Opinion ID: 806559
Heading Depth: 2
Heading Rank: 2

Heading: Rating Agency Claims

Text: Against the Rating Agencies, Anschutz alleges common law negligent misrepresentation based on the ratings assigned to the Dutch Harbor and Anchorage Finance ARS. The District Court held that Anschutz failed to state a claim for negligent misrepresentation under either New York or California law. See In re Merrill Lynch, 2011 WL 536437, at –13. Because we hold that New York law applies, and that Anschutz fails to state a negligent misrepresentation claim under New York law, we do not address Anschutz’s California law claim. 18
In multi-district litigation, we apply the choice-of-law rules from the transferor forum—in this case, California—to determine which state law controls. See Desiano v. Warner-Lambert & Co., 467 F.3d 85, 91 (2d Cir. 2006). California law prescribes a three-step “governmental interest” analysis to resolve choice-of-law questions. Kearney v. Salomon Smith Barney, Inc., 137 P.3d 914, 922 (Cal. 2006). At step one, the court determines whether the substantive laws of the competing jurisdictions are different. Id. If there is a difference, the court “examines each jurisdiction’s interest in the application of its own law under the circumstances of the particular case to determine whether a true conflict exists.” Id. Finally, if a “true conflict” exists, the court evaluates and compares “the nature and strength of the interest of each jurisdiction in the application of its own law to determine which state’s interest would be more impaired if its policy were subordinated to the policy of the other state.” Id. (internal quotation marks omitted). In this case, there is no dispute that New York and California law clearly diverge with respect to the elements of a negligent misrepresentation claim. As discussed below, New York negligent misrepresentation law requires the existence of a “special” or “privity-like” relationship that “impos[es] a duty on the defendant to impart correct information to the plaintiff.” See J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148 (2007). California courts have expressly rejected that requirement, holding that negligent misrepresentation claims may be brought against any person “who negligently supplies false information for the guidance of others in their business transactions” and “intends to supply the information for the benefit of one or more third parties.” Bily v. Arthur Young & Co., 834 P.2d 745, 757–58 (Cal. 1992) (internal quotation marks omitted). Because of the clear difference between New York and California law, we proceed to step two of the choice-of-law analysis by “examin[ing] each jurisdiction’s interest in the application of its own law.” Kearney, 137 P.3d at 922. 19 The New York contacts and interests in this case are considerable. Moody’s is a Delaware corporation with its principal place of business in New York. FAC ¶ 16. McGraw-Hill is a New York corporation with its principal place of business in New York. Id. ¶ 17. The ratings assigned to the relevant ARS were issued in New York, as the accompanying ratings announcements confirm. See Joint App’x 283–84 (Rubins Decl., Ex. A) (announcing Moody’s rating for Anchorage Finance ARS); id. 288, 291, 296 (Loewenson Decl., Exs. A–C) (announcing S&P rating for Anchorage Finance ARS); id. 300, 305 (Loewenson Decl., Exs. D–E) (announcing S&P rating for Dutch Harbor ARS). Given the strength of these contacts, the Ratings Agencies argue that New York has a long-standing interest in applying its own standards for negligence liability to the New York financial community. Rating Agencies Br. 14. By contrast, the only alleged connection with California is that the ARS were purchased through the San Francisco office of Credit Suisse.18 FAC ¶ 2. Nevertheless, Anschutz argues that California has a “fundamental interest” in protecting investors, even out-of-state investors, who purchased securities in California. Reply 13. To that end, Anschutz cites Diamond Multimedia for the proposition that California “has a clear and substantial interest in preventing fraudulent practices in this state.” 968 P.2d at 556. That proposition is certainly true—but it affords no help to Anschutz in this case. The FAC fails to allege any conduct by the Rating Agencies in California, much less any “fraudulent practices in [that] state.” Id. The FAC also fails to allege any injury to a California resident, any injury by a California resident, or any activity connected to the ratings that occurred in California. On these facts, the asserted California interest in protecting investors is highly attenuated, if not utterly dissipated. 