Professional Documents
Culture Documents
652592/2015
NYSCEF DOC. NO. 151 RECEIVED NYSCEF: 03/01/2017
Plaintiff,
Index No. 652592/20 15
-against-
Motion Sequence No. 008
Ryan Kavanaugh, Colbeck Capital
Management, LLC, Colbeck Capital, LLC, Hon. Charles E. Ramos (Part 53)
Colbeck Partners IV, Jason Colodne, Jason
Beckman, David Aho, Ramon Wilson,
Andrew Matthews, Greg Shamo, Tucker
Tooley, and Steven Mnuchin,
Defendants.
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TABLE OF CONTENTS
PRELIMINARY STATEMENT 1
STATEMENT Of FACTS 4
ARGUMENT $
CONCLUSION 22
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TABLE OF AUTHORITIES
Page(s)
CASES
Flomenhaft v. finkelstein,
127 A.D.3d 634 (1st Dept 2015) 20
Hunts Point Terminal Produce Co-op. Ass ii, Inc. v. N. Y. City Econ. Dev. Corp.,
54 A.D.3d 296 (1st Dept 200$) 20
Kimmell v. Schaefer,
$9 N.Y.2d 257 (1996) 17
11
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Leon v. Martinez,
84 N.Y.2d 83 (1994) 8, 12, 14
Loreley fin. (Jersey) No. 28, Ltd. v. Merrill Lynch, Pierce, Fenner & Smith Inc.,
117 A.D.3d 463 (1st Dept 2014) 14
Oster v. Kirschner,
77A.D.3d51 (lstDept2010) 12
Shisgal v, Brown,
21 A.D.3d 845 (1st Dept 2005) 10
111
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RULES
REGULATIONS
22 NYCRR 130-1.1(a) 20
22NYCRR 130.1-1(c) 20
iv
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Plaintiff RKA film Financing, LLC submits this Memorandum of Law in Opposition to
Defendant Steven Mnuchins Motion to Dismiss the Second Amended Complaint (SAC) (cited
PRELIMINARY STATEMENT
Defendant Mnuchins motion seeks to rewrite both the facts pled in the SAC and New
York law. Neither gambit is permissible. The SAC clearly and specifically alleges that Mnuchin
was an active and knowing participant in a scheme to defraud RKA film financing, LLC
company, Relativity Media, LLC (Relativity). RKA was repeatedly told that its loans
(RKAs P&A Loans) were strictly for the print and advertising (P&A) expenses of certain
Hollywood films, and Mnuchin knew this critical representation was a lie. Indeed, little did
RKA knowfrom the moment it was approached to invest (in 2014) until it uncovered the
scheme (in 2015)that Defendants had always intended to use RKAs P&A Loans to give
Relativity an economic lifeline and to enrich themselvesnot to market movies. Nor that
Rather, Mnuchin tries to spin an alternate factual narrative: one where he was a pawn of
his good friend Ryan Kavanaugh and was ignorant of Relativitys deteriorating business and
financial affairs (despite conducting extensive due diligence and serving as Co-Chairman of
Relativitys Board). Mnuchin cannot re-write the facts of the SAC via a motion to dismiss.
Rather, he must accept the well-pled facts in the SAC as true. Those facts establish that
Mnuchin had intimate knowledge of the inner workings of Relativity, including (i) the false
I
Mnuchins motion to dismiss is proceeding on a separate briefing and argument schedule than the
other Defendants, The other Defendants motions to dismiss are due on March 7, 2017.
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representations made to RKA; (ii) the true financial health of Relativity and the fact that it was
misrepresented to RICA; (iii) the marketing of the fraudulent investment opportunity (the P&A
Facility) to RKA through false representations; (iv) the true purpose Defendants solicited
RKAs P&A Loans; and (v) the lies told to obtain an additional round of investment from RICA
In brief, the SAC asserts that Mnuchin was an early investor in Relativity and ultimately
invested hundreds of millions of dollars in it. Multiple rounds of due diligence provided
Mnuchin a clear window into how Defendants had always treated the P&A facility as a working
capital slush fund for their company. Yet Mnuchin was informed that the same P&A facility
was marketed to RKA as a credit facility 100% dedicated to P&A for specific films. Mnuchins
unique vantage was made possible by his longstanding personal and professional ties to
Relativitys CEO (Ryan Kavanaugh), who considered Mnuchin a trusted advisor and with
whom he owned a company to manage their private jet. Further, Mnuchin was Co-Chairman of
Relativitys Board of Directors for almost a yearduring a time when tens of millions of
dollars were called from RKA to fund Relativity and line both Mnuchins and his Co
Defendants pockets.
