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.
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