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United States District Court, S.D. New York

February 26, 2004.

KINGDOM 5-KR-41, LTD., Plaintiff, -v- STAR CRUISES PLC, et al., Defendants; MARKETING SYSTEMS INTERNATIONAL, LTD., BWI, Plaintiff, -v- STAR CRUISES, et al., Defendants

The opinion of the court was delivered by: DENISE COTE, District Judge


Kingdom 5-KR-41, Ltd. ("Kingdom"), a Cayman Islands corporation, commenced this action on April 6, 2001, against Star Cruises PLC, a Bermuda corporation, and its wholly owned Page 2 subsidiary, Arrasas Ltd.*fn1 (collectively with Star, "Star"), as well as the Bank of New York ("BNY"), a New York corporation, for damages arising out of Star's acquisition of all of the outstanding shares of NCL Holding ASA ("NCL"), a Norwegian corporation.*fn2 BNY now moves to dismiss two of the three remaining state court claims against it. For the following reasons, BNY's motion is granted.


  In its original Complaint, Kingdom alleged violations of the federal securities laws and unjust enrichment against Star, and breach of contract against BNY.*fn3 BNY filed cross-claims against Star, and a third-party complaint against NCL. In a March 20, 2002 Opinion, the Honorable Alien Schwartz, to whom this case was then assigned, dismissed all of Kingdom's claims Page 3 except for its unjust enrichment claim against Star, and the breach of contract claim against BNY. Kingdom 5-KR-41, Ltd. v. Star Cruises PLC, No. 01 Civ. 2940 (ACS), 2002 WL 432390 (S.D.N.Y. Mar. 2002) (the "March Opinion"). The Court retained jurisdiction over the state law claim against BNY based on the diversity of the parties, and exercised supplemental jurisdiction over the remaining state law claim against Star.

  On August 5, 2003, after the conclusion of fact discovery, Kingdom filed an Amended Complaint in which it added claims against BNY for negligence and breach of fiduciary duty, as well as a demand for punitive damages.

  The following facts are as alleged by Kingdom, and as reflected in documents integral to its Complaint. On July 9, 1999, NCL and BNY executed a Deposit Agreement that created American Depositary Shares ("ADSs") of NCL.*fn4 The agreement reflected as its purpose NCL's desire to provide for the deposit of its shares and the creation, based on that deposit, of ADSs. Each ADS would represent four ordinary shares of NCL. The Deposit Agreement described at length the rights and duties of Page 4 NCL and BNY. It also granted BNY the right to resign, and NCL the right to remove BNY as the depositary and to appoint a successor. BNY and NCL also indemnified each other from certain types of liability and expenses.

  The Deposit Agreement included provisions addressing BNY's obligations to the beneficial owners of NCL's ADSs. It also addressed the liability of BNY to beneficial owners of ADSs. Section 5.03 of the Deposit Agreement, entitled "Obligations of the Depositary, the Custodian and the Issuer" provides in part that: "The Depositary assumes no obligation nor shall it be subject to any liability under this Deposit Agreement to an Owner or Beneficial Owners, except that it agrees to perform its obligations specifically set forth in this Deposit Agreement without negligence or bad faith."

  On January 13, 2000, Star commenced a tender offer to purchase all of the outstanding shares of NCL. In connection with the tender offer, Star filed a Schedule 14D-1 with the Securities and Exchange Commission ("SEC"). In the Schedule 14D-1, Star offered to purchase all ADSs of NCL. The offer was for 35 Norwegian Kroner ("NOK") per share and expired on February 10, 2000.

  The Schedule 14D-1 stated that Star's intent was to acquire all of the outstanding shares of NCL.*fn5 The Schedule 14D-1 stated Page 5 that three Star affiliates intended to transfer their shares to Star, and, provided Star held more than 90% of the outstanding shares following the tender offer, it intended to effect a compulsory acquisition pursuant to Norwegian law "as promptly as practicable" after the tender offer period ended. The Schedule 14D-1 also indicated that Star expected to offer the remaining shareholders a price "equal to" the offer price, but cautioned in bold letters that such a price was not guaranteed. Kingdom declined to tender its ADSs during the tender offer period.

