Yale M. Fishman 1998 Insurance Trust v. AGL Life Insurance Company et al
Filing
80
OPINION: Defendants' motions to dismiss are granted in their entirety. This resolves all outstanding motions on the docket 11-cv-1283. The Clerk of Court is directed to close the case. (As further set forth in this Opinion) (Signed by Judge Thomas P. Griesa on 5/3/2016) (kl)
USDCSDNY
I
DOCU!\1El'-."T
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
'; ELECfRONICALLY FILED~·
H.ti\J · ti"o ----~~--:---·- .
p . . n.c .u.
;,~ D:t.-fE FILED: _j-3- I b -~
,: ·~...-s...:~.,.--.-.. - ...-,....,..~........ ~·......,.'•..:t"l""'"'t"•
'....,• .;..-vvm• u • ···- •
•
YALE M. FISHMAN 1998 INSURANCE
TRUST,
11-cv-1283
Plaintiff,
OPINION
v.
PHILADELPHIA FINANCIAL LIFE
ASSURANCE COMPANY F /K/ A AGL
LIFE ASSURANCE COMPANY, et al.,
Defendants.
Plaintiff, the Yale M. Fishman 1998 Insurance Trust, brings this putative
class action on behalf of itself and others who held certain insurance products
sold by Philadelphia Financial Life Assurance Company f/k/a AGL Life
Assurance Company ("PFLAC").
These insurance products lost value due to
exposure to the Ponzi scheme perpetrated by Bernard Madoff. Against PFLAC,
plaintiff brings claims of breach of fiduciary duty, common law fraud, breach of
contract, breach of the implied covenant of good faith and fair dealing, violation
of New York General Business Law ("GBL") § 349, gross negligence, negligent
misrepresentation, unjust enrichment, and promissory estoppel.
1
:.,:.·
Plaintiff also brings derivative claims against numerous corporate and
individual defendants on behalf of certain funds in which its money was
ultimately invested.
Defendants move to dismiss plaintiff’s Consolidated Amended Direct and
Verified Derivative Complaint (the “Complaint”).
For the reasons detailed
below, the motions to dismiss are granted.
Background
Plaintiff purchased variable universal life insurance policies (“VULs”)
from PFLAC. One feature of a VUL is that policyholders are able to choose how
their premiums are to be invested from among the various investment options
offered by the issuer of the policy.
PFLAC provided plaintiff the option of investing its premiums with what
is now known as the Tremont Opportunity Fund. The Tremont Opportunity
Fund is itself a “fund of funds” that invested its assets with other Tremontmanaged funds known as the Rye Select Funds. Tremont Partners served as
General Partner of both the Tremont Opportunity Fund and each of the Rye
Select Funds (the Tremont Opportunity Fund and the Rye Select Funds are
collectively known as the “Nominal Defendants”).
Assets managed by the Rye Select Funds were ultimately entrusted to
Madoff.
The fate of plaintiff’s funds once in Madoff’s hands is well known.
Much of plaintiff’s money was lost to Madoff’s fraud.
2
Plaintiff also seeks to represent class members who purchased deferred
variable annuities (“DVAs”) from PFLAC, the assets of which were exposed and
ultimately lost to Madoff’s Ponzi scheme through a similar route.
Plaintiff alleges that PFLAC caused these losses by, in essence, failing to
perform the promised—or in any event, a reasonable amount of—due diligence
on the Tremont Opportunity Fund.
Plaintiff also brings derivative claims on behalf of the Nominal
Defendants.
These derivative claims are brought against (1) the general
partner of the Nominal Defendant funds, Tremont Partners; (2) Tremont
Partners’ corporate parent, Tremont Group Holdings, Inc. (“TGH”); and (3) a
division of TGH, Rye Investment Management (“Rye”) (Tremont Partners, TGH,
and Rye are collectively known as the “Tremont Defendants”).
Plaintiff also
brings derivative claims against the corporate parents of TGH: Oppenheimer
Acquisition Corp. (“Oppenheimer”), MassMutual Holding LLC (“MassMutual”),
and Massachusetts Mutual Life Insurance Co. (“MMLI”) (Oppenheimer,
MassMutual, and MMLI are collectively known as the “Control Defendants”).
Finally, plaintiff brings derivative claims against several individual directors
and officers of Tremont Partners and TGH (the “Individual Defendants”).
In its derivative claims, plaintiff argues that its losses would have been
avoided had the Tremont Defendants not misled the Nominal Defendants about
the steps being taken to safeguard their assets and had they managed the
assets with a reasonable level of care.
3
I.
The Parties
The named plaintiff is a trust holding VULs issued by PFLAC, the funds
of which were invested in the Tremont Opportunity Fund. It seeks relief both
for itself and others who purchased either VULs or DVAs from PFLAC which
lost value through exposure to Madoff’s fraud.
Plaintiff brings direct claims against PFLAC, and derivative claims
against
the
Tremont
Defendants,
Control
Defendants,
and
Individual
Defendants.
PFLAC
Pennsylvania.
is
an
insurance
company
organized
under
the
laws
of
It has its principal place of business in Philadelphia,
Pennsylvania.
The Tremont Defendants consist of TGH, Tremont Partners, and Rye.
TGH is an investment management firm organized under the laws of Delaware,
with its principal place of business in Rye, New York. It is the parent company
of Tremont Partners and has also been known as Tremont Advisers, Inc., and
Tremont Capital Management. Tremont Partners is a wholly-owned subsidiary
of TGH organized under the laws of Connecticut, with its principle place of
business in Rye, New York.
Tremont Partners is the general partner and
investment manager of the Nominal Defendants. Rye is a division of TGH with
its principal place of business in Rye, New York. Rye managed the Rye Select
Funds.
4
The Control Defendants—Oppenheimer, MassMutual, and MMLI—are the
various corporate parents of the Tremont Defendants.
Oppenheimer is the
direct corporate parent of TGH. It is a Delaware corporation with its principal
place of business in New York, New York.
MassMutual, in turn, is the
corporate parent of Oppenheimer with its principal place of business in
Springfield, Massachusetts.
