Szulik et al v. TAG Virgin Islands, Inc. et al
MEMORANDUM AND ORDER DENYING MOTION TO RECONSIDER 201 . As this Court concluded in the Order, on their third attempt to plead their claims, plaintiffs failed "to explain how the nondisclosure or omission of the 'kickbacks' diminished the value of the IEAH investments and resulted in a loss," to "plainly allege why the 'kickback' scheme forecasted or caused plaintiffs' losses," and to "allege how or why the nondisclosure of the 'kickbacks ' 'concealed the circumstances that bear upon the loss suffered[.]'".... This was so even though the Court, as it was required to do on consideration of a motion to dismiss, "accept[ed] all factual allegations in the complain t as true and [drew] all reasonable inferences in plaintiffs' favor.".... A motion for reconsideration should not be granted where a party merely seeks reconsideration of issues already decided. Shrader v. CSX Transp. Inc., 70 F.3d 255, 257 (2d Cir. 1995). Because plaintiffs have failed to identify any clear error or manifest injustice in the Court's previous ruling, their motion for reconsideration must be denied. For the foregoing reasons, plaintiffs' motion to reconsider is DENIED. SO ORDERED. (Signed by Judge P. Kevin Castel on 10/21/2013) (ja)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
MATTHEW J. SZULIK, KYLE M. SZULIK,
and MICHAEL COLLEARY, in his capacity as
trustee of the Raymond W. Szulik Revocable Trust
dated December 5, 2007,
DATE FILED: I~ j.l-13
12 Civ. 1827 (PKC)
JAMES S. TAGLIAFERRI, PATRICIA J.
CORNELL, and BARRY B. FEINER,
P. KEVIN CASTEL, District Judge:
In a Memorandum and Order dated August 21,2013 (the "Order"), the COUlt
granted in part and denied in part defendants' motion to dismiss plaintiffs Second Amended
Complaint (the "SAC"). Szulik v. Tagliafen-i, No. 12 Civ. 1827,2013 WL 4494684 (Aug. 21,
2013).1 Plaintiffs now move for reconsideration of the COUlt'S limitation ofthe scope ofthe
fi-and claims, pursuant to Rule 60(b), Fed. R. Civ. P., and Local Civil Rule 6.3.
Put simply, plaintiffs have plausibly and adequately alleged false statements and
certain damages that foreseeably flow from those false statements. The false statements relate to
the payment of compensation to plaintiffs' financial advisors for the entity, a thoroughbred horse
racing operation, that was the subject of the investment. But plaintiffs have not adequately and
plausibly alleged that all losses they suffered on the investment foreseeably flowed from the false
Familiarity with the facts set f011h in the Order is assumed. All capitalized terms and abbreviations have the same
meaning here as they had there.
statements about compensation. Each of the four claims required, as a matter of loss causation or
proximate cause, that the plaintiff plausibly and adequately allege that the particular losses
claimed foreseeably flowed /i'om the false statements. This plaintiffs have failed to do. As more
fully explained below, plaintiffs' motion for reconsideration is denied.
1. LEGAL STANDARD
Motions for reconsideration are govemed by Local Civil Rule 6.3 and Rule 60(b),
Fed. R. Civ. P. A motion to reconsider is "addressed to the sound discretion ofthe district
court[.]" See Mendell ex reI. Viacom, Inc. v. Gollust, 909 F.2d 724,731 (2d Cir. 1990). A
motion for reconsideration "is generally not favored and is properly granted only upon a showing
of exceptional circumstances." Marrero Pichardo v. Ashcroft. 374 F.3d 46,55 (2d Cir. 2004)
(citation omitted). "The standard for granting such a motion is strict, and reconsideration will
generally be denied unless the moving party can point to controlling decisions or data that the
cOUlt overlooked-matters, in other words, that might reasonably be expected to alter the
conclusion reached by the court." Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir.
1995). "[A] motion to reconsider should not be granted where the moving party seeks solely to
relitigate an issue already decided," Id. at 257.
