Key Points

  • The First Department unanimously dismissed the Brigade funds' fraud claims against James M. Chirico Jr. and Kieran J. McGrath and otherwise affirmed the denial of their CPLR 3211(a)(7) motions.
  • The funds could not justifiably rely on Avaya's financial projections because they did not allege using their contractual right to request non-public materials or otherwise conducting due diligence adequate for a sophisticated investor.
  • The funds were entitled to rely on McGrath's officer's solvency certificate, but the fraud claim based on it failed for insufficient allegations that McGrath knew the statement was false when made.
  • The investment agreement's New York governing-law clause did not bar the North Carolina Securities Act claim, which survives except to the extent it is based on financial projections; McGrath is potentially liable for his own statements.
  • The court granted a motion to strike parts of Chirico's reply brief that raised new arguments, including that the funds could not sue him for secondary liability without suing Avaya for primary liability.

A New York appeals court on Thursday threw out the fraud claims a group of investment funds brought over their purchase of notes from Avaya, but it kept alive the funds' claim against the same two defendants under North Carolina's securities statute.

Justices Manzanet-Daniels, Shulman, Rodriguez, Higgitt and Rosado of the Appellate Division, First Department, ruled unanimously in an unsigned decision that modified a May 2025 order by Justice Melissa A. Crane of State Supreme Court in New York County. Justice Crane had refused to dismiss the complaint that Brigade Cavalry Fund Ltd. and other funds filed against James M. Chirico Jr. and Kieran J. McGrath, Avaya's chief financial officer.

The decision separates what a sophisticated buyer may take on faith from what it must check itself. The court held that the funds could not justifiably rely on Avaya's financial projections, because they did not allege that they used a contractual right to request the company's non-public materials. They were entitled, however, to rely on a written officer's certificate attesting to Avaya's solvency. The court also held that a New York governing-law clause in the investment agreement did not bar the North Carolina claim.

Justifiable reliance was the funds' first obstacle. According to the decision, Brigade Capital Management LP, the funds' investment manager, "appears to have limited its due diligence to reviewing the financial statements" of Avaya and other public materials and to calls with McGrath. The investment agreement let Brigade request non-public materials to evaluate Avaya's business and the accuracy of its financial statements and guidance.

"However, Brigade did not allege that it availed itself of that contractual right or otherwise engaged in due diligence adequate for an actor of Brigade's sophistication," the court wrote. The funds had argued that discovery would show the depth and breadth of their diligence. The panel rejected that argument, holding that the funds "do not need discovery to gather facts as to their own due diligence."

Brigade had no duty to investigate Avaya's solvency, the court held, because it was entitled to rely on the certificate McGrath issued. The panel cited a 2010 decision holding that a plaintiff that has "gone to the trouble to insist on a written representation that certain facts are true" will often be justified in accepting it.

The certificate-based fraud claim failed anyway for lack of scienter, meaning knowledge that a statement was false when it was made. The funds pointed to a June 23, 2022, message in which an Avaya executive told the company's general counsel that an assessment of goodwill and trade names for potential impairment was "in-process and no conclusions have been reached at this time." They also cited a June 28 press release estimating large non-cash impairment charges.

The panel held that neither allegation showed McGrath knew on July 12 that his statement about Avaya's solvency was false. The court wrote that "there is nothing untoward about the assessment for potential impairment," which Avaya's filings with the Securities and Exchange Commission showed occurred every year.

"That Avaya subsequently announced that the impairment would be so large as to render the company insolvent as of the date of the certificate does not mean McGrath knew on July 12 that Avaya was insolvent," the court wrote. It also held that a theory of reckless disregard for the truth is not available against a defendant who is not an auditor.

The fraud claim against Chirico over the certificate failed for a separate reason. The funds alleged that he "would . . . have been aware of and approved this certification," but they made that allegation on information and belief, which the court held insufficient to state a fraud claim against him.

On the statutory claim, under the North Carolina Securities Act, or NCSA, the panel agreed with Justice Crane that section 6.9 of the investment agreement did not bar it. That section applies New York law to issues "concerning the construction, validity, enforcement and interpretation of this Agreement," and the court held that the NCSA claim concerns none of them. "Even if Avaya had sold notes to Brigade pursuant to an entirely different contract, defendants could still be liable under the NCSA for their oral representations and omissions," the court wrote.

The panel narrowed the claim, however, by dismissing it to the extent it rests on financial projections rather than the officer's certificate. The provision at issue, section 78A-56(a)(2), is based on section 12(2) of the federal Securities Act of 1933, so federal cases are persuasive authority, the court wrote. "[P]rojections of future performance not worded as guarantees are generally not actionable under the federal securities laws," the panel wrote, quoting a 2013 North Carolina Business Court decision.

The court held that McGrath is potentially liable under the statute for his own statements and that the funds adequately pleaded those statements were untrue. McGrath had argued that the funds' secondary-liability claim against him under section 78A-56(c) failed because their primary-liability claim failed. But he had sought dismissal of the primary claim only as to the projections. "Thus, sub silentio, he conceded that there were parts of the primary liability claim that were not dismissible," the court wrote.

Chirico's opening brief argued only that the investment agreement precluded the NCSA claim, but the court applied its projections ruling to him too, because McGrath had raised the point and the funds had a chance to answer it. The court refused, however, to let Chirico argue for the first time in reply that the funds could not hold him secondarily liable without suing Avaya for primary liability.

"An argument raised for the first time in reply—when the other party has no chance to respond—should not be considered," the court wrote, quoting its own 2021 precedent. It granted a motion to strike parts of Chirico's reply brief.

Chirico was represented by Ronald D. Lefton of Izower Lefton LLP. The Brigade funds were represented by Maeve O'Connor of Debevoise & Plimpton LLP.

The First Department otherwise affirmed Justice Crane's order, without costs.