Finally, MMLI is the corporate parent of
MassMutual (and, therefore, the corporate great-grandparent of TGH) and also
has its principal place of business in Springfield, Massachusetts.
Individual Defendants Sandra L. Manzke, Robert Schulman, Rupert A.
Allan, Suzanne Hammond, Stephen Clayton, Mark Santero, and Timothy
Birney are all former officers and directors of various Tremont Defendants.
The Nominal Defendants—the Tremont Opportunity Fund and the Rye
Select Funds—are investment funds organized under the laws of Delaware.
II.
Substantive Allegations
The Complaint details Madoff’s fraud, the red flags that defendants
allegedly could have detected but did not, the control relationships between
defendants, and defendants’ alleged financial incentive to turn a blind eye to
the fraud.
Plaintiff alleges that PFLAC distributed to plaintiff various materials
describing the Tremont Opportunity Fund. In 2000, PFLAC provided a Private
Placement Memorandum (“PPM”) in connection with plaintiff’s purchase of its
VUL policies. In a supplement to that PPM (“PPM Supplement”), the Tremont
5
Opportunity Fund was said to have the objective of providing above-average
returns over a market cycle. Certain risk factors associated with investing in
the Tremont Opportunity Fund were also listed.
In 2008, PFLAC provided
plaintiff a Second Amended and Restated PPM (“2008 PPM”) that stated that
Tremont Partners (as the general partner of the Tremont Opportunity Fund)
would be able to obtain sufficient information about its investment managers
to select them effectively, and reiterated the fund’s investment goals as
summarized in the PPM Supplement.
Plaintiff alleges that it was misled by these documents in numerous
ways. First, plaintiff’s funds were not invested in accordance with the stated
objectives of the Tremont Opportunity Fund—rather, plaintiff’s funds were not
invested at all. Second, the risk factors included in the PPM Supplement did
not include the possibility that plaintiff’s funds would be lost in a Ponzi
scheme. Third, although the documents created the impression that PFLAC
had vetted the Tremont Opportunity Fund by listing it as an investment option
under its VUL policies, plaintiff alleges that PFLAC did none of the diligence
that it represented it would do.
As for the Tremont Defendants, plaintiff alleges that they had a close
relationship with Madoff, based largely upon a close personal relationship for
much of the time period at issue between Madoff and Schulman (CEO of the
Tremont Defendants).
However, despite this close relationship, and the
Tremont Defendants’ representations that they would closely monitor all of the
6
funds in which they invested, plaintiff alleges that they failed to notice
numerous, conspicuous red flags. They failed to notice these red flags, plaintiff
alleges, because they did not perform the due diligence the way they said they
would.
Plaintiff ascribes this lack of oversight to the Tremont Defendants’
desire to continue collecting management fees from the ever growing pool of
investment assets that they were attracting due to their affiliation with Madoff.
Finally, plaintiff argues that liability flows to the Control Defendants
because of their control over the Tremont Defendants.
Plaintiff alleges that
Oppenheimer controlled the Tremont Defendants through its acquisition of
TGH as well as through common directors and executives. Oppenheimer, in
turn, was controlled by MassMutual and MMLI by virtue of their majority
ownership of Oppenheimer and through common officers and directors.
Legal Standard
To survive a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), a complaint must plead sufficient facts to state a claim to relief that is
plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 570 (2007).
In deciding such a motion, a court
must accept as true the facts alleged in the complaint, but it should not
assume the truth of its legal conclusions. Iqbal, 556 U.S. at 678–79. A court
must also draw all reasonable inferences in the plaintiff’s favor, and it may
consider documents attached to the complaint, incorporated by reference into
7
the complaint, or known to and relied on by the plaintiff in bringing the suit.
ATSI Commc’ns, Inc. v. Shaar Fund. Ltd., 493 F.3d 87, 98 (2d Cir. 2007).
Discussion
I.
Derivative Claims
Plaintiff brings derivative claims on behalf of the Nominal Defendants
against
the
Tremont
Defendants,
Control
Defendants,
and
Individual
Defendants. For the reasons set forth below, the court holds that plaintiff does
not have standing to assert its derivative claims, and, even if it did have
standing, its derivative claims would be barred under the doctrine of res
judicata. As such, all derivative claims are dismissed.
A.
Standing
Plaintiff and defendants dispute whether Delaware or New York law
governs the question of whether plaintiff has standing to bring a derivative suit.
Defendants argue that the Nominal Defendants are organized under the laws of
Delaware and, thus, Delaware law should govern disputes involving their
internal affairs. Plaintiff argues that New York law should apply because New
York has the stronger interest in the litigation.
Disputes involving an organization’s internal affairs are typically
governed by the laws of the state in which the entity was organized. Hausman
v. Buckley, 299 F.2d 696, 702 (2d Cir. 1962).
In fact, in New York, this
internal affairs rule is written into statutory law.
See N.Y. P’Ship Law
§ 121-901; see also Saltz v. First Frontier, LP, 782 F. Supp. 2d 61, 80 (S.D.N.Y.
8
2010), aff’d sub nom. Saltz v. First Frontier, L.P., 485 F. App’x 461 (2d Cir.
2012) (“The question of standing to bring a derivative suit is governed by the
law of the state of organization”). Thus, the court will apply Delaware law to
the standing issue.
However, it is also worth noting that the parties’ choice of law dispute
lacks any practical importance because the same result obtains under New
York and Delaware law.
So while the court applies Delaware law to the
standing question, the outcome would be the same under the laws of New
York.
Plaintiff fashions its claim as a double derivative suit. Within the context
of a limited partnership, a derivative claim allows a limited partner to sue on
behalf of the general partner. See Litman v. Prudential-Bache Props., Inc., 611
A.2d 12, 15 (Del. Ch. 1992).
This mechanism allows the limited partner to
force the general partner to live up to its fiduciary duty by suing a third party
to enforce the general partner’s rights for the benefit of the limited partners.
A double derivative suit is simply a vehicle for bringing a derivative suit
across a second degree of separation. Typically this takes the form of a suit
brought by shareholders of a parent company to assert the rights of a
subsidiary.
See, e.g., Lambrecht v. O’Neal, 3 A.3d 277, 282 (Del. 2010).
