Stichting Pensioenfonds ABP v Credit Suisse Group AG

[*1] Stichting Pensioenfonds ABP v Credit Suisse Group AG 2012 NY Slip Op 52433(U) Decided on November 30, 2012 Supreme Court, New York County Schweitzer, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 30, 2012
Supreme Court, New York County

Stichting Pensioenfonds ABP, Plaintiff,

against

Credit Suisse Group AG; CREDIT SUISSE AG; CREDIT SUISSE (USA), INC.; CREDIT SUISSE HOLDINGS USA, INC.; ASSET BACKED SECURITIES CORP.; CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.; CREDIT SUISSE SECURITIES (USA) LLC; DLJ MORTGAGE CAPITAL, INC.; CREDIT SUISSE FINANCIAL INC.; JEFFREY A. ALTABEF; JOSEPH M. DONOVAN; EVELYN ECHEVARRIA; JULIANA JOHNSON; BRUCE KAISERMAN; ANDREW A. KIMURA; MICHAEL A. MARRIOTT; CARLOS ONIS; GREG RICHTER; and THOMAS ZINGALLI, Defendants.



653665/2011



Plaintiff's Attorney:

Geoffrey C. Jarvis

Grant & Eisenhofer, P.A.

485 Lexington Avenue

New York, NY 10017

Defendants' Attorney:

Michael Timothy Reynolds

Richard W. Clary

Julie A. North

Robert Miranne

Cravath Swaine & Moore L.L.P.

825 Eighth Avenue, Worldwide Plaza

New York, NY 10019

Melvin L. Schweitzer, J.

Defendants bring a Motion to Dismiss pursuant to CPLR § 3211 (a)(5) and (a)(7). For the reasons discussed below, Defendants' motion is granted in part and denied in part.

Background

The following facts are drawn from the Complaint, and are taken as true with all [*2]reasonable inferences drawn in favor of the Plaintiff for the purposes of this Motion to Dismiss. Skillgames, LLC v Brody, 1 AD3d 247, 250 (1st Dept 2003).

Plaintiff Stichting Pensioenfonds ABP (ABP) is a Dutch pension fund for public employees which purchased shares of Residential Mortgage-Backed Securities (RMBS), known as the Certificates. Defendants are Credit Suisse Group AG, a Swiss company, and many of its subsidiaries (collectively, Credit Suisse), and many individuals who served as officers and directors of these entities (collectively, the Individual Defendants). ABP brings claims of fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation.

Credit Suisse, through its various subsidiaries, originated mortgage loans or acquired those loans from a third-party originator. It then selected mortgages and placed them into Issuing Trusts, which issued Certificates to investors through an underwriter. These Certificates were sold pursuant to a shelf registration statement, a prospectus which applied to several Issuing Trusts, and a prospectus supplement for each individual security offering (collectively, the Offering Documents). The Individual Defendants each signed at least one of these registration statements. ABP alleges that it relied on these Offering Documents in purchasing the Certificates. Since the financial crisis of 2007—2008, the Certificates have been downgraded to below investment grade by the ratings agencies and declined dramatically in value on the secondary market.

ABP alleges a set of fraudulent misstatements in the Offering Documents. Most importantly, ABP claims that the Credit Suisse originators utterly abandoned the underwriting standards described in the Offering Documents, in a systematic way that goes beyond simply allowing a few low quality loans into the securitization pool. It alleges that Credit Suisse knowingly reported false owner occupancy percentages, appraisal amounts, and loan-to-value (LTV) ratios in the Offering Documents. ABP also alleges that the original high credit ratings assigned to the Certificates by the ratings agencies and reported in the Offering Documents were undeserved because they were based on incorrect data.

Discussion

Statute of Limitations and Dutch Law

While Credit Suisse concedes that ABP's fraud and related claims are timely under New York's statute of limitations,[FN1] they argue that under New York's borrowing statute, CPLR § 202, they must also satisfy the limitations period of Dutch law. Credit Suisse argues that Dutch law applies a standard of "prompt notice"[FN2] and that ABP failed to give prompt notice of its claim, and thus that this case should be dismissed for untimeliness. ABP argues that Dutch law actually imposes a five year limitations period, which they have satisfied. In the alternative, ABP [*3]contends that its notice was reasonably prompt. The Court holds that the prompt notice standard applies, but that the question of whether ABP's action was reasonably prompt is not suitable for resolution on a motion to dismiss.

Pursuant to New York's Borrowing Statute, Plaintiff's Claims Must Be Timely Under Dutch Law

When a nonresident sues on a cause of action accruing outside of New York, CPLR § 202 "requires the cause of action to be timely under the limitations period of both New York and the jurisdiction where the cause of action accrued." Global Fin. Corp. v Triarc Corp., 93 NY2d 525, 528 (1999). ABP is a Dutch entity, and therefore a nonresident of New York, Compl. ¶ 14, so the question becomes where the cause of action accrued. If it accrued in the Netherlands, then ABP's claim must be timely under Dutch law; if it accrued in New York, then Dutch law does not apply.

The general rule here is clear: the cause of action accrues in the "place of injury," which in cases of economic harm is "usually . . . where the plaintiff resides and sustains the economic impact of the loss." Id. at 529; see Bank Brussels Lambert v Credit Lyonnais (Suisse) S.A., No. 93-CV-6876, 2001 WL 492363, at *4 (SDNY May 9, 2001)(holding under CPLR § 202 that plaintiffs' conversion claims "accrued at their respective placesof residence, in Belgium, Switzerland, France and Finland").

