Opinion
No. CV 09 5012119S
October 18, 2010
MEMORANDUM OF DECISION ON APPORTIONMENT DEFENDANT'S MOTION IN THE ALTERNATIVE TO DISMISS/STRIKE THE APPORTIONMENT COMPLAINT(#125)
Introduction
This commercial litigation is connected to the investment losses sustained in the hedge fund world as a result of the fraudulent Ponzi scheme run by Bernard Madoff (Madoff). The plaintiff/investor is The Calibre Fund, LLC (Calibre), which is a Greenwich based investment firm organized under Delaware law. The named defendant is BDO Seidman, LLP (BDO), a national accounting and auditing firm. These allegations are one of a plethora of Madoff-related actions which have been filed and are pending in various state and federal courts. There are many things that could be (or already have been) said or written about the circumstances surrounding this litigation, but in this memorandum of decision the court will confine itself to the merits of the instant motion concerning a third-party apportionment claim brought by the defendant BDO.
The operative complaint is Calibre's first revised complaint. It sounds in a total of six counts against BDO: two counts of fraudulent misrepresentation; two counts of negligent misrepresentation; one count of aiding and abetting fraud; and one count of innocent misrepresentation. The allegations in the complaint center around Calibre's losses from its investment of ten million dollars ($10,000,000) by way of a December 2007 subscription agreement with a hedge fund called Ascot Partners, L.P. (Ascot). Ascot is a Delaware limited partnership formed to invest in and trade securities. Ascot is a master partnership in a master-feeder investment structure. Calibre claimed to be unaware at the time of its investment that Ascot was acting as a feeder fund for Madoff. Ascot is charged with essentially turning over to Madoff to "invest" all of the money Ascot received from Calibre. Ascot was also a client of the defendant BDO, which prepared audited financial statements and opinion letters for Ascot. Calibre claims that it relied upon BDO's audited financial statements in making its decision to invest in Ascot, and that those audited financials contained both false statements of fact and material omissions of fact.
The motion before the court is an attack by Ascot's hedge fund manager upon an apportionment complaint brought by BDO. The hedge fund/apportionment defendants are Ascot, and the hedge fund manager of Ascot, an individual named J. Ezra Merkin (Merkin). In its apportionment complaint, BDO alleges that Ascot itself was negligent and did not exercise sufficient oversight with Madoff, and that Ascot made misrepresentations to both BDO and Calibre. As the general partner who conducted all management functions for Ascot, Merkin is alleged to be jointly and severally liable for any damages suffered by Calibre. The apportionment defendant Merkin is challenging the legal validity of the apportionment complaint filed against him by BDO, the named defendant/apportionment plaintiff.
Merkin is not joined by Ascot in this motion, and therefore the court's order does not extend to Ascot. Additionally, as an alternative to dismissal on jurisdictional grounds, Merkin has also moved to strike the apportionment complaint against him on the ground that it fails to sufficiently plead the elements of negligence. In light of the court's order granting dismissal of the apportionment complaint as to Merkin, it is not necessary for this court to reach or rule upon Merkin's alternative motion to strike, which is not further discussed herein.
Before further discussing the issue of apportionment, it is necessary to first turn to the allegations in the revised complaint, as that is the complaint for which apportionment of liability is being sought. The employees of the defendant BDO, including its accounting staff and CPAs, are in the business of preparing audited financial statements for certain BDO clients. Those BDO clients include a hedge fund, Ascot, involved with this securities trading stream with Madoff. It was a trading stream that allegedly saw all of Ascot's funds, along with millions of dollars from all of the other various feeder funds/investment pools flow downstream over the Madoff dam and disappear.
Calibre does not allege it traded or suffered its investment losses directly with Madoff, nor does it claim that BDO acted as an outside auditor for Bernard Madoff or a Madoff entity. Rather, Calibre's losses result from its investment as a limited partner with the intermediary hedge fund Ascot, a BDO client. It is Ascot which is alleged to have invested and lost Calibre's assets with Madoff. Madoff engineered a scheme whose contours only began to emerge publicly in late 2008 with Madoff's confession as to his true activities. Hence these allegations, wherein Calibre claims it lost the money it entrusted to Ascot, a BDO client, and that BDO is therefore liable for Calibre's damages.
