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American Financial International Group--Asia, L.L.C. v. Bennett

June 14, 2007


The opinion of the court was delivered by: Gerard E. Lynch, District Judge


This is one of several cases arising out of the collapse of Refco. See, e.g., In re Refco, Inc., Secs. Litig., No. 05 Civ. 8626, 2007 WL 1280649 (S.D.N.Y. Apr. 30, 2007) (addressing motions to dismiss in a related case). Plaintiffs in this case are a putative class of customers of RefcoFX, a subsidiary of Refco that provides currency-trading services. Plaintiffs held RefcoFX currency-trading accounts (Compl. ¶¶ 28-30, 33*fn1 ), and now bring various claims against corporate officers of Refco alleging, inter alia, that actions by those officers resulted in a loss of value in the funds held in those accounts. Four motions to dismiss by officers of Refco and entities controlled by those officers are now pending. The motions will be granted.


Plaintiffs allege that Refco, prior to its collapse, engaged in a massive fraudulent scheme designed to conceal uncollectible debts owed to the company. (Compl. ¶¶ 49-52.) In effect, Refco orchestrated a series of transactions where the debt would be transferred to a Refco subsidiary, and then temporarily paid off at the end of Refco's reporting periods via transactions in which another Refco subsidiary loaned money to a third party, which then loaned money to the first subsidiary to pay off the debt. These transactions were only temporary, and were designed to hide the bad debt from the public and Refco's investors. (Id.) The fraud was disclosed on October 10, 2005, when the Company revealed to the public "that Refco's financial results had been materially misstated and that Refco was owed $430 million in uncollectible debt." (Id. ¶ 60.)

Plaintiffs are a putative class of customers of RefcoFX, a Refco subsidiary that provided accounts through which customers could make currency trades. (Compl. ¶¶ 28-30, 55.) Plaintiffs allege that at some point after the October 10 announcement, "Defendants assured Plaintiffs and other members of the Class that RefcoFX's trading operations and customers['] trading accounts would be unaffected." (Id. ¶ 63.) However, on October 17, 2005, plaintiffs were notified by RefcoFX that their accounts were frozen, meaning that no funds could be withdrawn or deposited. (Id. ¶¶ 19-20, 64.)

Refco and Refco FX are not named as defendants in this action because they have filed for bankruptcy, and the automatic stay provisions of the bankruptcy law preclude suits against them. (Compl. ¶¶ 31, 33.) Accordingly, the named defendants are corporate officers of Refco and its subsidiaries.

Defendant Phillip R. Bennett was the President, Chief Executive Officer ("CEO"), and Chairman of Refco, RGHI and RefcoFX until he was forced to resign in October 2005. (Compl. ¶ 38.) Defendants Refco Group Holdings, Inc. ("RGHI") and the Phillip R. Bennett Three Year Annuity Trust (the "Bennett Trust") are shell entities owned and controlled by Bennett. (Compl. ¶¶ 34, 36, 38.)

Defendant Gerald M. Sherer was the President and CEO of RefcoFX, and Executive Vice President and Chief Financial Officer of RGHI. (Compl. ¶ 40.) Defendant William M. Sexton was Executive Vice President and Chief Operating Officer ("COO") of RefcoFX and RGHI. (Compl. ¶ 41.) After Bennett was forced to resign, Sexton briefly served as CEO of Refco and RefcoFX, but resigned on November 15, 2005. (Id. ¶ 42.) Defendant Philip Silverman was Secretary of Refco and RGHI. (Id. ¶ 46.) Of the other defendants remaining in the case, Santo C. Maggio has answered, and defendants Frank Mutterer and "Does 1 Through 50" have not been served.