However, an economic cause of action may accrue in a location other than the plaintiff's residence when the plaintiff maintains a separate "financial base," on the theory that the economic harm is sustained at the financial base. Lang v Paine, Webber, Jackson & Curtis, Inc., 582 F Supp 1421, 1426 (SDNY 1984). In determining where a cause of action accrues, "a court may properly consider where and how the plaintiff paid for the securities, where plaintiff maintained accounts which reflected the loss, and where the securities were actually handled." Epstein v Haas Sec. Corp., 731 F Supp 1166, 1178 (SDNY 1990) (citing Sack v V.T. Low, 478 F2d 360, 367—68 (2d Cir 1973)). However, this exception applies only in the "extremely rare case where the party has offered unusual circumstances evincing that the economic injury occurred at a place other than the plaintiff's residence." Baena v Woori Bank, No. 05-CV-7018, 2006 WL 2935752, at *7 (SDNY Oct. 11, 2006) (citing Gorlin v Bond Richman & Co., 706 F Supp 236, 240 n.8 (SDNY 1989)). The basic "sensible question" remains "who became poorer and where did they become poorer?" Baena, 2006 WL 2935752, at *7 (citing Appel v Kidder Peabody & Co. Inc., 628 F Supp. 153, 156 (SDNY 1986)).

ABP has not been able to offer any evidence of unusual circumstances. It represents that it purchased all the Certificates at issue in the United States, with U.S. dollars drawn from U.S. bank accounts, and held them in custodian accounts in New York, managed by an investment advisor incorporated in Delaware and with a primary place of business in New York. Pl's. Letter, July 31, 2012; Oral Arg. Tr. 70:13—26, Sept. 21, 2012. However, this is hardly unusual for a major institution conducting financial business. If merely using U.S. dollars in U.S. bank accounts and a New York based investment advisor was sufficient to constitute a separate financial base, it is difficult to imagine any major financial transaction that could not come within this exception.

To extend the separate financial base exception to a foreign institution conducting [*4]financial business in New York without any showing of actually unusual circumstances would allow the exception to swallow the rule and render New York's borrowing statute toothless. Instead, the Court chooses to focus on the sensible question. ABP is a Dutch pension fund, conducting investment activities in New York to grow its assets for the purpose of paying pensions to Dutch retirees. In the absence of any allegation of truly unusual circumstances to the contrary, the Court holds that ABP sustained its injury in the Netherlands, and thus Dutch law applies.

Dutch Law Applies a "Prompt Notice" Standard to Claims Based on Non-conformity of Goods

The parties have presented dueling expert affidavits on the question of the applicable Dutch statute of limitations. Credit Suisse's expert, Charles du Perron (Mr. du Perron), states that for all claims based on the receipt of a non-conforming good, the relevant law is Dutch Civil Code Article 7:23. This statute provides "[t]he buyer may not claim that delivery does not conform to the contract, unless he has notified the seller thereof promptly after he has, or reasonably should have, discovered this." 7:23 DCC. Mr. du Perron claims that this statute applies "to the sale of bonds and other securities, such as the residential mortgage backed securities at issue in the Complaint" and that it "applies to any claim based on the non-conformity of the object of the sale, regardless of whether the claim is brought in contract, [or] in delict (tort, including intentional deceit)." Du Perron Aff. ¶ 4. Credit Suisse argues that this "prompt notice" standard bars ABP's claims.

ABP's expert, Riemert Pieter Jan Lucris Tjittes (Mr. Tjittes), counters that where the cause of action is a tort claim based on "more than the mere non-conformity of the goods, such as where plaintiff alleges that the defendant breached a duty of care or acted intentionally," Article 7:23 does not apply. Tjittes Aff. ¶ 13. Instead, the cause of action is governed by Article 3:310 (1), providing a five year limitations period from the time of discovery for tort claims in which intentional misconduct is alleged. Tjittes Aff. ¶ 5. Under this standard, ABP's claims would be timely.

Which of Two Dutch Statutes That Govern the Statute of Limitations

Should Be Decided as a Matter of Law by the Court

CPLR § 4511 (b) requires a court to take judicial notice of "the laws of foreign countries or their political subdivisions . . . if a party requests it, furnishes the court sufficient information to enable it to comply with the request, and has given each adverse party notice of his intention to request it." The statute specifically indicates that the question of foreign law is to be "determined by the judge or referee, and included in his findings or charged to the jury," and that the decision is "subject to review on appeal as a finding or charge on a matter of law." CPLR § 4511 (c). Finally, the court has discretion to "consider any testimony, document, information or argument on the subject, whether offered by a party or discovered through its own research." CPLR § 4511 (d).

CPLR § 4511 gives the trial court broad discretion in considering what evidence to take [*5]into account and at what stage of the case to resolve these questions of law. The court may decide between conflicting expert affidavits without holding an evidentiary hearing, see Harris S.A. De C. V. v Grupo Sistemas Integrales De Telecomunicacion S.A. De C. V., 279 AD2d 263 (1st Dept 2001) (approving trial court's decision to construe Mexican lawwithout holding a hearing on the basis of "translated provisions of theMexican codes and judicial decisions, as well as multiple affidavits by the parties'experts interpreting the relevant legal provisions"), and it may do so at the motion to dismiss stage even when the expert affidavits submitted by the parties disagree. E.g, CMIA Partners Equity v O'Neill, No. 603622/09, 2010 WL 4904479, at *4—9 (NY Sup. Ct. Nov. 22, 2010); Hernandez v Bank of Nova Scotia, No. 601518/06, 2008 WL 4537817 (NY Sup. Ct. Sept. 8, 2008); TIG Ins. Co. v Weil, No. 0600944/05, 2005 WL 6071567 (NY Sup. Ct. Nov. 10, 2005).