Motions for reconsideration "should be granted only when the defendant
identifies an intervening change of law, the availability of new evidence, or the need to con'ect a
clear enor or prevent manifest injustice." Kolel Beth Yechie1 of Tartikov, Inc. v. YLL
F,3d - ,2013 WL 4609100, at *4 (2d Cir. Aug. 30,2013) (citation and
quotations omitted). As a preliminary matter, plaintiffs have not identified any intervening
change of controlling law. Neither have plaintiffs relied on any new evidence. Thus, in order to
prevail on their motion, plaintiffs must show the need to correct clear error or prevent manifest
injustice. See id.
A. Timeliness of Motion
The time limit for a motion for reconsideration is set forth in Rule 6.3 of the Local
Civil Rules. That Rule provides:
Unless otherwise provided by the Comt or by statute or rule ... a notice of motion for
reconsideration or reargument of a comt order detelmining a motion shall be served within
fomteen (14) days after the enlly of the Comt's detelmination of the original motion, or in
the case of a comt order resulting in a judgment, within fourteen (14) days after the entry
of the judgment.
Local Civil Rule 6.3. The Comt's Order was entered on August 21,2013. Plaintiffs moved for
reconsideration on September 9, 2013, apparently based on a view that the three-day extension of
Rule 6(d), Fed. R. Civ. P. applied to their motion. (PI. 's Reply Mem.l) Because any potential
error appears to have been inadveltent, and because in any event the possible delay of three
business days is de minimis, the Comt will consider the motion timely. See Holtz v. Rockefeller
& Co., Inc., 258 F.3d 62, 73 (2d Cir. 2001) ("A district court has broad discretion to detelmine
whether to overlook a party's failure to comply with local comt rules.") (citations omitted).
B. The Court's Causation Analysis
On this motion, plaintiff challenges the limitation of the scope of four claims
brought against defendants James S. TagliafelTi and Patricia J. Comele (PI.'s Mem. 2) Count
2 The SAC also alleged claims against Barry B. Feiner. The Court's IUlings on claims against Mr. Feiner are not
challenged on this motion.
III alleged scheme liability under Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), 15 U.S.C. § 78j, and Rule 10b-5(a) and (c) promulgated thereunder by the
Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. (SAC ~~ 367-77) Count N
alleged a primary violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5(b). (SAC
378-87) Count VII alleged a claim arising under the North Carolina Investment Advisers Act,
N.C. Gen. Stat. § 78C-I et seq. (SAC ~~ 396-401) Count VIII alleged a claim of "fraudulent
concealment," apparently under NOlih Carolina common law. (SAC ~~ 402-07; PI.'s Mem. 2)
Under the federal securities laws, a securities fraud plaintiff must allege both
transaction causation and loss causation. Lentell v. Merrill Lynch & Co. Inc., 396 F.3d 161, 172
(2d Cir. 2005). Transaction causation is analogous to reliance, and requires only "an allegation
that but for the deceptive act, the plaintiff would not have entered into the securities transaction."
Stoneridge Inv. Paltners, LLC v. Scientific-Atlanta, 552 U.S. 148, 171 (citing Lentell at 172).
Thus, the "but for" causation required to show transaction causation is "not a difficult hurdle to
clear" in a private fraud claim under § 10(b). Stoneridge at 171. Plaintiffs adequately and
plausibly alleged transaction causation.