This case is one of a plethora of Madoff-related actions pending in various state and federal courts around the country. Some cases are strictly related to the losses suffered by limited partners like Calibre in partnerships run by entities like Ascot and individuals like Merkin. Those securities transactions and partnerships eventually tanked when Madoff fell. Others allege misconduct on the part of investment advisors. Still other cases, such as this one, involve the adequacy and scope of outside accountant's opinions in the preparation of audited financials for Madoff trading partners, and the detrimental reliance upon those opinions by investors. These types of cases involve the same monetary trading losses and damages, but look to recover from different defendants under different theories of liability.
Calibre claims it relied upon those opinions of BDO to its detriment when Calibre made its decision to invest in the hedge fund Ascot, which was run by Merkin. Those decisions by Calibre whether to invest in Ascot, and/or to maintain its existing positions with Ascot, were allegedly based in whole or in part on BDO's opinions of soundness. Calibre alleges that the financial statements of Ascot audited by BDO made no mention of Madoff at all, or that Ascot was acting as a feeder fund for Madoff. Calibre claims those BDO opinions led to Calibre's large losses here when the Madoff Ponzi scheme collapsed, and Calibre's limited partnership investment with Ascot became essentially worthless.
On November 11, 2009, BDO filed an apportionment complaint against both Ascot and Merkin as apportionment defendants. Merkin has now moved to dismiss the apportionment complaint BDO has brought against Merkin personally. Merkin claims that the court lacks both subject matter and personal jurisdiction. Merkin argues that the apportionment complaint is flawed in that the statute governing such complaints does not apply to the allegations Calibre is asserting against BDO in the underlying lawsuit. The apportionment defendant Merkin argues that the damages which the apportionment plaintiff BDO alleges, namely, loss of investment principal and interest, do not fall within the "personal injury, wrongful death or damage to property" required by statute.
The court will first discuss the legal standards relating to motions to dismiss, followed by an analysis of the apportionment statutes as applied to the allegations in the apportionment complaint itself.
Motion to Dismiss
"A motion to dismiss . . . properly attacks the jurisdiction of the court, essentially asserting that the plaintiff cannot as a matter of law and fact state a cause of action that should be heard by the court . . . A motion to dismiss tests, inter alia, whether on the face of the record, the court is without jurisdiction." (Internal quotation marks omitted.) Cox v. Aiken, 278 Conn. 204, 210-11, 897 A.2d 71 (2006). "The standard governing a trial court's review of a motion to dismiss is well established. In ruling upon whether a complaint survives a motion to dismiss, a court must take the facts to be those alleged in the complaint, including those facts necessarily implied from the allegations, construing them in a manner most favorable to the pleader." (Internal quotation marks omitted.) Davis v. Environmental Commission, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 05 4007475 (January 26, 2007, Tobin, J.) [ 42 Conn. L. Rptr. 691].
"Jurisdiction of the subject-matter is the power [of the court] to hear and determine cases of the general class to which the proceedings in question belong . . . A claim that [the] court lacks subject matter jurisdiction [may be raised] at any time . . . Once the question of lack of jurisdiction of a court is raised, [it] must be disposed of no matter in what form it is presented . . ." (Citations omitted; internal quotation marks omitted.) Goldberg v. Goodwill Industries, Superior Court, judicial district of Hartford, Docket No. CV 05 4009642 (January 3, 2006, Keller J.). "The plaintiff bears the burden of proving subject matter jurisdiction, whenever and however raised." Fink v. Golenbock, 238 Conn. 183, 199 n. 13, 680 A.2d 1243 (1996).
