Opinion
No. 500540/2013.
02-22-2016
BARKANY ASSET RECOVERY & MANAGEMENT, LLC, Plaintiff, v. SOUTHWEST SECURITIES INC., Leighton Stallones, and SSJ Development, LLC, Defendants.
Heller, Horowitz & Feit, P.C. New York, NY, Attorneys for Plaintiff. Brunelle & Hadjikow, P.C. New York, NY, Jackson Walker LLP, Dallas, TX, Attorneys for Defendants.
Heller, Horowitz & Feit, P.C. New York, NY, Attorneys for Plaintiff.
Brunelle & Hadjikow, P.C. New York, NY, Jackson Walker LLP, Dallas, TX, Attorneys for Defendants.
CAROLYN E. DEMAREST, J.
In this action by plaintiff Barkany Asset Recovery & Management, LLC (plaintiff) against defendants Southwest Securities Inc. (Southwest), Leighton Stallones (Stallones), and SSJ Development, LLC (SSJ), plaintiff moves, under motion sequence number four, for an order, pursuant to CPLR 3212, granting it summary judgment on its causes of action for fraud, negligent misrepresentation, and breach of contract as against Southwest in the principal amount of $820,000, together with interest, based upon the ground that there is no material issue of fact with respect to its right to recover such judgment as a matter of law. Defendants oppose the motion but have not moved for affirmative relief in their favor.
BACKGROUND
Non-party Pratt Foreclosures, LLC (Pratt) is a New York limited liability company, whose members are Gershon Barkany (Barkany) and the wife of Moshe Schreiber (Schreiber), and whose manager is Schreiber. SSJ is a New York limited liability company, whose managing member is Stephen J. Jemal (Jemal), who controlled its affairs. Southwest is a Texas corporation engaged in the business of providing retail securities brokerage services to customers throughout the United States. Stallones was a senior broker and a vice-president of Southwest.
During 2008, Jemal approached Schreiber and Barkany and requested a short term loan from Pratt, a hard-money lender, for purposes of covering the immediate cash flow needs of SSJ until SSJ received the proceeds of permanent financing that it was then finalizing and which would be used to repay Pratt. According to Schreiber, he and Barkany would not consider making this loan unless it was fully secured. As a result, Jemal, during October and November 2008, furnished Schreiber and Barkany with account statements which purportedly related to an account that he and his family members maintained at Southwest (the Jemal Securities Account). An e-mail regarding account statements was sent by Stallones to Izidor Mikhli (Mikhli), Jemal's assistant at SSJ, who then forwarded what was represented to be the October 2008 Southwest account statements, as an attachment, to Barkany and Schreiber. According to Schreiber, copies of the account statements indicated an aggregate value of more than $3 million. Barkany and Schreiber allegedly told Jemal that if they had sufficient security for the loan, they were prepared to proceed with the loan transaction, and a closing was scheduled for the week before the Thanksgiving holiday.
Though purportedly provided as plaintiff's Exhibit G, copies of these statements have not been provided to the Court. The reference to “statements” in Stallone's e-mail of November 24, 2008 is ambiguous, at best. It is not disputed, however, that Jemal created the statements, unbeknownst to defendants, and that Southwest played no role in their creation or dissemination to Barkany and Schreiber.
On November 26, 2008, two days before the scheduled closing, Stallones, on behalf of Southwest, e-mailed a letter to Jemal's attorney, David Giles (Giles), confirming their conversation wherein Stallones had advised Giles that Southwest would “not require the execution of a Custodial Agreement or other agreement regarding the disposition of securities held in one of its customers brokerage accounts involving the Customer's Lender, the Customer [i.e., Jemal] and Southwest ... as a precondition to Southwest ... acting in accordance with the terms of a Pledge Agreement or other form of Control Agreement granting the lender [i.e., Pratt] a security interest in some of those securities held in [Jemal's] brokerage account with Southwest.”
On November 28, 2008, a closing of the loan was held, and SSJ signed a loan agreement with respect to the loan made by Pratt to SSJ (the Loan Agreement). The Loan Agreement was executed by SSJ by Jemal, as its managing member and also by Jemal, individually, as a guarantor of the loan. The Loan Agreement provided that SSJ agreed to repay to Pratt the principal amount of $820,000 within six months or by May 28, 2009, with interest at the rate of 23% per annum until paid. At the closing, SSJ also executed a Springing Lien Agreement, which provided that SSJ pledged and assigned to Pratt a first security interest in the collateral, consisting of the Jemal Securities Account, to secure SSJ's obligations under the loan. The Springing Lien Agreement became effective only upon nonpayment of the indebtedness at maturity. Defendants were never provided with copies of the Loan Agreement or the Springing Lien Agreement prior to SSJ's default.