have merit, first, he inaccurately describes the claims in the SAC to his likingas an
impermissible fraudulent breach of contract action against Relativity. But the SAC asserts no
contract claim. In fact, Mnuchin and RKA were never counterparties to any contract. Nor can
Mnuchin seriously dispute that the facts alleged in the SAC make out a primafacie case of fraud:
namely, that numerous, knowing misrepresentations were made to RICA (separate and apart from
any documented in a contract); that RKA relied on those misrepresentations; and that Defendants
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Second, Mnuchin attempts to rewrite the law of fraud to his advantage. In his view, a
defendant may only be liable for fraud if that defendant made a misrepresentation directly and
personally to his victim. If Mnuchin s version of the law were accurate, the mastermind of a
fraud scheme could insulate himself from legal responsibility merely by nominating a proxy to
speak to his victim. The law in New York is to the contrary. It is clear that a defendant who
participates in and/or has knowledge of the scheme is equally as liable as a defendant who
personally made a misrepresentation. No more is required. And the SAC amply establishes that
Mnuchin was intimately familiar with Relativitys business dealings and RIAs P&A Loans. He
used his positions as an investor in Relativity, a personal friend and trusted advisor of
Kavanaugh, and Co-Chairman of Relativitys Board to further the fraudulent scheme and
Third, Mnuchins negligent misrepresentation argument fails for the same reasons as his
fraud assertions. furthermore, the SAC plainly alleges a special relationship between Mnuchin
and RKA that gave rise to a duty to speak with care about RKAs P&A Loans. Specifically:
(i) Mnuchin had a fiduciary duty as a Director of an insolvent company to creditors like RKA,
and (ii) Mnuchin possessed unique and superior knowledgeby virtue of his position as Board
Co-Chair and because of his extensive due diligence into the Companyand he failed to correct
any misinformation or misimpressions upon which RKA extended its P&A Loans.
fourth, Mnuchin seeks to rewrite the SACs facts by claiming that RKA has not alleged a
cognizable fraud in the inducement claim because he had no (temporal) connection to Relativity
when RKA made its initial investment. Mnuchins argument misses the point. The SAC alleges
that Mnuchin had ties to Relativity two years prior to RXAs initial investment; and those ties
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continued throughout the duration of the fraud. Through his roles as investor and advisor to
Kavanaugh, and then as Co-Chairman of the Board, Mnuchin induced RKA to provide two
rounds of funding and (then) to continue to extend the RKA P&A Loans.
finally, Mnuchins request for sanctions should not be entertained. RKA filed the well-
pleaded SAC in accordance with a Court approved schedule, and contrary to Mnuchins
STATEMENT OF FACTS
Though Mnuchin would like to rely on his own version of events, there is only one set of
operative facts relevant to his motion to dismiss: those alleged in the SAC. They are set forth
below.
Mnuchin was Co-Chairman of Relativitys Board of Directors from October 2014 to May
2015. (f 1$.) But his connection to Relativity and his Co-Defendants dates to 2012. (J 45.) for
many years, Mnuchin shared a personal and professional relationship with Kavanaugh,
Relativitys CEO. (J 46.) Indeed, Kavanaugh described Mnuchin as a trusted advisor. (J 46.)
The two socialized regularly and registered a company together to co-own a private jet. (J 46.)
Mnuchin was also a Relativity investor and Chairman and Founder of OneWest Bank.
(J 45.) In 2012, he caused OneWest to make financial commitments to Relativity that ultimately
totaled $160,000,000. (J 45.) He and his company thus had an enormous financial stake in
Relativity. Prior to the investments, extensive due diligence was conducted of Relativity that
provided Mnuchin with unfettered access to all information regarding Relativitys finances.
(J 45.) Later, in August 2014, Mnuchin conducted another round of due diligence of Relativity
in advance of causing his companies to invest more than an additional $100,000,000. (JJ 47 &
n. 11.) Among other things, he learned about a plan to market a P&A Facility that, contrary to
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its name, was always intended to beand had always beenused as working capital for
Relativity. (J 45.) This, of course, was the central fraud hidden from RKA.
As it turned out, in 2012, Relativity was struggling financially and Mnuchins investment
would not be enough to keep it afloat. (J 23.) So Kavanaugh, and Jason Colodne and Jason
Beckman (both Relativity Board members), developed a plan to attract new capital. (J 23.)
Specifically, they marketed a lending facility (i.e., the P&A facility) through which investors
could make loans that were (supposedly) for the P&A expenses of Relativity-affiliated entities
that produced, distributed, and marketed Hollywood films (the Film SPEs). (fflJ 20, 24-25.)
