| McBride v KPMG Intl. |
| 2016 NY Slip Op 00306 [135 AD3d 576] |
| January 19, 2016 |
| Appellate Division, First Department |
[*1]
| Donna M. McBride, Individually and Derivatively onBehalf of Beacon Associates LLC II, Appellant, v KPMG International et al.,Respondents, et al., Defendants. Jay Wexler, Individually and Derivatively on Behalf ofRye Select Broad Market Prime Fund, L.P., Appellant, v KPMG LLP, et al., Defendants,and KPMG UK et al., Respondents. Daniel Ryan et al., Appellants, v Friehling &Horowitz, P.C., et al., Defendants, and KPMG UK et al., Respondents. MatthewGreenberg et al., Appellants, v Friehling & Horowitz, P.C., et al., Defendants, andKPMG UK et al., Respondents. |
Cotchett, Pitre & McCarthy, LLP, New York (Alexander E. Barnett of counsel),for appellants.
Linklaters LLP, New York (James R. Warnot Jr. of counsel), for KPMGInternational, respondent.
Hogan Lovells US LLP, New York (Ira M. Feinberg of counsel), for KPMG UK,respondent.
Wachtell, Lipton, Rosen & Katz, New York (Emil Kleinhaus of counsel), forJPMorgan Chase & Co., respondent.
Cleary Gottlieb Steen & Hamilton LLP, Washington DC (Nowell D. Bambergerof the bar of the State of Maryland, and the bar of the District of Columbia, admitted prohac vice, of counsel), for the Bank of New York Mellon Corporation, respondent.
Ballard Spahr LLP, New York (Scott M. Himes of counsel), for Paul Konigsberg,respondent.
Fishkin Lucks LLP, New York (Zachary W. Silverman of counsel), for FrankAvellino, respondent.
Judgment, Supreme Court, New York County (Richard B. Lowe, III, J.), enteredSeptember 5, 2014, dismissing plaintiff Donna M. McBride's complaint as against PaulKonigsberg, KPMG UK, and KPMG International, unanimously affirmed without costs.Judgment, same court and Justice, entered September 5, 2014, dismissing plaintiff JayWexler's first amended complaint as against Konigsberg, KPMG UK, and KPMGInternational, unanimously affirmed, without costs. Judgment, same court and Justice,entered September 5, 2014, dismissing the Ryan plaintiffs' first amended complaintagainst Konigsberg, KPMG UK, KPMG International, and Frank Avellino, unanimouslyaffirmed, without costs. Judgment, same court and Justice, entered September 5, 2014,dismissing the Greenberg plaintiffs' complaint against Konigsberg, KPMG UK, andKPMG International, unanimously affirmed, without costs. Order, same court andJustice, entered on or about August 18, 2014, which, insofar as appealed from as limitedby the briefs, granted defendants JP Morgan Chase & Co. and The Bank of NewYork Mellon's (BNY) motions to dismiss the claims for (1) aiding and abetting fraud,fraud in the inducement, and breach of fiduciary duty, (2) conversion, and (3) unjustenrichment, unanimously affirmed, without costs. Appeal from order, same court andJustice, entered on or about July 28, 2014, unanimously dismissed, without costs, assubsumed in the appeals from the judgments.
The motion court correctly found that New York lacks personal jurisdiction overKPMG UK pursuant to CPLR 302 (a) (3) (ii). While plaintiffs allege that KPMG UKcommitted a tort outside the state (negligently auditing nonparty Madoff SecuritiesInternational, Ltd. [MSIL] in the United Kingdom), and their causes of action arise out ofthat tort, KPMG UK's act did not cause injury to a person or property within the state."[T]he situs of commercial injury is where the original critical events associated with theaction or dispute took place, not where any financial loss or damages occurred" (CRT Invs., Ltd. v BDO Seidman,LLP, 85 AD3d 470, 471-472 [1st Dept 2011]).
The court providently exercised its discretion in denying plaintiffs' request forjurisdictional discovery since plaintiffs failed to submit affidavits specifying facts thatmight exist but could not then be stated that would support the exercise of personaljurisdiction over KPMG UK (CPLR 3211 [d]; see de Capriles v Lugo, 293 AD2d405, 406 [1st Dept 2002], lv dismissed in part, denied in part 98 NY2d 717[2002]).
