1. Introduction
This decision distinguishes between an investor’s reliance on financial projections and its reliance on a specifically obtained officer’s solvency certificate. It also demonstrates why the same alleged misstatement may support a statutory securities claim even when a common-law fraud claim fails.
The plaintiffs, including Brigade Cavalry Fund Ltd., invested through their investment manager, nonparty Brigade Capital Management, LP, referred to in the opinion as Brigade. The transaction involved notes issued by nonparties Avaya Inc. and Avaya Holdings Corp., collectively Avaya. The defendants appealing the denial of their dismissal motions were James M. Chirico, Jr., and Kieran J. McGrath, Avaya’s chief financial officer.
The challenged statements concerned Avaya’s financial projections and an officer’s certificate addressing its solvency. Plaintiffs asserted common-law fraud and claims under the North Carolina Securities Act, or NCSA. Defendants moved to dismiss under CPLR 3211(a)(7), which tests whether a complaint states a legally sufficient claim.
The principal questions were whether plaintiffs adequately pleaded justifiable reliance and fraudulent knowledge; whether a New York choice-of-law provision displaced the NCSA claim; whether financial projections were actionable under that statute; and which arguments the appellate court could consider when raised for the first time in a reply brief.
3. Legal Reasoning
A. Financial projections required adequately pleaded investor diligence
The projection-based fraud theory failed on justifiable reliance. Brigade appeared to have reviewed Avaya’s financial statements and other public materials and participated in calls with McGrath. But the investment agreement also entitled Brigade to request nonpublic information to evaluate Avaya’s business and the accuracy of its financial statements and guidance.
The complaint did not allege that Brigade used that contractual right or otherwise conducted diligence adequate for an investor of its sophistication. The court therefore treated the pleaded investigation as insufficient to support reliance on the projections.
Importantly, the decision does not announce that every sophisticated investor must obtain every available nonpublic document. Its reasoning is tied to the pleaded circumstances: Brigade’s sophistication, the nature of the representations, the information it reviewed, and an available contractual means of investigating further.
Plaintiffs could not postpone this pleading problem until discovery. Their own investigative efforts were facts within their knowledge. Discovery might reveal what defendants knew, but it was unnecessary to establish what Brigade itself had done before investing.
B. The solvency certificate supported reliance, but not an inference of fraudulent knowledge
The court reached a different conclusion about reliance on McGrath’s solvency certificate. Because Brigade had obtained a written representation concerning solvency, it was entitled to rely on that representation without conducting a separate solvency investigation.
That conclusion did not save the fraud claim. Justifiable reliance and scienter are distinct requirements. Even an investor entitled to accept a written assurance must sufficiently allege that the speaker knew it was false when made.
Plaintiffs relied on a June 23, 2022 communication from an Avaya executive to its general counsel about an ongoing assessment of goodwill and trade names, and a June 28 press release estimating substantial noncash impairment charges. Those allegations did not sufficiently establish that McGrath knew his July 12 solvency statement was false.
The court identified several weaknesses in the proposed inference. Avaya conducted impairment assessments annually, so the existence of an assessment was not inherently suspicious. The executive’s communication was not addressed to McGrath. It also expressly stated that no conclusions had yet been reached.
Nor did Avaya’s subsequent announcement of an impairment large enough to render it insolvent as of the certificate date establish McGrath’s contemporaneous knowledge. The distinction is between an allegedly inaccurate statement and a knowingly inaccurate statement: later developments may illuminate falsity without establishing the speaker’s earlier state of mind.
The court also rejected plaintiffs’ proposed reckless-disregard theory against these non-auditor defendants, relying on Cimen v HQ Capital Real Estate LP. That conclusion should be understood within the opinion’s particular pleading analysis, rather than enlarged into a rule governing every statutory securities claim or every form of recklessness.
As to Chirico, the allegation that he “would . . . have been aware of and approved” the certificate rested on information and belief. The court found that formulation insufficient to connect him to the alleged fraud. General assumptions about an executive’s awareness could not replace supporting factual allegations.
C. The contractual choice-of-law clause did not displace the independent statutory claim
Section 6.9 of the investment agreement selected New York law for issues concerning the agreement’s “construction, validity, enforcement and interpretation,” including its exhibits. Defendants argued that this provision barred the NCSA claim.
The court rejected that position because the statutory claim did not require resolution of those specified contractual questions. Defendants’ alleged liability for representations and omissions could exist independently of the particular agreement used to sell the notes.
The court’s counterfactual illustrates the distinction: even if Avaya had sold the notes under an entirely different contract, defendants could still potentially face NCSA liability for their oral representations and omissions.
