not require any medical treatment; despite his defense that he seemed medical care upon return to the US, he has failed to produce any medical records to substantiate his claim.  Finally, the only treatment Akon received was a massage therapy and did not see his surgeon until December 22nd 2009.

Furthermore, the dissent noted that Akon failed to produce such medical records when requested by the Plaintiff during the discovery process.  In addition, the surgeon who treated Akon claimed that he “did not treat him for post surgery symptoms”.  Akron’s credibility was also in question when the surgeon failed to corroborate that he advised Akon to go to the emergency room for the symptoms experienced in Puerto Rico.  Nevertheless, it was the surgeon’s position that such symptoms would not have prevented Akon from performing in Belgium.

Ultimately, the issue going forward for the plaintiff is that the medical records are solely in Akon’s possession and control.  For plaintiff to prevail, such records must be produced in order to prevail on the summary judgment otherwise it comes down to a trial.




Deutsche Bank prevails against Aozora in RMBS fraud suit.

In Aozora Bank, Ltd. v Deutsche Bank Sec. Inc., 2016 NY Slip Op 02511 (1st Dept., 2016), the First Appellate Division denied Aozora’s motion to file an amended complaint and affirmed the lower court’s opinion granting Deutsche Bank’s motion to dismiss the fraud claim.  The Court held that Aozora had sufficient inquiry notice and thus dismissed the fraud claim based on failure to file within the statutory limitations.

In 2006, Aozora invested $30 million in Blue Edge CDO, which was structured and sold jointly by Deutsche Bank and Deutsche Bank Securities, Inc.  Aozoara’s primary argument is that Deutsche Bank had negative views on the RMBS that were included in the CDO and yet continued to encourage investment in the CDO.  Aozora presented evidence that the global head of CDO’s stated in an internal email that the RMBS in Blue Star were “weak and horrible”.  Despite this negative view, Deutsche Bank approved selections for the CDO comprising of the subprime RMBS.

In 2005, Deutsche Bank took short positions with respect to the RMBS in Blue Edge and even sold credit default swaps to various entities and shifted the “long position to to CDOs such as Blue Edge.”  Deutsche Bank’s own negative view was not disseminated in any of the marketing materials with respect to Blue Edge.  Furthermore, while Deutsche Bank initially stated it held the collateral portfolio in its own books, it later decreased its exposure to the RMBS by approximately by 60%.  Aozora further alleged that the percentage of the portfolio comprising of sub-prime mortgage was 47.6% rather than the prime RMBS marketed value of 66.7%.

In 2013, Aozora filed a summons and notice and asserted causes of action for common law fraud, aiding and abetting fraud, breach of the implied covenant of good faith and fair dealing, negligent misrepresentation, and unjust enrichment.  Specifically with respect to the fraud claims, Aozora asserted that it relied upon Deutsche Bank’s misrepresentations with respect to the breakdown of the portfolio.  Despite conducting its own due diligence, Aozora further asserted that ” it did not know, and could not have known, that the marketing materials and offering documents contained material misrepresentations and omissions” and in particular, the quality of assets in the portfolio were much lower than represented in the marketing materials.

In its response, Deutsche Bank moved to dismiss the complaint under CPLR 3211(a)(5) and (7).  Primarily, Deutsche Bank argued that the claims were time barred since Aozora filed suit six years after it invested in Blue Edge and furthermore, failed to raise suit even after discovering the fraud within the extended two year period.  Deutsche Bank further argued that there was ample evidence to indicate there had been issues with mortgage backed securities and even submitted evidence such as Senate investigations and other press articles indicating that Aozora had sufficient opportunity to raise the issue.

In its opposition for dismissal, Aozora admitted that the suit was based on internal documents and records.  The primary purpose of Aozora’s US operations was to facilitate clients services and investing in structured finance products was not the primary task of the New York office.  Nevertheless, in 2012, upon realizing that other suits were filed with success, Aozora reviewed its structured products portfolio and examined the feasibility of raising claims against Deutsche Bank.

In March 2013, Aozora realized that there might be viable claims based on Senate reports and thus, commenced the action.  However, the lower,  court ruled that the fraud claim was untimely as the two year period to raise such a claim had passed.  The court also held that Aozora failed to conduct “reasonable due diligence” in investigating its fraud claim.