A
double derivative action is also possible in an analogous situation involving
limited partnerships.
See, e.g., Flynn v. Bachow, No. C.A. 15885, 1998 WL
671273 (Del. Ch. Sept. 18, 1998). And, while there seems to be no exemplar in
9
Delaware law, there is no reason a double derivative suit could not be
maintained across differing organizational structures, for example, when a
limited partner seeks to sue on behalf of a corporation in which the general
partner is a shareholder, or when a corporate shareholder seeks to sue on
behalf of a partnership of which the corporation is a limited partner.
The last of these possibilities appears to be closest to the model
suggested by plaintiff, which claims to stand in the shoes of PFLAC, a limited
partner in the Tremont Opportunity Fund, in bringing a derivative suit on
behalf of the fund. But while such a suit is possible in theory, plaintiff lacks
the requisite legal relationship with PFLAC to stand in its shoes. A derivative
plaintiff must be a shareholder, but plaintiff is merely a policyholder. 1 Yale M.
Fishman 1998 Ins. Trust v. Gen. Am. Life Ins. Co., No. 11-cv-1284, 2013 WL
842642, at *5 (S.D.N.Y. Mar. 7, 2013).
Therefore plaintiff does not have
standing to sue derivatively on behalf of the Nominal Defendants. Plaintiff’s
derivative claims are dismissed.
Plaintiff offers language from a 1944 Second Circuit opinion which suggests a
conceptual generalization of the examples provided above: that a double
derivative suit might be possible whenever a plaintiff seeks to force his
fiduciary to compel that fiduciary’s own fiduciary to act, thus suing on behalf
of his fiduciary’s fiduciary. Goldstein v. Groesbeck, 142 F.2d 422, 425 (2d Cir.
1944). Even if this were the law of Delaware today, it would not be of any help
to plaintiff, which has not provided any facts to support the legal conclusion
that PFLAC is its fiduciary. On the contrary, the relationship is governed by a
contract that explicitly provides that plaintiff has exclusive control over the
assets invested through the policy. See infra § II.C.
1
10
B.
Res Judicata
Even if plaintiff did have standing to sue on behalf of the Nominal
Defendants, its claims would be barred under the doctrine of res judicata.
“Under res judicata, a final judgment on the merits of an action
precludes the parties or their privies from relitigating issues that were or could
have been raised in that action.” Allen v. McCurry, 449 U.S. 90, 94 (1980).
To assert a defense of res judicata “a party must show that (1) the previous
action involved an adjudication on the merits; (2) the previous action involved
the plaintiffs or those in privity with them; [and] (3) the claims asserted in the
subsequent action were, or could have been, raised in the prior action.”
Monahan v. N.Y.C. Dep’t of Corr., 214 F.3d 275, 285 (2d Cir. 2000).
However, literal privity between plaintiffs is not always required. One whose
interests were adequately represented by another vested with the authority of
representation is bound by the judgment, even though he or she was not
formally a party to the prior litigation. Alpert’s Newspaper Delivery Inc. v.
N.Y. Times Co., 876 F.2d 266, 270 (2d Cir. 1989).
Derivative suits present one such situation.
Because a derivative
plaintiff stands in the shoes of a nominal defendant in asserting that nominal
defendant’s rights, judgments on the merits in derivative suits bar additional
claims by that nominal defendant and, in turn, future derivative claims
brought on that nominal defendant’s behalf. Judgments on the merits in suits
brought directly by a party can also preclude future related derivative litigation
11
in which that party is named as the nominal defendant. See Smith v. Alleghany
Corp., 394 F.2d 381, 391 (2d Cir. 1968); Greco v. Local.com Corp., 806 F. Supp.
2d 653, 658 (S.D.N.Y. 2011).
Because this principle creates the possibility that a later would-be
plaintiff could be prejudiced by the actions of prior plaintiffs with potentially
differing interests, notice must be given to other potential plaintiffs (typically
other shareholders or members) before the entry of a stipulated judgment in a
derivative suit. See Papilsky v. Berndt, 466 F.2d 251, 257–58 (2d Cir. 1972);
Fed. R. Civ. P. 23.1.
Similarly, in evaluating the preclusive effect of a prior
judgment, courts verify the alignment of the earlier and later plaintiffs’
interests, much as they do in initially evaluating the suitability of a derivative
plaintiff. See Chase Manhattan Bank, N.A. v. Celotex Corp., 56 F.3d 343,
346 (2d Cir. 1995).
In this case, plaintiff is hardly the first to bring derivative claims against
the Tremont and Control Defendants on the Nominal Defendants’ behalf.
Similar or identical claims were asserted on plaintiff’s behalf in the
consolidated state law action which was disposed of on the merits by the Final
Judgment and Order of Dismissal issued by this court on August 19, 2011.
Plaintiff does not contend that it did not receive notice of the settlement
that produced that judgment, that the prior derivative plaintiffs did not
adequately represent its interests, or that the prior derivative plaintiffs’
interests were contrary to its own. Plaintiff also does not dispute that the prior
12
judgment was a judgment on the merits or that the claims it raises here could
not have been raised then.
Rather, plaintiff argues only that it cannot be
bound by the prior judgment because it was not a party to it.
But this is
simply not the law as it relates to derivative actions. Therefore, even if plaintiff
did have standing to bring its derivative claims, the claims would be res
judicata. See Gen. Am. Life Ins. Co., 2013 WL 842642, at *5–6.
As such, the derivative claims in this action are dismissed.
II.
Direct Claims
Plaintiff alleges numerous direct claims against defendant PFLAC:
breach of fiduciary duty, common law fraud, breach of contract, breach of the
implied covenant of good faith and fair dealing, violation of N.Y. GBL § 349,
gross
negligence,
negligent
misrepresentation,
unjust
enrichment,
and
promissory estoppel. Each of these direct claims is dismissed.
A.
SLUSA
The Securities Litigation Uniform Standards Act (“SLUSA”), Pub. L. No.
105–353, § 101, 112 Stat. 3227 (1998) (codified at 15 U.S.C. §§ 77p(b),
78bb(f)(1)), bars certain state law based class actions alleging falsity “in
connection with the purchase or sale of a covered security.” Id.
