Opinion
113209/09.
Decided April 15, 2011.
Jaspan Schlesinger LLP, for Plaintiff.
Skaddan Arps Slate Meacher, Sidley Austin LLP, Bingham McCutchen LLP, Defendant.
This action is one of several on behalf of investors who suffered losses due to the Ponzi scheme perpetrated by Bernard L. Madoff (Madoff) and his company, Bernard L. Madoff Investment Securities (BLMIS). Plaintiffs Peter A. Zutty and Robert N. Zutty, unable to sue Madoff or BLMIS, have brought claims against several individuals and entities, including Tremont Partners, Inc. (TPI), which served as the general partner of defendants Rye Select Broad Market Prime Fund, L.P. (the Prime Fund), and Select Broad Market XL Fund, L.P. (the XL Fund); Massachusetts Mutual Life Insurance Company (MassMutual) and Oppenheimer Acquisition Corp. (OAC), TPI's corporate parents; KPMG LLP (KPMG), which served as the independent auditor of the XL Fund's financial statements; and defendant The Bank of New York Mellon Corporation, which acted as fund administrator for the XL Fund.
Motion Sequence Nos. 006, 007, 008, 009, 010, 011 and 012 are consolidated for disposition. In Motion Sequence No. 006, defendant MassMutual moves, pursuant to CPLR 3211 (a) and 3016 (b), for dismissal of the claims alleged as against it for failure to state a cause of action, and failure to plead fraud with particularity.
In Motion Sequence No. 007, defendants TPI, Tremont Group Holdings, Inc. (TGH), Robert I. Schulman, Stephen T. Clayton, Stuart Pologe, Patrick Kelly, Harry Hodges, Rupert A. Allan, Cynthia J. Nicoll, Ileana Lopez-Balboa, Robert I. Rosenbaum, Stephen Jupp, Lynn Keeshan and James G. McCormick (collectively, the Tremont defendants) move, pursuant to CPLR 3016 (b), 3211 (a) (1) and 3211 (a) (7), for an order dismissing the complaint as against them.
In Motion Sequence No. 008, defendant KPMG moves for an order compelling arbitration and staying the action as against it, or, alternatively, dismissing the complaint as against it.
In Motion Sequence No. 009, defendants Sandra L. Manzke and Suzanne S. Hammond move to dismiss the complaint as against them.
In Motion Sequence No. 010, defendant The Bank of New York Mellon Corporation, on behalf of itself and dissolved entity BNY Alternative Investment Services, Inc. (BNY Mellon) moves for an order dismissing all claims as against it.
In Motion Sequence No. 011, defendants the Prime Fund and the XL Fund move, pursuant to CPLR 3211 (a) and 3016 (b), for an order dismissing the complaint as against them.
In Motion Sequence No. 012, defendant OAC moves, pursuant to CPLR 3211 (a) and 3016 (b), for an order dismissing the complaint as against it.
BACKGROUND
Plaintiffs allege that they are investors in the Prime Fund and the XL Fund, which are hedge funds organized as limited partnerships under Delaware law (collectively, the Funds) (Complaint, ¶¶ 1-3, 5). TPI, the general partner of each Fund ( id., ¶¶ 42, 56), invested the Funds' assets with Madoff's firm, BLMIS, before learning on December 11, 2008 that Madoff's operations were a sham.
Plaintiffs first invested in the Prime Fund in 2001 ( id., ¶¶ 28, 35). Peter Zutty alleges that he initially invested $250,000 in the Prime Fund and that, "[a]s of October 31, 2008, the stated value of the [his] account was no less than $735,663.62" ( id., ¶¶ 28, 30). Robert Zutty alleges that he invested $250,000 in the Prime Fund and that, "[a]s of October 31, 2008, the stated value of [his] account was no less than $462,716.00" ( id., ¶¶ 35, 37).
Plaintiffs also claim that they invested in the XL Fund. Peter Zutty alleges an initial investment of $150,000 in the XL Fund in October 2008 and an account value of no less than $149,136.14 as of October 31, 2008 ( id., ¶¶ 31, 34). Robert Zutty alleges that he invested $250,000 in the XL Fund in April 2007, and that as of October 31, 2008, the stated value of his account was no less than $820,072.00 ( id., ¶¶ 38, 41).
Under the terms of the Funds' limited partnership agreement, TPI, the general partner of the Funds, was authorized to delegate responsibility for investing the Funds' assets to an investment advisor or advisors selected by TPI in its sole discretion (Prime Fund Amended and Restated Limited Partnership Agreement [Prime LPA], § 2.2 [Aff. of Jason C. Vigna, Exh A]; XL Fund Amended and Restated Limited Partnership Agreement [XL LPA], § 2.2 [Vigna Aff., Exh B]). Pursuant to that authority, TPI selected BLMIS to invest the Funds' assets (Complaint, ¶¶ 65, 90-91, 109-110).
TGH is the parent company of TPI ( id., ¶¶ 6-7). Plaintiffs allege that individual defendants Schulman, Clayton, Pologe, Kelly, Hodges, Allan, Nicoll, Balboa, Rosenbaum, Jupp, Keeshan, McCormick, Manzke and Hammond (the Tremont Individuals) were "decision-makers" charged with administering TGH, TPI, and the Funds ( id., ¶¶ 70; 72-73; 75-86).
Prior to becoming limited partners of the Funds, plaintiffs received private placement memoranda (the PPMs), which disclosed the material terms and risks of investing in the Partnerships ( id., ¶¶ 42, 56). According to the PPM for the Prime Fund (the Prime PPM) and the PPM for XL Fund (the XL PPM), TPI, as general partner, was responsible for managing the day-to-day operations and investment management of the Funds ( id., ¶¶ 51, 53, 57, 66, 68).
The Prime PPM disclosed that, under the direction of TPI, "the Partnership allocates its investment portfolio to one Investment Advisor" and that "[t]he overall success of the Partnership depends upon the ability of the present Investment Advisor to be successful in his own strategy" (Prime PPM, at i, ii-iii, 1-2, 6, 18 [Vigna Aff., Exh C]). The Prime PPM also warned that "[w]hen the Partnership invests with an Investment Advisor, the Partnership does not have actual custody of the assets" ( id. at 24, 27). It further disclosed that "[a]lthough the General Partner attempts to monitor the performance of each Investment Advisor, the Partnership ultimately must rely on . . . the accuracy of the information provided to the Partnership" ( id. at 25).
The XL Fund is a leveraged version of the Rye Select Broad Market Fund, L.P,, another fund that invested its assets through Madoff. The XL PPM explained that the XL Fund's strategy was to provide "a return linked to a three times levered exposure to the economic performance of the Rye Select Broad Market Fund, L.P. (the Reference Entity)" (XL PPM, at 1 [Vigna Aff., Exh D]). The XL PPM described the Reference Entity as a fund seeking capital appreciation "by investing the majority of [its] assets with one investment manager who employs a split strike conversion' investment strategy" ( id. at 3). The Reference Entity's PPM further explained that the investment manager would control the Reference Entity's assets, the Reference Entity's success depended on the skill of the investment manager, and the Reference Entity's general partner, TPI, might receive limited information from the investment manager (Rye Select Broad Market Fund, L.P. Amended and Restated Confidential Private Placement Memorandum [Broad Market PPM], at 9, 20, 18, 32-33, 40 [Vigna Aff., Exh E]).
