Citations
- 112 F. Supp. 2d 292
Full opinion text
OPINION AND ORDER
MARRERO, District Judge.
This action was commenced in the Southern District of Texas in May 1993 and later that year transferred to this Court, where the underlying transaction remains governed by Texas law. During its seven-year odyssey to date, the case has passed through the dockets of five federal judges, four of them in this District. Yet, as described below, largely on account of the parties’ own pretrial motion practice, the litigation remains no further along than a motion to dismiss the complaint, which itself is now in its third version. Now before the Court is defendant’s fourth such motion. In the meantime, a number of people who played critical roles in events dating to 1989 which gave rise to the lawsuit have died or are no longer associated with the parties and consequently not readily available to testify-
This Court hopes to cut short any further pretrial skirmishing in this action, even if it may ruin its prospects to rank alongside Jamdyce and Jamdyce in the legends of legal intricacy and longevity. It is time for the parties to bring their encounter out in the open before a jury. For the reasons described below, defendant’s motions are granted in part and denied in part. The parties are directed to proceed forthwith with completion of pretrial discovery in contemplation of advancing to a trial on the merits of the remaining issues within no longer than 60 days.
FACTS
A. The Parties and Jurisdiction
Plaintiff National Western Life Insurance Co. (“National Western”) is a Texas-based corporation incorporated in Colorado. Defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”), is a Delaware corporation whose principal place of business is in New York. The action was originally filed in the Southern District of Texas in May 1993 and transferred to this court in October 1993 pursuant to 28 U.S.C. § 1404(a). The Court has diversity jurisdiction over this dispute pursuant to 28 U.S.C. § 1332.
B. The Transaction
The parties’ dispute involves allegations of fraud and securities violations arising out of a mortgage loan on a cooperative residential building in New York City (the “Property”). In March 1989, National Western purchased from Merrill Lynch a $3 million sub-participation interest in a $12 million mortgage loan on the Property. National Western’s action relates to Merrill Lynch’s role in the sale of this sub-participation interest.
The Property, located in a Manhattan building known as “401 East 89th Street”, was converted into a cooperative unit pursuant to an Offering Plan filed in August 1988 with the Attorney General of the State of New York. According to the Plan, the building would be converted to a two-unit condominium, with the first unit consisting of the ground floor commercial space and the garage, and the other unit comprising the Property with its 198 residential apartments. The Plan specified that the conversion of the Property to cooperative ownership would occur pursuant to a non-eviction plan, which would allow non-purchasing tenants then residing in rent-regulated apartments to remain in occupancy on lease terms and rents calculated in accordance with state law.
On January 25, 1989, Gracie Associates, the owner of the Property and sponsor of the Offering Plan (the “Sponsor”), transferred title to the residential portion of the building to a Cooperative Corporation controlled by the Sponsor (this transaction is here referred to as the “Conversion Closing” and the corporation as the “Cooperative”). The Cooperative allocated its shares proportionately among the Property’s 198 apartments. Shares of the Cooperative corresponding to the apartments were offered for sale by the Sponsor. At the time of Conversion Closing, 61 units had been sold. Of the remaining unsold apartments, 48 were vacant, and the remaining 89 were occupied by rent-stabilized tenants. Thus, the Sponsor remained obligated for the monthly maintenance charges pertaining to 137 apartments, in full with respect to the vacant units and, as regards the occupied apartments, in effect for the difference between each apartment’s actual maintenance charge and the amount of stabilized rent the Sponsor collected from the tenant. Contemporaneous with the Conversion Closing on January 25, 1989, the Cooperative obtained a loan from CorEast Savings Bank (“CorEast”) for $12 million plus interest. CorEast, through a Participation and Servicing Agreement on January 26, 1989, sold 100% of its interest in the loan to Merrill Lynch Mortgage Capital, Inc. (“ML Mortgage”) and remained as the loan servicing bank. On March 1, 1989, ML Mortgage and its affiliate, defendant Merrill Lynch, entered into an agreement whereby the latter purchased from ML Mortgage a 25% sub-participation interest in the CorEast loan. On the following day, Merrill Lynch assigned its rights under the Sub-Participation Agreement to National Western in exchange for National Western’s payment of $2,816,215 (the “Transaction”).
In November and December of 1990, the Cooperative defaulted on its monthly payments on the CorEast loan, and then made only partial payments on the loan in February, March, and April 1991. On February 27, 1991, the Sponsor was forced involuntarily into Chapter 11 Bankruptcy proceedings, although this fact allegedly was not known to National Western at the time. National Western contends it learned that the Cooperative defaulted on its obligations under the CorEast loan “in or about July or August 1991” (Comply 70). In May 1993, National Western instituted this action in the Southern District of Texas, which granted Merrill Lynch’s motion to transfer the case to the Southern District of New York in August 1993. National Western’s second amended complaint, on which this action is based, was filed in this Court in October 1993.
C. The Transaction Documents
At the center of this controversy are several documents containing terms relating to the Transaction and information about the Sponsor, the Property and the Cooperative. These documents include an Offering Summary (the “Offering Summary”), an appraisal of the Property (the “Appraisal”), an Assignment and Assumption agreement between Merrill Lynch and National Western, and the August 1988 Offering Plan filed with the State. National Western’s claims are founded on alleged misrepresentations and omissions in the Offering Summary and the Appraisal.
The Offering Summary, which the Complaint states was provided to National Western in connection with the Transaction, contains a “Summary of Terms” and an extensive description of the finances of CorEast. It notes that the security for the mortgage loan was a first lien only on the condominium unit comprised of the 198-unit residential portion of the Property, which is the cooperative owned by “401 East 89th Street Owners, Inc.” The Summary also lists the Sponsor as “Grade Associates”, and gives an address for it at “c/o D.B.G. Property Corp./Arrandale Management Corp./Aegis Planning, Inc.” in Manhattan. According to the Offering Summary, the Appraised Value of the Property was $41,135,000, based on the Future Sellout Value of the Cooperative as determined by “an appraisal performed by Wm A. White/Tishman East, Inc. on January 24, 1989.” On the basis of this Appraised Value, the Loan-to-Value Ratio was represented to be 29.17%.
