The opinion of the court was delivered by: DEBORAH BATTS, District Judge
Plaintiffs Bank of America Corporation ("BAC"), Bank of
America, N.A. ("BNA"), Bank of America Overseas Corporation
(BAOC"), and BankAmerica International Financial Corporation
("BIFC") (collectively "Plaintiffs") bring this action alleging
fraudulent inducement, conversion, breach of fiduciary duty, and
breach of contract. Defendants, Antonio Carlos Braga Lemgruber
("Lemgruber"), Agropastoril Aventura Ltda. ("Agropastoril"), Rio
Aventura, Inc. ("Rio Aventura"), and SP Funds LLC ("SP Funds") (collectively, the "Lemgruber Defendants" or
"Defendants")*fn1 now move to dismiss the Complaint for lack
of subject matter jurisdiction, lack of standing to sue, failure
to state a legally sufficient claim, and failure to join real
parties in interest pursuant to Rules 8(c), 9(b), 12(b)(1),
12(b)(6), 12(b)(7), and 19 of the Federal Rules of Civil
Procedure, and on grounds of forum non conveniens.*fn2 For
the reasons stated below, the Lemgruber Defendants' motion is GRANTED IN PART and DENIED IN
The present action arises out of Plaintiffs' three-phase
purchase of the stock of a Brazilian bank, Banco Liberal S.A.
("BL Brazil"), and several of its affiliates, including a Liberal
Banking Corporation, Ltd., a Bahamian Bank ("BL Bahamas"),
(collectively the "BL Banks"),*fn3 from Defendant Lemburger
and former Defendants Floris and De Luca, who allegedly took part
in a scheme to defraud Plaintiffs by embezzling millions of
dollars from the BL Banks and concealing from Plaintiffs both the
embezzlement and other information that depreciated the value of
the stock and assets that plaintiffs acquired.
Plaintiff BAC is a multi-bank holding company incorporated in
Delaware with its headquarters in North Carolina. (Compl. ¶ 8).
BAC is the successor in interest to NationsBank Corporation ("NationsBank"), who originally contracted with Defendants to
purchase the BL Banks in 1998. (Id. ¶¶ 8, 17). Plaintiff BNA is
an indirect wholly-owned subsidiary of BAC, headquartered in
North Carolina, and is the successor by merger to NationsBank,
National Association. (Id. ¶ 9). BNA was formed as a national
bank organized under the laws of the United States and thus its
presence as a party to this action would satisfy the first
requirement for the Court's exercise of subject matter
jurisdiction under the Edge Act.*fn4 (Id.) Plaintiff BAOC,
a wholly-owned subsidiary of BNA, was formed in 1980 as an Edge
Act Corporation under the laws of the United States*fn5 and
is headquartered in Charlotte, North Carolina. (Id. ¶ 10).
Plaintiff BIFC was also formed as an Edge Act corporation and is
headquartered in San Francisco, CA. (Id. ¶ 11). BNA, BAOC, and BIFC are hereinafter collectively referred to as the "Edge Act
Defendant Lemgruber is a resident and citizen of Brazil.
(Compl. ¶ 12). Prior to Plaintiffs' purchase of the BL Banks'
stock, Lemgruber owned significant minority stakes in both BL
Brazil and BL Bahamas. (Id.) In addition, during the time
period relevant to this action, he was an officer and director of
both BL Banks with primary responsibility for managing operations
of BL Brazil's overseas' affiliates, including BL Bahamas.