Because of the significant risks of investing in the Funds, investors were required under the federal securities laws to have substantial net worth and investment experience before TPI could accept their subscriptions for partnership interests (Prime PPM, at 4, 12-16; XL PPM, at 10-14). Thus, the PPMs advised that investors needed to be willing and able "to bear the potential loss of their entire investment" (Prime PPM, at 12; XL PPM, at 10).
Pursuant to the LPAs, the Funds paid TPI monthly management and administration fees (Prime LPA, § 2.3; XL LPA, § 2.3). The LPAs also included a provision exculpating TPI and its members, officers and affiliates from liability to the Funds and their limited partners "to the fullest extent permitted by law" for any "errors in judgment or for action or inaction, whether or not disclosed, which said party reasonably believed to be in the best interests of the Partnership" (Prime LPA, § 2.7; XL LPA, § 2.6).
Plaintiffs purchased partnership interest in the Funds between 2001 and 2008 (Complaint, ¶¶ 28-41). Prior to purchasing their interests, plaintiffs signed subscription agreements in which they represented and warranted that they: (1) possessed sufficient "knowledge and experience in financial and business matters [such] that [they were] capable of evaluating the merits and risks" of investing in the Funds; (2) had obtained "sufficient information from the [Funds or] authorized representatives to evaluate the merits and risks" of such an investment; and (3) could "afford a partial or complete loss" of their investments (Peter Zutty Prime Fund Subscription Agreement, at S-20 [Vigna Aff., Exh F]; Peter Zutty XL Fund Subscription Agreement, at 20 [Vigna Aff., Exh G]; Robert Zutty Prime Fund Subscription Agreement, at S-20 [Vigna Aff., Exh H]; Robert Zutty XL Fund Subscription Agreement, at 22 [Vigna Aff., Exh I]). Plaintiffs further represented and warranted that they had "consulted with [their] own advisors" about investing in the Funds (Peter Zutty Prime Fund Subscription Agreement, at S-22; Peter Zutty XL Fund Subscription Agreement, at 22; Robert Zutty Prime Fund Subscription Agreement, at S-22; Robert Zutty XL Fund Subscription Agreement, at 24).
Thereafter, they received account statements disclosing, among other things, that the Funds' portfolio of securities investments "have been and will continue to be custodied for the benefit of the portfolio at Bernard L. Madoff Investment Securities, LLC" ( see July 31, 2007 Clients Statements addressed to Peter Zutty and Robert Zutty [Vigna Aff., Exhs J and K]).
BLMIS was a broker-dealer and investment advisor registered with the Securities and Exchange Commission (the SEC) (Complaint, ¶ 88). For years, Madoff reported "high rates of return" to its investors ( id., ¶ 89), using an options trading strategy known as "split-strike conversion." Plaintiffs allege that Madoff's security trades were fictitious, and that, rather than buying and selling securities, Madoff paid "fictitious returns to the other investors of [BLMIS] as part of [a] Ponzi scheme" ( id., ¶ 206).
On December 11, 2008, Madoff confessed that BLMIS was a well-orchestrated Ponzi scheme that had been going on for years, through which he misappropriated assets entrusted to him by numerous hedge funds and other investors, including the Funds ( id., ¶¶ 95-96). Prior to his confession, Madoff successfully concealed his scheme from the SEC, prominent financial institutions, hedge funds, charitable organizations, and thousands of sophisticated investors. Despite this long history of concealment, plaintiffs contend that "numerous red flags" should have revealed Madoff's fraud ( id., ¶ 207).
Chiefly, plaintiffs bring claims against TGH, TPI and the Tremont Individuals for breach of fiduciary (first cause of action), fraud (second cause of action), and unjust enrichment (third cause of action). Plaintiffs allege that TPI's failure to detect Madoff's fraud before he publicly confessed to it demonstrates that TPI must not have acted in good faith to monitor the Funds' investments ( id., ¶¶ 92-94). Plaintiffs also suggest that Madoff's fraud should have been obvious to TPI because a competing investment advisor, Harry Markopolos, "wrote several letters to the SEC in 1999 and 2005 claiming [that] BLMIS was a Ponzi scheme" ( id., ¶ 89).
Plaintiffs assert that the Tremont defendants "fail[ed] to perform proper due diligence with respect to Madoff and BLMIS," "ignor[ed] the red flags raised with respect to the activities of Madoff and BLMIS," and "abdicated their responsibilities to manage and control the assets of the Funds" ( id., ¶ 114). According to plaintiffs, this alleged inaction caused a diminution in value of their partnership interests in the XL Fund and "rendered worthless" their investments ( id., ¶¶ 116-118).
Plaintiffs also asserts fraud claims against the Prime Fund and the XL Fund (fourth cause of action) and MassMutual and OAC (fifth cause of action); claims for professional malpractice (eighth cause of action) and breach of contract (ninth cause of action) against KPMG; and claims for conspiracy (tenth cause of action) and unjust enrichment (eleventh cause of action) against BNY Mellon.
DISCUSSION
Although on a motion to dismiss a complaint pursuant to CPLR 3211 (a) (7), "the pleading is to be afforded a liberal construction," and "the facts as alleged in the complaint [are presumed] as true" ( Leon v Martinez, 84 NY2d 83, 87; see also Rovello v Orofino Realty Co., 40 NY2d 633), "factual claims [that are] either inherently incredible or flatly contradicted by documentary evidence are not entitled to such consideration'" ( Mark Hampton, Inc. v Bergreen, 173 AD2d 220, 220 [1st Dept 1991] [citation omitted], lv denied 80 NY2d 788; see also Caniglia v Chicago Tribune-N.Y. News Syndicate, 204 AD2d 233 [1st Dept 1994]).
In order to prevail on a motion to dismiss based upon documentary evidence, the movant must demonstrate that the documentary evidence conclusively refutes the plaintiff's claims ( AG Capital Funding Partners, L.P. v State St. Bank and Trust Co. , 5 NY3d 582). In addition, "[f]actual allegations presumed to be true on a motion pursuant to CPLR 3211 may properly be negated by affidavits and documentary evidence" ( Wilhelmina Models, Inc. v Fleisher , 19 AD3d 267, 269 [1st Dept 2005]). Thus, dismissal is warranted where, as here, documentary evidence establishes that "the allegations of the complaint fail to state a cause of action" ( L.K. Sta. Group, LLC v Quantek Media, LLC , 62 AD3d 487, 491 [1st Dept 2009]; see e.g. Hallman v Kantor , 72 AD3d 895, 896 [2d Dept], lv denied 15 NY3d 706 [granting motion to dismiss where clear language in the retainer agreement "conclusively established a defense to the plaintiff's claims of malpractice"]).
Motions to Dismiss by the Tremont Defendants (Motion Sequence No. 007); Manzke, and Hammond (Motion Sequence No. 009); and the Prime Fund and the XL Fund (Motion Sequence No. 011) 1. Breach of Fiduciary Duty and Unjust Enrichment Against the Tremont Defendants and Manzke and Hammond
Plaintiffs' claims for breach of fiduciary duty and unjust enrichment must be dismissed on the ground that plaintiffs lack standing to assert derivative claims on behalf of the Funds. Whether claims must be brought derivatively is determined by the law of the state in which the relevant entity was organized ( see Matter of Hakimian (Bear Stearns Co., Inc. ), 46 AD3d 294 [1st Dept 2007]). Because the Funds are Delaware limited partnerships ( see Complaint, ¶ 5), Delaware law dictates whether plaintiffs, who are limited partners in the Funds, can maintain direct causes of action against the moving defendants, or whether they are required to assert any causes of action derivatively on behalf of the Funds.
