Opinion
112732/05.
Decided September 8, 2006.
Fensterstock Partners, LLP, New York, NY, By: Blair C. Fensterstock, Maureen McGuirl, Julie A. Turner, for Plaintiff.
Fulbright Jaworski, LLP, For Byerische Hypo-Und Vereinsbank AG, HVB Structured Finance, Inc.; HVB Risk, Management Products; HVB America, New York, NY, By: Judith A. Archer, Sarah E. O'Connell, Fulbright Jaworski, LLP For Byerische Hypo-Und Vereinsbank AG, HVB Structured Finance, Inc.; HVB Risk Management Products; HVB America Los Angeles, California, By: Helen L. Duncan, Dinh Ha, Latham Watkins LLP, For Presidio Advisory Services, LLC, Presidio Growth, LLC, and Presidio Resources, LLC, Newark, New Jersay, By: Shane H. Freedman, Latham Watkins LLP, For Presidio Advisory Services, LLC, Presidio Growth, LLC, and Presidio Resources, LLC, San Francisco, California, By: Steven M. Bauer, Margaret A. Tough, for Defendants.
Motion sequences 007 and 009 are consolidated. Under motion sequence 007, defendants Byerische Hypo-Und Vereinsbank AG, HVB Structured Finance, Inc., HVB Risk Management Products Inc., and HVB America, Inc. (referred to together as HVB), move to dismiss plaintiff's amended complaint, pursuant to CPLR 3211 (a) (1) (3) and (7), and pursuant to CPLR 3216 (b). HVB additionally moves to strike paragraphs 22-24, and paragraph 28 from plaintiff's amended complaint as scandalous and prejudicial. Under motion sequence 009, defendants Presidio Advisory Services, LLC, Presidio Growth, LLC, and Presidio Resources, LLC (referred to together as Presidio) move to dismiss plaintiff's amended complaint pursuant to CPLR 3211 (a) (1), (2) and (7).
The matter arises out of plaintiff's participation in a Bond Linked Issue Premium Structure ("BLIPS") tax shelter transaction, which purported to generate a $57.7 million loss, claimed by plaintiff for income tax purposes in 2000, to offset capital gains. The Internal Revenue Service (IRS) disallowed the deduction in 2003, and in 2004, plaintiff was required to pay back taxes, interest and penalties. Plaintiff commenced this action in 2005 to recoup $3.5 million in fees, paid to participate in the BLIPS transaction, the amount of back taxes, interest and penalties paid after the deductions were disallowed, and the fees and costs incurred to file amended returns. As asserted against KPMG LLP, Randall S. Bickham, Neil J. Tendler (referred to together as KPMG), and Sidley Austin Brown Wood (Sidley Austin), the action is stayed pursuant to a stipulation and order entered December 12, 2005, in relation to plaintiff's participation in a settlement agreement in the class action in the United States District Court for the Southern District of New York (Marvin Simon, et al v. KPMG LLP, et al, Docket No 05 cv 03189 [DMC]). As asserted against Domenick DeGiorgio, a former senior vice president of defendant HVB Structured Finance, Inc., the action was discontinued by stipulation.
The following facts, as alleged in plaintiff's amended complaint will be deemed true, and given the benefit of every favorable inference ( EBC I, Inc. v. Goldman Sachs Co., 5 NY3d 11, 19; Sokoloff v. Harriman Estates Development Corp., 96 NY2d 409, 414; P.T. Bank Central Asia v. ABN AMRO Bank N.V., 301 AD2d 373, 375-6 [1st Dept 2003]), unless clearly contradicted by evidence submitted by the parties in connection with the motions ( see Zanett Lombardier, Ltd. v. Maslow, 29 AD3d 495 [1st Dept 2006], citing Robinson v. Robinson, 303 AD2d 234, 235 [1st Dept 2003]). Such evidence, moreover, will be used to supplement, and remedy any defects in the pleading ( Leon v. Martinez, 84 NY2d 83, 88; Rovello v. Orofino Realty Co., 40 NY2d 633, 636).
Plaintiff's amended complaint alleges that before he entered into the BLIPS transaction, he had a long-term fiduciary and business relationship with KPMG, and that as a result of this relationship, KPMG knew that in 2000, plaintiff would realize a $55 million capital gain on the sale of shares in one of his businesses. Plaintiff alleges that starting in or around the later part of 1999, KPMG accountant, defendant Neil Tendler, began to solicit his participation in the BLIPS transactions. Plaintiff's amended complaint outlines the details of several meetings and telephone and/or conference calls, including dates, place of occurrence and parties present and participating in the conversations, wherein Mr. Tendler represented that the BLIPS transaction would generate both ordinary and capital losses sufficient to offset plaintiff's anticipated or realized capital gain, that the transaction was tried and true, and had been reviewed, by a major Wall Street law firm, later identified as Sidley Austin. Plaintiff alleges that Tendler assured him that Sidley Austin made an independent review of BLIPS, and concluded that the BLIPS were legitimate and sound, and would "more likely than not," withstand IRS scrutiny. Tendler represented that after plaintiff completed the transaction, Sidley Austin would provide him with an independent tax opinion letter, that would protect him from tax penalties, in the unlikely event that the taxing authorities challenged the transaction. According to plaintiff's amended complaint, Tendler falsely represented that the BLIPS transaction was a tax advantaged investment in options and related foreign currency instruments that generated a large tax loss through the use of a loan that would be provided by HVB. Tendler advised him that the loan was necessary in order to generate the tax loss. Tendler advised plaintiff that all of the investments and trading activity would be handled by Presidio, that Presidio would prepare all of the necessary legal documents, and that Presidio would arrange for plaintiff to obtain a loan from HVB.
