On October 16, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Dexia SA/NV v. Morgan Stanley, 2013 N.Y. Slip Op. 51696(U), dismissing on the pleadings causes of action sounding in common-law fraud brought against the underwriters and sponsors of residential mortgage-backed securities (“RMBS”) by both the entity that purchased the RMBS for $626 million and by the assignees to whom the RMBS were sold at face value via a put option transaction.
Justice Bransten dismissed the assignees’ claims for lack of standing because (a) the documentary evidence submitted by the defendants (the assignment documents) conclusively established that the purchaser of the RMBS had assigned only “all right, title and interest in the Put Settlement Assets,” and (b) under New York law, “absent language demonstrating an intent to do so, tort claims do not automatically pass to an assignee.” Here, Justice Bransten held that the assignment language did not demonstrate an intent to assign common-law fraud claims, and thus dismissed the assignees’ claims for lack of standing based on documentary evidence.
Turning to the fraud claims asserted by the purchaser, Justice Bransten dismissed those as well based on New York law limiting the damages recoverable by a fraud victim to its out-of-pocket losses and prohibiting a fraud plaintiff from recovering its expectation damages. Because the documentary evidence submitted by the defendants conclusively established that the purchaser of the RMBS had been paid by its assignees at least as much as the purchaser paid for them, Justice Bransten held that the purchaser could not, as a matter of law, plead fraud damages.
This case illustrates two important lessons for both the commercial transaction lawyer and the commercial litigator: (1) if you are negotiating the purchase of an asset on behalf of an assignee, make sure you include explicit language in the assignment that any tort claims held by the assignor are being assigned to the assignee, or those claims will not pass to your client; and (2) if you are a commercial litigator whose client has been the victim of an alleged fraud, make sure they suffered an out-of-pocket loss or they will be without a remedy. In that regard, however, be aware that New York courts do not always enforce the out-of-pocket fraud loss rule consistently or strictly. For example, in Roni LLC v. Arfa, 74 A.D.3d 442 (1st Dep’t 2010), aff’d, 18 N.Y.3d 846 (2011), the First Department affirmed New York County Commercial Division Justice Charles Ramos’ denial of a motion to dismiss a fraud claim on the pleadings in a case where real estate investors were suing the promoters of the real estate investments for failing to disclose (or affirmatively misrepresenting) certain commissions they received from the sellers of the real estate. The defendants had argued that the fraud claims should be dismissed because, when the real estate was later sold, the plaintiffs recouped more than they had initially invested, although not as much as they would have recovered had the commissions not been paid by the sellers to the defendants. Justice Ramos and the First Department disagreed. According to the First Department, “plaintiffs sufficiently alleged damages by asserting that they suffered actual pecuniary loss in the amount of the secret commissions that inflated the purchase prices of the properties that the LLCs acquired.”