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United States District Court, S.D. New York

June 21, 2004.

DEREK HUGHES, Plaintiff,

The opinion of the court was delivered by: BARBARA JONES, District Judge


Before the Court is Defendants' motion for summary judgment, which seeks dismissal of Plaintiff's case on the grounds that the claims are barred by the statute of limitations and that Plaintiff suffered no damages. Defendants' motion is granted in part and denied in part.


  a. Background

  The following are the undisputed facts of the case, except where otherwise noted.

  Plaintiff Derek Hughes opened a discretionary investment management account at JP Morgan Chase & Co. ("Chase") on January 15, 1986 with a deposit of $615,131. At that time, he signed an Investment Management Discretionary Agreement ("Agreement") authorizing Chase to open the account for him, and to manage, hold, invest and reinvest securities in that account. On February 11, 1986, Chase sent Plaintiff a letter stating that, "[a]pproximately 85% of the account will be committed to . . . high quality, fixed income securities . . . [such as] U.S. Treasury and government agency securities, high quality corporate bonds and various money market instruments. . . . The balance of the portfolio will consist of up to 15% common stocks." (Hughes Decl. Ex. A). Plaintiff alleges that he informed Chase that his primary goal was "preserving the capital in the account." (Pl's Br. at 2).

  From the inception of the account until August 1990, Plaintiff did not withdraw any funds. In 1990, Plaintiff retired and advised defendant Fredrick Buddenhagen, who was employed in the Chase Investment Office, that he wanted to withdraw $7,500 per month from his account. Buddenhagen explained that he would accommodate these withdrawals by investing a larger percentage in real estate investment trusts ("REITs"), which are considered equities. (Hughes Dep. at 49-50; Defs' Br. at 3; Decl. of Mario Aieta, Ex. E). According to Plaintiff, however, Buddenhagen "did not disclose to Hughes the risks associated in investing in REITs and [] did not disclose to Hughes that change in the investment strategy would be inconsistent with Hughes's stated investment objectives." (Compl. ¶ 21; see also Pl's Br. at 3; Hughes Decl. ¶¶ 4-5). Plaintiff claims he was not familiar with REITs, although formerly he was president and chief financial officer of the Brazilian subsidiary of Arco Chemicals, which had annual sales of $200 million. Plaintiff did not ask for an explanation of what REITs were. There is no writing that memorialized any change in Chase's investment strategy or Plaintiff's investment objectives.

  Beginning in 1991, the portion of Plaintiff's account invested in REITs increased substantially, from 7% to 28% in 1991, to 59% at the end of 1996, to 70% at the end of 1997. Plaintiff was aware of the investments in his account through monthly and annual statements. As of December 31, 1997, the market value of Plaintiff's account was $967,847.00. Shortly thereafter, REITs fell out of favor with the market, and REIT equities and fixed income issues began to lose value. By July 31, 1999, the value of the account declined to $661,969.00.

  During the period between January 1998 and November 1999, Chase changed the designated "Investment Officer," who has primary responsibility for the account, several times. Plaintiff produced deposition testimony of two of the Investment Officers that showed that they either were unaware that they were the primary decision-maker on the account, (see Angelica Dep. at 15-16) or else were unfamiliar with Plaintiff's investment objectives.*fn1 (See Porta Dep. at 15, 17). These two Investment Officers also indicated during internal reviews of Plaintiff's account in 1998 and 1999 that the heavy concentration in REITs might be in violation Chase's guidelines for the type of account. (See Aieta Decl. Exs. E, F; Angelica Dep. at 19-22; Porto Dep. at 60, 70-71).

  Plaintiff also consulted with various Investment Officers at Chase in 1998 and the beginning of 1999, and was told not to be concerned about the asset allocation. (See Porto Dep. at 25; Hughes Decl. ¶ 12). Plaintiff alleges that, in or around July 1999, he contacted Buddenhagen, who was again in charge of Plaintiff's account, and who stated that he would send some information concerning other investment options. The information never arrived. Plaintiff closed the account on November 30, 1999, withdrawing the final balance of $610,076.

