Katzrin Fin. Group, LLC v Arcapex LLC 2015 NY Slip Op 31971(U) October 22, 2015
Supreme Court, New York County Docket Number: 651129/2014 Judge: Anil C. Singh presents the very troubling question of how did a sophisticated business entity, used to lending $1 Million on a handshake end up losing $5 Million in a loan deal with a sovereign nation, all the while being represented by a law firm?
“This action arises out of investments made by Katzrin Finance Group, LLC (plaintiff or Katzrin) in Blue King, Inc. (Blue King), a payday lending corporation wholly owned by the Chukchansi Indian tribe (the tribe), a sovereign nation recognized by the United States government. The defendants in this action are Vincent Ney (Ney) and Jon Geidel (Geidel), as well as companies owned by them Arcapex LLC (Arcapex), Blackthorn Advisory Group LLC (Blackthorn), and Light Sword LLC (Light Sword) (collectively, defendants). Plaintiff claims that defendants induced it to invest in Blue King, a doomed-to-fail enterprise, by misrepresenting key aspects of the venture’s financial situation. Plaintiff claims (1) negligent misrepresentation against Ney, Arcapex, Blackthorn, and Light Sword; (2) fraud against Ney, Arcapex, Blackthorn, and Light Sword; (3) unjust enrichment against all defendants; and (4) aiding and abetting fraud against Geidel. Plaintiff also brought professional malpractice and breach of fiduciary duty claims against the law firm Katten Muchin Rosenman LLP, its counsel during the alleged fraud, but ultimately dropped those claims against te firm. Facts David Azar (Azar) is the principle of Katzrin. He was introduced to Ney in or about 2005, where Ney discussed his success in the payday lending business (Azar had no prior experience or knowledge of the industry). 1 Over the next several years, Azar and Ney met periodically at business conferences and social gatherings. In 2010, Ney asked Azar for a $1 million loan for his payday lending business. Azar reviewed Ney’s financial information and agreed to give Ney the loan, unsecured by any collateral. Ney subsequently repaid the loan in full. In 2012, Azar made another similar loan to Ney that was also repaid in full. In or about February 2012, Ney solicited Azar’s investment in the Blue King payday lending operation, claiming that the enterprise would be lucrative and low risk. The secret to the operation’s success would lie in Blue King’s corporate structure. The corporation was to be wholly owned by the Chukchansi Indian tribe, who-as a federally recognized sovereign nation–enjoyed limited sovereign immunity and was not subject to state or local payday lending regulations. This beneficial regulatory position, combined with the expert services provided by Arcapex, Blackthorn, and Light Sword, would make Blue King low risk and high reward. ”
“From February 2012 to August 2012, Ney and his associate Geidel aggressively solicited plaintiffs investment in Blue King. Ney and Geidel met with Azar multiple times over this period, participated in numerous conference calls and emails, and provided Katzrin various business and financial documents to further solicit his investment. The three men discussed Blue King’s structure, operations, and profitability. On April 9, 2012, Plaintiff sent copies of Blue King’s business proposal and business structure to the law firm Katten Muchin Rosenman LLP seeking the firm’s legal advice. Katten would provide counsel and conduct due diligence for Katzrin throughout the negotiation process. On May 21, 2012, Geidel sent an email to Azar stating that the servicing agreements, which allegedly contained information on how much the servicing entities owned by Ney and Geidel were to be paid by Blue King, but the documents were never provided to either Katzrin or Katten, despite request. On or about June 22, 2012, August 1, 2012, August 2, 2012, and August 22, 2012, Katzrin invested amounts totaling $5 million in Blue King. Upon completion of this initial investment, Katzrin received a closing binder that failed to disclose payments to the servicing entities and the Indian tribe. On or about November 26, 2012, Katzrin invested an additional $3 million in Blue King. In or about February 2014, Blue King failed to make a monthly payment due to Katzrin and Katzrin exercised its rights to recover half of its investment. Katzrin commenced this action by filing its Summons and Complaint on April 11, 2014. ”
“In order to succeed on a fraud claim, a plaintiff must show both that they relied upon the defendant’s misrepresentations and that such reliance was justifiable. Stuart Silver Assocs. v. Baco Dev. Corp., 245 A.D.2d 96, 98-99 (1st Dep’t 1997). As the Court of Appeals has repeatedly stated: [I]f the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations. Centro Empresarial Cempresa SA. v. America M6vil, S.A.B. de C. V, 17 N.Y.3d 269, 278-79 (2011) (citation omitted). Assuming defendants had a duty to disclose the information contained in the service agreements, plaintiff still needs to show that its alleged reliance was justified given the nature of their relationship. A plaintiff will generally have no difficulty showing it was justified in relying on representations made by its fiduciary, while a plaintiff alleging fraud within the context of an ordinary arm’s length transaction will have a much tougher time. Similarly, it is much more difficult for sophisticated parties acting under the advice of counsel to plead justifiable reliance than those with little-to-no business experience. Centro is particularly instructive. As in the current case, the plaintiffs fraud claim partially hinged on the allegation that the defendants failed to disclose financial information necessary to determine the value of plaintiffs investment. Centro Empresarial Cempresa, 17 N. Y.3d at 279. As here, the plaintiffs were a sophisticated business entities with the benefit of legal counsel. Id. The plaintiffs were aware that defendants had not supplied all the information that they were entitled to but failed to take actions necessary to protect their interests. Id. In the court’s words, this was “an instance where plaintiffs have been so lax in protecting themselves that they cannot fairly ask for the law’s protection.” Id. (citation omitted). In the current case, plaintiff hired counsel to conduct due diligence, was aware that defendants possessed information that was potentially important to its business decisions, was denied access to that information, and decided to invest anyway. CF ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 25 NY3d 1043, 1045 [2015] (finding reasonable reliance was sufficiently stated when plaintiff sought information on how defendant would participate in the transaction, defendant made an affirmative misrepresentation). ”
“Here, Katzrin had the power to refuse to invest any of its money into Blue King until it had an opportunity to examine the service agreements: It was a sophisticated investor represented by a major law firm considering entering into an industry its own attorneys had warned was risky due to regulatory concerns. But here, Katzrin knew exactly what information it required, knew defendants likely possessed the information, and even knew what specific documents to ask for, but failed to take reasonable steps to protect its investment. Moreover, plaintiff continued investing for months following the last alleged discussion concerning the service agreements, even investing an additional $3 million months after completing the initial investment and months after plaintiffs own documentary evidence indicates it was made aware of the amounts being paid to the service providers and the Indian tribe. Thus, it is not the court’s role to insulate sophisticated businesses entities from the consequences of their own risky investments. “