The opinion of the court was delivered by: Robert W. Sweet, United States District Judge
Plaintiff, the Jordan (Bermuda) Investment Company, Ltd. ("Jordan"), pursuant to Federal Rules of Civil Procedure 14, 21, and 60(b) and 28 U.S.C. § 1653 has moved for an order to amend its Second Amended Complaint ("SAC"), dropping certain defendants in order to preserve diversity jurisdiction between Jordan and the remaining defendants, and to vacate the portion of this Court's opinion dated June 19, 2002, which, based on the absence of complete diversity jurisdiction, dismissed with prejudice the state law claims in the Amended Complaint against certain defendants. For the reasons set forth below, the motion is granted in part and denied in part.
This action was commenced on December 5, 2000. The initial complaint was dismissed by an opinion decided on July 19, 2001, Jordan (Berm.) Inv. Co. v. Hunter Green Inv. Ltd., 154 F. Supp.2d 682 (S.D.N.Y. 2001) ("Jordan I"). In a June 19, 2002 opinion ("Jordan II") this Court dismissed Jordan's amended complaint holding Jordan's RICO claim legally insufficient and the state law claims lacking jurisdiction. Jordan (Berm.) Inv. Co. v. Hunter Green Inv. Ltd., 205 F. Supp.2d 243 (S.D.N.Y. 2002). Familiarity is assumed with the preceding opinions.
In Jordan II the ground for finding a lack of diversity was that Jordan was neither a citizen of a state nor a subject of a foreign state within the meaning of 28 U.S.C. § 1332(a)(2). In light of the Supreme Court decision, JPMorgan Chase Bank v. Traffic Stream (BVI) Infrastructure Ltd., 536 U.S. 88 (2002) ("JPMorgan"), issued on June 10, 2002, shortly before Jordan II, the parties now concur that Jordan is a citizen of a foreign state for diversity purposes.
The instant motion was marked fully submitted on September 24, 2002. An administrative error delayed the issuance of this opinion.
As identified in the proposed SAC, Jordan is a corporation organized and existing under the laws of Bermuda, with its principal place of business in the State of Illinois. The sole shareholder of Jordan is The Jordan Trust ("the Jordan Trust"), which is organized and existing under the laws of Illinois. Its sole trustee is John W. Jordan II ("Mr. Jordan"), a resident and citizen of Illinois.
Jordan proposed to retain the following diverse parties as defendants in the SAC:
Hunter Green Investments LLC ("Hunter Green LLC") is a
Connecticut limited liability company and was Primary
Sub-Advisor and Commodity Trading Advisor to the
Beacon Emerging Debt Fund, Ltd. ("Beacon" or the
John Shilling ("Shilling") is a resident and citizen
of Connecticut and during 1997 and 1998 a director of
Hunter Green Investments Ltd. ("Hunter Green Ltd."),
the Investment Manager for Beacon and Beacon Emerging
Growth Fund LP ("Beacon Growth") and during 1997 and
1998 a director of Hunter Green LLC.
International Fund Services, Inc. ("IFS") is a
corporation organized and existing under the laws of
the State of Connecticut, with a principal place of
business in New York.
Investment Management Services Inc. ("IMS") is a
Delaware corporation, and alleged to be, along with
International Fund Services, Inc. ("IFS"), the
"effective" administrator of Beacon during 1997 and
1998, even though International Fund Services
(Ireland) was the nominal administrator.
Thomas Grizetti ("Grizetti"), residing in New York,
and was during 1997 and 1998, a director, officer
and/or employee of IFSI and defendants IMS and IFS.
European Fund Services Limited ("EFSI") is alleged to
be a Delaware corporation*fn1 and a director of Beacon
during 1997 and 1998.
Rosenman & Colin LLP ("Rosenman") was a New York
partnership, and acted as legal counsel for Beacon,
Beacon Growth, Hunter Green Ltd., Hunter Green LLC,
IFSI, IMS, and IFS.
Fred M. Santo ("Santo"), a citizen of New York, is employed as an attorney by Rosenman and was principally responsible for Beacon work at the firm.
Jordan proposes to drop the following non-diverse parties which were named as defendants in the Amended Complaint:
Hunter Green Investments Ltd. ("Hunter Green Ltd."), a
British Virgin Island Corporation and the investment
manager for Beacon and Beacon Growth.
International Fund Services (Ireland) ("IFSI"), a
citizen and resident in the Republic of Ireland, and
the Administrator of Beacon.
Ilya Kaminsky ("Kaminsky"), alleged to be a United
States citizen residing abroad and the Chief
Investment Officer of Hunter Green Ltd. and a director
of Hunter Green LLC.
Jonathan Vinnik ("Vinnik"), alleged to be a United
States citizen residing abroad and a director of both
Hunter Green Ltd. and Hunter Green LLC.
Susan Byrne ("Byrne"), a director of IFSI and IFS during 1998.
Mark William Solly ("Solly"), a citizen and resident
of the United Kingdom and director of Beacon during
William James Cowell ("Cowell"), a citizen and
resident of the United Kingdom and director of Beacon
The Second Amended Complaint The allegations of the SAC remain essentially the same as the state law claims which were alleged in in Jordan I, which described the transaction at issue:
The Trust is a tax-exempt charitable remainder unitrust.