Plaintiff alleges that after he paid the $3.5 million fee to Presidio in or around April 2000, Presidio set up Congo Ventures, LLC as the vehicle through which plaintiff would make his investment. Plaintiff's amended complaint alleges that Presidio then established a limited partnership between Congo Ventures, Presidio Growth, and Presidio Resources in which Presidio Growth was the managing partner. However, the documents annexed to the moving papers demonstrate that after the formation of Congo Ventures, on or about February 26, 2000, plaintiff, as "sole member" of Congo Ventures signed various Investor Questionnaires representing, among other things, that he was the person making the investment decision on behalf of Congo Ventures as the subscriber, and that he and/or Congo Ventures was an "Accredited Investor" within the meaning of Rule 501 (a) of the Securities Act. Plaintiff also signed a Subscription Agreement, as sole member of Congo Ventures, pursuant to which Congo Ventures agreed to purchase an interest in a limited liability company to be chosen by Presidio Growth, LLC, which in turn would act as Managing Member of the Company, on the terms and conditions described in the Confidential Memorandum dated January 2000, and an Amended and Restated Limited Liability Company Agreement applicable to the company chosen. (J.A.Turner Aff., Exh 2).
Plaintiff's amended complaint alleges that Presidio obtained a loan for Congo Ventures through HVB. Documents annexed to the motion papers demonstrate that plaintiff, as sole member of Congo Ventures, executed a $91,700,000.00 promissory note dated April 6, 2000 (the Note). The Note provides that the Bank would have no recourse against "the Investor or any of its assets or property, or against the Borrower or any of its assets or property other than the Pledged Collateral" which consisted of the investment or "Collateral Account" for which the loan was made. In addition to the Note, closing documents for the loan transaction included a Credit Agreement, a Pledge and Security Agreement, an Account Control Agreement, two International Swap Dealers Association Master Agreements, all dated April 7, 2000, and various representation letters, including a letter from HVB, dated March 17, 2000, stating, "We understand that you may cause an entity that you control (the "Borrower") to pursue directly or indirectly through other entities investment strategies proposed, organized and arranged for you by Presidio Growth LLC . . . The Borrower intends (i) to borrow funds from HVB Structured Finance Inc. and (ii) to execute transactions with or through us involving the Growth Strategies. . . ." The letter requested that plaintiff sign and notarize a statement that he understood that HVB was not involved in and accepted no responsibility for the establishment or promotion of Growth Strategies," and that HVB made no representations or warranties to plaintiff regarding the transactions or their consequences, which he did, as sole member of Congo Ventures on March 21, 2000. Also included in the closing documents for the loan were acknowledgments executed by both Presidio and KPMG, pursuant to which those entities represented that HVB and/or its affiliates did not "play any role whatsoever in the marketing to the Investor identified in the Credit Agreement . . . while we . . . are participating as lender or as counterparty in certain of the transactions contemplated by such Credit Agreement,. . . ." (1/23/06 Dinh Ha Aff, Exh1).
On or about April 18, 2000, plaintiff, as sole member of Congo Ventures, signed both an Assignment and Assumption Agreement, pursuant to which Congo Ventures assigned all of its interest and responsibility under the Note and related loan documents to Arvon Strategic Investment Fund, LLC, and an Amended and Restated Limited Liability Company Agreement (the "Arvon LLC Agreement"), as a Class B Member, of Arvon Strategic Investment Fund, LLC. ("Arvon"). The Arvon LLC Agreement was executed by Presidio Growth LLC as Managing Member. Pursuant to the Arvon LLC Agreement, the assigned loan became part of Congo Venture's capital account, and constituted part of its capital contribution as a Class B member of Arvon.
Plaintiff alleges that, between April and June 2000, Presidio engaged in a series of small low risk foreign currency transactions which plaintiff alleges had no reasonable probability of resulting in a reasonable profit to plaintiff, and which plaintiff alleges were undertaken to give the appearance, but not the reality, of economic substance to the BLIPS transaction. In or around June 2000, KPMG and Presidio advised plaintiff to cause Congo Ventures to withdraw from the BLIPS transaction. Plaintiff alleges that they further advised him, and that he understood, that as a result of his withdrawal at that time, he would incur a valid tax loss of approximately $55 million. Plaintiff alleges that after his withdrawal from the BLIPS transaction, on or about September 13, 2000, Sidley Austin provided him with a lengthy opinion letter regarding the tax viability of the BLIPS transaction, that KPMG provided him with another tax opinion letter on November 3, 2000, and that neither KPMG nor Sidley Austin disclosed the fact that on December 27, 1999, the IRS formally published Notice 1999-59, advising that taxpayers would not be allowed to claim losses generated from BLIPS-type transactions. Plaintiff alleges, further, that Sidley Austin did not independently research or analyze the BLIPS transaction but worked in concert with KPMG, Presidio and HVB to market, design, and promote the tax shelters, and that as a result of their participation, and lack of independent analysis, the opinion letters provided by them were worthless, and did not protect plaintiff from incurring a penalty when the IRS disallowed the deduction. Plaintiff's amended complaint alleges that Presidio, KPMG, HVB and Sidley Austin all knew that there were defects in BLIPS transactions, and that they knew that BLIPS should have been registered but agreed with one another, in advance, to market BLIPS as a risk free investment exempt from federal registration requirements. Plaintiff alleges that KPMG, Presidio, HVB and Sidley Austin acted together to conceal the true risks associated with BLIPs, to conceal the fact that the HVB loans were not bona fide loans, and to conceal the fact that, contrary to the representations made by KPMG and the intent of the documents he signed, the investments made by Presidio were not leveraged as they were represented to be. Plaintiff alleges that the documents prepared by KPMG, Sidley Austin, HVB and Presidio contained false and misleading information about the nature of the transactions and their respective involvements in those transaction, and that with the advice and consent of HVB and Presidio, KPMG and Sidley Austin falsely represented that they were acting independently from each other when, in fact, they were all acting together to split the $3.5 million dollar fee paid by plaintiff to participate in the transaction, with Presidio taking at least $1,375,000, KPMG and HVB taking $687,500 each, and that Sidley Austin receiving at least $165,000. As relevant to the moving defendants, plaintiff's amended complaint demands $15 million in compensatory damages and $500 million in punitive damages on the first and second causes of action for fraud and conspiracy, and a return of the $3.5 million he paid to defendants in fees under the fourth cause of action for rescission, restitution and unjust enrichment.