  Shortly after completion of the tender offers, Star confirmed in a February 16, 2000 press release that it had successfully acquired over 90% of NCL and intended to commence the compulsory acquisition of the remaining shares of NCL. On June 26, however, Star claimed in another press release that it could not commence the acquisition because 10.9% of NCL shares were still held by three affiliates. The press release stated that Star was planning an initial public offering of its own stock in the "later part" of 2000, after which Star intended to acquire the NCL shares of its affiliates and complete the compulsory acquisition. Page 6 Kingdom was the beneficial owner of 1,810,810 ADSs representing 7, 243, 240 ordinary shares of NCL. On October 11, 2000, Kingdom brought a valuation proceeding in Norway against Star and GT Lim. Kingdom claimed that Star and its related entities had acquired more than 90 percent of NCL's shares through the tender offer, and as a result were required to buy Kingdom's shares at 35 NOK each. On November 29, Star acquired the necessary NCL shares from its affiliates, and commenced the compulsory acquisition the following day. The share price offered in the compulsory acquisition was the then-market price of 13 NOK per share.

  BNY, as the depositary for NCL's ADSs, received notice of the compulsory acquisition and the right to contest the offer price on or about November 30. Pursuant to the terms of the compulsory acquisition offer, shareholders had until February 7, 2001 to contest the 13 NOK compulsory offer price and initiate a valuation proceeding under Norwegian law.

  In its Amended Complaint, Kingdom alleges that, under the Deposit Agreement, "BNY owed a fiduciary duty (as agent) to Kingdom, as ADS owner (as principal), to act in Kingdom's interest when it received notice of the Compulsory Acquisition offer. . . . BNY owed a fiduciary duty to Kingdom to keep Kingdom informed and to seek Kingdom's instructions on discretionary matters." According to Kingdom, the Deposit Agreement provided that BNY would "perform certain acts on behalf of ADS owners, such as Kingdom." Kingdom contends that BNY had a duty under Page 7 Sections 4.02 and 4.04 of the Deposit Agreement to distribute to ADS holders of NCL all notices regarding "distributions or the offering of any rights" with respect to their shares, including the compulsory tender offer and right to reject the offer and demand valuation of the shares by a Norwegian court. BNY did not notify the ADS holders of Star's offer, however, and, on December 4, 2000, approximately four days after the compulsory offer, accepted the 13 NOK per share price on behalf of all of the ADSs in its possession.*fn6

  Upon learning that BNY had accepted Star's 13 NOK per share price on Kingdom's behalf, Kingdom immediately instructed BNY to rescind the acceptance. BNY attempted to rescind, but Star refused to accept the rescission and asserted that Kingdom had lost its right to contest the 13 NOK acquisition price. The Norwegian court dismissed Kingdom's valuation proceeding against Star, finding that BNY's apparent authority to accept Star's offer on Kingdom's behalf terminated Kingdom's right to pursue its demand for at least 35 NOK per share in the Norwegian court. Kingdom claims it suffered damages of over $17 million.

  Kingdom asserts claims against BNY for breach of contract, negligence, and breach of fiduciary duty. BNY now moves to dismiss Kingdom's negligence and breach of fiduciary duty claims against it. New York law governs claims arising out of the Page 8 Deposit Agreement*fn7, and neither Kingdom nor BNY has disputed that Kingdom's negligence and breach of fiduciary duty claims fall under New York law.


  Rule 8(a) requires that a complaint contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Rule 8(a)(2), Fed.R.Civ.P. Pleadings under the Federal Rules are to give "fair notice of the claim asserted," so as to enable the opposing party to answer and prepare for trial. Summons v. Abruzzo, 49 F.3d 83, 86 (2d Cir. 1995). A court may dismiss an action pursuant to Rule 12(b)(6) only if "it appears beyond doubt, even when the complaint is liberally construed, that the plaintiff can prove no set of facts which would entitle him to relief." Jaqhory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997) (citation omitted). In construing the complaint, the court must "accept all factual allegations in the complaint as true and draw interferences from those allegations in the light most favorable to the plaintiff." Id. "Given the Federal Rules' simplified standard for pleading, a court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Swierkiewicz v. Sorema, N.A., Page 9 534 U.S. 506, 514 (2002).