Thus, the
court must determine whether plaintiff’s claims are precluded by SLUSA.
To fully understand SLUSA’s scope, it is necessary to look at the history
behind its passage. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547
U.S. 71, 78–83 (2006).
13
Following the stock market collapse in 1929 and the Great Depression,
Congress enacted the Securities Act of 1933 and the Exchange Act of 1934 in
order to protect investors and the overall financial system by deterring the
propagation of false, misleading, or incomplete information in connection with
the purchase or sale of certain securities.
See id. at 78; Anwar v. Fairfield
Greenwich Ltd., 118 F. Supp. 3d 591, 600 (S.D.N.Y. 2015).
The Securities Act of 1933 includes a number of anti-falsity provisions.
Section 11 imposes liability for registration statements “contain[ing] an untrue
statement of a material fact or omitt[ing] to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.”
15 U.S.C. § 77k(a).
Section 12(a) imposes liability for the offer or sale of a
security “by means of a prospectus or oral communication, which includes an
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements . . . not misleading.” 15 U.S.C. § 77l(a)(2).
Section 17(a) provides:
It shall be unlawful for any person in the offer or sale
of any securities . . . by the use of any means or
instruments of transportation or communication in
interstate commerce or by use of the mails, directly or
indirectly (1) to employ any device, scheme, or artifice
to defraud, or (2) to obtain money or property by
means of any untrue statement of a material fact or
any omission to state a material fact necessary in
order to make the statements made . . . not
misleading; or (3) to engage in any transaction,
practice, or course of business which operates or
would operate as a fraud or deceit upon the purchaser.
14
15 U.S.C. § 77q(a).
The Exchange Act of 1934 significantly expanded the scope of federal
securities regulation by establishing the Securities and Exchange Commission
(“SEC”) and through § 10(b). Under § 10(b):
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality
of interstate commerce or of the mails, or of any
facility of any national securities exchange . . . [t]o use
or employ, in connection with the purchase or sale of
any security registered on a national securities
exchange or any security not so registered . . . any
manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the
[SEC] may prescribe as necessary or appropriate in the
public interest or for the protection of investors.
15 U.S.C. § 78j. SEC Rule 10b–5, promulgated in 1942 pursuant to § 10(b),
provides:
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality
of interstate commerce, or of the mails or of any
facility of any national securities exchange, (a) To
employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or
to omit to state a material fact necessary in order to
make the statements made . . . not misleading, or
(c) To engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any person, in connection with the
purchase or sale of any security.
17 C.F.R. § 240.10b-5. Since at least 1946, courts have recognized an implied
private right of action under Rule 10b-5. See Dabit, 547 U.S. at 79.
15
In the decades that followed, large numbers of federal securities claims
came to the courts. And by the 1990s, Congress noticed that many of these
federal securities class action lawsuits were problematic.
Plaintiffs were
bringing meritless claims targeting deep-pocketed defendants in the hope of
obtaining settlement. See id. at 81.
In response, Congress enacted the Private Securities Litigation Reform
Act of 1995 (“PSLRA”), Pub. L. No. 104–67, 109 Stat. 737 (codified in scattered
sections of titles 15 and 18 of the U.S. Code).
PSLRA imposes heightened
pleading requirements for federal securities fraud claims.
To avoid these heightened pleading requirements, putative class action
plaintiffs increasingly sought to bring securities fraud claims under state law.
See Dabit, 547 U.S. at 81–82.
Congress then enacted SLUSA to prevent plaintiffs from evading PSLRA’s
standards. See id. at 82. SLUSA has two separate preclusion provisions. One
amends the 1934 Act and uses terminology substantially modeled on § 10(b)
and Rule 10b–5 in specifying the types of claims to which it applies. It reads:
No covered class action based upon the statutory or
common law of any State or subdivision thereof may
be maintained in any State or Federal court by any
private party alleging—(A) a misrepresentation or
omission of a material fact in connection with the
purchase or sale of a covered security; or (B) that the
defendant used or employed any manipulative or
deceptive device or contrivance in connection with the
purchase or sale of a covered security.
16
15 U.S.C. § 78bb(f)(1). The other preclusion provision amends the 1933 Act,
using terminology substantially modeled on § 17(a). It reads:
No covered class action based upon the statutory or
common law of any State or subdivision thereof may
be maintained in any State or Federal court by any
private party alleging—(1) an untrue statement or
omission of a material fact in connection with the
purchase or sale of a covered security; or (2) that the
defendant used or employed any manipulative or
deceptive device or contrivance in connection with the
purchase or sale of a covered security.
15 U.S.C. § 77p(b). Essentially, then, SLUSA precludes “covered class actions”
alleging certain falsity “in connection with the purchase or sale of a covered
security.” 15 U.S.C. §§ 77p(b), 78bb(f)(1).
Turning to the case at hand, plaintiff does not contest that the action is a
“covered class action” under SLUSA. With regard to whether the alleged falsity
was “in connection with the purchase or sale of a covered security,” 15 U.S.C.
§ 78bb(f)(1), four recent precedential decisions shed light on this requirement:
the Supreme Court’s ruling in Chadbourne & Parke LLP v. Troice, 134 S. Ct.
1058 (2014), and the Second Circuit’s rulings in In re Herald, 730 F.3d 112
(2d. Cir. 2013) (“Herald I ”), In re Herald, 753 F.3d 110 (2d. Cir. 2014)
(“Herald II ”), and In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128 (2d Cir. 2015).
In Troice, the Supreme Court instructed that SLUSA covers claims of a
“victim who took, tried to take, or maintained an ownership position in the
statutorily relevant securities through ‘purchases’ or ‘sales’ induced by the
fraud.” See 134 S. Ct. at 1067. In Herald II, the Second Circuit confirmed that
17
the “in connection with” requirement covers conduct by intermediaries who
induced victims to attempt to take ownership positions in covered securities,
including through feeder funds, even where no such securities were ultimately
purchased. See 753 F.3d at 113. And in Kingate, the Second Circuit reiterated
the reasoning of Herald II, finding that SLUSA applied because the plaintiffs
similarly expected that the feeder funds were investing proceeds in S&P 100
stocks, which are covered securities. See Kingate, 784 F.3d at 142.
