SANDZA v. BARCLAYS BANK PLC et al
Filing
18
MEMORANDUM OPINION granting defendants' motions to dismiss. See opinion for details. Signed by Judge Ellen S. Huvelle on December 22, 2015. (lcesh1)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
_________________________________________
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ELIZABETH B. SANDZA,
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Plaintiff,
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v.
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BARCLAYS BANK PLC, et al.,
)
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Defendants.
)
_________________________________________ )
Civil Action No. 15-732 (ESH)
MEMORANDUM OPINION
Plaintiff, a former partner at the now-defunct law firm Dewey & LeBoeuf LLP (“D&L”
or “the Firm”), brings this suit against Barclays Bank PLC (“Barclays”) and three of its
employees (the “individual defendants”). She alleges that defendants conspired with the Firm’s
management to fraudulently induce her and other non-management partners to take out capital
loans with Barclays, the proceeds of which were used to prop up the failing Firm and effectively
securitize the Firm’s own loans with Barclays. (See Compl. [ECF No. 1] at 1-4.) Central to the
alleged scheme was a concerted effort to “keep the non-management partners in the dark as to
the Firm’s financial affairs,” which encouraged partners to take out the capital loans and
forestalled a mass exodus from the Firm. (See id. at 2-3.) As a result, she alleges that she was
injured when the Firm filed for bankruptcy in May 2012, as she was unable to recover her capital
contributions and other deferred compensation, which she would not have agreed to defer had
she known of the Firm’s condition. (See id. at 2.)
She asserts one claim against the individual defendants for participation in a RICO
violation under 18 U.S.C. § 1962(c). (Id. ¶¶ 56-75.) She also asserts nine claims against
Barclays: (1) respondeat superior under RICO (id. ¶¶ 76-79); (2) deriving income from a RICO
violation under 18 U.S.C. § 1962(a) (id. ¶¶ 80-93); (3) conspiracy to commit a RICO violation
under 18 U.S.C. § 1962(d) (id. ¶¶ 94-103); (4) fraud (id. ¶¶ 104-10); (5) criminal conspiracy (id.
¶¶ 111-19); (6) aiding and abetting (id. ¶¶ 120-26); (7) negligence (id. ¶¶ 127-46); (8) breach of
fiduciary duty (id. ¶¶ 147-70); and (9) declaratory relief that plaintiff’s loan agreement with
Barclays is unenforceable (id. ¶¶ 171-79).
Defendants have moved to dismiss on a variety of grounds. (See Defs.’ Mot. to Dismiss
[ECF No. 7]; Def. Martin’s Mot. to Dismiss [ECF No. 9] (joining co-defendants’ motion to
dismiss).) The Court need not address many of those arguments, 1 because for several alternative
reasons, plaintiff’s complaint cannot survive.
BACKGROUND
Plaintiff Elizabeth Sandza was a partner at LeBoeuf, Lamb, Greene & MacRae, LLP
(“LeBoeuf”) from 1989 until 2007, when that firm merged with Dewey Ballantine LLP (“DB”)
to form D&L. (Compl. ¶ 1.) Throughout Ms. Sandza’s tenure as a D&L partner, the Firm
carried a significant amount of debt, dating back to LeBoeuf’s merger with DB. (See id. ¶¶ 24,
40.) Plaintiff alleges that, in 2005, DB began requiring increased capital contributions from its
partners as a result of its debt burden, which grew from approximately $32 million in 2005 to
$145 million soon after the 2007 merger, and by 2010, D&L owed approximately $160 million.
(Id. ¶¶ 9-10, 24, 40.) DB (and post-merger D&L) facilitated these capital contributions by
1
The Court need not consider whether: plaintiff’s RICO claims are barred by the Private
Securities Litigation Reform Act (Defs.’ Mot. to Dismiss at 13-17) and are also time-barred (id.
at 17-19); plaintiff’s aiding and abetting claim fails as a matter of law (id. at 37-39); plaintiff’s
criminal conspiracy claim fails as a matter of law (id. at 42-43); plaintiff’s declaratory judgment
claim is not cognizable as a separate cause of action (id. at 43); and plaintiff has failed to serve
defendant Martin, and in any event, the Court lacks personal jurisdiction over her (see generally
Def. Martin’s Mot. to Dismiss).
2
directing partners to Barclays, which had established a capital loan program that gave partners
access to the necessary funds. (Id. ¶¶ 11, 25.)
Plaintiff took out two loans with Barclays: a $38,000 partner capital loan in 2009 and a
second loan for $125,000 in March 2010, a month before she left the firm. (Id. ¶ 1.) The
proceeds of plaintiff’s capital loan were deposited with the Firm in her capital account, and she
alleges that, upon her departure in April 2010, the Firm was obligated to repay the loan from her
capital account and transfer the remaining balance to her. (See id. ¶¶ 1, 13-14.) However, when
she sought the return of her capital account balance, the Firm refused to release those funds,
instead suggesting she take out the second, $125,000 loan with Barclays. (See id. ¶ 46.) Having
been assured by the Firm that it would repay the loan, she executed the agreement. (Id. ¶ 47.) 2
She also agreed with the Firm to accept deferred compensation of $850,000, payable over 11
years starting in 2011, to make up for amounts she had been underpaid in previous years. (Id. ¶
1.)
Separately, Barclays was also a creditor of D&L, having extended it an unsecured $5
million loan in August 2007 and an unsecured $30 million credit facility in 2008. (Id. ¶¶ 22, 34.)
It is these loans that plaintiff alleges gave Barclays the motive to conspire with the Firm, for,
having extended $35 million in unsecured loans to a failing Firm, Barclays sought to protect
itself by inducing the partners to take out capital loans, which would be used by the Firm to pay
2
There is some ambiguity in the complaint regarding how this loan was used, either as another
capital contribution to the Firm (from which she was leaving imminently) or for plaintiff’s own
benefit, i.e., an advance on the disbursement that the Firm refused to make upon her departure.
Compare Compl. at 3, ¶ 1 ($125,000 was a “partner capital loan,” and plaintiff’s $200,000 total
capital contribution was “financed for the most part by Barclays’ capital loan program”) with id.
¶ 46 (alleging that the Firm suggested she take out a capital loan in lieu of her receiving
disbursement of her capital account). This issue is not especially relevant to the instant motion,
but it is worth noting that if she personally received the benefit of the $125,000 loan, then it
would be difficult to see how repayment of that loan injured her.
3
off its own loans with Barclays. (See Compl. at 2-3.) In other words, according to plaintiff’s
theory, the unsuspecting partners would be left holding the bag for the Firm, remaining
personally liable for their capital loans while the Firm’s own loans were fully repaid as of
December 2010. (See id. at 2-3, ¶ 42.)
The alleged scheme depended upon keeping non-management partners in the dark about
the Firm’s troubles, thus inducing partners to make additional capital contributions and
preventing a mass exodus from the partnership ranks, which in turn allowed the Firm to remain
viable for a longer period. (See id. at 3.) Plaintiff alleges that defendants (1) excused the Firm’s
defaults under departed partners’ loan agreements and failed to inform partners about those
defaults, and (2) failed to disclose to plaintiff and other partners the Firm’s poor financial
condition. (See id. at 2-3.) As to the defaults, she alleges that the Firm failed to repay departing
partners’ capital loans, and when the Firm’s growing indebtedness under those loans reached a
certain amount, a default was triggered affecting every partner loan agreement. (See id. ¶¶ 13,
17-18.) She does not allege that the defaults themselves caused her any injury, but rather that
their disclosure by Barclays would have alerted her to the Firm’s dire financial straits, allowing
her to make “better decisions or at least take[] steps to mitigate her damages.” (See id. ¶ 73.)