But the Defendants always intended to use the proceeds of these loans as general working capital
to finance Relativitynot to fund P&A. (JJ 24-25.) Through his diligence of Relativity and his
close personal and professional ties with Kavanaugh, Mnuchin was aware of the same and
In April 2014, the Defendants pitched the opportunity to invest in the P&A Facility to
RKA. (J 29.) They repeatedly misrepresented that the P&A facility would be used solely to
finance P&A for upcoming film releases, and for no other purpose (JJ 29-3 7), and that prior
P&A facilities had worked identically (J 31). Neither representation was true and both were
material to RKAs decision to invest, The Defendants provided RKA with marketing materials
that described the P&A Facility in detail. (See J 30-31, 35-36.) In fact, during Mnuchins
second round of diligence of Relativityat which point he was fully aware that the P&A Facility
had always been and would continue to be used for general working capitalhe reviewed the
marketing materials, which contained these false statements, and knew that they had been
provided to RKA. (J 47.) Knowing the truth about the P&A Facility, Mnuchin also knew that
the misrepresentations (i.e., that the P&A Facility would be used strictly for P&A) were designed
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Mnuchin then took active steps to participate in hiding the truth from RKA. As part of
his diligence, he obtained a legal opinion from Jones Day that stated that RKAs P&A Facility
was being usedand could be usedfor working capital. (JJ 48, 77.) That legal opinion
contradicted the representations that he knew had been made to RKA. (JJ 48, 77.) Neither
Mnuchin nor his Co-Defendants informed RKA about the legal opinion when they knew that, if
RKA invested with Relativity, it would be relying on misrepresentations that the RKA P&A
Loans would be (and had been) used only for P&A. (J 49.) But they were betting on RKAs
committed to providing an initial $58.5 million for P&A. (JJ 36-38.) Then, in the same month
Mnuchin was conducting his second round of diligence, in reliance on Kavanaugh s further
misrepresentations that additional Film SPEs required P&A financing, RKA increased the size of
its facility commitments by $22.5 million in August 2014. (JJ 42-44.) In total, RKA invested
When Mnuchin increased his investment in Relativity in October 2014, he was also
appointed Co-Chairman of its Board of Directors. (JJ 47, 50.) The Board, including Mnuchin,
was actively involved in Relativitys business decisions (including the P&A Facility) and in
the Board [was] intimately involved [in the companys financial decisions]
.
and [spoke] with Ryan [Kavanaugh] ten times per day (J 51; see also 64);
. .
there [was] rarely a transaction that the Board [was not] involved in, especially
anything material (J 51; see also 64); and
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nothing transpired that [the Board members] werent previously aware of and
the Board members all knew about details of this [P&A] transaction (J 51; see
also 64).
The Boards active role in business decisions was confirmed by Mnuchin, who later conceded
that he may have sat in with management in certain meetings to solicit potential investors on
Between October 2014 (when Mnuchin was made Co-Chairman of Relativitys Board of
Directors) and May 2015, he knew of and approved drawdowns in excess of $55 million from
RKAs P&A Facilitynamely, $13.4 million in December 2014, and $42.5 million in March
2015. (J 66.) Each time the Film SPEs drew on the P&A facility, the Defendants reaffirmed
that RKAs P&A Loans were only for P&A, notwithstanding Mnuchins knowledge to the
contrary. (J 52-54, 66.) And the Defendants took precautionary measures to ensure RKA did
not learn otherwise. In February and April 2015, with Mnuchins knowledge and approval, the
Defendants provided RKA with phony release dates for four films to create the impression that
the film SPEs needed money for P&A. (JJ 56, 58, 62-63, 66.) By that time, Mnuchin knew that
these films would not be released and these drawdowns were intended solely to fund Relativitys
In April 2015, a Relativity Board member admitted to RJKA that Relativity had
misappropriated RKAs P&A Loans for purposes other than P&A. (fflJ 64, 67.) These loans had
allowed Relativity to avoid bankruptcyunbeknownst to RKA. (JJ 63, 66, 68, 69-7 1, 74.) But
that was no longer the case. Pregnant with this material information, Mnuchin sought to
misappropriate RKAs P&A Loans for his own benefit. Specifically, in April and May 2015,
Mnuchin and the Relativity Board discussed Relativitys insolvency, including the outstanding
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obligations to OneWest and RKAs P&A Loans. ( 70.) Mnuchin then negotiated an agreement
to allow OneWest to sweep Relativitys operating account, knowing full well that much of the
funds in those accounts had been stolen from RKA. (J 71-72.) On May 29, 2015, Mnuchin
resigned from Relativity. (J 71). One day later, Relativity defaulted on its loan with OneWest.
(J 72.) And Mnuchin immediately caused OneWest to misappropriate about $50 million from
ARGUMENT
Mnuchin stands his motion on four arguments: (i) the SACs claims amount to an
improper fraudulent breach of contract claim; (ii) the fraud claim fails to allege that he
personally made a misrepresentation to RKA, or that he knew of and/or participated in the fraud;
(iii) the negligent misrepresentation fails for the same reason, and alleges no special relationship
that gave rise to a duty to speak with care about RKAs P&A Loans; and (iv) there is no
cognizable fraud in the inducement claim because he had no connection to Relativity when RKA
facts outside the four corners of the SAC. He devotes roughly half of his brief to this exercise.