If the Trust used leverage (i.e. borrowed money) to make
investments, it would risk accruing unrelated business
Beacon was a corporation organized to achieve a high
return on interest income by investing in emerging
markets. Its confidential Private Placement Memorandum
("PPM"), which offered Class A shares, warned that Beacon
utilized a high-risk investment strategy employing
leverage. Beacon borrowed funds from securities brokers
and others and used Beacon's securities or other assets
as security for its leveraged investments.
While notifying potential investors that "[t]he Fund is
also authorized to issue, and has issued, other classes
of shares which have different investment objectives and
have been offered on different terms and conditions than
the Shares" (PPM at 9), the PPM specified that: "no
offering literature or advertising in any form whatsoever
shall be employed in the offering of the shares except
for this memorandum[;] no person has been authorized to
make any representation or provide any information with
respect to the shares except with such information as is
contained in this memorandum and, if given or made, such
representations or information may not be relied upon as
having been authorized by the Fund or its directors."
(PPM at i.)
In early 1998, Jordan and Shilling had a telephone
conversation to explore the possibility of the Trust
investing in Beacon. During that discussion, Jordan
stated that the Trust's monies could not and would not
be used to make investments utilizing leverage. In
various written communications — including
letters from Shilling to JBIC dated (1) March 18,
1998; (2) March 19, 1998; and (3) March 23, 1998; and
(4) drafts, blacklined, and clean versions of both an
Investment Control Side Letter ("Investment Control
Letter") and Class J Supplement to Beacon's PPM
— Shilling represented that Beacon would issue
to the JBIC a special Class J of Shares which would
not utilize leverage as a part of their investment
strategy, and that any investment decisions would be
made with Jordan's prior consultation and approval.
Rosenman and Santo prepared or reviewed and approved the
draft text and final versions of the Class J Supplement
and Investment Control letter. On March 24, 1998,
Shilling delivered blacklined and clean versions of those
documents to the Trust's attorney and delivered an
executed copy of the Investment Control Letter to the
Trust. The Class J Supplement announced that Beacon had
the right to issue Class J shares and that those shares
would have rights equal to Class A shares, but that
"[u]nlike the Class A Shares described in the [PPM],
which utilize leverage as part of the investment 8
strategy, Class J shares will invest on an unlevered
basis." (Compl. ¶ 86 (quoting Class J Supplement.))
The Trust executed and returned the Beacon Subscription
Agreement and other documents on March 30-31, 1998, and
bank-wired $5 million ("the Trust monies") to New York to
be credited to Beacon's account. The Subscription
Agreement specified that JBIC would buy Class J "subject
to the terms and conditions set forth in this
Subscription Agreement . . . and in the Private Placement
Memorandum dated October 1, 1997, as supplemented through
the date hereof, and the exhibits thereto including but
not limited to the Class J Supplement (collectively, the
`Memorandum')." (IMS Mtn. Ex. 3 at 1.) By signing the
Subscription Agreement, JBIC agreed that "[i]n deciding
to invest in the Fund, Subscriber has relied solely upon
the information in the Memorandum. Specifically, the
Subscriber has not relied on oral representation or
warranties, if any have been made." (Id. at 6.)
Beacon sent JBIC account statements for the months of
April and May of 1998, both of which reflected JBIC's
ownership of Class J shares. Shilling and Jordan
discussed the Class J shares in August of 1998, and
Rosenman faxed JBIC a financial statement reflecting its
ownership of Class J shares on October 5, 1998.
Four creditor banks filed a Winding Up Petition to
liquidate Beacon on October 20, 1998, in the High Court
of Justice in the British Virgin Islands.
The complaint alleges that Beacon was not authorized to
issue Class J shares, that in fact Class J shares did not
exist, had no rights, and could not be issued; that the
Trust Monies could not be, and were in fact not invested
in a non-leveraged basis as per Jordan's prohibitions;
that Beacon failed to consult with Jordan or obtain his
approval before making any investment decisions
pertaining to the Class J shares' portfolio; that the
Trust's Monies were subject to claims and liens of
Beacon's creditors; that between April 7, 1998 and May
13, 1998, Beacon repeatedly utilized leverage to invest
the Trust Monies in foreign currency investments; and
that the defendants intentionally failed to disclose, and
even concealed, these facts.
Moreover, the complaint alleges that the defendants
continued to conceal their misappropriation of
plaintiff's funds after liquidation and into the year
2000 by making misleading or outright false
representations to the B.V.I. High Court-appointed
Liquidator pertaining to the allocation of funds from
JBIC's Beacon account.
Jordan I, 154 F. Supp.2d at 686-88.