Under Delaware law, whether plaintiffs' causes of action are direct or derivative turns on two questions — "(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually)?" ( Tooley v Donaldson, Lufkin Jenrette, Inc., 845 A2d 1031, 1033 [Del 2004]).
In considering the alleged misconduct and the nature of the relief sought, it is clear that the Funds, not plaintiffs individually, suffered the alleged injuries, and hence, would receive the benefit of any recovery. Thus, plaintiffs' claims for breach of fiduciary duty and unjust enrichment are derivative in nature because they are based on alleged injuries — i.e., the loss of Fund assets and the Funds' payment of allegedly unjustified fees to TPI (Complaint, ¶¶ 116-118, 137-143) — that were suffered directly by the Funds, and only indirectly by plaintiffs by virtue of their limited partnership interests in the Funds.
For instance, plaintiffs contend that their investments "have been rendered worthless, have been decimated and have been lost" (Complaint, ¶ 116), as a result of Madoff's theft of the Funds' assets, and the use of a portion of those assets to pay TPI's management fees. This is not a direct injury because it was the Funds, not the limited partners, who suffered the direct injury from Madoff's theft. Plaintiffs' alleged injuries occurred only secondarily, and as a function of their investments in the Funds. Thus, plaintiffs' claims are derivative ( see e.g. Cocchi v Tremont Group Holdings, Inc., No. 502009CA016230 [Fl Cir Ct 2010] [claims by investors in the XL Fund were derivative because plaintiffs could not prevail without showing harm to the XL Fund]; Ernst Young Ltd. v Quinn, 2009 WL 3571573 [D Conn 2009] [investors' claims were derivative under Delaware law where they stemmed from the fact that the fund suffered a direct injury]; TIFD III-X LLC v Fruehauf Prod. Co., 883 A2d 854, 859 [Del Ch 2004] [claims were derivative because they involved "harms that fell, in the first instance, on the Partnership as a whole and only affected (the partner) indirectly, as a consequence of its ownership interest in the Partnership"]).
In addition, plaintiffs do not contend that they suffered any injuries independent of the Funds. Rather, they suffered the same harm — a diminution in the value of their limited partnership interests. Such an injury is "classically derivative in nature" ( Ernst Young Ltd. v Quinn, 2009 WL 3571573 at * 9 ["claim predicated on the diminution of the value of a business entity is classically derivative in nature (citation omitted)'"]; see also Longo v Butler Equities II, L.P., 278 AD2d 97, 98 [1st Dept 2000]) [upholding dismissal of direct claim for breach of fiduciary duty because defendants' alleged misconduct, which "could only have reduced the value of the partnership's investment in the target company, impact(ed) on plaintiff only insofar as his pro-rata share was concerned" and thus did not plead "any direct injury to plaintiff independent of the injury caused to the partnership"]).
Accordingly, these derivative claims may be pursued solely by or on behalf of the Funds, and not by plaintiffs directly ( see Alpert v National Assn. of Sec. Dealers, LLC , 7 Misc 3d 1010[A], 2004 NY Slip Op 51872[U], *16-17 n 5 [Sup Ct, NY County 2004] [holding that standing to assert claims premised on injury to a company is determined by the law of the company's state of organization (Delaware) and Delaware law precludes "direct" claims premised on such injury]; Feldman v Cutaia, 951 A2d 727, 733 [Del 2008] [where, as here, "all of a (company's members) are harmed and would recover pro rata in proportion with their ownership of the (company) solely because they are (members), then the claim is derivative in nature"]).
In order for investors to assert derivative claims on behalf of a company, they must (1) first make a pre-suit demand on the company's directors or general partner to redress the defendants' alleged wrongdoing; or (2) adequately allege with particularity in their complaint facts sufficient to show that pre-suit demand is excused as futile ( see Wood v Baum, 953 A2d 136, 140 [Del 2008]). Plaintiffs do not allege that they have satisfied either requirement. Thus, they lack standing to maintain the derivative claims alleged in the complaint, and the breach of fiduciary duty and unjust enrichment claims must be dismissed ( see Hribar v Marsh McLennan Cos. , 73 AD3d 859 [2d Dept 2010]; Longo v Butler Equities II, L.P., 278 AD2d 97, supra [each affirming dismissal of derivative claims that were improperly asserted directly]; accord West Palm Beach Police Pension Fund v Collins Capital Low Volatility Performance Fund II, Ltd., 2010 WL 2949856 [SD FL 2010] [dismissing breach of fiduciary duty and unjust enrichment claims against manager of an investment fund that failed to detect Madoff's fraud, as improperly asserted directly rather than derivatively]).
In opposition to the motion, plaintiffs contend that these claims should nevertheless be deemed direct under a limited exception to the general rule found in two decisions of the Delaware Chancery Court: In re Cencom Cable Income Partners, L.P. ( 2000 WL 130629, * 4-6 [Del Ch 2000] [permitting claims that "appeared derivative" to be pled directly where company in which plaintiffs invested had completed liquidation proceedings, company was no longer actively managed by the general partners, all the company's stakeholders were parties to the action, and the alleged wrongdoers would obtain a significant portion of any derivative recovery]); and Anglo Am. Sec. Fund, L.P. v S.R. Global Intl. Fund, L.P. ( 829 A2d 143, 151 [Del Ch 2003] [finding claims that otherwise "might be classified as derivative" to be brought directly "in order to enable the injured parties (who were no longer limited partners) to recover while preventing a windfall to individuals or entities (who invested later and) whose interests were not injured"]). These cases, however, are completely inapposite.
The holding in Cencom has been "limited to its own unique set of facts" ( Agostino v Hicks, 845 A2d 1110, 1125 [Del Ch 2004]). That case has no application here because the complaint does not allege that the Funds are in liquidation, or that they are no longer managed by TPI. The complaint also fails to allege that any of the Funds' stakeholders other than plaintiffs are before the court, or that the Tremont defendants would receive any recovery if this case were maintained as a derivative action ( see Newman v Family Mgt. Corp., ___ F Supp 2d ___, 2010 WL 4118083 [SD NY 2010]; Trump v Cheng, 2006 WL 6484047 [Sup Ct, NY County 2006] [both distinguishing Cencom]).
Anglo American is similarly inapposite. In contrast to the plaintiffs in Anglo American, plaintiffs here not only remain limited partners in the Funds, but they also fail to allege that they would be unable to share in any recovery obtained in a derivative action, or that any new investors have been admitted to the Funds who would receive a "windfall" in that action ( see Trump v Cheng, 2006 WL 6484047, supra; Ernst Young Ltd. v Quinn, 2009 WL 3571573, supra [each distinguishing Anglo American]).
Plaintiffs' claim for breach of fiduciary duty is also barred by the exculpation clauses of the Funds' limited partnership agreements. Section 2.7 of the Prime LPA and section 2.6 of the XL LPA provide that TPI, and its members, officers and affiliates shall be exculpated from liability to the Funds and their partners, including plaintiffs, "to the fullest extent permitted by law."
