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Soward v. Deutsche Bank AG

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK


September 1, 2011

DAVID C. SOWARD, PLAINTIFF,
v.
DEUTSCHE BANK AG AND DEUTSCHE BANK SECURITIES, INC., DEFENDANTS.
THOMAS R. BECNEL AND JARDINE VENTURES, LLC, PLAINTIFFS,
v.
DEUTSCHE BANK AG AND DEUTSCHE BANK SECURITIES, INC., DEFENDANTS.

The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.

I. INTRODUCTION

OPINION AND ORDER

Plaintiffs, Thomas R. Becnel and Jardine Ventures, LLC (collectively "Becnel") and David Soward, bring these diversity actions against Deutsche Bank AG and Deutsche Bank Securities, Inc. (collectively "Deutsche Bank") alleging state-law claims of fraud, conspiracy to commit fraud, fraudulent concealment, aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract and breach of implied duty of good faith and fair dealing. Soward filed his Complaint on December 10, 2010 and Becnel filed his Complaint on March 9, 2011. These cases arise out of a tax shelter scheme known as the Bond Linked Issue Premium Structure Strategy ("BLIPS Strategy"), which the parties carried out between September 1999 and May 2000. Deutsche Bank argues that each of Soward's and Becnel's claims is time-barred as well as insufficient as a matter law. Deutsche Bank now moves to dismiss Soward's Amended Complaint and Becnel's Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons given below, these two cases are dismissed in their entirety.

II. BACKGROUND*fn1

A. The BLIPS Strategy

Soward and Becnel claim that Deutsche Bank conspired with Presidio Growth LLC and Presidio Advisory Services, LLC (collectively "Presidio") to defraud them by inducing them to invest in "investment program[s]" called "Alverstone Strategic Investment Fund" ("Alverstone") and "Hubbard Strategic Investment Fund" ("Hubbard"), respectively, and to charge them fees for loans, to be supplied by Deutsche Bank, that never existed.*fn2 What Soward and Becnel refer to as an "investment program" is actually an illegal tax shelter known as the BLIPS Strategy.*fn3 On December 21, 2010, Deutsche Bank entered into a non-prosecution agreement admitting wrongdoing in connection with the BLIPS strategy.*fn4 In the NPA, Deutsche Bank admitted that "the BLIPS transactions were designed to enable BLIPS investors to claim a purported tax benefit . . . . The BLIPS transactions were designed by KPMG and Presidio to create the impression that the loans [supplied by Deutsche Bank] had an unusual premium structure at an interest rate well above prevailing market rates."*fn5 As part of the tax shelter strategy, the BLIPS customer and Deutsche Bank would enter into a series of interest rate swaps, which had the net effect of "'convert[ing] the loans to variable-rate loans, at market rates, with no premium.'"*fn6 During these transactions, Deutsche Bank "'took steps to have the BLIPS series of transactions approved with [Deutsche Bank].'"*fn7 "'[Deutsche Bank's] credit reports, for example, falsely identified the primary purpose of BLIPS as providing the investor with an opportunity to make profits based on the potential depreciation of emerging market currencies.'"*fn8

1. Soward and the BLIPS Strategy

As part of the BLIPS Strategy,*fn9 Soward entered into a credit agreement ("Soward Credit Agreement") with Deutsche Bank for loans totaling $10.4 million on or about September 3, 1999.*fn10 Deutsche Bank then opened an account for Voltaire, LLC ("Voltaire"), a limited liability company solely owned by Soward, which Presidio Growth LLC and Presidio Advisory Services, LLC (collectively "Presidio") formed for Soward.*fn11 Soward deposited $224,250.00 into the Voltaire account to serve as collateral for the loans Deutsche Bank was supposed to supply.*fn12 Approximately three weeks after Soward entered into the Soward Credit Agreement, Soward entered into an assignment and assumption agreement ("Soward Assignment Agreement") and assigned Voltaire's rights in the Soward Credit Agreement to the Alverstone Strategic Investment Fund.*fn13 Soward claims that the Fund was purportedly managed by Presidio but was actually under the control of Deutsche Bank.*fn14 The Voltaire and Alverstone accounts were closed by Deutsche Bank on May 15, 2000.*fn15 Soward alleges that the loan between Deutsche Bank and Voltaire was a sham and that Deutsche Bank and Presidio "defrauded Soward by charging him fees and interest upon the fraudulent representation that there was a bona fide loan in place."*fn16

