M&T Bank Corp. v. McGraw Hill Cos.
Decision Date | 20 March 2015 |
Docket Number | 1063/14 CA 14-00775 |
Citation | 5 N.Y.S.3d 783,2015 N.Y. Slip Op. 02372,126 A.D.3d 1414 |
Parties | M&T BANK CORPORATION, Plaintiff Respondent, v. McGRAW HILL COMPANIES, INC., Doing Business as Standard and Poor'S Ratings Services, Standard & Poor'S Financial Services LLC, and Moody'S Investors Services, Inc., Defendants Appellants. (Appeal No. 1.). |
Court | New York Supreme Court — Appellate Division |
Cahill Gordon & Reindel LLP, New York City (Floyd Adams of Counsel), and Connors & Vilardo LLP, Buffalo, for Defendants–Appellants McGraw–Hill Companies, Inc., Doing Business as Standard and Poor's Ratings Services, and Standard & Poor's Financial Services LLC.
Satterlee Stephens Burke & Burke LLP, New York City (James J. Coster of Counsel), and Zdarsky, Sawicki & Agostinelli LLP, Buffalo, for Defendant–Appellant Moody's Investors Services, Inc.
Hodgson Russ LLP, Buffalo (Robert J. Lane, Jr., of Counsel), for Plaintiff–Respondent.
PRESENT: SCUDDER, P.J., CENTRA, LINDLEY, SCONIERS, AND DeJOSEPH, JJ.
Plaintiff commenced these actions against the credit agency Moody's Investors Services, Inc. (defendant) seeking to recover approximately $77 million it lost from its investment in structured finance securities. In early 2007, plaintiff invested in notes that were part of a collateralized debt obligation (CDO) known as Gemstone CDO VII (hereafter, Gemstone CDO) and Cairn Mezz ABS CDO III (hereafter, Cairn CDO). The Gemstone and Cairn CDOs were collateralized in part by residential mortgage backed securities (RMBS), which were bonds backed by pools of residential mortgage loans. A substantial portion of the Gemstone and Cairn CDOs were comprised of subprime RMBS. Each class of notes, or “tranche,” purchased by plaintiff received a rating from defendant, a nationally-recognized investment ratings agency. Defendant was paid by the issuers of the CDOs to provide its opinion on the creditworthiness of the notes. Defendant gave the Gemstone and Cairn CDO tranches purchased by plaintiff its highest and second-highest ratings. However, commencing in July 2007, the Gemstone and Cairn CDOs suffered multiple downgrades by defendant and, by April 2008, the CDOs defaulted and wiped out almost all of plaintiff's investment.
In a prior action, plaintiff sued various entities involved in the issuance of the tranches of Gemstone CDO (M&T Bank Corp. v. Gemstone CDO VII, Ltd., 68 A.D.3d 1747, 891 N.Y.S.2d 578 ). In its present complaints, plaintiff alleged fraud and negligent misrepresentation causes of action against defendant based on its credit ratings with respect to the Gemstone CDO (action in appeal No. 1) and the Cairn CDO (action in appeal No. 2), and Supreme Court denied defendant's motion to dismiss the complaints against it for failure to state a cause of action.
Supreme Court properly denied that part of defendant's motion seeking to dismiss the fraud causes of action against it. In their complaints, plaintiff alleged, inter alia, that defendant's ratings of the notes were false and misleading and that defendant knew that its ratings were false and misleading. Plaintiff further alleged that defendant “represented to the public, including [plaintiff], that [its] ratings of the Gemstone [and Cairn] notes were independent, were not affected by conflicts of interest, and were current and accurate, all of which was false and known to be false by [defendant].”
Although statements of opinion generally are not actionable in a fraud cause of action (see Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 179, 919 N.Y.S.2d 465, 944 N.E.2d 1104 ; Foot Locker Stores, Inc. v. Pyramid Mgt. Group, Inc., 45 A.D.3d 1447, 1448, 845 N.Y.S.2d 664 ; Scott v. Young Life, 273 A.D.2d 922, 923, 710 N.Y.S.2d 279 ), defendant correctly recognizes that statements of opinion may nevertheless be actionable as fraud if the plaintiff can plead and prove that the holder of the opinion did not subjectively believe the opinion at the time it was made and made the statement with the intent to deceive (see Rice v. Heilbronner, 272 A.D.2d 957, 957, 708 N.Y.S.2d 684 ; Tolin v. Standard & Poor's Fin. Servs., LLC, 950 F.Supp.2d 714, 722 ; see generally CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 286, 519 N.Y.S.2d 804, 514 N.E.2d 116 ). As one court has explained, a fraud claim based on an expression of opinion (IKB Intl. S.A. v. Bank of Am., 2014 WL 1377801, at *1 [S.D.N.Y.] ; see Banner v. Lyon & Healy, Inc., 249 App.Div. 569, 571, 293 N.Y.S. 236, affd. 277 N.Y. 570, 13 N.E.2d 774 ). Here, we agree with defendant that its credit ratings were statements of opinion, not fact (see e.g. Matter of Lehman Bros. Mtge.-Backed Sec. Litig., 650 F.3d 167, 183 ; Tolin, 950 F.Supp.2d at 722 ; Matter of Bear Stearns Mtge. Pass–Through Certificates Litig., 851 F.Supp.2d 746, 770–771 ; see also ESBE Holdings, Inc. v. Vanquish Acquisition Partners, LLC, 50 A.D.3d 397, 398, 858 N.Y.S.2d 94 ), but we conclude that plaintiff adequately pleaded that defendant did not believe its opinions when it issued the ratings. Plaintiff set forth in detail the reasons why defendant was aware that the ratings were inflated, including its allegation that defendant failed to follow its own policies and procedures in determining the ratings.
To the extent that plaintiff made allegations regarding defendant's conduct with respect to RMBS and CDOs in general rather than making specific allegations concerning the Gemstone and Cairn CDOs at issue here, we conclude that any further specificity regarding defendant's knowledge of the falsity of its ratings is within the knowledge of defendant and cannot be adequately stated at this juncture of the litigation (see Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 491–492, 860 N.Y.S.2d 422, 890 N.E.2d 184 ). The complaint adequately sets forth allegations upon which there is a “reasonable inference” of fraudulent conduct by defendant in issuing ratings that it did not believe were true (id. at 492, 860 N.Y.S.2d 422, 890 N.E.2d 184 ).
We reject defendant's further contention that plaintiff did not adequately plead justifiable reliance (see Steinhardt Group v. Citicorp, 272 A.D.2d 255, 257, 708 N.Y.S.2d 91 ; see generally Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559, 883 N.Y.S.2d 147, 910 N.E.2d 976 ). Plaintiff alleged that investors in the notes, including itself, would receive and rely on d...
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