Because the Funds are organized under the laws of Delaware, claims like the one asserted here, i.e., a claim of breach of duty pertaining to the conduct of the Funds' internal affairs, are governed by Delaware Law ( see Partnership Law, § 121-901). Under Delaware law, the language of this clause operates to bar all claims alleging breaches of the duty of care, including claims involving "reckless indifference" to one's duties and/or alleged failures to be informed of available material facts ( McPadden v Sidhu, 964 A2d 1262 [Del Ch 2008]). Thus, claims brought against defendants who are protected by such a clause must be dismissed unless the plaintiff "plead[s] . . . facts that demonstrate that the [defendants] acted with scienter, i.e., that they had actual or constructive knowledge' that their conduct was legally improper (citation omitted)" ( Wood v Baum, 953 A2d at 141; see also McPadden v Sidhu, 964 A2d at 1274 [a complaint must allege facts sufficient to show a breach of the duty of good faith, meaning an "intentional dereliction of duty or . . . conscious disregard for one's responsibilities"]).
Plaintiffs make only the conclusory allegation that the moving defendants acted in "bad faith" because they allegedly "knowingly disregarded [unidentified] red flags with regard to the activities of Madoff and BLMIS" (Complaint, ¶¶ 93, 94, 104, 115, 131). This bare allegation is completely insufficient to demonstrate scienter, and thus, fails to overcome the bar of the contractual exculpation provisions applicable to plaintiffs' claim for breach of fiduciary duty ( see SNS Bank v Citibank , 7 AD3d 352, 355 [1st Dept 2004] ["Even on a motion to dismiss, a court need not accept as true conclusory allegations that a defendant . . . acted willfully, in bad faith or with reckless disregard of its duties"]).
For instance, in In re Citigroup Inc. Shareholder Derivative Litigation ( 964 A2d 106 [Del Ch 2009]), the Delaware Court of Chancery dismissed, pursuant to a similar exculpation clause and the "business judgment rule," claims that the directors of Citigroup, Inc. breached their fiduciary duties by failing to disclose or prevent monumental losses to its inventory of "subprime" loans, which the directors allegedly knew, or should have known, were imminent in light of various "red flags" ( id. at 129-131). In reaching this decision, the court explained that "[i]n any business decision that turns out poorly there will likely be signs that one could point to and argue are evidence that the decision was wrong," but such "signs," without more, are insufficient to demonstrate that the decisionmaker consciously disregarded his duties ( id. at 131).
Likewise here, plaintiffs have alleged no facts which, if accepted as true, would show that the Tremont defendants, or Manzke and Hammond, engaged in knowing misconduct. Accordingly, plaintiffs' cause of action for breach of fiduciary is barred by the exculpation clauses of the Funds' limited partnership agreements, and must be dismissed ( see e.g. SNS Bank v Citibank, 7 AD3d at 355 [affirming dismissal of claims that defendant made "improper, imprudent, and unsuitable investments" where, as here, they were barred by the exculpation provisions of the parties' contract]).
In opposition to the motion, plaintiffs assert that the facts that Harry Markopolos privately complained to the SEC about Madoff, and that certain unidentified "advisors" had "suspicions" regarding Madoff, are sufficient to overcome this clause (Pl Opp., at 8-9). However, the complaint does not allege that the moving defendants had any knowledge about Markolopos's allegations, or the "suspicions" of other advisors. Thus, plaintiffs fail to allege anything that would create an inference that the moving defendants acted in bad faith, i.e., that they knew about Madoff's Ponzi scheme, but nevertheless invested with him.
Plaintiffs' claim for unjust enrichment must also be dismissed on the separate ground that it is barred by an express contract. Plaintiffs allege that TPI, TGH and the Tremont Individuals were "unjustly enriched" by fees and other payments that they received from the Funds (Complaint, ¶¶ 139-140). This claim is foreclosed, however, by the existence of express contractual provisions in the Funds' limited partnership agreements governing the fees at issue (Prime LPA, § 2.3; XL LPA, § 2.3).
Under New York law, the existence of a written contract covering the particular subject matter of the claims asserted precludes recovery in quasi contract ( Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382, 388 ["The existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter"]; see also Goldstein v CIBC World Mkts. Corp. , 6 AD3d 295, 296 [1st Dept 2004] ["A claim for unjust enrichment, or quasi contract, may not be maintained where a contract exists between the parties covering the same subject matter"]).
The LPAs are such contracts, and thus bar plaintiffs' unjust enrichment claim here ( see e.g. Sheiffer v Shenkman Capital Mgt., 291 AD2d 295, 295 [1st Dept 2002] ["the existence of a valid and enforceable written contract governing the disputed subject matter precludes plaintiffs from recovering in quantum meruit"]; Scavenger, Inc. v GT Interactive Software Corp., 289 AD2d 58, 59 [1st Dept 2001] ["since the matters here in dispute are governed by an express contract, defendant's counterclaim for unjust enrichment was properly found untenable"]).
2. Fraud Against the Tremont Defendants, Manzke, Hammond, the Prime Fund and the XL Fund
To properly plead a common-law fraud claim, a plaintiff must allege a misrepresentation of a material fact, falsity of the misrepresentation, scienter, plaintiff's reasonable reliance on the alleged misrepresentation, and injury resulting from the reliance ( Small v Lorillard Tobacco Co., 94 NY2d 43; see also Merrill Lynch, Pierce, Fenner Smith, Inc. v Wise Metals Group, LLC , 19 AD3d 273, 275 [1st Dept 2005]; P.T. Bank Cent. Asia, NY Branch v ABN AMRO Bank N.V., 301 AD2d 373 [1st Dept 2003]). The absence of any of these elements is fatal to a recovery on a claim for fraud ( Shea v Hambros PLC, 244 AD2d 39 [1st Dept 1998]).
In addition, pursuant to CPLR 3016 (b), "[w]here a cause of action . . . is based upon . . . fraud . . . the circumstances constituting the wrong shall be stated in detail." "[C]onclusory allegations" of fraud are insufficient ( Greschler v Greschler, 51 NY2d 368, 375). In particular, "CPLR 3016 (b) requires that a complaint for fraud articulate the misconduct complained of, in sufficient detail to clearly inform each defendant of what their respective roles were in the incidents complained of" ( Williams v Sidley Austin Brown Wood, L.L.P., 15 Misc 3d 1125[A], *4, 2007 NY Slip Op 50846[U], *3 [Sup Ct, NY County 2007] [citing P.T. Bank Cent. Asia, NY Branch v ABN AMRO Bank N.V., 301 AD2d at 377; see also Sherman v Eisenberg, 267 AD2d 29 [1st Dept 1999], lv dismissed 94 NY2d 899). Hence, "[e]ach of the foregoing elements must be supported by factual allegations containing the details constituting the wrong sufficient to satisfy CPLR 3016 (b)" ( Cohen v Houseconnect Realty Corp., 289 AD2d 277, 278 [2d Dept 2001]). Accordingly, dismissal of a claim for fraud is warranted where the requisite elements are not pleaded with sufficient particularity ( Rabouin v Metropolitan Life Ins. Co., 307 AD2d 843 [1st Dept 2003]; Zaref v Berk Michaels, P.C., 192 AD2d 346 [1st Dept 1993]).