2. Becnel and the BLIPS Strategy

Becnel's participation in the BLIPS strategy is nearly identical to Soward's. On or about September 12, 1999, Becnel entered into a credit agreement ("Becnel Credit Agreement") with Deutsche Bank for a loan totaling eighty million dollars.*fn17 Becnel then opened an account at Deutsche Bank for Jardine Ventures, LLC ("Jardine"), a limited liability company created by Presidio and solely owned by Becnel, and deposited $2.1 million into the account as collateral for the eighty million dollar loan.*fn18 Approximately three weeks after Becnel executed the credit agreement, Becnel executed an assignment and assumption agreement ("Becnel Assignment and Assumption Agreement"), assigning Jardine's rights to the Becnel Credit Agreement to Hubbard Strategic Investment Fund.*fn19 The Jardine and Hubbard accounts were closed by Deutsche Bank on or about May 15, 2000.*fn20 As with Soward, Becnel claims that the loan from Deutsche Bank was a sham.*fn21 Becnel, like Soward, alleges that because "[c]ontrol of the funds never passed from Deutsche Bank to [Becnel] . . . there was no legitimate basis for the fees charged by Deutsche Bank and Presidio."*fn22

B. The Class Actions

On January 28, 2005, Becnel filed claims "as lead plaintiff on behalf of others similarly situated against Deutsche Bank, Presidio, KPMG, Sidley Austin and others in a class action law suit."*fn23 Becnel v. KPMG, LLP, et al. was filed in the Circuit Court of Clark County, Arkansas and later removed to the United States District Court for the Western District of Arkansas.*fn24 Class certification was denied on August 9, 2005; the case was dismissed without prejudice on September 12, 2005.*fn25 On September 2, 2005, Kottler v. Deutsche Bank AG, et al. was filed in the United States District Court for the Southern District of New York involving the same investment program.*fn26 Becnel became a member of the Kottler class action.*fn27 Class certification was denied on March 29, 2010.*fn28

III. APPLICABLE LAW

A. Statute of Limitations and New York's Borrowing Statute

"When diversity of citizenship is the basis of jurisdiction, a federal court must look to the statute of limitations of the state in which it sits."*fn29 "New York courts generally apply New York's statute of limitations even when the injury giving rise to the action occurred outside New York. This general rule, however, is subject to a traditional statutory exception, New York's 'borrowing' statute."*fn30

Under New York's borrowing statute,*fn31 "when a nonresident plaintiff sues upon a cause of action that arose outside of New York, the court must apply the shorter limitations period, including all relevant tolling provisions, of either:

(1) New York; or (2) the state where the cause of action accrued."*fn32

"For the purposes of the borrowing statute, a cause of action accrues where the injury is sustained rather than where the defendant committed the wrongful acts."*fn33 "Hence, an action by a nonresident on a foreign cause of action is untimely if it is barred under the law of either New York or the state where the injury occurred."*fn34 "In cases involving economic harm, [the place where the injury occurred] is normally the state of plaintiff's residence."*fn35

The burden of proving that a particular statute of limitation has expired falls on the defendant. However, the plaintiff bears the burden of proving that a particular statute of limitation has been tolled. Finally, when another state's statute of limitations is considered pursuant to N.Y. C.P.L.R. 202, the party seeking to benefit therefrom bears the burden of proof.*fn36

B. American Pipe Tolling and Cross-Jurisdictional Tolling

In American Pipe and Construction Co. v. Utah, the Supreme Court held, in the context of exclusively federal claims, that "the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action."*fn37 "Once the statute of limitations has been tolled, it remains tolled for all members of the putative class until class certification is denied."*fn38 The Second Circuit has held that state law applies to tolling issues.*fn39 However, [s]ome states that have adopted American Pipe tolling have refused to expand the doctrine to include 'cross-jurisdictional class action tolling,' thereby declining to apply the tolling doctrine in situations where they otherwise would have if the original class action had been filed in its own jurisdiction . . . . Only a small fraction of states have addressed the cross-jurisdictional issue, though, and there is no clear consensus among them . . . . As a result, federal diversity courts are often left to predict how a state's highest court would rule.*fn40