  It is undisputed that, over the entire life of the account, Plaintiff profited from Chase's investment strategy. Specifically, although Plaintiff initially deposited $615,131 and withdrew a closing balance of $610,076, he also withdrew approximately $900,000 during the life of the account.*fn2

  2. Procedural History

  Plaintiff filed a Complaint in this Court on July 5, 2001 ("Complaint"), against Chase, Buddenhagen, and John T. Corry, who managed his account from 1986 until 1990. The Complaint asserts claims for: 1) breach of fiduciary duty, 2) negligence, 3) negligent supervision, and 4) breach of contract. Plaintiff alleges that he suffered $366,000 in damages, which represents "out-of-pocket losses and the loss of income and appreciation that the Rollover Account would have earned had it [been] managed appropriately by defendants." (Compl. ¶ 36; see also Compl. ¶¶ 40, 44, 47).

  Defendants filed a Motion for Summary Judgment on March 29, 2002, arguing that Plaintiff could not assert his causes of action because 1) the statute of limitations had run on each of the claims, and 2) over the life of the account, Plaintiff profited, and therefore he suffered no damages. DISCUSSION

  A. Summary Judgment Standard

  Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A party may not, however, rely on speculation or conjecture to overcome the motion. Rather, the non-movant must produce sufficient evidence to establish that there is a genuine issue of material fact for trial. Lipton v. Nature Co., 71 F.3d 464, 469 (2d Cir. 1995). In reaching its determination, the Court must view the facts in the light most favorable to the non-movant.

  B. Defendants' Motion for Summary Judgment

  In their Motion for Summary Judgment, Defendants do not argue that they did not breach the original contract with Plaintiff. In fact, Defendants admit that when Plaintiff's account "exceeded the agreed 15%" REITs, Defendants were "in breach of [the 1986] agreement." (Def's Reply Br. at 3). Likewise, although Defendants state in the fact section of their brief that their investment strategy was necessary to attain Plaintiff's objective of withdrawing $7,500 a month, they do not claim that they did not breach their fiduciary duty by purchasing REITs, by investing over 70% of Plaintiff's account in REITs, or by retaining the REITs through the time that Plaintiff closed his account.

  Defendants instead move for summary judgment on the bases that the statute of limitations has run on Plaintiff's claims and that Plaintiff suffered no damages as a result of Defendants' alleged improper conduct.*fn3 The Court will address these arguments in turn.

  1. Statute of Limitations

  a. Fiduciary Duty, Negligence, and Negligent Supervision

  Plaintiff's breach of fiduciary duty claim is governed by a three-year statute of limitations, and accrues when the breach occurs.*fn4 Kaszirer v. Kaszirer, 286 A.D.2d 598, 598 (1st Dep't 2001). Plaintiff's two claims of negligence also have a three-year statute of limitations. CPLR § 214(4) — (5). These tort causes of action accrue when injury is sustained, regardless of Plaintiff's discovery thereof. See Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 94 (1993).

  Plaintiff's Complaint does not specify a date on which the alleged breach or breaches occurred. Plaintiff's Complaint could be read to allege, inter alia, that Defendants breached their duties, (1) in 1991, when Plaintiff's account first exceeded 15% REITs; (2) from 1991 through November 1999, during which time Defendants allegedly failed to monitor properly Plaintiff's account; and (3) from January 1998 through November 1999, when Defendants allegedly should have sold the REITs.*fn5 Any claims that accrued prior to July 5, 1998, however, normally would be barred because of the three-year statute of limitations.

