| Stanfield Offshore Leveraged Assets, Ltd. v Metropolitan Life Ins.Co. |
| 2009 NY Slip Op 05905 [64 AD3d 472] |
| July 21, 2009 |
| Appellate Division, First Department |
| Stanfield Offshore Leveraged Assets, Ltd., et al.,Appellants, v Metropolitan Life Insurance Company et al., Defendants, and CreditSuisse First Boston (USA), Inc., et al., Respondents. |
—[*1] Linklaters LLP, New York (Paul S. Hessler and Joni Forster-Galvin of counsel), forrespondents.
Judgment, Supreme Court, New York County (Charles E. Ramos, J.), entered May 19, 2008,insofar as appealed from, dismissing as against defendants-respondents the cause of action foraiding and abetting a fraud, and bringing up for review orders, same court and Justice, enteredApril 23, 2008 and May 8, 2008, which granted motions to dismiss, unanimously affirmed, withcosts. Appeal from the aforesaid orders unanimously dismissed, without costs, as subsumed inthe appeal from the judgment.
Plaintiffs are several Cayman Islands companies and one New York limited partnership withhedge funds that purchased a portion of Meridian Automotive Systems, Inc.'s (Meridian) debt.By purchasing the debt, plaintiffs were assigned the right to collect debt from Meridian inconnection with loans that plaintiffs' predecessors-in-interest made to Meridian. Plaintiffs alsoinclude some of the original lenders. The loans were made pursuant to two lien credit agreements(referred to as "the First and Second Lien Credit Agreements") that enabled Meridian, adistressed company, to raise $485 million in new credit facilities.[FN1]Defendants Credit Suisse First Boston (USA), Inc. and Credit Suisse Securities (USA) LLC(referred to collectively as Credit Suisse) were retained by Meridian to act as joint lead arrangersof this refinancing of Meridian, which occurred on April 28, 2004.[*2]
Specifically, Meridian retained Credit Suisse andGoldman Sachs (not named as a defendant) and entered into a commitment letter dated March22, 2004 that provided that Credit Suisse would act as administrative agent and collateral agentand that it and Goldman Sachs would act as joint lead arrangers and joint book managers for thefacilities. Credit Suisse and Goldman Sachs received a fee for their role in the April 2004refinancing. A total of $21,000,000 in fees was paid, of which Credit Suisse's share was$17,087,742.
The loan agreements expressly provided that plaintiffs had "independently and withoutreliance upon [Credit Suisse] . . . and based on such documents and information as[plaintiffs] ha[ve] deemed appropriate, made [their] own credit analysis and decision to enterinto this Agreement." They further provided that Credit Suisse, as administrative agent, "shallnot . . . have any duty to disclose, and shall not be liable for the failure to disclose,any information relating to the Borrower [i.e., Meridian] or any of its affiliates that iscommunicated to or obtained by the Person serving as the First Lien Administrative Agent orany of its Affiliates in any capacity." In addition, the agreements provided: "[T]he. . . Administrative Agent [i.e., Credit Suisse] shall not be responsible for or haveany duty to ascertain or inquire into (i) any statement, warranty or representation made in or inconnection with this Agreement or any other Loan Document, (ii) the contents of any certificate,report or other document delivered hereunder or thereunder or in connection herewith ortherewith, (iii) the performance or observance of any of the covenants, agreements or other termsor conditions set forth herein or therein or the occurrence of any Default, (iv) the validity,enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or anyother agreement, instrument or document."
Meridian declared bankruptcy less than one year after the agreements were signed andplaintiffs subsequently commenced this action alleging that Meridian's solvency was falselyrepresented, fraudulently inducing them (or their predecessors-in-interest) to sign the loanagreements. The specific allegations against Credit Suisse are that by jointly arranging the April2004 refinancing, it aided and abetted Meridian's fraud and aided and abetted breaches offiduciary duties. The complaint alleges that in March 2004, "Credit Suisse and Goldman Sachsapproached the First and Second Lien Lenders on behalf of Meridian, including [p]laintiffsand/or their predecessors" and provided them with a "series of presentation materials forMeridian" that had been prepared by Credit Suisse and Goldman Sachs. It further alleges that"[t]he term sheet provided to prospective lenders, including [p]laintiffs and/or their predecessors,plainly stated that Meridian's solvency would be represented in the eventual credit agreements,despite the knowledge of the [d]efendants and Meridian that Meridian was already insolvent andwould become more insolvent giving effect to the planned massive payments to the Defendantswith proceeds of the 2004 Refinancing."[FN2][*3]
The complaint also alleges that Credit Suisse was awarethat Meridian was insolvent. The complaint states that "Credit Suisse knew that Meridian hadtotal liabilities of $700 million" and that Credit Suisse had valued Meridian at somewherebetween $575 to $675 million. Based on that allegation, plaintiffs assert that Credit Suisse's ownanalysis of Meridian's value indicated that the company was insolvent, i.e., it owed $700 millionand was only worth $575 million to $675 million. However, the complaint fails to set forthwhether Credit Suisse accounted for Meridian's liabilities when determining its worth andassumes that it did not.
