United States District Court, Southern District of New York
March 31, 2003
THE JORDAN (BERMUDA) INVESTMENT COMPANY, LTD., PLAINTIFF,
HUNTER GREEN INVESTMENTS LTD., HUNTER GREEN INVESTMENTS LLC, JOHN SHILLING, ILYA KAMINSKY, JONATHAN VINNIK, INTERNATIONAL FUND SERVICES (IRELAND), INTERNATIONAL FUND SERVICES, INC., INVESTMENT MANAGEMENT SERVICES INC., THOMAS F. GRIZETTI, MARK WILLIAM SOLLY, WILLIAM JAMES COWELL, EUROPEAN FUND SERVICES LIMITED, SUSANA BYRNE, ROSENMAN & COLIN LLP AND FRED M. SANTO, DEFENDANTS.
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 indispensable); Enza Inc. v. We the People, Inc., 838 F. Supp. 975, 978 (E.D.Pa. 1993) (holding defendant corporation to be indispensable when alleged fraud occurred in its name or on its behalf); Dou Yee Enters. v. Advantek, Inc., 149 F.R.D. 185, 188-89 (D.Minn. 1993) (same).
Rosenman contends that in the absence of Hunter Green Ltd. and IFSI as defendants, Jordan will be seeking relief from the employees of those entities for the alleged wrongdoing of Hunter Green Ltd. and IFSI themselves. See N.S.N. Int'l Indus. v. E.I. du Pont de Nemours & Co., Inc., 143 F.R.D. 30, 34 (S.D.N.Y. 1992) (holding corporation to be an indispensable party in technology misappropriation case where plaintiff made information available to defendant through corporation and had independent misappropriation claim against corporation); Murphy v. Gutfreund, 624 F. Supp. 444, 448-49 (S.D.N.Y. 1985) (holding that the claim of a former general partner alleging breach of annuity agreement was a suit against a dissolved partnership, not the trustees, and thus the partnership was an indispensable party under Rule 19(b)); Rosengarten v. Int'l Tel. & Tel. Corp., 466 F. Supp. 817, 828 (S.D.N.Y. 1979) (holding corporation to be an indispensable party in an action by shareholders alleging fraud within the corporation).
Jordan resists these contentions based on the allegations in the SAC that all defendants, as well as non-defendants IFSI and HGL, are joint tortfeasors and co-conspirators and as such the absent parties are not necessary parties and, therefore, cannot be indispensable parties under Rule 19(b). See Young v. Century House Historical Soc'y, 117 F. Supp.2d 277, 282 (N.D.N.Y. 2000) (citing Temple v. Synthese Corp., 498 U.S. 5, 7 (1990) (per curiam)) ("It is well settled that joint tort-feasors are not necessary parties."); Bodner v. Banque Paribas, 114 F. Supp.2d 117, 136 (E.D.N.Y. 2000) ("It is well established federal law that neither joint tortfeasors nor co-conspirators are indispensable parties.").
An absent joint tortfeasor is not deemed to be an indispensable party in a lawsuit, even when it allegedly was controlled as the alter ego or agent of a named defendant. Motorola Credit Corp. v. Uzan, 202 F. Supp.2d 239 (S.D.N.Y. 2002); In re Rio Piedras Explosive Litig., 179 F.R.D. 59 (D.P.R. 1998); Royal Indus. Ltd. v. Kraft Foods, Inc., 926 F. Supp. 407 (S.D.N.Y. 1996). In the cases cited by IMS the absent party was alleged to be the wrongdoer and the parties sued were not alleged to be joint tortfeasors or co-conspirators. See Dou Yee v. Enterprises (S) PTE, Ltd. v. Advantek, Inc., 149 F.R.D. 185 (D.Minn. 1993); Amoco Prod. v. Aspen Group, 189 F.R.D. 614 (D.Colo. 1999); Nowakowski, 1991 U.S. Dist. LEXIS 107; Vedder, 2001 U.S. Dist. LEXIS 16146, at *7-8 (acknowledging that "[w]hile co-obligors such as defendants here generally are not deemed indispensable parties," in this case, "the legal services to be rendered by [Plaintiff] pertained primarily to an Armenian joint venture of which [the absent party] is a partner, but [defendant] is not." In Enza, Inc. v. We the People, Inc., 838 F. Supp. 975 (E.D.Pa. 1993), a corporation was held to be indispensable in a suit against officers for fraud, but the joint tortfeasor rule was apparently not brought to the court's attention or ruled upon.