The Offering Summary also informed prospective purchasers that the Appraisal was available on request. The Complaint, however, alleges that National Western was provided and relied on “all or portions” of the Appraisal. National Western does not explicitly specify which, if any, parts of the Appraisal it actually received. But the Complaint cites the Appraisal as the source of a representation that the fair market value of the Property as rental was $20 million.
D. National Western’s Claims
National Western claims that Merrill Lynch knowingly or recklessly provided or withheld erroneous and misleading information about the financial condition of the Sponsor and about the value of the Property in order to induce National Western to participate in the Transaction, and that National Western relied to its detriment on the information it was given. Specifically, National Western’s allegations rest on two forms of material omissions or representations. The first claim centers on the financial condition of the Sponsor. National Western asserts that the Offering Summary purposefully omitted essential facts about the finances of the Sponsor and suggested through the omission that the financial condition of the Sponsor was irrelevant. The second claim relates to the fair market value of the Property. National Western maintains that the Offering Summary misrepresented the value of the investment by miscalculating the future sellout value and by reflecting that figure while omitting disclosure of the rental value. Finally, National Western contends that the rental value set forth in the Appraisal was false and misleading in material ways. On these grounds, National Western claims that Merrill Lynch’s representations and omissions constituted (1) violations of the Texas Securities Act, (2) common law fraud, (3) negligent misrepresentation and (4) breach of fiduciary duty. Merrill Lynch has moved under Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the allegations of fraud, securities violations and negligent misrepresentation, and for summary judgment under Rule 56 with regard to the breach of fiduciary duty claim.
DISCUSSION
I. MOTION TO DISMISS
A. Standard of Review
On a motion pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss a complaint for failure to state a claim upon which relief can be granted, the court must “tak[e] as true aU allegations in the complaint, and draw[ ] all reasonable inferences therefrom in the [plaintiffs] favor.” Koppel v. 1987 Corp., 167 F.3d 125, 130 (2d Cir.1999) (quotations omitted); accord Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). A court must not dismiss the complaint “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957) (citations omitted).
In addition to facts stated in the complaint, under Rule 10(c), “[a] copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes.” Fed.R.Civ.P. 10(c). While the Court normally looks to allegations in the complaint in deciding a motion to dismiss, it may also consider authentic documents that plaintiffs rely upon in bringing suit. “[T]he complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference.” • Cortec Indus., Inc. v. Sum Holding, LP, 949 F.2d 42 (2d Cir.1991). Otherwise, when matters outside the pleading are presented to and not excluded by the Court, the motion may be treated as one for summary judgment pursuant to Rule 56. See Fed.R.Civ.P. 12(b)(6).
B. Documents Before the Court
Here, a threshold issue has arisen as to what papers are properly before the Court on this motion. The Complaint acknowledges that in connection with its purchase of an interest in the Property, National Western was provided “a document entitled Offering Summary and all or portions of an appraisal incorporated therein.” (ComplA 23). However, neither document is attached to the Complaint as an exhibit or specifically incorporated in it by reference. See Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir.1989) (citing Goldman v. Belden, 754 F.2d 1059, 1066 (2d Cir.1985) for the proposition that limited quotation of a document not otherwise attached or relied upon does not constitute incorporation by reference). National Western also alleges that in deciding to purchase the sub-participation interest from Merrill Lynch, it “reasonably relied on the representations contained in both the Offering Summary and the appraisal incorporated therein.” (Id. ¶24, emphasis added) The Complaint does not explicitly specify the particular pages or sections of the Appraisal National Western concedes it received and relied upon, constituting one of the factual issues which renders the action difficult to dispose of entirely by way of a motion to dismiss, as Merrill Lynch persistently has endeavored to do.
In order to fill that gap, Merrill Lynch submitted, along with its papers supporting the present motion, copies of the Offering Summary and the entire Appraisal, as well as other materials outside the pleadings. It argues that because National Western’s claims rely upon these documents, Merrill Lynch may offer them and properly place them before the court without converting its Rule 12(b)(6) motion to dismiss into a motion for summary judgment under Rule 56. In support of this proposition Merrill Lynch cites Cortec Indus., 949 F.2d at 48.
In response, National Western distinguishes Cortee Industries, arguing that the case applies only when plaintiff, as the foundation for the cause of action as stated in the complaint, actually has reviewed and relied upon the entire documents defendant places before the court on the motion to dismiss. Thus National Western contends that, without converting Merrill Lynch’s motion into one for summary judgement, there is no basis for assuming that National Western, at the time its action accrued, saw portions of the Appraisal which are nowhere specified in the Complaint as constituting the source of the representations which gave rise to its claim. Merrill Lynch replies in supplemental correspondence that in fact its original motion was framed in the alternative, either as one to dismiss pursuant to Rule 12(b)(6) or for summary judgment, thereby apparently inviting the Court to exercise discretion under Rule 12(b)(6) to convert the entire motion into one for summary judgment.
The pleadings and cat-and-mouse motion practice in this case thus demonstrate some of the hallmarks of epochal litigation in the making. First are plaintiff fraud claims deftly crafted and shielded with seemingly meticulous imprecision, to that extent prompting defendant to pursue the pleadings — with some justification, as the Court here concludes — as though a moving target, a complaint still in search for a cause of action. Second is a defense apparently intent on pushing the envelope of the Rule 12(b) dismissal motion to the limits of its elasticity, prodding daringly beyond the pleadings right up to the border of summary judgment standards under Rule 56. And third are two litigants both endowed with institutional fortitude and fortunes to feed litigation, as well as counsel consummately skilled in the pretrial art of dodging their pleadings’ bullets.