(Id.; Declaration of Jared Goldstein ["Goldstein Decl."], Ex. D
(Management Agreement Between BAC, the BL Banks, and Lemburger,
dated January 23, 1998)).*fn6
The remaining Defendants are entities that Plaintiffs allege
were either directly controlled by Defendant Lemgruber or, in the
alternative, were sufficiently independent to have conspired with
Lemgruber to engage in the allegedly fraudulent transactions that
gave rise to this action. (Compl. ¶ 13). Defendants Goldbeach
Holdings Corporation ("Goldbeach"), Powerstone Corporation
("Powerstone"), Timber Springs Corporation ("Timber Springs"),
and Tiger International Overseas Corporation ("TIOC") are incorporated in the British Virgin
Islands. (Id.). Defendants Agropastoril Aventura Ltda. and
Delaware Asset Management Adm. Financiera e Consultoria
("Delaware Asset") are incorporated in Brazil. (Id.). Defendant
Blue Water Capital is incorporated and headquartered in Virginia
(Goldstein Decl. ¶ 9, Exs. J and K), while Defendants Santo
Escolastica, Inc. and Rio Aventura Stables, Inc. are incorporated
and headquartered in the state of Kentucky. (Compl. ¶ 13;
Goldstein Decl. ¶ 8, Exs. F and G). Defendant SP Fund is also
incorporated in Kentucky with its principal place of business
located in Versailles, Kentucky. (Second Declaration of Jared
Goldstein ["Goldstein 2nd Decl."] ¶ 2, Ex. 1).*fn7
B. The Three-Stage BL Bank Stock Acquisition
1. The 1998 Stock Purchase
In 1998, BAC, then NationsBank, decided to expand its presence
in the investment banking market through the purchase of a
majority stake in the BL Banks. (Compl. ¶ 17). At that time,
Former Defendants Floris and De Luca and Defendant Lemgruber (collectively referred to as "Sellers") owned or
controlled all shares and managed the operations of the BL Banks.
(Id. ¶¶ 18-19).
On January 13, 1998, BAC entered into a Stock Purchase
Agreement (hereinafter the "1998 Stock Purchase Agreement") with
the Sellers*fn8 through which Plaintiffs acquired 51% of the
stock of the BL Banks*fn9 for approximately $115 million.
(Compl. ¶ 20; Declaration of Chaya F. Weinberg-Brodt
["Weinberg-Brodt Decl."]*fn10 Ex. B (Fully executed Copy of
the 1998 Stock Purchase Agreement)). BAC, as a successor to
Nationsbank, is the only plaintiff who was a party.
(Weinberg-Brodt Decl., Ex. B at 1). The 1998 Stock Purchase
Agreement permitted NationsBank (now BAC) or "one or more of its
indirect subsidiaries" to acquire not less than 51% of the shares
of the BL Brazil, and 51% of the shares of BL Bahamas. (Id. at
1). In addition, section 11.2 of the Agreement contained a call option granting BAC, or one of its
subsidiaries, the right to purchase the remaining shares of the
BL Banks at a price to be determined according to the BL Banks'
financial statements at the time of sale. (Compl. ¶ 30;
Weinberg-Brodt Decl., Ex. B at 60).
The 1998 Stock Purchase Agreement also contained many
representations and warranties certified by the Sellers regarding
the financial condition of and other important information about
the BL Banks. For example:
In § 3.4 of the Agreement, the Sellers certified
that the Balance Sheets and Interim Balance Sheets
they provided to NationsBank "fairly present the
financial condition . . . of the [BL Banks]." (Compl.
¶ 22; Weinberg-Brodt Decl., Ex. B at 22-23).
In § 3.10, Sellers certified that the BL Banks had
"no undisclosed liabilities or obligations of any
nature (whether known or unknown and whether absolute
accrued, contingent or otherwise) except for
liabilities or obligations reflected or reserved
against in the Balance Sheets or the Interim Balance
Sheets . . ." (Compl. ¶ 23; Weinberg-Brodt Decl., Ex.
B at 26).
In § 3.14(a)(i), Sellers certified that since 1993
the BL Banks had been "in full compliance with each
Legal Requirement that is or was applicable to it or
to the conduct or operation of its business." (Compl.
¶ 24; Weinberg Brodt Decl., Ex. B at 30).
In § 3.15(a), Sellers certified that to their
knowledge "no Proceeding has been threatened, and no
event has occurred or circumstances exists that may
give rise to or serve as the basis for the
commencement of any such Proceedings." (Compl. ¶ 25;
Weinberg-Brodt Decl., Ex. B at 31).
