Opinion
012824-09.
March 1, 2011.
The following papers having been read on these motions:
Notice of Motion, Affirmation in Support and Exhibits...............................x Affidavit in Support of B. Kansler..................................................x Affidavit in Support of D. Cutler and Exhibits......................................x Memorandum of Law in Support........................................................x Notice of Motion....................................................................x Affidavit of S. Kleinman in Support.................................................x Affirmation in Support and Exhibits.................................................x Memorandum of Law in Support........................................................x Affidavits in Opposition and Exhibits...............................................x Affidavits in Opposition and Exhibits...............................................x Affirmation in Further Support and Exhibits.........................................x Reply Affirmation...................................................................x Memorandum of Law in Reply/Further Support..........................................x Memorandum of Law in Further Support................................................xThis matter is before the Court for decision on 1) the motion filed by Defendants Bonnie J. Kansler, CPA ("Kansler") and Sejour Associates, P.C. ("Sejour") on August 18, 2010, and 2) the motion filed by Defendants Fairfield Pagma Associates, LP ("Fairfield Pagma"), Seyfair LLC ("Seyfair") and Seymour Kleinman ("Kleinman") (collectively "Fairfield Pagma Defendants") on October 20, 2010, both of which were submitted on November 18, 2010. For the reasons set forth below, the Court grants the motions and dismisses the Amended Complaint against the moving Defendants.
Plaintiff voluntarily dismissed his claims against Defendant Debra Weiner with prejudice pursuant to a Stipulation of Discontinuance dated September 8, 2010 (Fairfield Pagma Ds' Memorandum of Law at n. 1).
BACKGROUND
A. Relief Sought
Defendants Kansler and Sejour move for an Order, pursuant to CPLR § 3212(b), granting summary judgment in their favor.
The Fairfield Pagma Defendants move for an Order, pursuant to CPLR § 3212, granting summary judgment in their favor.
Plaintiff Eugene Staffenberg ("Plaintiff" or "Staffenberg") oppose the motions.
B. The Parties' Background
This action arises from the Plaintiff's $500,000 investment of funds with Fairfield Pagma in or about January 31, 2008, and Fairfield Pagma's investment of those funds with Bernard L. Madoff Investment Securities ("BMLIS"). Plaintiff alleges that he made the investment on the recommendation of Defendant Kansler, his Certified Public Accountant ("CPA"), whose opinion Plaintiff sought regarding an investment vehicle for him which would return at least 5% per annum and permit him to withdraw 4% per annum while preserving the principal. Plaintiff received three $5,000 distributions from Fairfield Pagma in April, July and October of 2008, representing profits on his investment.
On or about January 2, 2009, Plaintiff received a letter dated December 29, 2008 from Fairfield Pagma informing him, inter alia, that:
On December 11, 2008, the Securities and Exchange Commission and federal prosecutors commenced securities fraud actions against Madoff Securities and Bernard Madoff individually. The assets of Madoff Securities, including any remaining customer funds, have been frozen and seized as part of those actions. A trustee has been appointed by the United States District Court for the Southern District of New York to collect, liquidate and distribute the proceeds from those assets pursuant to a claims process that should be announced shortly. As has been reported, the trustee may seek to recover distributions Madoff Securities made to customers and include those recoveries in the pool of assets to be shared by the customers Madoff Securities defrauded.
Ex. 3 to Amended Complaint ("Complaint") (Ex. A to Weisburd Aff. in Supp.)
The Complaint asserts eight causes of action. It is predicated on allegations that, although Kansler knew that Plaintiff wished to protect his investment principal, she advised him to invest in Fairfield Pagma without disclosing that it was a hedge fund that pooled its monies to invest solely with BLMIS. Kansler, rather than recommending a fund that was invested in a pool of investments to minimize risk, recommended an investment vehicle that was not diversified, and failed to advise Plaintiff that there was a substantial risk of loss should BLMIS lose all of its money or go out of business.
The four causes of action asserted against Kansler sound in professional malpractice/negligence, breach of contract, breach of fiduciary duty and breach of implied covenant of good faith. Plaintiff also seeks to hold Defendant Kansler's employer, Sejour, liable on the theory of respondent superior.
With respect to the Fairfield Pagma Defendants, Plaintiff alleges, inter alia, that "the investments of one hundred percent (100%) of the pooled funds of the limited partnership with BLMIS was not a prudent investment" (Compl. at ¶ 63). The four causes of action asserted against the Fairfield Pagma Defendants sound in breach of fiduciary duty, breach of contract, fraud and breach of implied covenant of good faith and fair dealing by a) failing to disclose the fact that the funds were solely invested in one fund i.e., BLMIS, which was later revealed to be a Ponzi scheme; and b) advising Plaintiff that it was able to pay a very high yield return because the fund was allegedly invested in "Treasuries" (Compl. at ¶ 78).
