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Docket Number

Attorney(S)

Reed Smith LLP, New York (James C. Martin of the bar of the State of California and the Commonwealth of Pennsylvania, admitted pro hac vice, of counsel), for appellants. Cahill Gordon & Reindel LLP, New York (Charles A. Gilman of counsel), for respondents. Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York (Martin Flumenbaum of counsel), for Fitch Group, Inc., Fitch Ratings, Inc., and Fitch Ratings Ltd., respondents.

Judges

Angela M. Mazzarelli
Rolando T. Acosta
John W. Sweeny

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Smart Summary

Case Summary: Geoffrey Varga, et al. v. McGraw Hill Financial, Inc., et al. (02-10-2017)

Factual and Procedural Background

Plaintiffs are the joint official liquidators of two Bear Stearns feeder funds (Bear Stearns High–Grade Structured Credit Strategies (Overseas) Ltd. and Bear Stearns High–Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd.) and were bringing claims derivatively on behalf of certain master funds in which those feeder funds were investors/shareholders. Plaintiffs alleged that the rating agency defendants (McGraw Hill Financial/Standard & Poor's, Moody's entities, and Fitch entities) fraudulently misrepresented the creditworthiness of certain residential mortgage-backed securities and collateralized debt obligations secured by subprime residential mortgages by assigning artificially high ratings. According to the complaint, the master funds invested capital in and relied upon those misrepresentations in deciding to purchase and to continue holding those securities.

Procedurally, the Supreme Court, New York County (Anil C. Singh, J.) entered an order on August 4, 2015 granting the rating agencies' motion to dismiss the complaint. A subsequent order, entered on or about January 13, 2016, upon renewal, adhered to the original determination and denied the part of plaintiffs' motion seeking leave to amend the complaint. The Appellate Division unanimously affirmed both orders, without costs.

Legal Issues Presented

Whether plaintiffs' fraud claims are time-barred under CPLR 213(8) because they were brought more than six years after the last purchase of the securities.
Whether plaintiffs' contention that injury did not occur until after purchase prevents accrual of the fraud claim at the time of purchase.
Whether "holder" claims (i.e., fraudulent inducement to continue holding securities) are actionable under the out-of-pocket rule governing fraud damages.
Whether plaintiffs have derivative standing to sue on behalf of the Cayman Islands master funds when Cayman law generally prohibits derivative actions and no exceptions are alleged.
Whether a subsequent assignment of claims by the master funds to plaintiffs (as assignees) cures the standing defect and whether the proposed amended complaint would relate back to the original complaint under CPLR 203(f).

Arguments of the Parties

Plaintiffs' Arguments

Plaintiffs alleged that the rating agencies fraudulently misrepresented the creditworthiness of certain RMBS and CDO securities by assigning artificially high ratings, and that the master funds relied on those misrepresentations in purchasing and holding the securities.
Plaintiffs contended that they did not sustain an injury until after purchase, implying that the fraud claim could not have accrued at the time of purchase.
Plaintiffs asserted that a subsequent assignment of the master funds' claims to them cured any derivative-standing defect and sought leave to amend the complaint accordingly.

Respondents' Position (as reflected in the opinion)