These cases make clear that SLUSA’s “in connection with the purchase
or sale of a covered security” requirement is met here. Plaintiff alleges that it
was harmed when, after being induced to invest in the Tremont Opportunity
Fund, its money was paid into the Madoff Ponzi scheme instead of being
invested in covered securities as it expected. That no covered securities were
actually purchased is of no import.
See Herald II, 753 F.3d at 113.
What
matters is that the plaintiff intended to invest in covered securities. Thus, the
claims against PFLAC involve investments made in connection with covered
securities.
However, not all of plaintiff’s state law claims are necessarily precluded
by SLUSA. Under Kingate, SLUSA only precludes “state law claims predicated
on conduct by the defendant that is specified in SLUSA’s operative provisions
referencing the anti-falsity proscriptions of the 1933 and 1934 Acts.” 784 F.3d
at 146 (emphasis in original). Kingate instructs a two-part analysis:
18
SLUSA requires courts first to inquire whether an
allegation is of conduct by the defendant, or by a third
party. Only conduct by the defendant is sufficient to
preclude an otherwise covered class action. Second,
SLUSA requires courts to inquire whether the
allegation is necessary to or extraneous to liability
under the state law claims.
If the allegation is
extraneous to the complaint’s theory of liability, it
cannot be the basis for SLUSA preclusion.
Id. at 142–43. This analysis must be done on a claim-by-claim basis. Id. at
143.
Using this approach, the Second Circuit divided claims into five groups:
Group 1, which consists of claims predicated on a
defendant’s own fraudulent misrepresentations or
misleading omissions;
Group 2, which consists of claims predicated on a
defendant’s own negligent misrepresentations or
misleading omissions;
Group 3, which consists of claims predicated on a
defendant’s aiding and abetting (rather than directly
engaging in) the frauds underlying the Group 1 claims;
Group 4, which consists of claims predicated on a
defendant’s breach of contractual, fiduciary, or tortbased duties owed to plaintiff, resulting in failure to
detect the frauds;
Group 5, which consists of claims predicated on a
defendant’s receipt of unearned fees.
Id. at 134–35, 151–52. The Second Circuit concluded that claims in Groups 1,
2, and 3 are precluded under SLUSA but that claims in Groups 4 and 5 are not
precluded.
19
Applying the approach to the claims at issue here, as explained in more
detail below, the court finds that plaintiff’s claims of common law fraud,
violation of N.Y. GBL § 349, and negligent misrepresentation are precluded, but
its claims of breach of fiduciary duty, breach of contract, breach of the implied
covenant of good faith and fair dealing, gross negligence, unjust enrichment,
and promissory estoppel are not precluded.
However, of the claims that survive SLUSA, the court must determine
whether they must dismissed based on state law principles for failure to state a
claim. Accordingly, as explained below, plaintiff’s claims of breach of fiduciary
duty, breach of contract, breach of the implied covenant of good faith and fair
dealing, gross negligence, unjust enrichment, and promissory estoppel are
dismissed for failure to state a claim.
As such, each of plaintiff’s direct claims is dismissed.
B.
Choice of Law
The court will apply New York law to plaintiff’s tort claims. Plaintiff pled
on the basis of New York law and applied New York law in its brief. See Pl.’s
Omnibus Opp’n to Def.’s Mot.’s to Dismiss, ECF No. 50.
Defendant PFLAC
assumed New York law applied to the tort claims for the purposes of its briefs
as well. See Mem. L. in Supp. PFLAC’s Mot. to Dismiss 11 n.5, ECF No. 45;
Reply in Supp. PFLAC’s Mot. to Dismiss, ECF No. 56.
The parties’ application of New York law to the tort claims makes sense
given New York’s choice of law rules. A court sitting in diversity must look to
20
the choice of law rules of the forum state. IBM v. Liberty Mut. Ins. Co., 363 F.3d
137, 143 (2d Cir. 2004). Under New York law, courts need not undertake a
choice of law analysis if there is no conflict between the applicable laws of the
relevant jurisdictions. Id. If there is no conflict and New York substantive law
is among the relevant choices, a court may apply New York substantive law.
Id. PFLAC notes that although the two insurance policies here were issued in
Florida and Pennsylvania, the relevant laws of those jurisdictions are
substantially the same as New York law. See Mem. L. in Supp. PFLAC’s Mot. to
Dismiss 11 n.5, ECF No. 45.
The court will thus apply New York law to
plaintiff’s tort claims.
However, as to the contract claims, the court will apply Florida and
Pennsylvania law.
The two policies purchased by plaintiff were issued in
Florida and Pennsylvania, respectively, and those forums’ laws apply according
to the express terms of each policy. See Decl. of Hutson Smelley, Ex. 2, ECF
No. 46; Decl. of Hutson Smelley, Ex. 3, ECF No. 46.
“New York courts will
generally enforce a clear and unambiguous choice-of-law clause contained in
an agreement.” Frankel v. Citicorp Ins. Servs., Inc., 80 A.D.3d 280, 285 (N.Y.
App. Div. 2010) (citing Welsbach Elec. Corp. v. MasTec N. Am., Inc., 859 N.E.2d
498, 500 (N.Y. 2006)). Such enforcement extends to insurance policies. See
Reger v. Nat’l Ass’n of Bedding Mfrs. Grp. Ins. Trust Fund, 372 N.Y.S.2d 97,
115–16 (N.Y. Sup. Ct. 1975). Thus, because of the choice of law clauses in
21
plaintiff’s policies, the court will apply Florida and Pennsylvania law to
plaintiff’s contract claims.
The court now turns to each claim to determine whether the claim
should be dismissed as precluded under SLUSA or for failure to state a claim.
C.
Breach of Fiduciary Duty
Plaintiff’s claim of breach of fiduciary duty is not precluded under
SLUSA, but is dismissed because PFLAC did not owe a fiduciary duty to
plaintiff. Under New York law, a claim for breach of fiduciary duty requires
(1) the existence of a fiduciary relationship; (2) misconduct by the defendant;
and (3) damages directly caused by the defendant’s misconduct. Varveris v.
