Commercial Division Blog

Posted: July 1, 2015 / Categories Commercial, Contracts, Fraud/Misrepresentation

Purchaser of Note Lacked Standing to Bring Fraud Claims Because Claims Not Specifically Assigned

On June 30, 2015, the Court of Appeals issued a decision in Commonwealth of Pa. Public School Employees' Retirement System v. Morgan Stanley & Co., Inc., 2015 NY Slip Op. 05591, holding that a successor purchaser of a note lacked standing to bring fraud claims based on the original sale because the right to bring fraud claims was not specifically assigned to it.

In Commonwealth of Pa. Public School Employees' Retirement System, the United States Court of Appeals for the Second Circuit faced a question of New York law: "whether proof of a subjective, uncommunicated intent to transfer a whole interest in a note — in the absence of limiting language — suffices to transfer an assignor's tort claims related to such note under New York law" and for that reason certified the following question to the Court of Appeals: "[W]hether, based on the declarations and documentary evidence presented . . . a reasonable trier of fact could find that" there had been a valid assignment of the "right to sue for common law fraud." The Court of Appeals answered "no," explaining:

To be sure, fraud claims are freely assignable in New York. It has long been held, however, that the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note. Thus, where an assignment of fraud or other tort claims is intended in conjunction with the conveyance of a contract or note, there must be some language — although no specific words are required — that evinces that intent and effectuates the transfer of such rights. Without a valid assignment, only the assignor may rescind or sue for damages for fraud and deceit because the representations were made to it and it alone had the right to rely upon them.

(Internal quotations and citations omitted) emphasis added).

The Court of Appeals went on to hold that because there was no "explicit" transfer of the right to bring common law claims, the burden of showing an intent to transfer those claims had not been met. The court rejected the argument that the statement that the transfer was "unqualified" was sufficient to transfer common law claims. Rather, New York law "requires either some expressed intent or reference to tort causes of action, or some explicit language evidencing the parties' intent to transfer broad and unlimited rights and claims, in order to effectuate such an assignment." (Internal quotations and citations omitted) emphasis added). Nor, the court explained, was it sufficient that the parties to the transfer assumed that it included common law claims where there was no evidence that "the assignment of tort claims was actually discussed or negotiated by the parties prior to or at the time of the transfer, or that the sale of the notes in any way referenced the simultaneous assignment of such claims."