In short, the New York statute firmly commits the determination of foreign law to the court and authorizes the court to make this determination after any presentation of evidence which furnishes the court sufficient information to decide. Here, the Court holds that the presentation of expert affidavits, translations of Dutch statutes and cases, and oral argument on this issue have provided sufficient information to make the determination.

Prompt Notice Is the Appropriate Standard

The central dispute between the parties is to what extent Article 7:23 applies beyond the realm of contract claims. First, Mr. Tjittes claims that Article 7:23 does not apply to claims based in part on issues beyond mere non-conformity of goods, "such as where plaintiff alleges that the defendant breached a duty of care or acted intentionally." Tjittes Aff. ¶ 13. Secondly, ABP claimed at oral argument that Article 7:23 does not apply in this case because there is no underlying contract for the Certificates to conform to. Oral Arg. Tr. 53:19—26, Sept. 21, 2012. On both points, Mr. du Perron's affidavits and case translations are more persuasive.

In claiming that Article 3:310 (1) applies to tort cases in which intentional misconduct is alleged, Mr. Tjittes cites to several Dutch lower court cases. Tjittes Aff. ¶ 6. However, these cases do not involve goods delivered from a seller to a buyer; instead, they involve such varied situations as a settlement agreement, tax fraud, and embezzlement. Tjittes Aff. Ex. 4—7. In these situations, it seems obvious that Article 7:23 could not apply. On the other hand, Mr. Tjittes does not cite to a case which applies Article 3:310 (1) to a tort claim which involved any actual goods sold to a buyer.

In a 2007 article, Mr. Tjittes wrote that "every legal claim and every defense of the purchaser that is factually based on the non-conformity of the delivered item to the agreement, on any basis whatsoever," may be barred by the application of Article 7:23, including any "claim or defense based on fraud." Du Perron Rep. Aff. Ex. 2. Mr. Tjittes now narrows this opinion, and supports his new claim primarily with an excerpt from an unpublished future edition of his book. Tjittes Aff. Ex. 20. While Mr. Tjittes claims that two intervening decisions by the Dutch Supreme Court, Ploum/Smeets II and Pouw/Visser, account for his change in opinion, Tjittes Aff. ¶ 18, the Court cannot find a basis for the change in those cases.

In contrast, Mr. du Perron has supported his interpretation of the applicability of Article 7:23 to fraud cases with the legislative history of the provision, du Perron Rep. Aff. Ex. 5, with multiple Dutch Supreme Court decisions, du Perron Rep. Aff. Ex. 6—7, and with many lower court decisions applying Article 7:23 to fraud in the sale of real estate and a horse. Du Perron Rep. Aff. Ex. 9—14. On this evidence, the Court concludes that Article 7:23 applies to claims of [*6]fraud based on the purchase of goods.

In its second argument, ABP claims that Article 7:23 applies only when goods do not conform to the contract, and there is no contract in the present case. ABP insisted repeatedly at oral argument that "[t]here's no contract here," Oral Arg. Tr. 51:21, Sept. 21, 2012, and "[t]here is no agreement [to] which the goods do not conform." Oral Arg. Tr. 57:22—23, Sept. 21, 2012. This is based on the fact that the claim of fraud rests on alleged misrepresentations in the Offering Documents, specifically the prospectuses and prospectus supplements for the Certificates, and a "prospectus supplement is not a contract." Oral Arg. Tr. 51:23—24, Sept. 21, 2012.

A prospectus, or a prospectus supplement, is indeed not a contract. See Greenapple v Detroit Edison Co., 618 F2d 198, 210 (2d Cir 1980) (stating that the purpose of a prospectus is solicitation and disclosure); see also McKesson HBOC, Inc. v New York State Common Ret. Fund, Inc., 339 F3d 1087, 1092 (9th Cir 2003) (holding that a prospectus is not an offer to enter a contract). Cf. Gustafson v Alloyd Co., Inc., 513 US 561 (1995) (holding that Section 12 of the Securities Act is not available to purchasers of stock in a private sale because a sale contract is not a prospectus). It seems that a prospectus is also not a contract under Dutch law. Tjittes Supp. Aff. ¶¶ 22—30.

However, just because the Offering Documents which contained the alleged misstatements are not contracts does not mean that there is no contract here. ABP purchased its securities from the underwriter, Defendant Credit Suisse Securities (USA) LLC. Compl. ¶ 2. Despite insisting that there was no contract, ABP stated that the Certificates "were purchased pursuant to a purchase and sale contract." Oral Arg. Tr. 53:6—8, Sept. 12, 2012; see also Tjittes Supp. Aff. ¶ 6. While the Complaint does not provide an excess of detail on the purchase and sale contract, there was a contract here. Mr. Tjittes points out that ABP was in contractual privity with only one of the many Defendants, but that is enough to render ABP's claim that there is no contract at all for the Certificates to conform to be inaccurate. Tjittes Supp. Aff. ¶ 4.

The parties agree that "non-conformity" is a Dutch term of art meaning "does not have the characteristics which the buyer was entitled to expect under the contract." Du Perron Rep. Aff. ¶ 1 n.1; accord Tjittes Aff. ¶ 14. These expectations do not have to be specified or incorporated into a detailed written contract; on the contrary, Credit Suisse has provided examples of Article 7:23 being applied to sales with no written contract at all. Du Perron Supp. Aff. ¶ 6. If the application of 7:23 does not require a formalized written contract at all, then it follows that the purchase and sale contract does not need to explicitly incorporate the Offering Documents for those Offering Documents to become relevant to the analysis. Since the purpose of the Offering Documents is solicitation and disclosure of material information about the Certificates, ABP was reasonably entitled to expect, under its purchase and sale contract with Credit Suisse Securities, that the Certificates would be consistent with the information in the Offering Documents. This is not enough to create a cause of action for breach of contract under American law, but this Court holds that it is enough to apply Article 7:23 under Dutch law.