Respondents moved to dismiss the complaint. The grounds addressed by the court included that the claims were time-barred under the six-year limitation in CPLR 213(8), that "holder" claims are not actionable because of the out-of-pocket rule for fraud damages, and that plaintiffs lacked derivative standing under Cayman Islands law (which generally prohibits derivative actions) with no pleaded exception.
Respondents opposed the contention that a later-assigned cause of action related back to the original pleading under CPLR 203(f), contending (as reflected by the court's analysis) that the proposed amendment by assignees does not relate back.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Prichard v. 164 Ludlow Corp., 49 A.D.3d 408, 854 N.Y.S.2d 53 (1st Dept. 2008)	Support for application of a six-year limitations period (CPLR 213[8]) to certain claims involving securities purchases.	Used to support the conclusion that plaintiffs' claims, which were brought more than six years after the last purchase, are time-barred.
CIFG Assur. N. Am., Inc. v. Credit Suisse Sec. (USA) LLC, 128 A.D.3d 607, 11 N.Y.S.3d 563 (1st Dept. 2015), lv. denied 27 N.Y.3d 906 (2016)	Additional authority recognizing the time-bar principles applied to claims involving purchases of securities.	Referenced alongside Prichard to reinforce the timeliness analysis and dismissal on statute-of-limitations grounds.
Continental Cas. Co. v. PricewaterhouseCoopers, LLP, 15 N.Y.3d 264, 907 N.Y.S.2d 139, 933 N.E.2d 738 (2010)	Principle that accrual of a fraud claim may occur at purchase where the pleadings reflect that the plaintiff understood the security was worth less than its purchase price.	Applied to reject plaintiffs' contention that injury did not occur at purchase, noting plaintiffs' pleadings reflected an understanding that the securities were worth less than their purchase price.
New York City Tr. Auth. v. Morris J. Eisen, P.C., 276 A.D.2d 78, 715 N.Y.S.2d 232 (1st Dept. 2000)	Case involving timing of payments and accrual issues—cited by plaintiffs in support of their accrual argument.	Distinguished by the court because, in that case, payments occurred at different times; here, payments were made at the time of purchase, so the case did not support plaintiffs' accrual argument.
Bank Hapoalim B.M. v. WestLB AG, 121 A.D.3d 531, 995 N.Y.S.2d 7 (1st Dept. 2014), lv. denied 24 N.Y.3d 914 (2015)	Authority applying the "out-of-pocket" rule and rejecting certain holder-type fraud claims.	Used to support the ruling that plaintiffs' alleged "holder" claims (fraudulent inducement to continue holding securities) are not actionable because they violate the out-of-pocket rule.
Starr Found. v. American Intl. Group, Inc., 76 A.D.3d 25, 901 N.Y.S.2d 246 (1st Dept. 2010)	Discusses limitations on recovery for fraud and supports the out-of-pocket rule analysis.	Cited in support of the conclusion that holder claims are barred by the out-of-pocket rule.
Foss v. Harbottle, [1843] 67 Eng. Rep. 189, 2 Hare 461	Foundational common-law principle that derivative actions are generally barred when the wrong is to the corporation and the proper plaintiffs are the corporation's majority/shareholders (the Foss v. Harbottle rule).	Referenced to explain the general prohibition against derivative actions under the applicable law (the law of the Cayman Islands) and to support the court's standing analysis.
Johnson v. Gore Wood & Co., [2002] EWHC 776, 2 AC 1[HL]	Authority concerning derivative relief and related principles under English/Common law jurisdictions.	Referenced alongside Foss to support the statement that Cayman law generally prohibits derivative actions and to explain plaintiffs' lack of derivative standing absent alleged exceptions.
Shenwick v. HM Ruby Fund, L.P., 106 A.D.3d 638, 966 N.Y.S.2d 69 (1st Dept. 2013)	Discusses derivative standing questions and the effect of governing foreign law on derivative suits.	Cited in the court's analysis of derivative standing under Cayman Islands law to show that applicable foreign-law limitations preclude plaintiffs' derivative suit absent pleaded exceptions.
Nomura Asset Acceptance Corp. Alternative Loan Trust v. Nomura Credit & Capital, Inc., 139 A.D.3d 519, 31 N.Y.S.3d 863 (1st Dept. 2016)	Interpretation of CPLR 203(f) and the circumstances under which an amendment asserting assigned claims relates back to the original pleading.	Applied to conclude that the master funds' subsequent assignment of claims to plaintiffs did not cure the standing defect because the proposed amended complaint by assignees did not relate back to the earlier filed complaint.
Southern Wine & Spirits of Am., Inc. v. Impact Envtl. Eng'g, PLLC, 80 A.D.3d 505, 915 N.Y.S.2d 541 (1st Dept. 2011)	Another decision addressing application of CPLR 203(f) and relate-back principles for amended pleadings.	Cited in support of the court's conclusion that the proposed amendment asserting assigned claims would not relate back and therefore did not cure plaintiffs' lack of standing.