In addition, there is no rule that a joint tortfeasor is a necessary and indispensable party if it is a corporation that employed the officers or agents who are charged with committing wrongful acts. Motorola Credit Corp. v. Uzan, 202 F. Supp.2d 239 (S.D.N.Y. 2002); Royal Indus. Ltd. v. Kraft Foods, Inc., 926 F. Supp. 407 (S.D.N.Y. 1996); Elgin Sweeper Co. v. Melson, Inc., 884 F. Supp. 641 (N.D.N.Y. 1995).
Rosenman did not deal with these authorities and instead relied upon five inapposite cases. Rosengarten, 466 F. Supp. at 828, a derivative action in which the corporation must be named as a party; Envirotech Corp. v. Bethlehem Steel Corp., 98 F.R.D. 250 (S.D.N.Y. 1983), aff'd, 729 F.2d 70 (2d Cir. 1984), a breach of contract action; N.S.N. Int'l Indus. v. E.I. du Pont de Nemours & Co., Inc., 143 F.R.D. 30, 35 (S.D.N.Y. 1992), where an absent party had the right to assert against the defendant a claim "arising out of the identical set of facts" as that asserted by the plaintiff; Murphy v. Gutfreund, 624 F. Supp. 444, 448-49 (S.D. N.Y. 1985), and Rhulen Agency, Inc. v. Alabama Ins. Guaranty Ass'n, 715 F. Supp. 94, 98 (S.D.N.Y. 1989), aff'd, 896 F.2d 674 (2d Cir. 1990), did not even involve indispensable parties but rather involved the citizenship of partnerships and unincorporated associations for diversity purposes.
Based on the authorities cited, Hunter Green Ltd. and IFSI as joint tortfeasors are not indispensable parties.
The SAC States a Claim for Fraud Against IMS
IMS has contended that Jordan has failed to state a claim of fraud against them and that the gravamen of the SAC is that Beacon failed to perform the subscription agreement and that "alleged concealment of a breach is insufficient to transform what would normally be a breach of contract action into one for fraud." Arista Techs., Inc. v. Arthur D. Little Enters., Inc., 125 F. Supp.2d 641, 653 (E.D.N.Y. 2000). Accord Glynwill Invs., N.V. v. Prudential Sec., Inc., No. 92 Civ. 9267 (CSH), 1995 U.S. Dist. LEXIS 8262, at *20-21 (S.D.N.Y. June 15, 1995) ("Where the fraudulent conduct alleged amounts only to the defendant's false representation that it was adhering to the terms of the contract, the claim for fraud must be dismissed as redundant of the breach of contract claim."); Brignoli v. Balch Hardy & Scheinman, Inc., 645 F. Supp. 1201, 1207 (S.D.N.Y. 1986) (dismissing fraud claims against corporation's shareholders based on allegation that they falsely represented that corporation was abiding by its contract with plaintiff.).
In addition, it is the IMS contention that the SAC does not allege direct commission of fraud and that the SAC does not contain appropriate allegations of corporate veil piercing.
As to the second contention, it is correct that the SAC does not speak in terms of piercing the corporate veil but rather that IMS acted as the effective administrator of Beacon through its control of IFSI, its agent acting on behalf of IMS and sent to Jordan the false account statement which if accurate would have revealed the breach of contract by Beacon (SAC, ¶¶ 4-7, 51-55). Jordan seeks to impose liability of IMS, not as a parent, but as an active participant through its control of IFSI.