The Promptness of Plaintiff's Action is a Question of Fact Which Must

be Left for the Trier of Fact and is Not Appropriate For Decision on this

Motion to Dismiss

The "prompt notice" standard as described by Mr. du Perron involves a highly fact specific [*7]determination. The Dutch Supreme Court in Tan v. Forward Business Parks (NJ 2010/545) required Dutch lower courts to take all circumstances of the case into account and consider relevant factors, specifically including:

(1) any detriment suffered by the seller due to the lapse of time before the buyer protested against the nonconformity of the stock, (2) the extent to which the facts complained of had been easily discoverable, (3) the experience and sophistication of the parties, (4) the relation between the parties, (5) the presence of legal expertise, and (6) any need for preliminary expert advice.

Du Perron Aff. ¶ 10(d). The legislative history of Article 7:23 "indicates that the buyer should give notice within such a short period of time as can be required of him in the circumstances of the case, considering his duty to investigate.'" Id at ¶ 8 (quoting Parliamentary History Book 7 DCC at 152).

The court has heard no evidence regarding the detriment suffered by the seller, presence of legal expertise, or need for preliminary expert advice before ABP could give notice. In addition, only limited evidence is available regarding the relation between the parties, and the extent to which the facts were easily discoverable is in substantial dispute. Of the factors considered relevant by a Dutch court to determine whether notice was prompt, the court can be confident only of the sophistication of both parties. It is simply impossible for the court to determine on a motion to dismiss, following the standards of Dutch law as presented in the expert affidavits and judicially noticed under CPLR § 4511, whether ABP gave reasonably prompt notice.[FN3]

The question of the promptness of a party's action given all the circumstances is within the competence and traditional purview of the jury. While this is imposing a division between the role of judges and juries that does not exist in Dutch law, leaving the fact-specific determination of "promptness" to the jury is the best way to apply this foreign standard within the framework of an American court.

II.Fraud

The elements of a claim of fraud under New York law are "(1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance by the plaintiff, and (5) damages." Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559 (2009). Under CPLR § 3016 (b), these elements must be pled in detail. Id. ABP has adequately alleged each element of its fraud claim against Credit Suisse.

Misstatements and Omissions in the Offering Documents [*8]

Credit Suisse argues, first, that the various misstatements ABP has identified in the Offering Documents are not actionable because the Offering Documents contain a "cure, repurchase, or substitute" provision; second, that ABP's allegations are insufficiently connected to the specific loans underlying the Certificates; and third, that given the disclosures in the Offering Documents, these alleged misstatements were not in fact misstatements at all.

1.The "Cure, Repurchase, or Substitute" Provisions Do Not Immunize Credit Suisse

The Offering Documents contained a "cure, repurchase, or substitute" provision which provided that, in the event of a delinquent mortgage, the sponsoring entity would either repurchase or substitute a performing loan into the Issuing Trust. E.g., Br. in Supp. Ex. 1 at S-10. Credit Suisse claims that, because of the presence of this provision, the Offering Documents did not actually make representations about the standards applied to the mortgages in the Issuing Trusts, but only represented that if any mortgages did fall below this standard, the sponsor would repurchase or substitute them. Because of this, Credit Suisse claims that it cannot be held liable for the presence of mortgages in the securitization pool that fall below this level of quality.

Credit Suisse bases this argument on Lone Star Fund V U.S., L.P. v Barclays Bank PLC, 594 F3d 383 (5th Cir 2010), which held that just such a provision changed the nature of the seller's representations. However, the plaintiffs in Lone Star based their claim on the factual allegation that there were certain loans in the portfolio which were past due, when there were supposed to be no such loans. Id. at 388. In contrast, ABP bases its claims not on the mere presence of specific mortgages which do not meet the standards described in the Offering Documents, but instead on the systematic abandonment of Credit Suisse's purported underwriting standards. See also, e.g., Plumbers' & Pipefitters' Local No. 562 Supplemental Plan & Trust v J.P. Morgan Acceptance Corp. I, No. 08-CV-1713, 2012 WL 601448, at *18—19 (EDNY Feb. 23, 2012) (factually distinguishing Lone Star on the same grounds); Employees' Ret. Sys. of the Gov't of the Virgin Islands v J.P. Morgan Chase & Co., 804 F Supp 2d 141, 155 (SDNY 2011); City of Ann Arbor Employees' Ret. Sys. v Citigroup Mortg. Loan Trust Inc., No. 08-CV-1418, 2010 WL 6617866, at *7 (EDNY Dec. 23, 2010). ABP claims that the entire process by which loans were originated, screened, and selected was misrepresented in the Offering Documents. A cure provision does not change the nature of Credit Suisse's representations about their process.

2.ABP Has Sufficiently Pled a Connection Between the Systematic Underwriting and Appraisal Failures Here As They Relate to the Certificates

Credit Suisse argues that ABP's claim of fraud fails because it does not cite specific loans which failed to meet the underwriting standards and should not have been included in the securitization pools. There is some support for the argument that ABP must discuss specific loans that are part of the collateralization pool of its Certificates. See, e.g., New Jersey Carpenters Health Fund v NovaStar Mortg., Inc., No. 08-CV-5310 DAB, 2012 WL 1076143, at *4—5 (SDNY Mar. 29, 2012) ("Plaintiff does not cite any example of a loan that failed to meet [*9]the underwriting guidelines and ended up in the 2007—2 loan pool, let alone the specific loans which secured Plaintiff's investment in the M—1 Certificates"; the court held that the "general allegations" were "not sufficiently specific" to survive a motion to dismiss.); Footbridge Ltd. v Countrywide Home Loans, Inc., No. 09-CV-4050, 2010 WL 3790810, at *13 (SDNY Sept. 28, 2010) (claim dismissed because it "does not allege facts that link these statements to the Securitizations at issue here"). In examining this authority, the Court concludes that these decisions reflect judgments as to the overall plausibility of the allegations at issue in each case, rather than a requirement that a plaintiff must allege deficiencies in specific loans in its securitization pool.