Kansler affirms that she has been a CPA since the late 1970s, and was Plaintiff's accountant from the early 1980s until December of 2008. The scope of her relationship was limited to the preparation of Plaintiff's tax returns. Kansler never acted as Plaintiff's investment advisor, or represented herself or Sejour to be investment advisors. There was no retainer agreement between Plaintiff and Kansler for providing investment information, and she never received a fee or commission in connection with any investment information.
Kansler avers, further, that in late 2007, Plaintiff called Kansler to discuss his tax returns. During that conversation, Plaintiff asked Kansler for investment advice regarding the proceeds from the sale of his home. Kansler told Plaintiff where she invested her money and said that, if Plaintiff was interested, Plaintiff could invest in BMIS through Fairfield Pagma, the partnership operated by Kansler's uncle.
Plaintiff testified at his deposition on May 7, 2009 that he 1) performed no independent investigation of Fairfield Pagma before he invested; 2) would not have done any independent investigation if Kansler had given him the name of a different investment vehicle; 3) would have put "blind faith" in any investment vehicle that Kansler recommended; 4) had "[no] understanding whatsoever" of how Fairfield Pagma funds were invested and never asked anyone; 5) never told anyone his requirements regarding how his funds should be invested; 6) did not ask who was making the decisions as to where Fairfield Pagma funds were invested; and 7) did not care about these decisions, as Plaintiff "only wanted to get 5 percent" (Ex. E to Miller Aff. in Supp. at pp. 60, 68-69).
C. The Parties Positions
The Kansler/Sejour Defendants contend, inter alia, that, 1) as the causes of action sounding in breach of fiduciary duty and breach of contract arise from the same set of facts as the malpractice cause of action, and do not allege distinct damages, they are duplicative and must be dismissed; 2) there was no fiduciary relationship between Sejour and Plaintiff; and 3) assuming, arguendo, the existence of a fiduciary claim, Plaintiff's claim is not viable because Plaintiff did not perform an independent investigation as to the risks associated with the investment and Sejour did not conceal pertinent information about BMIS.
The Fairfield Pagma Defendants submit, inter alia, that 1) Plaintiff's breach of contract claim fails as a matter of law because the Fairfield Pagma Defendants never entered into a contract that required them to "prudently and properly" invest limited partnership assets (Fairfield Pagma Ds' Memorandum of Law at p. 10); 2) although Kleinman is listed on the bottom of the LP Enrollment Form, nothing in that document suggests that he was personally assuming any responsibility to manage Fairfield Pagma's assets; 3) the Fairfield Pagma Defendants did not owe Plaintiff any fiduciary duty to disclose to Plaintiff where or by whom its assets were invested; and 4) the fraud claim cannot survive because Weiner did not knowingly make a misrepresentation, and Plaintiff did not rely on Weiner's statements.
Plaintiff oppose the motions, submitting, inter alia, that 1) as a limited partner of Fairfield Pagma, Defendants Seyfair, Fairfox and Kleinman owed a fiduciary duty to Plaintiff to act reasonably and prudently with regard to this investment, and breached that duty by disbursing certain funds to themselves; 2) the failure of Fairfield Pagma's General Partners to disclose to Plaintiff that his entire investment was invested with BLMIS creates a triable issue of fact whether there was an additional breach of fiduciary duty; 3) Defendants breached the implied covenant of good faith by accepting Plaintiff's investment, failing to deposit a portion of that investment with BLMIS and using Plaintiff's money, instead, to provide bonuses to the General Partners; and 4) with respect to the breach of contract claim, Plaintiff has raised a triable issue of fact as to whether Plaintiff's funds were invested in the manner required by the Limited Partnership Agreement.
RULING OF THE COURT
A. Summary Judgment Standards
To grant summary judgment, the court must find that there are no material, triable issues of fact, that the movant has established his cause of action or defense sufficiently to warrant the court, as a matter of law, directing judgment in his favor, and that the proof tendered is in admissible form. Menekou v. Crean, 222 A.D.2d 418, 419-420 (2d Dept 1995). If the movant tenders sufficient admissible evidence to show that there are no material issues of fact, the burden then shifts to the opponent to produce admissible proof establishing a material issue of fact. Id. at 420. Summary judgment is a drastic remedy that should not be granted where there is any doubt regarding the existence of a triable issue of fact. Id.