  Plaintiff argues that he should nonetheless be able to assert the claims that accrued prior to July 5, 1998 pursuant to New York's "continuous representation" doctrine. See Mason Tenders Dist. Council Pension Fund v. Messera, 958 F. Supp. 869, 888 (S.D.N.Y. 1997). This doctrine originated in a medical malpractice decision, Borgia v. City of New York, 12 N.Y.2d 151 (1962), in which the New York Court of Appeals concluded that "when the course of treatment which includes the wrongful acts or omissions has run continuously and is related to the same original condition or complaint, the `accrual' comes only at the end of the treatment." See Cohen v. Goodfriend, 642 F. Supp. 95, 100 (E.D.N.Y. 1986) (quoting Borgia, 237 N.Y.S.2d at 321-22). The doctrine "is premised on the trust relationship" between the parties, "and the inequity of barring the client from suing [] based on the running of the statute of limitation during the life of the relationship." Mason Tenders, 958 F. Supp. at 889 (citing New York state cases); see also Podgoretz v. Shearson Lehman Bros., Inc., 1994 WL 1877200, *5 (E.D.N.Y. Mar. 23, 1994) ("From a policy perspective, the rule safeguards patients who do not want to jeopardize their physician-client relationship by bringing a legal suit midway through a continuing course of treatment.").

  Subsequent to Borgia, the doctrine was extended to apply to other professionals, including accountants,*fn6 investment advisors,*fn7 lawyers,*fn8 and architects.*fn9 See generally Rosen v. Spanierman, 711 F. Supp. 749 (S.D.N.Y. 1989), vacated on other grounds, 894 F.2d 28 (2d Cir. 1990). These cases have expanded the scope of the doctrine to apply in non-medical cases on the theory that professionals "who have had an ongoing relationship with their clients are in the best position to correct their alleged malpractice." Cuccolo v. Lipsky, Goodkin & Co., 826 F. Supp. 763, 769 (S.D.N.Y. 1993); see also City of New York v. Veatch, 1997 WL 624985, *16 (S.D.N.Y. Oct. 6, 1997) (applying the doctrine to engineers because of a "desire to protect clients who are forced to depend on the continued services of the professionals who caused the problem so that they may have their problems fixed.").

  The Second Circuit has never ruled on the issue of whether portfolio managers are subject to the continuing treatment doctrine. While this Court does not believe that extending the doctrine to this case fits squarely within the policy rationales originally asserted in Borgia, the more relaxed standards that courts have recently used counsel in favor of applying the doctrine here.*fn10 Defendants managed Plaintiff's account continuously through the time period at issue and Plaintiff was entitled to rely on their professional expertise to correct any potential malpractice they might have committed. Cf. Cuccolo, 826 F. Supp. at 769-70 (applying the doctrine to accountants accused of giving improper investment advice, even though plaintiff might have known that the investments were failing, because plaintiff had the right to rely on the accountants to cure any alleged acts of malpractice).

  Accordingly, Plaintiff may bring his claims of breach of fiduciary duty, negligence and negligent supervision as they apply to actions taken both before and after July 5, 1998.

  b. Breach of Contract

  Plaintiff's breach of contract claim is governed by CPLR § 213(2), which specifies a six-year statute of limitations. Generally, the statute of limitations begins to run when the contract is breached, even if no damage occurs until later. See C.P.L.R. § 213(2); see also Raine v. RKO Gen., Inc., 138 F.3d 90, 93 (2d Cir. 1998); Ely-Cruikshank & Co. v. Bank of Montreal, 81 N.Y.2d 399, 402 (1993).

  In this case, Plaintiff alleges that Defendants breached the Agreement by, inter alia, "failing to exercise their discretion in good faith with respect to an account under their control and in failing to abide by industry standards of conduct." (see Compl. at ¶ 46). Plaintiff does not specify a date or dates on which these alleged breaches took place, although the Court reads liberally his Complaint to allege claims that arose both within and beyond the 6-year statute of limitations.

  Plaintiff also argues in his brief that Defendants breached the Agreement by purchasing REITs over and above the agreed upon 15%. (Pl's Opp'n, at 11). According to Plaintiff, these "purchases occurred in every year from 1988 to 1999." (Id.). Therefore, Plaintiff again alleges claims that arose both within and beyond the limitations period.

