Morgenthow v. Bank of NY

• Decision Date: 20 May 2003
• Citation: 760 N.Y.S.2d 438,305 A.D.2d 74
• Court: New York Supreme Court — Appellate Division
• Parties: MORGENTHOW & LATHAM et al., Respondents,<BR>v.<BR>BANK OF NEW YORK COMPANY, INC., et al., Appellants.

305 A.D.2d 74

760 N.Y.S.2d 438

MORGENTHOW & LATHAM et al., Respondents,

v.BANK OF NEW YORK COMPANY, INC., et al., Appellants.

GONZALEZ, J.

May 20, 2003.

Mark E. Herlihy and Harold M. Hoffman for respondents.

Richard H. Klapper of counsel (John L. Warden, Marc De Leeuw and Kieran B. Morrow on the brief; Sullivan & Cromwell LLP, attorneys), for appellants.

TOM, J.P., SULLIVAN, ELLERIN and MARLOW, JJ., concur.

OPINION OF THE COURT

GONZALEZ, J.

This appeal by defendant The Bank of New York (BNY) from Supreme Court's denial of its CPLR 3211 (a) (1) motion to dismiss requires us to determine whether certain judicial admissions by plaintiffs' agent in a pending federal action constitute "documentary evidence" within the meaning of CPLR 3211 (a) (1), and if so, whether that evidence flatly contradicts plaintiffs' allegations of justifiable reliance in support of their instant fraud claim. We conclude that Supreme Court properly considered the allegations of plaintiffs' agent in the federal action, but also find that it underestimated the contradiction between plaintiffs' fraud claim and their agent's prior allegations. Accordingly, we reverse and dismiss plaintiffs' fraud claim as against BNY for lack of justifiable reliance.

In 1993, plaintiffs Morgenthow & Latham, New York International Insurance Group and Oriental XL Funds (plaintiffs), three Cayman Islands trusts, jointly invested $40 million through the purchase of 20,000 shares of stock of defendant Joint Stock Bank Inkombank (Inkombank), formerly a leading Russian bank. The stock purchase agreements provided that in return for their investment, plaintiffs were guaranteed a 12% annual return in the form of dividends and the right, after 36 months, to redeem the Inkombank securities.

In 1996, the Central Bank of Russia (CBR) conducted an audit of Inkombank and issued a highly critical report containing numerous warnings concerning Inkombank's financial position. Plaintiffs allege that they were so alarmed by the CBR Report that they decided to exercise their contractual right to redeem their Inkombank shares. To this end, in August 1996 plaintiffs wrote a letter to Inkombank's President, Vladimir Vinogradov, demanding redemption of the shares at the original purchase price. However, plaintiffs further allege that their redemption demand was met by a "concerted effort" on the part of Inkombank and representatives of defendant The Bank of New York, Inkombank's correspondent bank in the United States, to convince plaintiffs to withdraw their redemption demand. Plaintiffs allege that representatives of BNY misrepresented Inkombank's financial condition and that as a result of these misrepresentations, plaintiffs withdrew their demand to redeem their Inkombank shares. Thereafter, in October 1998, the CBR revoked Inkombank's license to conduct banking business and Inkombank was ordered liquidated. Plaintiffs lost their entire investment.

Plaintiffs commenced the instant action in October 2000, alleging a single cause of action for fraud against BNY and Inkombank. According to plaintiffs' complaint, representatives of BNY: (i) knowingly and falsely misrepresented to plaintiffs that Inkombank was a sound, reputable and reliable financial institution, and (ii) concealed from plaintiffs that Inkombank's senior management was actively engaged in unlawful and criminal activities, including the theft of Inkombank's assets and money laundering. Plaintiffs' complaint further alleged that they justifiably relied on BNY's false assurances based on BNY's status and credibility as a highly respected United States financial institution, and, consequently, agreed to withdraw their redemption demand.

BNY moved to dismiss the single cause of action for fraud pursuant to CPLR 3211. BNY argued that allegations made by plaintiffs' "attorney-in-fact" and "trustee" in a separate consolidated action pending in Federal District Court (Zeltser v Joint Stock Bank Inkombank, 95 Civ 0796 [SD NY]; Pelaez v Regal V World Wide Holdings, 95 Civ 3410 [SD NY] [federal action]) constituted binding judicial admissions that are irreconcilable with plaintiff's allegations of fraud by BNY in the instant case.^[1]

The federal action was commenced in April 1995 by Foreign Investors Portfolio Management, Inc. (FIPM) against Inkombank and others. The amended complaint in that action identified FIPM as "trustee" for Inkombank's major shareholders, including the three plaintiffs in this case. FIPM asserted causes of action for fraud and breach of contract relating in part to the same $40 million stock purchase investment that is the subject of the instant action. The amended complaint contained no allegations of wrongdoing against BNY.

