Assessing the sufficiency of the complaint under these standards, I cannot say at this stage that under no set of facts could plaintiff prevail on its fraud claims. There are a number of issues of fact in this case that simply cannot be resolved on a motion to dismiss. In general, these issues relate to: what information was known to RTC, but not to OnBank, prior to the formation of the contract; whether that information was "peculiarly within" RTC's knowledge, and whether it was available to OnBank; whether RTC made any material misrepresentations to OnBank; and OnBank's ability to have discovered the discrepancy between the Certificate Principal Amount and the actual loan balance prior to the date on which the servicing rights and obligations were transferred to OnBank.
The chief issue in this regard is whether this case falls within the exception in Danann for matters peculiarly within the knowledge of the party relying on the other party's disclaimer. Defendant contends that OnBank either had, or could have obtained upon request, information that would have revealed the discrepancy, and that OnBank failed to examine that information. In particular, defendant asserts that there existed a "servicing tape" on which was recorded the servicing history of the loans, which would have revealed to OnBank the actual loan balance. Defendant also contends that a "Statement to Certificateholders" in the bid package showed a "Remaining Principal Balance" nearly one million dollars higher than the "Scheduled Principal Balance of Mortgage Loans after Distribution."
On the present record, however, it is not completely clear whether this information was fully available to OnBank prior to the transfer date. The complaint alleges that the information provided in the bid package "would have revealed no irregularities in the Mortgage Loans and did not reveal the imbalance." Complaint P 24. In addition, plaintiff's counsel stated at oral argument the servicing tape "was not made available in due diligence ..." Transcript, Mar. 25, 1997, at 14.
Defendant may be correct in its assertion that the facts were ascertainable by OnBank prior to the formation of the contract. If after a period of discovery that proves to be the case, plaintiff's claims may fail. As stated, however, on this motion, the allegations of the complaint must be accepted as true, and all inferences must be drawn in plaintiff's favor. For purposes of this motion, then, I must assume the truth of plaintiff's allegation that the facts were not made available to it until after the servicing transfer date.
OnBank also contends that in the banking and finance industry, it is standard practice to maintain a dollar-for-dollar parity between the certificate principal balance and the actual loan balance, and that the disparity in this case was so unusual that a reasonable person in OnBank's position would not have sought specific information to confirm the actual loan balance prior to submitting its bid and entering into the contract. FDIC takes the position that the reasonableness of OnBank's conduct during its due-diligence investigation is irrelevant because of OnBank's representations in the Agreement that it had undertaken an investigation and that it had received all the information it needed. Defendant contends that OnBank's disclaimers preclude it as a matter of law from pursuing its claims in this case, regardless of the extent to which OnBank did in fact undertake an investigation.
Based on plaintiff's allegations, however, I believe that issues of fact exist concerning whether the existence of the disparity was peculiarly within RTC's knowledge; if it was, this case might fall within the Danann exception. If this type of disparity was truly extraordinary, this case could be analogous to cases such as Alloy Briquetting, 756 F. Supp. 713, and Tahini Investments, Ltd. v. Bobrowsky, 99 A.D.2d 489, 470 N.Y.S.2d 431 (2d Dep't 1984), in which the courts held that issues of fact existed concerning whether the plaintiffs could reasonably have discovered hidden defects in land that were not disclosed by the defendants.
Whether RTC had a duty to disclose the disparity to OnBank is also a factual issue at this stage. In a business transaction, a duty to disclose may arise "where one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge." Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank, 731 F.2d 112, 123 (2d Cir. 1984). The complaint alleges that RTC knew that OnBank intended to "collapse" the REMIC so that OnBank would own the mortgage loans directly. The actual loan balance was therefore an important fact with respect to the value of the REMIC to OnBank. Furthermore, even if OnBank had simply planned to hold the Certificates and collect payments as the certificateholder, the value of the Certificates would still have been less than OnBank believed, since the amount of principal remaining was $ 1.1 million less than it appeared from the face of the Certificates. Based on the allegations of the complaint, then, it cannot be said at this stage that under no set of facts could it be found that RTC did have superior knowledge and a duty to disclose the facts to OnBank.