Here, plaintiffs have identified no material misstatements on which they reasonably relied. Plaintiffs allege that TPI, TGH, and the Tremont Individuals fraudulently induced them to invest and to remain invested in the Funds by "falsely claim[ing] . . . that they were actively managing and controlling the Funds and the assets of the Funds, and g[iving] no reason for Plaintiffs to believe that anything was amiss" (Complaint, ¶ 121). Likewise, plaintiffs allege that the Prime Fund and the XL Fund "falsely claimed and led Plaintiffs to believe that their investments were legitimate investments, and gave no reason for plaintiffs to believe that anything was amiss" ( id., ¶ 47). However, plaintiffs fail to identify any specific misstatements on which they reasonably relied, who made them, or when the statements were allegedly made. This lack of specificity warrants dismissal of the fraud claim ( see Cohen v Houseconnect Realty Corp., 289 AD2d at 278 [dismissing fraud claim where the "complaint does not contain any allegations setting forth the alleged material misrepresentations"]; Mountain Lion Baseball v Gaiman, 263 AD2d 636, 638 [3d Dept 1999] [finding that "plaintiff's complaint, which fails to set forth the substance of, the dates upon which or the persons to whom the alleged misrepresentations purportedly were made, falls far short of satisfying the pleading requirement imposed by CPLR 3016 (b)"]; Chrysler Credit Corp. v Dioguardi Jeep Eagle, 192 AD2d 1066, 1068 [4th Dept 1993] [finding claim "based upon fraud . . . insufficient on its face because defendants have failed to set forth in detail the alleged fraudulent representations"]).
Plaintiffs also fail to allege facts sufficient to show that any representation made by TPI, TGH, the Tremont Individuals or the Funds concerning TPI's management of the Funds or the legitimacy of the investments was false. Rather, plaintiffs merely conclusorily allege that "the representations made by Tremont and the Tremont Principals concerning the management and control of the Funds and the assets of the Funds were false at the time such representations were made" (Complaint, ¶ 122), and that the "representations made by the Funds . . . were false at the time such representations were made" ( id., ¶ 148). This is insufficient to state a cause of action for fraud ( see In re Health Mgt. Sys., Inc. Sec. Litig., 1998 WL 283286, * 5 [SD NY 1998] ["the conclusory allegation that the opposite of (an alleged misrepresentation) is true, without further factual elaboration, is insufficient"]; accord Greschler v Greschler, 51 NY2d at 375 ["Plaintiff's conclusory allegations as to the defendant's misrepresentations concerning his financial status fail to meet the statutory requirement that a cause of action based upon fraud must be pleaded in detail'"]).
In opposition, plaintiffs contend that the Prime PPM contains three specific misrepresentations: (1) TPI would be responsible for "the day-to-day administration of the Partnership [and have] primary responsibility [for] monitoring the ongoing activities of the Investment Advisor"; (2) TPI would have the "sole responsibility of contacting the Investment Advisor"; and (3) in selecting the Funds' Investment Advisor, TPI would consider the "Investment Advisor's . . . reputation" and "favorable outlook for the strategy" employed by him (Pl Opp., at 27-28).
However, even if alleged in the complaint, the foregoing alleged misrepresentations would still be insufficient to state a cause of action for fraud because plaintiffs have alleged no facts sufficient to demonstrate that any of the statements was false when made. There is no dispute that TPI was responsible for administering the Funds, monitoring the Investment Advisor (BLMIS), and communicating with BLMIS. Indeed, plaintiffs do not allege to the contrary in the complaint. Moreover, while plaintiffs allege that a few individuals criticized or questioned Madoff's investment strategy (Pl Opp., at 29), plaintiffs do not allege any fact demonstrating that the Tremont defendants selected Madoff — the former chairman of NASDAQ — without genuinely believing that he generally had a good reputation within the investment community. Thus, the subsequent revelation of Madoff's fraud does not establish, for pleading purposes, that any of TPI's prior representations regarding Madoff or the Funds was false when made. Indeed, courts have repeatedly "rejected the legitimacy of alleging fraud by hindsight (citation omitted)'" ( see e.g. Shields v Citytrust Bancorp., Inc., 25 F3d 1124, 1129 [2d Cir 1994] [earlier representation that loan loss reserve was adequate not false or misleading merely because it subsequently proved inadequate]).
Plaintiff's fraud claims are also defective because they do not satisfy the scienter requirement. Allegations of scienter are essential to a cause of action for fraud ( Wallace v Crisman, 173 AD2d 322 [1st Dept 1991]). Scienter means an actual intent "to deceive, manipulate, or defraud (citation omitted)'" ( Matter of People v Condor Pontiac, Cadillac, Buick GMC Trucks, Inc., 2003 WL 21649689, 2003 NY Slip Op 51082[U], *5 [Sup Ct, Greene County 2003]; see also Friedman v Anderson , 23 AD3d 163, 167 [1st Dept 2005] ["A fraud claim is not actionable without evidence that the misrepresentations were made with the intent to deceive"]). "[O]ne who conducts normal business activities while ignorant that those activities are furthering a fraud is not liable for securities fraud" ( Securities Exch. Commn. v Cohmad Sec. Corp., 2010 WL 363844, *1 [SD NY 2010] [dismissing fraud claims against party that referred clients to Madoff]).
With respect to the Funds, plaintiffs merely conclusorily assert, with no supporting factual allegations, that "[a]t the time of making these misrepresentations, the Funds knew such representations were false or made them recklessly without knowing whether they were true or false" (Complaint, ¶ 149]). Such boilerplate allegation is insufficient to plead scienter ( see Zanett Lombardier, Ltd. v Maslow , 29 AD3d 495 [1st Dept 2006] [finding conclusory statements of defendant's intent did not adequately plead sufficient details of scienter]; Giant Group, Ltd. v Arthur Andersen LLP , 2 AD3d 189 [1st Dept 2003] [fraud claim dismissed for failure to set forth facts sufficient to establish inference of scienter]).
With respect to TPI, TGH, and the Tremont Individuals, in addition to the conclusory allegation that they "knew such representations were false or made them recklessly without knowing whether they were true or false" (Complaint, ¶ 123), plaintiffs also suggest that these defendants had a motive to defraud plaintiffs — a pecuniary interest in "causing unearned fees, commissions and bonuses to inure [to] the benefit of Tremont and the Tremont Principals" (Complaint, ¶¶ 115, 119). However, this allegation is legally insufficient to establish scienter because the "desire for higher compensation . . . is found in virtually all commercial transactions, making it an ill-suited motive from which to draw an inference of intent to defraud" ( Technical Support Servs., Inc. v International Bus. Machs. Corp., 18 Misc 3d 1106[A], *30, 2007 NY Slip Op 52428[U], *25 [Sup Ct, Westchester County 2007]; see also Jana Master Fund, Ltd. v JPMorgan Chase Co., 19 Misc 3d 1106[A], 2008 NY Slip Op 50571[U] [Sup Ct, NY County 2008]; Stephenson v Citco Group Ltd., 700 F Supp 2d 599, 621 [SD NY 2010] [dismissing fraud claims against administrator of a fund looted by Madoff and stating "it is economically irrational to risk your professional reputation, license, and the possibility of legal liability simply in return for a professional services fee"])
Plaintiffs also allege that TPI, TGH, and the Tremont Individuals "ignored red flags raised by others in the industry with respect to Madoff and BLMIS" (Complaint, ¶ 112). The complaint fails, however to specify any such "red flags," an omission that is fatal to plaintiffs' fraud claim ( see e.g. Goldstein v CIBC World Mkts. Corp., 6 AD3d at 296 [dismissing fraud claim where plaintiff "failed to allege facts with sufficient specificity from which . . . intent . . . might be inferred"]).
