SILVER POINT CAPITAL FUND v. RIVIERA RESOURCES INC (2020)

The following e-filed documents, listed by NYSCEF document number (Motion 003) 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 58, 61, 64, 65, 66, 67 were read on this motion to/for DISMISS.

Upon the foregoing documents, Riviera Resources, Inc.'s (Riviera) motion to dismiss the amended complaint, pursuant to CPLR § 3211(a)(1), (a)(5) and (a)(7), is granted.

Factual Background

Riviera is a publicly traded corporation. Silver Point Capital Fund, L.P. and Silver Point Capital Offshore Master Fund, L.P. (together, Silver Point) are hedge funds that collectively held 1,779,131 common shares of Riviera stock (Amend. Compl., ¶ 12; NYSCEF Doc. No. 55). In June and July of 2019, a Riviera director, Evan Lederman, contacted Silver Point to solicit the sale of Silver Point's shares to Riviera and the parties engaged in a number discussions about such sale (id.).

Ultimately, pursuant to a Stock Repurchase Agreement (the Repurchase Agreement; NYSCEF Doc. No. 19) dated as of August 6, 2019, by and among Riviera and Silver Point, Silver Point agreed to sell all of its shares to Riviera at $10.50 per share (totaling $18,680,875.50), at a discount of approximately 7% to the then-prevailing market price (Amend. Compl., ¶ 13). In connection with the stock repurchase, the parties entered into a separate letter agreement of even date (the Big Boy Letter; NYSCEF Doc. No. 19), between Riviera as Buyer and Silver Point as Seller, annexed to the Repurchase Agreement as Exhibit A, drawn on Silver Point letterhead, which provides as follows:

The Seller hereby acknowledges that it is aware that the Buyer may have access to certain material, nonpublic information regarding the Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects (the “Information”). Any such Information may be indicative of a value of the Common Stock that is substantially different than the purchase price reflected in the Purchase.

* * *

3. The Seller acknowledges that the Buyer is relying upon this letter in engaging in the Purchase and would not engage in the Purchase in the absence of this letter.

4. Notwithstanding the Buyer's possession of the Information and the absence of disclosure thereof to the Seller, the Seller wishes to enter into the proposed transaction. The Seller, to the extent that it is acting as an agent and not as a principal, has fully advised its principal of the foregoing and the risks involved in participating in the proposed transaction.

(id. at 1-2 [emphasis added] ).

The Big Boy Letter further states:

5. Notwithstanding anything that may be expressed or implied in this letter, the Seller covenants, agrees and acknowledges that it shall have no recourse hereunder or under any documents or instruments delivered in connection herewith, and no recourse shall be had against any former, current or future director, officer, controlling person, employee, agent, advisor, stockholder, affiliate or assignee of the Buyer, or any former, current or future director, officer, employee, agent, advisor, general or limited partner, manager, member, stockholder, affiliate or assignee of any of the foregoing, whether by the enforcement of any assessment or by any legal or equitable proceeding, or by virtue of any statute, regulation or other applicable law, it being expressly agreed and acknowledged that no personal liability whatsoever shall attach to, be imposed on or otherwise be incurred by any former, current or future director, officer, controlling person, employee, agent, advisor, stockholder, affiliate or assignee of the Buyer, as such, for any obligations of the Buyer under this letter, or any of the documents or instruments delivered in connection herewith for any claim based on, in respect of, or by reason of such obligations or their creation

(id. at 2).

In addition, the Big Boy Letter contains the following release provisions (the Release):

6. The Seller does for itself and its successors and/or assigns, waive all warranties, express or implied, arising by law, equity or otherwise, with respect to its sale of the Common Stock, and hereby forever releases, discharges and dismisses any and all claims, rights, causes of action, suits, obligations, debts, demands, liabilities, controversies, costs, expenses, fees, or damages of any kind, (including, but not limited to, any and all claims alleging violations of federal or state securities laws, common-law fraud or deceit, breach of fiduciary duty, negligence or otherwise), whether directly, derivatively, representatively or in any other capacity (collectively, the “Claims”), against the Buyer or any of its affiliates, including, without limitation, any and all of its present and/or past directors and officers, partners, employees, representatives, fiduciaries or agents, their respective successors and assigns (collectively, the “Released Parties”), which are based upon or arise from the existence or substance of the Information and the fact that the Information has not been disclosed to the Seller. The Seller also agrees that it will not institute or maintain, or assist any person to institute or maintain, any cause of action, suit, complaint or other proceeding against any Released Party as a result of the existence or substance of the Information and the fact that the Information has not been disclosed to the Seller. The Seller intends to effect, to the maximum extent permitted by law, a complete and knowing waiver of its rights as set forth in this letter.