The Court believes it would not serve the interests of justice and efficient management of this case to treat Merrill Lynch’s motion as one for summary judgment at this juncture of these proceedings. To do so inevitably would invite further delays and extend the ultimate resolution of the merits of a dispute that already has been excessively prolonged. Accordingly, declining to engage the parties’ pre-trial sparring, the Court does not base any part of its determination on any of the documents outside the pleadings placed before the Court by Merrill Lynch beyond those National Western itself employed in bringing this lawsuit.
Accepting, as the Court must, the factual allegations in the Complaint as time and resolving doubts and drawing reasonable inferences in plaintiffs favor, the Court concludes that because National Western acknowledges it was provided a copy of the Offering Summary and because it refers to and relied upon that document as containing the representations and omissions upon which this action is founded, the Offering Summary in its entirety, under the doctrine of Cortee Industries, is before the Court for the purposes of this motion.
The question of how much of the Appraisal is properly before the Court presents greater difficulties, for National Western admits that it received “all or portions” of the document, thus conceding that at least some portions of the Appraisal on which the Complaint is grounded may be properly before the Court. The remaining question at this point is whether, for the purposes of this motion, a reasonable determination may be made as to which portions of the Appraisal National Western’s allegations actually refer to and rest upon as the source of the allegedly fraudulent information, and thus may be properly placed before the Court. Again drawing reasonable doubts and inferences in plaintiffs favor, the Court divides the issue into two components, corresponding to the two distinct theories and particular instances of actionable conduct alleged in the Complaint. Following this approach, the portions of the Appraisal setting forth information with regard to the scope of the financial obligations assumed by Sponsor and owed to the Cooperative are not before the Court. By National'Western’s own contradictory admissions evident in the Complaint, however, the Court will deem some portions of the Appraisal that relate to the fair market value of the Property as part of the record of this motion. These matters are described in more detail below. On the basis of the record so constructed, the Court proceeds to examine the sufficiency of the Complaint as to each of the legal theories and factual grounds upon which it is founded and challenged.
C. Dismissal for Failure to State a Claim
1. Texas Securities Act
The Texas Securities Act, Article 581-33(A)(2), provides that:
A person who offers or sells a security ... by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, is liable to the person buying the security from him .... However, a person is not liable if he sustains the burden of proof that either (a) the buyer knew of the untruth or omission or (b) he (the offeror or seller) did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.
Thus, the statutory elements critical to a determination about violation of the Act are the truth or falsity, actual knowledge and materiality of the representation or omission alleged to be false or misleading. The relevant inquiry for a claim narrows to “whether [defendant’s] representations, taken together and in context, would have misled a reasonable investor about the nature of the investment.” I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., Inc., 936 F.2d 759, 761 (2d Cir.1991). Unlike the prima facie standards applicable to common law fraud, under the Texas statute there is no requirement that plaintiff claim justifiable reliance on the representation or omission; it is enough that a false or misleading statement was made about a material fact. See Haralson v. EF Hutton, 919 F.2d 1014 (5th Cir.1990); Wood v. Combustion Engineering, Inc., 643 F.2d 339 (5th Cir.1981).
a. Sponsor’s Financial Condition
Actual Knowledge/Falsity
National Western’s first claim of fraud rests on Merrill Lynch’s alleged failure to provide information about the financial condition and obligations of the Sponsor to the Cooperative, an omission National Western asserts was material in inducing it to enter into the Transaction. To some extent, a claim resting on failure to provide information compounds the difficulty of deciding whether and to what extent, based on the pleadings, plaintiff had actual knowledge of the facts omitted that constitute the particular instances of fraud.
Under article 581-33 A(2) of the Act, the relevant knowledge of the untruth or omission applies alternatively to the two parties to a securities transaction. It covers knowledge either by the buyer or by the seller. As applied by the Fifth Circuit, actual knowledge that would bar recovery requires that plaintiff know “of’ the misleading statement or omission upon which the securities fraud claim is grounded. See Haralson, 919 F.2d at 1032. Unless plaintiff actually knows that a representation is false, or that existing information has been withheld, an action under the statute is not foreclosed. “And knowing that a false statement or omission has been made is not the same as knowing the true fact that was misrepresented or omitted.” Id. The Court in Haralson, noting that the concept of plaintiffs constructive knowledge has no place in actions under the Texas statute, further elaborated: “We do not suggest that a purchaser has any duty to find out the truth under [article 581-33 A(2)]. Indeed, a purchaser who is actually ignorant that a seller’s representation is inaccurate or incomplete may recover though the full truth is apparent from material in her possession.” Id. at n. 10.
Applying these standards to guide resolution of the controversy here, the Court cannot find, solely on the basis of the pleadings, that National Western had actual knowledge of the omissions or representations relating to the financials of the Sponsor.
National Western alleges that the Offering Summary was misleading in that it failed to disclose: (1) that the Offering Plan was a non-eviction plan; (2) the practical and legal significance of that fact; (3) that the Sponsor would be required to pay indefinitely the monthly maintenance charges assessed on the 89 rent-stabilized apartments “regardless of the amount of rent received from the tenants and on the 48 vacant apartments until, if ever, those apartments were sold, whether or not such apartments remained vacant and regardless of the amount of any rent the Sponsor might collect”; and (4) the financial statements and cash flow projections of the Sponsor, while making available detailed documents about CorEast, thereby creating a false and misleading impression that only the financial condition of the servicing bank was material. (Comply 36) According to National Western, by virtue of the obligations the Sponsor incurred to support indefinitely the maintenance charges corresponding to 69% of the apartments, the financial condition of the Sponsor was a fact material to an investor’s decision whether to purchase an interest in the loan on the Property, and Merrill Lynch’s failure to disclose that the Sponsor lacked the resources to sustain that commitment constituted a material omission.