In contrast, ABP can offer many examples of courts accepting allegations of generalized underwriting failures without requiring that the plaintiffs identify specific loans. See, e.g., Employees' Ret. Sys. of the Gov't of the Virgin Islands v J.P. Morgan Chase & Co., 804 F Supp 2d 141, 152 (SDNY 2011) ("A plaintiff need not allege that any particular loan or loans were issued in deviation from the underwriting standards, so long as the complaint alleges widespread abandonment of underwriting guidelines."); Tsereteli v Residential Asset Securitization Trust 2006-A8, 692 F Supp 2d 387, 394 (SDNY 2010) (holding that where there was "widespread abandonment of underwriting guidelines at IndyMac Bank during the period of time at issue and that the percentage of defaulting loans rose dramatically shortly after the Certificates were issued," this creates a sufficient nexus between the abandonment of underwriting standards and the Certificates at issue); In re Wells Fargo Mortgage-Backed Certificates Litig., 712 F Supp 2d 958, 971 (ND Cal 2010) (holding that plaintiffs need not "tie[] any inconsistent underwriting conduct to the specific Certificates at issue in this case" to state a sufficiently specific claim). The Court concludes that the weight of the authority indicates that Credit Suisse's allegations of systematic underwriting failure are sufficient to state a claim and do not need to be accompanied by reference to specific loans in the securitization pools of the Certificates.

3.ABP Has Identified Misleading Representations in the Offering Documents

Credit Suisse argues that the specific misrepresentations identified by ABP are in fact not misrepresentations at all, because taken as a whole, with all of the disclosures in the Offering Documents, these representations were not false.

For example, the Offering Documents disclosed that loans would be originated "generally in accordance" with the described underwriting guidelines, and that "exceptions to the underwriting standards" would be made based on "compensating factors," without any statements as to the frequency of such exceptions or the factors which would be considered. Br. in Supp. Ex. 1 at S-94. Credit Suisse claims that this vagueness and disclosure of occasional exceptions immunizes it from the claim that its description of the underwriting standards and processes was false and misleading because those standards were in fact ignored. Compare Footbridge Ltd. v Countrywide Home Loans, Inc., No. 09-CV-4050, 2010 WL 3790810, at *11—12 (SDNY Sept. 28, 2010)(disclosures that loans "would be issued under a more flexible' set of underwriting guidelines" precluded claims that originators were "too flexible in the underwriting decisions") with New Jersey Carpenters Vacation Fund v Royal Bank of Scotland Group, PLC, 720 F Supp 2d 254, 270 (SDNY 2010) ("Disclosures that described lenient, but [*10]nonetheless existing guidelines about risky loan collateral, would not lead a reasonable investor to conclude that the mortgage originators could entirely disregard or ignore those loan guidelines."); see also Pub. Employees' Ret. Sys. of Mississippi v Merrill Lynch & Co. Inc., 714 F Supp 2d 475, 483 (SDNY 2010) ("[T]he alleged repeated deviation from established underwriting standards is enough to render misleading the assertion in the registration statements that underwriting guidelines were generally followed."); In re IndyMac Mortgage-Backed Sec. Litig., 718 F Supp 2d 495, 509 (SDNY 2010) ("Disclosures regarding the risks stemming from the allegedly abandoned standards do not adequately warn of the risk the standards will be ignored."). The Court concludes that, assuming the allegations in the Complaint are true and drawing all inferences in ABP's favor, the description of underwriting procedures in the Offering Documents is misleading despite the disclosure of exceptions.

Credit Suisse's other arguments relating to the specific misstatements alleged by ABP are similar. Credit Suisse argues that the statements in the Offering Documents about appraisals and LTV ratios are not actionable because it disclosed an entire set of risks, including the risk that the appraisal may have been conducted in connection with prior financings, that the value of any mortgaged property may decline from its value at the time of appraisal, that the appraisers may not have been independent, that some mortgagors may have taken on multiple mortgages, etc. These disclosures simply do not immunize Credit Suisse from the abuses alleged by ABP, which include exerting pressure on appraisers to inflate property values. Credit Suisse also argues that appraisals are statements of opinion which are not actionable under New York law unless the speaker knows them to be false when made. This is irrelevant, since ABP has alleged exactly that: that Credit Suisse pressured or outright instructed appraisers to alter their valuations, and thus knew at the time that these appraisals were false. Compl. ¶ 216.

