Fund v. Goldman Sachs Grp., Inc.

• Decision Date: 30 January 2014
• Citation: 115 A.D.3d 128,2014 N.Y. Slip Op. 00587,980 N.Y.S.2d 21
• Parties: BASIS YIELD ALPHA FUND (MASTER), Plaintiff–Respondent, v. GOLDMAN SACHS GROUP, INC., et al., Defendants–Appellants.
• Court: New York Supreme Court — Appellate Division

115 A.D.3d 128

980 N.Y.S.2d 21

2014 N.Y. Slip Op. 00587

BASIS YIELD ALPHA FUND (MASTER), Plaintiff–Respondent,

v.GOLDMAN SACHS GROUP, INC., et al., Defendants–Appellants.

Supreme Court, Appellate Division, First Department, New York.

Jan. 30, 2014.

Boies, Schiller & Flexner LLP, New York (Philip M. Bowman, Jonathan D. Schiller and Thomas Ling of counsel), for appellants.

Lewis Baach PLLC, New York (Bruce R. Grace, Eric L. Lewis and Courtney L. Weiner of counsel), for respondent.

PETER TOM, J.P., ROLANDO T. ACOSTA, DIANNE T. RENWICK, LELAND G. DeGRASSE, ROSALYN H. RICHTER, JJ.

RENWICK J.

This is a case of a Wall Street firm (Goldman Sachs) being accused of selling mortgage-backed securities it knew to be “junk” and then betting against the same securities as the 2007 financial crisis unfolded. Specifically, plaintiff, Basis Yield Alpha Fund (Basis), a fund managed by an Australian hedge fund, Basis Capital Fund Management, commenced this action against several Goldman Sachs-related entities over investments in subprime mortgage-linked securities that contributed to the fund's demise.¹ The transactions took place on April 17 and June 13, 2007, with the sale of a security issued by a collateralized debt obligation (CDO) known as Point Pleasant 2007–1, Ltd., as well as Basis's entry into two credit default swaps that referenced securities from a similar CDO known as Timberwolf 2007–1, Ltd. Basis, which financed these transactions with loans from Goldman, reportedly lost $67 million when the bank began making margin calls on the products shortly after selling them to Basis. The margin calls quickly forced Basis into insolvency.

Initially, in 2010, Basis commenced an action for federal securities fraud and common law fraud against Goldman in the U.S. District Court for the Southern District of New York. In an order dated July 21, 2011, the court dismissed the case on the ground that the underlying transactions were not domestic securities transactions and, therefore, are not subject to federal securities laws. The District Court declined to exercise supplemental jurisdiction over the remaining state law claims and dismissed the case without prejudice. In late 2011, Basis commenced this action against Goldman for: (1) common law fraud; (2) fraudulent inducement; (3) fraudulent concealment; (4) breach of contract; (5) negligent misrepresentation; (6) breach of the implied covenant of good faith and fair dealing; (7) unjust enrichment; and (8) rescission. The factual allegations in the complaint are similar to those made in the federal action.

In lieu of answering the complaint, Goldman moved for an order compelling arbitration pursuant to the New York Convention and CPLR 7503(a) or, in the alternative, dismissing the complaint for failure to state a cause of action (CPLR 3211[a][7] ). Supreme Court denied the motion to compel arbitration, as well as the motion to dismiss with respect to the causes of actions alleging fraud, negligent misrepresentation, unjust enrichment and rescission.²

As a threshold consideration, we examine Goldman's contention that the motion court improperly denied its motion to compel arbitration. Goldman does not challenge the motion court's refusal to compel arbitration pursuant to the New York Convention.³ We note, however, that the motion court properly held that the purported document containing an arbitration clause did not meet the writing requirements of the New York Convention, which defines an “agreement in writing” to include “an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams (see New York Convention, Article II[2] )). The document, which was attached to an e-mail, was never signed by Basis, nor referred to in any exchange of correspondence between the parties.

Goldman also fails to satisfy the heavy burden of demonstrating that arbitration should be compelled pursuant to CPLR Article 75. As the Court of Appeals has stated, “[A] party will not be compelled to arbitrate ... absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes. The agreement must be clear, explicit and unequivocal” (Matter of Waldron (Goddess), 61 N.Y.2d 181, 183, 473 N.Y.S.2d 136, 461 N.E.2d 273 [1984] [internal quotation marks and citations omitted] ). An arbitration clause in an unsigned agreement may be enforceable but only “when it is evident that the parties intended to be bound by the contract” ( God's Battalion of Prayer Pentecostal Church, Inc. v. Miele Assoc., LLP, 6 N.Y.3d 371, 373, 812 N.Y.S.2d 435, 845 N.E.2d 1265 [2006] ).

Here, there is a substantial question as to whether the parties agreed to arbitrate. In support of its motion to compel arbitration, Goldman relied on a mandatory arbitration clause set forth in a document entitled “General Terms and Conditions” that was attached to a November 10, 2006 email. Goldman claims to have sent the email to Basis in connection with the latter's opening of a trading account with Goldman. It is, however, undisputed that the document was never signed by anyone from Basis. More importantly, the director of Basis's managing entity swore in an affidavit that Basis never entered into the arbitration agreement Goldman proffers.

