Opinion ID: 6976547
Heading Depth: 2
Heading Rank: 2

Heading: Dismissal of IOF’s Claims

Text: This claim was that by statements made in its offering brochures (“Brochures”) and a later document styled “Derivative Portfolio” (“Portfolio”), DLJ had expressly warranted to IOF that if purchased in recommended combinations, the twelve CMOs in issue would outperform Treasury notes within a specified range of interest rates. It is undisputed that the CMOs did not perform as allegedly warranted. The district court dismissed this claim on two legal grounds: (1) that the statements alleged to be warranties were only “puffery and expressions of opinion,” and “not express warranties,” and (2) that, in any event, the statements were made before and never incorporated into any enforceable contract of sale. (J.A. at 756-57.) We affirm that ruling on the second ground, and for the following reasons. An express warranty arises as to securities being purchased when the seller directly affirms the quality or condition of the investment, the affirmation tends to induce the buyer’s purchase, and the buyer purchases relying upon it. See Shippen v. Bowen, 122 U.S. 575, 7 S.Ct. 1283, 30 L.Ed. 1172 (1887). Here, the Portfolio was not created until April, 1990, after all but two of the twelve transactions at issue were consummated. Representations in the Portfolio therefore could not have induced transactions that occurred before the Portfolio had been created. In any event, neither the Portfolio nor the Brochures, alone or together, could have formed the basis for enforceable agreements between the parties, and the buy-sell agreements finally consummated expressly disclaimed any intention that earlier representations should have any legal effect. To explain this legal conclusion requires a description of DLJ’s customary process for marketing CMOs as known in the trade at relevant times and as used in the transactions at issue. DLJ’s process began by developing a possible structure for the investment. (J.A. 191.) Once the hypothetical structure was created, DLJ gauged customer interest in the investment by preparing and circulating brochures to potential buyers. (Id. at 192.) The brochures contained “a few bullet-points” describing only “the basic elements of [the] hypothetical structure.” (Id.) Since the brochures predated the actual creation of the security, they frequently did not identify such basic information as the original face amount or principal amount of the proposed security; the formula for determining interest coupons; the asking price for the security or the closing date for the securitization of the overall deal; the settlement date for the security; nor any other pricing information with respect to the proposed security. (Id.) With one exception, all of the Brochures at issue here conformed to this general format. 3 The fact that a brochure had been prepared for a security did not guarantee that the security would be created or that it would be created as described. (Id. at 193.) Based on customer response, DLJ might modify the security or decide not to create it at all. (Id.) Having received the brochures, potential customers notified DLJ of their interest in the security. (Id.) In at least one of IOF’s transactions with DLJ, IOF indicated its interest by submitting a letter of intent to DLJ. (Id. at 335.) If DLJ decided to go ahead and create the security, it produced an Offering Circular or Prospectus, providing a detailed description of the “nature and final structure of [the] security.” (Id. at 193-94.) 4 Generally, Offering Circulars or Prospectuses were forwarded to the customer a week or so before settlement date, (id. at 327-29), the date on which the sale was consummated. (Id. at 194.) Until settlement date, the buyer was free to cancel Ms proposed purchase. (Id. at 235-36.) In the transactions at issue here, the Offering Circulars and Prospectuses expressly warn of the interest rate and prepayment risks associated with the investments. One prospectus stated, for example, that yields are “Mghly sensitive” to the prevailing interest rate and the rate of principal payments (including prepayments) on the underlying mortgages and that “[h]igh prevailing levels of the Inflation Rate and/or a rapid rate of principal payments ... will materially decrease the yield to Investors....” (Id. at 452 (emphasis in original).) The document further warned that investors “should frilly consider the associated risks, including the risk that Mgh prevailing levels of the Inflation Rate and/or a rapid rate of principal payments ... could result in the failure of investors ... to recoup their initial investment.” (Id. (emphasis in original).) And, it further stated that “[n]o representation is made as to the anticipated rate of prepayments on such mortgage loans, any anticipated levels of the Inflation Rate or the anticipated yield to maturity....” (Id. (emphasis in original).) The Offering