Loss causation, on the other hand, has been described "in terms of the tort-law
concept of proximate cause, i.e., that the damages suffered by plaintiff must be a foreseeable
consequence of any misrepresentation or material omission[.]" Lentell, 396 F.3d at 172 (citation
and quotations omitted). The loss causation inquiry "typically examines how directly the subject
of the fraudulent statement caused the loss, and whether the resulting loss was a foreseeable
outcome of the fraudulent statement." Suez Equity Investors, L.P. v. Toronto-Dominion Bank,
250 F.3d 87, 96 (2d Cir. 2001). "Loss causation is the causal link between the alleged
misconduct and the economic halm ultimately suffered by plaintiff." Lentell, 396 F.3d at 172
(citation and quotations omitted). "[A1misstatement or omission is the 'proximate cause' of an
investment loss if the risk that caused the loss was within the zone of risk concealed by the
misrepresentations and omissions alleged by a disappointed investor." Id. at 173 (emphasis in
In analyzing loss causation, this Court found that plaintiffs' SAC failed "to
explain how the nondisclosure or omission of the 'kickbacks' diminished the value ofthe IEAH
investments and resulted in a loss." Szulik at *19. The Court explained that plaintiffs' vague
assertions that defendants "caused them to suffer damages by draining their assets and deceiving
them into continuing to entrust their savings," Id. (citing SAC ~~ 377,387), "more obviously
alleged transaction causation, i.e. had plaintiffs known of the fraud, they would not have
continued to invest with TAG VI." Id. In contrast, the Court found that plaintiffs did plausibly
allege a loss "in being duped into paying full management fees while defendants, unbeknownst
to them, were receiving fees from IEAH for the same investment." Id. at *20. Thus, the Comt
limited both of plaintiffs' fi'aud claims under Section lOeb) and Rule IOb-5 to losses resulting
from false statements or omissions, i.e. the overpayment of management fees. Id. The Court
subsequently applied the same limitation to plaintiffs' claim under the North Carolina Investment
Advisers Act, N.C. Gen. Stat. § 78C-8, Szulik at *21, and plaintiffs fi'audulent concealment
claim under North Carolina state law, id. at *22.
C. Federal Law Fraud Claims
As an initial matter, the basis for plaintiffs' contention that this Court required
"plaintiffs to plead that defendants' fi'audulent conduct was the sole cause of their losses" is not
disclosed in plaintiffs' submissions. (PI. 's Mem. 7) (capitalization omitted) Plaintiffs fail to cite
any pOltion of the Order imposing such a requirement, and indeed no such requirement may be
found in the loss causation discussion in the Order.
With respect to the federal fi'aud claims under Section 10(b) and Rule lOb-5,
plaintiffs argue that the Court should not have ruled at the motion to dismiss phase on "what
damages were not recoverable." (PI. 's Mem. 7) But this Court's earlier ruling limited claims,
not damages. Irrespective of any considerations relating to damages, liability cannot arise in the
first instance where a plaintiff has failed to adequately allege a necessary element of a claim. It
is undisputed that "[t]o state a claim for relief under § 10(b) and Rule lOb-5, plaintiffs must
allege [ ... ] that plaintiffs' reliance was the proximate cause of their injury." Lentell v. Merrill
Lvnch & Co., 396 F.3d at 172.
Particularly in the area of Securities Exchange Act-based private securities fi'aud
claims, for which the PSLRA imposes a loss causation requirement, courts are required to
carefully scrutinize the adequacy of pleadings. See Lentell at 172; 15 U.S.C. 78u-4(b). For
instance, in ATSI Commc'ns v. Shaar Fund, Ltd., the court affitmed dismissal of a fraud claim
for failure to adequately allege loss causation. 493 F.3d 87, 93 (2d Cir. 2007). The court found
that the complaint failed to establish any causal connection between the defendant's
misrepresentation that the defendant was an accredited investor and the plaintiffs claimed losses
fi'om a decline in value of its stock. Id. at 106-07. Further, the court specifically rejected the
argument that the misrepresentation induced the plaintiff to enter into a transaction under the
pretense that the defendants were "trustworthy, reputable[,] and long-term investors." Id. at 107.
This proffered basis for loss causation was rejected because the court found it to merely
represent "a paraphrased allegation oftransaction causation." Id. (quoting Lentell at 174).
District courts routinely limit claims in part at the motion to dismiss phase based
on a partial failure to adequately allege loss causation.