7. The Seller hereby irrevocably indemnifies and agrees to hold harmless the Released Parties, and each of them, with respect to any and all Claims which may be instituted by the Seller or its successors and/or assigns against the Released Parties, or any of them, which is based upon or arises from the existence or substance of the Information and the fact that the Information has not been disclosed to the Seller, and agrees to reimburse the Released Parties for any legal and/or other expenses (including the cost of any investigation an preparation) incurred by any of them in connection with any such Claim, whether or not resulting in any liability.

(id. at 3 [emphasis added] ).

As set forth above, Information is defined in the Big Boy Letter as:

certain material, nonpublic information regarding the Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects

(id. [emphasis added] ).

Finally, the Big Boy Letter provides:

8. Each of the Seller and the Buyer acknowledges and represents and warrants that (a) neither such party, nor any party acting on its behalf, has made any representation or warranty, whether express or implied, of any kind or character, regarding the sale and purchase of the Common Stock, except as expressly set forth in this letter; and (b) the assignment and transfer of the Common Stock by the Seller to the Buyer is irrevocable.

(id. [emphasis added] ).

Silver Point alleges that it only signed the Big Boy Letter because Riviera said that it was needed because Riviera was announcing its earnings in two days (Amend. Compl., ¶ 14), and that it did not release Riviera from claims because, Silver Point argues, the definition of Information did not include the sale of the Hugoton Basin property because it was a major transaction and, thus, not included in Riviera's representation that it may have material non-public information about its “properties.”

Silver Point alleges that, in fact, as the parties were negotiating and entering the Repurchase Agreement, Riviera was in the midst of secretly receiving bids on a “blockbuster $295 million asset sale of its Hugoton Basin properties, which represented approximately 45% of the Company's market capitalization” (the $295 Million Transaction) (id., ¶ 1). Silver Point claims that no public disclosures as to the $295 Million Transaction were made prior to its announcement on August 28, 2019 (i.e., in public filings, earnings calls or otherwise), when Riviera publicly revealed for that the proceeds of this transaction would be distributed to shareholders on a tax-free basis by way of a $260 million distribution (i.e., $4.25 per share) (id., ¶¶ 1, 3, 16, 18). Shortly after the announcement of the $295 Million Transaction, Riviera's stock price surged approximately 30% to $13.50 per share (id., ¶ 20). Silver Point alleges that it would never have entered into the Repurchase Agreement or signed the Big Boy Letter had it known of Riviera's material non-public information about the sale of its Hugoton Basin properties.

The Amended Complaint alleges claims for (i) common law fraud, (ii) fraudulent inducement, (iii) fraudulent concealment, and (iv) unjust enrichment. Silver Point withdraws its fifth cause of action for rescission (NYSCEF Doc. No. 66 at 23, n. 13)

Discussion

Dismissal under CPLR § 3211(a)(1) is appropriate when documentary evidence, such as a contract, “flatly contradict[s] the allegations in the complaint” (Quatrochi v. Citibank, N.A., 210 AD2d 53, 53 [1st Dept 1994]).

CPLR § 3211(a)(5) provides for dismissal based on a release, such that a plaintiff must show fraud, duress, or some other basis to invalidate the release (Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V., 17 NY3d 269, 276 [2011]). “[A] party that releases a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release” (id.).

CPLR § 3211(a)(7) requires dismissal where allegation, taken in the light most favorable to the non-moving party, fail to state a claim upon which relief may be granted.

Finally, CPLR § 3016(b) requires that for claims alleging fraud, “the circumstances constituting the wrong shall be stated in detail.”