Circulars contained similar warnings. (See, e.g., id. at 381). Finally, both the Offering Circulars and the Prospectuses disavowed any intended legal effect for any outside representations. The Offering Circulars stated: “No dealer, salesperson or other person has been authorized to give any information or to make any representations ... other than those contained in this Offering Circular ..., and if given or made, such information or representations must not be relied upon as having been authorized....” (Id. at 382, 389, 404, 411, 432, 443 (emphasis in originals).) Similarly, the Prospectuses stated: “No person has been authorized to give any information or to make any representations other than those contained in tMs Prospectus Supplement and the accompanying Prospectus in connection with the offer made hereby, and, if given or made, such information or representations must not be relied upon.” (Id. at 401 (emphasis in original).) 5 Viewing the negotiations as a whole, we conclude as a matter of law that the Offering Circulars and Prospectuses constituted the first communications between the parties having the requisite degree of specificity and definiteness to constitute valid offers. See Concilla v. May, 214 A.D.2d 848, 849, 625 N.Y.S.2d 346, 348 (3d Dep’t)(“It is recognized that an offer is the manifestation of willingness to enter into a bargain and that it must be definite and certain.”); see also 1 Richard A. Lord, Williston on Contracts § 4:18, at 414 (4th ed. 1990)(“It is a necessary requirement that an agreement, in order to be binding, must be sufficiently definite to enable the courts to give it an exact meaning.”); Restatement (Second) of Contracts § 33(1) (1981)(“Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.”). 6 IOF accepted the terms proposed by DLJ in the Offering Circulars and Prospectuses by choosing to go forward to settlement instead of exercising its option to cancel. Thus, the Offering Circulars and Prospectuses, and not the Brochures, define the consummated buy-sell agreements between the parties. The Offering Circulars and Prospectuses do not contain any warranties and expressly disavow any outside representations. Representations made in the Brochures and Portfolio, therefore, could not constitute enforceable warranties incident to contractual agreements between the parties. IOF’s breach of express warranty claim was therefore properly dismissed.
The gravamen of these claims was that both parties proceeded to- contract under material mistakes of fact respecting the performance predictions made by DLJ in the Brochures and Portfolio. The district court dismissed both claims on various grounds, including that the remedy sought, rescission, was not available in view of IOF’s sale of all the CMOs at issue. Without disavowing any of the district court’s stated grounds for decision, we affirm its dismissal of these claims for the following reason. As a basic proposition, a contract is made voidable by either unilateral or mutual mistake only where the asserted mistake concerns “a basic assumption on which the contract was made.” Restatement (Second) of Contracts § 152 (mutual mistake); id. § 153 (unilateral mistake). Given the fact that, as earlier noted, the contract here in issue expressly disavowed any legal effect for representations made in the Brochures or Portfolio, they could not have constituted “basic assumptions” as to which contract-avoiding mistakes could have been made — either by IOF unilaterally or by the parties mutually. The district court properly dismissed these claims.
This claim, based on the alleged misrepresentations of anticipated CMO performances in the Brochures was dismissed by the district court for lack of reasonable reliance by IOF. We affirm. The familiar elements of a fraudulent misrepresentation claim are that: (1) the defendant made a material false representation; (2) the defendant intended to defraud the plaintiff thereby; (3) the plaintiff reasonably relied upon the representation; and (4) the plaintiff suffered damage as a result of such reliance. See Banque Arabe et Internationale D’Investissement v. Maryland Nat. Bank, 57 F.3d 146, 153 (2d Cir.1995) (applying New York law). Here, just as they precluded recovery for breach of warranty, the warnings in the Offering Circulars and Prospectuses regarding the risks associated with the investments and the provisions in those documents disavowing any outside representations preclude a finding that IOF reasonably relied upon them in purchasing the CMOs. The district court properly dismissed this claim on that basis.

The district court dismissed this claim on the basis that quasi contract does not lie where, as here, there is a valid contract between the parties respecting the matter at issue. We affirm the dismissal on that basis. See Clark-Fitzpatrick, Inc. v. Long Island R.R. Co., 70 N.Y.2d 382, 388-89, 516 N.E.2d 190, 193, 521 N.Y.S.2d 653, 656 (1987).
