Assignees Beware: The Right to Assert a Fraud Claim Related to A Contract or Note Does Not Automatically Transfer with The Assignment of the Contract or Note

• Posted on: May 26 2023

Query: does the recipient of an assignment via a contract or a note automatically have the right to assert tort claims, including fraud claims, arising from that contract or note? In SureFire Dividend Capture, LP v. Industrial & Commercial Bank of China Financial Services LLC, 2023 N.Y. Slip Op. 02841 (1st Dept. May 25, 2023) (here), the Appellate Division, First Department answered the question in the negative. The reason, as one would expect, depends on the language used by the parties and their intention in making the assignment.

Under New York law, the assignment of the right to assert contract claims pursuant to a contract or note does not automatically give the recipient of the assignment the right to assert tort claims arising from that contract.¹ This rule dates back to Fox v. Hirschfeld,² where the First Department held that the assignment of fraud claims must be explicit in the contract being assigned. Fox involved the assignment of real property from the plaintiff-assignor to his wife. The First Department held that the plaintiff had not relinquished his right to pursue any claims for rescission or fraudulent misrepresentation because there was nothing in the assignment that explicitly stated that those claims were being assigned. 

Since Fox was decided, it has been construed to mean that, in the absence of an explicit assignment of a cause of action based on fraud, “only the … assignor may rescind or sue for damages for fraud and deceit [because] the representations were made to [the assignor] and [the assignor] alone had the right to rely upon them.”³ Notably, no specific words are required to effect the assignment of a fraud claim.⁴ Accordingly, 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 that evinces that intent and effectuates the transfer of such rights.⁵

In Sure Fire Dividend, the agreement at issue lacked any language sufficient to evince an intent to convey the right to assert a fraud claim. 

Sure Fire Dividend arose from an alleged fraud that was perpetuated by non-party Brenda Smith. Smith, the owner of CV Brokerage, controlled two separate hedge funds – TA1 and Broad Reach Capital, LP (“Broad Reach”) – that she allegedly used in connection with a Ponzi scheme to defraud people of their investments. Smith pled guilty for this fraud. 

Defendant Industrial and Commercial Bank of China Financial Services LLC (“ICBC”) worked with Smith as the clearing broker for both hedge funds and was allegedly the only clearing broker that would execute Smith’s options strategy. Plaintiff, SureFire Dividend Capture, LP (“SureFire”), alleged that it was both a direct investor in Broad Reach and the successor-in-interest of non-parties Aalii Fund, LP and Alpha Capital Partners, LP (collectively, the “A Funds”), which allegedly invested tens of millions of dollars in the Broad Reach fund. The A Funds’ interest was assigned to SureFire in February 2019, pursuant to a subscription agreement (the “In-Kind Subscription Agreement”). That agreement provided that the assignors were transferring the full balance of their interests in Broad Reach to SureFire and that the purpose of the agreement was to facilitate the transfer.

Plaintiff alleged that defendant ICBC aided and abetted Smith’s fraud and breach of fiduciary duty.

ICBC moved to dismiss both claims pursuant to CPLR § 3211(a)(3) for lack of standing. ICBC argued that SureFire lacked standing to assert claims to recover for the A Funds’ investments because the In-Kind Subscription Agreement did not evince an intent to assign any fraud-based claims as required under New York law. ICBC based its argument on, inter alia, the language of the In-Kind Subscription Agreement, which it maintained was clear and unambiguous. 

SureFire opposed, claiming that the In-Kind Subscription Agreement transferred all “rights, title and interests, including all contract, fraud and tort claims, in Broad Reach to SureFire.” That language, however, did not appear in the In-Kind Subscription Agreement. 

The motion court dismissed the action with prejudice to the extent it was “based on allegations that the A Funds assigned its fraud claims to plaintiff SureFire.” Among other things, the motion court held that “the plain language of the In-Kind Subscription Agreement [was] unambiguous and [did] not contain language that evince[d] any intent to assign any legal claims to SureFire.”⁶

On appeal, the First Department unanimously affirmed.

The Court held that “plain language” of the In-Kind Subscription Agreement “was unambiguous and did not evince an intent to assign the fraud-based claims.”⁷ The Court noted that “the one-paragraph subscription agreement provided only for the transfer of the ‘full balance of [A Funds’] interest in Broad Reach Capital LP to Sure Fire Dividend Capture SPV5 … for the purposes of facilitating an in-kind subscription to the Fund in the amount of its 2/28/19 balance.’”⁸ That language, said the Court, “plainly refer[red] to the transfer of the amount invested in the fund, with nothing more.”⁹ Since the language was clear and unambiguous on its face, the Court rejected SureFire’s attempt to show intent through “extra-contractual allegations.”¹⁰

Takeaway

The rule discussed above makes sense in the context of fraud claims. In a fraud action, the party alleging fraud must demonstrate reliance on the alleged misstatement or omission. When an assignment is made, the assignee must be in a position to allege reliance. As the courts have made clear, “[w]ithout a valid assignment, ‘only the … assignor may rescind or sue for damages for fraud and deceit’ because ‘the representations were made to [assignor] and [the assignor] alone ha[s] the right to rely upon them.’”¹¹ 

Footnotes

1. Banque Arabe et Internationale D’Investissement v. Maryland Natl. Bank, 57 F.3d 146, 152 (2d Cir. 1995).
2. Fox v. Hirschfeld, 157 App. Div. 364, 142 N.Y.S. 261 (1st Dept. 1913).
3. Nearpark Realty Corp. v. City Investing Co., 112 N.Y.S.2d 816, 817 (Sup. Ct., N.Y. County 1952).
4. Commonwealth of Pennsylvania Pub. Sch. Employees’ Retirement Sys. v. Morgan Stanley & Co., Inc., 25 N.Y.3d 543, 550 (2015); State of Cal. Pub. Employees’ Retirement Sys. v. Shearman & Sterling, 95 N.Y.2d 427, 432 (2000); see also Banque Arabe, 57 F.3d at 151-152.
5. E.g., State of Cal. Pub. Employees’ Retirement Sys., 95 N.Y.2d at 432.
6. Citing, Commonwealth of Pennsylvania, 25 N.Y.3d at 550, and State of Cal. Pub. Employees’ Ret. Sys., 95 N.Y.2d at 432. A copy of the motion court’s decision and order can be found here.
7. Slip Op. at *1 (citations omitted).
8. Id.
9. Id.
10. Id. (citing, Ark Bryant Park Corp. v. Bryant Park Restoration Corp., 285 A.D.2d 143, 150 (1st Dept. 2001)).
11. Commonwealth of Pennsylvania, 25 N.Y.3d at 550 (quoting, Nearpark Realty, 112 N.Y.S2d at 817); see also Fox, 157 App. Div. at 365-368; Banque Arabe, 57 F.3d at 151.