Under  CPLR 213 (8), Aozora failed to file a claim within six years of when the cause of action accrued or two years from the time it discovered the fraud or conducted reasonable due diligence to discover such fraud.   Here, Aozora had inquiry notice of its fraud claims before June 18th, 2011.  For example, Blue Edge was downgraded to junk in 2008 and Aozora suffered severe losses as a result.  Furthermore, the press coverage, various investigations and lawsuits began much before 2011.  In addition, the Court also asserted that despite some due diligence conducted in 2012 and 2013, Aozora failed to conduct any similar diligence prior to 2011.

Therefore, since Aozora had sufficient inquiry notice, the Court affirmed the lower court’s decision to dismiss the complaint in its entirety.

Derivative Suit against JP Morgan directors dismissed.

In an RMBS case, the First Appellate Division affirmed the lower court’s decision in Asbestos Workers Phila. Pension Fund v Bell, 2016 NY Slip Op 02510 [U][1st Dept., 2016] that a pre-suit demand was required and the Plaintiff was not excused from raising such demand in its derivative suit.

The Plaintiff raised a derivative suit against the board members of JP Morgan without a pre-suit demand.  The complaint was in relation to securitization of and sale of subprime mortgages, whereby the Plaintiff alleged that JP Morgan board members were aware that these mortgages were troubled assets, and yet made them more “financially secure than they appeared.”  Furthermore, the Plaintiff alleged that the board improperly abdicated its duties by appointing a management committee to oversee the sale of the mortgages and failing to oversee the committee’s actives diligently.  Plaintiff also argues that no pre-suit demand was necessary as it asserted a demand futility claim.

The Court applied Delaware law as JP Morgan is incorporated in Delaware.  Under Delaware law, the condition precedent in filing a shareholder derivative action is that the plaintiff must raise pre-suit demand upon the board.  However, this pre-suit demand may be waived if it is deemed to be futile.  In determining the futility, the Court must apply the two pronged test stated in Aronson v Lewis, 473 A2d 805, 814 [Del 1984], overruled in part on other grounds Brehm v Eisner, 746 A2d 244 [Del 2000].   

The two pronged test must determine “whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment” (Aronson v Lewis, 473 A2d at 814).  In order to prevail, if either prong is satisfied, the a pre-suit demand is deemed to excused.  Where the suit alleges board inaction, “demand futility can be established by particularized facts creating a reasonable doubt that at the time the complaint was filed, the board could not have properly exercised its independent and disinterested business judgment in responding to the demand”  quoting In re Goldman Sachs Group, Inc. Shareholder Litig., 2011 WL 4826104, 2011 Del Ch LEXIS 151 [Del Ch 2011] .

Here, the Plaintiff failed to satisfy the requirements of either prong.  There were no facts plead with any particularity as to how the board members were interested or lacked independence.  Here, the board members in question were outside directors and the Plaintiff failed to state if there was any personal financial gains received or if the directors stood on both sides of the transaction.  It should be noted that merely that a “director will be called upon to consider whether to sue himself or herself does not, in itself, warrant a conclusion that he or she lacks independence” is in itself not sufficient to prevail on a cause of action quoting Rales v Blasband, 634 A2d at 936.  In fact, Plaintiff’s argument was based on the “claim that the individual board members lack independence is based on plaintiffs’ argument that they will likely face individual liability for their acts.”   The Court rejected this contention and and reiterated the standard for liability of a director.

In Delaware, liability may be limited to a certain extent under Delaware Code Annotated, title 8, § 102(b)(7) which if incorporated into a company’s charter. Furthermore, such liability requires particularized allegations that the board’s actions were “made with  scienter, that is with actual knowledge that its conduct was legally improper.”  see also In re Goldman Sachs Group, Inc. Shareholder Litig., 2011 WL 4826104, 2011 Del Ch LEXIS 151 [Del Ch 2011] Supra.  Here, the Plaintiff failed meet the burden set forth as there was no particularity in the facts alleged.

With respect to the second prong, the Plaintiff also failed to meet with the burden as there were no particularized facts pleaded either.  Delegating a management committee to sell the securities did not per se a violation of a valid exercise of business judgment.  In order for the Plaintiff to prevail, there must be allegations stated where a director failed to exercise good faith and failed to take a course of action in the best interests of the company.  See In re Walt Disney Co. Derivative Litig., 906 A2d 27, 52 [Del 2006].  Here, the Court indicated that the Plaintiff failed to satisfy the second prong.

