IDT Corp. v Morgan Stanley Dean Witter & Co.

[*1] IDT Corp. v Morgan Stanley Dean Witter & Co. 2007 NY Slip Op 51591(U) [16 Misc 3d 1127(A)] Decided on July 10, 2007 Supreme Court, New York County Cahn, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 July 10, 2007
Supreme Court, New York County

IDT Corporation, Plaintiff,

against

Morgan Stanley Dean Witter & Co. and Morgan Stanley & Co., Inc., Defendants.



603710/04

Herman Cahn, J.

Plaintiff moves for leave to serve an amended complaint, CPLR 3025(b). Defendant cross-moves, seeking to have the court delay deciding the motion until an appeal of a prior decision in this action, is decided by the Appellate Division.

Defendants Morgan Stanley Dean Witter & Co. and Morgan Stanley & Co., Inc. (collectively, Morgan Stanley) had previously made a pre-answer motion to dismiss the complaint in this action. By decision dated April 10, 2006, the court granted the motion only to the extent of dismissing the third cause of action, and otherwise denied it. Morgan Stanley appealed the decision to the Appellate Decision. The appeal is still pending. IDT now moves to amend its complaint to add two new causes of action. Morgan Stanley seeks to have the motion held in abeyance pending the determination of its appeal.

Morgan Stanley was the investment banker for IDT. The complaint alleges that Morgan Stanley improperly shared confidential information about IDT with another Morgan Stanley client, Telefonica Internacional, S.A. (Telefonica), and used improper means, including disparaging IDT, to induce Telefonica to breach its contract with IDT. Allegedly, Morgan Stanley engaged in this conduct to encourage Telefonica to contract with other Morgan Stanley clients, and thereby enable Morgan Stanley to earn tens of millions of dollars in banking and other fees.

In December 2001, IDT and Telefonica were in an arbitration proceeding. IDT served Morgan Stanley with a subpoena seeking various documents. In response, Morgan Stanley produced over 2,000 pages of documents and claimed that it could not find any additional documents responsive to the request. The arbitrators eventually found that Telefonica had breached its contract with IDT.

On November 4, 2004, IDT filed the instant complaint, asserting causes of action for breach of fiduciary duty, intentional interference with contract, intentional interference with prospective business relations, misappropriation of confidential and proprietary business information and unjust enrichment. Morgan Stanley's CPLR 3211 motion was granted to the extent of dismissing the cause of action for intentional interference with prospective business relations. The balance of the motion was denied. Morgan Stanley appealed. While the appeal is pending, disclosure has continued. [*2]

IDT sought documents from Morgan Stanley, via a request similar to the subpoena in the arbitration. A court-ordered search of Morgan Stanley's electronic files produced two previously unproduced documents which, IDT claims, show that Morgan Stanley induced Telefonica to breach its contract with IDT and replace IDT with another Morgan Stanley client. These documents were discovered on October 17, 2006. IDT alleges that Morgan Stanley should have produced these documents in response to the earlier subpoena in the arbitration.

IDT now moves to amend its complaint by adding two causes of action based on the newly-found documents, fraudulent misrepresentation and fraudulent concealment. IDT alleges that Morgan Stanley deliberately failed to produce these documents in the arbitration proceeding and that the concealment prevented IDT from fully prosecuting its claims in the arbitration.

On January 7, 2007, IDT moved in the Appellate Division for permission to supplement the record on appeal with the newly discovered documents.

Morgan Stanley argues that IDT should not be allowed to amend its complaint until the appeal is decided. An amended complaint supersedes the original complaint and becomes the only complaint in the action (see Hummingbird Assoc. v Dix Auto Serv., Inc.,273 AD2d 58, 58 [1st Dept 2000]; Halmar Distributors, Inc. v Approved Mfg. Corp., 49 AD2d 841, 841 [1st Dept 1975]).

Morgan Stanley contends that if IDT is allowed to serve and file the amended complaint, and the Appellate Division then declines to decide the appeal due to the filing, Morgan Stanley will move again to dismiss the entire complaint, leading to a new round of briefings, and a fresh appeal if Morgan Stanley's new motion is denied. It argues that this would constitute a waste of judicial resources.

The filing of an amended complaint does not automatically moot an appeal of a decision on a motion to dismiss the original complaint (see Pier 59 Studios L.P. v Chelsea Piers L.P., 27 AD3d 217, 217 [1st Dept 2006]; American Express Travel Related Services Co. v North Atlantic Resources, Inc., 261 AD2d 310, 310 [1st Dept 1999]). If the amended complaint completely alters the original complaint, the appeal might be pointless because the allegations in the original complaint are no more. But if the amended complaint does not change the portion of the complaint that is the subject of the appeal, the appeal can continue. In Munn v New York City Hous. Auth. (202 AD2d 210, 211 [1st Dept 1994]), the amended complaint added a new cause of action, but did not substantively alter the original complaint. Therefore, the Appellate Division could still determine the appeal based on the original complaint, and the filing of an amended complaint did not moot the appeal (see also EDP Hosp. Computer Sys. v Bronx-Lebanon Hosp. Ctr., 212 AD2d 570, 571 [2d Dept 1995]; Vanderwoude v Post/Rockland Assoc.,130 AD2d 739, 740 [2d Dept 1987]).