In the federal action, FIPM alleged that "[i]n or about the latter part of 1994, Inkombank defendants * * * openly admitted to [FIPM and its attorneys] that they never intended to honor Inkombank's obligations to FIPM with respect to the $40 million stock purchase." The amended complaint further alleged that the "Inkombank defendants no longer made a secret of their links to Russian organized crime * * * [and] used this aspect in their attempts to intimidate [FIPM's principals and attorneys]." Finally, it alleged that after FIPM's attorney threatened legal action if Inkombank did not honor its obligations to FIPM, the Inkombank defendants resorted to bribery attempts, threats and murder to cover up their fraudulent scheme.

BNY argued that the allegations in the federal action demonstrate that plaintiffs or their agent had notice of Inkombank's unlawful activity and intent not to honor its obligations in 1994, two years before the alleged misrepresentations by BNY in 1996 which now form the basis of their fraud claim against BNY. Thus, BNY asserted that FIPM's allegations in the federal action defeat plaintiffs' claim of justifiable reliance in this action.

In opposition, plaintiffs countered that FIPM's allegations in the federal action are not binding on them, since they were not parties to that action; that those allegations do not undermine their claim of reliance in the instant case because the federal complaint did not mention the redemption of plaintiffs' Inkombank shares at a fixed price; and that Inkombank had "recanted" its intent not to honor its obligations to FIPM in a 1996 letter to plaintiffs, thereby demonstrating, or at least raising an issue of fact, as to the reasonableness of plaintiffs' reliance on BNY's statements.

In the order appealed from, the IAS court, assuming the truth of the allegations in the pleading, denied BNY's motion to dismiss. The court ruled that "the allegations in the Federal complaint, while constituting evidence which tends to belie plaintiffs' assertions that they justifiably relied upon BNY's statements, do not flatly contradict those statements." Further, the court clearly indicated that BNY's arguments were "more appropriate" on a summary judgment motion.

On appeal, BNY argues that plaintiffs' fraud allegations against BNY are irreconcilable with their trustee's prior allegations in the federal action, and that consequently the complaint should be dismissed. Additionally, BNY asserts that plaintiffs have failed to plead any material misrepresentations, justifiable reliance or injury to support their fraud claim. We agree with BNY that the allegations made by FIPM in the federal action are binding on plaintiffs and negate any claim of justifiable reliance on BNY's alleged misrepresentations.

Initially, we reject plaintiffs' argument that the IAS court should not have considered the allegations in the federal complaint on this CPLR 3211 motion to dismiss. Generally, on a motion to dismiss made pursuant to CPLR 3211, the court must "accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory" (Leon v Martinez, 84 NY2d 83, 87-88 [1994]).

However, "[i]n those circumstances where the legal conclusions and factual allegations are flatly contradicted by documentary evidence, they are not presumed to be true or accorded every favorable inference (Biondi v Beekman Hill House Apt. Corp., 257 AD2d 76, 81, affd 94 NY2d 659; Kliebert v McKoan, 228 AD2d 232, lv denied 89 NY2d 802), and the criterion becomes `whether the proponent of the pleading has a cause of action, not whether he has stated one' (Guggenheimer v Ginzburg, 43 NY2d 268, 275; see also, Leon v Martinez, supra, at 88)." (Ark Bryant Park Corp. v Bryant Park Restoration Corp., 285 AD2d 143, 150 [2001].) On a motion to dismiss pursuant to CPLR 3211 (a) (1), "a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law" (Leon v Martinez, 84 NY2d at 88; see also Teitler v Max J. Pollack & Sons, 288 AD2d 302 [2001]; Jaslow v Pep Boys—Manny, Moe & Jack, 279 AD2d 611, 612 [2001]).

Plaintiffs argue that FIPM's complaint in the federal action does not constitute "documentary evidence" within the meaning of CPLR 3211 (a) (1). In their view, the subdivision applies only to documentary evidence that "readily establishes that an essential element of a claim cannot be maintained as a matter of law," such as a defense based on the terms of a written contract or proof of payment to rebut a claim on a debt. In contrast, plaintiffs argue that their justifiable reliance in this case is a fact-driven inquiry that cannot be negated by factual allegations in a pleading by a different entity in a separate lawsuit. We disagree.

The documentary evidence relied upon by BNY constitutes informal judicial admissions by plaintiffs' "attorney-in-fact" in another action (see Matter of Union Indem. Ins. Co., 89 NY2d 94, 103 [1996] [admissions made by counsel for liquidator in separate action constitute informal judicial admissions that were binding on liquidator in instant action]). As ...