In re Moody's Corp. Sec. Litig.,
599 F. Supp.2d 493, 518 (S.D.N.Y. 2009) (dismissing a fraud claim against defendants insofar as
it rested on certain alleged fraudulent statements); In re AOL Time Wamer, Inc. Sec. Litig., 503
F.Supp. 2d 666, 680 (S.D.N.Y. 2007) (partially dismissing plaintiffs' Section 10 claim for failure
to plead loss causation with respect to a specific audit statement); City of Sterling Heights Police
& Fire Ret. Sys. v. Abbey Nat" PLC, 423 F. Supp. 2d 348, 364 (S.D.N.Y. 2006) (granting
motion to dismiss fraud claims brought under Section 1O(b) based on one set of
misrepresentations and violations but denying motion with respect to another set).
Plaintiffs' argument that misstatements and omissions relating to "kickbacks"
created a foreseeable risk that plaintiffs would lose their entire investment in lEAH cannot be
accepted. That result is foreclosed by the pleading principles set fOlih in Lentell, which "require
both that the loss be foreseeable and that the loss be caused by the materialization of the
concealed risk[.]" 396 F.3d at 173 (emphasis in original). If misstatements and omissions
relating to any discrete allegations of wrongful conduct (such as the kickback scheme here) could
always justify the full recovery of a lost investment, this would effectively obliterate the loss
causation requirement, which, "as with the foreseeability limitation in tOli[,] is intended to fix a
legal limit on a person's responsibility, even for wrongful acts." Lentell, 396 F.3d at 174
(citation and quotations omitted).
FUlther, to the extent that plaintiffs allege that their investments in lEAH were
overvalued at the time of purchase, such an argument invokes the concept of a "purchase value
time disparity" between the purchase price paid and the "true value" of a security. This theory
has been expressly rejected as a basis for proximate causation of an economic loss. Emergent
Capital Inv. Mgmt., LLC v. Stonepath Gill., Inc., 343 F.3d 189, 198 (2d Cir. 2003). This is
because "[s]uch an allegation-which is nothing more than a paraphrased allegation of
transaction causation-explains why a particular investment was made, but does not speak to the
relationship between the fraud and the loss of the investment." Lentell at 174.
Schuster v. Anderson, 413 F. Supp. 2d 983 (N.D. Iowa 2005), relied on by
plaintiffs, is sharply distinguishable from the instant case. The Schuster defendants were alleged
to have actually taken plaintiffs' entire capital investment and used it for purposes other than
investment in the shares of the underlying company, which was the only purpose authorized in
the relevant investment agreement. Id. at 994-95. Here, there is no allegation that defendants
did not actually invest plaintiffs' capital in lEAH securities that were within the scope of the
authority provided in the IMA-except, of course, insofar as that capital was taken as an
undisclosed "double-counted" management fee.
The "churning" cases relied upon by plaintiffs are also inapposite. In such cases,
a plaintiff alleges that his or her investment broker traded the plaintiffs account excessively in
order to generate more per-trade commissions. While it is true that the practice of "[c]hurning,
in and of itself, may be a deceptive and manipulative device under section 1O(b)," Armstrong v.
McAlpin, 699 F.2d 79, 91 (2d Cir. 1983), plaintiffs here have alleged no such device. A
churning case requires no allegation of misrepresentation or omission; rather, the churning itself
is recognized independently as a deceptive device. Id. In the instant case, plaintiffs have
claimed that alleged omissions by defendants materially misled plaintiffs and thus caused them
damages. Thus, other Circuits' willingness to award damages based on the decline in value of
purchased securities in "churning" cases fails to support plaintiffs' argument here.
D. North Carolina Fraud Claims
1. Fraud Under North Carolina Investment Advisers Act
Under the North Carolina Investment Advisers Act (the "NCIAA"):
It is unlawful for any person who receives, directly or indirectly, any
consideration from another person for advising the other person as to the value of
securities or their purchase or sale, whether tlu'ough the issuance of analyses or
reports or otherwise[:]
(1) To employ any device, scheme, or artifice to defraud the other person,
(2) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon the other person ....
N.C. Gen. Stat. § 78C-8. Plaintiffs allege that defendants violated the statute "by failing to
disclose kickbacks and other payments from lEAH in exchange for investing the Szuliks'
money." (SAC ~ 399)
Only two NOlth Carolina state court decisions have discussed the NCIAA, and
neither cOUit's analysis pertains to the issue ofloss causation pleading requirements. See State v.