The Springing Lien Agreement references an “Exhibit A” describing the collateral, but no Exhibit A has been provided to the Court.
According to Schreiber, he and Barkany would not actually fund the loan unless they received adequate assurances from Southwest that the Jemal Securities Account contained sufficient assets to protect the repayment to Pratt. Therefore, at 9:28 A.M. on the morning of November 28, 2008, and prior to the actual wiring of any funds from Pratt to SSJ, SSJ transmitted to Stallones at Southwest a Loan Confirmation and Freeze Letter. The Loan Confirmation and Freeze Letter from SSJ to Southwest stated:
“As you know, SSJ ... has entered into a loan agreement with Pratt ... wherein SSJ ... has borrowed the sum of $820,000 which SSJ ... has agreed to pay back in 7 months. Furthermore, SSJ ... has promised to not sell, margin or take any action with respect to the securities in the [Jemal Securities Accounts]. Please be advised that until June 28th 2009 or earlier if the loan is satisfied in full, this account shall be frozen and no one, including SSJ ... may trade, sell or margin any funds that are in this account.”
An e-mail from Stallones responding to this e-mail sent to Mikhil, Giles, and Pratt's then attorney, Steven Kwestel, Esq. (Kwestel), stated that “[w]e have received your Freeze letter and will freeze the account as instructed” (the Confirmatory E–Mail).
After receiving the Confirmatory E–Mail from Stallones, Pratt funded the loan by authorizing a wire transfer of its funds to SSJ's designated bank account. According to Pratt, it relied upon this Confirmatory E–Mail from Southwest, as a reputable national brokerage firm, when it funded this loan to SSJ, and without this Confirmatory E–Mail, it would not have proceeded with the closing of the loan inasmuch as such loan was designed to be a fully secured transaction.
In order to further protect its interests in the Jemal Securities Account, upon receiving the Confirmatory E–Mail, Kwestel sent an e-mail to Stallones, asking him to put his acknowledgment on Southwest letterhead and send it to Pratt's office. An e-mail dated December 1, 2008 from Stallones to Jemal stated that he would need to send another letter to Southwest authorizing this before they could proceed. Due to the Thanksgiving holiday weekend, Southwest's acknowledgment was not sent to Jemal by Stallones until December 2, 2008. This December 2, 2008 letter (the Freeze Letter) by Stallones, as vice-president of Southwest, on Southwest's letterhead, stated that Stallones was then in receipt of Jemal's letter of authorization of December 1, 2008, that he was “in the process of initiating [his] directives as indicated in the letter,” and that “[t]hey should be completed very early th[at] week.”
During 2009, SSJ made partial payments of interest on the loan, and allegedly represented to Pratt that, due to delays in completing its permanent financing, it would be unable to repay the principal on May 28, 2009, as required by the Loan Agreement. Pratt agreed to extend the maturity date of the loan through June 28, 2009 and thereafter further extended it, relying upon letters dated May 5, 2009, June 1, 2009, August 6, 2009, and September 30, 2009 from Stallones to Pratt confirming the freeze status of the Jemal Securities Account identified by number, (the Subsequent Freeze Letters). Each of these Subsequent Freeze Letters stated that such letter was to acknowledge that the Jemal Securities Account was still frozen, that such account would continue to be frozen, and that Southwest would not release such account without prior authorization from Pratt. The last of these Subsequent Freeze Letters, dated September 30, 2009, stated that the Jemal Securities Account would continue to be frozen until September 30, 2010.
After payment of the loan was still not forthcoming from SSJ, Pratt's then attorney, Solomon J. Borg, Esq. (Borg), in a May 4, 2010 letter sent to Stallones and Southwest, attaching the Springing Lien Agreement, advised that the secured loan had matured, was not paid, and was in default. Borg, in this letter, requested that Southwest deliver the Jemal Securities Account to himself as agent for Pratt so that it could dispose of it in accordance with the terms of the security agreement and the Uniform Commercial Code.