Court's Reasoning and Analysis

The Appellate Division affirmed the trial court's dismissal and denial of leave to amend for the following reasons, as drawn from the opinion:

Timeliness/Accrual: The court concluded plaintiffs' claims were time-barred under CPLR 213(8) because the complaint was filed more than six years after the last purchase of the securities. The court relied on precedents (including Prichard and CIFG) applying the six-year limitations period to similar claims.
Accrual was further analyzed with respect to plaintiffs' argument that injury did not occur until after purchase. The court found that plaintiffs' own pleadings reflected they understood at the time of purchase that the securities were worth less than their purchase price; relying on Continental Casualty, the court held the fraud claim accrued at purchase and thus was time-barred.
"Holder" Claims and Damages Rule: To the extent plaintiffs alleged claims premised on a fraudulent inducement to continue holding the securities (so-called "holder" claims), the court held these claims are not actionable because they conflict with the "out-of-pocket" rule governing recoverable fraud damages. The court relied on Bank Hapoalim and Starr Foundation in reaching this conclusion.
Derivative Standing Under Cayman Law: The court determined plaintiffs lacked standing to sue derivatively because the law of the Cayman Islands (the governing law for the issue, as the parties agreed) generally prohibits derivative actions. Plaintiffs did not allege they fell within any recognized exception to that general rule; the court referenced Foss v. Harbottle and related authorities to explain the principle.
Assignment and Relation Back: The court addressed plaintiffs' attempt to cure the standing defect by asserting claims assigned to them by the master funds and seeking leave to amend. The court concluded the proposed amended complaint by plaintiffs-as-assignees did not relate back to the original complaint under CPLR 203(f), citing Nomura and Southern Wine. Accordingly, the assignment did not cure the standing defect and the trial court properly denied leave to amend on that basis.
Final Determination: Based on the above legal analyses—timeliness/accrual, the non-actionability of holder claims under the out-of-pocket rule, lack of derivative standing under Cayman law, and the failure of the assignment/amendment to relate back—the Appellate Division unanimously affirmed the trial court's dismissal and denial of leave to amend.

Holding and Implications

Holding:

The Appellate Division affirmed the Supreme Court's order granting defendants' motion to dismiss the complaint and affirmed the order denying leave to amend the complaint. Both affirmances were unanimous and entered without costs.

Implications:

The direct effect is that plaintiffs' complaints against the rating agencies were dismissed and plaintiffs were not permitted to amend to assert assigned claims; plaintiffs remain without a viable remedy in this action as to these defendants based on the pleadings and the record addressed by the court.
The court's decision rests on established doctrines—statute of limitations accrual rules, the out-of-pocket rule for fraud damages, the general bar on derivative suits under applicable Cayman Islands law, and CPLR 203(f) relate-back principles—and does not announce a novel legal principle. The opinion applies and distinguishes prior authorities to the facts presented rather than establishing new precedent beyond those applications.

Note: This summary is drawn exclusively from the text of the provided opinion and does not add facts or inferences beyond that source.

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Geoffrey VARGA, et al., Plaintiffs–Appellants, v. McGRAW HILL FINANCIAL, INC. formerly known as The McGraw–Hill Companies, Inc., etc., et al., Defendants–Respondents, Bear Stearns High–Grade Structured Credit Strategies Master Fund Ltd., et al., Nominal Defendants.

Reed Smith LLP, New York (James C. Martin of the bar of the State of California and the Commonwealth of Pennsylvania, admitted pro hac vice, of counsel), for appellants.

Cahill Gordon & Reindel LLP, New York (Charles A. Gilman of counsel), for respondents.

Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York (Martin Flumenbaum of counsel), for Fitch Group, Inc., Fitch Ratings, Inc., and Fitch Ratings Ltd., respondents.

SWEENY, J.P., ACOSTA, MAZZARELLI, MANZANET–DANIELS, WEBBER, JJ.