B. Malpractice
A cause of action for accounting malpractice contemplates a failure to exercise due care and proof of a material deviation from recognized and accepted professional accounting standards. Friedman v. Anderson, 23 A.D.3d 163, 165 (1st Dept. 2005), rearg. den., 2006 N.Y. App. Div. LEXIS 592 (1st Dept. 2006). Plaintiff must establish that defendant departed from generally accepted accounting principles and the departure was the proximate cause of his injury. Kristina Denise Enterprises v. Arnold, 41 A.D.3d 788, 788 (2d Dept. 2007).
C. Breach of Contract
A cause of action for breach of contract requires allegations of the existence of a contract, plaintiff's performance under the contract, defendant's breach of the contract and resulting damages. JP Morgan Chase v. J.H. Elec. of New York, Inc., 69 A.D.3d 802, 803 (2d Dept. 2010).
A breach of contract claim predicated on a professional's failure to exercise due care or to abide by general professional standards is duplicative of a malpractice claim. See Kvetnaya v. Tylo, 49 A.D.3d 608, 609 (2d Dept. 2008) (trial court properly dismissed cause of action alleging breach of contract and breach of fiduciary duty where those causes of action arose from the same facts as the legal malpractice cause of action, did not allege distinct damages and were duplicative of legal malpractice cause of action). See also Mitschele v. Schultz, 36 AD3d 249, 252 (1st Dept. 2006) (where breach of contract claim was merely a rephrasing of malpractice claim, 3 year statute of limitation applied, regardless of whether underlying theory was based in contract or tort).
D. Fraud
The essential elements of a cause of action sounding in fraud are 1) a misrepresentation or a material omission of fact which was false and known to be false by defendant, 2) made for the purpose of inducing the other party to reply upon it, 3) justifiable reliance of the other party on the misrepresentation or material omission, and 4) injury. Colasacco v. Robert E. Lawrence Real Estate, 68 A.D.3d 706 (2d Dept. 2009), quoting Orlando v. Kukielka, 40 A.D.3d 829, 831 (2d Dept., 2007).
CPLR 3016(b) provides, in relevant part, that "[w]here a cause of action or defense is based upon misrepresentation, fraud, mistake. . . . the circumstances constituting the wrong shall be stated in detail." The complaint must sufficiently detail the allegedly fraudulent conduct. See Polonetsky v. Better Homes Depot, Inc. 97 N.Y.2d 46, 55 (2007).
E. Good Faith and Fair Dealing
Every contract contains an implied covenant of good faith and fair dealing which is breached when a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement. Atlas Elevator Corp. v. United Elevator Group, Inc., 77 A.D.3d 859, 861 (2d Dept. 2010) (citations and internal quotation marks omitted).
F. Breach of Fiduciary Duty
To state a claim for breach of fiduciary duty, a plaintiff must plead the existence of a fiduciary relationship between the parties, misconduct by the breach of that duty and damages directly caused by the defendant's misconduct. Kurtzman v Bergstol, 40 A.D.3d 588, 590 (2d Dept. 2007), subseq. app. at 62 AD3d 758 [2nd Dept. 2009]. A cause of action for breach of fiduciary duty based on the same allegations as the breach of contract claim must be dismissed. LaSalle Hotel Lessee, Inc. v. Marriott Hotel Services, Inc., 29 AD3d 464, 465 [1st Dept. 2006), rearg. den., 2006 N.Y. App. Div. LEXIS 9859 (1st Dept. 2006).
The duty owed by an accountant to a client is generally not fiduciary in nature. Able Energy, Inc. v. Marcum Kliegman LLP, 69 A.D.3d 443, 444 (1st Dept. 2010), citing DG Liquidation, Inc. v. Anchin, Block Anchin, LLP, 300 A.D.2d 70, 71 (1st Dept. 2002), except in certain limited circumstances, not here present, such as where the accountant engages in affirmative fraud on the client. Block v. Razorfish, Inc., 121 F. Supp. 2d 401, 403 (S.D.N.Y. 2000); Kanev v. Turk, 187 A.D.2d 395 (1st Dept. 1992) (complaint alleging breach of fiduciary duty sufficient where accountant advised plaintiff that she need not secure loan, despite accountant's knowledge that borrower was insolvent).
