Opinion
02 Civ. 7751 (SAS)
December 3, 2003
Charles H. Lichtman, Esq., Berger Singerman P.A., Fort Lauderdale, Florida, for Plaintiff
Susan G. Rosenthal, Esq., Brown Raysman Millstein Felder Steiner LLP, New York, NY, for Plaintiff
John A. Brock, Esq., Michael R. Bromwich, Esq., Tommy P. Beaudreau, Esq., Fried, Frank, Harris, Shriver Jacobson, New York, NY, for Defendant
OPINION AND ORDER
In a complaint filed September 26, 2002, American Tissue, Inc. ("ATI"), a Chapter 11 bankruptcy debtor-in-possession, sued its former accountant Arthur Andersen, L.L.P. for Andersen's allegedly negligent certification of certain ATI financial (mis)statements. By Opinion and Order dated May 5, 2003, I granted Andersen's motion to dismiss ATI's claims. See American Tissue, Inc. v. Arthur Andersen, L.L.P., 275 F. Supp.2d 398 (S.D.N.Y. 2003). By order dated May 27, 2003, I subsequently granted ATI leave to replead. ATI filed an amended complaint, and Andersen again moves to dismiss. For the reasons that follow, Andersen's motion is granted and the case is dismissed.
I. THE AMENDED COMPLAINT
The core allegations in this lawsuit are fully described in my prior Opinion and Order, familiarity with which is presumed. In short, ATI retained Andersen to audit its year-end consolidated financial statements for the years 1998, 1999, and 2000, and to review its 2001 quarterly financials. Nonetheless, ATI's financial statements for 1999, 2000, and the first three quarters of 2001 "were riddled with inaccuracies." American Tissue, 275 F. Supp.2d at 402.
Those inaccuracies, it is alleged, were directly attributable to Mehdi Gabayzadeh and Nourollah Elghanayan, who, "directly or indirectly through trusts or by immediate family member stock ownership," "owned and controlled" ATI. Amended Complaint ("Compl.") ¶ 19. ATI now accuses Andersen, in essence, of failing to prevent — and, to some extent, of facilitating — a fraud perpetrated by ATI's sole shareholders and directors.
Although ATI's initial complaint did not clearly explain that the misstatements it was suing Andersen for were the same misstatements that Elghanayan and Gabayzadeh caused to be made — leaving it instead for the Court to compare that initial complaint against an "Insider Complaint" filed by ATI against Elghanayan and Gabayzadeh — ATI's amended complaint removes any doubts:
[I]n August 2002, ATI . . . filed suit against Gabayzadeh, Elghanayan and certain non-debtor affiliates alleging various claims predicated upon financial abuses delineated in that complaint, known as the "Insider Complaint." While it is true that the initial Insider Complaint asserts claims that concern financial wrongdoing, ATI asserts that, the misdeeds . . . did not come solely at the hands of Gabayzadeh and Elghanayan. Rather, ATI submits that any actual accounting improprieties were the product of Andersen. . . . To be clear. ATI alleges that Andersen assisted in orchestrating, knew about. and facilitated the accounting improprieties. . . . [T]he accounting improprieties could not have even occurred without the facilitation and substantial assistance of Andersen, given the fact [that] ATI had certain public reporting requirements. . . .Id. ¶¶ 20-22 (emphasis added). That ATI is accusing Andersen of ratifying and facilitating Gabayzadeh and Elghanayan's malfeasance is further clarified by ATI's repeated reference to a "comparative negligence" theory of liability, under which Gabayzadeh, Elghanayan, and Andersen are jointly and severally liable for the misstatements in ATI's financials. See id. ¶¶ 38-45 (asserting a claim "for professional malpractice based upon [the] doctrine of comparative negligence").
II. LEGAL STANDARD
Federal courts may only adjudicate actual cases or controversies.See U.S. Const, art. Ill, § 2. "Because standing is jurisdictional under Article III of the United States Constitution, it is a threshold issue in all cases since putative plaintiffs lacking standing are not entitled to have their claims litigated in federal court."Shearson Lehman Hutton. Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir. 1991). Thus, a challenge to a plaintiff's constitutional standing to sue amounts to an objection to the court's subject matter jurisdiction.See Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000) ("A case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it.").
"It is well ingrained in the law that subject-matter jurisdiction can be called into question either by challenging the sufficiency of the allegation or by challenging the accuracy of the jurisdictional facts alleged." Gwaltney of Smithfield, Ltd, v. Chesapeake Bay Found., Inc., 484 U.S. 49, 68 (1987) (Scalia, J., concurring in part and concurring in the judgment) (citations omitted). See also Robinson v. Government of Malaysia, 269 F.3d 133, 140 (2d Cir. 2001) ("the defendant may challenge either the legal or the factual sufficiency of the plaintiff's assertion of jurisdiction, or both."). Where a defendant objects to a plaintiff's jurisdictional pleading, the standard of review is the same as the familiar Rule 12(b)(6) requirement: "the court must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of plaintiff." Sweet v. Sheahan, 235 F.3d 80, 83 (2d Cir. 2000). "But where evidence relevant to the jurisdictional question is before the court, 'the district court . . . may refer to [that] evidence.'" Robinson, 269 F.3d at 140 (alterations in original) (quoting Makarova, 201 F.3d at 113). Thus, "[i]n resolving the question of jurisdiction, the district court can refer to evidence outside the pleadings and the plaintiff asserting subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it exists." Luckett v. Bure, 290 F.3d 493, 496-97 (2d Cir. 2002).