I. Silver Point's Claims are Barred by the Express Terms of the Big Boy Letter

The Release contained in the Big Boy Letter is broad, “including, but not limited to any and all claims alleging common-law fraud or deceit, [and] breach of fiduciary duty” (NYSCEF Doc. No. 19, ¶ 6). In addition, as discussed above, the Big Boy Letter expressly acknowledged that Riviera may have material nonpublic information regarding its properties, plans and prospects and that “such Information may be indicative of a value of the Common Stock that is substantially different than the purchase price reflected in the Purchase” (id. at 1).

Silver Point's argument that any sale of the Hugoton Property was not included in the definition of Information fails. The definition of Information clearly includes “properties” and nothing in the Big Boy Letter carves out major sales of Riviera's properties. Indeed, the parties expressly provided that the definition of Information included “material” information. If the parties intended to carve-out major sales of properties, they could have negotiated for that exclusion. Having failed to do so, they cannot ask this court to rewrite their agreement.

In addition, the Big Boy Letter expressly disclaims reliance on “any representation or warranty, whether express or implied, of any kind or character, regarding the sale and purchase of the Common Stock, except as expressly set forth in this letter” (id., ¶ 8).

It is well settled that “a release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is fairly made” (Centro, 17 NY3d at 276 [quotation and citations omitted]. The Court of Appeals has explained that a “party that releases a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release” (id; Avnet, Inc. v. Deloitte Consulting LLP, 2020 NY Slip Op 05445 [1st Dept October 6, 2020] [dismissing claims, including fraud, based on release] ). Here, inasmuch as Silver Point argues that the Big Boy Letter was induced by fraud because Riviera allegedly said the letter was needed only because of its earnings call, this is not a “separate fraud from the subject of the release” because the Big Boy Letter expressly disclaims any such limitations and, indeed, expressly contemplates the fact that Riviera may have “material, nonpublic information regarding [the Company's] ․ properties, assets, projections plans and prospects” (NYSCEF Doc. No. 19 at 1 [emphasis added] ). Indeed, as discussed above, this is included in the definition of “Information” to which the Release expressly applied (id., ¶¶ 1, 6-7). In other words, the fraud described in the Amended Complaint, that Riviera withheld information relevant to the Stock Purchase transaction, “falls squarely within the scope of the release,” and is, thus, barred by its express terms (Centro, 17 NY3d at 277).

To the extent that Silver Point relies on Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc. to argue that the Big Boy Letter cannot bar its claims because the “disclaimer” contained therein is not sufficiently specific to the particular misrepresentation or omission alleged herein, and because Riviera's alleged misrepresentation or omission concerned facts peculiarly within Riviera's knowledge, this argument also fails (115 AD3d 128 [1st Dept 2014]). As discussed above, the Big Boy Letter expressly indicated that claims based on Information were barred and the definition of Information included Riviera's properties.

Basis Yield is simply inapplicable as it involved disclaimers and disclosures in offering circulars, which provided that the purchaser was disclaiming reliance on “any advice, counsel or representation whether oral or written of [the sellers] other than in this offering circular,” and advised the purchaser to “consider and assess for themselves the likely rate of default” of the residential mortgage backed securities they were purchasing (id. at 137). The Appellate Division found that such routine disclaimers “fell far short of tracking the particular misrepresentations and omissions alleged” where the complaint alleged that the seller structured, marketed and sold its securities with the specific intent of reducing its long term exposure to subprime risk by betting against them, and knew that it was selling “toxic” assets (id. at 138). This is decidedly different from the case at bar where the Amended Complaint does not allege a specific scheme to sell off toxic assets to unsuspecting buyers, but merely a plan to repurchase stock in a manner that was advantageous to Riviera over Silver Point, and where there is a broad and specific release, contained in a stand alone document, signed by Silver Point that expressly releases all claims, including claims of fraud and fiduciary duty, and which document specifically disclaims reliance on any representations, and explicitly acknowledges that Riviera may be withholding “material, nonpublic information regarding” itself and its “plans and prospects” (NYSCEF Doc. No. 19). Under these circumstances, Silver Point's “contention that it did not release a fraud claim is baseless” (Avent, supra at *1).

In addition, Riviera as a public company and could not have disclosed any material non-public information to Silver Point alone for the purpose of facilitating a trade. Indeed, the whole purpose of the Big Boy Letter was to address the fact that Riviera is a public company that was in possession of material non-public information, including the potential looming sale of the Hugoton Property.