For instance, in Credit Alliance Corp. v Arthur Andersen Co. ( 65 NY2d 536, order amended 66 NY2d 812), a fraud claim was brought against an auditor who allegedly issued reports containing false information. The plaintiffs attempted to plead scienter through the conclusory allegation that the auditor recklessly disregarded unidentified "facts which would have apprised it that its reports were misleading" ( id. at 554). In finding these allegations legally defective, the Court explained that "[t]his single allegation of scienter, without additional detail concerning the facts constituting the alleged fraud, is insufficient under the special pleading standards required under CPLR 3016 (b), and, consequently, the cause of action should have been dismissed" ( id.).
Likewise here, dismissal of the fraud claim is warranted because plaintiffs have failed to specify any "red flags" or other facts that the Tremont defendants allegedly disregarded.
Moreover, even if the complaint had actually identified particular "red flags," that would also be insufficient to establish scienter for pleading purposes ( In re J.P. Jeanneret Assoc., Inc., ___ F Supp 2d ___, 2011 WL 335594, *32 [SD NY 2011] ["(m)erely alleging that (accountant defendant) would' or could' or even should' have known of Madoff's fraud if only it had paid attention to the red flags' is insufficient to make out a (federal fraud) claim"]). To be sufficient, allegations of scienter based on red flags must include facts showing both that the defendant was actually aware of the alleged flags ( see South Cherry St., LLC v Hennessee Group LLC, 573 F3d 98 [2d Cir 2009]; Stephenson v Citco Group Ltd., 700 F Supp 2d at 622) and that the flags were "so obvious[ly]" indicative of misconduct "that the defendant must have been aware of [the wrongdoing]" and desirous of furthering it ( South Cherry St., LLC v Hennessee Group LLC, 574 F3d at 109, 112; see also MLSMK Inv. Co. v JP Morgan Chase Co., 737 F Supp 2d 137, 144 [SD NY 2010] [finding allegations of scienter insufficient because "(w)hile it may be true that Defendants could have connected the dots to determine that Madoff was committing fraud, Plaintiff offers no facts to support the claim that they actually reached such a conclusion"]).
Here, the complaint contains no allegations that the TPI, TGH or the Tremont Individuals actually knew of any "red flags" ( see South Cherry St., LLC v Hennessee Group LLC, 573 F3d 98, supra; Stephenson v Citco Group Ltd., 700 F Supp 2d 599, supra [each dismissing fraud claims]). Moreover, even if the complaint did contain such allegations, it would still be defective because it also fails to explain how one or more alleged red flags made it so obvious that Madoff was running a Ponzi scheme that defendants must have known about the scheme and wanted to further it ( see e.g. Laikin v Vaid, 2001 WL 1682873, *1 [Sup Ct, NY County 2001] [dismissing fraud claim where "the complaint does not allege specific facts as to how and when (the defendant) learned that the offering plan allegedly contained misleading information"]).
Accordingly, the complaint fails to allege facts creating a plausible inference that the moving defendants intended to defraud plaintiffs ( see Zaref v Berk Michaels, P.C., 192 AD2d 346, supra). As such, the fraud claims against them must be dismissed.
Massachusetts Mutual Life and OAC's Motions to Dismiss (Motion Sequence Nos. 006 and 012)
Plaintiffs allege one count of fraud against MassMutual and OAC. Plaintiffs do not base their fraud claims against MassMutual and OAC on any alleged act or omission, but rather, solely on their corporate status as owners of TPI ( see Complaint, ¶ 157). MassMutual is the corporate parent of OAC. OAC is the parent of TGH, which is the parent of TPI, the general partner of the Prime Fund and the XL Fund, the entities in which plaintiffs invested and which, in turn, invested their assets with Bernard Madoff.
Plaintiffs do not contend that OAC or MassMutual made any misrepresentation of fact to them, or communicated with them at all. Indeed, the complaint contains no allegations that the moving defendants had any dealings or contact with, or made any representations to plaintiffs regarding the Funds. Plaintiffs do not allege that the moving defendants had any involvement with the management of the Funds or their choice of investment managers. Rather, plaintiffs contend that, merely by "associating" themselves with the Tremont defendants, the moving defendants made false representations to plaintiffs, and are guilty of fraud.
Specifically, plaintiffs allege that "MassMutual was and is an insurance company domiciled in the Commonwealth of Massachusetts and licensed to do business in the State of New York" (Complaint, ¶ 9), and that OAC "was and is a Delaware business corporation authorized to do business in the State of New York and is a subsidiary of MassMutual Holding LLC, which is a subsidiary of [MassMutual]" ( id., ¶ 8).
Plaintiffs allege that, as the "owners of [TPI], the general partner of the Funds," MassMutual and OAC "had a duty to supervise the operations of its subsidiaries, including [TPI's] involvement and activities as general partner of the Funds and to assure that such activities were running properly" ( id., ¶¶ 157-158), and that MassMutual and OAC breached this duty ( id., ¶ 159). Plaintiffs assert that, by virtue of their ownership of TPI, MassMutual and OAC associated themselves with TPI ( id., ¶ 160), and "lent their names and credibility to [TPI] and its involvement as general partner of the Funds and its management, control and supervision of the Funds, including the investments made by Plaintiffs" ( id., ¶ 161), such that they "caused themselves to be identified with [TPI]" ( id., ¶ 162).
These allegations are insufficient to sustain a cause of action for fraud. First, plaintiffs fail to allege the most rudimentary element of a fraud claim — that MassMutual or OAC ever made a representation to them. Where a claimant has "failed to articulate a misrepresentation of a material existing fact," a fraud claim is "properly dismissed" ( WorldCom, Inc. v Segway Mktg. Ltd, 262 AD2d 164, 164 [1st Dept], lv dismissed in part, denied in part 93 NY2d 1036). Plaintiffs fail to identify a single statement by either MassMutual or OAC regarding the Funds. They do not identify any dealings with MassMutual or OAC, or any wrongful conduct by the moving defendants. They do not allege that either MassMutual or OAC had anything to do with the management of the Funds. To the contrary, plaintiffs allege that TPI had "ultimate authority" over the Funds, was in charge of "day-to-day management" of the Funds, and had "complete" or "sole" "discretion" to select the manager (Complaint, ¶¶ 51, 32, 57, 66). As such, plaintiffs' fraud claim must be dismissed ( see National Westminster Bank USA v Weksel, 124 AD2d 144, 147 [1st Dept], lv denied 70 NY2d 604 [overturning denial of motion to dismiss fraud claim where "(t)here is no allegation anywhere in the complaint that (defendant) made any representation, fraudulent or otherwise, to plaintiff"]; Mountain Lion Baseball Inc. v Gaiman, 263 AD2d at 638 ["In our view plaintiff's complaint, which fails to set forth the substance of, the dates upon which or the persons to whom the alleged misrepresentations purportedly were made, falls far short of satisfying the pleading requirement imposed by CPLR 3016 (b)"]).
Plaintiffs' essential argument is that MassMutual and OAC's ownership of TPI represented an endorsement of its statements to its investors, and its management of its funds. They contend that the moving defendants "lent their name and credibility to TPI," and that this led plaintiffs "to believe that their investments were legitimate investments" (Complaint, ¶¶ 161, 164). The alleged misrepresentation is that MassMutual and OAC, by virtue of being corporate parents that were "associated themselves with [TPI]," "lent their names and credibility to [TPI]" and "as a result of this association . . . caused themselves to be identified with [TPI] and such identification was used to mislead limited partners and prospective limited partners, including plaintiffs, as to the safety, security, and legitimacy of any investments made with the Funds" and "led Plaintiffs to believe that their investments were legitimate investments" ( id., ¶¶ 60, 161, 164).
