| China Dev. Indus. Bank v Morgan Stanley & Co. Inc. |
| 2011 NY Slip Op 05871 [86 AD3d 435] |
| July 7, 2011 |
| Appellate Division, First Department |
| China Development Industrial Bank,Respondent, v Morgan Stanley & Co. Incorporated et al., Appellants, et al.,Defendants. |
—[*1] Robbins Geller Rudman & Dowd LLP, Melville (Jason C. Davis of counsel), forrespondent.
Order, Supreme Court, New York County (Melvin L. Schweitzer, J.), entered February 28,2011, which, to the extent appealed from, denied the Morgan Stanley defendants' (collectively,Morgan) motion to dismiss the complaint pursuant to CPLR 3211 (a) (1) and (7) and 3016 (b),and denied that branch of the motion seeking to strike plaintiff's demand for a jury trial inconnection with plaintiff's fraudulent inducement cause of action, unanimously affirmed, withcosts.
In this action alleging common-law fraud, fraud in the inducement and fraudulentconcealment in the sale of an investment product (credit default swaps), plaintiff purchaser(China) alleges that defendant seller Morgan falsely promoted collateral debt obligations ashaving specified credit ratings, which Morgan knew to be overstated and misleading.Specifically, the ratings were allegedly generated with grandfathered models and protocols andassumptions that were no longer applicable. Such ratings for Morgan's products were allegedlyprocured by way of Morgan's financial influence over the rating agencies. We recognize that asophisticated business entity, like China, that alleges it was fraudulently induced to enter acontract because of false representations as to a product's quality, may nonetheless be precludedby contractual disclaimers from pursuing such a claim (see MBIA Ins. Corp. v Merrill Lynch, 81 AD3d 419 [2011]).Nevertheless, such rule is not determinative in this case. China has sufficiently alleged thatMorgan possessed peculiar knowledge of the facts underlying the fraud, and the circumstancespresent would preclude any investigation by China conducted with due diligence (see generally Jana L. v West 129th St.Realty Corp., 22 AD3d 274 [2005]). The element of scienter can be reasonably inferredfrom the facts alleged (see Pludeman vNorthern Leasing Sys., Inc., 10 NY3d 486, 492-493 [2008]), including e-mails, whichsupport a motive by Morgan, at the time of the subject transaction, to quickly dispose of troubledcollateral (i.e., predominantly residential mortgage-backed securities) which it owned at the time.
China also adequately alleged facts in support of its fraudulent concealment claim to indicatethat Morgan had a duty to disclose, inasmuch as Morgan allegedly had peculiar [*2]knowledge of the application of grandfathered ratings, the unstablecollateral which was sold, and its misstatements regarding the investment risks involved (seegenerally King County, Washington v IKB Deutsche Industriebank AG, 751 F Supp 2d 652[SD NY 2010]).
China's allegations were sufficiently particularized to support a claim for fraudulentinducement. As the validity of the parties' 2007 investment transaction is challenged by theallegations, the motion court properly concluded that the jury waiver provision in the agreementwas inapplicable to the fraudulent inducement cause of action (see generally Wells Fargo Bank, N.A. vStargate Films, Inc., 18 AD3d 264 [2005]).
Morgan argues that China ratified the parties' 2007 transaction agreement when, in May2009, it executed an amendment to the 2007 agreement. Morgan claims that at such time, Chinashould have been on inquiry notice of the alleged fraudulent conduct. However, because Chinaclaimed it signed the amendment under economic duress, and damage attributable to the fraudmay already have accrued (see e.g.Braddock v Braddock, 60 AD3d 84, 94-95 [2009]), there are issues of fact whichpreclude judgment for Morgan. Concur—Mazzarelli, J.P., Catterson, DeGrasse,Abdus-Salaam and RomÁn, JJ.