In response, Kyle A. Owens, Esq. (Owens), on behalf Southwest, responded that it could not provide Borg or Pratt with a statement for the Jemal Securities Account and that it was unable to deliver the Jemal Securities Account's contents to him, as the agent for Pratt. Owens further then advised Borg, for the first time, that the October 31, 2008 Southwest online statement was not authorized or created by Southwest and that Pratt should not rely on it for any purpose.
It is not clear how defendants first became aware of the October 2008 fraudulent statements supplied by Jemal, but it appears that Borg provided them in his demand for turnover of the collateral.
A copy of the actual statements for the period, provided by Southwest, reveal that the value of the Jemal Securities Account from July 2008 through November 2009 never exceeded $520. Plaintiff asserts that the value of the Jemal Securities Account at the time of the loan was only $250. SSJ has never repaid any portion of the principal indebtedness of the loan, which remains in default. By a written assignment dated February 6, 2012, entitled Amended Assignment and Assumption of Loan Contract, Pratt assigned and transferred the loan and all associated rights to plaintiff, a limited liability company which was created after the making of the subject loan to hold for (and ultimately distribute to) the creditors of Barkany certain assets owned by Barkany.
On February 4, 2013, plaintiff commenced this action against Southwest, Stallones, and SSJ. Plaintiff's complaint presently alleges a first cause of action against SSJ for breach of the Loan Agreement, a second cause of action against Southwest for breach of the Freeze Agreement represented by the Loan Confirmation and Freeze Letter and the Subsequent Freeze Letters, a third cause of action against Stallones and Southwest for common-law fraud, a fourth cause of action against Stallones and Southwest for negligent misrepresentation, a sixth cause of action against Stallones and Southwest for negligence, and a seventh cause of action for specific performance of delivery of the securities represented by Jemal and/or Southwest as being held in the Jemal Securities Account at Southwest on November 28, 2008, or, in the alternative, monetary damages equal to the value of the securities represented by Jemal and/or Southwest as being held in the Jemal Securities Account at Southwest on November 28, 2008. Thereafter, Southwest and Stallones interposed an answer dated October 25, 2013. Discovery has taken place, including depositions. On July 6, 2015, plaintiff filed its instant motion for summary judgment.
Following a motion to dismiss by Southwest and Stallones, pursuant to CPLR 3211(a)(7), plaintiff's fifth cause of action for breach of fiduciary duty was dismissed, by a decision and order dated September 9, 2013. That decision and order denied Southwest and Stallones' motion with respect to all of plaintiff's other causes of action (Barkany Asset Recovery & Mgt. v. Southwest Sec. Inc., 41 Misc.3d 673, 682 [Sup Ct, Kings County 2013] ).
DISCUSSION
In support of its motion, plaintiff notes that the court, in its September 9, 2013 decision and order, held that it had adequately pleaded facts to establish a special relationship between Pratt and Southwest and that Southwest and Stallones owed Pratt a special duty, sufficient to support its causes of action for negligent misrepresentation and fraudulent concealment or common-law fraud based on a non-disclosure of a fact (see Barkany Asset Recovery & Mgt. v. Southwest Sec. Inc., 41 Misc.3d 673, 681–682 [Sup Ct, Kings County 2013] ). It further points out that the court, in that decision and order, held that it had also stated a viable breach of contract claim (Id. at 684–685 ). It argues that it has now, following discovery, established its negligent misrepresentation, fraud, and breach of contract claims as a matter of law. In opposition, Southwest contends that there are triable issues of fact which preclude summary judgment in favor of plaintiff.
“It is well settled that [a] claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information' “ (Mandarin Trading Ltd. v. Wildenstein, 16 NY3d 173, 180 [2011], quoting J.A.O. Acquisition Corp. v. Stavitsky, 8 NY3d 144, 148 [2007], rearg. denied 8 NY3d 939 [2007] ). “A special relationship may be established by persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified' “ (Mandarin Trading Ltd., 16 NY3d at 180 [2011], quoting Kimmell v. Schaefer, 89 N.Y.2d 257, 263 [1996] ; see also Anchor Lbr. Corp. v. Manufacturers Trust Co., 242 App.Div. 656, 656 [2d Dept 1934] ). Furthermore, “[n]egligent misrepresentation occurs when there is (1) an awareness by the maker of an untrue statement that it is to be used for a particular purpose, (2) reliance by a known party on that statement in furtherance of that purpose, and (3) some conduct by the maker of the statement linking it to the relying party and evincing its understanding of that reliance” (Kimmell v. Schaefer, 224 A.D.2d 217, 218 [1st Dept 1996], affd 89 N.Y.2d 257 [1996] ; see also Prudential Ins. Co. of Am. v. Dewey, Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377, 384 [1992] ).