It is not necessary to pierce the corporate veil to hold a defendant liable for participating in a corporation's tortious conduct. New York v. Shore Realty Corp., 759 F.2d 1032, 1052-53 (2d Cir. 1985); Royal, 926 F. Supp. at 412; Morin v. Trupin, 747 F. Supp. 1051, 1067-68 (S.D.N.Y. 1990); DER Travel Servs., Inc. v. Dream Tours & Adventures, Inc., No. 99 Civ. 2231 (HBP) 2001 WL 1160598 *3-4 (S.D.N.Y. 2001); Southland Corp. v. Bukhari, 748 F. Supp. 988, 989-990 (S.D.N.Y. 1990).
The SAC alleges more than mere concealment by IMS of Beacon's breach. The SAC alleges IMS's involvement in affirmatively making misrepresentations to Jordan and its active involvement in covering up the fraud. Misrepresentations made after a contract is entered into which relate to a present fact that would exist if the contract were performed, are collateral or extraneous to the contract with the Fund, and are actionable in fraud. See Int'l Elecs., Inc. v. Media Syndication Global, Inc., No. 02 Civ. 4274 (LAK), 2002 WL 1897661, at *2 (S.D.N.Y. Aug. 17, 2002); Freedman v. Pearlman, 706 N.Y.S.2d 405, 408-09 (2000); Eagle Comtronics, Inc. v. Pico Products, Inc., 682 N.Y.S.2d 505, 507 (1998) ("The complaint states a viable cause of action for fraud.
Plaintiff does not allege merely that Defendant entered into the contract while misrepresenting its intent to perform as agreed, but alleges that, after the contract was entered into, defendant repeatedly misrepresented or concealed existing facts."). Moreover, IMS cannot rely on the rule that a fraud claim must be distinct from claims for breach of contract because IMS is not a party to the subscription agreement. The rule only applies where the defendant against whom the fraud claim is asserted has a contractual relationship with the plaintiff. LaBarte v. Seneca Res. Corp., 728 N.Y.S.2d 618, 621 (2001).
IMS has argued that plaintiff has not alleged motive or circumstances justifying an inference of fraudulent intent and the failure to allege any benefit accruing to IMS. In the "absence of such allegations concerning motive, plaintiff is under a more stringent obligation to plead circumstances justifying the inference of a fraudulent intent on the part of [the IMS defendants]." Karasyk v. Marc Commodities Corp., 770 F. Supp. 824, 831 (S.D.N.Y. 1991). The SAC alleges that IMS, at least twice, participated in the preparation of documents for delivery to plaintiff that falsely stated that Class J shares existed and concealed from the Trust that they knew Class J shares did not exist (SAC ¶¶ 47, 51-54, 65, 68). Those false representations constitute "consciously fraudulent behavior." Citadel Mgmt., Inc. v. Telesis Trust, Inc. 123 F. Supp.2d 133, 155 (S.D.N.Y. 2000); Jordan II, 205 F. Supp.2d at 253 (same).
In addition, the SAC alleges that IMS implemented the fraudulent scheme by effecting trades with the deposit in leveraged investments when IMS knew such investments were contrary to the restrictions set forth in the fund records they maintained (SAC ¶¶ 7, 43-46, 48-54, 63-65, 68-71) which constituted "consciously fraudulent behavior." Jordan II, 205 F. Supp.2d at 253. See also State Wide Photocopy Corp. v. Tokai Fin. Servs., Inc., 909 F. Supp. 137, 143 n. 7 (S.D.N.Y. 1995) (indicating that "a determination of fraudulent intent through `conscious behavior' is supported by factual allegations establishing `malicious violation of an agreement shortly after the agreement was made'").
IMS has referred to the exculpatory clause in the subscription agreement in favor of IFSI. However, an exculpatory clause, no matter how expensive its terms, cannot insulate a contracting party from its own fraud. Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 384-85 (1983) ("[A]n exculpatory clause is unenforceable when in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of internal wrongdoing."). Moreover, the exculpatory clause excludes liability for the accuracy of the underlying date provided to it and does not provide any protection where the underlying data is known to be false. See Gross v. Sweet, 49 N.Y.2d 102, 107 (1979) ("[U]nless the intention of the parties is expressed in unmistakable language, an exculpatory clause will not be deemed to insulate a party from liability for his own negligent acts.").