Plaintiff also alleges that Barclays and Firm management committed “approximately 114
instances of mail and wire fraud,” with Firm management “disseminating false and misleading
financial statements . . . to non-management partners,” and Barclays “providing the means
whereby these partners could make capital . . . contributions to the Firm.” (See id. at 1-2.) She
makes very few specific allegations as to the individual defendants, claiming only that they each
worked for Barclays on the D&L account (id. ¶¶ 3-5); that they had “superior knowledge of the
Firm’s financial situation” (id. at 4); and that they formed an association-in-fact that “engaged in
4
a pattern of racketeering activity, inter alia, by continuing to offer the capital loan program”
without disclosing the Firm’s dire financial condition (id. ¶¶ 59, 63).
In the end, the Firm filed for bankruptcy in May 2012, and plaintiff alleges that it was not
until that time that she learned of the Firm’s defaults and its underlying financial problems. (Id.
at 3, ¶ 118.) The Firm’s bankruptcy prevented her from recovering any of her deferred
compensation, and in January 2014, she agreed to repay Barclays her outstanding loan balance of
approximately $134,000, while reserving the right to bring suit against Barclays. (Id. ¶¶ 1, 92.)
ANALYSIS
I.
LEGAL STANDARD: RULE 12(b)(6)
To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), a
complaint “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that
is plausible on its face,’” such that a court may “draw the reasonable inference that the defendant
is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The plausibility standard “asks for more than
a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678. Thus,
“[f]actual allegations must be enough to raise a right to relief above the speculative level, on the
assumption that all the allegations in the complaint are true (even if doubtful in fact).” Twombly,
550 U.S. at 555 (citations omitted). In ruling on a 12(b)(6) motion, a court may consider facts
alleged in the complaint, documents attached to or incorporated in the complaint, matters of
which courts may take judicial notice, and documents appended to a motion to dismiss whose
authenticity is not disputed, if they are referred to in the complaint and integral to a claim. U.S.
ex rel. Folliard v. CDW Tech. Servs., Inc., 722 F. Supp. 2d 20, 24-25 (D.D.C. 2010).
5
II.
IMPLAUSIBILITY
At the outset, defendants argue for dismissal on the ground that Ms. Sandza’s
overarching theory of liability strains credulity. (See Defs.’ Mot to Dismiss at 7-9; see also
Iqbal, 556 U.S. at 678.) The gravamen of her complaint is that Barclays conspired with Firm
management to induce her and other non-management partners to take out capital loans, the
proceeds of which would “eliminate[] Barclays’ exposure on the Firm’s credit facilities.” (See
Compl. at 3.) At first glance, this theory has some intuitive appeal—Barclays overextended
itself to a troubled Firm and then, upon learning of its dangerous exposure, figured out a way to
use non-management partners to effectively securitize the Firm’s loans. The problem for
plaintiff is that her own allegations seriously undercut this theory.
First, the lynchpin of the alleged scheme, Barclays’ capital loan program, was put into
place nearly two years before Barclays faced any exposure on its first loan for $5 million to the
Firm. (See id. ¶¶ 9, 11, 22.) Next, plaintiff alleges that Barclays learned of the Firm’s
difficulties in 2007, when it received financial information from the Firm that it “knew was false
and misleading.” (See id. ¶ 48; see also id. ¶ 99 (“In late 2007 and early 2008, management
developed a scheme, with the knowledge of Barclays . . . to inject capital into the Firm and keep
the Firm viable.”).) According to plaintiff, rather than cutting off all ties upon learning of the
misrepresentation and underlying financial woes, however, Barclays extended the Firm a second
unsecured $30 million line of credit in 2008. (Id. ¶ 34.) Even if Barclays only learned of the
Firm’s troubles in late 2007, after it extended the August loan, Barclays would still have had to
6
extend an unsecured $30 million line of credit with full knowledge that the Firm was both in
financial trouble and lying about it. 3
That improbability does not mean, however, that dismissal is warranted. See Iqbal, 556
U.S. at 681 (“To be clear, we do not reject these bald allegations on the ground that they are
unrealistic or nonsensical. . . . It is the conclusory nature of respondent's allegations, rather than
their extravagantly fanciful nature, that disentitles them to the presumption of truth.”). The
plausibility standard looks to the factual sufficiency of the complaint, rather than the probability
that plaintiff can ultimately prove those facts. See Twombly, 550 U.S. at 556 (“[A] well-pleaded
complaint may proceed even if it strikes a savvy judge that actual proof of those facts is
improbable, and that a recovery is very remote and unlikely.”) (internal quotations omitted).
Therefore, it is immaterial if defendants are correct that “[n]o bank, concerned enough about a $5
million exposure that it would hatch a byzantine plot to eliminate it, would in the midst of that
plot increase its credit exposure seven-fold.” (Defs.’ Mot. to Dismiss at 8.)
III. FAILURE TO STATE A CLAIM – ALL COUNTS
At bottom, all of Ms. Sandza’s claims and legal theories rest on two central allegations:
(1) defendants failed to disclose that, at the time she took out her capital loans, the Firm had
already defaulted on its obligations to repay capital loans of previously departed partners, which
3
Defendants have also attached to their motion to dismiss two emails between Barclays and the
Firm, suggesting that Barclays offered another $20 million line of credit to the Firm in April
2010, but it was rebuffed in part because Barclays was “more demanding than [the Firm’s] other
banks in respect of financial information.” (See Ex. 3 to Defs.’ Mot. to Dismiss [ECF No. 7-4] at
11-15.) As plaintiff alleges, both of the Firm’s outstanding loans were repaid in 2010 (Compl. ¶
38), which from Barclays’ perspective was the very object of the alleged conspiracy (see id. at
3). It is highly implausible that Barclays would increase its exposure by $20 million at the same
time its alleged conspiracy was about to succeed. That said, the Court will not consider these
emails on a motion to dismiss, and it declines defendants’ invitation to convert the motion into
one for summary judgment. (See Defs.’ Mot. to Dismiss at 9 n.7.)
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caused her own loans to immediately go into default (see Compl. at 1-4); and (2) defendants
failed to disclose that the Firm was facing dire financial difficulties. (See id. at 4 (“The
Defendants all had numerous opportunities to educate the Plaintiff about what was going on at
the Firm, but chose not to disclose the Firm’s true financial condition and the fact that the Firm
was already in a default status on its Barclays’ debt obligations.”).) 4 Even these allegations
overlap, in that the “defaults” themselves had no financial consequences for plaintiff, but
disclosing their existence would have revealed to her the Firm’s financial troubles. (See Pl.’s
Opp’n at 4 (“Plaintiff’s injury does not stem from whether the Firm was in default on a certain
date . . . [but rather] is a direct result of Barclays’ failure to disclose material facts [about the
Firm’s finances] . . . .”).) Had defendants made these disclosures to Sandza, she alleges that she
“would not have enrolled in the Barclays capital loan program, and would have withdrawn from
the Firm unless adequate measures were taken to reform management and its practices.” (Id. ¶
74.)
Because there were no unremedied defaults for Barclays to disclose, and because Sandza
fails to allege a cognizable duty requiring defendants to disclose the Firm’s financial condition
(even assuming they had notice of this condition), all of her claims fail as a matter of law.
4
Plaintiff’s opposition also weakly asserts that defendants “actively disseminated
misrepresentations,” citing to Paragraph 107 of her complaint. (Pl.’s Opp’n at 21.) However,
Paragraph 107 merely alleges a fraudulent scheme “perpetrated by the Firm . . . [that involved]
disseminating the false message that the Firm was in good financial condition,” which Barclays
allegedly aided and abetted. (See Compl. ¶ 107 (emphasis added).) Even if the Court were to
infer that Barclays aided the scheme by also making fraudulent misrepresentations, such a bare,
conclusory allegation would not satisfy Iqbal, let alone the heightened specificity requirement of
Rule 9(b). See 556 U.S. at 681; Fed. R. Civ. P. 9(b). Therefore, the Court finds no support in the
complaint for a reasonable inference that defendants made affirmative misrepresentations.
