Opinion ID: 6976547
Heading Depth: 3
Heading Rank: 1

Heading: Claims based solely on DJL’s negotiation conduct

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.