The allegations in the SAC adequately allege fraud against IMS. The SAC Fails to Allege Fraud Against Rosenman The SAC contains seven paragraphs naming Rosenman and state that on March 23, 1998 Rosenman prepared or reviewed for Beacon a proposed Class J Supplement to the Private Placement Memorandum ("PPM"), and that on October 5, 1998 they sent Jordan a Beacon account statement shortly before Beacon was placed into liquidation. (SAC ¶¶ 11, 12, 29, 33, 57, 62, 67).
Jordan alleges that the draft of the Class J Supplement and a clean and black-lined version were sent by Shilling to Jordan's attorney and further alleges that all other communications in March 1998 were between Shilling and Jordan (SAC ¶¶ 20-26, 30). Shilling is alleged (id. ¶ 3) to be "a director of Hunter Green Investments Ltd. ("Hunter Green Ltd."), the investment manager for Beacon and Beacon Emerging Growth Fund."
Jordan alleges that on March 18, 1998, Shilling wrote a letter to the Trust describing a new class of shares for the Jordan Trust, and stating that an:
Annex will describe the terms and conditions which
specifically relate to The Jordan Trust Shares including
the investment parameters. I will prepare the Annex
following your review of the proposed portfolio and the
(SAC ¶ 24). Jordan then alleges that on March 19, Shilling sent Jordan a memorandum proposing a $5 million unlevered portfolio of short-term foreign currency investments. (Id. ¶ 25). This was then followed by letters sent on March 23 and 24 by Shilling to the Trust's attorney transmitting the proposed Class J Supplement and an Investment Control Side Letter. (Id. ¶¶ 26, 30). There is no allegation that Rosenman had any communication, oral or written, with the Trust or its lawyer until October 5, 1998, or that Rosenman had any role in the investment decisions made by Beacon or its investment manager to allegedly invest Jordan's money in non-leveraged securities (SAC ¶ 43, 46, 49, 50), in the failure of Beacon to consult with Jordan about investment decisions (Id. ¶ 44), or the "communications" with the liquidator which underlie Jordan's claims that property of Beacon was converted. (SAC ¶¶ 116-122).
Jordan's fraud claims are subject to the strictures of Rule 9(b). E.g., Burnett v. Physicians' Online, Inc., No. 94 Civ. 2731 (TPG), 1997 WL 470136, at *10 (S.D.N.Y. Aug. 15, 1997) (dismissing common law fraud claim for failure to satisfy 9(b)'s particularity requirements); A.I.A. Holdings, S.A. v. Lehman Bros., Inc., No. 97 Civ. 4978 (LMM), 1999 WL 47223, at *6 (S.D.N.Y. Feb. 3, 1999) (dismissing breach of fiduciary duty claim for failure to comport with Rule 9(b)); Daly v. Llanes, 30 F. Supp.2d 407, 414 (S.D.N.Y. 1998) (dismissing conversion claim for failure to comport with Rule 9(b)).
The SAC does not allege that Rosenman intended to defraud Jordan, nor that Rosenman had knowledge that the documents they were allegedly drafting or reviewing were false, or that they would be used for allegedly an improper purpose. Jordan only alleges "on information and belief," that the attorney defendants "specifically intended that the [documents] would be communicated to, and relied upon by The Jordan Trust." (SAC ¶ 29) and that the representations set forth in the Class J Supplement document regarding the issuance of a special class of shares and that Jordan's money would be invested on an unleveraged basis were representations of material fact," and that the attorneys "omitted and concealed material facts." (Id. ¶¶ 62, 67). However, Rosenman is not named in Count VI alleging a breach of fiduciary duty. In the absence of any fiduciary obligations, they cannot be held liable for allegedly failing to make disclosures to plaintiff. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Chipetine, 634 N.Y.S.2d 469, 470 (1995) ("Constructive fraud arises from . . . the confidential or fiduciary relationship sustained by one of the parties affected by the fraud toward the other."); Callahan v. Callahan, 514 N.Y.S.2d 819, 821 (1987) (explaining that a fraud claim may be based on the allegation that a fiduciary concealed material facts).
