Kirschner v. JP Morgan Chase Bank, N.A.

Background

Marc S. Kirschner, acting as trustee of the Millennium Lender Claim Trust, sued JPMorgan Chase Bank, N.A.; JPMorgan Securities LLC; Citigroup Global Markets Inc.; Citibank, N.A.; BMO Capital Markets Corp.; Bank of Montreal; SunTrust Robinson Humphrey, Inc.; and SunTrust Bank. The Trust’s claims arose from a $1.775 billion syndicated loan transaction that closed on April 16, 2014. The transaction involved institutional investors purchasing debt obligations of Millennium Laboratories LLC.

The complaint alleged violations of state securities laws, negligent misrepresentation, breach of fiduciary duty, breach of contract, breach of post-closing contractual duties, and breach of the implied covenant of good faith and fair dealing. Kirschner alleged that the defendants misrepresented or omitted material information about Millennium’s sales, marketing, and billing practices, as well as risks associated with a government investigation and related litigation. Millennium later filed for bankruptcy, and the bankruptcy plan established the Trust and authorized it to pursue the investors’ claims.

In a May 22, 2020 opinion, the court granted the defendants’ motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), which concerns whether a complaint states a legally sufficient claim, but allowed Kirschner to seek permission to amend. Kirschner then moved for leave to file a proposed amended complaint. The proposed amended complaint asserted two direct fraud claims against JP Morgan and Citi, aiding and abetting fraud and conspiracy claims against all defendants, and a negligent misrepresentation claim against all defendants.

Report and Recommendation

Judge Sarah L. Cave recommended denying leave to amend because the proposed amendments would be futile. An amendment is futile when the proposed pleading still would not survive a motion to dismiss. Kirschner objected, arguing that the proposed complaint adequately alleged a scheme involving Millennium’s insiders and the defendants and that Judge Cave had applied New York law incorrectly.

Judge Gardephe reviewed the portions of the recommendation challenged by Kirschner and reviewed the remaining portions for clear error. The court adopted Judge Cave’s recommendation.

Direct fraud claims

The first direct fraud claim alleged that JP Morgan and Citi controlled, authorized, or caused Millennium’s allegedly false statements and omissions. The court concluded that the proposed amended complaint did not plausibly allege that JP Morgan and Citi controlled Millennium’s statements or caused Millennium to make them. In particular, an email relied on by Kirschner concerned representations and warranties made by Millennium to the defendants, not communications from Millennium to investors. The court also agreed that the remaining allegations were conclusory.

The second direct fraud claim alleged that JP Morgan and Citi themselves made fraudulent statements to investors. The court concluded that the proposed pleading did not adequately identify actionable misrepresentations or omissions by those defendants. The presence of the defendants’ logos on a confidential information memorandum did not make them the joint makers of the statements. The allegations concerning nondisclosure failed because the defendants had no duty to provide the omitted information, and the allegations concerning statements about conditions for funding did not satisfy Federal Rule of Civil Procedure 9(b), which requires fraud to be pleaded with particularity.

The court also held that contractual disclaimers provided an independent reason the direct fraud claims were futile. The relevant agreements stated that the investors would make their own credit decisions and would not rely on the defendant banks. The court concluded that the proposed amended complaint did not add facts requiring a change from the court’s earlier conclusion that these disclaimers defeated the alleged reliance and disclosure-duty theories.

Aiding and abetting fraud

The proposed aiding and abetting claim alleged that the defendants knew about Millennium’s fraud and substantially assisted it. The court explained that this claim required allegations of an underlying fraud, the defendants’ knowledge of that fraud, and substantial assistance advancing it.

The court agreed with Judge Cave that the proposed complaint did not adequately allege affirmative assistance or direct participation by the defendants. To the extent the claim was based on the defendants’ failure to disclose information, the contractual disclaimers eliminated the alleged duty to disclose. The court therefore adopted the recommendation to deny leave to amend the aiding and abetting claim as futile.

Conspiracy to commit fraud

The proposed conspiracy claim alleged an agreement, intentional participation, overt acts, and resulting damage. The court agreed that the proposed complaint did not adequately allege an overt act. The theory primarily relied on the defendants’ failure to disclose information about Millennium’s investigations and litigation, but the court stated that mere inaction or nondisclosure was insufficient to serve as the required affirmative overt act.

The court therefore adopted the recommendation to deny leave to amend the conspiracy claim as futile.

Negligent misrepresentation

The proposed negligent misrepresentation claim required allegations of a special relationship creating a duty to provide accurate information, negligent provision of incorrect information, and reasonable reliance. Under the applicable New York law principles discussed by the court, the claim also required actual contractual privity or a relationship sufficiently close to approach privity.

The court concluded that the proposed amended complaint did not adequately allege that JP Morgan and Citi controlled, caused, or authorized Millennium’s statements. It also did not allege a special relationship or actual privity between the defendants and the investors. The court relied on the earlier conclusion that the agreements’ disclaimers rejected the alleged special relationship and duty of care. The court adopted the recommendation to deny leave to amend this claim as futile.

Disposition

The court adopted the Report and Recommendation and denied Kirschner’s motion to file an amended complaint. It directed the Clerk of Court to terminate the motion and close the case. This order decided whether the proposed amended pleading could proceed; it did not conduct a trial or resolve the truth of the underlying fraud allegations.

Classification basis

This is a procedural order because the court denied leave to amend on futility and pleading grounds rather than deciding the parties’ underlying fraud, contract, or other claims on their merits.