25 N.Y.3d 543 (2015)

Under New York law, the right to sue for fraud does not automatically transfer with the sale of a note or contract; an express assignment of the fraud claim is required.

Summary

Commerzbank AG brought a fraud claim related to the issuance of certain notes, arguing that the right to sue for fraud was transferred to it through a merger with Dresdner Bank, which had acquired the notes from Allianz Dresdner Daily Asset Fund (DAF). The New York Court of Appeals held that Commerzbank lacked standing to sue for fraud because there was no explicit assignment of DAF’s fraud claims to Dresdner when the notes were transferred. The court emphasized that in New York, fraud claims are not automatically assigned with the underlying instrument; an express assignment of those claims is needed to transfer the right to sue.

Facts

Morgan Stanley arranged the issuance of notes by the Cheyne structured investment vehicle (SIV). DAF purchased these notes. When the notes were downgraded, DAF was required to sell the notes to Dresdner Bank. Commerzbank subsequently merged with Dresdner, acquiring all its assets. Commerzbank sued Morgan Stanley, asserting fraud claims related to the notes originally purchased by DAF. Commerzbank argued that the sale of the notes from DAF to Dresdner implicitly included an assignment of any associated fraud claims. Evidence presented included declarations from former employees of DAF and Dresdner stating the parties’ belief that the fraud claims would transfer. The lower courts dismissed Commerzbank’s claims, finding no proof of the assignment of fraud claims from DAF to Dresdner.

Procedural History

The case began in the U.S. District Court for the Southern District of New York, which dismissed Commerzbank’s claims related to the notes originally purchased by DAF. The Second Circuit Court of Appeals then certified two questions of New York law to the New York Court of Appeals: (1) Whether a reasonable factfinder could find that DAF validly assigned its right to sue for fraud to Dresdner and (2) whether Morgan Stanley was liable for fraud if the first question was answered in the affirmative. The New York Court of Appeals accepted certification.

Issue(s)

1. Whether a reasonable factfinder could find that DAF validly assigned its right to sue for common law fraud to Dresdner in connection with its sale of Cheyne SIV notes.

2. If the first question is answered in the affirmative, whether a reasonable factfinder could find Morgan Stanley liable for fraud under New York law.

Holding

1. No, because the sale of the notes did not include an explicit assignment of the fraud claim.

2. Not answered, because the first question was answered in the negative.

Court’s Reasoning

The court reaffirmed that under New York law, the right to assert a fraud claim does not automatically transfer with the underlying contract or note. To assign a fraud claim, the intent to transfer the right to sue must be expressed, or there must be language that clearly indicates this intention. The court stated, “where an assignment of fraud or other tort claims is intended in conjunction with the conveyance of a contract or note, there must be some language—although no specific words are required—that evinces that intent and effectuates the transfer of such rights.” The court found that the evidence presented by Commerzbank—declarations of subjective intent—was insufficient to establish an assignment because there was no explicit language or reference to an assignment of tort claims. The court distinguished this case from cases where broad assignment language, such as the assignment of all rights in the “transaction,” was present. Because no assignment of the fraud claim was evident, the court held that Commerzbank did not have standing to sue.

Practical Implications

This decision clarifies that, under New York law, those seeking to acquire the right to sue for fraud need to ensure that such a right is explicitly assigned during the transaction. The assignment should include specific language indicating the intent to transfer tort claims related to the underlying instrument. Simply transferring the instrument is not enough. Practitioners must draft assignment agreements that clearly and unambiguously include fraud and other tort claims. This case also emphasizes the importance of documented intent and the need to avoid relying on assumptions or implied understandings when dealing with assignments of rights to sue for fraud. This ruling strengthens the certainty of transactions by requiring express assignments of fraud claims rather than relying on subjective or implicit transfers. This impacts both transactional lawyers, who draft the documents, and litigators, who will need to prove the existence or non-existence of an explicit assignment when arguing standing.