Defendant HVB asserts that plaintiff is not a party to the loan agreements that it entered into with Congo Ventures, and, therefore, has no standing to maintain a cause of action against it. However, although shareholders, even a sole shareholder, or one in a closely held corporation, have no standing to sue for injuries to the corporation itself ( Abrams v. Donati, 66 NY2d 951, 953; Behrens v. Metropolitan Opera Assn., Inc., 18 AD3d 47, 50 [1st Dept 2005]; Lawrence Ins. Group, Inc. v. KPMG Peat Marwick LLP, 5 AD3d 918 [3rd Dept 2004]), they may assert claims based upon breach of a duty owed directly to them, independent of any duty owed to the corporation ( Abrams v. Donati, 66 NY2d at 953; Behrens v. Metropolitan Opera Assn., Inc., 18 AD3d at 50; see e.g. Confidence Transp. Inc. v. Buck, 218 AD2d 837 [3rd Dept 1995]). Where there is an actionable wrong that arises out of a breach of duty independent of the contract, it may be asserted by the party actually incurring the injury or damages, provided the injury is a natural consequence of the alleged wrongful act ( see Behrens v. Metropolitan Opera Assn., Inc., 18 AD3d at 50). Thus, in a number of tax shelter cases, courts considering the issue have held that causes of action for fraud in the inducement, conspiracy, negligent misrepresentation and the like, belong to the taxpayer who undertook the investment, incurred the loss, and suffered the actual damage ( see Hirsch v. Arthur Anderson Co., 72 F 3d 1085, [2d Cir 1995]; 680 Fifth Ave. Assoc. v. Prudential Sec. Inc., 46 F 3d 1145, 1995 WL 15676, *2 [9th Cir 1995]). Analogy in such instances may be made to cases granting standing to a third-party beneficiary ( see e.g. 243-249 Holding Co. LLC v. Infante, 4 AD3d 184 [1st Dept 2004] [third-party beneficiary given standing to bring action in own name]) or the owner of a corporate nominee ( see e.g. Riley v. Maran, 82 Misc 2d 702 [Sup Ct, NY County 1974] [owner of corporate nominee could bring action in own name], citing Macklem v. Marine Park Homes, Inc., 17 Misc 2d 439 [S Ct, Nassau County 1955], aff'd 8 AD2d 824 [2nd Dept 1959], affd 8 NY2d 1076). In this case, plaintiff, who it is alleged was induced to enter into the BLIPS transaction, who paid the $3.5 million fee, claimed the loss that was passed through Congo Ventures, and paid the tax deficiency, penalties, interest and additional attorney and accounting fees associated with the disallowance of the deduction, is the real party in interest. With respect to the fraud and conspiracy claims, therefore, plaintiff has a right to maintain the action in his own name, and need not join the sub-chapter S corporation.
However, plaintiff's determination not to join Congo Ventures in the action is fatal to maintaining the fourth cause of action alleged in the amended complaint for recision. A person has no standing to seek recision of a contract to which he is not a party ( see Quatrochi v. Citibank, N.A., 210 AD2d 53, 54 [1st Dept 1994]; Freidus v. Sardelli, 192 AD2d 578 [2nd Dept 1993] [dismissal upheld where joint venture was not a party or privy to the contracts is sought to reform or rescind]; Baker v. Latham Sparrowbush Assoc., 129 AD2d 667 [2nd Dept], app denied 70 NY2d 606 [majority stockholder had no right to commence action in individual capacity questioning the validity of lease to which she was not a party]). Plaintiff, asserts that any damages suffered by Congo Ventures are nominal, and does not request leave to add Congo Ventures as a party. Thus, the fourth cause of action alleged in plaintiff's amended complaint, as asserted against HVB is dismissed, for lack of standing. Plaintiff's fourth cause of action, as asserted against Presidio is also dismissed, to the extent that it is addressed to the written contracts between the various Presidio entities and Congo Ventures. I make no determination with respect to whether plaintiff could assert a cause of action against Presidio based upon plaintiff's relationship with that entity before Congo Ventures was formed, when it is alleged the $3.5 million fee was paid.