Zacharakos, 110 A.D.3d 1059, 1059 (N.Y. App. Div. 2013).
This claim fits squarely within Kingate’s Group 4, and thus, is not
precluded under SLUSA. Kingate’s Group 4 consists of claims predicated on a
defendant’s breach of contractual, fiduciary, or tort-based duties owed to
plaintiff, resulting in failure to detect the frauds.
Such claims are not
precluded because they do not require false conduct by the defendant that
violates the operative provisions of SLUSA. Here, the false conduct at the heart
of the controversy—the conduct that violated the operative provisions of
SLUSA—was carried out by Madoff, not PFLAC. Despite PFLAC’s argument to
the contrary, it is of no import that the language used by plaintiff to describe
PFLAC’s conduct mirrors that of SLUSA.
The question is whether, as an
essential element of the claim, plaintiff must allege conduct by PFLAC that
22
violates the operative provisions of SLUSA. It does not need to so allege. Thus,
the court finds that plaintiff’s claim of breach of fiduciary duty is not precluded
under SLUSA.
PFLAC argues that, even if the claim of breach of fiduciary duty is not
precluded, it should still be dismissed because PFLAC, as an insurer, did not
owe a fiduciary duty to plaintiff.
Generally, “the relationship between the
parties to a contract of insurance is strictly contractual in nature,” and thus,
does not give rise to a fiduciary duty. Batas v. Prudential Ins. Co. of Am., 281
A.D.2d 260, 264 (N.Y. App. Div. 2001).
However, “[e]xceptional and
particularized situations may arise in which insurance agents, through their
conduct or by express or implied contract . . . may assume or acquire duties in
addition to those fixed at common law.” Murphy v. Kuhn, 682 N.E.2d 972, 975
(N.Y. 1997).
Here, the VULs and DVAs allowed policyholders to choose how their
premiums were invested from among the various investment options offered by
PFLAC. Plaintiff argues that this created a fiduciary duty that PFLAC owed to
plaintiff because the policies contained both an insurance component and an
investment component.
The circumstances here do not warrant a departure from the general rule
that insurance contracts do not impose a fiduciary duty on the insurer. See
2002 Lawrence R. Buchalter Alaska Trust v. Phila. Fin. Life Assur. Co., 96 F.
Supp. 3d 182, 232 (S.D.N.Y. 2015) (finding that defendant insurance company
23
owed no fiduciary duty to trust that purchased VULs); SSR II, LLC v. John
Hancock Life Ins. Co. (U.S.A.), 964 N.Y.S.2d 63 (N.Y. Sup. Ct. 2012).
In sum, while plaintiff’s claim of breach of fiduciary duty is not precluded
under SLUSA, the claim is dismissed because PFLAC did not owe a fiduciary
duty to plaintiff.
D.
Common Law Fraud
Plaintiff’s claim of common law fraud is precluded under SLUSA. The
claim falls within Kingate Group 1 because it requires proof that PFLAC made a
fraudulent false statement or omission as an essential element. Plaintiff does
not dispute that, after Kingate, its claim of common law fraud should be
dismissed as precluded under SLUSA. Accordingly, plaintiff’s claim of common
law fraud is dismissed.
E.
Breach of Contract
Plaintiff’s claim of breach of contract is not precluded under SLUSA, but
is dismissed on other grounds.
To establish a claim of breach of contract
under Florida law, a plaintiff must prove the following elements: (1) a valid
contract; (2) a material breach; and (3) damages. Beck v. Lazard Freres & Co.,
LLC, 175 F.3d 913, 914 (11th Cir. 1999) (citing Abruzzo v. Haller, 603 So. 2d
1338, 1340 (Fla. Dist. Ct. App. 1992)). Under Pennsylvania law, the elements
are essentially the same: (1) the existence of a contract, including its essential
terms; (2) a breach of a duty imposed by the contract; and (3) resultant
24
damages. Pennsy Supply, Inc. v. Am. Ash Recycling Corp. of Pa., 895 A.2d 595,
600 (Pa. Super. Ct. 2006).
This claim falls within Kingate’s Group 4, which, as previously noted,
consists of claims predicated on a defendant’s breach of contractual, fiduciary,
or tort-based duties owed to plaintiff, resulting in failure to detect the frauds.
Such claims are not precluded because they do not require false conduct by
the defendant that violates the operative provisions of SLUSA. Therefore,
plaintiff’s claim of breach of contract is not precluded under SLUSA.
However, plaintiff has failed to allege a specific contract term that PFLAC
breached.
Plaintiff accuses PFLAC of violating the contract formed by the
policies, the PPMs, and other offering materials by failing to “perform due
diligence” and “close the Tremont Opportunity Fund as an investment option.”
Compl. ¶ 185, ECF No. 15. However, plaintiff does not point to—and the court
cannot find—any provision in the policies, PPMs, or other offering materials
that imposes either of those duties on PFLAC. The court therefore dismisses
plaintiff’s claim of breach of contract for failure to state a claim.
F.
Breach of the Implied Covenant of Good Faith and Fair Dealing
Plaintiff’s claim of breach of the implied covenant of good faith and fair
dealing is not precluded under SLUSA, but is dismissed on other grounds.
Plaintiff’s claim of breach of the implied covenant of good faith and fair
dealing falls into the non-precluded Kingate Group 4. Therefore, the claim is
not precluded under SLUSA.
25
However, the claim must still be dismissed.
“Under Florida law, the
implied covenant of good faith and fair dealing is a part of every contract.”
Burger King Corp. v. Weaver, 169 F.3d 1310, 1315 (11th Cir. 1999) (citing Cty.
of Brevard v. Miorelli Eng’g, Inc., 703 So.2d 1049, 1050 (Fla. 1997)). However,
“an action for breach of the implied covenant of good faith cannot be
maintained in the absence of breach of an express contract provision.” Burger
King, 169 F.3d at 1316 (citing Hospital Corp. of Am. v. Fla. Med. Ctr., Inc., 710
So.2d 573, 575 (Fla. Dist. Ct. App. 1998)). As discussed above, plaintiff has
not identified any contractual obligation breached by PFLAC. Thus, plaintiff
does not have a claim for breach of the implied covenant of good faith and fair
dealing for the policy issued in Florida.