In § 3.24(c), Sellers certified that "[t]here is no
fact known to any of the Sellers . . . that
materially adversely affects, or as far as any Seller
can reasonably foresee, materially threatens, the business, operations,
properties, prospects, assets, liabilities or
condition" of the BL Banks. (Compl. ¶ 26;
Weinberg-Brodt Decl., Ex. B at 41).
In § 3.25, Sellers certified that neither Sellers
nor any other related person "has, or has had any
interest in any property . . . used in or pertaining
to the [BL Banks'] businesses," or except as
disclosed has "(i) made any loan to or received any
loan from, [the BL Banks], (ii) had any business
dealings or any material financial interest in any
transaction with [the BL Banks] other than in
ordinary course of business with the [BL Banks] at
substantially prevailing Market rates." (Compl. ¶ 27;
Weinberg-Brodt Decl., Ex. B at 41-42).
The Agreement also contains an indemnification provision. Under
section 10.2 of the Agreement, Sellers agreed to indemnify BAC
and its affiliates for "any loss, liability, claim, damage . . .,
expense . . . or diminution in value, whether or not involving a
third-party claim . . . arising directly or indirectly, from or
in connection with: (a) any Breach of any representation or
warranty made by Seller or [BL Brazil] in this Agreement . . . or
any other certificate or document delivered by Sellers or the
Brazilian Bank pursuant to the Agreement; or (b) any Breach by
any Seller or the Brazilian Bank of any covenant or obligations
of such Seller or the Brazilian Bank in this agreement." (Compl.
¶ 34; Weinberg-Brodt Decl., Ex. B at 52-53).
While BAC was a signatory to the 1998 Stock Purchase Agreement,
the BL Brazil shares were actually acquired by Nationsbank Brasil
Holdings, Ltda. (now Bank of America Brasil Holdings Ltd. or "Brasil Holdings"), a Brazilian holding company,
and the BL Bahamas shares were actually acquired by NB Bahamas
Ltd. ("Bahamas Holdings"), a Bahamian holding company.
(Declaration of Glenn Danzinger ["Danzinger Decl."] ¶¶ 7-8;
Weinberg Brodt Decl., Ex. B. § 2.3 (a) (ii) and iii)). Brasil and
Bahamas Holdings, which were each created for the sole purpose of
holding shares in their respective BL Banks, are in turn
subsidiaries of BIFC and BAOC, Brasil Holdings being jointly
owned by BIFC and BAOC, while Bahamas Holdings is wholly-owned by
BAOC. (Danzinger Decl. ¶¶ 7-8). However, neither BIFC, BAOC, nor
BNA acquired any shares in the BL Banks through the 1998 stock
purchase, though BAOC allegedly contributed $50 million to the
capital of BL Brazil. (Compl. ¶ 29). Moreover, Brasil and Bahamas
Holdings, not BAC, were parties to the BL Brazil and BL Bahamas
Shareholder Agreements executed on January 23, 1998. (See
Weinberg-Brodt Decl., Exs. C and D).
Finally, while the 1998 stock purchase transferred majority
ownership of the BL Banks to BAC, Lemgruber, Floris and De Luca
maintained managerial control over them. (Compl. ¶ 28). Section
2.3 of the 1998 Stock Purchase Agreement called for each of them
to execute a Management Agreement with BAC and the BL Banks, and
Lemgruber and De Luca did so on January 23, 1998, while Floris
did so on May 13, 1998. (Goldstein Decl., Exs. B-D (Management
Agreements for Floris, De Luca and Lemgruber)). 2. The 2000 and 2001 Stock Acquisitions
In March 2000, BAC first exercised its Call Option under the
1998 Stock Purchase Agreement to purchase an additional 19% of
the BL Banks stock in exchange for approximately $52.6 million.
(Comp. ¶ 31). Once again, the shares were actually acquired by
Brazil and Bahamas Holdings, and BAC was the only Plaintiff who
was party to the 2000 Stock Purchase Agreement. (Weinberg-Brodt
Decl., Ex. E (Letter Amendment to the 1998 Stock Purchase
Agreement, dated January 18, 2000)).