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A. Unremedied Defaults
Plaintiff alleges that, “under Barclays loan documentation,” the Firm was obligated to
apply the balance of departing partners’ capital accounts towards the outstanding amount of their
Barclays loans. (Compl. ¶¶ 17-18.) When several partners departed and the Firm took no action,
the Firm’s resulting indebtedness triggered a default, and, due to a cross-default provision in the
loan agreements, the loans of all participating partners also went into default. (Id. ¶¶ 16-18.)
Nonetheless, according to plaintiff, Barclays allegedly chose not to enforce its right to immediate
repayment after those defaults—and not to inform plaintiff or other partners about them—
because doing so would have revealed the Firm’s deterioration, thereby “precipitating an exodus
of partners . . . [and] ensuring the Firm’s collapse.” (See id. ¶¶ 53-54.) However, plaintiff’s
allegations of unremedied defaults rest entirely upon a misreading of the operative loan
agreements. 5
Ms. Sandza’s loan agreement consists of three sections: (1) a facility letter setting forth
the terms of her agreement with Barclays; (2) Schedule A, an Instruction Letter in which plaintiff
requested from the Firm a Partnership Undertaking in connection with her loan; and (3) Schedule
B, the Partnership Undertaking executed by the Firm. (See Ex. 2 to Defs.’ Mot. to Dismiss (the
“Loan Agreement”).) The relevant “default” provision appears in Paragraph 10.1(j) of the
5
Plaintiff did not attach the loan agreement to her complaint, but she relied on it repeatedly in
support of her “default” allegations. (See, e.g., Compl. ¶¶ 13, 17-18, 21.) As such, the Court
will consider the copy that defendants attached to their motion to dismiss. See Vanover v.
Hantman, 77 F. Supp. 2d 91, 98 (D.D.C. 1999) (“[W]here a document is referred to in the
complaint and is central to plaintiff’s claim, such a document attached to the motion papers may
be considered without converting the motion to one for summary judgment.”). Moreover, the
parties agree that plaintiff’s capital loan agreement is materially identical to those of other Firm
partners. (See Decl. of Andrew Johnman [ECF No. 7-10] ¶ 3; Pl.’s Opp’n at 4 (English court
decisions involving different Firm partners interpreted “the very same contract drawn up by
Barclays”).)
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facility letter, which states that plaintiff’s loan will go into default “in the event of any
indebtedness of the Firm in excess of US$250,000 becoming immediately due and payable . . .
by reason of default on the part of any person.” (Id. ¶ 10.1(j).) Next, Paragraph ii(b) of the
Partnership Undertaking provides that the Firm “will apply the balance of the [departing]
Partner’s Capital Account in satisfying (so far as is possible) any indebtedness remaining
outstanding under the Loan with the Bank, before paying any residue to the Partner or to the
Partner’s legal personal representatives.” (Id. at Schedule B ¶ ii.) Therefore, plaintiff’s
argument goes, the Firm’s failure to apply departing partners’ capital accounts toward their
outstanding loans created a shortfall in excess of $250,000, thus sending Sandza’s own loan into
default. (See Compl. ¶¶ 13, 17-18.)
The loan agreement provides that it “shall be governed by and construed in accordance
with the laws of England.” (Loan Agreement ¶ 11.1.) Such a choice-of-law provision is given
effect under D.C. law as long as there is a “reasonable relationship” with the chosen jurisdiction,
which is satisfied when one of the parties has its principal place of business in that jurisdiction.
See Ladd v. Chemonics Int’l, Inc., 603 F. Supp. 2d 99, 115 n.11 (D.D.C. 2009). Because
Barclays’ principal place of business is London, England (Compl. ¶ 2), the Court will construe
the loan agreement according to English law.
In determining how the relevant “default” provisions would be interpreted under English
law, the Court can rely on “any relevant material or source.” Fed. R. Civ. P. 44.1. It must
predict what English courts would find, unless those courts have already addressed the issue.
See Anglo Am. Ins. Grp., P.L.C. v. CalFed, Inc., 899 F. Supp. 1070, 1077 (S.D.N.Y. 1995).
Here, there is no need to predict how English law would be applied, because the Court already
has the benefit of an English court’s interpretation of this exact provision. See Barclays Bank
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PLC v. L. Londell McMillan, [2015] EWHC 1596 (Comm). In McMillan, Barclays sued a
former Firm partner for repayment of his capital loan, and the partner defended on the grounds
that he had relied upon Barclays’ false, implied representation that no unremedied defaults
existed at the time he took out the loan. See id. ¶¶ 17(6), 21. The English court found no merit
to this defense, holding that the Firm’s only obligation under Paragraph ii(b) of the Partnership
Undertaking is “negative in form,” requiring the Firm to refrain from paying the capital account
balance to the departing partner in preference to Barclays. See id. ¶ 71(6) (allegation of
unremedied defaults “fails as a matter of fact and law”). In other words, “[i]f there is no
payment to the partner there is no breach of obligation to [Barclays].” Id.
Just so here. Plaintiff does not allege that the Firm paid any former partners in preference
to Barclays. On the contrary, she alleges that the Firm refused numerous requests for capital
account disbursements, including plaintiffs’ own. (See Compl. ¶ 46.) Therefore, because there
were no unremedied defaults under English law, there could not possibly have been any failure
by Barclays to disclose them. Thus, any claims relating to “undisclosed defaults” necessarily fail
as a matter of law.
Plaintiff’s attempts to respond to this conclusion are unpersuasive. First, she attempts to
distinguish McMillan because it involved a different procedural posture, i.e., a contractual
defense to the enforcement of a loan agreement, rather than a tort action in which only one count
“even remotely touches upon the question of contract interpretation.” (See Pl.’s Opp’n at 3-4.)
In making this argument, plaintiff ignores the fact that issues of contract interpretation permeate
her entire cause of action, and that, regardless of the procedural posture, the English court
considered and rejected the very same “unremedied default” argument she advances here. See
McMillan, [2015] EWHC 1596 (Comm) ¶ 71(6). Next, she contends that, even if this Court
11
were to accept McMillan’s holding, it must still allow expert discovery regarding English law,
because a different English court found that the same Barclays contract might support a claim
that the capital loan was a sham transaction. (Pl.’s Opp’n at 4 (citing Barclays Bank PLC v.
Landgraf, [2014] EWHC 503 (Comm)).) This is a non sequitir. Even if another English court
had found that a loan between Barclays and a Firm partner was a sham from the outset, it would
not follow that the terms of the loan agreement required the Firm to satisfy that partner’s debt,
which is an entirely unrelated issue. Thus, there is no reason to allow discovery, for the parties
have only identified one English decision addressing the alleged defaults, and it forcefully
rejected the very argument that plaintiff makes here.
These “defaults” form the foundation of plaintiff’s case, and without them, her other
allegations quickly crumble. For instance, her claim seeking a declaration that the loan
agreements are unenforceable cannot be sustained, because it rests solely on the fact that she
made the agreements without knowledge of the defaults. (See Compl. ¶¶ 171-79.)