  In addition to the pleadings, the court may consider "any written instrument attached to [the complaint] as an exhibit or any statements or documents incorporated in it by reference, as well as public disclosure documents required by law to be, and that have been filed with the SEC, and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing suit." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citation omitted). A court need not credit general, conclusory allegations if they "are belied by more specific allegations of the complaint." Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1092 (2d Cir. 1995).

 The Negligence Claim

  Kingdom contends that BNY had an independent duty, apart and distinct from the Deposit Agreement, to exercise reasonable skill and care to ADS holders in accordance with "custom and practice" in the industry, "even where the Deposit Agreement did not cover a particular corporate action or event." Specifically, Kingdom alleges that BNY negligently failed to exercise its duty of reasonable care by failing to inform Kingdom of the compulsory acquisition offer, to seek Kingdom's instructions with regard to the offer, to consult with NCL regarding the terms of the offer, to disclose applicable internal policies regarding compulsory acquisition offers to Kingdom, and to maintain adequate internal policies for responding to compulsory offers. Page 10

  A claim for negligence requires proof of: (1) the existence of a duty owed by the defendant to the plaintiff; (2) a breach of that duty; and (3) injury to the plaintiff as a result of the breach. Alfaro v. Wal-Mart Stores, Inc., 210 F.3d 111, 114 (2d Cir. 2000). Under New York law, however, a cause of action in negligence "cannot be the basis of liability where [the defendant's] sole legal duties to [the plaintiff] arose entirely out of contract." International Ore & Fertilizer Corp. v. SGS Control Services, Inc., 38 F.3d 1279, 1283 (2d Cir. 1994); City of New York v. 611 West I52nd Street, Inc., 710 N.Y.S.2d 36, 38 (1st Dept. 2000). The negligent performance of a contract is not considered a tort unless a legal duty "independent" of the contract itself has been violated. Dorking Genetics v. United States, 76 F.3d 1261, 1269 (2d Cir. 1996) (quoting Clark-Fitzpatrick, Inc. v. Long Island Rail Road Co., 521 N.Y.S.2d 653, 656-57 (N.Y. 1987)). This legal duty must "spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract." dark-Fitzpatrick, 521 N.Y.S.2d at 657. "Merely alleging that the breach of contract duty arose from a lack of due care will not transform a simple breach of contract into a tort." Sommer v. Fed. Signal Corp., 583 N.Y.S.2d 957, 961 (N.Y. 1992) (citation omitted).

  There are circumstances where a "legal duty independent of contractual obligations may be imposed by law as an incident to the parties' relationship." Id. For example, if a "defendant Page 11 goes beyond a mere breach of contract and acts in such a way that a trier of fact could infer that it wilfully intended to harm the plaintiff," then the defendant may have breached an independent duty to the plaintiff. Carvel Corp. v. Noonan, 350 F.3d 6, 16 (2d Cir. 2003) (Wesley, J.) (interference with prospective business relationships). Professionals and bailees "may be subject to tort liability for failure to exercise reasonable care, irrespective of their contractual duties." Sommer, 583 N.Y.S.2d at 961. Whether an independent duty exists is a question of law to be decided by the court. See McCarthy v. Olin Corp., 119 F.3d 148, 156 (2d Cir. 1997); Church ex rel. Smith v. Callanan Industries, Inc., 752 N.Y.S.2d 254, 256 (N.Y. 2002). Where the damages sought are essentially the enforcement of a bargain, however, the action must proceed solely on the contract theory. Sommer, 583 N.Y.S.2d at 961.