A broker does not, in the ordinary course of business, owe a fiduciary duty to a purchaser of securities. Fekety v. Gruntal Co., 191 A.D.2d 370, 371 (1st Dept. 1993). See Fesseha v. TD Waterhouse Investor Servs., 305 A.D. 2d 268 (1st Dept. 2003) (claim for breach of fiduciary duty properly dismissed where plaintiff opened nondiscretionary trading account and relationship between plaintiff and defendant was merely that of broker and customer). Based on the allegations of the amended complaint, Fairfield Pagma was not retained by plaintiff to serve as his stockbroker.
Limited Liability Company Law § 409 provides that "a manager shall perform his or her duties as a manager in good faith and with a degree of care that an ordinary prudent person in a like position would use under similar circumstances." The manager of an LLC owes a fiduciary duty to operate the company in good faith and fairness, to avoid self-dealing and make full disclosure of all material facts. Bookhamer v. I. Karten-Bermaha Textiles Co., LLC, 52 A.D.3d 246 (1st Dept. 2008); Salm v. Feldstein, 20 A.D.3d 469, 470 (2d Dept. 2005). See also Nathanson v Nathanson, 20 A.D.3d 403, 404 (2d Dept. 2005) (allegations that manager engaged in self-dealing sufficient to state cause of action for breach of fiduciary duty). With respect to any causes of action dependent upon a fiduciary relationship, an informal fiduciary relationship is one founded upon trust or confidence reposed by one person in the integrity and fidelity of another, and may be found to exist, in appropriate circumstances, between close friends or where the confidence is based upon prior business dealings. Apple Records v. Capitol Records, 137 A.D.2d 50, 57 (1st Dept 1988). The "'exact limits' of such relationship are impossible of statement," Penato v. George, 52 A.D.2d 939, 942 (2d Dept 1976), app. dism. 42 N.Y.2d 908 (1977), and are "fact specific," Wiener v. Lazard Freres Co., 241 A.D.2d 114, 115 (1st Dept 1998).
G. Application of these Principles to the Instant Action
1. Review of the Undisputed Facts
The undisputed facts demonstrate that the relationship between Plaintiff and the Kansler/Sejour Defendants was nothing more than a conventional business relationship pursuant to which Kansler prepared and reviewed Plaintiff's tax returns for approximately twenty years. The record is devoid of evidence that the moving Defendants received any compensation, commission or payments from any source in connection with Plaintiff's investment in Fairfield Pagma or functioned as investment advisor to Plaintiff. In addition, Plaintiff testified at his deposition that he never sought investment advice from anyone at the Sejour accounting firm other than in the brief telephone conversation with Kansler on which he bases his claim.
Although Kansler prepared and reviewed Plaintiff's personal and business tax returns for approximately twenty years, she (1) was not retained nor remunerated for services rendered as an investment advisor, stockbroker or securities dealer, (2) was not responsible for making investment options available to Plaintiff, (3) did not hold herself out as one qualified to judge the merits of various investment vehicles and (4) was not involved in monitoring Plaintiff's investment accounts. Rather, she merely suggested investment options in response to Plaintiff's inquiry during a telephone conversation in December 2007.
Moreover, Plaintiff's allegations that Kansler suggested Defendant Fairfield Pagma without disclosing that she, her uncle and her children were invested in it, and also mentioned C.J. M. Fiscal Management as possible investment vehicles, are of no legal significance under the factual theory propounded by Plaintiff. Indeed, Plaintiff concedes that he 1) did not complete an independent investigation of Fairfield Pagma before he invested; 2) would not have performed any independent investigation if Kansler had given him the name of a different investment vehicle; and 3) would have put "blind faith" in any investment vehicle that Kansler recommended.
2. Allegations against the Kansler / Sejour Defendants
Plaintiff has failed to set forth a prima facie case of malpractice against the Kansler/Sejour Defendants. These Defendants made no representations as to the soundness or suitability of either of the suggested investment vehicles. Moreover, with respect to Kansler's alleged failure to reveal a conflict of interest, the record does not support the inference that the Kansler/Sejour Defendants benefitted from the purported failure to disclose such information or that there was any causal connection between the injury Plaintiff sustained as a result of the collapse of the Madoff Ponzi scheme and the purported failure to disclose. In light of these factors, and the fact that Plaintiff made no independent investigation regarding the proposed investments, the Court concludes that the malpractice claim is not viable.