Similarly, her allegations that defendants committed (or conspired with the Firm to
commit) mail and wire fraud must also be rejected. She identifies two types of alleged wire
fraud: (1) the Firm’s dissemination of misleading financial statements, “which the [individual
defendants] were well aware of,” and (2) Barclays’ continued offering of capital loans “with
superior knowledge that the non-management partners were relying upon false and misleading
financial statements.” (See Compl. at 1-2.) In other words, liability arising from either type of
alleged wire fraud depends upon defendants’ knowledge that the Firm had put out false financial
statements. See First Am. Corp. v. Al-Nahyan, 17 F. Supp. 2d 10, 33 (D.D.C. 1998) (RICO
defendant’s ignorance of illegal activity is an absolute bar to liability unless that ignorance is
willful or reckless). But the only specific allegation that defendants knew of false financial
12
statements rests entirely on the non-existent defaults. (See, e.g., id. at 2 (“Barclays specifically
knew that the Firm was not disclosing to the non-management partners that: (a) the Firm was
already in default under several of its Barclays partner capital loans; and (b) by entering into the
Barclays capital loans, the partners would themselves be automatically and immediately in
default to Barclays . . . .”); id. ¶ 19(a) (Barclays knew that “such events of default . . . were not
disclosed in DB’s 2006 audited financial statements”); id. ¶ 24 (“[S]uch financial statements . . .
did not disclose D&L’s defaulted obligations to repay any capital loans of departed partners.”).)
Plaintiff does not specifically allege that Barclays knew about any other discrepancies in the
financial statements, and the Court will not credit her unsupported speculation to the contrary.
(See id. ¶ 69 (Barclays “knew, at a minimum, that [the financial statements] did not disclose
material facts pertaining to . . . the Firm's repeated defaults”) (emphasis added).
Factual support for plaintiff’s conspiracy claims also erodes once the defaults are
disregarded, as Barclays’ alleged agreement to secretly excuse the defaults formed the initial
basis for the conspiracy. (See id. ¶ 101.) Plaintiff alleges that the conspiracy was formed soon
after Barclays learned of the Firm’s financial trouble, in order to keep the Firm in business and
ensure that Barclays was repaid its $35 million in loans. (See id. ¶¶ 99-101 (RICO conspiracy);
id. ¶ 112 (common law conspiracy).) However, again, the only specific allegation that Barclays
had advance knowledge of the Firm’s struggles is that it knew about the non-existent defaults.
(See id. ¶ 98; see also id. ¶ 175(a) (Barclays made capital loans with “superior knowledge about
the true financial condition of the Firm and specifically as to the existing defaults under the
capital loan program”) (emphasis added).)
At one point, plaintiff vaguely alludes to Barclays’ awareness of insufficient “projected
Firm revenues” (id. ¶ 114), but she does not provide any detail about those projections that might
13
make the allegation plausible. See Iqbal, 556 U.S. at 681. After all, her complaint is riddled
with allegations that the Firm publicly released false financial records (e.g., Compl. at 1-2, ¶ 36),
and that an auditor concluded that the Firm was successfully hitting its net profit benchmarks
under its Barclays loan agreements (id. at 4). Without more factual elaboration, it is difficult to
reconcile these allegations with the notion that Barclays, the Firm’s $35 million creditor, had
information about the true revenue projections. The same problem undermines her allegation
that Barclays knew of “inflated contracts” given to incoming Firm partners, which allegedly
should have alerted Barclays of the Firm’s imminent failure. (See id. at 2-3.) Given that her
complaint repeatedly alleges that the Firm falsified its financial records (see, e.g., id. at 1-2, ¶
36), she offers insufficient facts to show how or why Barclays would have learned that these
contracts were, in fact, inflated. In short, without the defaults that allegedly tipped Barclays off,
Sandza’s complaint lacks any explanation as to how Barclays went from an unknowing lender to
an active participant in the Firm’s fraud. See Twombly, 550 U.S. at 557 (“[W]ithout that further
circumstance pointing toward a meeting of the minds, an account of a defendant’s commercial
efforts stays in neutral territory.”). As such, her conclusory allegations that Barclays knew of
insufficient projections or inflated contracts are not enough to support a plausible inference that
defendants either knew about the Firm’s problems or conspired to cover them up. See Iqbal, 556
U.S. at 681.
B. The Firm’s Financial Condition
It should go without saying that a party cannot be held liable for failing to disclose
information that it does not possess. See, e.g., Restatement (Second) of Torts § 551(2) (1977)
(one party to a business transaction may have a duty to disclose “matters known to him that the
other is entitled to know”) (emphasis added). Because plaintiff has not adequately alleged
14
defendants’ knowledge of the Firm’s financial problems, her allegation that they breached their
duty to disclose those problems must necessarily fail. (See supra Part III.A.) But even if
defendants did know this information, Sandza has not adequately alleged that they were
obligated to disclose it to her.
In order for the alleged failure to disclose to be actionable, plaintiff must first allege that
defendants had a cognizable duty to make that disclosure. See Sununu v. Philippine Airlines,
Inc., 792 F. Supp. 2d 39, 51 (D.D.C. 2011) (“D.C. law provides that nondisclosure of a fact can
constitute a fraudulent misrepresentation . . . [if] there is a duty to speak.”). Her complaint
contains bare allegations of such a “duty.” (E.g., Compl. ¶ 139 (“Based on this continuous
failure to disclose material facts re the Firm's true financial condition, Barclays breached the duty
it owed to the non-management partners . . . .”); id. ¶ 143(b) (Barclays “failed to discharge its
duty to the non-management partners . . . .”). The complaint also asserts that, because plaintiff’s
loan agreement contained an English choice-of-law provision, Barclays had a duty to disclose
arising under English law. (Id. ¶ 158 (alleging a duty arising under Paragraphs 2, 13.1, and 13.4
of the U.K. Banking Code and PRIN 2.1(9)).) In response to defendants’ citation of numerous
cases holding that contractual choice-of-law provisions do not apply to tort claims (Defs.’ Mot.
to Dismiss at 35 n.33), Ms. Sandza fails to cite any relevant U.S. law. Instead, she doubles down
on her assertion that English law applies, arguing that “the duty to speak arose from the fiduciary
duty owed by Barclays to Plaintiff under the contractually-chosen English law.” (Pl.’s Opp’n at
21-22.)
Even if the Court were to assume that the English provisions that plaintiff cites are
binding sources of law, rather than voluntary codes of conduct (as defendants strongly argue
(Defs.’ Reply at 19)), there is simply no basis for applying English law to plaintiff’s tort claims.
15
The English choice-of-law provision governing contract claims between the parties “simply does
not cover tort claims arising from the same underlying events unless the parties so intend.” See
Minebea Co. v. Papst, 377 F. Supp. 2d 34, 38 (D.D.C. 2005) (emphasis added). In Papst, the
court found no such intent where the agreement simply stated “This Agreement shall be
governed by and interpreted in accordance with the Laws of New York.” Id. (emphasis omitted).
Plaintiff’s loan agreement contains a virtually identical choice-of-law provision (“This facility
letter shall be governed by and construed in accordance with the laws of England.”) (Loan
Agreement ¶ 11.1)). It goes on to state that plaintiff shall submit to the personal jurisdiction of
the English courts if Barclays “files an action . . . to enforce the terms of the loan.” (Id. ¶ 11.2.)
Therefore, the agreement lacks any indicia of intent that English law should apply to tort claims.
Under D.C. law, the general rule is that one party to a transaction has no duty of
disclosure to the other unless (1) the party is a fiduciary of the other, or (2) the party knows that
the other is acting unaware of a material fact that is unobservable or undiscoverable by an
ordinarily prudent person upon reasonable inspection. See Sununu, 792 F. Supp. 2d at 51.
Neither exception is applicable here. D.C. law establishes that “[t]he relationship between a
debtor and a creditor is ordinarily a contractual relationship and not a fiduciary relationship.”
See Ponder v. Chase Home Fin., LLC, 666 F. Supp. 2d 45, 49 (D.D.C. 2009). An exception can
be found if “a special relationship of trust or confidence exists in a particular case,” Ellipso, Inc.
v. Mann, 541 F. Supp. 2d 365, 373 (D.D.C. 2008) (internal quotations omitted), where the parties
extend their relationship beyond what the contract requires of them. See Paul v. Judicial Watch,
Inc., 543 F. Supp. 2d 1, 6 (D.D.C. 2008). However, plaintiff does not plead any specific facts
that suggest something more than a standard, arms-length debtor-creditor relationship. (See
Compl. ¶ 168 (making only a bare assertion of a “special kind of relationship”).) In fact, as
16
defendants point out, Ms. Sandza does not even allege that Barclays had any direct contact with
her, with perhaps the exception of her January 2014 agreement to pay off her Barclays loan
balance. (See Defs.’ Mot. to Dismiss at 3-4; Compl. ¶ 1.)