Clemmons, 433 S.E. 2d 748,752 (N.C. Ct. App. 1993) (noting in dicta that though the record
contained insufficient evidence to support an indictment under the state's general fraud statute,
there was sufficient evidence to support an indictment for an uncharged violation of the
NCIAA); Shareffv. Lakebound Fixed Return Fund, LLC, No. 09 CVS 9983, 2013 WL 873782,
at *5 (N.C. Super. Ct. Mar. 6,2013) (dismissing a fi'aud claim under the NCIAA for failure to
plead with sufficient palticularity to state a claim under North Carolina Rule 9).
"In cases such as this one, in which state law controls and the governing
principles are uncertain or ambiguous, we attempt to predict how the highest court of the state
would resolve the unceltainty or ambiguity." Caronia v. Philip M01Tis USA, Inc., 715 F.3d 417,
449 (2d Cir. 2013) (citing Travelers Insurance Co. v. 633 Third Associates, 14 F.3d 114, 119 (2d
Cir.1994». "In so doing, we give full weight to the decisions of the state's highest court, and we
give due regard to the decisions of the state's lower coutts." Id. (citations omitted). "We also
remain 'free to consider all of the resources to which the highest court of the state could look,
including decisions in other jurisdictions on the same or analogous issues[.]'" Id. (quoting
Leon's Bakery, Inc, v, Grinnell Corp., 990 F.2d 44, 48 (2d Cir.l993».
Far from repudiating the analysis of COutts applying the federal securities laws in
the context of a fraud claim, North Carolina courts have noted the substantial similarity between
state securities laws and their federal analogues, and thus found federal securities case law to be
instructive. For instance, North Carolina's general securities fi'aud statute "closely parallels"
S.E.C. Rule IOb-5, 17 CFR § 240.lOb-5. State v. Williams, 390 S.E.2d 746, 749 (N.C. Ct. App.
1990). Therefore, "[c]ases construing the federal rule are instructive when examining [NOlth
Carolina's] statute." State v. Davidson, 506 S.E.2d 743, 748 (N.c. Ct. App. 1998). Because the
language of the NOlth Carolina Investment Advisers Act is nearly identical to that of the federal
Investment Advisers Act of 1940 (the "40 Act"), this same interpretive principle applies to fraud
claims brought thereunder. 3 Compare 15 U.S.C. § 80b-6 with N.C. Gen. Stat. § 78C-8.
Thus, because North Carolina courts treat federal securities law as instructive in
the interpretation of state securities laws, in the absence of any contradictory state authority the
COutt finds no clear error or manifest injustice with its application of federal loss causation
analysis to plaintiffs' claim under the NCIAA.
3 In tum, "[tlhe provisions of § 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6, are substantially
similar to § lO(b) of the Securities Exchange Act of 1934, 15 U.S.c. § 78j(b), and Rule IOb-5 .... " Transamerica
Mortgage Advisors, Inc. (TAMAl v. Lewis, 444 U.S. 11, 35 n.l (1979) (White, J. dissenting). Thus, the antifraud
provisions of the 40 Act are generally interpreted consistently with those of Exchange Act Section 10(b) and Rule
lOb-5 promulgated thereunder. See generally S.E.C. v. Capital Gains Research Bureau, 375 U.S. 180 (1963).
2. Fraudulent Concealment
Fraudulent concealment "is a form of fraudulent misrepresentation entitling the
claimant to damages .... " Friedland v. Gales, 509 S.E.2d 793, 797 (N.C. Ct. App. 1998). "To
assert a claim for fraudulent concealment, there must be a showing that the opposing party knew
a material fact, and failed to fully disclose that fact in violation of a pre-existing duty to
disclose." Id. In addition to these requirements, fraudulent concealment claims are also required
to satisfy the traditional elements offraud under North Carolina law. Nakell v. Liner
Yankelevitz Sunshine & Regenstreif, LLP, 394 F. Supp. 2d 762,767-68 (M.D.N.C. 2005) (citing
Hunter v. Guardian Life Ins. Co. of Am., 593 S.E.2d 595, 598-99 (N.C. Ct. App. 2004)).