The Second Circuit very recently instructed that "a federal court evaluating the timeliness of state law claims must look to the law of the relevant state to determine whether, and to what extent, the statute of limitations should be tolled by the filing of a putative class action in another jurisdiction."*fn41 When "a question of state law has not been conclusively resolved by those courts, [the] general practice is to look next to the law of the circuit in which the state is based."*fn42

IV. DISCUSSION

Because of New York's borrowing statute,*fn43 the threshold issue is where the causes of action accrued. Soward resided in California at all relevant times*fn44 and therefore his claims accrued in California. Soward's claims will be time-barred under New York's borrowing statute if they are untimely under either New York or California law after accounting for each state's tolling provisions.*fn45

Becnel is a Florida resident and his claims accrued in Florida.*fn46 Becnel's claims will be time-barred if they are untimely under either New York or Florida's statute of limitations.*fn47

A. Soward's Fraud-Based and Fiduciary Duty-Based Claims

Under New York law, the statute of limitations for fraud is the greater of six years from the time of accrual or two years from the time the plaintiff discovered the fraud or could with reasonable diligence have discovered it.*fn48 This statute of limitations applies to Soward's allegations of fraud, aiding and abetting fraud and fraudulent concealment.*fn49 Soward's fiduciary duty-based claims, which include his claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, have the same statute of limitations.*fn50

Soward argues that his claims are timely under the accrual prong of section 213 because, due to the doctrine of continuous representation, the statute of limitations did not begin to run until May 15, 2000 when Deutsche Bank closed the Voltaire and Alverstone accounts.*fn51 Furthermore, Soward argues that the claims were tolled from January 28, 2005 to March 29, 2010 during the pendency of the Becnel and Kottler class actions.*fn52 Alternatively, Soward contends that his claims are timely under the second prong of section 213 -- the discovery prong -- because his claims did not accrue until November 18, 2003, when the Senate issued its report, and were tolled during the pendency of Becnel and Kottler.*fn53

1. Accrual Prong

Even accepting Soward's argument that the statute did not begin to run until the closing of the accounts, Soward filed this action on December 20, 2010 well after the six-year statute of limitations expired. In order for Soward's claims to be timely under this prong, the six-year statute of limitations must have been tolled by the continuous representation doctrine and cross-jurisdictional tolling. If either of these theories fail, Soward's claims will be untimely.

Whether or not Becnel and Kottler toll the statute of limitation in New York is a question of cross-jurisdictional tolling.*fn54 Few states have addressed cross-jurisdictional tolling,*fn55 and New York is not one of them. Deutsche Bank argues that New York does not allow cross-jurisdictional tolling and points to two unpublished, and ultimately unhelpful, New York Supreme Court cases.*fn56 Soward relies on Primavera Familienstifung v. Askin, where a court in this district, applying New York's borrowing statute, examined Connecticut's statute of limitations and tolling provisions.*fn57 Despite no Connecticut authority on point, the Primavera court held that Connecticutwould recognize cross-jurisdictional tolling because (1) there were no issues of forum shopping and (2) "federal interests should be considered where all of the litigation involved is occurring in the federal forum."*fn58 The Primavera court rejected defendant's contention that "cross-jurisdictional tolling may only apply where the state supplying the statute of limitations would recognize such tolling."*fn59 Soward claims that the federal interest in Becnel lies in the fact that the Becnel court found federal subject matter jurisdiction because there was a substantial, federal question to be decided.*fn60

Soward did not suggest any "federal interests" that would apply to the Kottler class action.