Thereafter, in April 2001, BAC again exercised its Call Option
under the 1998 Stock Purchase Agreement to acquire the remaining
30% of the BL Banks' stock for approximately $86.4 million.
(Compl. ¶ 32). There were two 2001 Stock Acquisition Agreements,
one for the purchase of the remaining 30% of BL Brazil stock and
the other for the purchase of the remaining 30% of BL Bahamas
stock. (See Weinberg-Brodt Decl., Exs. F and G). None of
Plaintiffs were signatories to either of these agreements.
Instead, Brasil Holdings, which acquired the remaining BL Brazil
shares, was party to the BL Brazil Share Purchase Agreement,
while Bahamas Holdings, which acquired the remaining BL Bahamas
shares, was party to the BL Bahamas Share Purchase Agreement.
(Id; Danzinger Decl. ¶¶ 7-8). However, both of the 2001 Share
Purchase Agreements specifically state that they were made pursuant to BAC's Call Option in the 1998
Stock Purchase Agreement. (Weinberg-Drodt Decl., Exs. F and G).
In addition, as part of these 2001 Agreements, the Sellers
allegedly re-certified the warranties contained in the 1998 Stock
Purchase Agreement regarding the BL Banks' financial condition.
(Compl. ¶ 32; Weinberg-Brodt Decl., Ex. H).
While neither BNA, BIFC nor BAOC directly purchased any of the
BL Banks' stock during the three-phase stock purchase, Plaintiffs
allege they did contribute funding for the 2001 Stock Purchase
Agreement as follows: BIFC and BAOC borrowed $86.4 million from
BNA under a revolving line of credit, $27.8 million borrowed by
BIFC and $58.6 million borrowed by BAOC. (Danziger Decl. ¶ 11).
BIFC and BAOC then made an equity contribution totaling $46.3
million to Brazil Holdings, which was used to acquire the
remaining 30% of BL Brazil stock. (Id.) BAOC also made an
equity contribution of $40.1 million to Bahamas Holdings, which
the latter used to acquire the remaining 30% of BL Bahamas stock.
(Id. ¶ 12). In addition, Plaintiffs allege that "the possessory
interests" acquired through the three-phase stock acquisition are
currently held by BAOC and BIFC. (Compl. ¶ 33). C. Defendants' Alleged Fraud
1. Overdrafts and Cover-Ups
Beginning shortly after the completion of the 1998 Stock
Purchase and continuing through the 2001 Stock Acquisition,
Defendant Lemgruber allegedly embezzled the assets of the BL
Banks by initiating approximately $24 million worth of illegal
overdrafts from his personal account and the accounts of
companies allegedly under his control. (Compl. ¶ 36). The bulk of
those monies, almost $20 million, allegedly went directly to
Lemgruber himself and to Defendants Santa Escolastica, Timber
Springs Corporation, Agropastoril Aventura Ltda., Deleware Asset
Management Adm. Financiera e Consultoria, Rio Aventura Stables
Inc., SP Funds, Interbrett Investec Group, Goldbeach, Tiger
International Overseas Corporation, American Versailles Fund and
Powerstone. (Id. ¶ 37).
In addition, Lemgruber allegedly attempted to conceal these
overdrafts from Plaintiffs by forging documents and executing a
series of fraudulent transactions to create fictitious assets
that appeared to offset the overdrafts in the BL Banks' financial
statements. (Compl. ¶ 42). For example, Plaintiffs allege that on
or about March 9, 2001, Lemgruber, through his control and by
conspiring with Defendants Powerstone and Goldbeach, conducted a
series of fraudulent transactions creating $24 million in fictitious certificates of deposits
("CDs"). (Id. ¶ 43). In addition, to bolster BL Bahamas'
assets, Lemgruber allegedly created other false documents for
other fraudulent transactions, including the issuance of bogus
loans from BL Bahamas, which were then booked as BL Bahamas
assets. (Id. ¶ 46). Finally, on or about June 25, 2001
Lemgruber allegedly attempted to cover-up the fictitious CDs by
creating documents that purported to swap the fictitious CD's and
BL Bahamas' interest in the bogus loans it had purportedly issued
for $28.7 million in other fictitious CD's and Brazilian
government bonds. (Id. ¶ 47).