With regard to the policy issued in Pennsylvania, “Pennsylvania law does
not recognize a separate claim for breach of implied covenant of good faith and
fair dealing.” Blue Mountain Mushroom Co. v. Monterey Mushroom, Inc., 246 F.
Supp. 2d 394, 400 (E.D. Pa. 2002). That is, “where the conduct forming the
basis of the plaintiff’s breach of duty of good faith and fair dealing claim is the
same conduct forming the basis for the breach of contract claim, the claims
merge and there is no separate cause of action for breach of duty of good faith
and fair dealing.”
Smith v. Lincoln Ben. Life Co., No. 08-01324, 2009 WL
789900, at *12 (W.D. Pa. Mar. 23, 2009), aff’d, 395 F. App’x 821 (3d Cir. 2010)
(citing Meyer v. Cuna Mut. Grp., 2007 WL 2907276, at *15 (W.D. Pa. Sept. 28,
2007)).
Once again, it is important that plaintiff has not identified any
26
contractual obligation breached by PFLAC. Plaintiff does not have a claim for
breach of the implied covenant of good faith and fair dealing for the policy
issued in Pennsylvania, and the claim is therefore dismissed.
G.
Violation of N.Y. GBL § 349
Plaintiff’s claim for violation of N.Y. GBL § 349 is precluded under
SLUSA.
Section 349 of the New York General Business Law declares as
unlawful “[d]eceptive acts or practices in the conduct of any business, trade or
commerce or in the furnishing of any service in this state.” “A plaintiff under
section 349 must prove three elements: first, that the challenged act or practice
was consumer-oriented; second, that it was misleading in a material way; and
third, that the plaintiff suffered injury as a result of the deceptive act.”
Stutman v. Chem. Bank, 731 N.E.2d 608, 611 (N.Y. 2000).
This claim falls
within Kingate Group 1 or 2 because it requires proof that PFLAC made a
fraudulent or negligent false statement or omission as an essential element.
Plaintiff does not dispute that, after Kingate, its claim of violation of N.Y. GBL
§ 349 should be dismissed as precluded under SLUSA. Accordingly, plaintiff’s
claim of violation of N.Y. GBL § 349 is dismissed.
H.
Gross Negligence
Plaintiff’s claim of gross negligence is not precluded under SLUSA, but is
dismissed for failure to state a claim. Under New York law, to state a claim for
gross negligence, a plaintiff must allege the following elements: (1) the existence
of a duty on defendant’s part as to plaintiff; (2) a breach of this duty; (3) injury
27
to the plaintiff as a result of the breach; and (4) conduct by defendant that
evinces a reckless disregard for the rights of others or smacks of intentional
wrongdoing.
Farash v. Cont’l Airlines, Inc., 574 F. Supp. 2d 356, 367–68
(S.D.N.Y. 2008), aff’d, 337 F. App’x 7 (2d Cir. 2009).
This claim falls within Kingate’s Group 4, and thus, is not precluded
under SLUSA. See Anwar, 118 F. Supp. 3d at 605, 617.
PFLAC makes two arguments as to why plaintiff’s claim for gross
negligence should be dismissed nevertheless. PFLAC’s first argument is that it
did not owe a duty to plaintiff. Plaintiff alleges that PFLAC owed plaintiff “a
duty to manage and monitor the investments of [plaintiff] with reasonable
care.” Compl. ¶ 199, ECF No. 15. In very similar contexts, courts have come
to differing conclusions as to whether such a duty might exist. Compare 2002
Lawrence R. Buchalter Alaska Trust, 96 F. Supp. 3d at 222 (finding a “duty of
care in vetting investment options” that “arises from circumstances extraneous
to, and not constituting elements of, the contract”), with Michael S. Rulle Family
Dynasty Trust v. AGL Life Assur. Co., No. 10-231, 2010 WL 3522135, at *5
(E.D. Pa. Sept. 8, 2010), aff’d, 459 F. App’x 79 (3d Cir. 2011) (dismissing claim
of negligence because no duty existed).
PFLAC’s second argument is that damages are barred by the economic
loss rule. Under New York’s economic loss rule or economic loss doctrine, a
plaintiff cannot recover in tort for purely economic losses caused by a
defendant’s negligence.
See Schiavone Const. Co. v. Elgood Mayo Corp., 436
28
N.E.2d 1322 (N.Y. 1982). However, the economic loss rule does not apply in
every tort action. See 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia Ctr.,
Inc., 750 N.E.2d 1097, 1101 n.1 (N.Y. 2001). In determining whether to apply
the economic loss rule, the New York Court of Appeals has instituted a “duty
analysis” consisting of “policy-driven scrutiny of whether a defendant had a
duty to protect a plaintiff against purely economic losses.” King Cnty., Wash. v.
IKB Deutsche Industriebank AG, 863 F. Supp. 2d 288, 302 (S.D.N.Y. 2012).
“Plaintiffs who enter into transactions that are of a contractual nature—even if
no contract exists—are limited to the benefits of their bargains unless they can
show a legal duty separate and apart from obligations bargained for and
subsumed within the transaction.” In re MF Glob. Holdings Ltd. Inv. Litig., 998
F. Supp. 2d 157, 185 (S.D.N.Y. 2014) (internal quotation marks and citation
omitted).
Accordingly, if the court finds that PFLAC did indeed owe an
independent duty of care to plaintiff outside of the contract, the economic loss
rule would not preclude plaintiff’s claim of gross negligence.
PFLAC’s two
arguments thus boil down to a single argument: that it did not owe plaintiff
any duty.
Ultimately, the court need not decide whether PFLAC owed plaintiff a
duty, because plaintiff fails to sufficiently allege the fourth element necessary
to state a claim for gross negligence—that is, conduct by defendant that
evinces a reckless disregard for the rights of others or smacks of intentional
wrongdoing. PFLAC was careful to warn investors that they bore the risk of the
29
investment.
For example, the PPM Supplement prominently stated: “THE
POLICYHOLDER BEARS THE ENTIRE INVESTMENT RISK FOR ALL AMOUNTS
INVESTED IN THE POLICY, INCLUDING THE RISK OF LOSS OF PRINCIPAL.”