In this complaint, the Jordan Trust sets forth twelve counts: fraud (Counts I-IV), negligence (Counts V and X), breach of fiduciary duty (Counts VI-IX), conversion (Count XI), and violation of N.Y. General Business Law § 349 (Count XII). The Issue If permitted to drop the selected defendants, diversity would be preserved. According to the Jordan Trust, leave to amend a complaint is typically granted, even where the aim is to drop non-diverse parties in order to preserve jurisdiction. E.g., Le Blanc v. Cleveland, 248 F.3d 95 (2d Cir. 2001); Dali (USA), Inc. v. Lee, No. 96 Civ. 3305 (MBM), 1996 U.S. Dist. LEXIS 15623 (S.D.N.Y. Oct. 15, 1996); Chronicle Holdings, Ltd. v. Alexander Int'l Holding Corp., No. 92 Civ. 0303 (JSM), 1992 U.S. Dist. LEXIS 10528 (S.D.N.Y. July 9, 1992). It is the position of the defendants Investment Management Services, Inc., International Fund Services (Ireland), International Fund Services, Inc., European Fund Services Limited and Thomas F. Grizetti (collectively "IMS"), that certain of the dropped non-diverse parties are indispensable.
In addition, IMS and Rosenman resist amendment on the grounds of futility. See Nowakowski v. Kohlberg, No. 89 Civ. 5621 (RWS), 1991 U.S. Dist. LEXIS 107, at *5 (S.D.N.Y. Jan. 8, 1991) ("Despite the liberal policy toward amendment embodied in Rule 15(a) of the Federal Rules of Civil Procedure leave to amend should not be granted where it is futile."). It is their position that the proposed amended complaint "would be the subject of a successful motion to dismiss on jurisdictional grounds," or for failure to state a claim for relief. Dellefave v. Access Temps., Inc., No. 99 Civ. 6098 (RWS), 2001 U.S. Dist. LEXIS 3165, at *14 (S.D.N.Y. 2001), aff'd, No. 01-7438, 2002 U.S. App. LEXIS 12210 (2d Cir. June 17, 2002).
Legal Standard for Failure to State a Claim
In reviewing a motion to dismiss under Rule 12(b)(6), "a district court must limit itself to facts stated in the complaint and documents attached to the complaint as exhibits or incorporated in the complaint by reference." Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1991). Courts must "accept as true the factual allegations of the complaint, and draw all inferences in favor of the pleader." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993) (IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052 (2d Cir. 1993)). Dismissal is warranted only when "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 (1957). Bass v. Jackson, 790 F.2d 260, 262 (2d Cir. 1986) (same).
The Dropped Non-Diverse Parties Are Not Indispensable Federal Rule of Civil Procedure 19(b) governs the determination of whether an action should proceed in the absence of a party. "This determination is an equitable one and is left to a court's discretion." Global Discount Travel Servs., LLC v. TWA, Inc., 960 F. Supp. 701, 709 (S.D.N.Y. 1997). As noted by the Second Circuit, courts should be flexible in their approach regarding Rule 19(b) because a "mechanical determination of who is an indispensable party is clearly inappropriate in light of Rule 19(b)'s reference to `equity and good conscience.'" Prescription Plan Serv. Corp. v. Franco, 552 F.2d 493, 496 (2d Cir. 1977).
As noted in this Court's prior decision in the instant case, Jordan "alleges, in essence, that the defendants engaged in a scheme to defraud the plaintiff of $5 million by inducing it to invest in nonexistent Class J shares of Beacon, making unauthorized use of the funds once invested, and then failing to compensate the plaintiff fully upon liquidation." Jordan I, 154 F. Supp.2d at 694. It now seeks leave to drop, among other defendants, Hunter Green Ltd., the investment manager for Beacon, and IFSI, the administrator for Beacon.
With respect to the claims of fraud and negligent misrepresentation alleged in Counts I through V of the proposed Second Amended Complaint, IFSI is claimed by IMS to be an indispensable party because it "allegedly performed the wrongful acts of which plaintiff complains," Nowakowski, 1991 U.S. Dist. LEXIS 107, at *12, i.e., it was the Administrator of the Beacon Emerging Debt Fund ("Beacon") that prepared and mailed the account statements that allegedly concealed the non-existence of the Class J shares purchased by the Jordan Trust and the use of leverage to invest the Trust's funds. (SAC ¶¶ 51-54).
In order to prove its case against IMS, Jordan will have to establish that IFSI acted wrongly. Under the circumstances, according to IMS, "[a]llowing the suit to proceed in the absence of [IFSI] [would] likely . . . prejudice [its] positions on these issues and would also thwart the policy underlying Rule 19 of reaching `complete, consistent and efficient settlement of controversies.'" Nowakowski, 1991 U.S. Dist. LEXIS 107, at *12. (citation omitted). IMS contends that it also would be contrary to Rule 19's goal of permitting defendants IMS and IFS to avoid "sole responsibility for a liability [they] [allegedly] share with another." Id. Accord e.g., Vedder Price Kaufman & Kammholz v. First Dynasty Mines, Ltd., No. 01 Civ. 3970 (WHP), 2001 U.S. Dist. LEXIS 16146, at *7-9 (S.D.N.Y. Oct. 5, 2001) (holding subsidiary alleged to be alter ego of parent to be indispensable where it was primary participant in the dispute); Amoco Prod. Co. v. Aspen Group, 189 F.R.D. 614, 616 (D.Colo. 1999) (holding shareholders alleged to be alter egos of corporation to be ...