The Court further concludes that Plaintiff's allegations that Defendants Kansler/Sejour breached its contract to advise Plaintiff on investment matters with due care and diligence are insufficient to support a breach of contract claim. That conclusion is based on the following factors: 1) the record does not demonstrate the existence of an agreement between the parties that the Kansler/Sejour Defendants would provide investment advisory services to Plaintiff, 2) the Complaint does not allege that Kansler/Sejour breached their duty to properly prepare Plaintiff's tax returns, which is the service they were contracted to perform during their twenty year relationship with Plaintiff, and 3) the Sejour accounting firm itself made no investment recommendations to Plaintiff, and its employee, Defendant Kansler, was not under a contractual obligation to act as an investment advisor to Plaintiff.
Moreover, Plaintiff's assertion in support of the breach of contract claim, that Defendants Kansler/Sejour violated their agreement to provide professional services in accordance with good and accepted professional standards, is merely a rephrasing of the deficient malpractice/negligence claim recast in the language of breach of contract. Accordingly, the cause of action for breach of contract asserted against Defendants Kansler/Sejour must also be dismissed on that basis.
In addition, the conclusory allegation that Plaintiff acted on investment advice proffered by Kansler is insufficient to create a fiduciary relationship between him and his accountant and the firm by which she was employed. Finally, Plaintiff's causes of actions for breach of the implied covenant of good faith and fair dealing do not contain additional factual allegations sufficient to sustain those causes of action. Accordingly, those claims are not only duplicative but factually deficient and must be dismissed.
3. Allegations against the Fairfield Pagma Defendants
With respect to the allegations against the Fairfield Pagma Defendants, although Plaintiff signed an enrollment form reflecting that he wished to become a limited partner in Fairfield Pagma Associates, LP, with an investment of $500,000, he testified, inter alia, that 1) he did not know anyone at Fairfield Pagma; 2) never spoke with anyone at Fairfield Pagma before sending in a check for $500,000; 3) did not know how many stocks or funds Fairfield Pagma would invest his money in; 4) knew nothing about Fairfield Pagma; and 5) made no effort to find out who Fairfield Pagma was, or what they invested in. Under these circumstances, there is no basis to sustain a breach of fiduciary claim against the Fairfield Pagma Defendants based on their alleged failure to advise Plaintiff, as a member of the Limited Liability Company, that all of the pooled funds of the Partnership were to be invested in BLMIS. Moreover, a limited partner would be bound by the language of the Limited Partnership Agreement which clearly states that the pooled assets of the Partnership would be managed on a discretionary basis by Bernard L. Madoff. Under these circumstances, there was no failure to disclose or breach of fiduciary duty.
The Court notes, further, that the enrollment form on which Plaintiff's breach of contract claim is predicated is devoid of any provision pursuant to which the Fairfield Pagma Defendants agreed to prudently and properly invest Plaintiff's retirement funds. Rather, the language of the form speaks to Plaintiff's intention to become a member of the Limited Partnership and sets the deadlines for principal withdrawals. Thus, a breach of contract claim against Defendants, predicated on the enrollment form, is not viable.
The Court also concludes that the fraud claim cannot be sustained because Defendant could not have reasonably relied on unspecified representations by Defendants. The Fairfield Pagma Defendants made no representations with respect to management of the pooled assets of the Limited Partnership on the enrollment form on which Plaintiff predicates his claim.
As noted, Plaintiff has conceded his failure to make even minimal inquiry regarding his proposed investment. In addition, with respect to the Fairfield Pagma Defendants, the representation on which Plaintiff relied was the Limited Partnership enrollment form which contains no representations as to how Plaintiff's money would be invested. Under these circumstances, Plaintiff's fraud claim cannot be sustained. As no representations were made, there could have been no justifiable reliance.
With respect to Plaintiff's argument that the Fairfield Pagma Defendants' failure to include an affidavit of an individual who has personal knowledge of the facts is fatal to their application for summary judgment, the Court's decision is based on the parties' extensive submissions including documentary evidence, deposition testimony, and the affidavits of the parties. In reaching its decision, the Court has not relied on the affirmation of Defendants' attorney who lacked personal knowledge of the facts of the case.
In sum, the Court concludes that Plaintiff has failed to raise a triable issue of fact with respect to the causes of action in the Complaint sufficient to defeat the respective motions for summary judgment by the Kansler/Sejour Defendants and by the Fairfield Pagma Defendants. Accordingly, the Court grants the motions and dismisses the Complaint against the moving Defendants.
In light of that determination, the Court has not addressed the issue of whether Plaintiff is barred from commencing litigation to recover losses from third parties as a result of his having availed himself of the safe harbor protection of Internal Revenue Service Rev. Proc. 2009-20.
All matters not decided herein are hereby denied.
This constitutes the decision and order of the Court.