In this claim, IOF alleged that by reason of DLJ’s greatly superior sophistication and knowledge of the subject matter, their broker-customer relationship gave rise to a fiduciary duty on DLJ’s part that was breached both by DLJ’s failure properly to advise IOF of the risks associated with the CMO purchases and by the concealed payments to Boothe. The district court dismissed this claim on the basis that, as a matter of law, the broker-customer relationship created no general fiduciary duty that could be breached in either of the ways alleged. We agree. 7 Under New York law, as generally, there is no general fiduciary duty inherent in an ordinary broker/customer relationship. See Perl v. Smith Barney Inc., 230 A.D.2d 664, 666, 646 N.Y.S.2d 678, 680 (1st Dep’t). Such a duty can arise only where the customer has delegated discretionary trading authority to the broker. See Press v. Chemical Inv. Servs. Corp., 988 F.Supp. 375, 386-87 (S.D.N.Y.1997). IOF’s accounts with DLJ were not, however, discretionary and where the customer maintains a nondiscretionary account, the broker’s duties are quite limited. For example, where the terms of a nondis-cretionary account require the customer’s authorization on all transactions, a broker has a fiduciary duty to notify the customer before making sales. See Conway v. Icahn & Co., 16 F.3d 504, 510 (2d Cir.1994). And, a broker on a nondiscretionary account has the duty to execute requested trades. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir.1991). But IOF’s claim relates to no such limited duties and its nondiscretionary account did not give rise to the much broader, general fiduciary duty on which the claim depends. The district court therefore properly dismissed the claim as it pertained both to DLJ’s negotiation conduct and to its concealed payments to Boothe. e. Breach of implied covenant of good faith and fair dealing In this claim, as in the breach of fiduciary duty claim, IOF alleged breach of the implied covenant both by DLJ’s negotiation conduct and by its concealed payments to Boothe. In addition to challenging as a matter of law the existence of such an implied covenant, DLJ raised by its summary judgment motion a statute of limitations defense. The district court, expressing reservations as to whether under New York law such an implied covenant can be found except in respect of ongoing duties imposed by an executed contract, see, e.g., Bissell v. Merrill Lynch & Co., 937 F.Supp. 237, 247-48 (S.D.N.Y.1996), nevertheless thought that two state court decisions indicated that such an implied covenant might arise from bribes given not to influence contract performance, but to induce its execution. 8 Accordingly, the court held that to the extent the breach of covenant claim was based upon the concealed payments to Boothe, the claim was a viable one. But, the court then held, cryptically, that the claim was barred by the applicable state statute of limitations. (J.A. at 760). We believe the claim should have been dismissed on the basis that, as the district court recognized might be the rule, such an implied covenant relates only to the perfor-manee of obligations under an extant contract, and not to any pre-contract conduct. The two state court decisions which the district court thought might recognize a pre-contract bribery exception to this general rule seem to us doubtful authority for that proposition. We therefore affirm dismissal of this claim on the ground that the implied covenant of good faith and fair dealing does not apply to any of the pre-contract conduct on which the claim was based. 9 d. Inducing breach of fiduciary duty In this claim, rested solely on the allegations of DLJ’s concealed payments to Boothe, IOF alleged that, as intended, the payments suborned Boothe’s breach of fiduciary duty to IOF by causing him to select the CMOs on which IOF sustained loss. By its summary judgment motion, DLJ contended that IOF’s allegations and supporting materials would not support the inference that DLJ’s payments into the IOF-Boothe account constituted “bribery,” or that, even if so, they caused the CMO purchases and resulting loss to IOF. In addition, DLJ raised a statute of limitations defense to the claim, contending that because the last alleged bribe payment was made on December 7, 1989, and the claim was first made by amended complaint on May 31, 1996, it was barred by New York’s three-year statute, N.Y. C.P.L.R. § 214(4) (McKinney 1998). Responding, IOF contended that the applicable limitations period was the six-year default period provided by N.Y. C.P.L.R. § 213(1), and that because the amended complaint should relate back under Fed.R.Civ.P. 15(c) to the filing of the original complaint on April 14, 1995, the claim was timely filed. Alternatively, IOF contended that the claim was saved by equitable tolling based upon DLJ’s deliberate concealment from IOF of the IOF-Boothe account, the payments made through it to Boothe, and its unilateral cancellation following Boothe’s death. The district court, finding the three-year statute applicable, dismissed the claim as time-barred. It gave short shrift to the relation-back and equitable estoppel contentions. The former was rejected without discussion; the latter, on the basis of IOF’s lack of diligence in bringing the claim. (J.A. 759 n. 11, 760 n. 12.) IOF contends on appeal that the district court erred in dismissing this claim by summary judgment on statute of limitations grounds. DLJ defends the dismissal on that ground and, alternatively, on the ground, raised below, that the necessary causal connection between the Boothe payments and the CMO purchases could not be inferred on the summary judgment record. We agree with IOF that on the record we review there are genuine issues of material fact that preclude dismissal either on statute of limitations or causal connection grounds.