Such a tactic is contrary to New York law. See Leon v. Martinez, 84 N.Y.2d 83, 87 (1994)
(under CPLR 3211, a court must accept the facts as alleged in the complaint as true, accord
plaintiffs the benefit of every possible favorable inference, and determine only whether the facts
as alleged fit within any cognizable legal theory). Where, as here, the facts as alleged fit
within.. cognizable legal theor[ies], the motion must be denied. Id. at 87-88. In assessing a
.
motion under CPLR 321 1(a)(7). . . the criterion is whether the proponent of the pleading has a
cause of action, not whether he has stated one. Wyle Inc. v. ITT Corp., 41 Misc. 3d 1216(A), at
*4 (N.Y. Sup. Ct. N.Y. Cnty. 2013) (Ramos, I) (quoting Leon, 84 N.Y.2d at 88). To the extent
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Mnuchin wishes the facts were different, he is free to marshal his counterfactual narrative to the
Court at summary judgment. His request for sanctions fares no better. The motion should be
denied.
Mnuchin repeatedly harps on the argument that RKAs claims are nothing more than an
effort to impose personal liability for a fraudulent breach of contract based on the funding
Agreement that RKA entered with Relativity at the time of RIA s initial investment. (Mnuchin
at 10-11, 13, 22). Despite his effort to rewrite the facts and the claims in the SAC, Mnuchins
brief suffers from several basic defects. first, Mnuchin is not a party to the funding Agreement.
See Sun Prods. Corp. v. Bruch, 507 F. Appx 46, 47-48 (2d Cir. 2013) (holding that a fraud
claim may be dismissed as duplicative only as against a defendant against whom the related
contract claim is viable.) (applying New York law) (internal quotations omitted).
Second, RKA has asserted no breach of contract claim. See Allenby, LLC. v. Credit
Suisse, A.G., 134 A.D.3d 577, 581 (1st Dept 2015) (holding because [plaintiffs] fraud claim
[was] asserted against all three defendants but a contract claim [was] asserted against only [one
defendant], the fraud claim [could not] be duplicative as to [the other two defendants]).
Third, RKA has identified numerous misrepresentations made by Defendants that were
(i) false when made and (ii) entirely separate from the funding Agreement, as well as Mnuchin s
involvement with, and in, Relativity. (See J 42-5 1, 53-56, 64-66, 70-73, 77).
fourth, the SAC pleads a multi-stage fraud that began long before the funding
Agreement was signed, and from the beginning Defendants fully intended to misappropriate
RKAs P&A Loans. See, e.g., 277 Mott Street LLC v. Fountainhead Constr. LLC, 83 A.D.3d
541, 541 (1st Dept 2011) (finding plaintiff sufficiently alleged fraud where defendant induced
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construction contract, always intend[ing] to divert the funds for purposes other than the
construction on plaintiffs property.); see also Shisgal v. Brown, 21 A.D.3d 845, 847 (1st Dept
2005) (finding plaintiffs allegations that [defendants] borrowed money from plaintiffs based on
false representations made by defendants agents/general counsel that the loans were to be used
for working capital or to purchase additional garages; that such representations were known by
defendants to be false and were intended and designed to have plaintiffs rely upon them by
lending money were sufficient to plead fraud (internal quotation marks omitted)).
In sum, RKA does not assert a fraudulent breach of contract claim, or any contract
claim at all. And Mnuchins efforts to style them as such are of no moment.
Mnuchin also argues he cannot be held liable for fraud because the SAC fails to allege
that (i) he made any misstatement directly to RKA or (ii) he personally participated in, or had
actual knowledge of, any interactions with RXA. (Mnuchin at 13-14, 16-19). The first
argument ignores the law, while the second ignores the facts.2
Mnuchin s first argument rests on the misguided belief that a fraud claim requires each
defendant to personally interact with, and make specific misrepresentations to, a plaintiff.
(Mnuchin at 13-14.) His attempt to rewrite the law is mistaken. Based on Mnuchin s argument,
no one could ever be liable for being part of a fraud if he did not have direct communications
2
To survive a motion to dismiss a claim for fraud, a plaintiff must allege, a material
misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the
plaintiff and damages. Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009).
Under CPLR 30 16(b), [w]here a cause of action. is based upon misrepresentation [or] fraud.
. . . the
. ,
circumstances constituting the wrong shall be stated in detail. N.Y. C.P.L.R. 30 16(b). The Court of
Appeals has repeatedly explained, however, that this standard requires that a complaint simply inform a
defendant with respect to the incidents complained of. Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d
426, 491 (2008) (internal quotation marks omitted).
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with the victim of his fraud. He cites no case for his propositionbecause he cannot.
It is black-letter law that liability attaches equally to those who made material
misstatements and to those who participated in, had knowledge of, or furthered the fraudulent
scheme. See Polonetsky v. Better Homes Depot, 97 N.Y.2d 46, 55 (2001) (holding corporate
officers and directors liable for fraud where they participated in or had knowledge ofthefraucf
(emphasis added)). No more is required. See, e.g., Lawati v. Montague Morgan Slade Ltd., 102
A.D.3d 427, 429-30 (1st Dept 2013) (denying motion to dismiss fraud claim where individual
made no misrepresentation, but was connected to the false statements); Kuo feng Corp. v. Ma,
24$ A.D.2d 168, 168-69 (1st Dept 1998) (approving of fraud claim premised on knowing
participation in a scheme to defraud, even if that participation does not by itself suffice to
constitute the fraud); Freschi v. Grand Coat Venture, 583 F. Supp. 780, 785-86 (S.D.N.Y.