"When issues of fact are necessary to the determination of the court's jurisdiction, [however] due process requires a trial like hearing be held, in which an opportunity is provided to present evidence . . ." (Internal quotation marks omitted.) Gordon v. H.N.S. Management Co., 272 Conn. 81, 92, 861 A.2d 1160 (2004). "Affidavits are insufficient to determine factual issues raised on a motion to dismiss unless . . . they disclose that no genuine issues as to a material fact exists." (Internal quotation marks omitted.) Adolphson v. Weinstein, 66 Conn.App. 591, 594, n. 3, 785 A.2d 275 (2001), cert. denied, 259 Conn. 921, 792 A.2d 853 (2002).
Apportionment Complaints
Apportionment is allowed in certain circumstances where the negligent acts or omissions of two or more persons combine to cause harm to a plaintiff. In Connecticut, apportionment complaints are a creature of statute, one that did not exist at common law. Such complaints are governed by General Statutes § 52-102b. Section 52-102b provides in pertinent part: "A defendant in any civil action to which § 52-572h applies may serve a writ, summons and complaint upon a person not a party to the action who is or may be liable pursuant to said section for a proportionate share of the plaintiff's damages in which case the demand for relief shall seek an apportionment of liability." Section 52-572h, referenced above, applies to "causes of action based on negligence . . . to recover damages resulting from personal injury, wrongful death or damage to property."
From the plain meaning of the statutory language, a defendant such as BDO may only file an apportionment complaint if the negligence caused the plaintiff "personal injury, wrongful death or damage to property." As there are no claims by Calibre of personal injury or wrongful death here, the court's focus is on the meaning of the statutory term "damage to property." The Connecticut Supreme Court has held that § 52-102b is "the exclusive means by which a defendant may add a person who is or may be liable pursuant to § 52-572h for a proportionate share of the plaintiff's damages as a party to the action." (Emphasis added.) Allard v. Liberty Oil Equipment Co., 253 Conn. 787, 792-93 (2000).
Discussion
As previously stated, Merkin argues that the damages which the plaintiff Calibre alleges against BDO are the loss of Calibre's investment and interest and claims that these type damages do not constitute the damage to property as defined and required under § 52-572h. Merkin argues that the economic loss alleged by Calibre, namely the loss of its investment in Ascot, is not the type of loss contemplated by the apportionment statute. Specifically, Calibre alleges in its revised complaint that, "[a]s a direct, foreseeable and proximate result of this negligence, Calibre has sustained pecuniary loss and has lost a substantial part of its investment, together with lost interest and general and incidental damages in an amount yet to be determined, and to be proven at trial." (Revised Complaint ¶ 141.) Merkin contends that these allegations cannot be considered either damage to tangible property, or the loss of its use, either of which are required to bring Merkin into this action as an apportionment defendant.
In response to the apportionment defendant Merkin's claims, BDO asserts that its apportionment complaint meets the applicable requirements under §§ 52-102b and 52-572h, and therefore, this court has subject matter jurisdiction. BDO argues that the "damage to [tangible] property" requirement of § 52-572h is fulfilled by "the existence of a res consisting of Calibre's capital account in Ascot Partners, together with the loss of that res as a result of the negligent misrepresentations made by Merkin to [BDO] . . ." (BDO Objection, p. 7).
In determining whether the phrase "damage to property" as used in § 52-572h(b) includes purely economic losses, the Connecticut Supreme Court has looked to statutory construction and legislative history to discern the intent of the legislature. Williams Ford, Inc. v. Hartford Courant Co., 232 Conn. 559, 657 A.2d 212 (1995). The court stated that: "We approach this question [i.e., whether the phrase `damage to property' within § 52-572h(b) includes within its meaning purely commercial losses] according to well established principles of statutory construction . . . In seeking to discern that intent, we look to the words of the statute itself, to the legislative history and circumstances surrounding its enactment, to the legislative policy it was designed to implement, and to its relationship to existing legislation and common law principles governing the same general subject matter . . . We also note the rule of statutory construction that statutes in derogation of common law should receive a strict construction and [should not] be extended, modified, repealed or enlarged in its scope by the mechanics of construction." Id.