Initially, we agree with the district court that the applicable statutory period for this claim is the three-year period provided by N.Y. C.P.L.R. § 214(4). Applying the rule that “choice of the applicable Statute of Limitations depends on the substantive remedy which the plaintiff seeks,” Loengard v. Santa Fe Indus., Inc., 70 N.Y.2d 262, 266, 514 N.E.2d 113, 115, 519 N.Y.S.2d 801, 803 (1987), a breach of fiduciary duty claim seeking money damages to compensate for the decline in the value of investments has been held subject to this three-year statute.. See Geren v. Quantum, Chem. Corp., 832 F.Supp. 728, 735-36 (S.D.N.Y.1993). We see no reason why this rule should not apply to a claim seeking monetary relief for inducing a breach of fiduciary duty such as IOF’s. This being the applicable limitations period, IOF’s claim is time-barred as a matter of law unless saved by relation-back or estoppel. DLJ’s last alleged act of bribery occurred, at the latest, on December 7,1989, the settlement date of the final trade in the IOF-Boothe account. The last CMO purchases settled on April 30,1990. The amended complaint was not filed until May 31, 1996. Regardless of whether the statute of limitations began to run in December of 1989 or April of 1990, IOF’s claim is therefore untimely. Since the original complaint was not filed until April 14, 1995, it too was filed outside the applicable limitations period and relation back under Rule 15(c), even if otherwise appropriate, could not save the claim. Whether it may be saved, however, by equitable tolling, is another matter. On that, we believe there are genuine issues of material fact that made erroneous on a summary judgment motion the district court’s rejection of this basis for avoiding the limitations defense. Under New York law, as generally, a party may be estopped from raising a statute of limitations defense where his fraud, concealment, or deception prevented the plaintiff from timely filing his claim. See Simcuski v. Saeli, 44 N.Y.2d 442, 448-49, 377 N.E.2d 713, 716, 406 N.Y.S.2d 259, 262 (1978). Here, undisputed facts on the summary judgment record reveal the following. In 1989, Boothe engaged in at least six “trades” in the IOF-Boothe account through DLJ, netting a profit of $33,860. (J.A. at 598.) The trades were “day trades” in corporate bonds; the face amount of the bonds involved in each trade equaled $2,000,000.00. DLJ did not require Boothe to put up any of his own money to effect the trades and every trade resulted in a profit. (Id. at 593, 598-99.) 10 IOF has no record of receiving the proceeds from the trades. (Id. at 583.) Although the IOF-Boothe account was opened in the name of IOF, IOF has no record of the account. (Id.) DLJ’s Compliance Manual requires that before opening any corporate cash account, it must have a corporate resolution authorizing the account and designating at least two corporate officers who have authority to place orders, transact business, and issue instructions regarding the account. (Id. at 595.) So far as appears, DLJ did not obtain the required resolution. (Id. at 596.) Also, according to DLJ’s Compliance Manual, DLJ should have sent duplicate confirmations of the trades to IOF. (Id. at 596.) IOF has no record of receiving duplicate confirmations. (Id. at 583.) DLJ closed the IOF-Boothe account on March 26,1990, seven days after Boothe’s death. (Id. at 603.) IOF never instructed DLJ to take this action. (Id. at 583.) When pressed at oral argument on this appeal as to why DLJ closed the account, counsel for DLJ responded only that there was no explanation in the record. In every year relevant to IOF’s bribery allegation, Boothe signed an IOF Code of Ethics statement indicating that neither he nor his family received any article of value or cash from any organization doing business with IOF. (Id. at 562-67.) IOF did not learn of the IOF-Boothe account until March 17, 1995. (Id. at 679.) Based on these undisputed facts, we conclude that there is a genuine issue of material fact regarding whether, by the process used by DLJ’s agents in opening, using and finally closing the IOF-Boothe account without authorization or explanation, DLJ concealed the very existence of the account and thus prevented IOF from timely filing its bribery-related claim. DLJ suggests that equitable estoppel cannot apply because IOF failed to exercise due diligence in filing its amended complaint after learning of the IOF-Boothe account. See generally Simcuski, 44 N.Y.2d