Decl. of Hutson Smelley, Ex. 4, ECF No. 46.
That same PPM Supplement
further warned investors that Tremont Fund’s general partner would have
complete discretion over the selection of managers and that a thorough
investigation of potential managers might not be possible because of limited
publicly available information. Id. These sorts of warnings—and the fact that
investors knew that Tremont was responsible for choosing a manager—belie
the claim that PFLAC’s conduct evinced a reckless disregard for the rights of
others or smacked of intentional wrongdoing.
Simply put, a claim of gross
negligence is not plausible on the facts alleged by plaintiff and must be
dismissed.
I.
Negligent Misrepresentation
Plaintiff’s claim of negligent misrepresentation is precluded under
SLUSA. Under New York law, the elements of a negligent misrepresentation
claim are: (1) the defendant had a duty, as a result of a special relationship, to
give correct information; (2) the defendant made a false representation that he
or she should have known was incorrect; (3) the information supplied in the
representation was known by the defendant to be desired by the plaintiff for a
serious purpose; (4) the plaintiff intended to rely and act upon it; and (5) the
plaintiff reasonably relied on it to his or her detriment. Hydro Inv’rs, Inc. v.
30
Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000).
This claim falls within
Kingate Group 2, which consists of claims predicated on a defendant’s own
negligent misrepresentations or misleading omissions.
Thus, because the
claim requires false conduct by PFLAC that violates the operative provisions of
SLUSA, the claim should be dismissed. Unsurprisingly, then, plaintiff does not
dispute that, after Kingate, its claim of negligent representation should be
dismissed as precluded under SLUSA.
Accordingly, plaintiff’s claim of
negligent misrepresentation is dismissed.
J.
Unjust Enrichment
Plaintiff’s claim of unjust enrichment is not precluded under SLUSA but
is dismissed for failure to state a claim. Both plaintiff and defendant PFLAC
apply New York law to the claim of unjust enrichment, and the court will follow
suit. Under New York law, to state a claim of unjust enrichment, a plaintiff
must establish three elements: (1) that the defendant benefitted; (2) at the
plaintiff’s expense; and (3) that equity and good conscience require restitution.
Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield of New Jersey, Inc.,
448 F.3d 573, 586 (2d Cir. 2006).
Plaintiff’s claim of unjust enrichment falls within Kingate Group 5, which
consists of claims predicated on a defendant’s receipt of unearned fees. Such
claims are not precluded because they do not require false conduct by the
defendant that violates the operative provisions of SLUSA. Therefore, plaintiff’s
claim of unjust enrichment is not precluded under SLUSA.
31
However, plaintiff’s claim of unjust enrichment must still be dismissed.
“The theory of unjust enrichment lies as a quasi-contract claim. It is an
obligation the law creates in the absence of any agreement.” Goldman v. Metro.
Life Ins. Co., 841 N.E.2d 742, 746 (N.Y. 2005). Accordingly, 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.”
Clark-Fitzpatrick, Inc. v. Long Island R.R. Co., 516
N.E.2d 190, 193 (N.Y. 1987).
Here, plaintiff’s claim asserts rights that are
governed by the policies, namely, that PFLAC “collected improper management
fees based on the Policies’ net asset values.” Compl. ¶ 209, ECF No. 15. Thus,
because the collection of fees was governed by the policies, plaintiff cannot
maintain its claim for unjust enrichment.
Plaintiff argues that, because it pleads its claim for unjust enrichment in
the alternative to the breach of contract claim, dismissal is improper. However,
a claim for unjust enrichment may only survive as an alternative theory of
liability when the existence of the contract is in dispute. See New Paradigm
Software Corp. v. New Era of Networks, Inc., 107 F. Supp. 2d 325, 329
(S.D.N.Y. 2000). Here, there is no dispute that the policies formed a valid and
enforceable contract between plaintiff and PFLAC.
enrichment claim is dismissed.
32
Thus, plaintiff’s unjust
K.
Promissory Estoppel
Plaintiff’s claim of promissory estoppel is not precluded under SLUSA,
but is dismissed for failure to state a claim.
Under New York law, a party
seeking to state a claim for promissory estoppel must allege that (1) a speaker
made a clear and unambiguous promise; (2) it was reasonable and foreseeable
for the party to whom the promise was made to rely upon the promise; and
(3) the person to whom the promise was made relied on the promise to his or
her detriment.
Johnson & Johnson v. Am. Nat. Red Cross, 528 F. Supp. 2d
462, 463 (S.D.N.Y. 2008). This claim most likely falls within Kingate Group 4,
but regardless, it is not precluded because it does not rely on false conduct by
PFLAC that violates the operative provisions of SLUSA.
Therefore, plaintiff’s
claim of promissory estoppel is not precluded under SLUSA.
However, plaintiff still fails to state a claim for promissory estoppel.
Plaintiff alleges that PFLAC “made a clear and unambiguous promise in the
documents and materials tendered to Plaintiff and the Class to conduct and
perform due diligence and the continued monitoring of the fund managers.”
Compl. ¶ 215, ECF No. 15. But, as discussed above, plaintiff has not pointed
to any provision in the policies or other materials in which PFLAC makes any
such promise.
In fact, the PPM Supplement prominently stated: “THE
POLICYHOLDER BEARS THE ENTIRE INVESTMENT RISK FOR ALL AMOUNTS
INVESTED IN THE POLICY, INCLUDING THE RISK OF LOSS OF PRINCIPAL.”
Decl. of Hutson Smelley, Ex. 4, ECF No. 46. Because plaintiff fails to allege
33
sufficiently that PFLAC made a clear and unambiguous promise, plaintiffs
claim of promissory estoppel is dismissed.
In sum, each of plaintiffs direct claims must be dismissed as either
precluded under SLUSA or because they fail to state a valid claim.
Conclusion
Defendants' motions to dismiss are granted in their entirety.
This
resolves all outstanding motions on the docket 11-cv-1283. The Clerk of Court
is directed to close the case.
SO ORDERED.
Dated: New York, New York
May 3, 2016
Thomas P. Griesa
U.S. District Judge
34
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?