Presidio, unlike HVB, does not seek to challenge plaintiff's standing. Presidio argues that plaintiff is bound by the contracts he signed on behalf of Congo Ventures, and thus, is required to litigate any action, arising out of his investment, in San Francisco California, in accordance with the forum selection clause set forth in paragraph 4.7 of the Subscription Agreement, which states, in pertinent part:
. . . the parties expressly agree that. . . . [a]ny action or proceeding brought by any other party against any Indemnified Party or the Company relating in any way to this Agreement or the Limited Liability Company Agreement shall, be brought and enforced in the courts of the State of California located in San Francisco or . . . in the courts of the United States located in the City of San Francisco, California, and the Investor and the Company irrevocably submit to the jurisdiction of both such state and federal courts in respect of any such action or proceeding. The Investor and the Company irrevocably wave, to the fullest extent permitted by law, any objection that they may now or hereafter have to laying the venue of any such action or proceeding in the courts of the State of California located in San Francisco or in the courts of the United States located in the City of San Francisco . . .
(2/17/06 Turner Aff., Exh. 2, p. 12). The language is unambiguous, and may be deemed mandatory as opposed to permissive ( see Boss v. American Express Financial Advisors, 6 NY3d 242; cf. compare to this case, UFH Endowment, Ltd. v. Nevada Manhattan Mining, Inc., 2000 WL 1457320 [SD NY, Sept. 28, 2000]). The fact that plaintiff is not a signatory to the contract will not prevent it from being enforced against him where, as in this case, and as argued by plaintiff on the issue of standing, plaintiff is so closely aligned with the signatory and the transaction that it is foreseeable that he would be bound, and thus, implicitly, is included in its terms ( see L-3 Communications Corp. v. Channel Technologies, Inc., 291 AD2d 276, 277 [1st Dept 2002]; see also Weingrad v. Telepathy, Inc., 2005 WL 2990645, *5 [SD NY, Nov. 7, 2005]; Nanopierce Technologies, Inc. v. Southridge Capital Management LLC, 2003 WL 22882137 [SD NY, Dec. 4, 2003]; Best Cheese Corp. v. All-Ways Forwarding Intl. Inc., 24 AD3d 580, 581 [2nd Dept 2005]; Indosuez Intl. Finance B.V. v. National Reserve Bank, 304 AD2d 429, 431 [1st Dept 2003]), and under federal procedural law, the "relating in any way to" language makes the clause broad enough to encompass tort claims, including fraudulent inducement claims, if such claims "ultimately depend on the existence of a contractual relationship between the parties" ( see Korean Press Agency, Inc. v. Yonhap News Agency, 421 F Supp 2d 775 [SD NY 2006], citing Coastal Steel Corp. v. Tilghman Wheelabrator Ltd., 709 F 2d 190, 203 [3rd Cir], cert denied 464 US 938). An analogous rule exists under state law with respect to the scope of mandatory arbitration provisions ( see e.g. GAF Corp. v. Werner, 66 NY2d 97, cert denied 475 U.S. 1083; Matter of Silverman [Benmor Coats], 61 NY2d 299), and although some ambiguity of application exists under state law ( see Fantis Foods, Inc. v. Standard Importing Co., Inc., 63 AD2d 52 [1st Dept 1978] [contract claims were subject to forum selection clause while tort claims were not], reversed on other grounds 49 NY2d 317 [issue regarding application of forum selection clause to tort claims not reached]), both types of clauses affect a choice of forum, and should be treated in the same way ( in accord see GMAC Commercial Credit LLC v. J.C. Penny Co., Inc., 186 Misc 2d 701, 704 [Sup Ct, NY County 2001]), as more recent cases appear to do without articulating a rule ( see e.g. LSPA Enterprise, Inc. v. Jani-King of NY, Inc. ___ AD3d ___, 817 NYS2d 657 [2nd Dept 2006]).
Mandatory forum selection clauses are prima facie valid, and it is the public policy of this state to enforce them, unless enforcement of the clause is shown to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or it is shown that a trial in the selected forum would be so gravely difficult the opposing party would, for all practical purposes, be deprived of his day in court ( Brooke Group v. JCH Syndicate 488, 87 NY2d 530, 534; Best Cheese Corp. v. All-Ways Forwarding Int'l, Inc., 24 AD3d at 581; ( Fleet Capital Leasing/Global Vendor Finance v. Angiuli Motors, Inc. 15 AD3d 535 [2nd Dept 2005]; Indosuez Int'l Finance, B.V. v. Nat'l Reserve Bank, 304 AD2d at 431; British West Indies Guaranty Trust Co., Ltd v. Banque Internationale a Luxembourg, 172 AD2d 234 [1st Dept 1991]). General allegations that the contract itself was induced by fraud are not sufficient to preclude enforcement of a forum selection clause ( LSPA Enterprise, Inc. v. Jani-King of New York, Inc., 817 NYS2d at 657; British West Indies Guaranty Trust Co., LTD v. Banque Internationale A Luxembourge, 172 AD2d 234 [1st Dept 1991]). Thus, a party may not defeat a forum selection clause "by artful pleading of claims not based on the contract containing the clause if those claims arise out of the contractual relationship or a breach of that relationship ( Weingrad v. Telepathy, Inc., 2005 WL 2990645 at *4; Nanopierce Technologies, Inc. v. Southridge Capital Management LLC, 2003 WL 22882137 at *6; Anselmo v. Univision Station Group, Inc., 1993 WL 17173, *2 [SD NY, Jan. 15, 1993]; but c.f. DeSola Group, Inc. v. Coors Brewing Co., 199 AD2d 141 [1st Dept 1993] [discussed, infra]). The complaint must allege that the clause was procured by fraud or adhesion ( see Roby v. Corporation of Lloyd's 996 F.2d 1353, 1360-62 [2d Cir 1993], cert denied 510 US 945; AVC Nederland B.V. v. Atrium Inv. Partnership, 740 F2d 148 [2d Cir 1984]; LSPA Enterprise, Inc. v. Jani-King of New York, Inc., 2006 WL 1851219; British West Indies Guaranty Trust Co., LTD v. Banque Internationale A Luxembourge, 172 AD2d 234).
