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Fraud Action Dismissed On Standing Grounds Because The Claim Did Not Transfer With The Assignment Of The Contract

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  • Posted on: Apr 24 2017

Last year, this Blog wrote about the importance of assigning title to, or ownership in, a claim, when assigning the right to pursue an action to another party. (Here.)

Recently, the issue arose in connection with an action alleging, among other things, fraud and negligent misrepresentation in connection with the purchase and sale of residential mortgage-backed securities (“RMBS”). On April 12, 2017, in Royal Park Investments SA/NV v. Morgan Stanley (here), Justice Charles E. Ramos of the Supreme Court, New York County, Commercial Division, dismissed with prejudice four complaints filed by Royal Park Investments SA/NV (“Royal Park”) against Morgan Stanley and other investment banking firms because the tort claims alleged by Royal Park had not been properly assigned to it.

Background

The action arose out the purchase of RMBS by Fortis Bank (“Fortis”) and certain affiliates of the bank between January 12, 2005 and July 27, 2007. Fortis Bank was a sophisticated financial institution that extensively invested in the RMBS market. In 2007, Fortis began to experience significant financial trouble, as a result of its exposure to U.S. structured credit assets. On May 12, 2009, Royal Park acquired Fortis and, in connection with the transaction, entered into a Portfolio Transfer Agreement (“PTA”), pursuant to which Royal Park acquired from Fortis the RMBS that were structured, marketed, and/or sold by the defendants between 2005 to 2007.

Royal Park maintained that in the offering documents provided to Fortis, Morgan Stanley (and the other banks) failed to disclose and affirmatively misrepresented material information regarding the nature and credit quality of the loans underlying the RMBS and used the offering documents to defraud it and its assignors into purchasing “investment grade” securities at inflated prices.

The defendants moved to dismiss the complaints on the ground that Royal Park lacked standing to sue because the PTA did not assign Royal Park any non-contractual claims.

The Motion Court’s Ruling

Justice Ramos granted the motions to dismiss, holding that the PTA lacked any language transferring tort claims to Royal Park:

It is well settled in New York, that the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note. There must be some language that evinces an intent to transfer fraud claims.

***

Here, it is undisputed that the PTA transfers to RPI all rights, title, and interest in and to the Portfolio Property, which is expressly limited to contractual rights and obligations.

***

There is simply no language in the documents evidencing an outward expression of an intent to assign the tort claims at issue. Contrary to RPI’s assertions, the above-mentioned language of rights, title, and interest in and to the Portfolio Property reveals no verifiable intention to include tort claims.

Internal citations omitted.

Since the Court found the PTA to be clear and unambiguous, it refused to examine any extrinsic evidence to demonstrate the intent of the parties, especially since the purpose of doing so was “to create an ambiguity in the PTA when none exists.”  As the Court noted, given the sophistication of the parties and their counsel, if the parties “intended to assign non-contractual claims, they would have done so through express language.” Justice Ramos found that they had not done so.

Takeaway

Two lessons flow from Royal Park: 1) the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note. There must be some language that evinces an intent to transfer fraud claims; and 2) where the assignment pertains to a contract or note, the court will examine the contract or note to determine whether it is complete, clear, and unambiguous, and if so it will enforce the agreement according to the plain meaning of its terms.

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