The holding turns on the scope of this clause. It does not establish that every choice-of-law provision is incapable of reaching statutory claims, nor does it resolve every other possible objection to applying the NCSA.
D. The NCSA required a separate analysis of projections and the certificate
NCSA § 78A-56(a)(2) derives from § 12(2) of the federal Securities Act of 1933. The court therefore treated federal securities decisions as persuasive guidance in interpreting the North Carolina provision.
Applying that framework, the court invoked the general rule that projections of future performance not expressed as guarantees are ordinarily not actionable under federal securities law. It also noted that plaintiffs did not allege that they were denied an opportunity to investigate or that reasonable diligence could not have revealed the relevant facts concerning the projections.
These grounds justified dismissal of the projection-based statutory theory. The opinion does not create an absolute immunity for every statement labeled a projection; it applies a qualified rule to the allegations before the court.
The officer’s certificate stood differently. McGrath could potentially be liable under the NCSA for his own statements, and plaintiffs adequately pleaded that those statements were untrue. The failure to plead fraudulent knowledge sufficient for common-law fraud therefore did not automatically defeat the remaining statutory theory.
The court also rejected McGrath’s effort to obtain dismissal through an argument about primary and secondary liability. His challenge to primary liability targeted the financial projections rather than the entire statutory claim. The court characterized that limited position as implicitly conceding that other portions of the primary-liability claim were not dismissible.
This was not a finding of ultimate statutory liability. It was a determination that the remaining claim survived the particular pleading and appellate challenges presented.
E. Appellate fairness controlled consideration of reply arguments
Chirico initially argued that the investment agreement precluded the NCSA claim. He addressed the substantive defects in the financial-projection theory only in reply. Nevertheless, the court applied its projection ruling to him because McGrath had raised that issue in his opening brief, giving plaintiffs an opportunity to respond.
The court reached the opposite conclusion regarding Chirico’s new contention that plaintiffs could not sue him for secondary liability without suing Avaya for primary liability. McGrath’s arguments had not adequately presented that distinct issue. Plaintiffs therefore lacked a fair opportunity to answer it.
The court struck the improper portions of Chirico’s reply rather than deciding that new theory on its merits. Consequently, the opinion should not be read as resolving whether Avaya had to be joined or sued as a prerequisite to the particular secondary-liability claim.
5. Potential Impact
Investor diligence must be pleaded concretely
Sophisticated investors challenging financial projections should expect scrutiny of their actual pre-investment investigation, particularly where their contracts provide access to additional information. General references to diligence, coupled with a promise that discovery will supply details, may be insufficient.
Written assurances remain meaningful protections
The decision preserves an important distinction between relying on forecasts and relying on a negotiated factual certification. Obtaining a specific written assurance can strengthen the reliance element, although it does not eliminate the need to plead the other elements of fraud.
Later accounting developments require a link to earlier knowledge
Plaintiffs relying on later impairments or insolvency announcements must identify facts supporting the defendant’s knowledge at the time of the challenged statement. The existence of an accounting review, corporate proximity to information, or an adverse later outcome may not supply that link.
Contract language and claim structure matter independently
Transactional parties should not assume that a clause governing interpretation and enforcement of an agreement necessarily governs every related statutory claim. The decision encourages attention both to the clause’s language and to whether the claim depends on contractual rights or an independent legal duty. It does not decide whether differently drafted language would be effective.
Dismissal must be assessed theory by theory
A complaint can fail as fraud yet survive under a securities statute. Likewise, dismissal of allegations concerning forecasts need not eliminate a claim concerning a statement of existing financial condition. Future litigants should distinguish the challenged statements, the applicable legal elements, and each defendant’s alleged involvement.
Co-appellants cannot assume unrestricted access to each other’s arguments
One appellant’s opening brief may give the respondent adequate notice of a shared issue. It does not automatically preserve a different argument introduced by another appellant in reply. The decision makes the opportunity to respond central to that procedural distinction.
7. Conclusion
Brigade Cavalry Fund Ltd. v Chirico draws three important distinctions: forecasts versus factual certifications, justified reliance versus adequately pleaded fraudulent knowledge, and contractual interpretation versus independent statutory liability.
Brigade’s insufficiently pleaded diligence defeated the projection-based fraud theory, while the written solvency certificate supported reliance but lacked sufficient allegations of scienter. The NCSA claim received separate treatment: the projection theory was dismissed, but the certificate-based claim survived. The decision’s broader significance lies in its insistence on statement-specific, defendant-specific, and claim-specific analysis rather than an all-or-nothing treatment of an investment dispute.