Independent Order of Foresters v. Donaldson, 95 Civ. 2568 (DAB).

• Decision Date: 13 March 1996
• Docket Number: No. 95 Civ. 2568 (DAB).,95 Civ. 2568 (DAB).
• Citation: 919 F. Supp. 149
• Parties: The INDEPENDENT ORDER OF FORESTERS, Plaintiff, v. DONALDSON, LUFKIN & JENRETTE INC., and Donaldson, Lufkin & Jenrette Securities Corp., Defendants.
• Court: U.S. District Court — Southern District of New York

919 F. Supp. 149

The INDEPENDENT ORDER OF FORESTERS, Plaintiff, v. DONALDSON, LUFKIN & JENRETTE INC., and Donaldson, Lufkin & Jenrette Securities Corp., Defendants.

No. 95 Civ. 2568 (DAB).

United States District Court, S.D. New York.

March 13, 1996.

COPYRIGHT MATERIAL OMITTED

Edward C. Cerny, III, Michael J. McAllister, William E. Kelly, Lane & Mittendorf, New York City, for Plaintiff.

Michael R. Lazerwitz, Jean E. Kalicki, Judith R. Margolin, Brandt J. Goldstein, Cleary, Gottlieb, Steen & Hamilton, Washington, DC, Jonathan I. Blackman, New York City, for Defendants.

MEMORANDUM AND ORDER

BATTS, District Judge.

Plaintiff, The Independent Order of Foresters, brings this diversity action for breach of warranty, mutual mistake, breach of fiduciary duty and negligent and fraudulent misrepresentation, based on the sale of securities. Defendants, Donaldson, Lufkin & Jenrette, Inc. and Donaldson, Lufkin & Jenrette Securities Corp., have moved to dismiss the Complaint pursuant to Fed. R.Civ.P. 12(b)(6) and 9(b).

I. BACKGROUND

Plaintiff is a fraternal benefit society located in Ontario, Canada, that issues life, accident and health policies and annuities for and to its members. (Compl. ¶ 1.) Defendants are located in New York and engage in the business of buying and selling securities. (Compl. ¶¶ 2-3.)

Beginning in 1980, Plaintiff set out to acquire a portfolio of securities. (Compl. ¶ 6.) From 1980 until 1990, William E. Boothe ("Boothe"), was responsible, subject to the approval of Plaintiff's board of directors, for choosing appropriate securities. (Compl. ¶ 7.) From 1981 until 1989, Daniel Walsh ("Walsh"), employed by L.F. Rothschild & Co., Inc., advised Boothe. (Compl. ¶ 8.) In 1989 Walsh, then employed by the Defendants continued to advise Boothe and the Plaintiff until 1994. (Compl. ¶¶ 8-9.)

Defendants, on behalf of Plaintiff, bought collateralized mortgage obligations securities. (Compl. ¶¶ 11-19, 26.) Plaintiff alleges that sales brochures, prepared by Defendants, were sent to Plaintiff and that those brochures, containing purportedly false statements, induced it to buy the mortgage securities. Many of the transactions eventually lost money. (Id.) Plaintiff alleges that Defendants had a special knowledge about the instability of the securities traded, which Plaintiff did not have, and breached a duty to Plaintiff by inducing it to buy that type of security. Plaintiff makes no mention in its Complaint of any contracts between it and the Defendants to buy securities, or of any documents required to be filed with the SEC before a securities sale can go forward, such as, offering circulars. Instead, Plaintiff brings its action based solely on the statements in the sales brochures, declaring them to be warranties.

Defendants now move for dismissal pursuant to Rule 12(b)(6) and 9(b).

II. DISCUSSION

"On a motion to dismiss under Rule 12(b)(6), the court must accept as true the factual allegations in the complaint, and draw all reasonable inferences in favor of the plaintiff." Bolt Elec., Inc. v. City of N.Y., 53 F.3d 465, 469 (1995) (citations omitted). "The district court should grant such a motion only if, after viewing plaintiff's allegations in this favorable light, `it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Walker v. City of N.Y., 974 F.2d 293, 298 (2d Cir.1992) (quoting Ricciuti v. New York City Transit Auth., 941 F.2d 119 (2d Cir.1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957))), cert. denied, 507 U.S. 961, 113 S.Ct. 1387, 122 L.Ed.2d 762 (1993).

A. Choice of Law

Plaintiff claims that discovery is necessary to determine whether Ontario or New York law applies. Federal courts, when determining what law to apply, must follow the choice of law rules prevailing in the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 494, 61 S.Ct. 1020, 1020-21, 85 L.Ed. 1477 (1941); Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255, 263 (2d Cir.1984). In New York, it is required that a party wishing to apply the law of a foreign state show how that law differs from the forum state's law. Failure to do so results in the application of New York law. Loebig v. Larucci, 572 F.2d 81, 85 (2d Cir.1978); Richmond Lace Works, Inc. v. Epstein, 31 F.R.D. 150, 152 (S.D.N.Y.1962); Stein v. Siegel, 50 A.D.2d 916, 377 N.Y.S.2d 580, 583 (N.Y.App. Div. 2d Dep't 1975). Furthermore, when the foreign state is a common law state, courts assume that the foreign law is the same as New York's law. Loebig, 572 F.2d at 85. Plaintiff, if it wished to invoke Ontario law, had an obligation to show how that law differed from New York law. Plaintiff is able to do so without discovery. Plaintiff failed to do so. Hence, the Court will apply New York law.