Finally, Credit Suisse argues that the alleged misrepresentations relating to credit ratings are not actionable because the Offering Documents did not misrepresent the credit ratings actually given by the ratings agencies, and because credit ratings are predictive opinions which are actionable only if they are not believed when made. This argument suffers from the same flaw. ABP has indeed alleged that Credit Suisse did not believe in the accuracy of the credit ratings when they were given, because those ratings were predicated on data which Credit Suisse provided and knew to be false. Compl. ¶¶ 235—37. In conclusion, if the allegations of the complaint are taken as true then Credit Suisse cannot hide behind disclosures and claims of opinion.[FN4] [*11]

B.ABP Has Pled Scienter

To plead a claim of fraud, a plaintiff must allege that the defendant knowingly made false statements with the intent to deceive. See Friedman v Anderson, 23 AD3d 163, 166 (1st Dept 2005). Scienter must be pled with sufficient detail to satisfy CPLR § 3016 (b). However, this "requirement should not be confused with unassailable proof of fraud." Pludeman v N. Leasing Sys., Inc., 10 NY3d 486, 492 (2008). Instead, the plaintiff must plead facts "sufficient to permit a reasonable inference of the alleged conduct." Id. This is a more lenient test than the Second Circuit's "strong inference of fraud" test, and requires only that the complaint include "facts from which it is possible to infer defendant's knowledge of the falsity of its statements." Aris Multi-Strategy Offshore Fund, Ltd. v Devaney, 26 Misc 3d 1221(A) (NY Sup. Ct. 2009) (quoting Houbigant Inc. v Deloitte & Touche LLP, 303 AD2d 92, 99 (1st Dept 2003)). In short, the requirement under New York law is that "the complaint contains some rational basis for inferring that the alleged misrepresentation was knowingly made." Houbigant, 303 AD2d at 98.

ABP has alleged that Credit Suisse and its affiliated entities were involved in every step of the complex process that eventually resulted in the Certificates, including making the mortgage loans, selecting the loans for securitization, commissioning diligence reviews of the loans, servicing the loans, monitoring loan performance, bundling the loans into RMBS, and selling the RMBS Certificates to investors. Compl. ¶¶ 81—133. The thorough and detailed Complaint describes the participation of every entity defendant in this process. Compl. ¶¶ 73—76. In particular, ABP alleges that Credit Suisse's knowledge of the poor quality of the loans can be inferred from its interactions with its due diligence vendor, Compl. ¶¶ 98—104, and through its use of the "repricing" program, which involved demanding extra compensation from third party originators for poor quality loans. Compl. ¶¶ 105—110. Taken together, ABP's allegations make it rational to infer that Credit Suisse knew that many of the representations in its Offering Documents were false.

C.ABP Has Pled Justifiable Reliance

ABP must plead that it justifiably relied on the alleged misstatements in the Offering Documents in its decision to purchase the Certificates. "New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations made during business acquisitions by investigating the details of the transactions." Global Minerals & Metals Corp. v Holme, 35 AD3d 93, 100 (1st Dept 2006); see UST Private Equity Investors Fund, Inc. v Salomon Smith Barney, 288 AD2d 87, 88 (1st Dept 2001) (dismissing on reliance grounds where plaintiff "failed to make use of the means of verification that were available to it"). However, when the allegedly misrepresented facts are "peculiarly within the misrepresenting party's knowledge" then the other party may reasonably rely even though they are unable to investigate. Dallas Aerospace, Inc. v CIS Air Corp., 352 F3d 775, 785 (2d Cir 2003).

ABP has alleged that it in fact relied on the Offering Documents. Compl. ¶¶ 287, 289. It has also alleged that it "had no reasonable means or ability to conduct its own due diligence regarding the quality of the mortgage pools" because it did not have access to the underlying loan files, appraisals, or supporting documentation. Compl. ¶ 290. These allegations are [*12]sufficient to plead justifiable reliance.

Credit Suisse argues that any reliance on the Offering Documents was unjustified because the Offering Documents repeatedly disclosed the riskiness of the investment. This does not follow. For example, the fact that the Offering Documents disclosed that the underwriting standards were "less stringent than the standards generally accepted by Fannie Mae or Freddie Mac," Br. in Supp. Ex. 1 at S-94, does not mean that ABP was unjustified in relying on the Offering Documents' description of what those less stringent underwriting standards were. Similarly, the disclosure that the LTV ratios were high does not prevent ABP from reasonably relying on the Offering Documents' disclosure of the actual ratios.

D.ABP Has Alleged Loss Causation

As the final element of its claim of fraud, ABP must plead "that the misrepresentations directly caused the loss about which plaintiff complains." Laub v Faessel, 297 AD2d 28, 31 (1st Dept 2002); see also Citibank, N.A. v K-H Corp., 968 F2d 1489, 1495 (2d Cir 1992). When a market-wide phenomenon (such as the financial crisis of 2007—2008) may have caused the loss, the plaintiff must plead "facts which, if proven, would show that its loss was caused by the alleged misstatements as opposed to intervening events." Lentell v Merrill Lynch & Co., Inc., 396 F3d 161, 174 (2d Cir 2005). It is not, however, necessary to allege that the entirety of the loss was caused by the alleged misstatements and none was caused by the more general market decline. See, e.g., In re Lehman Bros. Sec. & Erisa Litig., 799 F Supp 2d 258, 305 (SDNY 2011) ("To plead loss causation, the complaint must allege facts that support an inference that . . . plaintiffs would have been spared all or an ascertainable portion of [the] loss absent the fraud." (emphasis in original)). Where the plaintiff pleads some causation between the defendant's misstatements and the loss, and the defendant claims some other mechanism of causation such as a market downturn, causation "is a matter of proof at trial and not to be decided on a . . . motion to dismiss." Emergent Capital Inv. Mgmt., LLC v Stonepath Group, Inc., 343 F3d 189, 197 (2d Cir 2003).

ABP has alleged a loss in the form of a decline in the market value of the Certificates,[FN5] and has alleged a chain of causation leading from the alleged abandonment of underwriting standards, to higher rates of default and delinquency in the underlying mortgages, to the Certificates' ratings downgrades, finally to the Certificates' decline in market value. Compl. ¶ 294. The validity of this chain of causation, and the apportionment of ABP's loss between this [*13]cause and the general credit crisis, are not sustainable issues for a motion to dismiss.