In the absence of allegations of knowledge and scienter, the fraud claims are deficient; The Official Comm. of Unsecured Creditors v. Donaldson, Lufkin & Jenrette Sec. Corp., No. 00 Civ. 8688 (WHP), 2002 WL 362794, at *7 (S.D.N.Y. March 6, 2002) (dismissing fraud claim where complaint contained only six paragraphs expressly referencing defendant, and those paragraphs "simply recount lawful conversations or corporate acts"); In re Sterling Foster & Co., Inc. Sec. Litigation, 222 F. Supp.2d 216, 281 (E.D.N.Y. 2002) (dismissing fraud claims against defendants where complaint stated that defendants "(1) knew that the prospectuses omitted mention of the secret agreements; and (2) cleared [plaintiff's] trades [because] the complaint does not contain any factual allegations to support these conclusory claims and does not explain how this knowledge or conduct is fraudulent"); Jordan II, 205 F. Supp.2d at 251 ("[T]o satisfy the particularity requirements of Fed.R.Civ.P. 9(b), it is well-settled that allegations of fraud cannot ordinarily be based upon information and belief, except as to matters peculiarly within the opposing party's knowledge . . . Plaintiff's complaint must generally include a statement of facts upon which the belief is founded."); Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 542, 554 (1985) (dismissing a fraud cause of action because a single allegation of scienter, without additional detail concerning the facts constituting the fraud, is insufficient under the pleading requirements).
There is no allegation that Rosenman performed any act beyond preparing the drafts of the supplement to the subscription agreement knowing, it is alleged, that the supplement would be reviewed by the Trust. Even if, as alleged, the Class J shares, the subject were not authorized at that time, the providing of a draft under these circumstances does not constitute a misrepresentation made with intent to defraud.
In October, Rosenman forwarded the Beacon financial statement to counsel for the Trust, knowing, it is alleged, that the representation of the existence of Class J shares contained in the statement was false. Rosenman made no representation but forwarded its client's statement to counsel for the Trust. Jordan has cited no case holding that such allegations are sufficient to state a cause of action for fraud.
The cases cited by Plaintiff do not support an action for fraud against Rosenman. Callahan v. Callahan, 514 N.Y.S.2d 819 (1987), involved the distribution of assets after the separation of a husband and wife. In this case, the husband's attorney, played an active role in leading the wife to convey her interest in the marital dwelling to the husband for much less than market value. He did not merely forward on the husband's misrepresentations, but "assured plaintiff [the wife] that the undersigned value . . . was fair." Id. at 821. Second, the attorney was not just an uninvolved professional, but the "trusted friend" of both the husband and wife, who induced the wife "to forgo the advice of separate counsel in reliance on his own advice." Id. at 822. This is clearly not the case here.
Plaintiff's other cases are equally unavailing. Singer v. Whitman & Ransom, 442 N.Y.S.2d 26, 27 (1981), discusses a cause of action for fraud in the context of a "judicial proceeding." Friedman v. Harman, No. 91 Civ. 1523 (PKL), 1994 WL 97104, at * 1 (S.D.N.Y. Mar. 23, 1994), an attorney drafted both a Commission Agreement and Purchase Agreement for her client, explicitly misrepresenting the existence of the former agreement in the latter. The SAC Fails to State A Claim of Negligence Counts V and X allege a claim of negligence against IMS and Rosenman raising the issue of the existence of a duty owed by the person performing a service for a particular client to a third party with whom the product of the service is shares. IMS, it is alleged, prepared the Beacon accounts, which were false and were transmitted to the Trust. Rosenman prepared drafts of certain documents for Beacon relating to the Class J securities, documents which it is alleged were false, and which were transmitted by Beacon to the Trust. Rosenman, it is alleged, also sent to counsel for the Trust a Beacon financial statement, "General Ledger Account Detail April 1, 1998 (inception) through September 28, 1998," which, it is alleged, was false and known to Rosenman to be false.