at 450, 377 N.E.2d at 717, 406 N.Y.S.2d at 263 (“due diligence on the part of the plaintiff in bringing his action is an essential element for the applicability of the doctrine of equitable es-toppel”). It is undisputed that IOF did not discover any information regarding the IOF-Boothe account until March 17, 1995. According to IOF’s counsel (as stated in a sworn affidavit) the initial information obtained regarding the IOF-Boothe account was insufficient, in light of counsel’s obligations under Fed.R.Civ.P. 11, to immediately assert a bribery claim. (J.A. 679.) Instead, after learning of the existence of the account, counsel for IOF, on May 3, 1995, served a Fed.R.Civ.P. 34 document demand on DLJ, requesting all records concerning the transactions in the IOF-Boothe account. (Id. at 679-80.) In the spring of 1996, IOF obtained the requested documents, which it determined would support a bribery claim. (Id. at 680.) The amended complaint was filed on May 31, 1996. We think these facts of record create a genuine issue of material fact regarding IOF’s due diligence in filing this claim. With both DLJ’s deliberate concealment of the facts necessary to support the claim and IOF’s diligence in pursuing it once discovered thus in genuine issue, the district court erred in deciding the equitable estoppel issue against IOF as a matter of law.
DLJ contends, as an alternative basis for affirming dismissal of this claim, that as a matter of law on the summary judgment record, it could not be inferred either that the payments into the IOF-Boothe account were “bribes,” or that they induced the CMO purchases and resulting loss to IOF. We disagree. The elements of a claim for inducing breach of fiduciary duty under New York law are; (1) a breach by a fiduciary of obligations to another; (2) that the defendant knowingly induced or participated in the breach; and (3) that the plaintiff suffered damages as a result of the breach. See Whitney v. Citi bank, N.A., 782 F.2d 1106, 1115 (2d Cir.1986). DLJ first contends that it could not reasonably be inferred from the summary judgment materials before the court that the six transactions in the IOF-Boothe account were causally connected to the CMO purchases, given the hundreds of other trades Boothe executed with DLJ during the same period. We disagree. The record discloses a close temporal link between the DLJ “deposits” into the IOF-Boothe account _ and most of the CMO transactions at issue here. Specifically, the record reveals that: (1) on May 25, 1989, DLJ deposited $6,000 into the IOF-Boothe account; one week later, on June 1,1989, Boothe purchased FHLMC 54-H and DLJ 2 89-F; on June 14, 1989, two weeks before settlement of the CMOs, DLJ deposited another $5,000 into the IOF-Boothe account; (2) on October 3, 1989, DLJ deposited $2,500 into the IOF-Boothe account; one week later, Boothe purchased FHLMC 100N CMO; (3) on November 14, 1989, DLJ deposited $4,420 into the IOF-Boothe account; one week later, Boothe purchased FHLMC 113 R and FHLMC 113 RS; (4) on November 16, 1989, DLJ deposited $10,000 into the IOF-Boothe account; twelve days later, Boothe purchased FHLMC 23 K; and (5) on December 7, 1989, DLJ deposited $5,940 into the IOF-Boothe account; five days later, Boothe purchased FHLMC 19 L. (J.A. 598-99, 669.) While this temporal connection might be found purely coincidental or otherwise irrelevant to the asserted bribery of Boothe, we conclude that it suffices to create a genuine issue of material fact as to the requisite causation element. DLJ also contends that the summary judgment materials would not support a finding that the payments into the IOF-Boothe account were in any event intended and made to induce Boothe to purchase the CMOs. Again, we disagree. The following facts are undisputed on the record. Although the account was set up in IOF’s name, the formalities for establishing such an account were not followed. IOF never received duplicate confirmations of the trades. Boothe was allowed to make the trades without putting up any funds. Every trade resulted in a “profit.” There was a close temporal link between a number of the CMO purchases and the deposits into the account. The account was closed, without instruction from IOF, seven days after Boothe’s death. Again, a finder of fact might well determine that these facts were explainable on grounds not indicative of bribery, but we conclude that they raise genuine issues respecting the matter that made summary judgment improper. 11