Plaintiff argues that this case falls within the exception to the rule, articulated in Armco Inc. v. North Atlantic Ins. Co. Ltd. ( 68 F Supp 2d 330 [SD NY 1999]), that is recognized when there are sufficient allegations of the type of scheme or plan that would imbue the entire contract with fraud ( see aslo DeSola Group, Inc. v. Coors Brewing Company, 199 AD2d at 141). In Armaco, Armaco employees, charged with the duty of negotiating and entering into a contract for the sale of some of its businesses, secretly became officers or shareholders of the purchasing entity, negotiated the contract in a way that caused Armaco to over-fund a trust established to meet the pre-existing obligations of those businesses, and converted the monies placed in the trust until it went bankrupt. In denying effect to the forum selection clause in that case, the District Court found that the complaint was based upon a large scale scheme to defraud, that included numerous pre-contact activities by the defendants that were not 'related to" the contract within the meaning of the forum selection clause, and that the forum selection clause, in any event, was procured by fraud based upon the acts of the employee responsible for drafting the sales contract on Armaco's behalf, who purposefully removed Armaco's standard forum selection clause, and replaced it with a clause laying venue in England, where his co-conspirators resided. In DeSola Group, Inc. v. Coors Brewing Company ( 199 AD2d 144), the First Department denied effect to a forum selection clause which it found to be "permeated by fraud" based upon the plaintiff's allegations that the agreement was never intended by the parties to be a binding agreement, the defendant represented to plaintiff that the sole purpose of the agreement was to provide a billing number, and the services for which plaintiff sought payment were outside the scope of the agreement. In both instances, the party seeking to enforce the forum selection clause was alleged to have been a participant in a scheme to defraud the plaintiff with respect to the nature or purpose of the contract containing the choice of forum provision.
In this case, plaintiff claims that Presidio participated with KPMG and Sidley Austin in the marketing of BLIPS through the use of false and misleading statements, not only as to their safety and viability for federal income tax purposes, but as to the nature of the transactions he was entering into. He alleges that he relied on Presidio to draft all of the underlying documents, as he was advised to do by KPMG, and that Presidio structured the Subscription Agreement and related documents in such a way as to make it appear that he was borrowing money for purposes of leveraging investments. Plaintiff alleges that Presidio, conspired in advance, to execute the transactions, in such a way, as to deprive plaintiff of the benefit of his bargain, by failing to use any loan proceeds to fund the investments, and that it issued false tax statements that plaintiff relied upon in claiming the deduction. Thus, although there are no allegations that the clause itself was the subject of adhesion or fraud, plaintiff has alleged sufficient facts from which to infer that Presidio engaged in a scheme, that included number of pre-contract activities, and that the contracts it drafted on his behalf were a ruse, or part of a deception or sham transaction, which is enough, at the pleading stage, to deny enforcement of the forum selection clause ( see Matter of Silverman [Benmor Coats], 61 NY at 307-08 Stellmack Air Conditioning Referigeration Corp. v. Contractors Management Systems of NH Inc., 293 AD2d 956 [3rd Dept 2002], citing Pima Paint Corp. v. Flood Conklin Mfg. Co., 388 US 395, 403-04; DeSola Group, Inc. v. Coors Brewing Company, 199 AD2d 144). Factors such as the substantial overlapping of plaintiff's claims against HVB, the interrelated nature of the contracts, the obvious risk of duplication of resources and inconsistent results, also militate against transfer of the action on forum non conveniens grounds. ( Blanco v. Banco Indus. de Venezuela, S.A., 997 F 2d 974, 979-80 [2d Cir. 1993]; Brooke Group Ltd. v. JCH Syndicate, 87 NY2d 530; LaSala v. E*Trade Securities LLC, 1005 WL 2848853 [SD NY 2005]).
Having determined that the clause will not be enforced at this juncture, it is unnecessary to address plaintiff's argument regarding the effect of competing forum selection clauses contained in some of the other contracts that were executed in connection with the BLIPS transaction.
In support of their respective motions to dismiss the first cause of action alleged in plaintiff's amended complaint for fraud, HVB and Presidio rely upon the assertion that they had no contact with plaintiff prior to his determination to enter into the BLIPS transaction, and that that the amended complaint fails to allege any representations made to plaintiff by either HVB or Presidio upon which plaintiff could have relied. HVB and Presidio additionally assert, under CPLR 3211 (a) (1), that plaintiff's fraud claim is precluded by documentary evidence consisting of various provisions in the written documents pursuant to which plaintiff represented that HVB made no representations to Congo Ventures regarding the loan or the proposed investment transactions, and that Congo Ventures was not relying on HVB or Presidio for any advise with respect to nature of the transaction or its tax ramifications. HVB and Presidio further assert that they had no duty to disclose any of the purported omissions to plaintiff.