III. DISCUSSION
ATI's initial complaint was dismissed because it ran afoul of this Circuit's Wagoner rule.
The rationale underlying the Wagoner rule derives from the fundamental principle of agency that the misconduct of managers within the scope of their employment will normally be imputed to the corporation. Because management's misconduct is imputed to the corporation, and because a [debtor-in-possession] stands in the shoes of the corporation, the Wagoner rule bars a [debtor-in-possession] from suing to recover for a wrong that he himself essentially took part in.Wight v. Bankamerica Corp., 219 F.3d 79, 86-87 (2d Cir. 2000). Thus, I held that ATI "could have saved its case only by showing that (a) Andersen's alleged malpractice was unrelated to the misconduct charged in the Insider Complaint, or (b) that the insiders' misconduct is not fairly attributable to ATI." American Tissue, 275 F. Supp.2d at 406. Because ATI was apparently unable to make those allegations, its Amended Complaint fares no better than the first and must be dismissed.
Indeed, just a few months after my previous opinion in this case, the Second Circuit considered the Wagoner rule under very similar facts, with the result was the same. In re The Bennett Funding Group, 336 F.3d 94 (2d Cir. 2003), involved a company that was used as the vehicle for "the greatest Ponzi scheme on record." Id. at 97. The bankruptcy trustee sued the defunct company's former accounting firm (Andersen) "on the theory that they should have detected the fraud." Id. at 96. The Court unequivocally held that a bankruptcy trustee — and thus a debtor-in-possession, see American Tissue, 275 F. Supp.2d at 404, n. 6 ("in this context, what is true of the bankruptcy trustee is equally true of a debtor-in-possession") — has no standing to sue under those facts.
Where a corporation's management and a third party collaborated in the fraudulent scheme, the [debtor-in-possession] can sue only if it can establish that there has been damage to the corporation apart from the damage to the third-party creditors. Even if there is damage to the corporation itself, the [debtor-in-possession] cannot recover if the malfeasor was the corporation's sole shareholder and decision maker.Bennett Funding, 336 F.3d at 100 (citation omitted). Here, ATI has alleged that Andersen collaborated with ATI's principals in issuing false financial statements. That being so, ATI must establish harm to the corporation apart from harm to third-party creditors. But, to the contrary, ATI purports to bring these claims on behalf of those creditors. See Compl. ¶ 1 ("All claims asserted herein are either personal to ATI, or brought on behalf and for the benefit of the bankruptcy estate's creditors"). This is forbidden by the holding in Wagoner, "[A] bankruptcy [debtor-in-possession] has no standing generally to sue third parties on behalf of the estate's creditors, but may only assert claims held by the bankrupt corporation itself. . . . [Where] a bankrupt corporation has joined with a third party in defrauding its creditors, the [debtor-in-possession] cannot recover against the third party for the damage to the creditors." Wagoner, 944 F.2d at 118. Moreover, even if ATI could demonstrate some harm to the corporation itself, there is no question that the insiders were ATI's sole shareholders and decision makers. See American Tissue, 275 F. Supp.2d at 401 ("In addition to owning the company, Elghanayan served as ATI's Chairman of the Board and Gabayzadeh served as its President and Chief Executive Officer."). Thus, recovery is barred in all events.
In the face of such stark and controlling precedent, ATI does not dispute that the Wagoner rule precludes its claims. Rather, bizarrely, it argues that I should simply discard the Wagoner rule, notwithstanding the fact that the Court of Appeals in Bennett Funding reaffirmed the rule's application on nearly identical facts just five months ago. "[T]he Wagoner Rule [sic] is, in fact, at odds with the on-point New York comparative negligence statute and the applicable cases interpreting that statute. In essence, to boil it down, if Andersen owed ATI a duty of care to ATI [sic] and that duty was breached, the Court will have to comparatively apportion the amount of fault between ATI and Andersen, based upon their respective degrees of misconduct." ATI's Memorandum of Law in Opposition to Andersen's Motion to Dismiss Amended Complaint ("ATI Mem.") at 2.
This argument completely misapprehends the nature of theWagoner rule. The Wagoner rule is astanding rule — it says that a bankrupt corporation cannot sue a third party for fraud that the corporation itself participated in because that claim actually accrues to the corporation's creditors. The comparative fault rule is a damages rule — it says that a defendant may be liable for conduct even though the plaintiff herself was also at fault; the defendant's liability is simply limited to that percentage of the damages that she is responsible for.See N.Y. C.P.L.R. § 1411 (2003).
These two rules are not at odds. The Wagoner rule certainly does not "serve as a 100% defense . . . to a negligence claim." ATI Mem. at 7. It only serves as a defense to the bankrupt corporation or its trustee asserting that claim. ATI's creditors are free to pursue these claims against Andersen, who may then be responsible for its comparative share of the damages. Alternatively, ATI can seek a judgment from Gabayzadeh and Elghanayan in the Insider Action, who may, in turn, seek contribution from Andersen. But ATI may not sue Andersen directly. ATI has no standing to assert such claims, and I have no jurisdiction to adjudicate them.
IV. CONCLUSION
For the foregoing reasons, Andersen's motion is granted and the case is dismissed with prejudice. The Clerk is directed to close this motion [#31] and this case.
SO ORDERED.