Through this overdraft and cover-up scheme, the Lemgruber
Defendants were allegedly able to embezzle approximately $38
million in BL Bank assets and to inflate by many millions of
dollars the purchase price paid by Plaintiffs in the 2001 Stock
Acquisition by including phony assets on BL Bahamas' books.
(Compl. ¶ 49).
2. Failure to Disclose Administrative and Criminal
Investigations Against BL Banks
In addition to the overdraft and cover-up scheme, Lemgruber and
former Defendants Floris and De Luca allegedly failed to disclose
to Plaintiffs prior to either the 2000 or 2001 Stock Acquisitions
that, beginning in 1999 and continuing to the present, Brazilian
authorities instituted a series of administrative proceedings and criminal investigations against
them and other BL Banks' officers alleging fraudulent
misrepresentations, illegal speculation and other violations of
Brazilian law. (Compl. ¶¶ 50-53; 57-59). In April 2001,
Lemgruber, Floris and De Luca allegedly expressly certified that
the representations and warranties contained in § 3 of the 1998
Stock Purchase Agreement, which declared, among other things,
that (1) the BL Banks were in full compliance with all applicable
legal requirements, (2) no legal proceedings had been threatened
against the BL Banks, (3) the BL Banks had no undisclosed
liabilities or obligations except those reflected in the balance
sheets, and (4) the Sellers did not know of any facts that
materially adversely affected the business of the BL Banks, were
still true. (Id. ¶¶ 57-61) (Weinberg-Brodt Decl., Ex. H).
Similarly, at the time of the 2000 Stock Acquisition, Lemgruber,
Floris and De Luca allegedly failed to disclose that the 1998
certifications were no longer true. (Id. ¶ 62).
The administrative proceedings and criminal investigations,
along with the alleged overdrafts, sham covering transactions and
bogus loans created liabilities and obligations of the BL Banks
that were not fairly presented in the BL Banks' balance sheets.
(Compl. ¶ 62). However, Plaintiffs, relying on Lemgruber, Floris
and De Luca's allegedly false recertifications of the 1998
warranties, went through with the 2000 and 2001 Stock Acquisitions and ended up paying more than
$139 million for assets allegedly worth substantially less.
(Id. ¶¶ 65-66). In addition, Plaintiffs are now responsible for
the costs of defending the BL Banks in the on-going
administrative and criminal proceedings. (Id. ¶ 54).
On February 11, 2002, Plaintiffs commenced the present action,
asserting: (1) a fraudulent inducement claim against the
Lemgruber Defendants for making the above-mentioned
misrepresentations and omissions which allegedly induced
Plaintiffs to consummate the 2000 and 2001 Stock Acquisitions at
prices which far exceeded the actual value of the BL Banks'
stock; (2) a conversion claim against Lemgruber for his alleged
embezzlement of $38 million in BL Bank assets to which
Plaintiffs' have a legal right and immdediate superior right of
possession; (3) a breach of the fiduciary duty claim against
Lemgruber for embezzling the BL Bank funds while manager of the
BL Banks and against the other Lemgruber Defendants for
conspiring with him to commit such embezzlement; and (4) a breach
of contract claim against Lemgruber for breaching the warranties
in § 3 of the 1998 Stock Purchase Agreement by providing untrue
re-certifications of the warranties and representations at the time of the 2001 Stock Purchase. (Compl.
The Lemgruber Defendants move to dismiss this action on several
grounds. First, they urge dismissal pursuant to F.R.C.P. 12(b)
(1) on grounds that the Court cannot properly exercise either
Edge Act or diversity subject matter jurisdiction over this case.
Second, they contend that all Plaintiffs lack standing to sue for
either conversion or breach of fiduciary duty and that BNA, BIFC
and BAOC also lack standing to sue for fraudulent inducement and
breach of contract. Third, Defendants argue that the fraudulent
inducement, breach of fiduciary duty and breach of contract
claims should be dismissed pursuant to Rules 12(b) (6) and 9(b)
because Plaintiffs have not adequately pled justifiable reliance.
