FRAUDULENT CONVEYANCES Nassau Academy of Law CLE Live ...

302 B.R. 760 Page 14302 B.R. 760(Cite as: 302 B.R. 760)In the end, despite Sharp's efforts to cast State Streetas an instigator and active participant in the Spitzes'scheme, the complaint cannot overcome the absenceof any duty on State Street's part to protect Sharp'sinterests. Indeed, each of the alleged affirmative actsthat Sharp identifies as comprising State Street's"substantial assistance" are at root omissions-- failuresto act. By allowing Sharp continued access tothe line of credit, for instance, State Street in essencepreserved the status quo. Although it would havebeen in the long-term best interests of Sharp (and itsother creditors) for State Street to have immediatelycut off the Spitzes' access to the revolving loan facilityand loan proceeds, State Street owed Sharp noduty of loyalty, and had no obligation to put Sharp'sinterests ahead of its own. Similarly, State Streetcould possibly have thwarted the fraud by disclosingwhat it knew to the Noteholders prior to the closingof the second financing. However, in the absence of aduty to disclose its knowledge of the Spitzes' fraud,State Street cannot be held liable for its failure torespond to inquiries from the Noteholders' representative.[FN8] See Renner, 2000 WL 781081, at *9(concluding that a bank official did not aid and abet acustomer's fraud by "fail[ing] to respond" to inquiriesconcerning the customer). Indeed, the failure to answeror respond to phones calls (even if motivated bya conscious desire not to disclose information) canhardly be characterized as more than inaction.FN8. Had State Street made any false ormisleading statements to the Noteholders, itmight have had a duty to correct any resultingmisimpressions. Surely, however, theNoteholders could not have viewed StateStreet's failure to respond to their inquiriesas any kind of endorsement of the proposedtransaction. If anything, under the circumstances,State Street's evasiveness mighthave aroused a prudent investor's suspicions.[16] The closest Sharp comes to identifying any actof participation by State Street is the written consentState Street gave in March 1999 to the Noteholders'purchase of $25 million in subordinated notes fromSharp. Sharp argues that State Street's act of consentingto the transaction was a sine qua non of theSpitzes' expanded fraud, since without the consent,Sharp would not have been able to borrow any additionalmoney, and the Spitzes' continued looting wasfunded in part by the additional funds advanced bythe Noteholders. However, State Street's contractuallybargained-for authority to block Sharp from furtherborrowing, did *777 not confer on the bank anaffirmative duty to protect Sharp--and still less toprotect other third-parties, such as the Noteholders--from the actions of Sharp's management. Significantly,although the consent made it possible for theSpitzes to seek additional financing through fraud,there is no allegation that State Street did anything toinduce the Noteholders to lend to Sharp. Sharp hasnot alleged, for example, that the consent was intendedas--or could have been reasonably interpretedby the Noteholders to be--a representation by StateStreet as to Sharp's creditworthiness. More importantly,although State Street may have anticipatedthat the Spitzes would continue to loot the company,they had no duty to intervene to prevent breaches offiduciary duty by Sharp's management.Equally unavailing are Sharp's efforts to hold StateStreet accountable for encouraging or inducing theSpitzes to expand the scope of their fraud. Althoughthe case law and the Restatement identify "inducement"as an independent form of participation, thereis scant authority setting forth exactly what conductwould qualify as inducement in this context. SeeSharp Mem. at 13 ("[W]e are not aware of any mentionof inducement of this sort in the case law...."). Inits complaint, Sharp asserts thaton November 30, 1998, State Street demanded andobtained Sharp's agreement to secure new financingfrom investors unaware of the fraud, and to usethat financing to pay off State Street's line of credit.In exchange, State Street agreed to give Sharp untilMarch 31, 1999 to obtain this new financing and toretire the debt to State Street.Compl. 50. The Bankruptcy Court concluded thatthis pleading violated Rule 9(b), "by failing to allegewho made the demand, who else was present, exactlywhat was said, and where this occurred." Bankr.Dec.at 517.Assuming that Rule 9(b) applies to these allegations,and that the pleading falls short of the rule's particularitythreshold, this would not, of course, be groundsfor dismissal with prejudice, since Sharp could begranted leave to replead to provide more detail. SeeLuce v. Edelstein, 802 F.2d 49, 56 (2d Cir.1986)("Complaints dismissed under Rule 9(b) are almostalways dismissed with leave to amend."); accord© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.