III.Fraudulent Inducement

To state a claim of fraudulent inducement, a plaintiff must allege the basic elements of fraud, discussed supra. Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 NY3d 269, 276 (2011). However, the misstatements already discussed cannot alone support a claim for fraudulent inducement, which "necessarily relies upon extrinsic evidence that cannot be found in the terms of a written agreement." Altomare v Balnir, Inc., 309 AD2d 683, 684 (1st Dept 2003).

Credit Suisse argues that, because ABP's claim of fraudulent inducement is based entirely on alleged false statements in the Offering Documents, it has not presented any extrinsic evidence outside of the written agreement. ABP's claim is indeed based on the Offering Documents; the Complaint does not describe any other alleged fraudulent representations, aside from vague references to the "public statements" and "public representations" of the Defendants. Compl. ¶¶ 324, 327. In addition, the Offering Documents warned investors to "rely only on the information in this document." Reply Br. Ex. 1.

If the Offering Documents constitute the written contract between ABP and Credit Suisse, then ABP would indeed be unable to make a claim for fraudulent inducement based only on the statements in the Offering Documents. However, the Offering Documents are not themselves the contract, but are instead disclosure and solicitation documents, as ABP pointed out at oral argument. See supra Part I.B.2; Greenapple v Detroit Edison Co., 618 F2d 198, 210 (2d Cir 1980) (holding that the purpose of a prospectus is solicitation and disclosure). Because the Offering Documents are disclosure solicitation documents, they themselves constitute the evidence extrinsic to the contract which is required for a fraudulent inducement claim. Drawing all reasonable inferences from the Complaint, the misstatements in the Offering Documents induced ABP to enter into the purchase agreement with Credit Suisse Securities, satisfying the elements of a fraudulent inducement claim.

IV.Aiding and Abetting Fraud

ABP has alleged that the Individual Defendants aided and abetted Credit Suisse's fraud. To state a claim for aiding and abetting fraud, a plaintiff must plead "(1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud." Stanfield Offshore Leveraged Assets, Ltd. v Metro. Life Ins. Co., 64 AD3d 472, 476 (1st Dept 2009). While the circumstances of the fraud must be stated in detail, pursuant to CPLR § 3016 (b), actual knowledge may be pled generally. Id.

The Individual Defendants were directors or officers of the various corporate defendants in this case. The Complaint describes the securitization process in detail, states each Individual Defendants' position, and alleges that each Individual Defendant signed at least one Registration Statement, a step without which the securitization process could not have occurred. Compl. ¶¶ 31—41, 49—54. In addition to the extremely particular allegations of the Registration Statement signatures, the Complaint alleges generally that the Individual Defendants knew of the alleged fraud and "directed, supervised and otherwise knew of the abandonment of underwriting [*14]practices and the utilization of improper appraisal methods; the inaccuracy of the ratings assigned by the rating agencies; and the failure to convey to the Issuing Trusts legal title to the underlying mortgages." Compl. ¶ 333.

Credit Suisse complains that this allegation of knowledge does not satisfy CPLR § 3016 (b) because it does not "clearly inform the defendant[s] with respect to the incident complained of and give notice of the allegations the plaintiff intends to prove." Fort Ann Cent. Sch. Dist. v Hogan, 206 AD2d 723, 724 (3d Dept 1994). However, given the wealth of detail in the Complaint regarding the securitization process, the alleged systematic failures of that process, and the alleged fraudulent misstatements, the Individual Defendants have more than enough information regarding the claims against them to mount their defense.

V.Negligent Misrepresentation

Credit Suisse argues that ABP's negligent misrepresentation claim fails to satisfy not only the Dutch statute of limitations, discussed above, but the New York statute of limitations as well. In general, the limitations period in New York for a claim of negligent misrepresentation is three years from the time the injury is sustained. Colon v Banco Popular N. Am., 59 AD3d 300 (1st Dept 2009); but see Fandy Corp. v Lung-Fong Chen, 262 AD2d 352, 352—53 (2d Dept 1999) (applying the six year limitations period for "an action for which no limitation is specifically prescribed by law," citing CPLR § 213 (1)). However, in some cases a court may apply the longer six year fraud limitations period, either (as argued by ABP) whenever that negligence claim is pled in conjunction with a fraud claim, or (as argued by Credit Suisse) only when that negligence claim sounds in fraud. Compare Colon, 59 AD3d at 300 (implying that the six year limitations period applies whenever the negligence claim is pled in the same action as a fraud claim) with Ackerman v Nat'l Prop. Analysts, Inc., 887 F Supp 494, 508 (SDNY 1992) (applying three-year period to negligent misrepresentation claim where securities fraud is asserted in the same action) and A.H.A. Gen. Constr., Inc. v Edelman P'ship, 291 AD2d 239 (1st Dept 2002) (same, for construction fraud). The cases on point are difficult to reconcile. However, because ABP's negligent misrepresentation claim fails on other grounds, the Court does not need to reach this issue.

A claim of negligent misrepresentation requires "(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information." J.A.O. Acquisition Corp. v Stavitsky, 8 NY3d 144, 148 (2007). A duty to impart correct information is "imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party." Greenberg, Trager & Herbst, LLP v HSBC Bank USA, 17 NY3d 565, 578 (2011) (quoting Kimmell v Schaefer, 89 NY2d 257, 263 (1996)).