Fourth, Defendants urge dismissal under Rules 12(b) (7) and 19(b)
for Plaintiffs' failure to join indispensable parties, namely
Brasil Holdings, Bahamas Holdings and the BL Banks. Finally,
Defendants move for dismissal on grounds of forum non conveniens.
A. Subject Matter Jurisdiction
1. Rule 12(b) (1) Dismissal
While a Court considering a challenge to subject matter
jurisdiction under Rule 12(b) (1) must "accept as true all material factual allegations in the complaint," Shipping
Financial Serv. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir.
1998), "the burden of proving jurisdiction is on the party
asserting it . . . to make a prima facie showing of
jurisdiction." Robinson v. Overseas Military Sales Corp.,
21 F.3d 502, 507 (2d Cir. 1994). (citing Cuto Indus., Inc. v.
Naughton, 806 F.2d 361, 364 (2d Cir. 1986)). Moreover, "that
showing is not made by drawing from the pleadings inferences
favorable to the party asserting it." Shipping Financial,
140 F.3d at 131; see also Robinson, 21 F.3d at 507 ("In
determining whether a plaintiff has met this burden, we will not
draw argumentative inferences in the plaintiff's favor.");
London v. Polishook, 189 F.3d 196, 199 (2d Cir. 1999) ("[I]t is
the affirmative burden of the party invoking [federal subject
matter] jurisdiction . . . to proffer the necessary factual
predicate not just an allegation in a complaint-to support
jurisdiction.") (citations omitted). Therefore, when resolving
issues surrounding its subject matter jurisdiction, a district
court is not confined to the Complaint and may refer to evidence
outside the pleadings, such as affidavits. Makarova v. United
States, 201 F.3d 110, 113 (2d Cir. 2000) (citing Kamen v.
American Telephone & Telegraph Co., 791 F.2d 1006, 1011 (2d Cir.
1986)). Plaintiffs have asserted two bases for this Court's exercise of
subject matter jurisdiction over the present case: (1) federal
question jurisdiction under the Edge Act, 12 U.S.C. § 632, and
(2) diversity jurisdiction under 28 U.S.C. § 1332. (Compl. ¶ 14).
Accordingly, the Court shall address each of these jurisdictional
The Edge Act, 12 U.S.C. §§ 601 et seq., provides federal
district courts with an independent basis for exercising subject
matter jurisdiction over certain purely state or common law
actions involving international banking by designating such
actions as "federal question" actions. The Act provides, in
Notwithstanding any other provision of law, all suits
of a civil nature at common law or in equity to which
any corporation organized under the laws of the
United States shall be a party, arising out of
transactions involving international or foreign
banking . . . or out of other international or
foreign financial operations . . . shall be deemed to
arise under the laws of the United
12 U.S.C. § 632 (emphasis added).
For a district court to exercise Edge Act jurisdiction over a
civil action, that action must meet two requirements: (1) a corporation organized under the laws of the United States is a
party; and (2) the action arises out of transactions involving
international or foreign banking or other financial operations.
See Papadopoulos v. Chase Manhattan Bank, N.A.,
791 F. Supp. 72, 74 (S.D.N.Y. 1990). Defendants contend that the present
action does not satisfy either of these requirements. Thus, the
Court shall address both.
a. Corporation Organized Under the Laws of the United States as
a Party to Action
For this Court to have Edge Act jurisdiction over the present
action, at least one of the parties must be a corporation
organized under the laws of the United States. Defendants do not
dispute that three of the four named Plaintiffs, BNA, BAOC, and
BIFC are corporations organized under the laws of the United
States (see Compl. ¶¶ 9 11), and, as discussed in Part II.B.5
infra, these three Plaintiffs have standing to assert a breach
of contract claim against Defendants. Nevertheless, Defendants
argue that the first prong of Edge Act jurisdiction is not met
because the Edge Act Plaintiffs are not the "true parties in
interest" with respect to the breach of contract claim since the
indemnity and warranty provisions in the 1998 Stock Purchase
Agreement which give them the right to sue for ...