1984) (rejecting argument that each person alleged to have participated in a fraud is not liable
a claim of fraud. And as detailed below, ample facts support Mnuchins knowledge of and
Mnuchin argues that fraud and negligent misrepresentation require, at minimum, particularized
factual allegations that a defendant made a representation of materialfact to the plaintiff. (Mnuchin at
14 (quoting Small v. Lorillard Tobacco Co., Inc., 94 N.Y.2d 43, 57 (1999)). The language he quotes,
however, is simply from a hornbook list of the elements of fraud. Small, 94 N.Y.2d at 57 (To make out
a prima facie case of fraud, the complaint must contain allegations of a representation of material fact,
falsity, scienter, reliance and injury,). RKA does not dispute that its fraud claim must include allegations
of a material misrepresentation. The SAC contains a plethora of such misrepresentations, and identifies
when and by whom they were made. (See J 31, 36, 42, 66, 73.) But Mnuchin ignores that actors who
knew of andlor participated in the fraud (like Mnuchin) are liable along with the actors who actually
spoke with the victim. See Folonetsky, 97 N.Y.2d at 55.
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Mnuchin next argues that the SAC fails to allege that he participated in, or had
knowledge of, the fraud. (Mnuchin at 16-19.) This strategy ignores the facts alleged in the SAC
that must be accepted as true. Leon, 84 N.Y.2d at 87-88. It also overlooks the law, which
compels the inference of knowing participation in a fraud based both upon a defendants actions
and the surrounding circumstances. See Pludeman, 10 N.Y.3d at 493 (upholding fraud claim and
observing that {aJlthough plaintiffs have not alleged specific details of each individual
defendants conduct, we have never required talismanic, unbending allegations. Simply put,
sometimes such facts are unavailable prior to discovery.). Indeed, the Court of Appeals has
always acknowledged that. . . less than plainly observable facts may be supplemented by the
corporate individuals allegedly fraudulent conduct, as opposed to the direct naming of such
individual with regard to the same conduct alleged,. . . is a distinction without much of a
difference. Id. at 492 n.3. Thus, actual knowledge need only be pleaded generally, cognizant,
particularly at the prediscovery stage, that a plaintiff lacks access to the very discovery materials
which would illuminate a defendants state of mind. Oster v. Kirschner, 77 A.D.3d 51, 55 (1st
Dept 2010).
Here, the SAC clearly alleges that Mnuchin knew of, and participated in, Defendants
misrepresentations and fraud. Mnuchins knowledge and participation may be inferred from
(i) his position as Co-Chairman of the Board when the misrepresentations were made to RKA
(JJ 50-5 1), and (ii) his close ties to Kavanaugh and Relativity (j 46). See DDJMgmt., LLC v.
Rhone Group L.L.C., 78 A.D.3d 442, 443 (1st Dept 2010) (on a motion to dismiss plaintiffs are
entitled to the most favorable inferences, including inferences arising from the positions and
responsibilities of defendants); Id. at 444 (holding plaintiffs sufficiently alleged fraud against
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the individual and corporate defendants based, in part, on the corporate positions and titles of the
individual defendants). Further, the SAC clearly alleges that, though Defendants fraud started
before he joined Relativitys Board in October 2014, the scheme and cover up continued through
2015while he was on the Board.4 (See J 45-51, 53-56, 64-66, 70-71, 77.) In fact,
Defendantsincluding Mnuchincaused the Film SPEs to borrow over $50 million in P&A
the Board was intimately involved [in the business] and [spoke] with Ryan
[Kavanaugh] ten times per day (J 51; see also 64);
there was rarely a transaction that the Board [wasnt] involved in, especially
anything material (J 51; see also 64);
Kavanaugh and Mnuchin were close personal friends, and Mnuchin was
Kavanaughs trusted advisor (J 46); and
The combination of Mnuchins Board position, his pre-existing relationship with Relativity
senior management, as well as the Boards regular oversight of the business and solicitation of
investors like RXA, support the strong inference that Mnuchin was a knowing participant in
Defendants fraud. See Pludeman, 837 N.Y.S.2d at 12 (holding that, given the corporate
positions and titles of the individual defendants [and] that these individuals actually operate the
That the fraud lasted over an extended period of time and involved multiple phases, and that
Mnuchin played only some of the various roles that were a part of the scheme strengthens the inference
that he participated in and had knowledge of the fraud. See Pludeman, 10 N.Y.3d at 493 (holding that
because the fraud alleged was not isolated and took place over number of years, [t]he very nature of the
scheme . .gives rise to the reasonable inference. that the officers, as individuals and in the key
. . .