[*2] Plaintiffs base their claims againstKPMG International on the contention that KPMG International is vicariously liable forKPMG UK'S alleged misconduct. However, plaintiffs' allegations, even if true, wouldnot establish a basis for imposing vicarious liability on KPMG International for KPMGUK'S acts, either on a theory that an actual principal-agent relationship existed or on atheory of apparent authority. Accordingly, the claims against KPMG International werecorrectly dismissed.
In April 2014, the court dismissed Wexler's claim against the Tremont defendants forfraudulently inducing him into investing in nominal defendant/derivative plaintiff RyeSelect Broad Market Prime Fund L.P. Wexler appealed but withdrew his appeal withprejudice. Without an underlying fraudulent inducement claim, Wexler's claim thatJPMorgan, BNY, and Konigsberg aided and abetted fraudulent inducement necessarilyfails (see Kleinerman v 245 E.87 Tenants Corp., 74 AD3d 448, 449 [1st Dept 2010]).
Like Wexler, McBride invested in a feeder fund. She became a member of nominaldefendant/derivative plaintiff Beacon Associates LLC II (Beacon Fund), which ismanaged by defendant Beacon Associates Management Corp. (Beacon Associates).Beacon Associates "invested" most of the Beacon Fund's assets with nonparty Bernard L.Madoff Investment Securities LLC (BMIS). McBride alleges that Beacon Associatesfraudulently induced her into becoming a member of the Beacon Fund by, for example,failing to disclose that the Beacon Fund's assets would be invested with BMIS. Shealleges that JPMorgan, BNY, and Konigsberg aided and abetted Beacon Associates inthis fraudulent inducement. However, McBride makes only conclusory allegations thatthe aiders and abettors knew about and substantially assisted Beacon Associates' fraud;all of her specific allegations deal with aiding and abetting Madoff's/BMIS'sfraud. Hence, her aiding and abetting claim fails (see CRT Invs., Ltd. v Merkin, 29 Misc 3d 1218[A], 2010NY Slip Op 51868[U], *15 [Sup Ct, NY County 2010], affd 85 AD3d 470 [1stDept 2011]).
The Ryans and the Greenbergs did not invest in feeder funds; they invested directlyin BMIS. Their claim that Konigsberg and BNY aided and abetted the fraud of BMISinsiders Frank DiPascali and Annette Bongiorno fails for lack of allegations ofsubstantial assistance by the alleged aiders and abettors (see Stanfield Offshore LeveragedAssets, Ltd. v Metropolitan Life Ins. Co., 64 AD3d 472, 476 [1st Dept 2009],lv denied 13 NY3d 709 [2009]). The Ryans and the Greenbergs allege thatKonigsberg's firm, nonparty Konigsberg Wolf & Co., P.C. (KWC), "signed off" onMadoff's family investment books, which substantially assisted the continuation of theBMIS fraud. However, they fail to show why KWC's corporate veil should be pierced toreach Konigsberg (seeWeinberg v Mendelow, 113 AD3d 485 [1st Dept 2014]). In any event, they donot explain how signing off on accounting statements for entities other than BMISsubstantially assisted BMIS's fraud. For example, they do not allege that, when theydecided to invest in BMIS, they relied on the fact that Madoff's family investment bookswere in order (see National Westminster Bank v Weksel, 124 AD2d 144, 149 [1stDept 1987], lv denied 70 NY2d 604 [1987]; see Stanfield, 64 AD3d at476).
BMIS had both a fraudulent side (the investment advisory side) and a legitimate side(the proprietary trading and market making side). BMIS maintained an account for itsbrokerage business (i.e., the legitimate business) with BNY and an account for itsfraudulent business with JPMorgan. Madoff moved funds from BMIS's account atJPMorgan to MSIL's bank account in London to BMIS's account at BNY; he thenremoved funds from the BNY account. The Ryans and the Greenbergs allege that BNYprovided substantial assistance to the BMIS fraud by allowing Madoff to transfer fundsbetween the BNY account and London. However, substantial assistance "means morethan just performing routine business services for the alleged fraudster" (CRT, 85AD3d at 472). A bank's allowing its customer to transfer money from its account is aroutine business service (see MLSMK Inv. Co. v JP Morgan Chase & Co.,431 Fed Appx 17, 20 [2d Cir 2011]).