Finally, nothing alleged by Silver Point with respect to why the Big Boy Letter may have been necessary triggers any further disclosure obligations on the part Riviera. Silver Point relies on a Third Department case, Anderson v. Meador, to argue that where partial disclosure of a fact is made, a party may liable for failing to make full disclosure (56 AD3d 1030 [3d Dept 2010]). Anderson is, however, wholly inapplicable as it involved a contract to purchase real estate and did not involve any release whatsoever (id.; see also L.K. Station Group LLC v. Quantek Media LLC, 62 AD3d 487 [1st Dept] [no release; dismissing fraudulent concealment claim] ).

II. The Fraud Claims Fail

To state a claim for fraud, Silver Point must allege misrepresentation or concealment of a material fact, falsity, scienter, justifiable reliance and injury (Pramer S.C.A. v. Abaplus Intl. Corp., 76 AD3d 89, 101 [1st Dept 2010]. For claims of fraudulent inducement, an essential element is detrimental reliance (Meyercord v. Curry, 38AD3d 315, 316 [1st Dept 2007] [reversing trial court's denial of motion to dismiss fraudulent inducement claim] ). Thus, a plaintiff has to show both that the defendant's alleged “misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentation directly caused the loss about which plaintiff complains (loss causation)” (id., quoting Water St. Leasehold LLC v. Deloitte & Touche LLP, 19 AD3d 183 [2005] [internal quotation marks omitted] ). For claims of fraudulent concealment, a plaintiff must allege all the foregoing elements of fraud as well as a duty on the part of the defendant to disclose the allegedly material information and failure to do so (Mitschele v. Schultz, 36 AD3d 249 [1st Dept 2006]; E.B. v. Liberation Publications, Inc., 7 AD3d 566 [2d Dept 2004] [fraudulent concealment claim requires allegation defendant had duty to disclose] ).

Here, Silver Point's fraud, fraudulent inducement and fraudulent concealment claims are all based on the fact that Riviera did not disclose that it was in the process of negotiating the sale of its Hugoton Basin properties, which resulted in the $295 Million Transaction and the resulting $260 million distribution, and that, had Silver Point known about this sale, it would have either not entered into the Repurchase Agreement or negotiated a different price.

Even if Silver Point's fraud claims were not barred by the Release discussed above, the claims nevertheless fail. Paragraph 1 of the Big Boy Letter, which was drafted on Silver Point letterhead, expressly indicates that Riviera may have material non-public information about its properties, which necessarily included the Hugoton Properties, and Silver Point expressly acknowledged the same. As such, Silver Point cannot be said to have justifiably relied on any omission by Riviera in its alleged failure to disclose the upcoming sale of the Hugoton Properties (see Mayercord, supra [plaintiff cannot show he relied on defendant's representations to his detriment] ). While on a motion to dismiss the court must liberally construe the pleading, the court is not required to accept allegations that are plainly contradicted by the documentary evidence (Robinson v. Robinson, 303 AD2d 234, 235 [1st Dept 2003]).

Moreover, contrary to Silver Point's arguments, under the circumstances, there was neither a fiduciary duty to provide such material non-public information (see below), nor does the special facts doctrine apply (see below).

A. Fiduciary Duty

As to the question of fiduciary duty, Riviera argues that the lack of breach of fiduciary duty claims in Silver Point's complaint is telling: when sophisticated investors negotiate against a fiduciary and understand that a fiduciary is acting in its own interest, they cannot reasonably rely on the fiduciary to disclose every material fact (citing Pappas v. Tzolis, 20 NY3d 228, 232 [2012] and Centro Empresarial Cempresa S.A. v. American Movil, S.A.B. de C.V., 17 NY3d 269, 278 [2011]).

Riviera is correct. As the Court of Appeals explained in Pappas, “[w]here a principal and a fiduciary are sophisticated entities and their relationship is not one of trust, the principal cannot reasonably rely on the fiduciary without making additional inquiry” (20 NY3d at 232). Here, Silver Point is a sophisticated group of investors, represented by counsel, selling stock worth millions of dollars. It is simply not credible to believe—and nor does it allege—that it believed that Riviera was acting in Silver Point's interest (and not its own) when it reached out to Silver Point to propose the stock repurchase. Any reliance on such a representation, even if made, would be wholly unreasonable. The parties negotiated an arms length transaction. No fiduciary duty attached.

