Fraud Claim Based on Omissions Fails in Light of Disclosure that Not All Material Information Was Being Disclosed for Securities Law Reasons

On November 5, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Silver Point Capital Fund, L.P. v. Riviera Resources, Inc., 2020 NY Slip Op. 51308(U), holding that a fraud claim based on an omission fails because the material information was withheld for securities law reasons, explaining:

To state a claim for fraud, Silver Point must allege misrepresentation or concealment of a material fact, falsity, scienter, justifiable reliance and injury. For claims of fraudulent inducement, an essential element is detrimental reliance. Thus, a plaintiff has to show both that the defendant's alleged "misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentation directly caused the loss about which plaintiff complains (loss causation). For claims of fraudulent concealment, a plaintiff must allege all the foregoing elements of fraud as well as a duty on the part of the defendant to disclose the allegedly material information and failure to do so.

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

Even if Silver Point's fraud claims were not barred by the Release discussed above, the claims nevertheless fail. Paragraph 1 of the Big Boy Letter, which was drafted on Silver Point letterhead, expressly indicates that Riviera may have material non-public information about its properties, which necessarily included the Hugoton Properties, and Silver Point expressly acknowledged the same. As such, Silver Point cannot be said to have justifiably relied on any omission by Riviera in its alleged failure to disclose the upcoming sale of the Hugoton Properties. While on a motion to dismiss the court must liberally construe the pleading, the court is not required to accept allegations that are plainly contradicted by the documentary evidence.

(Internal citations omitted).

Commercial litigation frequently involves fraud-based claims. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.