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Defenses That “Bordered on the Frivolous” Insufficient to Defeat Motion for Summary Judgment

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  • Posted on: Apr 25 2018

On April 9, 2018, Justice Shirley Werner Kornreich of the Supreme Court, New York County, Commercial Division granted a motion for summary judgment involving claims that the defendant owed the plaintiff nearly $3.5 million in connection with investment in more than 800 derivatives transactions over a four-year period. In granting the motion, Justice Kornreich had some harsh words about the strength of the defenses proffered in opposition to the motion.

INTL FCStone Mkts., LLC v. Corrib Oil Co. Ltd., 2018 N.Y. Slip Op. 30646(U) (Sup. Ct., N.Y. County, Apr. 9, 2018) (Here.)

Background

Defendant Corrib Oil Co. Ltd. (“Corrob”) owed nearly $3.5 million to INTL FCStone Markets, LLC (“FCStone”). The debt arose from the investment in more than 800 derivatives transactions with FCStone, which Corrib made as a hedge on its exposure to oil price fluctuations. The trades were governed by an ISDA Master Agreement, Schedule, and Credit Support Annex, along with confirmations (“Confirmations”) governing each of the transactions.

Until 2014, Corrib made money on the transactions because the price of oil increased. But in June 2014, the oil market crashed, and so too did Corrib’s positions on the trades. Margin calls followed. Corrib initially satisfied FCStone’s margin calls but, eventually, as Corrib’s positions went even more into the red, Corrib stopped making payments. Corrib first defaulted on a margin call in September 2015. It then defaulted on FCStone’s subsequent margin calls and payment demands. On December 11, 2015, FCStone declared an event of default under the Master Agreement and, on December 29, 2015, FCStone noticed an early termination. At that time, Corrib owed FCStone approximately $3.4 million on 59 trades. FCStone again demanded payment in May 2016, but Corrib did not pay.

On June 24, 2016, FCStone commenced the action by filing a summons and motion for summary judgment in lieu of complaint. By order dated February 23, 2017, the Court denied the motion because FCStone failed to submit the Confirmations governing the trades.

On March 15, 2017, Corrib filed an answer with counterclaims. At a preliminary conference conducted shortly thereafter, problems with the counterclaims were discussed.

On April 17, 2017, Corrib filed an amended answer in which it asserted various counterclaims, including, but not limited to: breach of contract; breach of the implied covenant of good faith and fair dealing; fraud; and fraudulent inducement. At a compliance conference a few weeks later, the court stayed discovery because it became “apparent that Corrib’s defenses and counterclaims bordered on the frivolous.…” Corrib admitted that after production of the trade Confirmations, “it never objected to them,” it never had any written investment advisory agreement with FCStone, and, more importantly, Corrib had “no defense to nonpayment.”

On August 7, 2017, FCStone filed a motion for summary judgment.

The Court’s Decision

As an initial matter, the Court observed that Corrib sought to avoid summary judgment (and, therefore, paying the money owed) on the strength of the “supposed merits of its counterclaims.” Those counterclaims, however, “have no merit,” said the Court. Consequently, the Court held that “[t]here is no question of fact regarding Corrib’s liability to FCStone.”

There is no question of fact regarding Corrib’s liability to FCStone. Corrib does not dispute the occurrence of the subject transactions, that the Confirmations accurately reflect their terms, that FCStone’s margin calls were valid, that it failed to meet such margin calls, that FCStone was entitled to notice an early termination as a result, or that the amount due is $3,415,320.38 plus interest. Rather, Corrib seeks to avoid paying FCStone based on the supposed merits of its counterclaims. The counterclaims have no merit.

Footnote omitted.

Thereafter, the Court discussed the counterclaims/defenses to underscore the strength of its finding (i.e., that they “have no merit”).

For example, with regard to Corrib’s claim that FCStone breached a duty to Corrib, the Court found that FCStone was neither a fiduciary nor an investment advisor for Corrib. Under the Schedule, the parties agreed that FCStone was “‘not acting as a fiduciary for or an advisor to [Corrib]’” “and that Corrib was not relying on any advice from FCStone in deciding to enter into the Transitions.” In fact, said the Court, “the parties never executed any contract in which FCStone agreed to be Corrib’s financial adviser.” Consequently, Corrib could not claim that “FCStone breached duties arising from such an agreement, that FCStone negligently performed such duties, or that FCStone’s conduct amount[ed] to a breach of fiduciary duty.”

Since the parties were not in a fiduciary relationship, the Court rejected Corrib’s argument that FCStone violated the Investment Advisers Act of 1940. In this regard, the Court noted that the transactions at issue were made at “arms’ length” and that FCStone did not receive any compensation for providing investment advice to Corrib. Instead, the Court found that FCStone “merely transacted with a counterparty on a securities trade.…”

The Court rejected the fraud and fraudulent inducement defenses because Corrib could not show justifiable reliance on any purported misstatement. Noting that these defenses were based on alleged misrepresentations about the terms of the trades and FCStone’s promise not to serve as a counterparty, the Court found that the “terms of the trades [were] set forth in the Confirmations, which clearly disclose[d] that FCStone was the counterparty.” As such, Corrib could not claim any fraud or fraudulent inducement – Corrib could not claim “to have justifiably relied on a representation when that very representation [was] negated by the terms of a contract.” Citations omitted.

The Court also found that Corrib could not claim justifiable reliance on the alleged misrepresentations because it failed “to review and challenge [the] terms of a Confirmation.” “Having failed to do so,” Corrib could not “claim it was justified in not noticing that terms in the Confirmations conflicted with oral assurances allegedly provided by FCStone.”

Accordingly, the Court granted FCStone’s motion in its entirety.

Takeaway

INTL FCStone reinforces well-established legal principles about what it takes to plead, among other things, fraud and breach of fiduciary duty. On a practical level, however, the case is notable because it highlights the difficulties litigating a case in which the facts and the law are not favorable, and the Court informs the parties as such.

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