| DDJ Mgt., LLC v Rhone Group L.L.C. |
| 2010 NY Slip Op 07995 [78 AD3d 442] |
| November 9, 2010 |
| Appellate Division, First Department |
| DDJ Management, LLC, et al., Respondents, v Rhone GroupL.L.C. et al., Appellants, et al., Defendants. |
—[*1] Nixon Peabody LLP, New York (Christopher M. Mason of counsel), for Quilvest S.A., QuilvestAmerican Equity Ltd., and Three Cities Holdings Limited, appellants. Epstein Becker & Green, P.C., New York (Barry A. Cozler of counsel), forrespondents.
Upon remittitur from the Court of Appeals (15 NY3d 147 [2010]) for consideration of issuesraised but not determined in this Court, order, Supreme Court, New York County (Helen E.Freedman, J.), entered April 28, 2008, which denied the motions of defendants-appellants to dismissplaintiffs' fraud cause of action, unanimously affirmed, with costs.
The prior decision of this Court (60 AD3d 421 [2009]), having dismissed the fraud claim on theground of lack of reasonable reliance by plaintiffs, did not address the alternative argument bycorporate and individual defendants, those other than PricewaterhouseCoopers (PwC), that plaintiffsfailed to otherwise sufficiently plead the elements of fraud, particularly scienter. We now address thatissue. As the dismissal of the claims against PwC was affirmed in the prior decision of this Court, andnot addressed by the Court of Appeals, that determination is unaffected.
It is alleged that plaintiffs loaned the now-defunct American Remanufacturers Holdings, Inc. (ARI)some $40 million based on the representations made in ARI's 2003 and 2004 financial statements. It isalleged, essentially, that ARI and the remaining defendants concealed from plaintiffs the fact thatbetween 2003 and 2004, defendants had changed the manner in which ARI took reserves on unsolditems, taking such reserves only for items unsold for two years, instead of one year as previously done.This resulted in the appearance of a dramatic increase in ARI's [*2]earnings before interest, taxes, depreciation and amortization between2003 and 2004. We now hold that the motion court properly denied defendants' motion to dismiss thefraud claim, as the allegations sufficiently plead such claim.
CPLR 3016 (b) "imposes a more stringent standard of pleading than the generally applicable noticeof the transaction rule of CPLR 3013" (Edison Stone Corp. v 42nd St. Dev. Corp., 145 AD2d249, 257 [1989] [internal quotation marks omitted]). Moreover, where allegations of fraud are basedon information and belief, the source of such information must be revealed (see Kanbar vAronow, 260 AD2d 182 [1999]; Wall St. Transcript Corp. v Ziff Communications Co.,225 AD2d 322 [1996]; Belco Petroleum Corp. v AIG Oil Rig, 164 AD2d 583, 598-599[1991]). However, at this early stage of the litigation, plaintiffs are entitled to the most favorableinferences, including inferences arising from the positions and responsibilities of defendants (see Pludeman v Northern Leasing Sys., Inc.,40 AD3d 366, 367-368 [2007], affd 10 NY3d 486 [2008]), and plaintiffs need only setforth sufficient information to apprise defendants of the alleged wrongs (see Bernstein v Kelso &Co., 231 AD2d 314, 320-321 [1997]). Moreover, the pleading requirements should not benarrowly construed, and a plaintiff alleging an aiding-and-abetting fraud claim may plead actualknowledge generally, particularly at the prediscovery stage, so long as such intent may be inferred fromthe surrounding circumstances (see Oster vKirschner, 77 AD3d 51 [2010]).
As an initial matter, we reject the argument that, at most, the complaint alleges that QuilvestAmerica, not all Quilvest entities, elected defendants deVogel and Uhrig to the ARI board of directors.Quilvest also asserts, in a footnote, that, while Three Cities Holdings Limited (now named QuilvestServices Ltd.) is a Quilvest entity, Scott Duncan was an employee of Three Cities Research, Inc.,which is not a Quilvest entity. Moreover, the reference to the management agreement in the 2003audited financial statement refers to a fee paid to defendant Rhone and Three Cities Research, notThree Cities Holdings. Nevertheless, for the proposition that defendant Duncan is not an employee ofQuilvest, Quilvest cites Duncan's affidavit, in which he states only "I never expected that myinvolvement with Three Cities Research, Inc. would subject me to suit as an individual in New YorkState" (Duncan is an Illinois resident). This is not a statement that he does not work for Three CitiesHoldings or Quilvest. Furthermore, Quilvest does not cite any authoritative documentation whichaffirmatively dissociates it from either Duncan or Quilvest American.
The complaint also describes the "ARI Control Defendants" as the Rhone defendants and the"Quilvest/Three Cities" defendants, and describes deVogel and Uhrig as agents of both QuilvestAmerica and "Quilvest." It further describes Three Cities Holdings, which is controlled and directed by"Quilvest," as controlling and directing the business of Three Cities Research, Inc. Given theseallegations, and nothing definitive to negate them, Quilvest cannot dissociate itself from QuilvestAmerica, Three Cities Research or Scott Duncan for purposes of these pleadings.
Plaintiffs have also sufficiently alleged fraud against the individual and corporate defendants, based,in part, on the corporate positions and titles of the individual defendants with ARI and/or with thecorporate defendants (see Oster v Kirschner, supra; Houbigant, Inc. v Deloitte &Touche, 303 AD2d 92, 98 [2003] [complaint only needs to demonstrate some "rational basis" toinfer that alleged misrepresentation was knowingly made]; JP Morgan Chase Bank v Winnick,350 F Supp 2d 393, 400 [SD NY 2004] ["At the pleading stage, it is appropriate to allow the plaintiffs'claims to proceed against these defendants on the assumption that persons [*3]occupying such positions in the company would have knowledge of boththe fraud and the substantive terms of the Credit Agreement when they signed the borrowing requests"];Pludeman, 40 AD3d at 367 ["At this early juncture, according plaintiffs' complaint the mostfavorable inferences, one can readily deduce, given the corporate positions and titles of the individualdefendants, that these individuals actually operate the day-to-day business of corporate defendant, andconsequently were involved in or knew about the alleged fraudulent concealment"]), also raising areasonable inference that they acted on behalf of their corporate employers, the owners, shareholdersand managers of ARI (see Osipoff v City of New York, 286 NY 422, 428 [1941] ["acorporation is liable, as an individual, for tort committed by its servants or agents acting within thescope of their service or agency"]). These inferences are supported by the surrounding circumstances,as well as numerous e-mails tending to establish the individual defendants' knowledge of the allegedmisrepresentations, coupled with their superior knowledge from which it may reasonably be inferredthat a duty to speak arose on the part of defendants (see Williams v Sidley Austin Brown & Wood, L.L.P., 38 AD3d 219[2007]; Kaufman v Cohen, 307 AD2d 113, 126 [2003]; P.T. Bank Cent. Asia, N.Y.Branch v ABN AMRO Bank N.V., 301 AD2d 373, 378 [2003]). Concur—Mazzarelli,J.P., Saxe, Friedman, Acosta and DeGrasse, JJ. [Prior Case History: 19 Misc 3d 1124(A), 2008NY Slip Op 50839(U).]