Additionally, the complaint alleges that Credit Suisse played a key role in arranging the 2004refinancing and "did so despite its knowledge that Meridian was insolvent and that Meridian. . . was telling prospective lenders, including [p]laintiffs and/or their predecessors,that Meridian was solvent." It further alleges that Credit Suisse "did so despite its knowledge thatMeridian's directors planned to breach their fiduciary duties by paying out amounts of the 2004[r]efinancing proceeds to the Investor Defendants, thereby deepening the insolvency of analready insolvent company." Plaintiffs maintain that Credit Suisse was willing to provide itsassistance in spite of Meridian's fraud and its board's breach of fiduciary duties because "[i]tstood to receive (and did receive) large fees."
The specific allegation in the complaint under the causes of action for aiding and abettingfraud, based "[u]pon information and belief," is that "Credit Suisse knowingly and intentionallyprovided substantial assistance to Meridian in committing its fraud by contacting prospectiveinvestors and distributing information about Meridian and the 2004 [r]efinancing, as well as byorganizing the 2004 [r]efinancing in its capacities as Joint Arranger, First Lien AdministrativeAgent, First Lien Collateral Agent, and Joint Book Manager."
The investor defendants moved for dismissal of the complaint on the ground that it failed tostate a cause of action. Thereafter, Credit Suisse moved for the same relief. The motions weregranted. At issue on this appeal is the motion made by Credit Suisse.
In order to plead properly a claim for aiding and abetting fraud, the complaint must allege:"(1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider andabettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud"(UniCredito Italiano SPA v JPMorgan Chase Bank, 288 F Supp 2d 485, 502 [SD NY2003] [internal quotation marks omitted], quoting Gabriel Capital, L.P. v NatWest Fin.,Inc., 94 F Supp 2d 491, 511 [SD NY 2000]). "[A]ctual knowledge of the fraud may beaverred generally" (In re Worldcom, Inc. Sec. Litig., 382 F Supp 2d 549, 560 [SD NY2005] [internal quotation marks omitted]). Substantial assistance exists "where (1) a defendantaffirmatively assists, helps conceal, or by virtue of failing to act when required to do so enablesthe fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm onwhich the primary liability is predicated" (UniCredito Italiano, 288 F Supp 2d at 502[internal quotation marks omitted], quoting McDaniel v Bear Stearns & Co., Inc., 196 FSupp 2d 343, 352 [SD NY 2002]).
Here, plaintiffs have failed to plead an essential element of the claim—substantialassistance. Plaintiffs maintain, "upon information and belief," that Credit Suisse assisted in thefraud by contacting prospective investors and distributing information about Meridian, as well asby organizing the refinancing. However, the crux of plaintiffs' claim is that Credit Suisse [*4]assisted in the alleged fraud by failing to disclose Meridian'sinsolvency. This allegation is insufficient to support a claim of aiding and abetting fraud absent afiduciary duty or some other independent duty owed by Credit Suisse to the plaintiffs (see Eurycleia Partners, LP v Seward &Kissel, LLP, 12 NY3d 553 [2009]; King v Schonberg & Co., 233 AD2d 242[1996]).
Furthermore, the agreement provided that Credit Suisse did not have a duty to disclose anyinformation relating to Meridian and could not be held liable for the failure to disclose anyinformation. Thus, the agreement itself bars plaintiffs' cause of action for aiding and abettingfraud based on allegations of silence or inaction (see Jebran v LaSalle Bus. Credit, LLC, 33 AD3d 424 [2006]).
Because the failure to plead substantial assistance is, by itself, a sufficient ground fordismissal of the complaint, we need not reach the issue of whether the complaint fails to allegeadequately that Credit Suisse had actual knowledge of Meridian's alleged underlying fraud orwhether the language contained in the agreements limiting Credit Suisse's liability preclude aclaim of fraud or aiding and abetting fraud. Concur—Mazzarelli, J.P., Buckley, McGuireand DeGrasse, JJ. [See 2008 NY Slip Op 31179(U).]
Footnote 1: This amount was comprised of a$75 million first lien revolving loan, a $235 million first lien term loan and a $175 millionsecond lien term loan. Meridian used $337 million in proceeds from these new facilities to repayits prior existing secured bank debt.
Footnote 2: The complaint alleges thatMeridian was "looted" based on a payout of $51,000,000 from the proceeds of the 2004refinancing to the investor defendants, the institutional investors who allegedly controlledMeridian. However, the agreements provided that Meridian would use approximately$53,000,000 of the proceeds to repay principal and other amounts that it owed under certainsubordinated notes.