Court grants in part and denies in part a motion to dismiss, specifically finding that the plaintiff had pled fraud with sufficient particularity to survive dismissal, but did not allege a duty of care in a negligent misrepresentation claim and could not demonstrate any such duty when the parties were engaged in an arm’s length transaction.
B. Riley FBR, Inc. f/k/a B. Riley & Co., LLC vs. Clarke, No. 18-CV-2318 (NEB/BRT) (D. Minn., 9/6/19).
Plaintiff B. Riley FBR, Inc. f/k/a B. Riley & Co., LLC (“B. Riley”) is an investment advisory firm and investment bank that contracted with several entities through Defendant Thomas M. Clarke (“Clarke”) to provide financial services, including raising capital. As alleged in the complaint, roughly $900 million was raised, which should have resulted in a payment of almost $17 million to B. Riley, but the various entities failed to pay under the contracts. B. Riley has separate suits against those entities for breach of contract and other claims, but is suing Clarke separately on the premise that “Clarke represented and affirmed to B. Riley that he had authority to act on behalf of” the various entities who engaged B. Riley when those entities now claim Clarke had no such authority. Additionally, B. Riley claims Clarke “knowingly and intentionally made material representations that he” and the various entities would honor the agreements with B. Riley when, as B. Riley alleges, Clarke knew that was not true.
According to the Complaint, Clarke engaged B. Riley in a series of transactions on behalf of three related companies to provide financial advisory services, stating in each instance that he was authorized and sign on behalf of those entities. Based on those representations, B. Riley entered into the three different contracts and “provided those services, and was never paid.” Ultimately, B. Riley claims “Clarke negotiated on behalf of the entities, fraudulently induced B. Riley into the contract, and knew all along that B. Riley would not be paid.”
In its Complaint, B. Riley specifically alleged “fraudulent inducement” and “negligent misrepresentation” against Clarke for his part in negotiating the contracts. Clarke argued this was a contract dispute among B. Riley and the entities and that the pleadings were deficient in making claims against Clarke individually, as the Complaint did not properly plead the elements required for fraud or for negligence.
However, the Court observes, “[t]his suit is not the typical ‘broken promises’ claim for fraud based on a defendant’s promise and failure to perform.” Instead, “B. Riley’s theory is more nuanced than that.” At its core, B. Riley alleges “Clarke made two misrepresentations: (1) he misrepresented his authority to act on behalf of the entities and (2) he misrepresented their intention to pay B. Riley for its work.” To the extent these claims relate to the negligent misrepresentation cause of action, the question is whether Clarke had a duty to disclose to B. Riley. But, this was an arm’s length negotiation where the “parties were ‘sophisticated equals negotiating a business transaction.’” As such, B. Riley and Clarke were “adversarial parties” who were there to “negotiate at arm’s length” and “there is no duty imposed” on parties in that situation, unless there is a showing of a “special relationship.” Since B. Riley did not plead nor suggest any special relationship, the Court rules that "...it is impossible for B. Riley to succeed on its negligent misrepresentation claim.”
As the claims relate to the “fraudulent inducement” cause of action, Clarke argues this was a mere breach of contract claim and that fraud was not sufficiently pled. On the claim that Clarke knew the entities would not perform under the contract, Clarke argues that such an allegation could not support a fraud claim, as it is a “well-settled rule that a representation or expectation as to future acts is not a sufficient basis to support an action for fraud merely because the represented act or event did not take place.” Additionally, according to Clarke, B. Riley was required to provide under Minnesota law “affirmative evidence that the promisor had no intention to perform.” The Court disagrees and distinguishes the cited cases, saying “the difference lies in the actors: the promisor (Clarke) is different from the performer [the entities].” It was sufficient for a case where the promisor is different than the performer to allege that the promisor knew the performer had no intention of performing under the contract.
(S. Edwards: This was a somewhat novel way to bring in a party to a contract dispute who would not otherwise be liable under the breach of contract. It appears it was necessary as the entities are now in bankruptcy. While the argument survived on a motion to dismiss, there will still need to be evidence developed that there was actual knowledge at the time the contracts were signed that Clarke indeed did not have authority to sign for the companies and that the companies had no intention of fulfilling their obligations under the contracts. As the remaining claim requires a finding of fraud, knowledge and intent at the time the contract was signed, the proof will be key. If Clarke learned these facts later, the Court’s ruling that he owed no duty of care to B. Riley would likely result in a subsequent dismissal of the case.)
(SOLA Ref. No. 2019-43-04)
NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.