The inference that plaintiffs seek to draw is that, by virtue of their ownership of TPI, MassMutual and OAC represented that investments made through TPI were secure and legitimate. However, plaintiffs cannot demonstrate that, simply by virtue of ownership, MassMutual and OAC represented anything to plaintiffs, or committed fraud. "It is beyond dispute that a corporation may not be held liable for the actions of another company merely because it has an ownership interest in it" ( Maung Ng We v Merrill Lynch Co., Inc., 2000 WL 1159835, *3 [SD NY 2000]; see also United States v Bestfoods, 524 US 51, 61 ["(i)t is a general principle of corporate law deeply' ingrained in our economic and legal systems' that a parent corporation . . . is not liable for the acts of its subsidiaries (citation omitted)]").
Plaintiffs' fraud claim against OAC and MassMutual must also be dismissed on the ground that plaintiffs fail to allege the falsity of any representation. Plaintiffs' assertion that "these representations made by MassMutual and [OAC] were false at the time such representations were made" (Complaint, ¶ 165), merely restate the legal requirement of alleging falsity. This is insufficient to support a fraud claim ( see e.g. Caldwell v Gumley-Haft L.L.C. , 55 AD3d 408, 408 [1st Dept 2008] [conclusory allegations of falsity absent factual support fail to satisfy the particularity requirement of CPLR 3016 (b)]).
Plaintiffs also fail to sufficiently plead scienter. Although plaintiffs make no factual allegation of any representation made to them by the moving defendants, they nonetheless conclusorily conclude that MassMutual and OAC "knew or should have known that such representations were false" (Complaint, ¶ 166). Where, as here, a "complaint is devoid of any but the most conclusory allegations . . . that defendant . . . knew or should have known" about the alleged fraudulent conduct, that complaint fails "to support the scienter element of its claim" ( National Westminster Bank v Weksel, 124 AD2d at 148; accord Zanett Lombardier, Ltd. v Maslow, 29 AD3d at 496-496 [finding "conclusory statement of (defendant's) intent did not adequately plead sufficient details of scienter"]). Accordingly, a fraud claim must be dismissed where, as here, "[t]he complaint does not allege any facts to suggest who at [the defendant] possessed such knowledge, when and how they obtained the knowledge, or even why anyone at [the defendant] should have known that the views expressed [as another's were not true]" ( Devaney v Chester, 813 F2d 566, 568 [2d Cir 1987]; see also Laikin v Vaid, 2001 WL 1682873 at *2 [fraud claim should be dismissed where it "does not allege specific facts as to how and when (the adverse party) learned that the offering plan allegedly contained misleading information"]). Plaintiffs' failure to offer any facts in support of an allegation that MassMutual and OAC knowingly made a false representation is fatal to its fraud claim.
In opposition to the motion, plaintiffs contend that the fraud claim should survive because "the allegations made in the Complaint are sufficient to put [MassMutual and OAC] on notice as to the claims against them" (Pl Opp., at 34). However, notice pleading does not apply to fraud claims ( see e.g. Block v Landegger, 44 AD2d 671, 671 [1st Dept 1974] [dismissing fraud claim where allegations did "not sufficiently plead the circumstances constituting the wrong,'" and stating that a fraud claim must be "stated in detail, as distinguished from the notice pleading required by CPLR 3013"]).
Plaintiffs further contend that the complaint adequately pleads causes of action for aiding and abetting fraud and piercing the corporate veil. However, the complaint contains no such causes of action. It is well settled that claims asserted for the first time in opposition papers should not be considered by the court ( see e.g. MediaXposure Ltd. (Cayman) v Omnireliant Holdings, Inc., 29 Misc 3d 1215(A), *6 [Sup Ct, NY County 2010] [denying plaintiff's attempt to "amend the complaint through an opposition brief, which is not permissible"]; Rubin v Nine West Group, Inc., 1999 WL 1425364, *4 [Sup Ct, Westchester County 1999] [" A claim for relief may not be amended by the briefs in opposition to a motion to dismiss (citation omitted)'"]).
Accordingly, the complaint is dismissed as against MassMutual and OAC.
BNY Mellon's Motion to Dismiss (Motion Sequence No. 010)
Plaintiffs allege two causes of action against BNY Mellon — conspiracy to commit fraud (tenth cause of action) and unjust enrichment (eleventh cause of action).
Plaintiffs allege that BNY Mellon entered into a service agreement with the XL Fund, pursuant to which BNY Mellon would serve as administrator of the XL Fund (Complaint, ¶ 58). According to the complaint, BNY Mellon's duties under its contract to provide administrative services, which were set forth in an administrative services agreement (the ASA), were simply to provide purely administrative services, not investment advice or due diligence ( see Complaint, ¶ 60 [setting forth list of administrative services, such as maintaining books and records, opening and closing accounts, preparing statements, performing annual audits and reconciling general ledger accounts]).
Rather, as the general partner in the XL Fund, TPI had the responsibility to conduct due diligence, select investments, monitor investment performance, and consider the appropriate balance of portfolio risks ( see Complaint, ¶ 109 ["Tremont and the Tremont Principals had the sole power to manage the funds"]). BNY Mellon is not alleged to have had any interest, direct or indirect, in any of the Tremont defendants, or any Tremont-affiliated entity.
According to the XL PPM, BNY Mellon also provided custodial services to the XL Fund, pursuant to the ASA, and also served as the fund's secretary to the extent necessary ( id., ¶ 61).
In performing its services, BNY Mellon was specifically entitled to rely on information it received:
In the event BNY-AIS's computations hereunder rely, in whole or in part, upon information, including . . . prices or values supplied by a Fund or by brokers, dealers, market makers, or specialists described in the Offering Materials, BNY-AIS shall not be responsible for, under any duty to inquire into, or deemed to make any assurances with respect to, the accuracy or completeness or such information (ASA, § 5 [g] [Aff. of Steven J. Kaiser, Exh A]). Thus, BNY Mellon had no obligation to independently verify information it received was correct.
As an initial matter, plaintiffs' claims against BNY Mellon are derivative of the XL Fund, and may not go forward as direct claims. Plaintiffs simply allege that losses that the XL Fund sustained in turn caused the value of their investments in the XL Fund to diminish, which is quintessentially a derivative claim.
As previously discussed, courts routinely dismiss purportedly direct claims based on injuries that are derivative of their investments ( see e.g. Stephenson v Citco Group Ltd., 700 F Supp 2d 599, supra [dismissing claims by investors in a fund that suffered Madoff-related losses, holding claims were derivative]; Ernst Young Ltd. v Quinn, 2009 WL 3571573 at *1, *8 [holding that claims by limited partners against an investment fund's auditor for failing to reveal that the fund was invested in "a massive Ponzi scheme" were derivative, not direct, because "(u)nder Delaware law, injuries sustained on account of having investment or ownership stake in a corporation that diminishes in value are not individually suffered harms"]).