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But there is more. The SAC alleges thatbeginning in August 2014 (when RKA made
its second funding commitment)Mnuchin was intimately familiar with the very marketing
materials and other information provided to RKA that described (in detail) the purported
operation of the P&A Facility. (J 44, 47.) At the same time, Mnuchin obtained a legal opinion
from Jones Day that RKAs P&A Loans could be misused and spent in direct contradiction with
those misrepresentationsi.e., as working capital. ( 48.) Mnuchin believes this offers him
some defense. (Mnuchin at 16-17). He is mistaken. At most, it is a question of fact for the jury
whether, as alleged, the legal opinion supports the heavy inference that Mnuchin knew RKAs
P&A Loans were obtained through falsehoodsor else why would Mnuchin have even sought
such a legal opinion in the first place? See Leon, 84 N.Y.2d at 27; see also Loreley Fin. (Jersey)
No. 28, Ltd. v. Merrill Lynch, Fierce, Fenner & Smith Inc., 117 A.D.3d 463, 468 (1st Dept
2014) (reinstating fraud claim and noting that plaintiffs theory of fraud does not rest upon a
single decisive event which manifestly demonstrates defendants wrongdoing, but on a series of
interrelated events which, viewed as whole, portray the alleged fraudulent scheme). And such a
The SAC further alleges that the Defendants (including Mnuchin) continued to
misrepresent to RXA that its loans were being used solely for P&A. Specifically, through at
least March 2015, each time RKA advanced capital, the Defendants repeated that critical
misrepresentationall while Mnuchin was Co-Chairman of the Board. (J 52.) Then, well aware
of both Relativitys insolvency and imminent bankruptcy, as well as the misuse of RKAs P&A
Loans, Mnuchin directed a sweep of Relativitys accounts for the benefit of OneWest Bank,
Of course, Mnuchin could have attached Jones Days opinion to his motion. He did notand so
the factual questions remains.
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in a civil complaint; indeed, all his citations compel denial of his motion. In brief, the cases on
which he relies turn on the failure of a plaintiff to either (i) allege any misstatements or
omissions made by any of the Defendants, (ii) describe those alleged misstatements or omissions
with sufficient particularity, andlor (iii) plead other facts establishing each Defendants role or
participation in an alleged scheme.7 But the SAC states with specificity myriad misleading
statements, acts, and omissions, in addition to the names, dates, and roles of Defendants
including Mnuchinin the fraud. (See J 31, 36, 42, 66, 73.)
North Valley Partners, LLC v. Jenkins, 2009 WL 1058162 (Sup. Ct. N.Y. Cnty. April 14,
2009) is not to the contrary. There, the only specific action attributed to Board of Director
defendants was the approval of bonuses for senior management on the condition that they be
invested in the allegedly fraudulent transaction. Id., at *5 But the complaint did not allege how
the Directors knew misrepresentations regarding the transaction had been communicated to the
plaintiffs, or how they otherwise participated in the fraud. Id., at *6. Because the complaint
failed to allege that the directors were involved in day-to-day management of the company, it
could not be inferred that they were involved in and knew about the fraud. Id. (citing Pludeman,
6
Mnuchin, not OneWest, perpetrated the fraud. That he helped perpetrate the fraud through
OneWest should not shield him from liability. Contrary to Mnuchins contentions (Mnuchin at 19-21),
whether OneWest was released from claims vis-a-vis Relativity during bankruptcy are irrelevant and has
no bearing on RKAs claims against Mnuchin. Mnuchin neglects to note that the Bankruptcy court
explicitly carved out and preserved RKAs claims during those proceedings. See Confirmation Order
66, In re: Relativity Fashion, LLC, No. 15-1 1989-mew, Dkt. No. 1573 (Bankr. S.D.N.Y. Feb. 8,2016).
See, e.g., Schulman v. Greenwich Assoc., LLC, 52 A.D.3d 234, 234 (1st Dept 2008) (dismissing
a claim because in addition to fail[ing] to allege what misrepresentations, if any, were made by [an]
individual defendant, plaintiffs also did not assert[J any allegations that would warrant imposing
individual liability upon him); C7FG Assur. N. Am., Inc. v. Bank ofAm., N.A., 41 Misc. 3d 1203(A), at
*3 (Sup. Ct. N.Y. Cnty. Sept. 23, 2013) (dismissing fraud claim that failed to identify statements by any
of three sets of corporate defendants and to distinguish their roles in the fraud).
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10.N.Y.3d at 49 1-92). That is not that the case here. The SAC specifically alleges that
Kavanaugh (J 51); the Board was involved in most every business decision (J 51); Mnuchin has
conceded that he may have been involved with the solicitation of investors (J 50); and Mnuchin
had invested more than $250,000,000 following multiple rounds of due diligence (JJ 45, 47
n. 11). As such, the SAC clearly alleges that Mnuchin was fully aware of, and actively
Mnuchin next argues that RKAs negligent misrepresentation claim8 fails because (i) it
does not allege a misrepresentation he made to RKA, and (ii) he did not have a special
relationship with RKA that gave rise to a duty to disclose information. (Mnuchin at 14-15.)
