People v. Credit Suisse Sec. (USA) LLC

• Decision Date: 13 December 2016
• Citation: 47 N.Y.S.3d 236,145 A.D.3d 533
• Parties: PEOPLE of the State of New York by Eric T. SCHNEIDERMAN, etc., Plaintiff–Respondent, v. CREDIT SUISSE SECURITIES (USA) LLC, formerly known as Credit Suisse First Boston LLC, et al., Defendants–Appellants.
• Court: New York Supreme Court — Appellate Division

145 A.D.3d 533

47 N.Y.S.3d 236

PEOPLE of the State of New York by Eric T. SCHNEIDERMAN, etc., Plaintiff–Respondent,

v.CREDIT SUISSE SECURITIES (USA) LLC, formerly known as Credit Suisse First Boston LLC, et al., Defendants–Appellants.

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

Dec. 13, 2016.

Cravath, Swaine & Moore LLP, New York (Richard W. Clary of counsel), for appellants.

Eric T. Schneiderman, Attorney General, New York (Steven C. Wu of counsel), for respondent.

FRIEDMAN, J.P., ANDRIAS, MOSKOWITZ, KAPNICK, WEBBER, JJ.

Order, Supreme Court, New York County (Marcy S. Friedman, J.), entered December 24, 2014, which, insofar as appealed from, denied the motion of defendants Credit Suisse Securities (USA) LLC, f/k/a "Credit Suisse First Boston LLC," DLJ Mortgage Capital, Inc., Credit Suisse First Boston Mortgage Securities Corporation, Asset Backed Securities Corporation and Credit Suisse Mortgage Acceptance Corporation (collectively, Credit Suisse) to dismiss the complaint pursuant to CPLR 3211(a)(5), affirmed, with costs.

The motion court correctly found that the Attorney General's claims are not time-barred. Credit Suisse was involved in the creation and sale of residential mortgage-backed securities (RMBS) in 2006 and 2007. As of March 21, 2012, the parties entered into a tolling agreement stating that the Attorney General was investigating Credit Suisse's business practices, and that the parties agreed to toll the applicable limitations period for any potential claim by the Attorney General. The tolling period began on March 8, 2012 and ended three years from the agreement's execution date.

On November 20, 2012, the Attorney General commenced this action, interposing causes of action for securities fraud under the Martin Act (General Business Law article 23–A, § 352 et seq. ) and for persistent fraud or illegality under Executive Law § 63(12). In this complaint, the Attorney General alleges that Credit Suisse failed to abide by its representations that it was taking a variety of steps to ensure the quality of the loans underlying its RMBS. Specifically, the Attorney General alleges, Credit Suisse's actual due diligence process was very different from its public representations about the quality of its due diligence, in that it falsely represented to investors that it had conducted a thorough examination of loans pursuant to a philosophy of ensuring the borrowers' ability to repay. Further, the Attorney General alleges that while Credit Suisse acknowledged internally the bad quality of the loans that the originators sold, Credit Suisse falsely represented to investors that it "influence[d]" originators to "utilize appropriate origination practices." Credit Suisse also allegedly represented that its quality control process was designed to "increase" the "quality" of loans in its RMBS, though, in reality, Credit Suisse continued to securitize loans from the same originators that its quality control process identified as problematic. The essence of the Attorney General's claims under both Executive Law § 63(12) and the Martin Act is that Credit Suisse made false representations in order to induce investors to purchase the securities.

General Business Law § 353(1) states, "Whenever the attorney general shall believe ... that any person ... has engaged in ... fraudulent practices, he may bring an action ... to enjoin such person ... from continuing such fraudulent practices." Moreover, section 353(3) provides, "Upon a showing by the attorney general that a fraudulent practice ... has occurred, he may include ... an application to direct restitution of any moneys or property obtained ... by any such fraudulent practice."

In turn, Executive Law § 63(12) states, in relevant part, "Whenever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on ... of business, the attorney general may apply ... for an order enjoining the continuance of such business activity or of any fraudulent or illegal acts, [and] directing restitution and damages."

As originally enacted, however, § 63(12) provided no definition of the term "fraud" (see L. 1956, ch. 592, § 1). Rather, the section's definition of that term was added in 1965 (see L. 1956, ch. 666, § 1)—specifically, "any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suspension, false pretense, [or] false promise."

As this Court previously held in State of New York v. Bronxville Glen I Assoc. , 181 A.D.2d 516, 516, 581 N.Y.S.2d 189 (1st Dept.1992), the statute of limitations for an action brought by the Attorney General under the Martin Act alleging investor fraud "is six years pursuant to CPLR 213(8), and not three years pursuant to CPLR 214" (see also Podraza v. Carriero, 212 A.D.2d 331, 340, 630 N.Y.S.2d 163 [4th Dept.1995], lv. dismissed 86 N.Y.2d 885, 635 N.Y.S.2d 950, 659 N.E.2d 773 [1995] ; Loengard v. Santa Fe Indus. Inc., 573 F.Supp. 1355, 1359 [S.D.N.Y.1983] ). More recently in Matter of People v. Trump Entrepreneur Initiative LLC, 137 A.D.3d 409, 26 N.Y.S.3d 66 (1st Dept.2016), lv. granted 2016 N.Y. Slip Op. 73667(U) (May 17, 2016) (Trump ) we analyzed the issue of the statute of limitations for claims brought under Executive Law § 63(12). In conducting this analysis, we first noted that the language of § 63(12) parallels the language of the Martin Act (Trump, 137 A.D.3d at 417–418, 26 N.Y.S.3d 66 ). Additionally, we noted, section 63(12)" ‘did not ‘make’ unlawful the alleged fraudulent practices, but only provided standing in the Attorney–General to seek redress and additional remedies for recognized wrongs which pre-existed the statute