  In response, Defendants argue that if the contract was breached, it was breached in 1991, and that Plaintiff may not bring claims that allege breaches occurring after 1991. This argument fails, however. In this case, the Agreement entailed continuing performance, so that "each breach may begin the running of the statute anew such that accrual occurs continuously and plaintiffs may assert claims for damages occurring up to six years prior to the filing of the suit." See Tsegaye v. Impol Aluminum Corp., 2003 WL 221743, *7 (S.D.N.Y. Jan. 30, 2003) (quoting Stahlex-Interhandel Trustee, Reg. v. W. Union Fin. Servs. E. Europe Ltd., 2002 WL 31359011, *5 (S.D.N.Y. Oct. 21, 2002)); see also Asian Vegetable Research and Dev. Ctr. v. Institute of Intern. Educ., 944 F. Supp. 1169, 1177 (S.D.N.Y. 1996).

  The Court holds that Plaintiff may bring his breach of contract claims regarding alleged breaches that arose on or after July 5, 1995 because they are within the limitations period, but not those that arose prior to this date.

  2. Damages

  Defendants argue that all of Plaintiff's causes of action should be dismissed because he has not suffered any damages. Specifically, they argue that the Court should evaluate Plaintiff's damages claim by looking at his account from 1990, when Chase began buying REITs, through November 1999, when Plaintiff closed the account. In response, Plaintiff argues that Defendants' calculation of damages is an attempt at "exoneration by historical performance," and that it is unfair to cover up damages suffered in later years by mismanagement with the account's gains in the previous years. Plaintiff asserts that the Court should calculate damages from January 1998, the time that Plaintiff contends REITs became "unsuitable," till the close of the account.

  Both parties cite the case Matter of Janes, 223 A.D.2d 20 (4th Dep't 1996), aff'd, 90 N.Y.2d 41 (1997), in which the Appellate Division found that executors for an estate imprudently failed to diversify soon after receiving certain stock. Id. at 29 (holding fiduciary liable "for its initial imprudent failure to diversify as well as for its subsequent indifference, inaction, nondisclosure and outright deception in response to the prolonged and steep decline in the worth of the estate"). The Court stated that the measure of damages "for a fiduciary's negligent retention of assets" is the value of the securities at the time that they should have been sold, minus their value when ultimately sold, minus dividends or other income earned on the assets. Id. at 34-35; see also Matter of Donner, 82 N.Y.2d 574, 579, 586 (1993) (stating that damages should be measured from the date that the securities at issue should have been sold). In addition, the Appellate Division explicitly rejected any measure of damages "based on lost profits or appreciation . . . [or] upon the hypothetical performance of an investment of the proceeds of sale in the market." Id. at 35. The Court of Appeals affirmed this rejection of any "lost profits" or "market index" measure of damages." 90 N.Y.2d at 55.

  As the Court stated supra, the date on which the breach or breaches occurred is a question of fact that the jury must decide. A jury might find that the relevant breach occurred in 1991, when the account first exceeded 15% REITs. Using 1991 as the time that the REITs "should have been sold," under the Janes calculation,*fn11 Plaintiff suffered no damages. However, a jury could find that the relevant breaches occurred during 1998 and 1999, when Defendants allegedly improperly monitored Plaintiff's account, resulting in a loss of several thousand dollars. Calculating damages from this point under Janes would result in a significant damages award.*fn12 The Court finds that there are questions of fact regarding the amount of damages that Plaintiff suffered, and therefore denies Defendants' motion for summary judgment.

  3. Defendant John T. Corry

  In the Complaint, Plaintiff states that Defendant Corry managed his account until 1990. All of Plaintiff's claims regarding the Defendants' alleged breaches, however, concern actions taken during and after 1991.

  After a review of the Complaint and the motion papers, the Court concludes that Plaintiff has no viable claim against Defendant Corry because his involvement in the account pre-dates any and all alleged breaches. Therefore, Defendant Corry is dismissed from this case.


  Defendants' motion for summary judgment is granted to the extent that Plaintiff may not bring his breach of contract claim insofar as it alleges breaches prior to July 5, 1995, but is otherwise denied. Defendant Corry is dismissed from the case. The parties are directed to appear before the Court for a scheduling conference on Tuesday, July 13, 2004 at 4:00p.m.


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