Munn cites to Anthony J. Demarco, Jr., P.C. v Bay Ridge Car World, Ltd. (169 AD2d 808, 809 [2d Dept 1991]), in which the Second Department rejected a plaintiff's contention that service of the amended complaint rendered the appeal moot. The court noted that the amended complaint added new parties and a new cause of action, but did not substantively alter the original complaint. Therefore, a determination based on the appeal from the original complaint would still affect the parties' rights.

In contrast, in O'Ferral v City of New York (8 AD3d 457, 459 [2d Dept 2004]), the appeal from the original complaint was held to be academic in regard to a cause of action in the original complaint that was not in the amended complaint. Since the amended complaint superseded the [*3]original complaint, the cause of action found only in the original was no longer a part of the action.

The rules as to when an amended complaint moots an appeal addressed to the original complaint are not hard and fast. The case of Velez v Feinstein (87 AD2d 309, 312-313 [1st Dept 1982]) presents an exception to the general rule that there must be substantive similarity between the original and amended cases in order not to render the appeal from the original complaint moot. Although the facts in that case differ from those in the instant action, the court's determination is instructive regarding the conditions under which an amended complaint does not moot an appeal from a previous complaint and does not signify an abandonment of the appeal. While acknowledging that, technically, the amended complaint superseded the complaint that was the subject of the appeal, the court found that equitable grounds required that the appeal continue.

Here, the proposed amended complaint contains the same allegations as the original complaint. It differs in adding two new causes of action and the allegations that accompany those causes of action. The claims that are the subject of the appeal remain. The serving and filing of the proposed amended complaint shall not moot the appeal from the original complaint. Therefore, the pendency of the appeal addressed to the original complaint does not deprive plaintiff of its right to file an amended complaint.

Morgan Stanley also argues that IDT should not be given leave to serve an amended complaint as its proposed causes of action lack merit. Leave to amend a pleading should be "freely given" (CPLR 3025 [b]), as a matter of discretion in the absence of prejudice or surprise (Oil Heat Inst. of Long Island Ins. Trust v RMTS Assoc., LLC, 4 AD3d 290, 293 [1st Dept 2004]; Stroock & Stroock & Lavan v Beltramini, 157 AD2d 590, 591 [1st Dept 1990]). At the same time, in order to conserve judicial resources, examination of the underlying merit of the proposed amendment is mandated (Megaris Furs, Inc. v Gimbel Bros., Inc.,172 AD2d 209, 209 [1st Dept 1991]).

Morgan Stanley contends that IDT's new claims are legally deficient because IDT cannot demonstrate that it suffered any harm as a result of not having the documents during the arbitration with Telefonica. The newly discovered documents would not have been relevant to the disposition of the arbitration. Without seeing the documents, the arbitrators found in IDT's favor and determined that Telefonica breached its contract with IDT. Morgan Stanley thus argues that the arbitrators were not concerned about what Telefonica's motives for the breach were, which is what the documents allegedly concern.

IDT replies that while the arbitrators may have been indifferent to Telefonica's motives, they were interested in establishing when the breach took place, because billions of dollars turned on the date of the breach. IDT suggests that the documents would have helped to establish the date of the breach.

Morgan Stanley also contends that the information in the new documents is cumulative because it has already produced material that conveys the same information. IDT replies that the two documents are more specific than any others, in that these documents reveal Morgan Stanley explicitly advising Telefonica to replace IDT.

The elements of fraud are representation of a material existing fact, falsity, scienter, deception and injury (Megaris Furs, Inc., 172 AD2d at 209). The elements of fraudulent concealment are the same, with the addition that the party charged with fraud must have had a [*4]duty to disclose material information, due to being a fiduciary of the party alleging fraud, and failed to do so (P.T. Bank Cent. Asia v ABN AMRO Bank N.V., 301 AD2d 373, 376 [1st Dept 2003]; see also Kaufman v Cohen, 307 AD2d 113, 119-120 [1st Dept 2003]).

Here, IDT sufficiently alleges that Morgan Stanley misrepresented its compliance with the subpoena in the arbitration, that Morgan Stanley did so intentionally to undermine IDT's claims in the arbitration, that IDT relied on Morgan Stanley to comply with the subpoena and that the non-compliance and misrepresentation caused IDT injury. It also alleges that Morgan Stanley concealed information requested by the subpoena and thereby caused IDT to sustain damages. These claims sufficiently state causes of action.

The motion to serve an amended complaint is granted. Morgan Stanley's cross motion is denied.

It is

ORDERED that plaintiff's motion for leave to serve an amended complaint is granted and the amended complaint attached to plaintiff's motion is deemed served and filed as of this date; and it is further

ORDERED that defendants are directed to serve an answer to the complaint within 10 days after service of a copy of this order with notice of entry upon their attorneys; and it is further

ORDERED that defendants' cross motion to stay consideration of plaintiff's motion is denied.

Dated: July 10, 2007

ENTER:

___________/S/___________________

J.S.C.