At the outset, IMS urges that these claims are legally defective because Jordan seeks damages only for alleged economic losses, i. e., the loss of the value of the Trust's investment, and "a negligence action seeking recovery for economic loss will not lie," particularly in the absence of contractual privity. Black Radio Network, Inc. v. NYNEX Corp., No. 96 Civ. 4138 (DC), 2000 U.S. Dist. LEXIS 594, at *10 (S.D.N.Y. Jan. 24, 2000). Accord Orlando v. Novurania of America, Inc., 162 F. Supp.2d 220, 225 (S.D.N.Y. 2001) ("New York's economic rule restricts plaintiffs who have suffered economic loss,' but not personal or property injury to an action for the benefit of the bargain. If the damages are the type remedied in contract, a plaintiff may not recover in tort."; Land Mine Enters. v. Sylvester Builders, Inc., 74 F. Supp.2d 401, 407 (S.D.N.Y. 1999), aff'd, 234 F.3d 1262 (2d Cir. 2000) ("[I]t is well-established under New York law that, where a plaintiff alleges only economic damage resulting from a defendant's alleged negligence, defendants owe no duty to plaintiffs with whom they are not in contractual privity.").
According to Jordan, that rule does not apply to claims for negligence in the performance of services, even where only economic injury is alleged. See Consol. Edison Co. of New York, Inc. v. Westinghouse Electric Corp., 567 F. Supp. 358 (S.D.N.Y. 1983); Ajax Hardware Mfg. Corp. v. Indus. Plants Corp., 569 F.2d 181, 185-86 (2d Cir. 1977); MCI Telecomm. Corp. v. John Mezzalingua Assocs., Inc., 921 F. Supp. 936, 945 (N.D.N.Y. 1996) (stating that an exception to the "economic loss rule" exists "for claims of negligent performance of contractual services."). Both as to Rosenman and IMS, Jordan has cited the Prudential Ins. line of authority. Prudential Insurance Co. of America v. Dewey, Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377, 384 (1992).
Prudential is the latest effort of the Court of Appeals to delineate the "boundaries of liability to parties not in privity." Prudential, 80 N.Y.2d at 382. From bean counters, to engineers, accountants, and lawyers, the following test has emerged:
Significantly, the opinion in Credit Alliance distilled
the principles emerging from the prior case law and
identified three critical criteria for imposing
liability: (1) an awareness by the maker of the statement
that it is to be used for a particular purpose; (2)
reliance by a known party on the statement in furtherance
of that purpose; and (3) some conduct by the maker of the
statement linking it to the relying party and evincing
its understanding of that reliance (id. at 551).
Prudential, 80 N.Y.2d at 384.
What is missing here is an allegation that the statement was known by the maker to be used for the particular purpose of the Trust and conduct by the maker of the statements linking the statement to the Trust and indicating understanding of that reliance. This case is closer to California Pub. Employees' Retirement Sys. v. Shearman & Sterling, 95 N.Y.2d 427, 434 (2000) ("Calpers") (concluding that there is no privity between the law firm and loan assignee where the only contact between a law firm and assignee was the firm's letter to assignee's counsel transmitting document drafts); see also Conti v. Polizzotto, 663 N.Y.S.2d 293, 294 (1994) (dismissing negligence claim against law firm where "plaintiffs have failed to allege specific facts upon which the existence of an attorney-client relationship or privity between the parties could be inferred"); United Bank of Kuwait PLC v. Enventure Energy Enhanced Oil Recovery Assocs. — Charco Redondo Butane, 755 F. Supp. 1195, 1200 (S.D.N.Y. 1989) (holding that absence of privity of contract precluded attorney from liability to bank that loaned money to client in reliance on alleged negligent misrepresentation in opinion letter); Council Commerce Corp. v. Schwartz, Sachs & Kamhi, P.C., 534 N.Y.S.2d 1 (1988) (holding law firm not liable for negligence in preparing a letter in the course of representing its own clients); Estate of Ginor v. Landsberg, 960 F. Supp. 661, 672 (S.D.N.Y. 1996), aff'd, 159 F.3d 1346 (2d Cir. 1998) (Dismissing claims for malpractice and breach of fiduciary obligation since law firm represented a partnership and its general partner and did not represent the plaintiff limited partner. Even where the law firm issued an opinion letter to the limited partner, "there was no privity" and "a lawyer owes no fiduciary duties to one with whom he is not in privity."), than Prudential.