Soward's reliance on Primavera proves unavailing. The Second Circuit has recently made clear that the question of "whether, and to what extent, the statute of limitations should be tolled by the filing of a putative class action in another jurisdiction" is purely a question of state law.*fn61 Rather than considering "federal interests" and forum shopping, the Second Circuit looked solely at various sources of state law and, noting that it lacked "sufficient indicia of Virginia law," certified the question to the Supreme Court of Virginia.*fn62

None of the cases cited by Soward or Deutsche Bank, or indeed uncovered by this Court, answers the question as to whether New York would allow cross-jurisdictional tolling. Predicting how New York courts would rule on the issue of cross-jurisdictional tolling would be difficult. The few states that have considered the issue have been split in both their acceptance of cross-jurisdictional tolling and the rationale for their decision.*fn63 Furthermore, little authority exists as to how a federal court in this Circuit decides whether a state would allow cross-jurisdictional tolling when that state has not addressed the issue. Of the federal courts that have considered this issue, most have refused to extend the doctrine into a state that has yet to consider it.*fn64 In this regard, Primavera is in the minority of cases that have imported the doctrine into another jurisdiction's law before that jurisdiction has ruled on the issue. Moreover, Primavera's reliance on federal interests in reaching such a decision has recently been rejected by the Second Circuit.*fn65 In the face of these overwhelming precedents, I cannot say that New York would adopt cross-jurisdictional tolling and decline to import the doctrine into New York's law. This Court will therefore not toll New York's statute of limitations for the period when the Becnel and Kottler class certification status was pending. Without the benefit of cross-jurisdictional tolling, even if the statute of limitations did not begin to run until the Voltaire and Alverstone accounts closed on May 15, 2000, Soward's fraud-based and fiduciary duty claims are time barred under the accrual prong.

2. Discovery Prong

Soward argues that even if his claims are untimely under the accrual prong, they are timely under the second prong of section 213 -- the discovery prong -- because he could not have reasonably discovered the fraud until November 18, 2003, when the Senate Permanent Subcommittee on Government Affairs issued its report after an investigation into the tax shelter industry.*fn66 However, without the benefit of cross-jurisdictional tolling, even if the discovery rule applies, Soward's fraud claims were filed well after the two-year statute of limitations expired. Soward's fraud claims are untimely under both prongs of section 213 and therefore time-barred under New York law. Pursuant to the borrowing statute, this Court will apply the shorter of either New York's or California's statute of limitations.*fn67

Because Soward's fraud claims are time-barred under New York law, they are time-barred regardless of their status under California law.

B. Becnel's Fraud-Based and Fiduciary Duty-Based Claims

1. Accrual Prong

As with Soward, Becnel claims that, due to the doctrine of continuous representation, the statute of limitations on his fraud-based and fiduciary-duty based claims did not begin to run under the accrual prong until May 15, 2000, when Deutsche Bank closed the Jardine and Hubbard accounts.*fn68 However, without the benefit of cross-jurisdictional tolling, even accepting Becnel's argument that the statute did not begin to run until the closing of the accounts, Becnel filed his individual action on March 9, 2011 well after New York's six-year statute of limitations expired. Therefore, Becnel's fraud-based and fiduciary duty claims are time barred under the accrual prong.

2. Discovery Prong

Unlike Soward, who claims that he could not have reasonably discovered the fraud until the Senate Subcommittee issued its report in 2003,*fn69 Becnel claims that inquiry notice was not triggered until December 21, 2010 when Deutsche Bank entered into the NPA.*fn70 In support of this argument, Becnel points to the Kottler class action*fn71 and argues that the Kottler court found that the loans were legitimate and therefore "[a]t the very least, there are disputed factual questions about when Plaintiffs were put on notice that the banks charged fees for a loan premium which did not exist."*fn72

The Kottler decision does not support Becnel's contention that "even reasonable diligence could not have led Plaintiffs to discover that the DB loan premium was not legitimate."*fn73 Becnel's interpretation of and reliance on Kottler are inaccurate on multiple levels. First, the Kottler court never found that Deutsche Bank provided the loans. Becnel mistakenly believes that the Kottler court's statement of facts, which was taken from the plaintiffs' complaint, is equivalent to the court finding those facts to be true.*fn74 This, of course, is incorrect. Second, the Kottler court dismissed the fraud claims because the pleadings were insufficient to meet Rule 9(b)'s particularity requirement and not because the court found that "there was nothing fraudulent about the financial mechanism used to generate the tax losses." Moreover, the "financial mechanism used to generate the tax losses" refers to the securities transactions the parties used to implement the tax shelters and not the loans at issue in this case.