As to the lack of oversight claim, the  Court stated that the burden is much higher for the Plaintiff to satisfy.  In order to prevail, “a plaintiff must set forth particularized facts that there was a “sustained or systematic failure” by the board to exercise oversight, demonstrating “the lack of good faith that is a necessary condition to liability” see In re Caremark Intl., Inc. Derivative Litig., 698 A2d 959, 967 [Del Ch 1996]). The Plaintiff’s claim amounted to a lack of monitoring of corporate operations which would not satisfy the standard above.



Breach of fiduciary duty complaint against Archstone dismissed.

In Cambridge Capital Real Estate Invs., LLC v Archstone Enter. LP, 2016 NY Slip Op 02017 (1st Dept., 2016), the First Department reversed the lower court and dismissed the complaint filed in its entirety.

The plaintiff invested $20 million in Archstone Multifamily  JV LP (the “Fund”) for 1% interest.  Archstone Multifamily GP, LLC is a general partner of the fund.  The Fund acquired Archstone Enterprise, LP which then controlled the assets of Archstone-Smith Real Estate Investment Trust, a $23.7 billion REIT.  As part of the deal, Lehman Brothers was a sponsor and provided financing for the acquisition in the amount of $3 billion in secured financing, which amounted to 47% of the total financing.  Bank of America provided 28% and Barclays provided the balance at 25%.

In 2009, the sponsors provided an additional $485 million in funding to Archstone and later in the year, the original limited partnership agreement was amended. The following year, sponsors exchanged $5.2 billion in debt for preferred shares in Archstone.  This resulted in a bifurcation of two share classes: (1) preferred interested held by the sponsors and (2) common interest held by the Fund itself.

In 2012, Lehman bought out the other sponsor’s shares in two separate transactions: $1.33 billion in January and the balance in June for $1.65 billion.  Lehman then sold its assets to  Equity Residential and AvalonBay Communities, Inc. via a asset purchase agreement for $2.7 billion in cash, $3.8 billion in stock, and the assumption of $9.5 billion in debt.  The transactions closed on February 27th, 2013.

In November 2012, plaintiff became aware of Lehman’s transaction.   On December 2012, Plaintiff filed a complaint alleging “breach of the limited partnership agreement, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty as against the fund’s general partner; aiding and abetting breach of fiduciary duty as against the other defendants; and fraud and conversion as against all defendants.”

The lower court dismissed the breach of contract action as time barred.  Pursuant to Section 6.01 (e) and (g) of the amended limited partnership agreement, there is no requirement that there be a delivery of written notice to all limited partners.  The provision only requires that a “major decision” be approved by a “Requisite Interest of the Limited Partners”, which pursuant to the agreement, applies to limited partners holding more than 50% of the total percentage interest   Furthermore, consent was not required as the transaction had been approved by 99% of all the partnership interests and no partner responds within ten days.

The Court also reversed the lower court’s and dismissed the cause of action relating to breach of fiduciary duty against the general partner of the Fund.  IN applying Delaware law, the court examined the application of the heightened “entire fairness” standard, which focuses on two elements: (1) fair dealing and (2) fair price quoting In re Crimson Exploration Inc. Stockholder Litig. , 2014 WL 5449419, *9, 2014 Del Ch LEXIS 213, *30 [Del Ch 2014]).

Here, the Plaintiff failed to demonstrate that it did not “receive the substantial equivalent in value of what [it] had before”.  Furthermore, the facts indicate that the GP attained $16 billion in value, which was the current value of Archstone at the time of the transaction.  In addition, the Plaintiff conceded it “represented a premium of approximately 15% over the implied purchase price of Lehman’s combined acquisitions of the interests of the other [s]ponsor [b]anks’ interests earlier in 2012.”  Plaintiff merely asserted a conclusory statement that the transaction was “unfair” without any detail.

Since there was an express contract, the Court affirmed the dismissal for the cause of action relating to the breach of the implied covenant of good faith and fair dealing.

Thus, upon examining the transaction, the Court held that there was no breach of fiduciary duty and dismissed the Plaintiff’s complaint in its entirety.