First, as detailed above, RKA has alleged that Mnuchin knew of, and approved of, and
allege this prong. M& T3ank Corp. v. Gemstone CDO VII, Ltd., 23 Misc. 3d 1105(A), at *6,
12-13 (N.Y. Sup. Ct. N.Y. Cnty. 2009) (applying Pludeman standards under CPLR 30 16(b),
misrepresentation); see also Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., 910 F.
Supp. 2d 543, 546, 548 (S.D.N.Y. 2012) (under New York negligent misrepresentation law, the
8
To state a cause of action for negligent misrepresentation, a plaintiff must allege that: (1) the
defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant
made a misrepresentation that he should have known was incorrect; (3) the defendant knew that the
plaintiff desired the information supplied in the representation for a serious purpose; (4) the plaintiff
intended to rely and act upon it; and (5) the plaintiff reasonably relied on it to its detriment. Wells Fargo
BankNw., NA. v. TacalntlAirlines, 247 F. Supp. 2d 352, 366 (S.D.N.Y. 2002).
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whether a defendant breached a duty to provide a plaintiff with accurate information; thus
Second, RICA has alleged the existence of a special relationship that imposed a duty on
Mnuchin to speak with care to RKAand these facts must be taken as true. See Knight Sec. LF.
v. Fiduciary Tr. Co., 5 A.D.3d 172, 174 (1st Dept 2004) ({W]hether there was a special
relationship between the parties at bar is a factual issue inappropriate for summary
adjudication.). Mnuchin forgets that a special relationship may arise in the commercial context,
absent privity or a professional relationship. See Kimmell v. Schaefer, 89 N.Y.2d 257, 263
(1996) (a special relationship and associated duty of care may arise where the relationship of
the parties. . . [is] such that in morals and good conscience the one has the right to rely upon the
other for information). New York recognizes a duty by a party to a business transaction to
speak. . . when the parties stand in a fiduciary or confidential relationship with each other...
[or] where one party possesses superior knowledge, not readily available to the other, and knows
that the other is acting on the basis of mistaken knowledge. Brass v. Am. Film Techs., Inc., 987
f.2d 142, 150 (2d Cir. 1993). The SAC alleges each of those scenarios giving rise to Mnuchins
duty to speak.
Relativity was insolvent while Mnuchin was Co-Chairman of its Board. (JJ 54, 59, 66
71.) Mnuchin s suggestion otherwise is a factual dispute that is not appropriate on his motion to
dismiss. (Mnuchin at 15.) As such, he had a fiduciary duty to avoid depleting assets that could
be used to repay RKA that required him to inform RKA that the RICA P&A Loans were being
misappropriated. See Berg & Berg Enters., LLC v. Boyle, 100 Cal. Rptr. 3d 875, 89394 (Cal.
Ct. App. 4th 2009) (in CaliforniaRelativitys state of incorporationdirectors owe a duty to
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creditors to avoid actions that divert, dissipate, or unduly risk corporate assets that might
otherwise be used to pay creditors claims. This would include acts that involve self-dealing or
the preferential treatment of creditors. (emphasis in original)); see also N. Am. Catholic Educ.
Programming found., Inc. v, Gheewalla, 930 A.2d 92, 101 (Del. 2007).
The SAC also alleges that Mnuchin had superior knowledge and knew that RKA was
acting based on that mistaken knowledge. (JJ 45-66, 70-73.) This transformed what Mnuchin
styles merely as commercial relationship into a special relationship. See Century Pac., Inc. v.
Hilton Hotels Corp., Case No. 03-cv-$258, 2004 WL $68211, at *$ (S.D.N.Y. Apr. 21, 2004)
(finding a special relationship where commercial parties enjoy a relationship of trust and
reliance and where defendants induce[d] plaintiffs into a business transaction by making
certain statements or providing specific information with the intent that plaintiffs rely on those
statements or information) (citing Polycast Tech. Corp. v. Uniroyal, Inc., No. 87-cv-3297, 1928
Mnuchins fiduciary duty to RKA, as well as his intimate knowledge and approval of
Defendants misrepresentations required him to correct these repeated falsehoods related to the
P&A facility and the whereabouts of the P&A fundsgiven that RKA was acting on the basis
of mistaken knowledge. Brass, 987 f.2d at 150. Thus, as alleged, Mnuchin breached those
duties by misrepresenting and failing to inform RKA of: (i) the nature of the P&A facility, (ii)
the use of the P&A funds, (iii) Relativitys operations, and (iv) Defendants plan to siphon off
the remainder of those funds through OneWest following Mnuchins resignation and prior to
Accordingly, the SAC pleads facts sufficient to put Mnuchin on notice of its negligent
misrepresentation claim.
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Next, Mnuchin argues that RKAs fraud in the inducement claim9 should be dismissed
because RKA has not alleged that he said anything to RKA, ever, let alone prior to the
execution of the Funding Agreement at the time of RKAs first funding on June 30, 2014.