"The elements of a civil cause of action for fraud are (I) a false representation or
concealment of a material fact (2) that is reasonably calculated to deceive (3) made with intent to
deceive (4) which does in fact deceive and (5) results in damage to the injured patty." Charlotte
Motor Speedway, LLC v. Cnty. of Cabanus, No. COAI2-1361, 2013 WL 5458617 (N.C. Ct.
App. Oct. 1,2013) (citation omitted). "[I)n order to survive a motion to dismiss pursuant to
[North Carolina) Rule 12(b)(6), the complaint must allege with particularity all material facts and
circumstances constituting the fraud, although intent and knowledge may be aveITed generally."
Becker v. Graber Builders, Inc., 561 S.E.2d 905, 910 (N.C. Ct. App. 2002) (citations omitted).
Plaintiffs argue that this Court en'ed in applying to their state law fraud claims the
loss causation analysis discussed in connection with their federal fraud claims. Plaintiffs base
their argument on the broad contention that "under North Carolina law, fraud claims do not have
a loss causation element." (PI. Mem. 3) (capitalization omitted). Contrasting federal securities
fraud law with the law of fraud in North Carolina, plaintiffs suggest that, while a federal fraud
claim requires a showing of both "transaction causation" and "loss causation," North Carolina
law requires only "proximate causation," which plaintiffs characterize as equivalent to
"transaction causation." (Pl.'s Mem. 5) Plaintiffs urge that merely alleging "but for" causation,
also known as factual causation, is sufficient to satisfy the "proximate cause" element of a Notth
Carolina fi"aud claim.
The loss causation requirement applicable to federal law securities fraud claims is
far from unique to federal law and is no different from the common law concept of "proximate
cause" as applied in fraud cases. See Restatement (Second) of Torts § 548A (1977) ("A
fi·audulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction
in reliance upon it if, but only if, the loss might reasonably be expected to result from the
reliance."); Grand v. Nacchio, 147 P.3d 763, 773 (Ariz. Ct. App. 2006) (causation in securities
fraud requires a showing of both transaction causation and loss causation, and "[l]oss causation
is nothing more than proximate cause"); OCM Principal Oppottunities Fund v. crnc World
Markets Corp., 68 Cal. Rptr. 3d 828, 862 (Cal. Ct. App. 2007) ("the entitlement to damages
requires the existence of proximate causation, that is, a causal link between the losses and the
'facts misrepresented"'); Kirkruffv. Wise garver, 697 N.E.2d 406, 413 (Ill. App. ct. 1998)
(holding that to recover for misrepresentation in cases involving breach of fiduciary duty,
plaintiffs must prove that the misrepresentation was both a cause-in-fact and proximate cause of
the injury); Spreitzer v. Hawkeye State Bank, 779 N.W.2d 726, 740 (Iowa 2009) ("As with other
totts, it is generally recognized the causation element of a fraud claim is composed of both
factual and legal causation of the loss ... Without legal causation, the chain oflosses resulting
from an investment would be virtually limitless.").
Plaintiffs cite three North Carolina decisions that they argue demonstrate that
North Carolina courts require only a showing of "but for" causation at the pleading stage of a
fraud suit. In dicta in Jefferson Standard Life Ins. v. Guilford County, the Supreme COUit of
North Carolina explained that in order for legal fraud to be actionable, "there must be some
causal connection between the fi'aud and the injury alleged, and some relevancy between them
and the relief demanded." 38 S.E. 2d 519, 523 (N.C. 1946). However, because Jefferson
Standard Life Ins. was resolved strictly on constitutional grounds, the court did not elaborate on
the degree or character of the causal connection required. Id. at 524 ("When a transaction is in
direct violation of the Constitution and laws, it is not necessary to invoke fraud [... J to establish
its invalidity."). Shugar v. Gill, a civil suit for assault and battery, examined the propriety of a
punitive damages award and is entirely inapposite to the issue of proximate cause pleading
requirements. 277 S.E.2d 126,131 (N.C. Ct. App. 1981).
