J&R Multifamily Group, Ltd. v. UBS Real Estate Securities, Inc.

Background

J&R Multifamily Group, Ltd. brought claims against U.S. Bank National Association, Wells Fargo Bank, National Association, and Rialto Capital Advisors, LLC. J&R alleged that the defendants tortiously interfered with the prospective sale of its Houston, Texas apartment complex, Worthington on the Beltway, and committed fraud related to the loan secured by that property. The case had been transferred from the Southern District of Texas under a mandatory forum-selection clause in the loan agreement.

J&R refinanced the property in 2012 with a $7,185,000 loan. After a 2013 fire damaged several apartments, Rialto took over loan servicing in early 2017 and asserted that J&R was in default. J&R alleged that it had made its loan payments on time and completed the restoration work. After J&R received formal letters of intent from five potential buyers, Rialto issued a payoff statement stating that more than $1.4 million in default interest had accrued. J&R alleged that this demand prevented it from completing a sale. J&R also alleged that monthly statements from 2013 through 2016 had shown a zero default-interest balance.

Choice of Law

The court applied New York choice-of-law rules because the case had been transferred under a valid mandatory forum-selection clause. It concluded that the loan agreement’s choice-of-law provision, which covered matters such as the agreement’s construction, validity, and performance, was not broad enough to cover J&R’s tort claims.

Applying New York’s choice-of-law rules, the court held that New York substantive law governed the fraud claim because Texas and New York fraud law were substantively identical. The court applied Texas substantive law to the claim for tortious interference with prospective business relations because Texas had the greatest interest in the alleged injury and the laws of Texas and New York differed on the required causal showing.

Fraud Claim

Under New York law, fraud requires a material misrepresentation or omission, knowledge that it was false, an intent to induce reliance, justified reliance, and damages. The court also applied the heightened pleading requirement for fraud, which requires the plaintiff to identify the allegedly fraudulent statements, their speaker, when and where they were made, and why they were fraudulent.

J&R advanced two alternative theories. First, it alleged that the payoff statement falsely claimed more than $1.4 million in default interest. The court concluded that J&R adequately alleged the first three fraud elements, including fraudulent intent, but not justified reliance. J&R admitted that it did not believe the payoff statement accurately stated the amount it owed. Because J&R did not believe the statement, the court ruled that it could not have justifiably relied on it.

Second, J&R alleged that the earlier monthly statements falsely showed no default interest and that it would have acted differently, possibly selling the property earlier, had it known about the alleged default. The court found these reliance allegations conclusory. It also ruled that J&R could not claim reliance based on costs it incurred for interest, reconstruction, maintenance, and other obligations because the loan agreement required J&R to bear those costs regardless of the statements’ default-interest figures.

Tortious-Interference Claim

Under Texas law, a claim for interference with a prospective business relationship requires, among other things, a reasonable probability of a business relationship, intentional interference, an independently tortious or unlawful act, causation, and actual loss. J&R based its claim on the allegedly fraudulent payoff statement.

The court first concluded that J&R could not rely on the alleged fraud as the independently wrongful act because J&R had not adequately pleaded fraud. The court also considered that Texas law may allow an interference claim based on a tort directed at a third party. But J&R had not alleged that any prospective purchaser saw the payoff statement or any other alleged misrepresentation. Because the prospective purchasers did not rely on the alleged misrepresentations, the court ruled that J&R had not alleged the required independently tortious or unlawful act.

Disposition

Judge Castel granted defendants’ motion to dismiss the Fourth Amended Complaint. The opinion does not state that the dismissal was with or without prejudice.