“In an action to recover damages for fraud, the plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by [the] defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury” (Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 [1996] ). In addition, “[a] cause of action to recover damages for fraudulent concealment requires ... an allegation that the defendant had a duty to disclose material information and that it failed to do so” (P.T. Bank Cent. Asia, N.Y. Branch v. ABN AMRO Bank N.V., 301 A.D.2d 373, 376 [1st Dept 2003] ; see also Swersky v.. Dreyer & Traub, 219 A.D.2d 321, 326 [1st Dept 1996] ).
“[W]here one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge, there is a duty to disclose that information” (Stevenson Equip. v. Chemig Constr. Corp., 170 A.D.2d 769, 771 [3d Dept 1991], affd 79 N.Y.2d 989 [1992] [internal quotation marks omitted] ). Under the Special Facts doctrine, “a duty to disclose arises where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair' “ (P.T. Bank Cent. Asia, N.Y. Branch, 301 A.D.2d at 378, quoting Chiarella v. United States, 445 U.S. 222, 248 [1980] ; see also Kimmell, 89 N.Y.2d at 263 ; see also Greenman–Pedersen, Inc. v. Berryman & Henigar, Inc., 130 AD3d 514, 516 [1st Dept 2015] ; Pramer S.C.A. v. Abaplus Intl. Corp., 76 AD3d 89, 99 [1st Dept 2010] ; Par Plumbing Co. v. Engelhard Corp., 256 A.D.2d 124, 124 [1st Dept 1998] ; Merrill Lynch, Pierce, Fenner & Smith v. Chipetine, 221 A.D.2d 284, 285 [1st Dept 1995] ). In this case, the “transaction” was between Pratt and SSJ which apparently supplied false information to Pratt. Whether Southwest and Stallones had any duty to Pratt turns on facts that are in dispute.
The drastic remedy of summary judgment cannot be granted where legitimate and material issues of fact remain to be determined upon a full opportunity to vet the evidence at trial (see Andre v. Pomeroy, 35 N.Y.2d 361, 364–365 [1974] ). On such a motion, the facts must be viewed “in the light most favorable to the non-moving party' “ and may be “granted only where the moving party has tender[ed] sufficient evidence to demonstrate the absence of any material issues of fact' “ (Vega v. Restani Construction Corp., 18 NY3d 499, 503 [2012] quoting Ortiz v. Varsity Holdings, LLC, 18 NY3d 335, 339 [2011] and Alvarez v. Prospect Hospital, 68 N.Y.2d 320, 324 [1986] ). Plaintiff has failed to meet its burden to establish an entitlement to summary judgement in light of the conflicting evidence regarding numerous, highly material, questions of fact.
In light of this finding, it is unnecessary to address the several evidentiary objections raised by defendants with respect to the competency of plaintiff's evidence.
With respect to plaintiff's satisfaction of the requisite elements of its negligent misrepresentation and fraud causes of action, while the documentary evidence, including the depositions of the parties, clearly would support plaintiff's contention that Southwest and Stallones were aware of Pratt's loan to SSJ and had every reason to understand that the Jemal Securities Account was being frozen as security for repayment, there is no evidence that Pratt ever requested confirmation of the value of the account in writing. Although defendants must have known that the account did not contain securities of sufficient value to cover the $820,000 loan, it would have no duty to make such disclosure in the absence of a request for such information, which would, in any case, have to have been authorized by Jemal as their customer.