In the third cited case, Hester v. Miller, the North Carolina COUIt of Appeals
addressed the issue of proximate cause in the context of a negligence claim arising out of an
automobile collision. 255 S.E.2d 318, 321 (N.C. App. 1979). The Court's brief decision
concluded that the summary judgment movant had not established intervening negligence as a
matter of law. Id. The case has little or nothing to do with the pleading requirements in a fi'aud
The traditional formulation ofthe common law requirement of proximate cause,
indeed, does apply to a fi'aud claim under North Carolina law. See Pearce v. Am. Defender Life
Ins. Co., 316 N.C. 461,471 (1986) (fraud claims require a showing "that the plaintiff suffered
actual injury as a proximate result of defendant's deceptive statement or misrepresentation.");
Selfv. Yelton, 688 S.E.2d 34, 38 (N.C. Ct. App. 2010) (an essential element of each of
plaintiffs' fraud claims "is a showing that defendant proximately caused their damages");
Raleigh Flex Owner I, LLC v. MarketSmatt Interactive, Inc., 1:09-CV-699, 2011 WL 923356, at
*12 (M.D.N.C. Mar. 7, 2011) (granting summary judgment against plaintiff's fraud claims
because plaintiff "failed to offer any evidence that it suffered damages as a proximate result of
reliance it placed on any false statements[ ... J as required by NOlth Carolina law.").
North Carolina law requires more than an allegation of "but for" causation to
properly allege proximate causation. See Cooper-Ranis, Inc. v. Escalle, 200 S.E.2d 440, 442
(N.C. Ct. App. 1973) ("An event which is a 'but for' cause of another event-that is, a cause
without which the second event would not have taken place-is not, necessarily, the proximate
cause ofthe second event."); Strates Shows, Inc. v. Amusements of AnI" Inc., 646 S.E.2d 418,
425 (N.C. Ct. App. 2007) ("while the illegal conduct by defendants may have been the cause-infact of plaintiffs legal fees and costs, it was not the 'proximate cause' of such fees and costs.")
(citation omitted). It embraces the traditional common law fOl1'llulation oflimiting a defendant's
liability to the foreseeable consequences of his or her actions. See Bumpers v. Cmty. Bank ofN.
Virginia, 747 S.E.2d 220, 234 (N.C. 2013) ("the Cl1lX of proximate cause is the foreseeability of
an injury"); Williams v. Boulerice, 268 N.C. 62, 68 (1966) ("Foreseeability is an essential
element of proximate cause.").
Plaintiffs make no mention offoreseeability in their complaint, and their
allegations do not support a reasonable inference that the total loss oftheir investment in lEAH
was a foreseeable consequence oftheir overpayment of investment management fees. The only
specific allegation of damages made in their common law fi'audulent concealment claim was that
"[tJhe Szuliks relied upon and acted upon TagliafelTi and Cornell's representations and
concealment of facts and were hmmed as a result." (SAC '\I 407) The SAC states that defendants
"skimmed millions of dollars off of' the lEAH investments, breaks out the total of $1.63 million
in undisclosed "kickbacks" in detail, and notes that the "kickbacks" were collected
simultaneously with over $1.4 million in management fees. (SAC '1)128, 130-31) But nothing in
the SAC suggests that, at the time the lEAH investments were made, the overpayment of
investment management fees in the form of "kickbacks" would foreordain a total loss of the
value ofthe investment. See SAC '1)'1)125-63, 402-07. Thus, beyond the loss involved in the
double payment of management fees, plaintiffs failed to adequately allege proximate cause as
required under North Carolina law.