Merrill Lynch argues that the Offering Summary provided information sufficient to alert a reasonable investor that the Sponsor was a single-purpose entity created in connection with the conversion of the Property into a cooperative and therefore was dependent on sales of apartments in order to pay the Cooperative loan and maintenance charges. Merrill Lynch also asserts that the Appraisal offers additional details disclosing that the conversion occurred pursuant to a non-eviction plan and explaining related effects, as well as providing information and assumptions about the extent of the Sponsor’s financial obligations to the Cooperative. For the purposes of this motion, because constructive knowledge of the truth of Merrill Lynch’s representations or omissions cannot be attributed to National Western, which has alleged it may not have been provided the full Appraisal, the Court looks only to the information contained in the Offering Summary. On this point the Offering Summary merely identifies the Sponsor as “Grade Associates, c/o D.B.G. Property Corp/Arrandale Management Corp./Aegis Planning, Inc.,” with an address at 850 Third Avenue, New York, New York. It further states that 61 units had been sold as of January 26, 1989, leaving at least 48 units (24%) vacant and available for sale and 89 units (45%) occupied by tenants, the shares corresponding to these units therefore retained by the Sponsor.
The Court finds that beyond what is disclosed in the Offering Summary, the Complaint does not otherwise acknowledge awareness by National Western of information about Sponsor’s financial statements and net worth, or about the materiality and importance of that information to the National Western’s decision to invest, sufficient to introduce into the record here the full scope of all factual notice contained in the Appraisal regarding the Sponsor’s obligations. As to this claim, it would not be productive or dispositive to assume National Western’s receipt and actual knowledge of all facts set forth in the Appraisal relevant to this issue. As the Court reads the theory of the Complaint, even if National Western had seen the entire Appraisal, it would still not have possessed alleged material documentation not set forth in either the Offering Summary or in the Appraisal. That information pertained to the actual identity, cash flow and net worth statements of the Sponsor, supported with the same or comparable level of detail as National Western asserts it was provided with respect to CorEast. Neither party has claimed that this material was ever prepared or provided. National Western could not be held to have known of the omission of documents that in fact never existed.
Nonetheless Merrill Lynch contends that whatever material National Western was provided did contain sufficient information about the Sponsor and its financial significance to the transaction to have placed a reasonable investor on “inquiry notice” as early as March 1989 to undertake further investigation that may have disclosed the representations or omissions claimed to be false or misleading. The Court disagrees. At the time of National Western’s investment, because the financial statements and net worth of the Sponsor presumably were not part of the Transaction documents, as regards this claim there were no suspicious circumstances suggestive of knowing misrepresentation or fraud misconduct. See Marks v. CDW Computer Centers, Inc., 122 F.3d 363, 368 (7th Cir.1997). Moreover, National Western had no affirmative duty to undertake an inquiry in order to ascertain whether the information provided to it was inaccurate or incomplete. For the purposes of the Texas statute it is enough that plaintiff offer sufficient evidence that the representations or omissions were made by defendant, that they were false or misleading and that plaintiff did not know “of’ the misstatements. See Haralson, 919 F.2d at 1032. See also Hill York Corp., 448 F.2d at 695-96 (“The availability of information elsewhere does not excuse misleading or incomplete statements.”). Even were National Western considered a sophisticated investor, it would not be barred from recovery under the Texas statute if it otherwise establishes the elements of a prima facie case. See id. at 696; Longden v. Sunderman, 737 F.Supp. 968, 973 (N.D.Tex.1990); Lutheran Brotherhood v. Kidder Peabody & Co., Inc., 829 S.W.2d 300, 308 (Tex.App.1992, writ granted w.r.m.).
Here, Merrill Lynch does not contest that the complete financial statements and cash flows of the Sponsor were not furnished to National Western. The information undisputably supplied in the Offering Summary to National Western about the Sponsor’s identity, address and financial responsibility for maintenance charges in regard to 69% of the units is not enough of itself to provide actual knowledge about matters omitted or about the true financial capacity of the Sponsor to sustain the cooperative’s losses. Possessing certain information, though the full truth may be apparent from it, does not necessarily equate to knowledge that that information may be incomplete, inaccurate or misleading. See Haralson, 919 F.2d at 1032, n. 10. Drawing reasonable inferences in National Western’s favor, National Western may fairly have assumed, and is entitled to seek to prove its theory, that it was led by Merrill Lynch’s omission of the Sponsor’s financials to believe that the Sponsor would be able during the short term to sell enough shares of the apartments it held, and that therefore the Sponsor’s ability to sustain its obligations to the Cooperative indefinitely was not as critical. Whether or not such assumptions were reasonable or credible, and whether or not it was prudent for National Western to have proceeded with the investment on the basis of the limited information about the Sponsor it did possess, are issues of fact which cannot be adjudicated on a motion to dismiss the complaint for failure to state a cause of action. It is sufficient that National Western has stated a claim for which a set of facts exists that could entitle it to relief.
Materiality
As noted above, Merrill Lynch does not specifically dispute that the Sponsor’s financial statements were not provided to National Western, although it asserts that National Western was provided sufficient information. Merrill Lynch further argues that the omission of the Sponsor’s finan-cials in the Offering Summary and Appraisal was not legally material, in that National Western could not justifiably have relied on the absence of financial statements to assume that the Sponsor would indefinitely sustain annual losses totaling $671,000 in the event it was unable to market the vacant and unsold apartments.
