Barkany Asset Recovery & Mgt., LLC v. Southwest Securities Inc., Leighton Stallones, and SSJ Development, LLC, Index No. 500540/2013, 2/22/16 (Demarest, J,)

Motion for Summary Judgment; Fraud; Negligent Misrepresentation; Breach of Contract; Duty to Disclose

By: Julie Lavoie | Staff Writer

In 2008, Jemal, manager of Defendant SSJ Development, LLC (“SSJ”), requested a short-term loan from Pratt Foreclosures, LLC (“Pratt”). Pratt, however, refused to consider the loan unless it was fully secured. Thereafter, SSJ forwarded an email (“Oct. 2008 Email”) to Pratt from Defendant Stallones, vice president of Defendant Southwest Securities Inc. (“Southwest”), a national retail securities brokerage company. Specifically, the Oct. 2008 Email included statements from Jemal’s Southwest account, the Jemal Securities Account (“JSA”), which indicated a value of more than three million dollars. Based on this assurance, Pratt and SSJ executed two agreements: (1) a Loan Agreement, which provided that SSJ would repay Pratt the principal amount of $820,000 plus interest on or before May 28, 2009 and (2) a Springing Lien Agreement, which guaranteed Pratt a first security interest in JSA to fulfill SSJ’s loan obligations. Additionally, SSJ sent a Loan Confirmation and Freeze Letter (collectively “Freeze Agreement”) to Stallones . Stallones confirmed receipt in an email sent to both SSJ and Pratt.

On the maturity date, SSJ was unable to repay the loan. Pratt agreed to extend the deadline twice pursuant to four letters from Stallones that confirmed the freeze on the JSA. When the principal remained unpaid, Pratt advised Stallones and Southwest that they were in default and requested delivery of the JSA. Subsequently, a Southwest attorney responded that the company could not deliver the JSA’s contents. The attorney also notified Pratt, for the first time, that the account statement provided in the Oct. 2008 Email “was not authorized or created by Southwest” and, therefore, should not be relied on for any reason. In fact, the actual account statements for that period revealed that the value of JSA never exceeded $520, and, thus, was inadequate security for the loan. Pratt assigned the loan and all associated rights to Plaintiff Barkany Asset Recovery & Management, LLC (“Barkany”).

Barkany commenced an action claiming that: (1) SSJ breached the Loan Agreement when it did not repay the principal amount by the deadline, (2) Southwest breached the Freeze Agreement because it failed to freeze the JSA “in an amount sufficient to secure Pratt” against SSJ’s default under the loan, and (3) Stallones and Southwest committed fraud and negligent misrepresentation because they were required to disclose that the JSA did not contain securities of sufficient value to cover the loan. Barkany moved for summary judgment arguing the evidence set forth established there is no material issue of fact regarding its right to recover as a matter of law. In opposition, Defendants contended that there were triable issues of fact.

The Court denied Plaintiff’s motion for summary judgment due to two issues of fact regarding: (1) a telephone conversation between Stallones and Pratt and (2) Defendants obligations under the Freeze Agreement. First, the Court held that a duty to disclose, which is an element of both fraud and negligent misrepresentation claims, does not exist unless a Defendant makes an affirmative false representation, knowing that the Plaintiff will rely on it. Here, the Court held that there was a material issue of fact in regards to whether Barkany asked for confirmation of the value of the account and Defendants answered falsely in an undocumented phone call. Second, the Court held that there was an issue of fact as to whether Southwest actually breached the Freeze agreement. Here, the Court focused on whether Southwest assumed a duty to freeze any amount beyond the value of the assets in the JSA.

Accordingly, the Court denied Plaintiff’s motion in its entirety.

Barkany Asset Recovery & Mgt., LLC v. Southwest Securities Inc., Leighton Stallones, and SSJ Development, LLC, Index No. 500540/2013, 2/22/16 (Demarest, J,).

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