Opinion
Index No. 651720/2023 Motion Seq. Nos. 002 006
01-10-2024
YS GM MARFIN II LLC, YS GM MF VI LLC, YS GM MF VII LLC, YS GM MF VIII LLC, YS GM MF IX LLC, YS GM MF X LLC, YIELD STREET MANAGEMENT, LLC, YIELD STREET MARINE FINANCE, LLC Plaintiff, v. FOUR WOOD CAPITAL ADVISORS, LLC, FOUR WOOD CAPITAL PARTNERS, LLC, STEVEN BAFFICO, ANDREW SIMMONS, Defendant.
Unpublished Opinion
DECISION + ORDER ON MOTION
MELISSA A. CRANE, JUSTICE
The following e-filed documents, listed by NYSCEF document number (Motion 002) 6, 7, 8, 9, 10, 11, 12, 16, 56, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 71,72 were read on this motion to/for DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 006) 13, 14, 15, 53, 73, 74 were read on this motion to/for DISMISS.
Upon the foregoing documents, it is
This case relates to a massive fraud in the marine financing arena whereby vessels that had already been sold for scrap metal were used as purported collateral. Defendant Four Woods Capital Advisors (Four Woods) agreed in an Investment Management Agreement (the Agreement) to provide investment management services with respect to various ship finance transactions. Plaintiff Yieldstreet Marine Finance LLC signed the Agreement on or about April 18, 2018. Defendant Baffico signed the Agreement on behalf of both Four Woods and Four Woods Capital Partners
In the Agreement, Four Woods agreed to "monitor, collect, administer and service each loan with reasonable care using that degree of skill and attention that is (i) deemed commercially reasonable in the industry, and (ii) no less than the degree of skill and attention it uses in servicing and administering similar loans for its own account, the account of its affiliates, or for the account of other investors and in all cases in accordance with applicable laws." It is undisputed that Four Woods was supposed to monitor loan repayments and track the vessels that served as collateral. According to plaintiffs, this would have included independently verifying the vessels' location, such as by using a third-party tracking system.
Defendants also introduced plaintiffs to the primary borrower, North Star, which ultimately defaulted on the Loans. North Star is associated with a Dubai based family named Lakhani. Plaintiff claims the defendants not only vouched for the Lakhanis, but assured plaintiffs that "Defendants' diligence was informed by extraordinary direct access to that family's business, including that Mr. Simmons personally worked in the North Star Borrowers' Dubai offices on a monthly basis" (Complaint ¶13). Nevertheless, defendants allegedly lost track of the vessels that had been sold for scrap prior to plaintiff extending the loans.
On October 30, 2023, the court heard oral argument on motions 2, 3 and 6. The court denied motion 3, defendant Simmons' motion to dismiss for lack of personal jurisdiction, on the record (see EDOC 78). The court also denied defendant Baffico's motion to dismiss, and denied that part of Four Woods' motion to dismiss the fraud claims (see Transcript of Proceedings, EDOC 84 pages 45-46). The court took that part of the motion seeking to dismiss the claims for breach of fiduciary duty, negligent misrepresentation and negligence of the motion on submission.
Aiding and Abetting Fraud and Fraud (counts 1 and 3)
The notice of motion (EDOC 17) purports to move to dismiss plaintiffs' complaint without limitation. However, defendants have made no arguments to dismiss the second cause of action for breach of contract. Therefore, the court retains that cause of action.
As discussed on the record (EDOC 84 pg 45-46), plaintiffs have sufficiently alleged aiding and abetting fraud and fraud against all defendants. Defendants' main defense is that they were merely passing along information from the Lakhinis. However, what defendants knew or did not know about the falsity of the information they claim they were just passing along is an issue of fact at this pre discovery stage. For example, plaintiffs allege Mr. Baffico falsely advised plaintiffs in September 2019 that certain vessels had "hit the beach" (i.e. were on the ocean) the month prior, indicating that Plaintiffs could expect re-payment shortly on the facilities relating to those vessels. In fact, those vessels had already been scrapped. In addition, Mr. Baffico blamed payment delays on complications at certain foreign banks. This alleged statement, however, was pure fabrication, because the Lakhinis simply had not paid the amounts due.
Mr. Baffico also sent plaintiffs invoices for additional management fees ostensibly because the acquisition of the certain ships took longer than expected, but that "overdue vessels . . . finally hit the beach in Aug[ust]" so the extra payments would likely be a "one-time assessment." However, in reality, no vessels had "hit the beach" at all. The vessels no longer existed. Thus, the invoices for the management fees were to manage ships that no longer existed. These allegations are sufficient to plead that plaintiffs received fraudulent invoices from defendants. Considering that defendants were supposed to be monitoring where these boats were, at this juncture, there is a question of fact about what Mr. Baffico knew or did not know. It may turn out that Mr. Baffico was merely an information conduit, but considering Mr. Baffico knowledge is completely within his own purview, it would be premature to dismiss the claims for fraud and aiding and abetting fraud at this stage (see Cohen Bros. Realty Corp. v. Mapes, 181 A.D.3d 401, 404 [1st Dep't 2020][allegations involving false, forged or inflated purchase orders and that defendants knew that the work described on the bogus purchase orders or invoices and other contract forms was either falsely stated, overcharged or not provided sufficient to state a fraud claim pre-discovery]).
Nor does it matter that Mr. Baffico was working for Four Woods at the time. "A corporate officer who participates in the commission of a tort may be held individually liable, regardless of whether the officer acted on behalf of the corporation in the course of official duties and regardless of whether the corporate veil is pierced" (Peguero v. 601 Realty Corp., 58 A.D.3d 556, 559 [1st Dep't 2009]).