The issue of materiality entails judgments that often contain an inextricable mixture of fact and law, and is not one easily resolved by dispositive motions. See TSC Indus., Inc. v. Northway Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976); Marks, 122 F.3d at 370. The Fifth Circuit has recognized that there is a “subjective aspect” to the materiality standard in security fraud claims. See Haral-son, 919 F.2d at 1033. With regard to a motion to dismiss, the Second Circuit has declared that “[a] fact may not be dismissed as immaterial unless it is so obviously unimportant ... that reasonable minds could not differ on the question of [its] importance.” Allen v. WestPoinh-Pepperell, Inc., 945 F.2d 40, 45 (2d Cir.1991) (citing Goldman v. Belden, 754 F.2d 1059 (2d Cir.1985)). The standard of materiality as regards an omitted fact was promulgated by the Supreme Court in TSC Industries. For an omission to be material, the Court said, there must be a “substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” 426 U.S. at 449, 96 S.Ct. 2126. See also Lutheran Brotherhood, 829 S.W.2d at 307 (“To be material, a misrepresentation or omission must have influenced the buyer’s actions to the extent that the buyer would not have entered into the transaction had the representation not been made”).
This Court cannot conclude, as Merrill Lynch argues, that as a matter of law there is no substantial likelihood that a reasonable jury would determine that the omission of the information about the Sponsor’s financial condition National Western alleges it was not provided could not have been viewed by a reasonable investor as altering the “total mix” of the information available, or that reasonable people could not differ on the question of its importance. Conceivably, the Sponsor’s financial statements and net worth could have served to shed more light on the actual capacity of the Sponsor to sustain losses beyond the early years of the Cooperative’s operation. Consequently, on the record here, the Court must reject Merrill Lynch’s argument that its omission of this information was obviously unimportant, and thus legally immaterial to National Western’s investment decision.
In summary, with respect to National Western’s fraud claim related to the fi-nancials of the Sponsor, the Court finds numerous issues about which substantial dispute exists between the parties. On further proof, the full extent of the documents National Western actually had or did not have available may reveal whether it did possess sufficient information about the Sponsor’s financials. It may or may not turn out that documentation would have altered the full scope of facts relevant to a purchaser’s reaching a reasonable decision concerning the contemplated investment. Industry practice as understood by the parties and evidencing what supporting documentation is generally considered material in connection with transactions of the kind here in contention may offer guidance as to whether the Sponsor’s financials should have been provided in this case. However, on a record based on the pleadings alone, the Court is not able to settle these matters. As to these contentions, National Western should be entitled to gather evidence in order to buttress its legal theory. It is not for the Court to render judgement on the merits or the credibility of National Western’s allegations, or to pass upon the substance of its hypothesis. The Court’s duty at this early stage of the proceedings is merely to assess the legal sufficiency of the Complaint, not to judge its implausibility. It is sufficient that some cognizable legal theory exists which would enable National Western to proceed at trial to transform pleadings into proof of its assertion that defendant’s false or misleading representations or omissions entitle National Western to relief. Consequently, as to this first allegation of Texas Securities Act violations, the Court holds that Merrill Lynch has not established “beyond doubt” that National Western could not recover on its claim at a trial on the facts disputed.
b. Valuations of the Property
Actual Knowledge/Falsity
National Western’s claim of fraud based on the fair market valuations of the Property presents a different set of issues. The alleged fraudulent conduct upon which this part of National Western’s action is based is grounded on some claimed omissions of material facts as well as on actual representations contained in the Offering Summary and in the Appraisal, all or portions of which National Western acknowledges having been provided as inducement for its purchase of an interest in the Property. Judicial solicitude is not warranted with regard to allegations in the Complaint that on their face do not bear up to scrutiny. On a Rule 12(b)(6) motion to dismiss, the court’s deference to the plaintiffs allegations assumes a well-pleaded complaint. The court is not obliged to accept as true claims that are self-contradictory or that the record otherwise disproves beyond doubt. See, e.g., ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 n. 8 (3d Cir.1994) (concluding that when documents attached to a complaint contradict the allegations of the complaint, the document controls in a motion to dismiss for failure to state a claim).(cited in Northern Indiana Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 454 (7th Cir.1998)); 2 James Wm. Moore et al., Moore’s Federal Practice, § 12.34[l][b] (3d ed.2000). The Court must recognize as true only factual allegations. It need not adopt plaintiffs pleadings expressed as conclusions of law, unwarranted deductions or subjective characterizations. See Associated Builders, Inc. v. Alabama Power Co., 505 F.2d 97, 100 (5th Cir.1974) (“Concíusory allegations and unwarranted deductions of fact are not admitted as true,” so an allegation that a document is “materially misleading” must be supported by fact.); Moore’s, § 12.34[l][b]. Some of the contentions National Western advances in support of its claim of fraud based on the fair market valuations of the Property suffer from a number of these infirmities.
National Western’s claims are grounded primarily on the Offering Summary, which it states was provided to it and on which it relied. But National Western also asserts having received and relied on “all or portions of’ the Appraisal, and bases some of its claims on information found only in the Appraisal. The documents National Western acknowledges having seen contained representations about the fair market value of the Property. The information derived from two appraisal methods that National Western maintains produced statements actionable under the Texas Securities Act in that: (1) the “Offering Summary and the appraisal presented a false and misleading appraisal of the fair market value of the residential condominium unit based on the estimated proceeds from the sale of shares in the Cooperative” (emphasis added); (2) the “Offering Summary failed to disclose the fair market value of the Property as a rental”; and (3) the “appraisal presented a false and misleading appraisal of the fair market value of the Property as a rental”. (Compl. ¶ 26, emphasis added).
As regards market value based on the estimated proceeds from the sale of all the issued shares of the Cooperative (the “Future Sellout Value”), National Western affirmatively states that it reasonably relied on the figure of $41,135,000 set forth in the Offering Summary (CompU 39). Basing its allegation “upon information and belief’, National Western asserts that this representation of value derived entirely from the computations contained in the Appraisal (CompU 40). Thus National Western endeavors scrupulously to avoid stating or implying in any way that it actually saw the portion of the Appraisal containing the analysis which produced the Future Sellout Value number, necessarily creating the inference that, as to this figure, National Western’s theory is that the only source it relied on was the Offering Summary. By contrast, National Western asserts that the Appraisal stated that the fair market value of the Property as a rental building (“Rental Value”) was $20,000,000 (Comply 62). Noting that the Rental Value is not presented in the Offering Summary, National Western alleges that the inclusion of the Property’s Future Sellout Value and omission of the Rental Value caused the Offering Summary to be materially misleading (¶ 58).