  Kingdom alleges in its Amended Complaint that not only the Deposit Agreement but also the "custom and practice of the industry" imposed a duty on BNY to seek Kingdom's instructions regarding the compulsory acquisition offer. Kingdom presents no case law supporting the proposition that industry custom and practice can create an independent legal duty outside of the contractual relationship. Although custom and practice can help define a standard of care a party must exercise after it has undertaken a duty, see, e.g., Lee v. Pennsylvania R. Co., 192 F.2d 226, 229 (2d Cir. 1951), custom and practice do not give rise to an independent legal duty. See Mallor v. Wolk Page 12 Properties, Inc., 311 N.Y.S.2d 141, 148 (N.Y. Sup. 1970) (collecting cases). In construing the common law of negligence in their jurisdictions, other courts have explicitly found that custom and usage do not give rise to an independent legal duty. See, e.g., Canal Barge Co., Inc. v. Torco Oil Co., 220 F.3d 370, 377 (5th Cir. 2000); Florida Fuels, Inc. v. Citcro Petroleum Corp., 6 F.3d 330, 334 (5th Cir. 1993); Van Duyn v. Cook-Teacrue Partnership, 694 N.E.2d 779, 782 (Ind. Ct. App. 1998); Servicemaster of St. Cloud v. Gab Business Services, Inc., 544 N.W.2d 302, 307 (Minn. 1996); First Nat'l Bank of Ft. Smith v. Kansas City Southern Rwv. Co., 865 S.W.2d 719, 729 (Mo. Ct. App. 1993).

  Kingdom next contends that it enjoyed a special relationship of trust and confidence with BNY as the depositary of Kingdom's ADSs. Kingdom asserts that by "entrusting its substantial investment in the care of BNY, Kingdom put its trust and confidence in BNY." This assertion also fails. Kingdom does not plead the existence of such a relationship with BNY in its Amended Complaint, raising it for the first time in its brief in opposition to this motion. Even if Kingdom had pleaded the existence of a special relationship between it and BNY, its conclusory assertion would be directly contradicted by the explicit terms of the Deposit Agreement, a document that is integral to the Complaint. As the Deposit Agreement makes clear, it is NCL that chose BNY to serve as the depositary for ADSs, and any special relationship that existed was between NCL and BNY. Page 13 Kingdom provides no authority for the proposition that a depositary bank has a special relationship of trust and confidence with the owners of ADSs such that the depositary bank owes them a duty of care extraneous to the contract governing the deposit. The cases that Kingdom does cite in connection with this claim are inapposite. See, e.g., Apple Records, Inc. v. Capitol Records, Inc., 529 N.Y.S.2d 279, 283 (1st Dep't 1988) (parties' intertwined 20-year business relationship created an independent duty outside of the contract).

  Kingdom argues that BNY's promotion of itself as "the leading depositary of ADSs" created an independent duty. To the extent that advertising of expertise can create a duty, the duty would have run between BNY and NCL. Again, Kingdom has cited no authority for the existence of a duty to it under this alternative theory.

  Finally, Kingdom argues that the law of bailment created an independent legal duty to Kingdom when BNY took custody of Kingdom's property. Kingdom's attempt to cast its relationship with BNY as one of bailor-bailee again is raised for the first time in its brief in opposition to this motion. Kingdom presents no case law supporting the proposition that the relationship between a depositary bank and an ADS holder is one of a bailor-bailee. Under New York law, "a bailment is the delivery of personalty for some particular purpose, or on mere deposit, upon a contract, express or implied, that after the purpose has been Page 14 fulfilled it shall be redelivered to the person who delivered it, or otherwise dealt with according to his directions, or kept until he reclaims it, as the case may be." Pagliai v. Del Re, No. 99 Civ. 9030 (DLC), 2001 WL 220013, at *5 (S.D.N.Y. Mar. 7, 2001) (citation omitted) (emphasis supplied). The elements of a bailment are "intent to create the bailment, delivery of possession of the bailed items, and acceptance of the items by the bailee." Id. (citation omitted).

  Kingdom does not allege facts sufficient to establish the existence of a bailor-bailee relationship between itself and BNY.*fn8 Kingdom has not identified what it delivered to BNY for its safekeeping; rather, it was NCL who chose BNY as the depositary of its shares and who delivered them into the possession of BNY. In addition, nothing in the Deposit Agreement itself nor in Kingdom's pleadings reflects an intent by Kingdom to create a bailor-bailee relationship with respect to the NCL ADSs beneficially owned by Kingdom.