(Mnuchin at 12-13.) Specifically, he claims he could not have induced RKA to lend money
because he did not join Relativitys Board until three months after the Funding Agreement.
As explained above, the SAC alleges that Mnuchin participated in, and had knowledge
of, the fraud, even if he did not personally make a statement to RKA. (See supra at 11-15.)
Specifically, Mnuchin and his Co-Defendants induced RKA: (1) to invest on June 30, 2014;
(ii) to invest a second time in August 2014; (iii) to continue to extend loans to the film SPEs;
and (iv) to refrain from bringing suit in order to complete their misappropriation of RKA s P&A
Loans. That is all the law requires. See Polonetsky, 97 N.Y.2d at 55. The SAC further alleges
that:
Mnuchin had longstanding ties to Kavanaugh and Relativity since at least 2012
(J 45), and was Kavanaughs trusted advisor (J 46);
In 2012, when Mnuchin led OneWests investment in Relativity, he became
familiar with its finances and its use of the then-existing P&A facility for working
capital ( 45); and
The elements of fraud in the inducement are substantially the same as the elements of fraud.
Specifically, a fraud in the inducement claim requires (a) a misrepresentation or a material omission of
fact; (b) the defendants knowledge of its falsity; (c) made for the purpose of inducing the other party to
rely upon it; (d)justifiable reliance; and (e) injury. See Shea v. Hambros PLC, 244 A.D.2d 39, 46 (1st
Dept 1998).
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marketing materials (which detailed how the P&A was supposed to operate) that
his Co-Defendants used to induce RKAs initial investment (JJ 46-47).
August 2014 (J 44), and the Defendants repeated statements (through March 2015) that its P&A
Loans for specific films would be used for only P&A (fflJ 52-57). Thus, the suggestion (and the
basis of his argument) that Defendants fraudand their inducement of RKAtook place more
than three months before Mr. Mnuchin had any association with Relativity is incorrect.
(Mnuchin at 2).
Lastly, Mnuchin seeks sanctions based on his claim that RKA (1) lacks a good faith basis
for its a fraud action and (ii) used his nomination as Treasury Secretary to gamer media attention
First, the Court granted RKA leave to file the instant complaint against all the
Defendants, despite Mnuchins protestations at the October 2016 hearing. (See Mnuchin, Ex. G,
Oct. 11, 2016 Hrg Tr. at 24:3-14, 28:21-29:14.) Adhering to the Courts grant can hardly be
viewed as frivolous conduct that is sanctionable. And, as detailed above, the SAC states valid
claims against Mnuchin. See Flomenhaft v. Finkeistein, 127 A.D.3d 634, 639 (1st Dept 2015)
(sanctions were not appropriate[] . . . because. . . plaintiff stated a valid cause of action).
10
Sanctions are only appropriate in the case of frivolous conduct. See 22 NYCRR 130-1.1(a).
Conduct is frivolous only if: (i) it is completely without merit in law and cannot be supported by a
reasonable argument for an extension, modification or reversal of existing law; (ii) it is undertaken
primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or
(3) it asserts material factual statements that are false. 22 NYCRR 130.1-1(c). See Hunts Point
Terminal Produce Co-op. Assn, Inc. v. NY City Econ. Dev. Corp., 54 A.D.3d 296, 296 (1st Dept 2008).
Further, New York courts traditionally only award sanctions in cases of extreme behavior and
egregious and contemptuous conduct. Matter of Thompson (S.L.T Ready-Mix, Div. of Torrington
Indus. Inc.), 245 A.D.2d 911, 913 (3rd Dept 1997).
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Second, Mnuchin claims that the instant complaint was meant both to harass and to drag
his name through the mud are without factual basis. (Mnuchin at 23.) Notably, Mnuchin fails to
remind the Court that all the claims at issue were filed in March 2016, almost a year before his
Treasury nomination. And the SAC isand has always beenpredicated on conduct that took
place while and before he was Co-Chairman of the Relativity Board. Nor does Mnuchin mention
that that, from the get-go, RKA has sought a speedy resolution of this matter that has been
prolonged by Mnuchin and his co-Defendants through repeated requests for leisurely briefing
schedules and their own (baseless) claims against RKA (which were later abandoned given their
frivolity). See Relativity Media, LLC v. RK4 Film Financing, LLC, No. 652594/2015. (RXA did
not seek sanctions in connection with those claims.) Mnuchin s request for, and stipulation to,
RKA reserves all rights against Mnuchin and co-Defendants predicated on their baseless and
factually misleading suit against RKA.
12
That Mnuchin seeks to blame the U.S. Senates and the medias scrutiny of his nomination on
RKA is factually inaccurate. As Mnuchin well knows, any negative press to which he may (regrettably)
have been exposed was principally due to his inaccurate statements to the U.S. Senate, OneWests
mortgage practices, and the decisions he made while running his hedge fund, Dune Capital.
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CONCLUSION
Mnuchins motion to dismiss and request for sanctions should both be denied.
Respectfully Submitted,
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