The Complaint then elaborates the particulars that establish how these representations are allegedly false and misleading. With regard to the Future Sellout Value indicated in the Offering Summary, the complaint alleges the figure indicated in the Offering Summary misleadingly included the following:
• the proceeds of sales of shares allocated to 61 of the 198 apartments even though those shares had already been sold at the time of the cooperative conversion closing (¶ 42);
• the anticipated proceeds from the shares allocated to the 137 unsold apartments, which should not have been included because the shares corresponding to the unsold units were not collateral for the underlying loan, as the Sponsor had given a security interest in those shares to another lender (¶¶ 44-46);
• a premium attributable to the potential for conversion which should not have been included because the conversion to cooperative ownership was scheduled to close the day after the Appraisal was completed (¶¶ 48-49).
With regard to the Rental Value, the Complaint alleges that in representing the $20 million figure, the Appraisal:
• stated that in the event of a foreclosure the mortgagee would have the legal right to rent the apartments at market rents for the sold and vacant apartments, disregarding that “as a matter of law the sold and vacant apartments would become subject to rent stabilization” (¶ 63-64);
• did not include condominium common charges of approximately $223,138 per year as an expense (¶ 65).
In deciding to purchase the interest in the loan on the Property, National Western claims it “reasonably relied on the representation in the Offering Summary as to the [$41.1 million] fair market value of the residential condominium unit” (¶ 60). But National Western also asserts that “the fair market value of the property as a rental is the only meaningful measure of the value of the property as security for a loan to a cooperative corporation” (¶ 55), and, thus, that Rental Value is “highly material to a judgment whether to purchase an interest in the loan” (¶ 56). In this regard, National Western claims it relied on the representation in the Appraisal as to Rental Value (¶ 68), concluding that had it known that the inclusion of one method of valuation and the omission of the other from the Offering Summary caused the Offering Summary to be materially misleading, National Western would not have purchased the interest in the loan.
These pleadings, some grounded on one document fully in the record of this motion, and others on unspecified portions of other material not on the record, pose for the Court a number of conceptual difficulties and dilemmas in assessing the sufficiency of the Complaint. An initial quandary is what reasonable inferences to draw from allegations that seem internally at odds. The Complaint states that National Western “reasonably relied on the representations contained in both the Offering Summary and the appraisal incorporated therein” (¶ 24, emphasis added) and that both “the Offering Summary and the Appraisal presented a false and misleading appraisal of the Future Sellout Value (¶ 26b)”. These assertions could reasonably be construed, as Merrill Lynch contends, to establish that National Western must have seen and relied on the entire Appraisal, or at minimum on the portions describing both the Future Sellout Value and the Rental Value, because the particular deficiencies described in the Complaint relating to these representations actually derive from assumptions and analysis contained in the Appraisal. Yet National Western takes pains to avoid any intimation that it relied on representations about the Future Sellout Value contained in the Appraisal. Of course, National Western cannot sustain a claim that it relied upon and was misled by affirmative representations founded in documentation which did not include particular information National Western is careful not to avow having seen, while at the same time maintaining it was misled because it acted upon that same information as actually set forth in all or portions of a document National Western admits it was provided. In other words, it is difficult to see how National Western can contend that it was defrauded both because it acted to its detriment upon information it was provided, and at the same time because it was deprived of that same information.
The apparent contradiction presents a second dilemma for the Court: which of several courses to adopt in order to resolve the conflict. Among its options are to rule that: (1) National Western should be charged with having received the entire Appraisal because (a) the document is incorporated by reference in the Offering Summary, or (b) the Court should take judicial notice of the complaint filed by National Western in the related action against the appraiser in which National Western unequivocally declares that it relied on the entire Appraisal in reaching its decision to purchase the sub-participation interest in the Property; (2) National Western’s pleadings are inconsistent, and therefore National Western must be charged with having knowledge of the portions of the Appraisal from which the Future Sellout Value was derived; (3) despite the seeming ambiguity, the portions of the Appraisal National Western concedes having seen did not contain the Future Sellout Value analysis and National Western’s source of this representation must be accepted to have been the Offering Summary; (4) these claims should be dismissed in their entirety, as Merrill Lynch argues, for lack of the greater particularity demanded for fraud claims by Rule 9(b) of the Federal Rules of Civil Procedure, or (5) Merrill Lynch’s Rule 12(b)(6) motion to dismiss should be converted into a Rule 56 motion for summary judgment in light of the materials outside the pleadings referenced by the parties in connection with this proceeding.
From among the various inferences reasonably flowing from the pleadings, the one which may be drawn in the light most favorable to, and consistent with, National Western’s theory in this regard is that the information National Western cites relating to the Future Sellout Value is based only on the Offering Summary and unspecified portions of the Appraisal that National Western may have seen, and that in relying only on this representation of fair market value National Western’s source of information was the Offering Summary.
But even cast in this vaguely harmonious light and propped by fair judicial inferences, National Western’s ability to withstand a motion to dismiss this part of its fraud claims may be unavailing. One reason is the number of irreconcilable internal conflicts still remaining in National Western’s theory. First, on this construction, National Western’s pleadings would suggest that because the Offering Summary failed to mention the Rental Value, considered by National Western as a material omission, National Western was unaware of this information. But this contention cannot be taken as fact because elsewhere the Complaint explicitly states that “plaintiff reasonably relied on the representation in the Van Ancken appraisal as to the fair market value of the residential condominium unit as a rental” (Compl.l 68). Second, the argument would indicate that, to the extent the Offering Summary did not contain the Rental Value, National Western was misled even if the information it considered so vital was, in fact, supplied to it by way of some other document, namely the portions of the Appraisal National Western concededly possessed, all of which the Offering Summary incorporated by reference.