Even assuming Plaintiff made any type of showing of the applicability of Ontario law, the Court still finds that, under New York choice of law rules, New York has the greater interest in applying its laws. To determine which forum's laws should apply, New York applies the interests analysis test. Istim, Inc. v. Chemical Bank, 78 N.Y.2d 342, 347, 575 N.Y.S.2d 796, 798, 581 N.E.2d 1042 (1991); Stein, 377 N.Y.S.2d at 583. The Defendants are located in New York and the acts took place in New York, as Plaintiff concedes in its Complaint. Furthermore, there is no allegation that Ontario securities were traded by the Defendants, or that any trading took place in Ontario. Hence, New York has the greater interest in applying its laws to the acts that occurred here, and to the entities residing in its state.

B. Breach of Warranty

Plaintiff alleges five causes of action. The first is breach of warranty.

1. Breach of Express Warranty

Plaintiff alleges that certain statements made in the sales brochures were warranties. (Compl. ¶¶ 14-24.) A warranty is an affirmation of the quality or condition of the thing sold, which induces the buyer to buy the seller's product, the seller intending the inducement to have that effect. Shippen v. Bowen, 122 U.S. 575, 581, 7 S.Ct. 1283, 1285, 30 L.Ed. 1172 (1887); Keenan v. D.H. Blair & Co., 838 F.Supp. 82, 90 (S.D.N.Y. 1993); 8 Williston on Contracts § 954, at 357. However, opinions, puffery and other similar language is not actionable as a breach of warranty. Shippen, 122 U.S. at 581, 7 S.Ct. at 1285; Keenan, 838 F.Supp. at 90; 8 Williston on Contracts § 954, at 357. The question to be determined, therefore, is "did the seller assume to assert a fact of which the buyer is ignorant, or did he merely express a judgment about a thing as to which they each may be expected to have an opinion." Keenan, 838 F.Supp. at 90 (quoting Wedding v. Duncan, 310 Ky. 374, 220 S.W.2d 564 (1949)). Whether the statements alleged were actionable warranties or promotional puffery remains to be seen. Further, what effect the contracts had on these statements, if any, cannot be determined at this stage.¹ Accordingly, Plaintiff's First Cause of Action cannot be dismissed at this time.

2. Implied Warranties

When dealing with the sale of securities, there exists only three implied warranties: title, genuineness and validity. 8 Williston on Contracts § 954A, at 362-63; § 954C, at 378-79. Facts to support these types of warranties were not alleged here. Hence, the Court finds no facts to support a cause of action for implied warranties, and this cause of action is dismissed.

C. Mutual Mistake

Next, Plaintiff alleges that there was a mutual mistake of fact, and requests rescission of the contract. A mutual mistake must exist at the time the contract is entered into and it must be substantial. Gould v. Board of Educ., 81 N.Y.2d 446, 453, 599 N.Y.S.2d 787, 790, 616 N.E.2d 142 (1993). Furthermore, a rescission is available only where, "a mistake of both parties at the time the contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances." Hartford Fire Ins. Co. v. Federated Dep't Stores, Inc., 723 F.Supp. 976, 994 (S.D.N.Y.1989) (quoting Gerard v. Almouli, 746 F.2d 936, 938 & n. 2 (2d Cir. 1984) (quoting Restatement (Second) of Contracts § 152(1))) (parties predictions are not mistakes); Backus v. MacLaury, 278 A.D. 504, 106 N.Y.S.2d 401, 404 (N.Y.App.Div. 4th Dep't 1951). The purpose behind a claim of mutual mistake is to rescind an agreement between the parties that does not reflect a "meeting of the minds." Id.; Leasco Corp. v. Taussig, 473 F.2d 777, 781 (2d Cir.1972).

Plaintiff does not allege that it was mistaken as to the underlying facts of the parties' agreement, but that they were untrue. Furthermore, there is no allegation that Defendants were mistaken as to any part of the agreement. In fact, in their papers arguing against Plaintiff's theory, the Defendants assert that there is no mistake of fact regarding the underlying agreements. Hence, there are no facts alleged in the Complaint which could support this cause of action; it is dismissed.

D. Negligent Misrepresentation

New York's blue sky laws, commonly known as the Martin Act, N.Y.Gen. Bus.Law, art. 23-A, §§ 352 et seq., provides for the attorney general to regulate and enforce New York's securities laws. It is clearly established that there is no private right of action for claims covered by the Martin Act. CPC Int'l Inc. v. McKesson Corp., 70 N.Y.2d 268, 276; 519 N.Y.S.2d 804, 807, 514 N.E.2d 116 (1987); Breakwaters Townhomes Ass'n of Buffalo, Inc. v. Breakwaters of Buffalo, Inc., 207 A.D.2d 963, 616 N.Y.S.2d 829, 829 (N.Y.App.Div. 4th Dep't 1994); Rego Park Gardens Owners, Inc. v. Rego Park Gardens Assocs., 191 A.D.2d 621, 595 N.Y.S.2d 492 (N.Y.App.Div. 2d Dep't 1993); Ansonia Tenants' Coalition, Inc. v. Ansonia Assocs., 151 Misc.2d 213, 573 N.Y.S.2d 211, 213 (N.Y.Sup. Ct.1991). Any claim that is covered by the Martin Act is therefore not actionable by a private party; otherwise, the party essentially would...