Silver Point argues that Centro and Pappas are distinguishable because the relationship between the parties in both of those cases was, practically speaking, “not one of trust” at the time of the transaction at issue because there were prior business disputes between the parties (Pappas, 20 NY3d at 233). However, nothing in either case indicates that they are so limited. As the Court of Appeals explained: “it is clear that plaintiffs were in a position to make a reasoned judgment about whether to agree to the sale of their interests to [defendant]. The need to use care to reach an independent assessment as to the value of the lease should have been obvious to plaintiffs” (id.; Centro, 17 NY3d at 279 [“Where a principal and fiduciary are sophisticated parties engaged in negotiations to terminate their relationship, [ ] the principal cannot blindly trust the fiduciary's assertions”). A substantially identical argument was raised and rejected in Kafa Investments, LLC v. 2170-2178 Broadway, LLC (39 Misc 3d 385 [NY Cnty Sup Ct 2013] [Kapnick, J], affd 114 AD3d 433, 433 [1st Dept 2014] [“That defendants arguably are fiduciaries of plaintiffs does not invalidate the release, since they negotiated across the table from the plaintiffs, who are sophisticate parties represented by counsel”). In Kafa, the plaintiffs sought to distinguish the Court of Appeals holding in Centro on the grounds that in that case, as in Pappas, the relationship between the parties was hostile at the time of the signing of the release and that the parties no longer had a relationship of trust,” whereas the Kafa plaintiffs “were totally unaware of any potential fraud claims when they signed” their release and their relationship with the Kafa defendants was fully intact during contract negotiations (id. at 389). However, the trial court (Kapnick, J.) explained that these distinctions do not make the Centro holding inapplicable as the Court of Appeals in that case was interpreting the unambiguous terms of a release that fully encompassed the alleged claims of fraud and “the unambiguous language of a release cannot be abrogated by the fact that the parties were fiduciaries,” especially where the fiduciary relationship between the parties was being severed by the transaction at issue and each side was “represented by sophisticated counsel” and “cannot claim [ ] ignorance” of what it was signing (id. at 393-94) (id.). The same analysis applies here.

B. Special Facts Doctrine

Absent a fiduciary duty between the parties, a duty to disclose arises only under the special facts doctrine (Jana L. v. West 129th Street Realty Corp., 22 AD3d 274, 277 [1st Dept 2005]). In such case, “a duty to disclose arises where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair” (Swersky v. Dreyer and Traub, 219 AD2d 321 [1st Dept 1996] [quotation marks omitted] ). This is a two prong test: (1) the information must be “peculiarly within the knowledge” of the defendant and (2) the information must be such that it could not have been discovered “through the exercise of ordinary intelligence” (Jana L., supra at 278 [quotation marks omitted] ). In other words, “if the other party has the means available to him of knowing 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 misrepresentation” (Schumaker v. Mather, 133 NY 590, 596 [1892]). At a minimum, a party has a “duty to inquire” (Jana L., supra). It does not appear that Silver Point did so here.

Moreover, none of the special facts cases cited by Silver Point in support of the application of the special facts doctrine to this action deal with releases (see e.g., Basis Yield, supra; Pramer S.C.A., supra, DDJ Mtge., LLC v. Rhone Grp. LLC, 15 NY3d 147, 154 [2010]; Anderson v. Meador, 56 AD3d 1030, 1035 [3d Dept 2008]).

III. The Unjust Enrichment Claim Fails

In addition to being barred by the terms of the Big Boy Letter, the unjust enrichment also fails to state a claim as a matter of law. To state a claim for unjust enrichment a plaintiff must show (1) that the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered (Mandarin Trading Ltd. v. Wildenstein, 16 NY3d 173 [2011]). Recovery for unjust enrichment will be barred, however, by the existence of a valid contract between the parties, i.e., the Repurchase Agreement here (Whitman Realty Group, Inc. v. Galano, 41 AD3d 590 [2d Dept 2007]).

Accordingly, it is

ORDERED that the motion to dismiss is granted and the amended complaint is dismissed.

Andrew Borrok, J.