  In sum, the obligations owed by BNY with respect to the ADSs were defined in the Deposit Agreement. Kingdom has not identified a separate duty extraneous to the contract. Equally important, the damages Kingdom seeks are in the nature of a claim for the benefit of the bargain, and not tort damages. For each of these reasons, Kingdom's claim for negligence must be Page 15 dismissed.

  Contrary to Kingdom's assertion, neither the law of the case nor judicial estoppel compels a different result. The law of the case doctrine, which is discretionary, dictates that "a decision on an issue of law made at one stage of a case becomes binding precedent to be followed in subsequent stages of the same litigation." Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304 F.3d 200, 218 (2d Cir. 2002).

  In the March Opinion, the Court addressed BNY's claim against Star and NCL for contribution under the common law by observing, inter alia, that "Kingdom's claim against BNY sounds both in contract and in tort." The Court stated that the duty to Kingdom was "extraneous to the contract itself since it was not created solely by agreement." The allegations of an independent duty to which the Court referred were the allegations that BNY had violated the "custom and practice in the industry" by not notifying Kingdom of the compulsory offer.

  The March Opinion was not required to confront the legal sufficiency of Kingdom's negligence claim. Indeed, the negligence claim was first pleaded the following year, in an Amended Complaint of August 5, 2003. The law of the case doctrine should not be invoked unless the parties had a "full and fair" opportunity to litigate the initial determination. Westerbeke, 304 F.3d at 219 (citation omitted). Having now had that opportunity, and for the reasons described above, it is well Page 16 settled that industry custom cannot create a legal duty.

  Judicial estoppel also does not apply. Judicial estoppel applies to inconsistent factual positions asserted in a prior proceeding that were adopted by the court. Wight v. Bankamerica Corp., 219 F.3d 79, 90 (2d Cir. 2000). "If the statements can be reconciled there is no occasion to apply an estoppel." Id. (citation omitted).

  In opposing Star's motion to dismiss BNY's claim for contribution, BNY argued:

[Star] attack[s] BNY's entitlement to common-law contribution on the ground that contribution is not available to a defendant whose potential liability to a plaintiff is for economic loss resulting from an alleged breach of contract. . . . The Court should treat Kingdom's claim for the moment as one sounding both in contract and in negligence.
(Emphasis supplied.) BNY has not advanced any factual positions that contradict those it presented at earlier stages of this litigation. Kingdom has not identified even a clear contradiction of a legal position. BNY's argument can be read as stating only that, until the court resolved the adequacy of Kingdom's pleadings, they should be treated as alleging both claims in contract and for negligence.

 Breach of Fiduciary Duty

  Kingdom next asserts that the Deposit Agreement made BNY the agent of Kingdom, an ADS owner. Kingdom claims that this Page 17 principal-agent relationship placed a fiduciary duty on BNY to act in Kingdom's interest when it received notice of the compulsory acquisition offer, and required it to keep Kingdom informed and seek Kingdom's instructions on discretionary matters pertaining to the offer. Kingdom alleges that BNY breached its fiduciary duty to Kingdom by accepting Star's compulsory acquisition offer.

  A claim of breach of fiduciary duty under New York law requires the plaintiff to plead: (1) a fiduciary duty between the parties; (2) defendant's breach of that duty; and (3) damages suffered by the plaintiff which were proximately caused by the breach. See Whitney v. Citibank, N.A., 782 F.2d 1106, 1115 (2d Cir. 1986). Under New York law, a fiduciary relationship exists "when one person is under a duty to act for or to give advice for the benefit of another within the scope of the relation." Levitin v. PaineWebber, Inc., 159 F.3d 698, 707 (2d Cir. 1998) (citation omitted) (a broker with no discretionary authority is not a fiduciary). Where the parties deal in an arms-length commercial transaction, however, "no relation of confidence or trust sufficient to find the existence of a fiduciary relationship will arise absent extraordinary circumstances." In re Mid-Island Hosp., Inc., 276 F.3d 123, 130 (2d Cir. 2002) (citation omitted). Thus, a conventional business relationship "without more" does not create a fiduciary relationship in New York. Pursier v. Women's Interart Center, Inc., 566 N.Y.S.2d 295, 297 (1st Dep't 1991). The fact that parties have executed a Page 18 contract is insufficient to create a fiduciary relationship. Northeast General Corp. v. Wellington Advertising, Inc., 82 N.Y.2d 158, 164-65 (N.Y. 1993).

