Commercial Division Rules that U.S. Treasury Secretary’s Access to a Company’s Detailed Financial Information in His Role as a Board Member Is Insufficient to Establish Liability for Fraud
Members of a company’s board who are also investors in the company often have access to detailed information about the company’s finances and its lending facilities. But what happens when an investor-board member could, through access to the company’s financial information, potentially determine that funds from a lending facility are not being used for the purpose that the company and its agents had previously represented that they would be used for? Is the investor-board member potentially liable for fraud merely on the basis of his access to or awareness of financial information about the company? Justice Charles E. Ramos’s recent decision in RKA Film Fin., LLC v. Kavanaugh, No. 652592/2015, 2017 BL 222658, 2017 N.Y. Misc. LEXIS 2459, 2017 NY Slip Op 50846(U) (Sup. Ct. June 27, 2017), suggests that the answer may be no. According to the Commercial Division, without personal involvement in the alleged fraud itself or a special duty to disclose to the plaintiff, an investor-board member is likely not liable for fraud to a plaintiff creditor.
The plaintiff, RKA Film Financing LLC (“RKA”), is a media financing company. In 2014, RKA decided to lend money to Relativity, a global media company based in California that is affiliated with several special purpose entities (“SPE”) that finance, produce, and advertise movies. From April 2014 to June 2014, RKA negotiated a lending facility agreement with Relativity and several companies that are part of a New York-based financial advisory firm (the “Colbeck defendants”) and that also provided funding to Relativity. As part of the negotiations, RKA conducted extensive due diligence by speaking with several individual agents of Relativity, who are also named as defendants in this action (the “individual defendants”). After the negotiations concluded, RKA agreed to enter an agreement with certain Relativity-affiliated SPEs to fund movie print and advertising expenses. Plaintiff alleged that the financing agreement provided that RKA’s investment would only be used for print and advertising expenses for specific movies. RKA then lent Relativity $73.6 million to fund print and advertising expenses for a slate of ten films, including Women in Black 2, Black or White, Solace, Masterminds, and November Man. However, allegedly unbeknownst to RKA, Relativity was in financial decline; and instead of using RKA’s funding for print and advertising, Relativity instead used it to prop up Relativity’s declining finances by paying for general corporate expenses.
In October 2014, defendant Steve Mnuchin (who is currently U.S. Secretary of the Treasury), joined Relativity’s board after his private investment firm, Dune Capital, invested $104 million in Relativity. In conjunction with Dune Capital’s investment, the Jones Day law firm provided Mnuchin with an opinion detailing Relativity’s available debt facilities, including the RKA facility, and stating that “each facility could be and was being used for working capital.” Mnuchin also served as CEO and Chairman of OneWest, a commercial lender that had lent $160 million to Relativity in 2012, and which was allegedly privy to detailed information about Relativity’s finances.
On April 6, 2015, in response to a request from RKA, agents of Relativity informed RKA that only $1.7 million of RKA’s print and advertising financing had actually been spent on print and advertising. However, on April 10, 2015, Relativity confirmed that $69.4 million in RKA’s print and advertising funding would be made available for a slate of four upcoming films. But this was not to be. Just a few days later, on April 13, 2015, Relativity admitted that it had appropriated RKA’s financing and used it for improper purposes. The individual defendants then allegedly prevented RKA from inspecting Relativity’s books.
On May 29, 2015, Mnuchin--who had undisputedly not participated in any of the above communications about the use of the funds, and who had no direct contact with RKA during the execution and performance of the RKA funding agreement--resigned from Relativity’s board. A day later Relativity defaulted on a loan from OneWest, at which point Mnuchin allegedly began seizing approximately $50 million from Relativity’s accounts in order to recoup OneWest’s loan. Relativity then filed for Chapter 11 bankruptcy.
RKA brought suit against the Colbeck defendants and several other individuals including Mnuchin (but not Relativity), alleging that they had misled RKA into believing that its investment in the lending facility would be used only to fund advertising for major movie releases. Mnuchin moved to dismiss for failure to state a claim.
Justice Ramos granted Mnuchin’s motion, and dismissed RKA’s fraud, fraudulent inducement, and negligent misrepresentation claims against Mnuchin.