Another issue is whether the prospectus and the other materials in the bid package contained any false information. OnBank alleges that the statements in the bid package that the total Certificate Principal Balance would initially equal the outstanding principal balances of the underlying mortgages, that the outstanding Certificate Principal Balance of a Certificate would be reduced to the extent of distributions of principal and any losses, and that the principal amount of the B-1 Certificates was the same when OnBank submitted its bid in 1994 as it had been in 1989, combined to effectively represent that the outstanding loan balance at the time of OnBank's bid was equal to the principal amount of the Certificates. Again, it is simply not possible at this juncture to conclude that OnBank will be unable to adduce facts to support this allegation.
Defendant also cites the Second Circuit's decision in Harsco for the proposition that a fraud claim cannot be sustained where contractual disclaimers preclude allegations of the element of reasonable reliance. See Harsco, 91 F.3d at 345. The Second Circuit has subsequently recognized, however, that under New York law relating to fraud, it is not necessary for the plaintiff to prove that the correct information "was available only to the defendant and [was] absolutely unknowable by the plaintiff before reliance can be deemed justified." Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1542-43 n.9. (2d Cir. 1997). See also Mallis v. Bankers Trust Co., 615 F.2d 68, 80 (2d Cir. 1980) ("indeed some cases have imposed liability in situations in which plaintiff could have determined the truth with relatively modest investigation").
I am also not persuaded by defendant's assertion that plaintiff has not adequately pleaded scienter. Under 15 U.S.C. § 78u-4(b)(2), which was enacted as part of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), the complaint in a securities fraud action must "with respect to each act or omission alleged to violate this title, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." This standard is based on the standard that had been applied in the Second Circuit prior to the passage of PSLRA, which "required plaintiffs to allege facts that give rise to a strong inference of fraudulent intent." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994).
In addition, Rule 9(b) requires "averments of fraud" and "the circumstances constituting fraud" to be pleaded "with particularity." Therefore, a securities fraud complaint "must '(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'" Shields, 25 F.3d at 1127-28 (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).
In the case at bar, plaintiff has identified a number of documents, such as the Prospectus, Prospectus Supplement, and the Pooling and Servicing Agreement, that it alleges contained fraudulent statements because they indicated that the Certificate Principal Amount would be reduced to reflect losses and distributions of principal. The complaint also alleges specific conversations between identified individuals from OnBank and RTC during the contract negotiations when RTC failed to disclose the disparity, despite RTC's alleged knowledge of the disparity and its knowledge that OnBank intended to collapse the REMIC after the deal was consummated. See Amended Complaint PP 15-25.
Plaintiff has also satisfactorily pleaded facts giving rise to a strong inference of fraudulent intent. OnBank alleges that RTC knew that the Certificates were worth over a million dollars less than OnBank believed them to be, and deliberately failed to inform OnBank of that fact so that OnBank would submit a higher bid. Although I recognize that it is not sufficient merely to allege that it was in defendant's economic self-interest to commit fraud, Shields, 25 F.3d at 1130, the allegations here go beyond that. Plaintiff does not simply rely on RTC's alleged desire to generate a high bid; OnBank alleges that RTC deliberately and knowingly misrepresented the value of the Certificates. That sort of conscious behavior meets the pleading requirements of § 78u-4(b)(2) and the Second Circuit. See San Leandro, 75 F.3d at 813.
II. Contract Claim
The contract claim is based primarily on section 2.3 of the Agreement, which states that
the Seller shall be liable for all Servicing Obligations which are incurred or which relate to any time period prior to and including the Servicing Transfer Date. Subject to the provisions of paragraph (b) hereof, Purchaser shall be liable for all Servicing Obligations which are incurred or which relate to any time period after the Servicing Transfer Date, and effective as of such Servicing Transfer Date, Purchaser hereby agrees to assume, and shall be deemed to have assumed, all such obligations, and the Seller shall have no obligations with respect thereto.