“It is well-settled as a matter of law in New York that generally neither a bank, nor a brokerage, owes a duty to third parties with respect to any fraud or wrongdoing that may be perpetrated by a client” (Parklex Associates v. Royal Capital Markets, Corp., 36 Misc.3d 1232(A), at *2 [Kings Co Sup Ct 2012] ; see Lerner v. Fleet Bank, NA, 459 F3d 273, 286 [2d Cir2006] ; In re Agape Litigation, 681 FSupp2d 352, 360 [EDNY 2010] ; Kolbeck v. LIT America Inc., 923 FSupp 557 [SDNY 1996] ; Winkler v. Battery Trading, Inc., 89 AD3d 1016, 1018 [2d Dept 2011] ). Plaintiff's claims rest upon Stallones' and Southwest's alleged duty to disclose to Pratt that the assets in the Jemal Securities Account were insufficient security for the loan of $820,000. No such duty exists unless Stallones and Southwest made an affirmative representation that was not true knowing that Pratt would rely upon it. Stallones and Southwest contend they did not know of Pratt's purpose to collateralize the loan with the Account assets, but even if it can be inferred that they did have such awareness, they had no duty to advise Pratt as to the value of the Account absent an inquiry that was incorrectly answered.
Plaintiff alleges that confirmation of the actual value of the Account was requested and given in a telephone conversation between Stallones and Pratt's attorney Kwestal immediately prior to the closing on the loan, however, there is no written documentation of this conversation and Stallones has testified that he “never talked to Mr. Kwestal. He's lying about that story” (Defendant's Exhibit A, Depos of Stallones at 25). Thus, there is a significant question of fact which precludes summary judgment since Southwest and Stallones would have no duty to Pratt for fraud or negligent misrepresentation if no such statement as to value was made. The only obligation of Stallones and Southwest to Pratt, acknowledged by defendants, was to freeze the Account as promised and there is no indication that this was not done.
Although it is reasonable to infer that, at the time Stallones transmitted the Confirmatory E–Mail of the freezing of the account, he had actual knowledge that Pratt was making a loan in the amount of $820,000 in reliance upon Jemal's agreement to freeze the securities in the Jemal Securities Account (see Stallones' Deposition Transcript at 13–14), the sufficiency of the security for that loan would not be known to him as the Jemal family apparently was possessed of substantial other resources, including other securities accounts with Southwest. It was not incumbent on Stallones and Southwest to inquire about the sufficiency of the collateral, indeed, it would have been a breach of duty to the customer Jemal to do so without direction from him. Thus, the disputed factual question regarding a telephone conversation between Stallones and Kwestal in which the value of the assets in the Jemal Securities Account was alleged to have been incorrectly stated requires a trial.
Southwest, in opposing plaintiff's motion, submits expert reports by Brian Underwood, an expert in securities and lending practice, and Gavin W. Manes, PhD, an expert in digital forensics. Mr. Underwood opines that Southwest and Stallones acted in accordance with professional standards, and Mr. Manes opines that the statements supplied to Schreiber and Barkany in October and November 2008 were not supplied by Southwest or Stallones, a fact that is not disputed. In any case, “a[n] expert may not be utilized to offer [an] opinion as to the legal standards which he believes should have governed a party's conduct” since this is an issue to be determined by the court (see Russo v. Feder, Kaskovitz, Isaacson, Weber, Skala & Bass, 301 A.D.2d 63, 68–69 [1st Dept 2002] ).
Plaintiff, in its motion, also seeks summary judgment on its second cause of action for breach of contract. Plaintiff alleges that the Freeze Letter and Subsequent Freeze Letters (the Freeze Letters), signed by Stallones on behalf of Southwest, created a binding and enforceable contractual obligation between Pratt and Southwest under which Southwest agreed to freeze the Jemal Securities Account for Pratt's benefit in an amount sufficient to secure Pratt in the event of a default by SSJ under the loan, and that Southwest breached this contractual obligation to Pratt by failing to ensure that the collateral, which it represented existed in the Jemal Securities Account, was available to Pratt in the event of a default under the loan, and by failing to deliver such collateral to Pratt upon its request.
Southwest, in opposition, points out that the Freeze Letters only required it to freeze whatever was in the Jemal Securities Account and that it made sure the $250 in the Jemal Securities Account was not paid out and remained frozen. There is no indication that Southwest breached this obligation. To the extent that Southwest or Stallones actually assumed any additional duty beyond the actual value of the assets in the Account, a factual issue is raised requiring trial. The breach of contract claim appears to be redundant of the fraud and negligent misrepresentation causes of action, but need not be further addressed at this time. Plaintiff's motion for summary judgment on the breach of contract cause of action is denied.
CONCLUSION
Accordingly, plaintiff's motion is denied in its entirety. This case is referred to Commercial Division Part 11 for trial. The parties are directed to appear for conference in Part 11 on March 8th, 2016 at 10am.
This constitutes the decision, order, and judgment of the court.