The court in Williams Ford, Inc. v. Hartford Courant Co., supra, after examining the legislative history behind § 52-572h, held that, "the legislature intended the phrase `damage to property' to encompass only its usual and traditional meaning in the law of negligence actions, namely, damage to or the loss of use of tangible property as opposed to damages from personal injury." Id., 583. The court read the phrase in "its traditional sense of physical damage to tangible property . . . We simply cannot stretch the meaning of `damage to property,' as used in § 52-572h(b), to include commercial losses unaccompanied by physical damage to or loss of use of tangible property . . . We conclude that the term `damage to property,' as used in § 52-572h, does not include purely commercial losses." Id., 584.
According to American Jurisprudence, Second Edition, tangible property "is that which is capable of being handled, felt, or touched, and may be evaluated by the physical senses . . . Intangibles consist of rights not related to physical things that are merely relationships between persons, natural or corporate, which the law recognizes by attaching to them certain sanctions enforceable in the courts. Intangible property has no physical existence, but may be evidenced by a document with no intrinsic value, such as a stock certificate." 63 Am.Jur.2d, Property § 9 (2010). The court finds that a limited partnership subscription in Ascot, such as is alleged here, falls into the same category of intangible property.
According to the holding in Ford, commercial losses would be included within the statutory ambit of apportionment complaints only in the limited circumstance where such commercial losses were accompanied by physical damage to or loss of use of property. In other words, the commercial loss must be the result of, or flow from, damage to tangible property or loss of use of the property. Thus, commercial or financial loss is `property damage' only if it is accompanied either by physical damage to the property, or the loss of use of the property. "Loss of use must mean in the statutory context, as interpreted by the court, a negligent act prevented the use of the property for the commercial purposes for which it was intended, resulting therefore in commercial loss." Worcester v. Salzillo, Superior Court, judicial district of New Haven, Docket No. CV 08 5019588 (May 29, 2009, Corradino, J.) ( 47 Conn. L. Rptr. 893).
The damages the plaintiff suffered in Williams Ford, Inc. v. Hartford Courant Co., supra, were purely monetary. They were mainly savings that the plaintiff would have realized stemming from claims of misrepresentation. In the present matter, the apportionment defendant Merkin, relying on the language in Ford, contends that the court lacks subject matter jurisdiction over BDO's apportionment complaint because the plaintiff Calibre is claiming only economic loss, namely the loss of substantially all of its investment with Ascot, and not the requisite "damage to property" under § 52-572h.
Before addressing whether the plaintiff Calibre's complaint sufficiently alleges damage to tangible property, the court must first determine whether the allegations set forth damage to property in general. The issue of whether a plaintiff's alleged damages for negligent misrepresentation can constitute "damage to property" under the meaning of § 52-572h was addressed by the court in Boardman v. Webb, Superior Court, judicial district of New Haven, Docket No. CV 01 0448197 (January 29, 2002, Arnold, J.) [ 31 Conn. L. Rptr. 299], which stated, "[m]isrepresentation cannot be said to cause damage to a person's property; rather it inflicts economic damages." In Boardman, the plaintiff home buyer alleged negligent and fraudulent misrepresentation of a home's features by the seller and broker. The court, citing Ford, reasoned that because the harm to plaintiff was solely economic, the apportionment complaint must be dismissed, as § 52-572h did not apply. In the present matter, the plaintiff's revised complaint asserts two counts of fraudulent misrepresentation, two counts of negligent misrepresentation, and one count of innocent misrepresentation, and as a result, "Calibre has lost substantially all of its investment plus interest." (Revised Complaint, ¶ 98.) The damages alleged are therefore purely economic and cannot be said to have caused physical damage to or loss of use of property. Thus, it is clear that with respect to the apportionment defendant Merkin, the apportionment complaint does not meet the statutory requirements.
It should be noted that other opinions have held that misrepresentations may fall within § 52-572h under limited instances, such as when allegations of misrepresentations are coupled with additional causes of action that allege physical damage or the loss of use of tangible property. See Kramer v. Petisi, 285 Conn. 674 (2008); Borman v. Wheeler Real Estate, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 08 5007830 (June 22, 2009, Pavia, J.) ( 48 Conn. L. Rptr. 97). Those circumstances are not present here.
