The Appellate Division, First Department, at 27 Madison Ave. (NYLJ/Rick Kopstein)
The Appellate Division, First Department, has upheld the dismissal of two cases stemming from the 2008 financial crisis.
The plaintiff’s failure to make a pre-suit demand of JPMorgan’s board of directors doomed a derivative action brought by a pension fund that lost money on JPMorgan stock, a unanimous panel ruled in Asbestos Workers Philadelphia Pension Fund v. Bell, 652020/13.
In a separate ruling, the appeals court established an accrual date for common-law fraud and aiding and abetting claims brought against issuers of mortgage-backed securities. A unanimous panel in Aozora Bank v. Deutsche Bank Securities, 652161/13, said the April 2011 publication of a Senate report on the financial crisis put potential plaintiffs on “inquiry notice” that they had been fraud victims, triggering a two-year statute of limitations.
In Bell, the court said the plaintiffs had not established that “at the time the complaint was filed, the board of directors could not have properly exercised its independent and disinterested business judgment,” which excuses the pre-suit demand obligation.
The pension fund had alleged the individual directors were responsible for the bank’s share decline because they failed to heed warning signs and direct bank executives to cease packaging and selling residential mortgage-backed securities, known as RMBS, as the financial crisis began.
“Plaintiffs allege that the board’s actions were intended to make JP Morgan appear more financially secure than it actually was in the short run, all the while knowing that the substantial losses (in the billions of dollars) would subsequently be realized by JPMorgan, based upon repurchase obligations and other lawsuits by the government and RMBS investors,” the panel said in an unsigned opinion.
Under Delaware law, which controlled because JPMorgan is incorporated there, the pre-suit demand requirement can be excused only if such a demand would have been futile, the panel said.
Joining in the opinion, which affirmed the June 2014 dismissal of the case by Manhattan Supreme Court Justice Charles Ramos, were Justices David Friedman, Richard Andrias, Judith Gische and Barbara Kapnick.
Barrack, Rodos, & Bacine partner Alexander Gershon represented the plaintiff. Stuart Baskin, a partner at Shearman & Sterling, argued for certain JPMorgan directors. Debevoise & Plimpton partner Gary Kubek represented the company and other named officers and directors. The attorneys either did not wish to be quoted or did not respond to requests for comment.
In Aozora, the court declared that the plaintiff, a Japanese bank that lost all of its $30 million investment in a Deutsche Bank-issued RMBS, should have discovered the alleged fraud “in the exercise of reasonable diligence.”
Although the Senate report, entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” did not mention the particular collateralized debt obligation, or CDO, Aozora purchased one called Blue Edge, a chapter was devoted to Deutsche Bank’s role in packaging and selling RMBS and CDO products.
Since Aozora began its case in January 2014, its suit was time barred under CPLR 213(8), which requires fraud claims to commence within two years of when the plaintiff discovered the fraud or could have discovered it with reasonable diligence.
Aozora should have begun its fraud investigation in 2008, the panel said, noting Blue Edge was downgraded to junk status that year.
Also, “there was considerable publicity about the subprime mortgage crisis from news reports, investor lawsuits and government investigations well before June 2011,” the panel noted in an unsigned opinion. “Indeed, by April 2011, defendants had been sued multiple times in connection with RMBS and CDOs.”
“Aozora had more than $430 million invested in Blue Edge and other CDOs; it could have, and should have, considered whether Blue Edge’s underlying assets fell within the Senate Report’s ambit,” it added.
Justices Rolando Acosta, Dianne Renwick, Andrias and Karla Moskowitz joined in the ruling, which affirmed the January 2015 dismissal of all claims by Manhattan Commercial Division Justice Jeffrey Oing.
According to Reuters, Aozora is the largest unsecured Lehman Brothers creditor, having lost $463 million on investments in the now-bankrupt company.
Paul, Weiss, Rifkind, Wharton & Garrison partner Jessica Carey argued for Deutsche Bank. Kirby McInerney partner Andrew McNeela represented Aozora. Neither responded to requests for comment.