Plaintiffs reliance on Jacobs v. Physicians Weight Loss Center of America, Inc.,
620 S.E. 2d 232 (N.C. Ct. App. 2005), is misplaced. In that case, a weight loss center
contractually required physicians to forward prescriptions directly to a prefelTed pharmacy
instead of given to patients. Id. at 234. Had patients been given their prescriptions, they would
have been able to fill them more cheaply at a different pharmacy. Id. at 235. A class of
plaintiffs sued the weight loss center for, among other things, actual and constructive fraud under
North Carolina law. Id. The trial court granted partial summary judgment for the defendant on
the constructive fraud claims of those class members who did not ask to take their prescription to
a different phmmacy. Id. The Comt of Appeals concluded that there was no evidence that
patients were infOimed that they had a right to ask to have the prescription filled elsewhere. Id.
at 237. In passing, the Court quoted Barber v. Woodmen of the World Life Ins. Society, 382
S.E.2d 340, 345 (N.C. Ct. App. 1989) (citation omitted), an appeal from a denial ofa motion for
a directed verdict, as noting that "[0 lur court has held that whether plaintiffs damages [are1the
proximate result of defendant's actions is almost always a question of fact for the jury." Id. at
237. The issue presented on defendants' motions to this Court was not whether there was
evidence sufficient to go to a jury but whether plaintiff had met the pleading requirements at the
threshold ofthe action.
Plaintiffs also rely on Bear Hollow, L.L.C. v. Moberk, L.L.C., No. 5:05CV21O,
2006 WL 1642126 (W.D.N.C. June 5,2006), an action alleging common law Ii-aud under North
Carolina law in a real estate transaction. While not discussing the nature of the allegations, the
district COUIt noted that the amended complaint specifically "alleged special damages flowing as
a direct and proximate result of the Ii-aud." Id. at *10. 4 In contrast, there is nothing in the SAC
characterizing plaintiffs' loss of the principal invested in lEAH as "a direct and proximate result"
of defendants' failure to disclose the "kickback" arrangement.
Thus, because NOlth Carolina fraud law itself requires a showing of not only "but
for" causation but also traditional proximate cause, the Court finds no clear error or manifest
injustice with its application of federal causation analysis to plaintiffs' NOlth Carolina claims.
As this COUit concluded in the Order, on their third attempt to plead their claims,
plaintiffs failed "to explain how the nondisclosure or omission of the 'kickbacks' diminished the
value of the lEAH investments and resulted in a loss," to "plainly allege why the 'kickback'
scheme forecasted or caused plaintiffs' losses," and to "allege how or why the nondisclosure of
the 'kickbacks' 'concealed the circumstances that bear upon the loss suffered[.]'" Szulik,2013
WL 4494684 at *19 (citing Lentell, 396 F.3d at 175). This was so even though the COUlt, as it
was required to do on consideration of a motion to dismiss, "accept[ed] all factual allegations in
the complaint as true and [drew] all reasonable inferences in plaintiffs' favor." Friedus v.
In North Carolina, "special damages" are "damages which are the natural but not necessary result of the alleged
wrongful act of the defendant." Oberhortzer v. Huffman, 234 N.C. 399 (1951). Such damages "must be pleaded
with sufficient particularity to put the defendant on notice." rd.; see also N.C. Gen. Stat. lA-I, Rule 9(g) ("When
items of special damage are claimed each shall be averred.")
Barclays BankPLC, _ F.3d _,2013 WL 4405291, at *3 (2d Cir. Aug. 19,2013) (citation
omitted). A motion for reconsideration should not be granted where a patty merely seeks
reconsideration of issues already decided. Shrader v. CSX Transp. Inc .. 70 F.3d 255, 257 (2d
Cir.1995). Because plaintiffs have failed to identifY any clear error or manifest injustice in the
COUlt's previous ruling, their motion for reconsideration must be denied. 5
For the foregoing reasons, plaintiffs' motion to reconsider is DENIED.
P. Kevin Castel
United States District Judge
Dated: New York, New York
October 21, 2013
5 Plaintiffs' alternative request that they be permitted to recover the full amount of defendants' "kickbacks" need not
be reached at this juncture. The issue may be raised in Final Pretrial Submissions.
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?