For these reasons, Becnel's reliance on Kottler provides no support for his argument regarding notice. Other than Kottler, Becnel does not provide any further reasons as to why the discovery rule saves his Complaint from being untimely.*fn75 Without the benefit of cross-jurisdictional tolling, Becnel's fraud claims are untimely under both prongs of section 213 and therefore time-barred under New York law. Pursuant to the borrowing statute, this Court will apply the shorter of either New York's or Florida's statute of limitations.*fn76 Because Becnel's fraud claims are time-barred under New York law, they are time-barred regardless of their status under Florida law.

C. Soward's Claims for Breach of Contract and Breach of Implied Duty of Good Faith and Fair Dealing Soward claims that Deutsche Bank breached Section 2.01 of the Soward Credit Agreement wherein Deutsche Bank agreed to make available to the borrower on the borrowing date an amount equal to $10.4 million when in fact the loan was a sham and never occurred.*fn77 For similar reasons, Soward also claims that Deutsche Bank breached the Assignment Agreement between Soward and Presidio.*fn78 New York's statute of limitations for a breach of contract is six years and is measured from the time of the breach.*fn79 Soward argues that the New York statute of limitations began to run on May 15, 2000, upon the closing of his accounts at Deutsche Bank.*fn80 However, because I have declined to toll the statute of limitations during the pendency of the Kottler and Becnel class actions, Soward's contract claims are also time-barred under New York's six-year statute of limitations. As with his fraud-based claims, Soward's contract claims are time-barred regardless of their status under California law because the borrowing statute looks to the shorter of New York or California's statute of limitations, including tolling periods.*fn81

D. Becnel's Claims for Breach of Contract and Breach of Implied Duty of Good Faith and Fair Dealing

Similar to Soward, Becnel claims that Deutsche Bank breached Section 2.01 of the Becnel Credit Agreement and its implied duty of good faith and fair dealing by representing the purported eighty million dollar loan was a real loan, by making withdrawals from the Jardine and Hubbard accounts for the sham loan and by entering into the Becnel Assignment Agreement.*fn82 As mentioned above, New York's statute of limitations for breach of contract is six years from the time of the breach. Becnel has not provided the Court with a date when he believes the contract was breached.*fn83 However, in arguing that his Complaint was timely filed, Becnel does state that "under the continuing representation doctrine, the New York statute of limitations began to run on May 15, 2000."*fn84 Even if the Court uses this date, without cross-jurisdictional tolling, Becnel's contract claims were filed well after the six year statute of limitations expired. As with Becnel's other claims, his contract claims are time-barred regardless of their status under Florida law because the borrowing statute will use the shorter of New York or Florida's statute of limitations, including tolling periods.*fn85

E. Leave to Amend Standard

Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that other than amendments as a matter of right, "a party may amend its pleading only with the opposing party's written consent or with the court's leave."*fn86 Although "[t]he Court should freely give leave when justice so requires,"*fn87 it is "within the sound discretion of the district court to grant or deny leave to amend."*fn88 "When a motion to dismiss is granted, the usual practice is to grant leave to amend the complaint."*fn89 However, "it is well established that leave to amend a complaint need not be granted when amendment would be futile."*fn90

In response to Deutsche Bank's allegation that Soward has removed from his Amended Complaint all references to the BLIPS tax shelter as a "strategic slight of hand," Soward asks the Court for leave to file a second amended complaint in order to incorporate the original complaint, which does refer to the BLIPS Strategy.*fn91 This request is denied. Because Soward's claims must be dismissed as time-barred, amending the Amended Complaint would be futite and is therefore denied.

V. CONCLUSION

For the foregoing reasons, Deutsche Bank's motions to dismiss are granted. The Clerk of the Court is directed to close these motions (10 Civ. 9248, docket no. 11; 11 Civ. 01614, docket no. 7) and these cases.

SO ORDERED.


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