A cause of action for fraud requires allegations that the defendant made material representations of existing fact; that were false and known by the defendant to be false when made, for the purpose of inducing plaintiff's reliance, justifiable reliance by the plaintiff, and damages ( Lama Holding Company v. Smith Barney, Inc., 88 NY2d 413; New York University v. Continental Ins. Co., 87 NY2d 308, 318; Friedman v. Anderson, 23 AD3d 163 [1st Dept 2005]). Where the claim is based upon material omissions, the general rule is that no duty to disclose exists in the absence of a confidential, fiduciary relationship or statutory duty between two parties to a contract (Chiarella v. United States, 445 US 222, 228 (1980); US v. Szur, 289 F3d 200 [2nd Cir 2002]; Aaron Ferer Sons Ltd. v. Chase Manhattan Bank, NA, 731 F2d 112, 123 [2d Cir 1984] [omissions of material fact may rise to a level constituting fraud only if there is a showing "that a duty of disclosure existed"]; George Cohen Agency, Inc. v. Donald S. Perlman Agency, Inc., 114 AD2d 930, 931 [2nd Dept 1985], app den, 68 NY2d 603). Mere silence "without some act which deceived" cannot constitute a concealment that is actionable as fraud ( Mobil Oil Corp. v. Joshi, 202 AD2d 318 [1st Dept 1994]; see also U.S. v. Chestman, 947 F2d 551 [2nd Cir 1991], cert denied 503 US 1004). Presidio, however, as managing member of the investment entity, Arvon, cannot escape the imposition of fiduciary duty, which will be implied, as a matter of law, and notwithstanding any disclaimers in the underlying documents ( see Kramer v. Schloss, 92 Fed Appx 815, 815 [2d Cir 2004]; Salm v. Feldstein, 20 AD3d 469 [2nd Dept 2005]; Blue Chip Emerald LLC v. Allied Partners Inc., 299 AD2d 278 [1st Dept 2002]). Any distinction between omissions and misrepresentations in such instance is illusory ( see Chiarella v. United States, 445 US 222).
During oral argument of the motions, plaintiff conceded that HVB and Presidio made no direct representations to him prior to the time plaintiff paid the fee to participate in the BLIPS transaction. It is plaintiff's position, that the alleged representations should be imputed based upon their actions in structuring and facilitating the BLIPS transaction, their alleged agreement, in advance of the transactions, that BLIPS would be marketed to high net worth individuals as leveraged investments through the use false and misleading representations, and their facilitation of the fraud by including false and misleading information in the loan documentation to make it appear that the BLIPS transactions had actual economic value. Thus, in order to tie HVB and Presidio to the alleged fraud, plaintiff relies upon the allegations of conspiracy contained in the second cause of action, alleging that HVB and Presidio, among other things, conspired with and worked closely with KPMG and Sidley Austin to "design, market, and implement" the BLIPS.
As correctly noted by HVB and Presidio, New York does not recognize civil conspiracy as an independent cause of action ( Lewis v. Rosenfeld, 138 F Supp 2d 466, 479 [SD NY 2001]; Alexander Alexander of New York v. Fritzen, 68 NY2d 968, 969; Ward v. City of New York, 15 AD3d 392, 393 [2nd Dept 2005]; Litras v. Litras, 254 AD2d 395 (2nd Dept 1998); Riverbank Realty Co. v. Koffman, 179 AD2d 542, 543 [1st Dept 1992]). However, allegations of conspiracy are permitted to connect the actions of separate defendants with an otherwise actionable tort ( Alexander Alexander of NY v. Fritzen, 68 NY2d at 969), and that is what the plaintiff seeks to do in this case. For purposes of these motions, therefore, the first and second causes of action will be read together, as a single claim.
The elements of a conspiracy are: (1) a corrupt agreement between two or more parties; (2) an overt act in furtherance of the agreement; (3) the defendant's intentional participation in the furtherance of the plan or purpose; (4) resulting damages or injury ( see Lewis v. Rosenfeld 138 F Supp 2d at 479; Best Cellars Inc. v. Grape Finds at Dupont, Inc., 90 F Supp 2d 431, 446 [SD NY 2000]; see also Truong v. ATT, 243 AD2d 278 [1st Dept 1997]; Albion Fund v. State St. Bank, 8 Misc 3d 264, 273 [Sup Ct, NY County 2003], affd 2 AD3d 162 [1st Dept 2003]). The defendant's participation in furtherance of the plan must consist of specific wrongful acts constituting independent torts in furtherance of the conspiracy ( Riverbank Realty Co. v. Koffman, 179 AD2d at 543). Dismissal of the fraud claim will also mandate dismissal of the conspiracy claim ( Ward v. City of New York, 15 AD3d at 393).
In this case, plaintiff's amended complaint specifies the alleged fraudulent statements and omissions made by KPMG, the relationship between the various defendants, and the role allegedly played by each. In addition, the allegations of HVB's knowledge and complicity in the alleged misrepresentations and omissions, as well as its active participation in the way BLIPS were marketed, promoted and implemented, are supplemented by a Deferred Prosecution Agreement and Statement of Admitted facts made by the HVB Management Committee, that was filed in the United States District Court for the Southern District of New York ( United States v. Bayerische Hypo-und Vereinsbank AG, Docket No 06 Cr 00162 [AKH]) ( see 2/17/06 Turner Aff, Exh 1), and the guilty plea entered by HVB employee Domenick DeGiorgio ( United States v. DeGiorgio, Docket No. 05 Cr 00853 [BSJ] [SDNY]) ( see 2/17/06 Turner Aff, Exh 4). Plaintiff acknowledges, and asserts that these documents supplant and supercede any reference in the amended complaint to "a federal grand jury indictment handed down in mid-October 2005." Thus, reference to the unspecified "mid-October 2005" indictment is stricken, as irrelevant to plaintiff's claims.
DeGiorgio's guilty plea states, in part:
My participation in BLIPS began in approximately October 1999, when one of the BLIPS promoters asked me whether HVB would be interested in serving as one of the banks for these transactions. The transactions were somewhat complicated, but an essential part of creating reported tax losses depended on the bank purporting to provide a loan structured in a particular way. The loan proposed by the BLIPS promoters was a sham because, among other things, as designed, no money ever left the bank and because HVB never set aside any of its own money or procured funds from the banking market in order to fund any of these loans.