Here there is no allegation of fact beyond the statement made for either IMS or Rosenman. The naked allegation of knowledge of falsity does not constitute sufficient pleading.
The SAC States a Claim of Breach of Fiduciary Duty Against IMS but not Rosenman Counts VI through IX of the SAC allege that IMS breached fiduciary duties owed to the Trust. To state such a claim, Jordan must allege facts sufficient to show that each IMS defendant was "under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation." N. American Knitting Mills, Inc. v. Int'l Women's Apparel, Inc., No. 99 Civ. 4643 (LAP), 2000 U.S. Dist. LEXIS 13139, at *10-11 (S.D.N.Y. Sept. 11, 2000); Regal Custom Clothiers, Ltd. v. Mohan's Custom Tailors, Inc., No. Civ. 6320 (SS), 1997 U.S. Dist. LEXIS 9288, at *17 (S.D.N.Y. June 26, 1997).
There is no allegation of facts sufficient to show "any such relationship of trust and confidence" between the Trust and any of the IMS defendants remaining in the case independent of IFSI. Regal, 1997 U.S. Dist. LEXIS 9288, at *17.
It is presumed that IFSI, the dropped non-diverse defendant, as the Fund administrator, had a fiduciary duty to all Fund shareholders to implement all trades on behalf of those shareholders and to report the status of each shareholder's account accurately. The SAC alleges that IMS assumed the role that IFSI was responsible to perform. (SAC ¶¶ 4-7). By doing so IMS assumed the fiduciary duties owed by IFSI to the Trust. See E.P. Lehmann Co. v. Polk's Modelcraft Hobbies, Inc., 770 F. Supp. 202, 204-05 (S.D.N.Y. 1991); see also Limited, Inc. v. McCrory Corp., 564 N.Y.S.2d 751, 753 (1991); Manley v. AmBase Corp., 121 F. Supp.2d 758, 772 (S.D.N.Y. 2000). By undertaking to implement trades on behalf of the Trust as directed and to provide account statements to the Trust, IMS assumed a fiduciary duty to provide prior notice of any trade and to provide accurate information regarding the status of the Trust's account. See Conway v. Icahn & Co., Inc., 16 F.3d 504, 510 (2d Cir. 1994); Kwiatkowski v. Bear Stearns Co., Inc., 1997 WL 538819 *4 (S.D.N.Y. Aug. 29, 1997).
There is no allegation of a direct breach of fiduciary duty by Rosenman, appropriately enough given the preceding privity discussion. There are claims in Counts VII, VIII and IX of concerted action, conspiracy and aiding and abetting in connection with the alleged violation of fiduciary duties.
The elements of a cause of action for knowing participation in a breach of fiduciary duty are (1) breach of a duty owed to plaintiff by a fiduciary; (2) defendant's knowing participation in the breach; and (3) damages. Diduck v. Kaszuchi & Sons Contractors Inc., 974 F.2d 270, 281-82 (2d Cir. 1992). Knowledge is defined as (a) knowledge that the primary violator was a fiduciary as to plaintiff and (b) knowledge that the primary's conduct constituted a breach of fiduciary duty. Id. at 282-83.
The SAC nowhere pleads any facts to support the naked allegation of Rosenman's knowledge nor of the particular breaches of fiduciary duty with which it is sought to be charged. The SAC Fails to State a Claim of Conversion Count XI of the SAC alleges that all defendants (i) converted the Trust's $5 million investment in Beacon by investing those funds in an unauthorized manner; and (ii) converted funds or assets belonging to Beacon by transferring them to Beacon Growth or United European Securities Ltd.
The SAC alleges that the Trust wired $5 million "to [the Bank of] New York for the account of the Bank of Ireland to be credited to the account of Beacon." (SAC ¶ 35). This deposit into Beacon's bank account forecloses plaintiff's conversion claim because the Trust did not own, possess or control the money at the time of the alleged conversion. Citadel, 123 F. Supp.2d at 147-151. This is so because the Trust lost "title to money deposited in a general account at the moment those funds [were] deposited." Id. at 148. Stated alternatively, where, as here, "the allegedly converted money is incapable of being described or identified in the same manner as a specific chattel, it is not the proper subject of a conversion action." High View Fund, L.P. v. Hall, 27 F. Supp.2d 420, 429 (S.D.N.Y. 1998). Because plaintiff does not and cannot "claim ownership of a specifically identifiable, segregated [$5 million]," it fails to state a claim for conversion. Id.