Meanwhile Simmons, on behalf of Four Woods, notified the plaintiffs, including New York-based employees, that several payments had been received from North Star but neglected to mention North Star had only paid 10% of what was actually due. In addition, in response to plaintiffs request for due diligence in connection with a new loan request, Simmons forwarded to plaintiffs fabricated memoranda of agreement (MOA) for the sale of certain ships to entities that would deconstruct them for scrap (Complaint ¶ 81). Based on those MOAs, on September 19, 2019, plaintiffs extended an additional loan of $14,500,000 to North Star for the purchase of the vessels (Complaint ¶¶ 76-77, 78, 80). Meanwhile, Four Wood earned over $100,000 for having brought the loan to Yieldstreet (Id. ¶ 80). In fact, however, the vessels the MOAs referenced no longer existed (Id. ¶ 81).
In addition, defendant Simmons allegedly emphasized that defendants were "tracking the vessels" (Id. ¶ 82). However, this could not have been true, because most of the vessels had already been reduced to scrap metal and spare parts (Id.)
Nor are the fraud claims duplicative of the breach of contract claims. At the very least, the alleged falsehoods lulled plaintiffs into a false sense of security whereby plaintiffs entered into further loans with North Star, and thereby enabled defendants to charge for fraudulent administrative and management fees with respect to ships that no longer existed.
Breach Of Fiduciary Duty And Conversion Against All Defendants
However, the court dismisses the cause of action for breach of fiduciary duty. First, paragraph 21 of the parties' agreement [EDOC 3] states that "manager is an independent contractor to and not an employee, partner or dependent agent of the investor and the performance of services to be rendered by Manager under this Agreement shall not be construed to impact or change Manager's status as an independent contractor." Given this language, it would not be reasonable for plaintiffs to believe they had a fiduciary relationship with defendants based on agency (see Chan v. Havemeyer Holdings LLC, 2024 WL 41188, at *1 [1st Dep't Jan. 4, 2024])
Also, plaintiffs do not dispute that Four Woods never managed plaintiffs funds, had no discretion or authority over plaintiffs investments and did not control plaintiffs assets. Thus, the level of control plaintiffs retained over which loans to invest in only bolsters the conclusion that the relationship between the parties was not fiduciary (see RNK Capital LLC v Natsource LLC, 76 A.D.3d 840, 841-42 [1st Dep't 2010]).
Moreover, to the extent that defendants actively concealed the tine location of the ships (ie the scrap yard rather than the high seas) the breach of fiduciary duty claim is wholly duplicative of the fraud claim that the court has already upheld.
Similarly, the conversion claim adds nothing to what the breach of contract claim has already alleged and therefore is also dismissed as duplicative.
Negligent Misrepresentation Against All Defendants
A cause of action alleging "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" (J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148, 831 N.Y.S.2d 364, 863 N.E.2d 585 [2007]). Further "liability for negligent misrepresentation has been imposed only on those 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" (Kimmell v. Schaefer, 89 N.Y.2d 257, 263, 652 N.Y.S.2d 715, 675 N.E.2d 450 [1996]); see also CMMF, LLC v. J.P. Morgan Inv. Mgmt. Inc., 78 A.D.3d 562, 565, [1st Dep't 2010] [denial of motion to dismiss claim for negligent misrepresentation where allegations included misrepresentations regarding the number of collateralized mortgage obligations in investor's portfolio, which real estate backed securities in the portfolio were collateralized, use of misleading ratings as an indicator of the portfolio's health, and use of misleading pricing information regarding liquidation of the portfolio's assets]).
Defendants argue that, like the lack of a fiduciary relationship, there was no "special relationship" between the parties sufficient to support a negligent misrepresentation claim. However, "[w]hether such a 'special relationship' exists in the commercial context is 'highly fact specific' and is not generally amenable to summary disposition" Silver creek Mgmt.. Inc. v. Citigroup, Inc., 346 F.Supp.3d 473, 504-05 (S.D.N.Y. 2018[citations omitted]).
Here, defendants were the ones supposedly to perform the actual monitoring of the vessels. They therefore were in a superior position to know where those vessels were and plaintiffs relied on representations about the location of the vessels to their detriment. Defendants also allegedly sent plaintiffs fraudulent documentation. Moreover, defendants were supposed to be managing the investments. Plaintiffs relied to their detriment on defendants' misrepresentations about the status of the collateral and the status of repayments. Plaintiffs made additional loans and refrained from taking action earlier. This is sufficient to state a claim for negligent misrepresentation.
Negligence against All Defendants
However, the court dismisses the claim for negligence. Plaintiff alleges "It was negligent for Defendants to repeatedly lose track of the collateral that, as managers, they were paid millions to secure, safeguard, and monitor. It was negligent for Defendants to recommend and supervise a law firm to represent Lenders in connection with the Loans without ever disclosing that firm's substantial relationship with the North Star Borrowers" (Complaint ¶ 151). The court fails to see a distinction between these allegations and the allegations underlying the breach of contract claim. Therefore, the claim for negligence is duplicative. To the extent the claim is not duplicative of breach of contract, it is duplicative of the causes of action for fraud or negligent misrepresentation.
Accordingly, it is
ORDERED THAT the court grants the motions to dismiss in part and dismisses: count 4 (Breach of Fiduciary Duty); count 6 (Negligence); and count 7 (conversion) and otherwise denies the motion; and it is further
ORDERED THAT defendants have until February 13, 2024 to answer the complaint; and it is further ORDERED THAT there shall be no motion practice without prior conference with the court.