At the time I participated in BLIPS I was well aware of these facts. I reviewed the draft BLIPS tax opinion letter and knew that BLIPS was falsely described as involving an important part of the transaction of these purported loans, and I knew that this false description was created in order that BLIPS clients would claim tax losses and for themselves money that they should have paid in taxes.
I agreed to participate in these transactions, and in furtherance of the scheme, I and others caused HVB to prepare and execute various false documents that made it appear that HVB was providing real loans when in reality it was not. . . .
* * * *
. . . BLIPS falsely claimed that the investment component of the program was leveraged when it was not. The purported loan was not used in the relatively small trades relating to two foreign currencies. . . .
HVB's Statement of Admitted Facts, which is part of the Deferred Prosecution Agreement states that "between 1996 and 2002 HVB participated in a number of fraudulent tax shelter transactions devised by others," and that its activities in connection with these and other transactions included, "(I) participating in transactions purporting to be loans that were not bona fide loans; (ii) participating in trading activity on instructions from promoters that was intended to create the appearance of investment activity but that had no real substance; (iii) participating in creating documentation that contained false representations concerning the purpose and design of transactions; and (iv) engaging in activity with others, including accounting firms, investment advisory firms various individuals affiliated with those entities, lawyers and clients (defined herein to include the high net worth U.S. individuals and purported entities they created who participated in the transactions to obtain and generate the tax losses), all directed toward the implementation of the tax shelters designed to defraud the United States" (1/17/06 Turner Aff, Exh 1 [c]). HVB admitted that the conduct occurred under the supervision and direction of DeGiorgio, and that although DeGiorgio gave HVB enough information to decline to participate in the transactions, he also made false and misleading representations to HVB concerning the legitimacy of the various transactions to HVB personnel, and that it did not have proper policies and procedures in place for analyzing the tax-motivated transactions in which it was participating, and did not involve its Tax Department in an appropriate analysis and approval process. Nevertheless, HVB accepted responsibility for DeGiorgio's actions because it placed him in a supervisory position, permitted him to operate and manage HVB's Financial Engineering Department with few controls, and rewarded him for generating substantial fees for the bank by participating in the tax shelter transactions.
In support of its motion to dismiss plaintiff's complaint, HVB asserts that the fraud admitted in the Deferred Prosecution Agreement was against the United States government, for assisting high net worth individuals, such as plaintiff, to avoid paying millions of dollars in taxes, not against investors like plaintiff who took full advantage of tax savings generated by BLIPS until they were disallowed by the IRS. The posture of the federal criminal proceeding notwithstanding, HVB admitted to purposefully participating with accountants, promoters and tax attorneys in a scheme to make it appear that investors were taking loans to make leveraged investments when they were not. Holding financial institutions that extend credit to finance business ventures, responsible for misrepresentations made by a sponsor of the investment, burdens the institution with matters collateral to its limited function, tends to expose the financial institution to liability as an insurer of the performance of the particular investment, imposes a burden on the financial community, and ultimately inures to the detriment of the investing public ( National Union Fire Ins. Co. of Pittsburgh, Pa. v. Robert Christopher Assoc., 257 AD2d 1, 12 [1st Dept 1999]). In this case, however, the admissions made by HVB during the course of the federal criminal proceedings, provide a sufficient basis, to draw a solid inference that not only did it participate in the marketing of BLIPS, but that the loan transaction, without which the loss deductions could not be claimed, and the investment activities by Presidio, supposedly using the proceeds of the loan, were sham transactions. Implementation of the alleged plan or scheme, in such instance, cannot be separated from the inducement, particularly where, as in this case, plaintiff's damages flow directly, at least in part, from the fact that the loans were never funded and investment were not "at risk."
Plaintiff's amended complaint alleges that he was advised by KPMG that he was entering into a highly leveraged investment in foreign currency options, and that he was unaware and uninformed of the fact that the loan was not real or that the investment was not truly leveraged. Plaintiff further alleges that HVB and Presidio not only knew that he would be solicited to participate in the BLIPS transactions based these misrepresentations as to the nature of the transactions he entered into, but participated in preparing the documentation that was used to make it appear that the transaction was legitimate. HVB's admissions, moreover, are contrary to the statements made in the representation letters it drafted and requested plaintiff, Presidio and KPMG to sign, and which were included in closing documents for the loan. Thus, the amended complaint, as supplemented by the submissions of the parties, sufficiently sets forth a corrupt agreement, overt tortious acts by HVB and Presidio in furtherance of that agreement, their intentional participation in the furtherance of the plan or purpose to promote, market and implement BLIPS through the use of false and misleading statements, and in a fraudulent way ( Lewis v. Rosenfeld 138 F Supp 2d at 479; Best Cellars Inc. v. Grape Finds at Dupont, Inc., 90 F Supp 2d at 446).