Instead, plaintiff alleges that Barclays “knew or should have known how bad things
were” at the Firm (Compl. ¶ 150), and that she “had no opportunity to acquire similar knowledge
of the inner-workings of the Firm.” (Id. ¶ 162.) As noted, it is true that one party’s superior
knowledge can give rise to a duty to disclose, when it knows that the other party is acting
unaware of a material fact that is “unobservable or undiscoverable by an ordinarily prudent
person upon reasonable inspection.” See Sununu, 792 F. Supp. 2d at 51 (internal quotations
omitted). But as discussed, plaintiff’s allegations that Barclays knew of the Firm’s poor health
rest almost entirely upon its alleged knowledge that the Firm defaulted on its capital loan
obligations, which the Court has already rejected. And even if Barclays did know of the Firm’s
poor heath, plaintiff does not explain how Barclays could have known that Sandza did not know
(and could not have discovered) the precariousness of her own Firm’s finances. Indeed, as a
Firm partner, she had the statutory right to inspect its books. See N.Y. P’ship Law § 41
(“[E]very partner shall at all times have access to and may inspect and copy any of [the
partnership books].”). The mere fact that Barclays allegedly “knew that [plaintiff] for the most
part would not scrutinize quarterly and/or annual financial statements” (see Compl. ¶ 157) offers
her no comfort, because her own lack of diligence does not make those facts undiscoverable.
See Sununu, 792 F. Supp. 2d at 51. By the same token, the fact that the Firm may have refused
her access to its books (see Compl. ¶ 163) does not cure the problem, because she does not allege
that Barclays had any knowledge of that unlawful refusal.
17
In short, even assuming arguendo that Barclays did have superior knowledge of the
Firm’s finances, plaintiff fails to allege specific facts to support an inference that Barclays knew
what she had not learned and could not have discovered as a partner of the Firm. As such,
Barclays cannot be charged with a duty to disclose. To hold otherwise would impose an
extraordinary burden on creditors, compelling them to disclose basic information about the
debtor’s own business, on the off-chance that the debtor may have been too busy to discover it
herself (see id. ¶¶ 153-57) or may have been unlawfully refused that information by her own
partners (see id. ¶ 163). This failure to adequately plead a duty to disclose means that her
negligence, fraud, and breach of fiduciary duty claims cannot survive. By extension, given the
Court’s rejection of her default allegations, neither can any of her remaining claims.
Furthermore, for the reasons set forth below, there are two additional arguments that
doom plaintiff’s claims: her civil RICO claims are insufficiently pled, and her state law claims
are untimely.
IV. FAILURE TO STATE A CLAIM – CIVIL RICO COUNTS
Plaintiff first alleges that the individual defendants participated in a RICO enterprise in
violation of 18 U.S.C. § 1962(c). (Compl. ¶¶ 56-75.) To state a claim under that subsection,
plaintiff must allege “(1) the conduct (2) of an enterprise (3) through a pattern of racketeering
activity.” Salinas v. United States, 522 U.S. 52, 62 (1997). “Racketeering activity” is defined to
include acts of mail fraud and wire fraud, 18 U.S.C. § 1961(1)(B), and there must be at least two
such predicate acts to constitute a “pattern.” Salinas, 522 U.S. at 62.
Where the alleged predicate acts involve mail or wire fraud, as here, plaintiff must satisfy
the heightened pleading standard of Rule 9(b), which, at a minimum, requires that defendants be
given “fair notice of the plaintiffs’ claims and grounds therefore, so that they can frame their
18
answers and defenses.” See Bates v. Nw. Human Servs., Inc., 466 F. Supp. 2d 69, 88-89 (D.D.C.
2006) (quoting Fink v. Nat’l Sav. & Trust Co., 772 F.2d 951, 963 (D.C. Cir. 1985)). Typically,
that means “stat[ing] the time, place and content of the false misrepresentations, the fact
misrepresented[,] and what was retained or given up as a consequence of the fraud.” See Bates,
466 F. Supp. 2d at 89 (quoting U.S. ex rel. Williams v. Martin-Baker Aircraft Co., 389 F.3d
1251, 1256 (D.C. Cir. 2004)); see also W. Associates Ltd. P’ship ex rel. Ave. Associates Ltd.
P’ship v. Mkt. Square Associates, 235 F.3d 629, 637 (D.C. Cir. 2001) (“RICO claims premised
on mail or wire fraud must be particularly scrutinized because of the relative ease with which a
plaintiff may mold a RICO pattern from allegations that, upon closer scrutiny, do not support
it.”).
Under such a demanding standard, plaintiff’s allegations of mail and wire fraud are
woefully deficient, for the only specific fact she alleges is that there were “approximately 114”
such instances. (See Compl. at 1.) She does not allege a time or a place for any of the alleged
frauds, nor does she attribute any of them to the individual defendants, let alone attempt to
delineate which individual defendant committed which frauds. (See id. at 1-2 (alleging only that
Firm management and Barclays committed 114 instances of wire fraud between 2007 and
2012).) Even if the Court were to read “the individual defendants” in place of “Barclays”—as it
would have to do in analyzing a claim against the individual defendants—it would still have no
idea which of the “approximately 114 instances” are attributable to Firm management (and thus
irrelevant to this analysis). And even her description of the basic content of Barclays’ alleged
fraud is frustratingly opaque—Barclays “provid[ed] the means whereby these partners could
make capital and other financial contributions to the Firm based on . . . false information.” (See
id.) Certainly, a fair reading of that allegation is that Barclays committed wire fraud by offering
19
loans without disclosing material facts, but as discussed above, plaintiff has failed to adequately
allege that Barclays even knew these material facts. (See supra Part III.A.) Absent specific facts
indicating that Barclays had this knowledge or conspired to conceal it, the mere loan offers
themselves cannot constitute wire fraud, and as such, plaintiff’s Section 1962(c) count fails
under both Rule 9(b) and 12(b)(6).
By extension, of course, her related count for respondeat superior liability against
Barclays—based on the same RICO allegations rejected above—must also be denied. (See
Compl. ¶¶ 76-79.) An employer’s vicarious liability necessarily depends upon the liability of its
employees, which has not been adequately pled here. See Crawford v. Signet Bank, 179 F.3d
926, 929 (D.C. Cir. 1999) (“In the absence of agent liability, therefore, none can attach to the
principal.”).
Next, plaintiff alleges that Barclays violated 18 U.S.C. § 1962(a), which prohibits the use
or investment of racketeering income in an enterprise. (See Compl. ¶¶ 80-93.) In order to state a
claim under this subsection, plaintiff must adequately allege that she was injured by Barclays’
use or investment of racketeering income, rather than by the racketeering activity itself.
Danielsen v. Burnside-Ott Aviation Training Ctr., Inc., 941 F.2d 1220, 1229 (D.C. Cir. 1991) (“It
is not sufficient to allege injury flowing from the predicate acts of racketeering.”). Her
explanations of both the “reinvestment” and causation are difficult to parse. She identifies the
“racketeering income” as “the monies induced by fraud from the Plaintiff and other nonmanagement partner victims,” and she alleges that “Barclays, through the Control Group . . .
reinvested the capital loan funds ‘in the Firm.’” (See Pl.’s Opp’n at 14 (emphasis in original).)