The Ryans and the Greenbergs allege that, as BMIS officers, Peter Madoff, MarkMadoff, Andrew Madoff, DiPascali, and Bongiorno (the individual BMIS defendants)owed fiduciary duties to BMIS investors. They further allege that BNY and Konigsbergaided and abetted the individual BMIS defendants' breach of fiduciary duty. The Ryansadditionally allege that [*3]Avellino aided and abettedthe individual BMIS defendants' breach of fiduciary duty.
The claims against BNY and Konigsberg for aiding and abetting breach of fiduciaryduty fail for the same reason the claims against them for aiding and abetting fraud fail,i.e., for lack of allegations of substantial assistance (see Kaufman v Cohen, 307AD2d 113, 126 [1st Dept 2003]).
The Ryans' claim against Avellino for aiding and abetting fiduciary duty failsbecause there was no underlying breach of fiduciary duty (see OFSI Fund II, LLC v CanadianImperial Bank of Commerce, 82 AD3d 537, 540 [1st Dept 2011], lvdenied 17 NY3d 702 [2011]). While officers of a corporation owe fiduciary duties tothe corporation (see e.g. Limmer v Medallion Group, 75 AD2d 299, 303[1st Dept 1980]), the Ryans cite no authority for the proposition that a corporation'sofficers owe fiduciary duties to people who give the corporation money to invest.
In its April 2014 order, the court found that Wexler's claims for conversion andunjust enrichment were derivative, not direct. As noted, Wexler appealed from this orderbut withdrew his appeal. Hence, he may not relitigate the nature of those claims (seegenerally Buechel v Bain, 97 NY2d 295, 303 [2001], cert denied 535 US1096 [2002]).
Even if McBride's claims for conversion and unjust enrichment are direct, theynonetheless fail to state a cause of action, as do the Ryans' and the Greenbergs' claims.Where, as here, a plaintiff alleges that a defendant converted money, the money "must bespecifically identifiable and be subject to an obligation to be returned or to be otherwisetreated in a particular manner" (Republic of Haiti v Duvalier, 211 AD2d 379, 384[1st Dept 1995]). McBride sent her money to Beacon Associates, which sent it toMadoff, who deposited it at JPMorgan. Even if, arguendo, McBride's money wasspecifically identifiable when she sent it to Beacon Associates, there is no indication thatBeacon Associates segregated it when it sent investors' money to Madoff. By the timeMadoff deposited investors' money at JPMorgan, McBride's investments would not havebeen specifically identifiable. The Ryans and the Greenbergs assert conversion claimsagainst BNY, not JPMorgan. JPMorgan sent money to MSIL in London; in turn, MSILsent money to BNY. By the time BNY got the money, the Ryans' and the Greenbergs'investments would not have been specifically identifiable.
Even if, arguendo, plaintiffs' money were specifically identifiable, their conversionclaims would fail because they had no possessory right or interest in the allegedlyconverted property (seeColavito v New York Organ Donor Network, Inc., 8 NY3d 43, 50 [2006]).Plaintiffs had no possessory right or interest in BMIS's accounts at JPMorgan and BNY;rather, BMIS had the right and interest in those accounts (see Calisch Assoc.v Manufacturers Hanover Trust Co., 151 AD2d 446, 448 [1st Dept 1989]).
In support of their unjust enrichment claims, McBride fails to allege a "sufficientlyclose relationship" with JPMorgan, and the Ryans and the Greenbergs fail to allege a"sufficiently close relationship" with BNY (see Georgia Malone & Co., Inc. v Rieder, 19 NY3d511, 516 [2012]).
The Ryans' claim against Avellino for negligent misrepresentation was correctlydismissed for the simple reason that it fails to allege that Avellino made anymisrepresentation (see EurycleiaPartners, LP v Seward & Kissel, LLP, 46 AD3d 400, 402 [1st Dept 2007],affd 12 NY3d 553 [2009]).
The court providently exercised its discretion in denying plaintiffs leave to amendsince plaintiffs failed to submit "appropriate substantiation" (see Guzman v Mike's PipeYard, 35 AD3d 266, 266 [1st Dept 2006] [internal quotation marks omitted]).Even before the amendment to CPLR 3025 (b) took effect on January 1, 2012, werequired a "proposed pleading accompanied by an affidavit of merit" (see Fletcher v Boies, Schiller& Flexner, LLP, 75 AD3d 469, 470 [1st Dept 2010]).
[*4] We have considered plaintiffs' remaining arguments(for example, that the court should have taken judicial notice of certain developments)and find them unavailing. Concur—Tom, J.P., Friedman, Saxe and Kapnick,JJ.