HVB and Presidio additionally move to strike plaintiff's demand to recover back taxes and interest paid to the IRS, citing Alpert v. Shea Gould Climenko Casey ( 160 AD2d 67 [1st Dept 1990]; in accord see Estate of Nevelson v. Carro, Spanbock, Kaster Cuiffo, 259 AD2d 282, 284 [1st Dept 1999]). In opposition, plaintiff relies on Jamie Towers Housing Co. Inc. v. William B. Lucas, Inc. ( 296 AD2d 359 [1st Dept 2002]), asserting that, as the innocent victim of a fraud, Jamie Towers rather than Alpert v. Shea Gould is applicable to this case. However, the facts of Alpert v. Shea Gould Climenko Casey ( 160 AD2d 67) are directly aligned to the facts alleged in plaintiff's amended complaint. In Alpert, the plaintiffs were seeking to recover damages on the ground that they were fraudulently induced to enter into a tax shelter that the IRS subsequently disallowed. The interest assessed by the IRS on the tax deficiencies in Alpert far exceeded the amount of back taxes that the defrauded taxpayer was required to pay. Reasoning that the recovery of consequential damages naturally flowing from a fraud is limited to that which is necessary to restore a party to the position occupied before the commission of the fraud ( 160 AD2d at 71; see also Orbit Holding Corp. v. Anthony Hotel Corp., 121 AD2d 311, 315 [1st Dept 1986]), the Appellate Division upheld the determination of the motion court to strike the claim for damages in the form of back taxes, reasoning that the recovery of back taxes would place the plaintiff in a better position than had they never invested in the subject tax shelter, stating, further, that it is well settled that the victim of fraud may not recover the benefit of an alternative agreement overlooked in favor of the fraudulent one ( Alpert v. Shea Gould Climenko Casey, 160 AD2d at 72, citing Kensington Publ. Corp v. Kable News Co., Inc., 100 AD2d 802 [1st Dept 1984]; see also Lama Holding Company v. Smith Barney, Inc., 88 NY2d at 422-23; Gaslow v. KPMG LLP, 19 AD3d 264 [1st Dept 2005]). The Appellate Division also adopted the reasoning of the United States Court of Appeals in Freschi v. Grand Coal Venture ( 767 F2d 1041 [2d Cir 1985], vacated on other grounds, 478 US 1015, on remand 800 F 2d 305, amended 806 F2d 17), that interest paid to the IRS upon disallowance of the tax deduction was not an item of damage suffered by plaintiff but a payment to the IRS for his use of the money during the period of time when he was not entitled to it, ruling that the recovery of interest payments to the IRS also should have been precluded to prevent plaintiffs from recovering a windfall from both having used the tax moneys for seven years and recovering all interest therefrom. By contrast, in Jamie Towers Housing Company, Inc. v. William B. Lucas, Inc. 296 AD2d 359, the manager of a residential cooperative failed to pay real estate taxes on the property. Distinguishing Alpert, and reasoning that the recovery of interest in that case would not constitute an impermissible windfall or put the plaintiff in a better position, the Appellate Division allowed the plaintiff in that case to introduce evidence of the actual amount of interest and late charges paid to the City due to the misfeasance of the manager, offset by the actual income derived from the funds in question during the relevant period of time. In this case, plaintiff entered into the BLIPS transaction to avoid paying tax on a $55 million capital gain from the sale of shares in one of his businesses, and as a result of his participation in the BLIPS transaction, he had the full use of his money for a period of approximately four years before the assessment of back taxes interest and penalties. The facts of this case, therefore, fall squarely within the ambit of Alpert. Contrary determinations by other courts in other jurisdictions do not have binding precedential effect in this case Gaslow v. KPMG, 12 AD3d at 265, ( c.f. compare Seippel v. Jenkens Gilchrist, P.C., 341 F. Supp 2d 363 [SDNY 2004] [applying Virginia law], amended on reconsid. 2004 WL 2403911 [SD NY 2004]; Eckert Cold Storage, Inc. v. Behl, 943 F. Supp 1230 [ED Cal 1996] to Lama Holding Company v. Smith Barney, Inc., 88 NY2d at 422-23.
Damages asserted by plaintiff in addition to the tax liabilities and interest paid, include the recoupment of penalties, recovery of which is not precluded by any of the cited precedents, and the attorney and accounting fees and costs incurred in connection with the IRS proceedings and the filing of amended tax returns ( see Estate of Nevelson v. Carro, Spanbock, Kaster Cuiffo, 259 AD2d at 284). Thus, contrary to Presidio's assertion, the striking of plaintiff's cause of action for recision, and his demand for back taxes and interest does not prevent plaintiff from demonstrating any compensable damages, and these remaining elements of damage are sufficient to satisfy the final element requisite to sustain the first and second causes of action, as consolidated against these defendants. The motions by Presidio and HVB to dismiss plaintiff's consolidated fraud and conspiracy claims pursuant to CPLR 3211(a) (7), therefore, are denied.
Accordingly, for the reasons set forth above, it is:
ORDERED, that all references to "a federal grand jury indictment handed down in mid-October 2005" in plaintiff's amended complaint are stricken; and it is further
ORDERED, that the fourth cause of action alleged in plaintiff's complaint, to the extent that it seeks to rescind the written agreements entered into between Congo Ventures LLC and BAYERISCHE HYPOUND VEREINSBAN AG, HVB STRUCTURED FINANCE INC., HVB RISK MANAGEMENT PRODUCTS INC., HVB AMERICAN INC., and to rescind the written agreements between Congo Ventures LLC and PRESIDIO ADVISORY SERVICES, LLC, PRESIDIO GROWTH, LLC; PRESDIO RESOURCES, LLC, is dismissed, for lack of standing, and it is further
ORDERED, that plaintiff's demand for damages, in the form of tax deficiencies and interest paid to the IRS and/or other taxing authorities, is stricken; and it is further
ORDERED, that plaintiff's first and second causes of action are consolidated. The balance of the motions, asserted under motion sequence 007 and 009, are denied, and plaintiff is directed to serve an amended pleading, in conformity with this decision, within 30 days of service of a copy of this order with notice of entry.