It is unclear how Barclays can be charged with “reinvesting” loan funds in the Firm, when
plaintiff alleges that the partners themselves contributed those funds to the Firm. (See, e.g.,
20
Compl. ¶ 25 (partners could choose to make their capital contributions up front in cash, by
withholding from draws, or by participating in Barclays loan program); id. ¶ 172 (Barclays loan
program would “fund [partners’] required capital contributions to the Firm”).) Barclays merely
provided her the access to the funds, but plaintiff does not explain what legal basis Barclays
would have had for controlling the use of those funds or directing them elsewhere, such that it
could be held liable merely for “allowing the investment . . . into the Firm.” (See id. ¶ 93
(emphasis added).) In fact, the only racketeering income Barclays itself is alleged to have
received—“interest on loans and credit facilities”—is not alleged to have been reinvested back
into the Firm. (See Pl.’s Opp’n at 14.)
Moreover, this alleged “reinvestment” and the deferred compensation injury lack a causal
connection, because her own allegations show that she would have suffered the injury either
way. She alleges that the reinvestment caused her a separate injury (id.), because she would not
have agreed to accept deferred compensation had Barclays “not delayed the Firm’s collapse by
allowing the investment of the capital funds into the Firm” (Compl. ¶ 93). In other words, the
Firm would have collapsed but for that reinvestment, and because the Firm had not yet collapsed,
she was induced to accept deferred compensation. According to her own allegations, then, the
Firm would have already gone bankrupt but for that delay, and she would never have seen the
deferred compensation anyway. Instead, as she alleges elsewhere in her complaint, the deferred
compensation injury is simply a second, consequential injury flowing from her unawareness of
the Firm’s problems. (See Compl. ¶ 73 (“Had Barclays disclosed the truth about the Firm's
operations . . . the Plaintiff would not have agreed to deferred compensation arrangements to be
paid over future periods.”).) Furthermore, she claims deferred compensation damages under her
21
Section 1962(c) count as well (see id.), putting to rest any notion that they constitute a separate
and distinct “reinvestment” injury.
Finally, plaintiff alleges that Barclays violated 18 U.S.C. § 1962(d) by conspiring with
Firm management to commit a RICO violation. (See Compl. ¶¶ 94-103.) The Court has already
rejected her allegations of an underlying Section 1962(c) violation by the individual defendants,
which would ordinarily mean that her related conspiracy claim must also be rejected. See
Edmondson & Gallagher v. Alban Towers Tenants Ass'n, 48 F.3d 1260, 1265 (D.C. Cir. 1995).
However, plaintiff alleges separately that the Firm also committed wire fraud with defendants’
knowledge. (See Compl. at 1.) This allegation could serve as a separate basis for finding a
RICO conspiracy, but for the fact that, once the non-existent defaults are disregarded, plaintiff
fails to allege enough specific facts to permit a plausible inference that (1) Barclays knew about
the Firm’s problems, or (2) conspired with Firm management to cover them up. (See supra Part
III.A.) Plaintiff’s bare assertions that Barclays “knew or should have known” how bad things
were at the Firm (Compl. ¶ 150), or that it “had to know” that the non-management partners were
taking out loans based on false information (id. at 4), cannot be a substitute for specific
allegations of fact from which to infer that Barclays did, in fact, have such knowledge.
Therefore, plaintiff fails to state a conspiracy claim under Section 1962(d).
V.
STATUTE OF LIMITATIONS – STATE LAW COUNTS
The statute of limitations for plaintiff’s state law claims of fraud, negligence, breach of
fiduciary duty, aiding and abetting, conspiracy, and declaratory relief is three years. See D.C.
Code § 301(8). As such, those claims must be dismissed as time-barred if they accrued prior to
May 14, 2012. (See Compl. (filed May 14, 2015).) The Firm filed for bankruptcy just two
weeks after that date (id. at 3), and it was only then that plaintiff alleges that she and the other
22
non-management partners first learned of the Firm’s “defaults” and financial woes (see id. ¶
118). In other words, she suggests that she did not have actual knowledge of her potential claims
until at least May 28, 2012, and therefore her state law claims are timely. As it must at this
stage, the Court credits plaintiff’s assertion that she did not have advance notice of the Firm’s
troubles, no matter how implausible that may seem in light of: (1) the Firm’s alleged refusal to
return her capital account balance in 2010 (id. ¶ 46); (2) the Firm’s alleged unlawful refusal to
allow her to inspect its books (id. ¶ 163); (3) the slew of news articles publicizing the Firm’s
troubles prior to the bankruptcy filing; 6 and (4) her natural interest in her prior Firm, which owed
6
See, e.g., Duff McDonald, Dewey & LeBoeuf: Partner exodus is no big deal, Fortune, Mar. 22,
2012, available at http://fortune.com/2012/03/22/dewey-leboeuf-partner-exodus-is-no-big-deal/
(noting that, despite Firm’s claim that its finances were sound, “30 partners have fled the law
firm after an earnings miss in 2011”); Jennifer Smith & Ashby Jones, More Partners Leave
Dewey & LeBoeuf LLP, The Wall Street Journal, Mar. 23, 2012, available at
http://blogs.wsj.com/law/2012/03/27/shake-it-up-dewey-leboeuf-overhauls-its-leadership/
(describing a “flow of [partner] defections since the start of the year” and “plans to cut lawyers
and administrative staff, following lower than expected profits in 2011”); Linda Sandler &
Sophia Pearson, Dewey & LeBoeuf Approaches Deadline on $75 Million Bank Debt, Bloomberg,
Apr. 27, 2012, available at http://www.bloomberg.com/news/articles/2012-04-27/deweyleboeuf-approaches-deadline-on-75-million-bank-debt (Firm facing “deadline to show bank
lenders it has a survival plan, possibly including absorption by another firm”); Peter Lattman,
Dewey & LeBoeuf Said to Encourage Partners to Leave, New York Times, Apr. 30, 2012,
available at http://dealbook.nytimes.com/2012/04/30/dewey-leboeuf-said-to-encourage-partnersto-leave/ (beginning “Dewey & LeBoeuf, the New York law firm crippled by financial
mismanagement, an exodus of partners and a criminal investigation of its former chairman,
encouraged its partners on Monday evening to look for another job . . . .”) (emphasis added);
Andrew Longstreth & Nate Raymond, The Dewey chronicles: The rise and fall of a legal titan,
Reuters, May 11, 2012, available at http://www.reuters.com/article/us-dewey-recapidUSBRE84B00L20120512 (describing a January 2012 meeting of Firm partners at which they
were informed by Firm chairman Steven Davis that “[t]he firm was living on the edge [of
bankruptcy].”). This list is by no means comprehensive: the Wall Street Journal’s Law Blog
alone published forty articles detailing the Firm’s pending collapse between March 2012 and the
bankruptcy filing. See http://blogs.wsj.com/law/tag/dewey-leboeuf/. The New York Times
published at least twenty-five such articles in that same period. See
http://query.nytimes.com/search/sitesearch/?action=click&contentCollection®ion=TopBar&
23
her nearly a million dollars (see id. ¶ 103). Even so, her state law claims are untimely because
she had inquiry notice of them prior to May 14, 2012. See Drake v. McNair, 993 A.2d 607, 617
(D.C. 2010) (actual or inquiry notice sufficient to trigger statute of limitations).
Under D.C. law, a claim usually accrues at the time the alleged injury occurs. Diamond
v. Davis, 680 A.2d 364, 389 (D.C. 1996). Here, plaintiff alleges that she was injured when she
took out capital loans and agreed to accept deferred compensation, without full knowledge of the
Firm’s problems. (See Compl. ¶ 124.) That would ordinarily mean that her claims accrued by
March or April 2010 at the latest. (See id. ¶ 1.) However, “where the relationship between the
fact of injury and the alleged tortious conduct is obscure when the injury occurs,” D.C. courts
apply the more forgiving discovery rule. See Bussineau v. President & Directors of Georgetown
Coll., 518 A.2d 423, 425 (D.C. 1986). Sandza alleges that defendants’ failure to disclose the
Firm’s problems kept her from recognizing her injury until the bankruptcy filing (see Compl. ¶
118), and as such, the Court will apply the discovery rule to her claims.