Third, as so studiedly articulated in the pleadings, National Western’s claim logically would imply that in deciding to purchase the sub-participation interest National Western may have relied either (1) primarily on the information contained in the Offering Summary, (2) on the Offering Summary and very limited portions of the Appraisal, or (3) on the Offering Summary only, despite other relevant material information National Western had been supplied in all or portions of the Appraisal. Fourth, National Western’s allegations pertaining to the sources of the material information Merrill Lynch furnished or withheld seem internally contradictory to the extent the Complaint states, on the one hand, that the “Rental Value” (the $20 million figure National Western concedes it obtained from the Appraisal) is “the only meaningful measure of the value of the Property as security for a loan to a cooperative corporation” (¶ 55) and, on the other, that in deciding to purchase the interest in the Property, National Western “reasonably relied in the representation in the Offering Summary as to the fair market value” (the $41.1 Million Future Sellout Value) of the Property. (¶ 60) As discussed below, erecting a fraud theory founded on these incongruous grounds produces an insubstantial structure which cannot support several of the necessary elements National Western must satisfy in order to state a prima facie case under either the Texas statute or common law.
Consequently, even if National Western was not provided portions of the Appraisal which contained the Future Sellout Value, a matter about which National Western’s contradictory pleadings raises some doubt, the Court cannot accept as true or draw the inferences and conclusions National Western declares flow from these alleged representations and omissions. The fact is that to the extent National Western’s theory rests on its having been provided only portions of the Appraisal, for the purposes of the Texas Securities Act, National Western may be held to have known “of’ the omission of the remainder. This conclusion follows not only because the Offering Summary disclosed that a complete Appraisal existed and was available on request, but because National Western’s admitted possession of only a portion of the Appraisal logically must be taken as an extension of its actual knowledge that a complete document did exist. That knowledge would also encompass notice that in some material respects the representations the full Appraisal contained about the market value of the Property, at least as reflected in the Rental Value figure, varied significantly from the valuation National Western had been furnished in the Offering Summary.
' The Future Sellout Value
National Western’s theory is also unavailing in that National Western has not shown that the information about the valuations it has challenged was in fact false and misleading in the particular manner claimed. See Calpetco 1981 v. Marshall Exploration, Inc., 989 F.2d 1408, 1417 (5th Cir.1993).
First, National Western’s allegations assert legal conclusions not supported by law. Thus, for the purposes of this motion, the Court cannot accept such allegations as true. National Western argues that the Future Sellout Value conveyed in the Offering Summary and appraisal is false and misleading because it included proceeds from the sale of shares allocated to the 61 apartments already sold at the time of the Conversion Closing, and consequently the shares corresponding to these units could not be resold for the benefit of the Cooperative or the lenders in the event of a default on the loan. Merrill Lynch argues that this contention is legally incorrect because upon foreclosure on the Property, the mortgagee would take title to the entire condominium unit and could thus, as the highest and best use of the Property, reconvert it into a cooperative. It then would have the right to reissue and sell shares in the Property once more, even those pertaining to the 61 apartments originally sold.
Merrill Lynch’s argument is an accurate representation of the legal consequences of a default by a cooperative corporation. Upon foreclosure of a cooperative corporation, the mortgagee takes title and possession to the property, effectively abolishing the ownership interest of the shareholders who had originally purchased. See Bruce Bergman, 3 New York Mortgage Foreclosures § 37.09[2][a], 37 — 81 (1990) (citing Federal Home Loan Mortgage Corp. v. New York State Div. of Hous. & Community Renewal, 87 N.Y.2d 325, 639 N.Y.S.2d 293, 662 N.E.2d 773, 775 (1995)(noting that upon foreclosure, proprietary leases of shareholders were cancelled and the share purchasers ceased ownership of their allo-cable shares, but that their rent protection rights were reimposed as they lost their ownership interest); and DeSantis v. White Rose Assocs., 152 Misc.2d 567, 578 N.Y.S.2d 363, 367 (NY.Sup.Ct.1991) (declaring that upon a foreclosure and sale of premises previously converted to cooperative ownership, those occupants who were formerly proprietary lessees stand in the same position as renters — protected by New York City rent stabilization laws, which automatically become applicable as soon as a multiple dwelling is no longer owned as a cooperative.)). The purchasing shareholders effectively lose their original equity and become tenants entitled to occupancy at the legal rents. The mortgagee may then dispose of the property as it may deem appropriate, subject to New York’s rent protection laws. See id. Among its options is to sell the property for its highest and best use, which conceivably may still be a cooperative unit. In that event, the shares corresponding to the units of the original purchasers may be resold and the former owners would be entitled to repurchase their units, usually at preferential rates.
If the calculation of the Future Sellout Value, in fact, represents the total value of the Cooperative assuming all its shares were to be offered for sale once more following foreclosure, it would be entirely appropriate and necessary to reflect in a computation of value the estimated proceeds corresponding to all units, including the 61 previously sold. To calculate the total sellout value without taking account of the anticipated proceeds from the sale of those 61 units would have presented an incomplete picture of the building’s value.
Finally, National Western’s allegations in this regard are not only legally inaccurate, but are expressed as unsupported speculation and legal conclusions that do not provide enough notice, under Fed. R.Civ.P. 9(b), to state a claim for fraud. The statement, for example, that “upon information and belief’ the proceeds from the sale of shares allocated to the. 137 unsold apartments were “not collateral” for the underlying loan “as the sponsor had given a security interest in those shares to another lender” (Compl-¶¶ 44-46), is conclusory and demands greater particularity in a fraud allegation. On a motion to dismiss, conclusory pleadings, particularly where asserted “upon information and behef ’ need not be accepted as factual allegations if they are not supported by a statement of facts upon which the belief is founded. See Campaniello Imports, Ltd. v. Saporiti Italia S.p.A., 117 F.3d 655, 664 (2d Cir.1997) (citing Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir.1986)). The court may on its own examine the shortcomings of such assertions, in the light of which it may accord them only the limited recognition due or dismiss them entirely if they are otherwise contradicted by facts on the record or judicially noticed.