[ ]' " (id., at 416, 26 N.Y.S.3d 66, quoting State of New York v. Cortelle Corp., 38 N.Y.2d 83, 85, 378 N.Y.S.2d 654, 341 N.E.2d 223 [1975] ). We further found that " section 63(12) does not encompass a significantly wider range of fraudulent activities than were legally cognizable before the section's enactment" (Trump at 418, 26 N.Y.S.3d 66, citing State of New York v. Bronxville Glen I Assoc., 181 A.D.2d at 516, 581 N.Y.S.2d 189 ). Thus, we concluded, the Attorney General's " fraud claim under [Executive Law] § 63(12)... is subject to the residual six-year statute of limitations in CPLR 213(1)" because the section "does not create any liability nonexistent at common law, at least under the court's equitable powers" (Trump at 418, 26 N.Y.S.3d 66 ).

We adhere to that determination here. The conduct targeted under § 63(12) parallels the conduct covered under the Martin Act's definition of fraud in that both the Martin Act and § 63(12) target wrongs that existed before the statutes' enactment, as opposed to targeting wrongs that were not legally cognizable before enactment. Accordingly, § 63(12) is not subject to the three-year statute of limitations under CPLR 214 (see Aetna Life & Cas. Co. v. Nelson, 67 N.Y.2d 169, 174, 501 N.Y.S.2d 313, 492 N.E.2d 386 [1984] ).

The dissent maintains that the complaint is based on statutory violations encompassing a larger range of claims than were legally cognizable before § 63(12)'s enactment. But, as noted above, and as we noted in Trump, the conduct at issue in this action was, in fact, always subject to granting of relief under the courts' equitable powers (see e.g. People v. Federated Radio Corp., 244 N.Y. 33, 38–39, 154 N.E. 655 [1926] ).

Further, CPLR 213(1), rather than CPLR 214(2), is applicable to an Executive Law § 63(12) claim based on a scheme to obtain ownership of distressed properties by means of fraudulent misrepresentations (Cortelle Corp., 38 N.Y.2d 83, 378 N.Y.S.2d 654, 341 N.E.2d 223 ).

The argument that Bronxville Glen I Assoc. and Cortelle Corp. have been superseded by Gaidon v. Guardian Life Ins. Co. of Am. , 96 N.Y.2d 201, 727 N.Y.S.2d 30, 750 N.E.2d 1078 (2001), is unavailing (see Trump, 137 A.D.3d at 418, 26 N.Y.S.3d 66 ). In Gaidon, which applied CPLR 214(2) to a General Business Law § 349(h) claim, the Court stated that " General Business Law § 349, as invoked in this case, falls in the ... category" of "claims which, although akin to common- law causes, would not exist but for the statute " (Gaidon at 209, 727 N.Y.S.2d 30, 750 N.E.2d 1078 [internal quotation marks omitted] ).

Contrary to the dissent's conclusion, the complaint sets forth the elements of common-law fraud, including scienter or intent, reliance, and damages. The allegations in the complaint describe a specific scheme whereby Credit Suisse "benefit[ed] [itself] at the expense of investors." As the trial court correctly found, "these claims seek to impose liability on [Credit Suisse] based on the classic, longstanding common-law tort of investor fraud," thus invoking a six-year statute of limitations.

All concur except FRIEDMAN, J.P. and ANDRIAS, J. who dissent in a memorandum by ANDRIAS, J. as follows:

ANDRIAS, J. (dissenting).

In November 2012, the State Attorney General commenced this action alleging that defendants violated the Martin Act (General Business Law § 352 et seq. ) and Executive Law § 63(12) by committing multiple fraudulent and deceptive acts in connection with the promotion and sale of residential mortgage-backed securities (RMBS) through the end of 2007. The majority affirms the denial of defendants' motion to dismiss the complaint as time-barred, finding that the Martin Act and Executive Law § 63(12) claims are governed by the six-year limitation periods of CPLR 213(8) and CPLR 213(1), respectively. Because I believe that the three-year statute of limitations of CPLR 214(2) applies to the Attorney General's claims, as pleaded in this action, I respectfully dissent.

Neither the Martin Act nor Executive Law § 63(12) contains its own statute of limitations. Thus, to determine the applicable statute of limitations, we must examine the complaint to identify "the gravamen or essence of the cause[s] of action" (Western Elec. Co. v. Brenner, 41 N.Y.2d 291, 293, 392...