Under the discovery rule, a claim accrues “when a plaintiff has either actual or inquiry
notice of (1) the existence of the alleged injury, (2) its cause in fact, and (3) some evidence of
wrongdoing.” Drake, 993 A.2d at 617. A plaintiff need not know everything about her potential
claims before the statute will run, but instead, she must only know (or have reason to know)
enough to give rise to a duty to inquire further. See Diamond, 680 A.2d at 389-90. At that time,
if a potential plaintiff, in the exercise of reasonable diligence, could learn enough to justify filing
suit before the expiration of the limitations period, then the statute begins to run. Id. at 390.
Whether a plaintiff can be charged with inquiry notice is governed by an objective standard, i.e.,
WT.nav=searchWidget&module=SearchSubmit&pgtype=Homepage#/dewey+%26+leboeuf/fro
m20120301to20120528/.
24
what a reasonable person would have done in plaintiff’s circumstances. See Hendel v. World
Plan Exec. Council, 705 A.2d 656, 664 (D.C. 1997). As such, “a potential plaintiff may be
legally accountable for investigating a possible claim before learning ‘some evidence of
wrongdoing’”—if enough information is available to her that a reasonable person would
investigate and thus learn of the wrongdoing, then she has been put on inquiry notice. See
Diamond, 680 A.2d at 390; see also Ray v. Queen, 747 A.2d 1137, 1141-42 (D.C. 2000) (“The
critical question in assessing the existence vel non of inquiry notice is whether the plaintiff
exercised reasonable diligence under the circumstances in acting or failing to act on whatever
information was available to [her].”) (emphasis added).
There is no question that information about the Firm’s pending collapse was available to
Ms. Sandza in the months leading up to the bankruptcy filing. (See supra n.6 (and articles cited
therein).) There is also no question that this was the very information she claims should have
been disclosed when she took out the loans and agreed to accept deferred compensation, thus
causing her injury. (See, e.g., Compl. ¶¶ 73-74.) Moreover, the available news articles offered
her far more than the simple fact that the Firm was in trouble in 2012; they also clearly alerted
her to the possibility of fraud by Firm management, including the overstatement of previous
years’ earnings. 7 Even accepting her contention that she had no actual knowledge of the Firm’s
7
See, e.g., Julie Triedman, Dewey & LeBoeuf’s 2010, 2011 Profits, Revenues Revised, The
AmLaw Daily, Apr. 3, 2012, available at
http://amlawdaily.typepad.com/amlawdaily/2012/04/dewey-2010-2011-financials-revised.html
(noting that the Firm earned “far less” in 2010 and 2011 than it had previously reported to The
American Lawyer, causing the publication to issue a correction); Peter Lattman, Prosecutors
Scrutinize Ex-Head of Dewey, N.Y. Times, Apr. 28, 2012, available at
http://dealbook.nytimes.com/2012/04/27/new-york-prosecutors-examining-former-deweychairman/?_r=0; Peter Lattman, Teetering, Dewey Ousts Ex-Head From Post, N.Y. Times, Apr.
29, 2012, available at http://dealbook.nytimes.com/2012/04/29/dewey-leboeuf-ousts-ex-headsteven-h-davis/ (state prosecutors’ investigation triggered by evidence of possible financial
improprieties provided by several Firm partners, including management’s misleading of lenders
25
pending bankruptcy or criminal investigation, all of this information was readily available to her
so that she must be charged with constructive knowledge of it. See, e.g., Drake, 993 A.2d at 617
(charging plaintiff with constructive knowledge of information that was contained in publicly
available land records); Alkasabi v. Washington Mut. Bank, F.A., 31 F. Supp. 3d 101, 109
(D.D.C. 2014) (because bank’s bankruptcy was “widely publicized,” and notice of its FDIC
receivership was published in newspapers of general circulation, plaintiffs had constructive
knowledge of those facts).
By extension, a reasonable person in Sandza’s position would have been spurred by this
information to investigate further, and in doing so, she would have learned more than enough to
file her claim within the three-year limitations period. See Diamond, 680 A.2d at 389-90.
Plaintiff all but acknowledges as much. (See Pl.’s Opp’n at 34 (disclosure of the Firm’s
problems “would have given her fair warning that . . . certain material facts had not been
disclosed to her, i.e., undisclosed debt obligations, inflated earnings projections, and phony
invoices”). She instead takes issue with the news articles’ reliability, arguing that disclosure by
Barclays would have been more reliable and thus put her on sufficient notice. (See id.) But even
if one can fairly question the reliability of the New York Times, the Wall Street Journal, Fortune,
Reuters, Bloomberg, and The American Lawyer, a reasonable person would still have sought
more information from the Firm’s current or former partners. Indeed, plaintiff alleges that she
would have done precisely this, if informed by Barclays of the financial problems. (See Compl.
¶ 73 (“Had Barclays disclosed the truth . . . [she] would have initially discussed the Firm’s
about Firm’s financial condition); Ashby Jones, Dewey’s Former Chairman Lawyers Up, Apr.
30, 2012, available at http://blogs.wsj.com/law/2012/04/30/deweys-former-chairman-lawyersup/ (describing Manhattan DA’s investigation into “goings-on at Dewey, with particular focus on
[former Firm chairman Steven] Davis”).
26
financial plan with the remaining partners at D&L so that she . . . could take steps to protect
herself.”). In short, a reasonably diligent investigation would have confirmed: (1) her injury (the
capital contributions and deferred compensation that now would almost certainly never be
repaid); (2) its cause in fact (the non-disclosure of the Firm’s financial troubles at the time she
took out her loans and agreed to defer receipt of her capital contributions); and (3) some
evidence of wrongdoing (the allegations of fraud by Firm management). See Drake, 993 A.2d at
617. Thus, plaintiff had inquiry notice of her claims more than three years prior to filing, and her
state law claims are therefore untimely. 8
Plaintiff raises numerous objections to being charged with inquiry notice. First, she
argues that the Court cannot take judicial notice of these news articles, because they are “classic
hearsay” and thus inherently unreliable. (See Pl.’s Opp’n at 32.) However, the Court is not
accepting these articles for the truth of their assertions, but rather for the fact that they contained
certain information, which (true or not) should have put plaintiff on notice of the need to
investigate her potential claims. See Fed. R. Evid. 801(c)(2). Taking judicial notice of the
existence of these articles is entirely proper. See Washington Post v. Robinson, 935 F.2d 282,
8
Because every one of the articles cited supra nn.6-7 was published more than three years before
plaintiff filed her complaint, it is unnecessary to locate a precise date on which she had inquiry
notice. Suffice it to say that she certainly had such notice by the time of the May 11, 2012
Reuters article by Longstreth & Raymond—The Dewey chronicles: The rise and fall of a legal
titan. That article stated that management “often withheld crucial information from their
partners;” that the Firm “never made its budget targets after the merger;” that the Firm’s $125
million bond offering March 2010—the month before Sandza’s departure—“suggested that [the
Firm] needed money it could not immediately repay;” that in October 2011, the Firm “made a
startling disclosure about [compensation] guarantees,” i.e., the “inflated contracts” alleged by
plaintiff; that a criminal investigation was underway; and that “[g]iven Dewey’s immense
liabilities, no one has offered a likely scenario under which the partnership could survive.” Id.
Most, if not all, of this information was already available elsewhere (see supra nn.6-7), but the
Reuters article simply laid it out starkly and comprehensively. That information was more than
sufficient to give rise to a duty of inquiry, and thus the limitations period had begun to run by
then, at the very latest. See Diamond, 680 A.2d at 389-90.