It is worth noting that BDO, without citing a single authority, maintains that the economic loss that Calibre suffered should be categorized as harm to "tangible" property, arguing that the "tangible" property was the "res consisting of Calibre's capital account." (BDO objection, p. 7). BDO asserts that the question of whether Calibre's capital account is "tangible" property is analogous to whether or not money, or cash, itself is "tangible" property. It is clear from the subscription agreement that Calibre purchased a "Class C" limited partnership interest in Ascot Partners, L.P. Therefore, Calibre held a right to share in the profits and losses of the limited partnership. This right is clearly intangible personal property. See Holmes v. Golub, Superior Court, judicial district of New London, Docket No. 504931 (September 13, 1991, Mihalakos, J.) ( 6 C.S.C.R. 894) [ 4 Conn. L. Rptr. 504] (stating that a partnership interest is of an intangible nature); Montecalvo v. Mandarelli, 682 A.2d 918 (R.I. 1996) (stating that a partnership interest is an intangible property right); 2 J. White R. Summers, Uniform Commercial Code (5th ED. 2006) § 9, p. 599. Therefore, even if the court were to find that in addition to the economic losses Calibre alleges, it also alleges physical damage or the loss of use of property, the loss of use of property that BDO claims supports its position, is an intangible property right that is clearly excluded under Williams Ford, Inc. v. Hartford Courant Co., supra, 232 Conn. 583.
Capital is "money or assets invested." Black's Law Dictionary (8th ed. 2004). A capital account is defined as "a partner's share of the partnership capital." Black's Law Dictionary (8th ed. 2004).
Although there is no Connecticut authority directly on point, courts are split in categorizing money as either tangible or intangible property. This court is persuaded by the line of cases that hold that money is to be considered intangible property. Although it has physical characteristics, money, like a promissory note, has physical characteristics, but at its heart, is simply a promise to pay the bearer of the note. See In re Oakley, 344 F.3d 712, 714 (7th Cir. 2003) (stating,"[i]n contrast to tangible possessions, financial assets are in the nature of reserves . . . Money in whatever form — whether cash or an invisible, a disembodied, financial asset — is a medium of exchange rather than a useful good"); Dessert Beauty, Inc. v. Platinum Funding Corp., 519 F.Sup.2d 410 (S.D.N.Y. 2007) (distinguishing monies from tangible real property in a conversion claim); In re Pergament's Estate, 204 Misc. 384, 123 N.Y.S.2d 150 (1953) (stating that cash is not ordinarily thought of as tangible personal property); Weiss v. McFadden, 353 Ark. 868, 120 S.W.3d 545 (2003) (stating "[m]oney is intangible personal property"); Taylor v. Powertel, Inc., 250 Ga.App. 356, 551 S.E.2d 765 (2001) (stating that money is intangible personalty that is fungible).
The court views this right as one similar to the intangible right of a stockholder to share in the earnings of a corporation.
Conclusion
Pursuant to the statutory scheme, a defendant may only seek to apportion liability in a negligence case which caused the plaintiff "personal injury, wrongful death or damage to property." In its complaint against BDO, the plaintiff Calibre alleges purely commercial or economic losses, losses unaccompanied by physical damage to any property. It does not allege the requisite statutory "damage to property." As a creature of statute, this apportionment complaint lives or dies by the statute, and the original complaint from which it springs. Should the Connecticut legislature see fit to extend the doctrine of apportionment to strictly monetary investment losses as are alleged here, it may certainly choose to do so. There may even be sound policy arguments that may be advanced in support of such a statutory amendment. However, such a change if it ever occurs will come too late to save this particular apportionment complaint. This court lacks subject matter jurisdiction over BDO Seidman's Apportionment Complaint as to the apportionment defendant J. Ezra Merkin. The motion to dismiss as to him is therefore GRANTED.
See § 52-102b, which incorporates § 52-572h.
IT IS SO ORDERED,