Order, Supreme Court, New York County (Anil C. Singh, J.), entered August 4, 2015, which, inter alia, granted defendants McGraw Hill Financial, Inc., Standard & Poor's Financial Services LLC, Moody's Corporation, Moody's Investors Service Inc., Moody's Investors Service Limited, Fitch Group, Inc., Fitch Ratings, Inc. and Fitch Ratings Limited's (the rating agencies) motion to dismiss the complaint, unanimously affirmed, without costs. Order, same court and Justice, entered on or about January 13, 2016, which, upon renewal, adhered to the original determination, and denied the part of plaintiffs' motion seeking leave to amend the complaint, unanimously affirmed, without costs.

Plaintiffs allege that the rating agencies fraudulently misrepresented the creditworthiness of certain residential mortgage-backed securities and collateralized debt obligations secured by subprime residential mortgages by assigning them artificially high ratings, and that the nominal defendants (the master funds), in which Bear Stearns High–Grade Structured Credit Strategies (Overseas) Ltd. and Bear Stearns High–Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd. (the feeder funds), of which plaintiffs are the joint official liquidators, invested all their capital and were shareholders and/or investors, relied upon those misrepresentations in deciding to invest in those securities and maintain the investments.

Plaintiff's claims were brought more than six years after the last purchase of securities (CPLR 213[8] ) and thus are time-barred (see Prichard v. 164 Ludlow Corp., 49 A.D.3d 408, 854 N.Y.S.2d 53 [1st Dept.2008] ; see also CIFG Assur. N. Am., Inc. v. Credit Suisse Sec. (USA) LLC, 128 A.D.3d 607, 608, 11 N.Y.S.3d 563 [1st Dept.2015], lv. denied 27 N.Y.3d 906, 2016 WL 2636590 [2016] ).

Plaintiffs' contention that they did not sustain an injury until after the purchase of the securities, and that therefore the fraud claim could not have accrued before then, is belied by their pleadings, which reflect an understanding that the securities were worth less than their price at the time of purchase (see Continental Cas. Co. v. PricewaterhouseCoopers, LLP, 15 N.Y.3d 264, 271, 907 N.Y.S.2d 139, 933 N.E.2d 738 (2010). Plaintiffs' reliance on New York City Tr. Auth. v. Morris J. Eisen, P.C. , 276 A.D.2d 78, 715 N.Y.S.2d 232 [1st Dept.2000] ), is misplaced, since the payments in this case were made at the time of purchase.

To the extent plaintiffs allege "holder" claims, i.e., fraudulent inducement to continue to hold the securities, these claims violate the "out-of-pocket" rule governing damages recoverable for fraud, and are not actionable (see Bank Hapoalim B.M. v. WestLB AG, 121 A.D.3d 531, 535, 995 N.Y.S.2d 7 [1st Dept.2014], lv. denied 24 N.Y.3d 914, 2015 WL 233937 [2015], citing Starr Found. v. American Intl. Group, Inc., 76 A.D.3d 25, 27–28, 901 N.Y.S.2d 246 [1st Dept.2010] ).

Moreover, plaintiffs lack standing to sue derivatively. The law of the Cayman Islands, which the parties agree governs this issue, generally prohibits derivative actions, and plaintiffs do not allege that they fall within any of the exceptions to the general rule (see Foss v. Harbottle, [1843] 67 Eng. Rep. 189, 2 Hare 461; Johnson v. Gore Wood & Co., [2002] EWHC 776, 2 AC 1[HL] ; see also Shenwick v. HM Ruby Fund, L.P., 106 A.D.3d 638, 966 N.Y.S.2d 69 [1st Dept.2013] ).

Plaintiffs' lack of standing was not cured by the master funds' subsequent assignment of their claims, and the proposed amended complaint by plaintiffs, as assignees, does not relate back to the earlier filed complaint (see CPLR 203[f] ; Nomura Asset Acceptance Corp. Alternative Loan Trust v. Nomura Credit & Capital, Inc., 139 A.D.3d 519, 520, 31 N.Y.S.3d 863 [1st Dept.2016] ; Southern Wine & Spirits of Am., Inc. v. Impact Envtl. Eng'g, PLLC, 80 A.D.3d 505, 915 N.Y.S.2d 541 [1st Dept.2011] ).

Varga v. McGraw Hill Fin., Inc.