27
291 (D.C. Cir. 1991) (a “court may take judicial notice of the existence of newspaper articles in
the Washington, D.C., area that publicized” certain facts).
Second, she argues that, on a motion to dismiss, the Court cannot take judicial notice that
there has been “extensive press coverage,” a finding of fact that she argues would be necessary
to charge her with inquiry notice. (See Pl.’s Opp’n at 31-32.) Nowhere does she cite authority
suggesting that inquiry notice depends upon the number of articles published, and in fact, courts
have found inquiry notice where the information available to plaintiff was far more meager or
inaccessible. See, e.g., Drake, 993 A.2d at 617 (finding on a motion to dismiss that publicly
available land records gave plaintiff access to all the necessary facts to put her on inquiry notice);
Hughes v. Vanderbilt Univ., 215 F.3d 543, 548 (6th Cir. 2000) (finding on a motion to dismiss
that two articles by each of Nashville’s two leading newspapers, and a report by Nashville’s CBS
affiliate, were sufficient to trigger inquiry notice); Shah v. Stanley, 2004 WL 2346716, at *8
(S.D.N.Y. Oct. 19, 2004) (finding on a motion to dismiss that two articles in Fortune were
sufficient to trigger inquiry notice). Therefore, the Court need not find that the press coverage
was “extensive;” it simply finds that the press coverage was sufficient, as a matter of law, to put
a reasonable person on notice of the need to investigate.
Finally, she argues that the press coverage could not have adequately put her on notice
because none of it mentioned Barclays. (See Pl.’s Opp’n at 35.) But as discussed, a plaintiff
need not be aware of every fact pertaining to her cause of action before the limitations period
begins to run. See Diamond, 680 A.2d at 389-90. And, as particularly relevant here, “the
relationship of the defendants, together with other facts, may establish as a matter of law that a
reasonable plaintiff with knowledge of the misconduct of one would have conducted an
investigation as to the other.” Id. at 380.
28
In Diamond, plaintiff alleged an elaborate conspiracy between the lawyer defending him
in a tax fraud case, his lawyer’s firm, the federal judge presiding over his tax fraud case, and the
Reynolds family, which owned a company against whom plaintiff had separately brought a civil
RICO case. See id. at 385. In short, he alleged that his lawyer, who also represented the J.
Sargent Reynolds estate and whose firm represented Reynolds Metals, advised him to waive a
jury trial in order to give control over the verdict to the federal judge, who had a close personal
relationship with the Reynolds family and served as executor for the J. Sargent Reynolds estate.
See id. When the judge then convicted him of tax fraud, plaintiff alleged that the conspiracy
succeeded, in that he was subsequently discredited in his failed RICO suit against Reynolds
Metals. See id. Plaintiff argued that his claims against the lawyers were not time-barred because
the lawyers fraudulently concealed their conflicted representation of Reynolds Metals, and thus,
he lacked knowledge of a crucial link in the alleged conspiracy. See id. at 385-86. The D.C.
Court of Appeals disagreed, finding that he had sufficient knowledge to trigger inquiry notice: he
knew of his injury (the tax fraud conviction); its cause (the judge’s verdict facilitated by his
lawyer’s advice to waive jury trial); the relationship between the judge and the Reynolds family;
the relationship between his lawyer and the judge, who worked together in executing the J.
Sargent Reynolds estate; and the firm’s representation of another member of the Reynolds
family. See id. at 385-89. Armed with that knowledge, particularly the working relationship
between the firm and the Reynolds family, a reasonable person would have investigated further
and found public documents revealing the firm’s representation of Reynolds Metals. See id. at
388.
The D.C. Circuit has also followed this approach, affirming dismissal of a complaint
where press reports put plaintiff on inquiry notice of an alleged conspiracy to deny him ballot
29
access, even though the reports failed to name all of the alleged co-conspirators. See Nader v.
Democratic Nat’l Comm., 567 F.3d 692, 701 (D.C. Cir. 2009) (applying D.C. law) (Washington
Post article discussed a legal campaign against plaintiff waged “by the Democratic Party and
like-minded groups”) (emphasis added). The Court found that plaintiff was already aware of the
allegedly improper conduct, and thus his later discovery of additional co-conspirators did “not
alter the fundamental nature of the wrong at issue.” Id. The Court next considered whether,
even if the plaintiff’s claims against known conspirators were time-barred, he could still pursue
claims against the unknown conspirators, but again it found he could not. See id. at 702. It held
that the relationship between the Democratic Party and the unknown conspirators (the
Democratic National Committee and the Kerry-Edwards campaign) was sufficiently close that a
reasonable person would have investigated their potential involvement. See id.
Taken together, Diamond and Nader foreclose plaintiff’s assertion that press coverage
could only put her on inquiry notice if it mentioned Barclays. The press coverage put her on
notice of both the Firm’s problems and potential fraud by Firm management in covering those
problems up. (See supra nn.6-7.) She was thus alerted to her injury, its cause in fact, and the
likelihood of wrongdoing by Barclays’ alleged co-conspirators at the Firm. As in Nader,
plaintiff’s discovery of Barclays’ alleged involvement did not “alter the fundamental nature of
the wrong at issue” (see 567 F.3d at 701); she made certain financial decisions without material
facts, and whether the Firm alone withheld (or misrepresented) those facts, or whether Barclays
also participated, is largely irrelevant to her injury. And, as in both Diamond and Nader,
plaintiff was aware of the close working relationship between Barclays and the Firm, such that a
reasonable person would have investigated Barclays’ potential involvement. First, she knew that
Barclays had extended the Firm two unsecured loans worth $35 million. (See Compl. ¶¶ 22, 34.)
30
By extension, she knew that, “as a prime institutional lender to D&L, Barclays received periodic
financial statements and other customary information from D&L.” (See id. ¶ 28.) Next, she
knew that Barclays and the Firm co-sponsored the partner loan program, the proceeds of which
she believes was used to repay Barclays on the Firm’s loans. (Id. ¶¶ 25(c), 38.) She also knew
that Barclays had been fully repaid as of December 2010 (see id. ¶ 38), in contrast to the
remaining creditors that pushed the Firm into bankruptcy. 9
In terms of defaults, she knew what her own loan agreement did (or did not) require of
the Firm, and she could have inquired of current and former Firm partners about whether the
Firm was living up to those obligations. Most crucially, she concedes that learning of the Firm’s
problems “would have given her fair warning that . . . certain material facts had not been
disclosed to her, i.e., undisclosed debt obligations.” (See Pl.’s Opp’n at 34.) That concession is
critical. If the articles would have tipped her off to the undisclosed defaults, then they would
almost certainly have tipped her off to Barclays’ involvement—it is hard to imagine how such
defaults could have gone unremedied or undisclosed without Barclays’ approval of, and/or
participation in, the alleged scheme.
The Court recognizes that “[w]hen accrual actually occurred in a particular case is a
question of fact,” Diamond, 680 A.2d at 370, so it cannot make that determination at this stage
unless no reasonable fact-finder could find otherwise. But where a former partner at an
international law firm is owed nearly a million dollars by that firm, the Court finds that, as a
9
Whether or not she had actual knowledge of all of these facts at the time of the press coverage,
her complaint makes clear that they were then readily available to her in the Firm’s audited
financial statements (see Compl. ¶¶ 22, 34, 38), and thus a reasonably diligent investigation
would have turned them up. See Ray, 747 A.2d at 1141-42 (relevant inquiry is what a reasonable
plaintiff would do with “whatever information was available to [her]”) (emphasis added).
31
matter of law, no reasonable person would have failed to take note of even one of the scores of
national news articles putting her on notice of her potential claims.
CONCLUSION
The defendants’ motions to dismiss will be GRANTED. A separate order accompanies
this Memorandum Opinion.
/s/
ELLEN SEGAL HUVELLE
United States District Judge
Date: December 22, 2015
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