Since the record does not affirmatively establish a valid obligation to arbitrate the issues raised herein, we must examine Goldman's alternative argument seeking dismissal of the action. With regard to the fraud allegations, Goldman argues that plaintiff failed to state a cause of action because the element of reasonable reliance is precluded as a matter of law by the disclaimer and disclosure in the offering circulars. We do not find that such argument is procedurally precluded by the fact that “Goldman's motion was made underCPLR 3211(a)(7).” The concurring opinion incorrectly maintains that Goldman cannot rely on documentary evidence (the disclaimer and disclosure in the offering circulars) because a CPLR 3211(a)(7) motion is limited to a review of the pleadings.

The motion court examined the purported documentary evidence, albeit over plaintiff's objections, but concluded that it did not bar the fraud claims. Plaintiff, however, has abandoned such procedural argument by failing to raise it on appeal ( see Matter of Raqiyb v. Fischer, 82 A.D.3d 1432, 1433, 919 N.Y.S.2d 543, n. [3rd Dept.2011],citing Matter of Ifill v. Fischer, 72 A.D.3d 1367, 901 N.Y.S.2d 723, n. [3rd Dept.2010] ). Instead, in its opening paragraph of the argument section opposing Goldman's motion to dismiss the fraud claims, plaintiff simply comments:

“Goldman's argument on appeal strays far beyond addressing the sufficiency of the allegations. Instead, Goldman seeks to play on a field of disputed issues of fact. But this provides no basis for dismissing this Complaint. That is particularly the case here when this Complaint is based not just on well-pleaded allegations, but on inculpatory Goldman documents disclosed in prior proceedings [emphasis added].”

Thus, on this appeal, plaintiff does not claim that this Court is “procedurally” precluded from examining the documentary evidence at issue because Goldman moved to dismiss under CPLR 3211(a)(7). Rather, plaintiff appears to be arguing that the documentary evidence simply raises “disputed issues of fact,” which, as plaintiff correctly asserts, is not enough for a dismissal under CPLR 3211(a)(7).

In any event, the concurrence's contention that this Court is limited to the pleadings, when reviewing a motion to dismiss pursuant to CPLR 3211(a)(7), is not a completely accurate statement of the law. What the Court of Appeals has consistently said is that evidence in an affidavit used by a defendant to attack the sufficiency of a pleading “will seldom if ever warrant the relief [the defendant] seeks unless [such evidence] conclusively establishes that plaintiff has no cause of action ” ( Rovello v. Orofino Realty Co., Inc., 40 N.Y.2d 633, 636, 389 N.Y.S.2d 314, 357 N.E.2d 970 [1976] [emphasis added]; see also Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 401 N.Y.S.2d 182, 372 N.E.2d 17 [1977] ).

A CPLR 3211(a)(7) motion may be used by a defendant to test the facial sufficiency of a pleading in two different ways. On the one hand, the motion may be used to dispose of an action in which the plaintiff has not stated a claim cognizable at law. On the other hand, the motion may be used to dispose of an action in which the plaintiff identified a cognizable cause of action but failed to assert a material allegation necessary to support the cause of action. As to the latter, the Court of Appeals has made clear that a defendant can submit evidence in support of the motion attacking a well-pleaded cognizable claim ( see Rovello, 40 N.Y.2d 633, 389 N.Y.S.2d 314, 357 N.E.2d 970;Guggenheimer, 43 N.Y.2d 268, 401 N.Y.S.2d 182, 372 N.E.2d 17;see also Board of Managers of Fairways at N. Hills Condominiums v. Fairways at N. Hills, 150 A.D.2d 32, 545 N.Y.S.2d 343 [2d Dept.1989] ).⁴

When documentary evidence is submitted by a defendant “the standard morphs from whether the plaintiff has stated a cause of action to whether it has one” (John R. Higgitt, CPLR 3211[A][7]: Demurrer or Merits–Testing Device?, 73 Albany Law Review 99, 110 [2009] ). As alleged here, if the defendant's evidence establishes that the plaintiff has no cause of action (i.e., that a well-pleaded cognizable claim is flatly rejected by the documentary evidence), dismissal would be appropriate ( see e.g. Constructamax, Inc. v. Dodge Chamberlin Luzine Weber, Assoc. Architects, LLP, 109 A.D.3d 574, 971 N.Y.S.2d 48 [2d Dept.2013];Rabos v. R & R Bagels & Bakery, Inc., 100 A.D.3d 849, 851–852, 955 N.Y.S.2d 109 [2d Dept.2012];Skillgames, LLC v. Brody, 1 A.D.3d 247, 250, 767 N.Y.S.2d 418 [1st Dept.2003];Kliebert v. McKoan, 228 A.D.2d 232, 643 N.Y.S.2d 114 [1st Dept.1996],lv. denied89 N.Y.2d 802, 653 N.Y.S.2d 279, 675 N.E.2d 1232 [199...