  "Generally, banking relationships are not viewed as special relationships giving rise to a heightened duty of care." Banque Arabe et Internationale D'Investissement v. Maryland Nat. Bank, 57 F.3d 146, 158 (2d Cir. 1995); Aaron Ferer & Sons, Ltd. v. Chase Manhattan Bank, 731 F.2d 112, 122 (2d Cir. 1984). Such a duty may be found, however, where the bank and its customer are engaged in a principal-agent relationship. To establish the existence of such a relationship requires the pleading of facts sufficient to show: "(1) the principal's manifestation of intent to grant authority to the agent, and (2) agreement by the agent, [and (3)] control over key aspects of the undertaking." Commercial Union Ins. Co. v. Alitalia Airlines, S.p.A., 347 F.3d 448, 462 (2d Cir. 2003) (citation omitted).

  Kingdom asserts that a fiduciary relationship existed because BNY was its agent and because it was entrusted with Kingdom's property. It asserts that it has adequately pleaded the existence of such a relationship, and any factual dispute must await summary judgment or trial.

  Kingdom does not sufficiently plead the existence of a fiduciary relationship between itself and BNY. Kingdom's Amended Complaint does not allege circumstances that would give rise to a fiduciary relationship between the parties. In fact, the Deposit Page 19 Agreement specifically disavows any responsibility to, or control by, beneficial owners such as Kingdom. For example, Section 5.04 provides for two instances in which BNY may be removed as the depositary of NCL's ADSs. BNY may resign at any time, and must give notice of its resignation only to NCL, or, alternatively, NCL itself may remove BNY as the depositary of its shares. Upon NCL's designation of the successor depositary, such successor depositary "without any further act or deed" becomes "fully vested" with all the rights, duties, and obligations of BNY. There is no mention of the owners or beneficial owners. Beneficial owners such as Kingdom do not have the power to remove BNY as the depositary, and their consent is not required to confirm any successor depositary should NCL remove BNY and designate a new depositary. A conclusory pleading of a fiduciary duty is insufficient to plead a cause of action in the face of the contrary terms in the contract which governed the parties' relationship.

  As with the negligence claim, Kingdom asserts that the law of the case prevents BNY from prevailing on its motion to dismiss the breach of fiduciary duty claim. According to Kingdom, the March Opinion recognized the existence of an agency relationship between BNY and Kingdom.

  Although the March Opinion does state, in the context of dismissing BNY's third-party claim against NCL for breach of the duty of good faith as owed by an agent, that "BNY acts as Page 20 Kingdom's agent under certain circumstances," such language does not broadly proclaim the existence of a principal-agent relationship between Kingdom and BNY. As with Kingdom's negligence claim, the March Opinion could not directly confront the legal sufficiency of Kingdom's fiduciary duty claim since it had not yet been pleaded. See Westerbeke, 304 F.3d at 219. In addition, Kingdom does not plead (or identify in its papers on this motion) that the "certain circumstances" to which the March Opinion refers are applicable here.*fn9 Thus, the law of the case does not compel a finding that Kingdom adequately pleads the existence of a fiduciary relationship with BNY.

  Kingdom also argues that the doctrine of judicial estoppel prevents BNY from denying a fiduciary relationship with Kingdom because it had argued to the Court that there was a fiduciary relationship between BNY and NCL. The fact that BNY argued that it enjoyed a fiduciary relationship with NCL does not preclude BNY from taking a contrary position with respect to its relationship with Kingdom. NCL, the issuer of the ADSs, and Kingdom, one of the beneficial owners of NCL's ADSs, stand in different positions with respect to BNY, a fact evident throughout the Deposit Agreement. Page 21


  For the reasons stated above, the Bank of New York's motion to dismiss the claims for negligence and breach of fiduciary duty asserted by Kingdom 5-KR-41, Ltd. in its Amended Complaint is granted.


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