I. Standards for Motions to Dismiss

For purposes of a motion to dismiss, courts "accept the complaint's factual allegations, and all reasonable inferences that can be drawn from those allegations in the plaintiffs favor, as true." Roth v. Jennings, ___ F.3d ___, No. 06-0784, 2007 WL 1629889, at *1 (2nd Cir. Jun. 8, 2007). Rule 8(a)(2) of the Federal Rules of Civil Procedure requires only "a short and plain statement of the claim showing that the pleader is entitled to relief," in order to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. 41, 47 (1957). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1964-1965 (2007) (internal citations omitted). "Factual allegations must be enough to raise a right to relief above the speculative level," and must make "a 'showing,' rather than a blanket assertion, of entitlement to relief." Id. at 1965 & n.3.

II. Breach of Contract and Breach of Warranty (Counts III and IV)

Defendants move to dismiss plaintiffs' claims of breach of contract and breach of warranty on the grounds that plaintiffs have failed to allege that they were parties to any relevant contract. Plaintiffs allege that "[e]ach Defendant entered into a contract with each Class member governing the trading accounts." (Compl. ¶ 100.) This, however, is the extent of their effort to identify the contracts in question. Plaintiffs correctly note that notice-pleading standards apply to claims for breach of contract, see Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 176-177 (2d Cir. 2004), but the complaint fails to give the defendants notice as to what contract they supposedly breached. The only mention of any contract in the complaint is a reference to "uniform client agreements" (Compl. ¶ 99), but these appear to be contracts between RefcoFX and plaintiffs. "As officers of the corporation with which the plaintiff contracted, . . . the respondents may not be held personally liable on the contract, since they did not bind themselves individually under that contract." Gordon v. Teramo & Co., 764 N.Y.S.2d 144, 144 (App. Div. 2d Dep't 2003).

Plaintiffs' breach of warranty claims against the corporate officers and the Bennett-controlled entities fail for the same reason: there was no privity of contract between plaintiffs and defendants. In non-personal injury actions, "privity must necessarily exist because the creation of the warranty requires a direct exchange between buyer and seller." Inter Impex S.A.E. v. Comtrade Corp., No. 00 Civ. 0133, 2004 WL 2793213, at *5 (S.D.N.Y. Dec. 6, 2004) (internal citations and quotation marks omitted).

Plaintiffs argue that "defendants are personally liable on the breach of contract and warranty claims because they used the corporate entities to commit numerous torts against the plaintiffs." (P. Mem. 22.*fn2 ) Of course, a corporate officer's participation in a tort renders him subject to personal liability. See Am. Exp. Travel Related Services Co., Inc. v. North Atlantic Resources, Inc., 691 N.Y.S.2d 403, 404 (App. Div. 1st Dep't 1999). But liability in such circumstances is for the tort, not for all wrongs suffered by the victims at the hands of the corporation.

Plaintiffs also argue that defendants should be found liable for the corporation's breach of contract on a theory of veil-piercing. (P. Mem. 23.) To pierce the corporate veil, plaintiffs must show that defendants "(1) have exercised such control that the subsidiary has become a mere instrumentality of the parent, which is the real actor; (2) such control has been used to commit fraud or other wrong; and (3) the fraud or wrong results in an unjust loss or injury to plaintiff." Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 138 (2d Cir. 1991) (internal citation and quotation marks omitted). Nothing in the complaint suggests that RefcoFX was a "mere instrumentality" of the defendants or even addresses the extent to which defendants controlled the corporation. Accordingly, plaintiffs' argument is without merit, and the contract and warranty claims must be dismissed.

III. Negligence (Count I)

Count I of the complaint, which alleges negligence, seeks recovery only of economic damages. However, "New York law holds that a negligence action seeking recovery for economic loss will not lie." Suffolk County v. Long Island Lighting Co., 728 F.2d 52, 62 (2d Cir. 1984). Plaintiffs acknowledge this rule and do not dispute that it is generally applicable here. (P. Mem. 18.) Instead, they rely upon the exception to the rule for negligent performance of contractual services, see MCI Telecomm. Corp. v. John Mezzalingua Assoc., Inc., 921 F. Supp. 936, 945 (N.D.N.Y. 1996), and argue that "to the extent that an agreement exists between the parties, a ...

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