Negligent Misrepresentation
Negligent misrepresentation is a cause of action based upon fraud and constitutes a tort. Kimmell v. Schaefer, 89 N.Y.2d 257 (1996). A claim for negligent misrepresentation differs from intentional fraud because it does not require the defendant to have actually “intended” to defraud the plaintiff. A negligent misrepresentation is sufficient. To take advantage of this relaxed standard, the plaintiff must allege a special relationship between it and the defendant. See Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011).
In Kortright Capital Partners LP v. Investcorp Investment Advisers Ltd., 16cv7619, NYLJ 1202792223825, at *1 (SDNY, Decided June 27, 2017), U.S. District Judge William Pauley sustained a claim of negligent misrepresentation asserted by a sophisticated party, while finding that most of the allegations were not well taken.
Facts of Kortright
In Kortright, plaintiff was a sophisticated investment advisor that managed capital for high net worth individuals and institutional investors. Plaintiff entered into a “project agreement” with the defendant — another investment advisor that had its own investor clients. Under the project agreement, the defendant invested in plaintiff $50 million of its own proprietary capital and $40 million of its clients’ capital. Defendant in turn was entitled to a share of plaintiff’s operating revenue, veto power over certain corporate transactions and access to plaintiff’s confidential information.
Plaintiff then entered into discussions to be acquired by an independent alternative asset management company called Man Group. After lengthy discussions over a span of 14 months, plaintiff and Man Group agreed upon a proposed transaction. Plaintiff sought defendant’s input before the agreement with Man Group was executed, and defendant indicated it wished to redeem its own proprietary capital before the acquisition, but that it would leave its clients’ capital with plaintiff.
Defendant withdrew its own funds from plaintiff and then plaintiff signed the acquisition deal with Man Group. The closing of the acquisition was conditioned on plaintiff bringing a minimum investment from defendant, which was dependent on defendant’s clients’ investment money staying with the acquiring entity. That was the problem.
Simultaneously with signing with Man Group, plaintiff entered into agreements revising its relationship with defendant, but those agreements did not specify a fixed term for maintaining its investment with plaintiff.
Plaintiff then sought defendant’s consent to transfer its investments to Man Group, as contemplated by the acquisition deal. Defendant provided that consent, then two days later revoked it because defendant needed its clients’ consent and those clients refused. Since the clients’ money was not going to follow Man Group, the condition to closing was not satisfied and Man Group bailed on the deal.
Stuck holding the bag, plaintiff and its co-founders sued defendant, asserting several claims, including negligent misrepresentation. The court summarized these allegations:
The Complaint alleges that [defendant] made multiple misrepresentations to [plaintiff] indicating its willingness to allow its clients’ investments in [plaintiff] to be transferred to the Man Group. Specifically, the Complaint alleges that [defendant] (1) provided false election forms, regarding its clients’ consent to the Man Transaction Agreement, (2) failed to disclose the need to obtain its clients’ consent for the Man Transaction, (3) permitted [plaintiff] to represent in its investor consent letters that [defendant] would remain invested with [defendant], (4) misrepresented that it supported the transfer of [plaintiff] funds into the Man Group in April 2016, and (5) misrepresented its willingness to commit to the Man Transaction by signing the Revenue Sharing Agreement and Termination Agreement. (Compl. ¶100.) [Plaintiff] alleges it relied on these statements in winding down its business and proceeding with the Man Transaction Agreement.
Analysis of Negligent Misrepresentation
Defendant moved to dismiss at the pleadings stage. The court noted the elements of a claim for negligent misrepresentation as follows:
To state a claim for negligent misrepresentation under New York law, the Complaint must allege:
(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 relied on it to his or her detriment.
Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 114 (2d Cir. 2012) (internal quotation marks omitted).
The court rejected most of the allegations because plaintiff had entered into the acquisition contract before certain alleged misrepresentations were made (so plaintiff could not have relied upon them to proceed with the transaction) and because plaintiff did not allege how the two-day period between defendant’s consent and revocation caused plaintiff to incur any additional cost in winding down.
The court did sustain the claim based upon its finding that plaintiff alleged that defendant negligently represented its willingness to participate in the Man Transaction while failing to explain that the transfer of defendant’s client capital was subject to client consent. The court found those statements were made with a degree definitiveness that led both parties to take action. The court noted that plaintiff structured the Man Transaction Agreement based on those representations, concluding: “Thus, construed in the light most favorable to [plaintiff], those statements reflected [defendant’s] then-present intention to participate in the transfer of the [plaintiff] funds to the Man Group — an intention on which both parties acted — not simply promises of future action.”
Special Relationship
Recognizing that a special relationship must be established to sustain the claim of negligent misrepresentation, the court found that plaintiff adequately alleged such because plaintiff and defendant “had ‘a closer degree of trust…than that of the ordinary buyer and seller.’ Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 788 (2d Cir. 2003). [Defendant] was [plaintiff’s] ‘self-proclaimed ‘strategic partner” and had special privileges, including the ability to veto numerous proposed actions by [plaintiff]. (Compl. ¶ 44-46, 97.) In addition, [defendant] had access to ‘virtually any and all information regarding the [plaintiff] funds’ (Compl. ¶ 44) and held itself out as a ‘partner,’ offering ‘sales and marketing support.’ (Compl. ¶ 34-35.)”
Somewhat more questionable, however, was the court’s conclusion that a special relationship was also established by the fact that only defendant would have known that its clients’ consent was necessary to transfer their investment money, so that showed “specialized knowledge” upon which the plaintiff was unaware. That issue was not terribly difficult to inquire about, and it appears plaintiff, a sophisticated party, could have easily discovered that during the discussions. The court nevertheless accepted it at face value on this motion to dismiss.
Observations
While the court barely sustained the negligent misrepresentation claim, it is obvious that plaintiff, a sophisticated investing firm, could have avoided its problems if it had done a better job during the negotiations in fleshing out the ability of defendant to provide its clients’ funds and in getting defendant’s commitments properly reduced to writing so that plaintiff could have been assured of satisfying the condition to closing.