National Western’s unsupported allegation that the Sponsor may have given a security interest in shares of the Cooperative to another lender cannot support the legal or factual conclusion that the 137 unsold apartments were not collateral for the loan. Read broadly, National Western’s allegation is tantamount to a charge that CorEast made a loan to the Cooperative that was unsecured for as much as 69% of the proper collateral and that this fraudulent deficiency was then passed on to Merrill Lynch and subsequently to National Western. If the security interest in question did exist, National Western might have, upon sufficiently specific pleadings, legitimate grounds to complain if that interest was in fact superior to that acquired by National Western in connection with its purchase of a sub-participation in the Co-rEast loan. However, both the Complaint and the Offering Summary state that the lender had a first mortgage lien on the entire 198-unit residential condominium unit (Compl. ¶ 18; Offering Summary, “Summary of Terms”). National Western cannot now argue that both its own pleading and the Offering Summary were incorrect with regard to that assertion. On the other hand, if the alleged interest existed but was subordinate — as it would have to be if in fact CorEast had a first mortgage lien — National Western has not alleged anything to substantiate a claim that any such junior encumbrance would have been material to its decision to invest. See Haralson, 919 F.2d at 1033 (holding that a claim of misrepresentation based on an assertion that certain stock was free and clear of all liens, when in fact the securities had been pledged as a collateral for another loan, was barred as a matter of law because the defendant could not demonstrate how the existence of a subordinate encumbrance was material to its assent to an investment agreement). National Western’s bare, conclusory pleadings fail to inform of such essential facts as to the nature of such interest, or as to the basis of National Western’s belief that it existed.
Further, National Western also does not allege any facts indicating how such information, if true, would have come to the attention of an appraiser performing a real estate valuation of a property, not an accountant’s audit of the financial holdings of the owner or a title search of liens against the collateral. Nor do National Western’s pleadings suggest what relevance or materiality the security interest the Sponsor allegedly had previously given to another lender would have in relation to a representation incorporated in an appraiser’s professional analysis and opinion. The appraiser’s work product addresses only what fair value the underlying property might yield if sold in the open market. The methods appraisers use ordinarily do not involve or require an appraiser to investigate any encumbrances on the property, and a fair market value estimation as a general matter presumes unencumbered property. See, e.g., United States v. 0.376 Acres of Land, 838 F.2d 819 (6th Cir.1988) (discussing, in the context of an eminent domain proceeding, real estate appraisal methods to ascertain fair market value); United States v. 320.0 Acres of Land, More or Less in the County of Monroe, State of Florida, 605 F.2d 762 (5th Cir.1979)(same).
Implicit in National Western’s argument is that, in computing and rendering a projection as to fair market value, appraisers have a legal or professional duty, for which they or their clients may be held accountable in damages, to conduct title or lien searches, to disclose all discoverable encumbrances, and to factor into their assumptions the effects of such restrictions on ownership or transfers of the relevant property. No such duty exists. If sustained as law, National Western’s theory would place an unwarranted burden on appraisers. Indeed, were it to prevail, appraisals of property encumbered by security interests, a class that includes most real estate, would be almost meaningless or irrelevant because automatically any limitations on conveyance imposed by such liens would materially diminish the worth of the property or render it entirely unmarketable.
Rental Value
The Court also cannot accept as true National Western’s allegations that the failure to include the Rental Value information in the Offering Summary was a material omission making that document misleading. First, National Western’s contention that it was not provided the information is contradicted by its admission in the Complaint that it relied on the Appraisal as its source of knowledge about the Rental Value. On this point, in fact, the Complaint quotes from a relevant portion of the Appraisal (ComplV 63). Second, the specifics National Western cites in support of its claim that the representation was false and misleading also rest on unwarranted speculation and conclusions of law.
National Western asserts that the $20 Million Rental Value calculation is based on a false representation of New York Law with regard to residential rents permissible upon foreclosure of a cooperative. The Appraisal represented that in the event of a default and foreclosure, “the mortgagee would have the legal right to lease all the apartments at market rents.” According to National Western, this statement, which the Complaint states as a direct quote, disregarded that “as a matter of law the sold and vacant apartments would be subject to rent stabilization” under New York law (Compl.lffl 63-64).
Generally, under the Texas Securities Act or common law fraud, statements of the law are not actionable as false representations of fact because both parties are deemed to have equal access to and knowledge of the law. See Fina Supply, Inc. v. Abilene Nat’l Bank, 726 S.W.2d 537, 540 (Tex.1987); Executive Condominiums, Inc. v. State, 764 S.W.2d 899, 902 (Tex.App.1989, writ denied); see also Askew v. Smith, 246 S.W.2d 920, 922 (Tex.Civ.App.1952, no writ). There are exceptions when the defendant has superior knowledge and uses it to mislead the plaintiff, or when a fiduciary relationship exists between the parties. See Fina Supply, Inc., 726 S.W.2d at 540; Askew, 246 S.W.2d at 923. Also, Texas law distinguishes statements of the law of other states from statements of its own laws, so that Texas plaintiffs are not charged with knowledge of other states’ laws. The general principle that all persons are presumed to know the law “does not apply to a misrepresentation concerning foreign laws, including [those] of a sister state; same being generally regarded a representation of fact.” Askew, 246 S.W.2d at 922.
National Western’s contention that, “as a matter of law,” upon foreclosure a cooperativ