18 Once again, the Anschutz briefs attempt to embellish the record on appeal by asserting that the ARS ratings “were intended to be (and were in fact) disseminated to potential investors in California,” and that Anschutz purchased the ARS “for its working capital account, which was also maintained in California.” Reply 14. No such allegations appear in the FAC. 20 Assuming arguendo that a “true conflict” exists between the interests asserted by both states, New York law still prevails. If New York’s policy of strictly limiting negligent misrepresentation claims to “privity-like” relationships is subordinated to California law, the result would clearly impair New York’s interest in defining the scope of negligence liability for professional conduct based in New York. Contrary to Anschutz’s assertions, these are not “generic” interests in the uniform application of New York law, but particular interests in regulating the New York-based conduct of New York-based defendants. Without a comparable nexus between this case and California, the impairment to California’s interests if New York law were applied is much less clear. Indeed, a holding that California’s interests prevail in this case would effectively make California law into national law for any negligent misrepresentation claim based on the purchase of securities through a broker’s California office. Such a holding would make no sense, especially when the countervailing interest is that of a state that has been the center of our country’s financial markets for more than a century. Accordingly, having “evaluate[d] and compare[d] the nature and strength of the interest of each jurisdiction in the application of its own law,” Kearney, 137 P.3d at 108, we conclude that New York law controls.19
To state a claim for negligent misrepresentation under New York law, the plaintiff must allege that “(1) the defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant made a false representation that he or she should have known was incorrect; (3) the information supplied in the representation was known by the defendant to be desired by the plaintiff for a serious purpose; (4) the plaintiff intended to rely and act upon it; and (5) the plaintiff reasonably 19 We recognize, once again, that the Northern District of California reached a different result in the parallel proceeding. Anschutz Corp., 785 F. Supp. 2d at 822. Because the District Court in that case did not appear to consider the strength of New York’s interest in protecting New York-based defendants for their New York-based conduct, we are not persuaded. 21 relied on it to his or her detriment.” Hydro Investors, Inc. v. Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000); see Eiseman v. State of New York, 70 N.Y.2d 175, 187–88 (1987). Under the “duty” element, “New York strictly limits negligent misrepresentation claims to situations involving ‘actual privity of contract between the parties or a relationship so close as to approach that of privity.’” In re Time Warner Inc. Secs. Litig., 9 F.3d 259, 271 (2d Cir. 1993) (quoting Ossining Union Free Sch. Dist. v. Anderson LaRocca Anderson, 73 N.Y.2d 417, 424 (1989)); see also J.A.O. Acquisition Corp., 8 N.Y.3d at 148 (“A claim for negligent misrepresentation requires the plaintiff to demonstrate . . . the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff.”). Anschutz has alleged no relationship or contact with the Rating Agencies that could remotely satisfy the New York standard. The primary authority Anschutz musters in support of its negligent misrepresentation claims is not to the contrary.20 LaSalle Nat’l Bank v. Duff & Phelps Credit Rating Co., 951 F. Supp. 1071, 1093–94 (S.D.N.Y. 1996). In LaSalle, a case decided under the pleading standards abrogated by the Supreme Court in Iqbal and Twombly,21 the complaint contained allegations of direct communication between six of the twenty-six plaintiffs and the rating agency, which “evidence[d] an intent to assure plaintiffs of the validity of the rating and influence plaintiffs to purchase the Bonds.” Id. at 1094. Here, there are no allegations of any direct contact between Anschutz and the Rating Agencies. We therefore conclude that Anschutz has failed to state a claim for negligent misrepresentation under New York law. 20 The other two cases Anschutz cites in its opening brief are clearly inapposite. In Abu Dhabi Comm. Bank v. Morgan Stanley & Co., 651 F. Supp. 2d 155 (S.D.N.Y. 2009), the district court did not reach the duty element, because it held that the negligent misrepresentation claim was preempted by New York’s Martin Act. Id. at 181–82. In Duke v. Touche Ross & Co., 765 F. Supp. 69 (S.D.N.Y. 2001) which did not involve credit rating agencies, the complaint contained allegations that the defendant accounting firm had directly solicited the investments of several plaintiffs. Id. at 77. 21 LaSalle Nat’l Bank, 951 F. Supp. at 1080–81; cf. Aschroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). 22 For the foregoing reasons, we conclude that New York law controls, and that Anschutz fails to state a claim for negligent misrepresentation under New York law. We therefore affirm the decision of the District Court to dismiss the negligent misrepresentation claims against the Rating Agencies.