Likewise here, claims against BNY Mellon are dependent on plaintiffs' investment in the XL Fund, and may not be brought as direct claims. As plaintiffs allege, BNY Mellon "entered into a service agreement with the Rye Select XL Fund" (Complaint, ¶ 58), and BNY Mellon performed "various day-to-day tasks on behalf of the Rye Select XL Fund" ( id., ¶ 60). Alleging that they were investors in the XL Fund ( id., ¶¶ 28-41), plaintiffs claim that BNY Mellon caused their injury — a decline in the value of their investment — by not properly performing services it owed to the XL Fund set forth in its agreement with the XL Fund ( id., ¶¶ 225-226, 236-238). Plaintiffs argue that, "[b]y virtue of the foregoing" ( id., ¶¶ 230-231, 244-245), their investments in the XL Fund "have been rendered worthless" ( id., ¶ 227).
Thus, plaintiffs' alleged loss is not distinct from the losses that were allegedly suffered by the other limited partners. As such, the claims they seek to bring against BNY Mellon are derivative, and must be dismissed.
Plaintiffs' claims for conspiracy to commit fraud (tenth cause of action) and unjust enrichment (eleventh cause of action) must also be dismissed on substantive grounds.
With respect to the conspiracy claim, this claim must be dismissed because there is no such tort under New York law. A "claim of conspiracy to commit fraud is not viable because the State of New York does not recognize an independent cause of action in tort for conspiracy" ( Waggoner v Caruso , 68 AD3d 1 , 6 [1st Dept 2009], affd 14 NY3d 874; see e.g. Roche v Claverack Coop. Ins. Co. , 59 AD3d 914, 918 [3d Dept 2009] ["As New York does not recognize an independent cause of action for civil conspiracy to commit a tort, that claim was properly dismissed"]).
Plaintiffs' unjust enrichment claim also fails because, as previously discussed, a claim for unjust enrichment cannot be maintained where a contract exists between the parties covering the same subject matter ( Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382, supra; Goldstein v CIBC World Mkts. Corp. , 6 AD3d 295, supra). Here, plaintiffs allege that "BNY entered into a service agreement with the Rye Select XL Fund" (Complaint, ¶ 58), and that "BNY neglected its duties as administrator to the Rye Select XL Fund" ( id., ¶ 236). BNY Mellon's compensation for those services is expressly addressed by the ASA. Therefore, the unjust enrichment cause of action must be dismissed.
Accordingly, the complaint is dismissed as against BNY Mellon.
KPMG's Motion to Dismiss (Motion Sequence No. 008)
Pursuant to an engagement agreement dated October 6, 2006, and amended on October 15, 2007 (the Engagement Agreement), KPMG was engaged to audit the year-end financial statements of the XL Fund (Complaint, ¶¶ 63-63, 198, 211). Plaintiffs assert two claims against KPMG arising out of its audits of the XL Fund's financial statements — professional malpractice and breach of contract. KPMG moves to dismiss the complaint as against it on the ground that plaintiffs' claims against it are subject to mandatory arbitration because there is a valid and binding arbitration agreement to which plaintiffs are bound.
Pursuant to the Engagement Agreement, the XL Fund is required to arbitrate any claims arising out of KPMG's audits of the XL Fund's financial statements. Specifically, the Engagement Agreement provides for mediation and arbitration as the "sole methodologies" for resolving "[a]ny dispute or claim arising out of or relating to the engagement letter between the parties or the services provided thereunder" (Engagement Agreement, at 5, Appendix 2 [9/20/10 Aff. of Laya R. Kaigh, Exh A]).
Plaintiffs concede that their action against KPMG should be stayed in favor of arbitration. In their omnibus memorandum of law in opposition to defendants' motions to dismiss, plaintiffs do not oppose KPMG's motion to dismiss or compel arbitration. Indeed, in the affirmation supporting the omnibus memorandum, plaintiffs expressly "consent to a stay of the action against KPMG LLP pending arbitration" (10/26/10 Aff. of Seth A. Presser, ¶ 3). Because plaintiffs do not oppose KPMG's motion, it must be granted ( see e.g. Cippitelli v County of Schenectady, 307 AD2d 658 [3d Dept 2003]).
Although plaintiffs contend that they only consent to a stay of the action pending arbitration "on the condition that KPMG LLP remain in this action for the purposes of discovery only" (Presser Aff., ¶ 3), the court rejects this contention.
The purported condition is directly contrary to the terms of the Engagement Agreement, which sets forth the discovery principles applicable in arbitration. The Engagement Agreement states that "[d]iscovery shall be permitted in connection with the arbitration only to the extent, if any, expressly authorized by the arbitration panel upon a showing of substantial need by the party seeking discovery" (Engagement Agreement, App II, at 2). Thus, the Engagement Agreement makes clear that the arbitrators — not the court — are to decide how much discovery the parties are entitled to, if plaintiffs make a showing of "substantial need." Thus, plaintiff's proposal that KPMG remain in the action so that the court may supervise discovery must be rejected because it is inconsistent with the engagement agreement.
Consequently, KPMG's motion to compel arbitration and stay this action pending arbitration is granted.
The court has considered the remaining claims, and finds them to be without merit.
Accordingly, it is
ORDERED that the motion of defendant Massachusetts Mutual Life Insurance Company to dismiss the complaint herein (Motion Sequence No. 006) is granted, and the complaint is dismissed in its entirety as against said defendant with costs and disbursements to said defendant as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendant; and it is further
ORDERED that the motion of defendants Tremont Partners, Inc., Tremont Group Holdings, Inc., Robert I. Schulman, Stephen T. Clayton, Stuart Pologe, Patrick Kelly, Harry Hodges, Rupert A. Allan, Cynthia J. Nicoll, Ileana Lopez-Balboa, Robert I. Rosenbaum, Stephen Jupp, Lynn Keeshan and James McCormick to dismiss the complaint herein (Motion Sequence No. 007) is granted, and the complaint is dismissed in its entirety as against said defendants with costs and disbursements to said defendants as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendants; and it is further
ORDERED that the motion of defendant KPMG LLP to compel arbitration and to stay this action (Motion Sequence No. 008) is granted; and it is further
ORDERED that plaintiffs shall arbitrate their claims against defendant KPMG LLP in accordance with the Engagement Agreement dated October 6, 2006; and it is further
ORDERED that all proceedings in this action are hereby stayed as against defendant KPMG LLP, except for an application to vacate or modify said stay; and it is further
ORDERED that either party may make an application by order to show cause to vacate or modify this stay upon the final determination of the arbitration; and it is further
ORDERED that the motion of defendants Sandra L. Manzke and Suzanne S. Hammond to dismiss the complaint herein (Motion Sequence No. 009) is granted, and the complaint is dismissed in its entirety as against said defendants with costs and disbursements to said defendants as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendants; and it is further
ORDERED that the motion of defendant the Bank of New York Mellon Corporation on behalf of itself and dissolved entity BNY Alternative Investment Services, Inc. to dismiss the complaint herein (Motion Sequence No. 010) is granted, and the complaint is dismissed in its entirety as against said defendant with costs and disbursements to said defendant as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendant; and it is further
ORDERED that the motion of defendants Rye Select Broad Market Prime Fund, L.P. and Rye Select Broad Market XL Fund, L.P. to dismiss the complaint herein (Motion Sequence No. 011) is granted, and the complaint is dismissed in its entirety as against said defendants with costs and disbursements to said defendants as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendants; and it is further
ORDERED that the motion of defendant Oppenheimer Acquisition Corp. to dismiss the complaint herein (Motion Sequence No. 012) is granted, and the complaint is dismissed in its entirety as against said defendant with costs and disbursements to said defendant as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendant; and it is further
ORDERED that the action is severed and continued as against the remaining defendant.