First, Justice Ramos addressed RKA’s fraud claim. To prevail on a fraud claim, a plaintiff must establish that the defendant’s misrepresentations were the direct and proximate cause of the claimed losses. A fraud cause of action may be predicated on concealment of material facts, but the plaintiff must first establish that the defendant had a duty to disclose. Further, in pleading a fraud claim, the plaintiff must clearly state the circumstances constituting the wrong in detail. Justice Ramos concluded that RKA had failed to allege a viable claim for fraud against Mnuchin, reasoning that RKA did not substantively allege that Mnuchin was responsible for, aware of, or a participant in the fraud surrounding the RKA lending facility. Mnuchin’s personal relationship with individual defendant Ryan Kavanaugh was insufficient to establish awareness or liability; moreover, neither Mnuchin’s due diligence into Relativity’s finances nor the opinion he received from Jones Day confirming that each of Relativity’s lending facilities was being used for working capital sufficed to meet this burden. Noting that “RKA has yet to identify a specific factual misrepresentation made by Mnuchin to RKA,” Justice Ramos concluded that “[m]ere knowledge (or awareness) of Relativity's finances is inconclusive to establish fraud absent evidence of any representation made by Mnuchin to RKA.” Further, Mnuchin’s involvement in the sweep of Relativity’s accounts in collecting on OneWest’s loan was irrelevant to whether Mnuchin was liable for the fraud. In any event, even if Mnuchin did know that the RKA lending agreement had been induced by misrepresentations, RKA failed to allege the existence of a relationship between Mnuchin and RKA that imposed a duty of disclosure on Mnuchin. Thus, RKA’s fraud claim against Mnuchin could not withstand scrutiny.
Justice Ramos next addressed RKA’s separate fraudulent inducement claim. To prevail on a fraudulent inducement claim, a plaintiff must establish a material misrepresentation that is known to be false, made with the intention of inducing reliance and upon which it actually relied, that caused the plaintiff to sustain a detriment. Justice Ramos agreed with Mnuchin that it would be factually impossible for him to have fraudulently induced RKA to enter into the print and advertising funding agreement, because Mnuchin had not joined Relativity’s board until over three months after RKA and Relativity had executed the agreement, and there were no allegations that he was involved in the execution or performance of the agreement in any way.
Finally, the Commercial Division addressed RKA’s negligent misrepresentation cause of action. That claim failed due to the absence of a privity-like or fiduciary relationship between Mnuchin and RKA.
Justice Ramos’s analysis of RKA’s fraud claim against Mnuchin suggests that mere access to or awareness of a company’s finances, without more, may be insufficient to establish that an investor-board member is liable for a fraud committed by the company or its agents. In this case, Justice Ramos held that Mnuchin was not liable for fraud because: (a) Mnuchin was not involved in or aware of the alleged fraud; (b) Mnuchin did not himself make any specific misrepresentations to RKA; and (c) Mnuchin did not have a duty to disclose to RKA. The mere fact that Mnuchin, as a board member and investor in the company, had access to Relativity’s financial information, an opinion relating to them prepared by Jones Day, and access to Relativity’s financial accounts was not sufficient to establish fraud. RKA Film thus suggests that mere access to a firm’s financials and accounts, or opinions relating to them prepared by law firms or other outside consultants, may be insufficient on their own to establish that an investor-board member is liable for fraud. RKA Film may therefore provide some measure of comfort for investor-board members about the possibility of fraud claims brought by the firm’s creditors, absent the sort of circumstances identified by the Commercial Division.
 Citations herein are to the Bloomberg Law reporter version of the opinion.
 Id. at *1.
 The companies are: Colbeck Capital Management, LLC, Colbeck Capital, LLC, and Colbeck Partners IV.
 Id. at *2.
 Id. Defendant Jason Beckman made this admission. The opinion does not specify Beckman’s relationship to the other defendants.
 Id. at *2-3.
 Id. at *1-2. Earlier in the case, the court granted an earlier motion to dismiss by Mnuchin, but permitted RKA to file a second amended complaint. The instant decision concerns that amended version of the complaint. See id. at *3.
 Id. at *3. Mnuchin also made a motion for sanctions, id., which Justice Ramos denied due to the lack of evidence of frivolous conduct by the plaintiffs, id. at *5.
 Id. at *3.
 Kavanaugh’s relationship to the other defendants is unclear.
 Id. at *4.
 Id. at *5.