ABP argues that Credit Suisse possessed superior knowledge or special expertise because it had superior knowledge of its own underwriting procedures, it alone was aware of the misstatements in the Offering Documents, and it alone had the ability to investigate the underlying loans. However, "a company's knowledge of the particulars of its own business is not the type of unique or specialized knowledge" that can create a duty. MBIA Ins. Co. v GMAC Mortg. LLC (MBIA v GMAC), 30 Misc 3d 856, 864 (NY Sup. Ct. 2010) (quotation omitted); See Batas v Prudential Ins. Co. of Am., 281 AD2d 260 (1st Dept 2001) (holding that "defendants' [*15]superior knowledge of their products" created no special relationship between an insurance company and its customers); Gusmao v GMT Grp., 35 Inc., No. 06-CV-5113, 2008 WL 2980039, at *15 (SDNY Aug. 1, 2008) (holding that although the sellers of a business had special and detailed knowledge of that business, that knowledge did not create a duty that could support a negligent misrepresentation claim). New York courts in other RMBS cases have held that "[m]ere possession of the loan files and servicing files does not create the type of specialized knowledge discussed in Kimmell." MBIA v GMAC, 30 Misc 3d at 865; see also MBIA Ins. Corp. v Residential Funding Co., 2009 NY Slip Op. 52662(U), 2009 WL 5178337, at *6 (NY Sup. Ct. Dec. 22, 2009). The types of special knowledge held by Credit Suisse in this case are not sufficient to create a duty.

In addition, there was no special relationship between Credit Suisse and ABP, such that Credit Suisse held a particular position of trust and confidence. In general, "a special relationship does not arise out of an ordinary arm's length business transaction between two parties." MBIA Ins. Corp. v Countrywide Home Loans, Inc., 87 AD3d 287, 296 (1st Dept 2011); see Aerolineas Galapagos, S.A. v Sundowner Alexandria, LLC, 74 AD3d 652 (1st Dept 2010); ESE Funding SPC Ltd. v Morgan Stanley, 68 AD3d 676 (1st Dept 2009). The number of transactions and length of the relationship between the parties are also insufficient to create such a relationship. MBIA v GMAC, 30 Misc 3d at 865. The transactions at issue in this case were arm's length interactions between two sophisticated entities, and did not create any duty which might support a claim of negligent misrepresentation.

VI.Punitive Damages

ABP includes in its Complaint a claim for punitive damages. Compl. ¶ 320. "It is well established law that punitive damages are not available for a private wrong," including "ordinary fraud." Mom's Bagels of New York, Inc. v Sig Greenebaum, Inc., 164 AD2d 820, 823 (1st Dept 1990) (citing Walker v Sheldon, 10 NY2d 401, 405 (1961)). Punitive damages may only be recovered in a fraud action where the fraud is "aimed at the public generally, is gross and involves high moral culpability." Walker, 10 NY2d at 405.

The facts alleged in the Complaint do not support a claim that Credit Suisse's alleged fraud was aimed at the public generally, as opposed to a relatively small set of sophisticated investors, nor do they support the claim that Credit Suisse demonstrated "such wanton dishonesty as to imply a criminal indifference to civil obligations." Walker, 10 NY2d at 405. Punitive damages in this situation are not warranted.

Conclusion

Accordingly, it is hereby

ORDERED that ABP's claims of negligent misrepresentation and punitive damages are dismissed; and it is further

ORDERED that Credit Suisse's Motion to Dismiss is denied as to all other claims.

Dated:November 30, 2012

ENTER:

/s/Melvin L. Schweitzer [*16]

J.S.C. Footnotes

Footnote 1: Credit Suisse does contest the timeliness of the negligent misrepresentation cause of action under New York's statute of limitations. It is not necessary to reach this question; see Part V, infra, for a discussion of ABP's negligent misrepresentation claim.

Footnote 2: ABP contests the translation of "prompt" and argues that a more correct phrasing would be "within a reasonable period." Tjittes Aff. ¶ 26; see Du Perron Rep. Aff. ¶ 39. The Court uses "prompt notice" as a shorthand for the standard of Article 7:23, while remaining mindful that the degree of urgency conveyed by the Dutch phrase may vary from that implied by "prompt."

Footnote 3: In addition, ABP argues that it could not have given notice of its claim before it had evidence that Credit Suisse made deliberate misstatements. This argument is not wholly convincing, as ABP could still have given notice of the material non-conformity of the Certificates to their Offering Documents even without evidence of scienter on the part of Credit Suisse. However, it does demonstrate the need for factual development. Only with evidence of what ABP knew, and when, regarding not only the qualities of the Certificates but also the underlying actions by Credit Suisse could a fact finder hope to judge when ABP should reasonably have given notice.

Footnote 4: Credit Suisse argues that the allegedly inflated owner occupancy levels reported in the Offering Documents are not false or misleading because the Offering Documents disclosed that the owner-occupancy figures were based solely on the borrowers' stated intention and were not independently verified by Credit Suisse. The disclosure that figures were not independently verified would not immunize Credit Suisse if it actually knew that the figures were false; however, the Court is unable to find facts supporting Credit Suisse's knowledge explicitly alleged in the Complaint. The alleged misstatements regarding owner occupancy levels, therefore, do not support a claim of fraud. However, ABP has pled numerous other misstatements which do support its claim.

Footnote 5: Credit Suisse argues that a decline in the value of the Certificates on the secondary market is not a cognizable injury because ABP knew that its investment might not be liquid. This argument relies on NECA-IBEW Health & Welfare Fund v Goldman, Sachs & Co., 743 F Supp 2d 288 (SDNY 2010), which has since been overruled by the Second Circuit. NECA-IBEW Health & Welfare Fund v Goldman Sachs & Co., 693 F3d 145, 165—67 (2d Cir 2012). The Second Circuit's decision in NECA-IBEW is of limited applicability because it construes § 11 of the Securities Act, but the Court can find no support for Credit Suisse's argument that a decline in value of the Certificates is not a cognizable injury in common law fraud claim.