Holding Company; Residential Mortgage-Backed Securities; Fraud; Transfer of Rights; Contracts; Security Transfers.
By: Aaron Jacob | Senior Staff Writer
Plaintiff, Royal Park Investments (hereinafter “RPI”) is a limited liability company incorporated under the laws of Belgium and wholly owned by Fortis Bank, the banking arm of Fortis Holdings (hereinafter “Fortis”). RPI is a special purpose vehicle created to acquire a portion of Fortis Bank’s structured credit portfolio (“RPI Assets”). Scaldis Capital Limited (hereinafter “Scaldis”), is another special purpose vehicle, also fully controlled by Fortis who, along with Fortis, was originally used to purchase 146 certificates of residential mortgage-backed securities (“RMBS”) in 102 different offerings. Defendants constitute Morgan Stanley (“Morgan Stanley”) and its various subsidiaries as global financial services firm and financial holding companies from whom the securities were purchased.
The crux of this action arises out of RPI’s purchase of the aforementioned securities through a Portfolio Transfer Agreement (hereinafter “PTA”) from its parent company Fortis, who proceeding this sale, had acquired Scaldis’s securities. RPI’s base claim alleges that Defendant used offering documents to defraud RPI and its assignors into purchasing “investment grade” certificates at inflated prices. Between August and November 2013, RPI commenced an action against the Defendants asserting six (6) tort causes of action sounding in fraud and negligent misrepresentation. Defendant contends that RPI lacks standing to sue in tort; more so, Fortis improperly transferred the rights to Scaldis’s Certificates and subsequently to RPI, and therefore lacked ability to transfer tort claims of Scaldis’s securities to RPI.
The Court dismissed all claims against Defendant because Fortis and RPI, as sophisticated parties, failed to properly transfer the right to a fraud action in the PTA. The Court held that because it was undisputed that the unambiguous PTA’s language transferred to RPI all “rights, title, and interest in and to the Portfolio Property,” and because it is well settled in New York, that the right to assert a fraud claim related to a contract or note does not automatically transfer (without express language) with the respective contract or note, the PTA was expressly limited to contractual rights and obligations and was absent of a transfer of fraud claims.
More so, the court used this same reasoning to establish RPI’s lack of standing in the Scaldis’s Certificates. Fortis had made the same drafting error while transferring the certificates from Scaldis to itself, therefore the subsequent transfer through the PTA lacked the right to transfer fraud claims on two instances. However, even if the Scaldis Certificates were validly transferred, RPI’s claims would still fail for lack of standing, as the PTA did not assign the right to assert fraud claims. Therefore, the court dismissed all claims against Defendants.
Royal Park Investments SA/NV v. Morgan Stanley, Index No. 653695/2013, 4/11/2017 (Ramos, J.).