Furthermore, as far as Rosenman is concerned, the SAC contains no allegations that it had any role whatsoever in managing funds of the Trust. As such, this claim fails. See Weisman, Celler, Spett & Modlin v. Chadborne & Parke, 706 N.Y.S.2d 414, 415 (2000) (rejecting conversion claim against law firm, since the "law firm's liability must still be established by sufficient proof that it aided and assisted [co-defendant] in misappropriating the . . . shares with culpable knowledge that such funds did not belong to him").
As for the money or property allegedly converted from Beacon, that is, at best, a derivative claim that Jordan lacks standing to assert. HBL Indus. v. Chase Manhattan Bank, 45 B.R. 865, 868 (S.D. N.Y. 1985). Accord Jackson Nat'l Life Ins. Co. v. Ligator, 949 F. Supp. 200, 204 (S.D.N.Y. 1996). No conversion claim has been appropriately alleged.
The SAC does not allege that the Trust funds were maintained separately when transferred to the Bank of New York for the account of Beacon at the Bank of Ireland. The allegations fail to meet the requirements of the cases cited by Jordan, Lenczycki v. Shearson Lehman Hutton, Inc., 656 N.Y.S.2d 609, 610 (1997) (finding that the funds of a specific, named bank account are sufficiently identifiable for conversion claim); Correspondent Servs. Corp. v. J.V.W. Invs. Ltd., 120 F. Supp.2d 401, 405-06 (S.D. N.Y. 2000) (holding that a bank's unauthorized transfer to a brokerage firm of funds deposited by an account holder constitutes conversion).
The RICO cases cited by Jordan do not alter this conclusion, nor is there an allegation that the alleged conversion of Beacon funds was for the benefit of IMS and the detriment of creditors.
A conversion claim has not been stated.
The SAC Fails to State a Claim Under GBL § 349
Count XII of the SAC alleges violations of Section 349 of the General Business Law ("GBL") which provides for consumer protection from deceptive acts and practices. To invoke this statute, plaintiff must, as a threshold matter, "charge conduct that is consumer oriented." New York Univ. v. Cont'l Ins. Co., 87 N.Y.2d 308, 320 (1995). Moreover, a plaintiff must allege facts sufficient to show that the challenged conduct has a "broader impact on consumers at large," i.e., it "potentially affects similarly situated consumers" in New York. S.Q.K.F.C., Inc. v. Bell Atl. Tricon Leasing Corp., 84 F.3d 629, 636 (2d Cir. 1996) (citation omitted). Accord Black Radio Network v. NYNEX Corp., 44 F. Supp.2d 565, 583 (S.D.N.Y. 1999).
In this case, investors, such as the Trust who purchase securities are not "consumers," and their investments are not "consumer-oriented" transactions falling within the ambit of GBL § 349. E.g., In re Sterling Foster & Co., Inc. Sec. Litig., MDL No. 1208 (ADS) (MLU), 2002 U.S. Dist. LEXIS 11612 at *197-202 (E.D.N.Y. June 27, 2002). Accordingly, the SAC fails to state a claim under the statute.
Moreover, "Section 349 has not been held by courts in the Second Circuit to apply to securities fraud claims." Cyber Media Group, Inc. v. Island Mortgage Network, Inc., 183 F. Supp.2d 559, 581 (E. D.N.Y. 2002) (dismissing § 349 claim brought by investors stemming from stock purchase agreement) and it has been held that this case involves the sale of securities. See Jordan II, 205 F. Supp.2d at 250.
Jordan concedes that under the rulings to date these precedents are controlling, and that as matters now stand, the GBL § 349 claim should be dropped. (Reply Mem. at 21 n. 15).
The motion of Jordan to file a Second Amended Complaint is granted omitting the causes of action deemed futile as set forth above.
It is so ordered.