Mashreqbank, PSC v. ING Group N.V. et al

Filing 72

OPINION AND ORDER re: 14 MOTION to Dismiss the Complaint filed by Richard Kilbride, ING Investment Management Company, ING Managed Account Group. Defendants' motion to dismiss is DENIED with respect to Plaintiff's breach of contract claim and GRANTED with respect to Plaintiff's breach of fiduciary duty and fraud claims, and Plaintiff's demand for punitive damages is stricken. (Signed by Judge Lorna G. Schofield on 10/25/2013) (lmb)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
MASHREQBANK, PSC,
:
Plaintiff,
:
:
-against:
:
ING GROUP N.V., et al.,
:
Defendants. :
:
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10/25/2013

13 Civ. 2318 (LGS)
OPINION AND
ORDER

LORNA G. SCHOFIELD, District Judge:
Plaintiff MashreqBank, psc (“Mashreq” or “Plaintiff”) brings claims for breach of
contract and breach of fiduciary duty against Defendant ING Investment Management
Co. (“ING”) and for common law fraud against ING and ING employee Richard Kilbride
(together, “Defendants”). These claims arise from disputes regarding a 2005 Investment
Management Agreement between Mashreq and ING (“Agreement”) and amendments to
the Agreement made in 2007 (“Revised Guidelines”), both of which are attached to
Plaintiff’s Complaint.
Defendants move to dismiss all claims pursuant to Rule 12(b)(6) of the Federal
Rules of Civil Procedure. For the reasons stated below, Defendants’ motion is granted in
part and denied in part.
I.

Facts
The facts are taken from Plaintiff’s Complaint. Mashreq provides banking and

financial services and is based in the United Arab Emirates. ING manages investments
for both individual and institutional investors and is based in the United States. During

the relevant time period, Richard Kilbride was Head of Fixed Income for Managed
Accounts for ING and signed the Agreement on behalf of ING.
On February 28, 2005, Mashreq and ING entered into the Agreement, which
provided ING discretion and authority to manage Mashreq’s investment account subject
to accompanying investment guidelines (“Guidelines”). Mashreq’s account was known
as an “ING Intermediate Fixed Income Separately Managed Account,” which Mashreq
alleges ING marketed as a “safe ‘boring’ portfolio of well-researched investment-grade
fixed-income investments.” The Agreement allowed Mashreq to terminate its account
with ING upon thirty days notice. The Agreement also allowed the Guidelines to be
revised, and the first revision occurred on May 28, 2005, in order to “clarif[y]” and
“refine[]” the Guidelines.
On November 2, 2006, Mashreq met with ING in New York to discuss and view a
presentation concerning ING’s proposals to revise the Guidelines further. Mashreq
alleges that the presentation demonstrated an “investment philosophy that emphasized
minimizing risk through superior research,” leaving Mashreq with the impression that
ING had “an extremely sophisticated and sensitive approach to risk management.” The
presentation also included ING’s proposed modifications to the Guidelines, which
included, among other things, “expressly allowing CDO’s, CBO’s[,] CLO’s and other
structured products.” Mashreq accepted some of ING’s proposals and rejected others,
including “promptly and clearly” rejecting ING’s proposal to “allow CDOs, CBOs,
CLOs, and other structured products.” Mashreq and ING negotiated the revisions and
exchanged drafts for two months.

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On February 5, 2007, Mashreq and ING executed the Revised Guidelines. The
Revised Guidelines do not mention CDOs, CBOs or CLOs. Mashreq alleges that the
Revised Guidelines prohibited CDOs, CBOs and CLOs because they are not included in
the list of “Permitted Securities.” The Revised Guidelines remove the words “other
structured notes” from the description of “Permitted Securities,” add the words
“subordinated bank debt” to the description of “Prohibited Investments” and maintain the
requirement that all securities be investment-grade. Mashreq alleges that, if the
Agreement had allowed CDOs, CBOs and CLOs, or if the Agreement had allowed noninvestment-grade securities, Mashreq would have pulled its money from ING’s
management. At this time, Mashreq had $108 million under ING’s management.
Mashreq alleges that the Revised Guidelines were “nothing more than trickery
designed to convince Mashreq to keep its money with ING” and that “ING never
intended to abide by the [Revised Guidelines].” Mashreq further alleges that between
February and July 2007, ING invested 70% of Mashreq’s money, or $73 million, in
securities that were “toxic,” “illiquid,” “below investment-grade” and “blatantly violated
the [Agreement and Revised Guidelines] in at least seven ways.” Mashreq also alleges
that the securities at issue were “rife with multiple layers of serious conflicts of interest”
and contained other “red flags,” such as the absence of an independent auditor or
accountant and “layers of large outright fees.”
On July 31, 2007, Mashreq participated in a conference call with ING during
which Mashreq discovered that eleven securities listed as asset-backed securities were
CDOs/CBOs. Mashreq alleges that when it confronted Defendants about the securities at
issue, Defendants assured Mashreq that “even though valuations were tough in the

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current market,” the investments were “money good.” Mashreq alleges that Defendants
actually had no way of valuing the securities at issue. Mashreq further alleges that it
requested more information from Defendants and did not receive it, leading Mashreq to
believe Defendants had done no research and had very little information about the
securities.
None of the eleven securities at issue was registered with the SEC, all were issued
by shell corporations, and none of their offering circulars was publicly available.
Mashreq alleges that it was very difficult for it to identify and trace these securities in
order to conduct research. Mashreq alleges that ING hid these securities from Mashreq
by, among other things, withholding requested information, categorizing the securities as
asset-backed securities and “intermingl[ing]” them in portfolio reports with well-known,
respectable securities.
On August 24, 2007, ING sent Mashreq an email, which is attached to Plaintiff’s
Complaint, stating that it “believes that the [Revised Guidelines] do permit
CDOs/CLOs.” On August 29, 2007, Mashreq sent ING a response, which is also
attached to Plaintiff’s Complaint, reminding ING of Mashreq’s position taken during
negotiations that CDOs/CLOs would not be permissible. On September 16, 2007,
Mashreq received another email from ING, which is also attached to Plaintiff’s
Complaint, asserting that ING believed the Revised Guidelines to allow CDOs, relying
on the “deletion of the prohibition on embedded leverage” and the facts that the Revised
Guidelines allowed investment in asset-backed securities and did not list CDOs as
“Prohibited Investments,” and claiming that Defendants did not remember any
conversation with Mashreq about CDOs during negotiations.

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On December 14, 2007, Defendants offered to buy back two of the eleven
securities at issue in exchange for a release. Mashreq declined this offer and was able to
mitigate its alleged initial damages of $60 to $70 million, ultimately suffering an alleged
$43 million in damages from losses attributable to the eleven securities at issue.
The Complaint was filed April 8, 2013, and asserts claims for breach of contract
and breach of fiduciary duty against ING and its parent corporation, ING Groep N.V.
(“ING Groep”), and common law fraud against ING, ING Groep, and ING employee
Richard Kilbride. On May 21, 2013, Mashreq and ING Groep agreed to the dismissal of
ING Groep, which the Court approved on May 22, 2013.
II.

Standard of Review
On a motion to dismiss, the Court accepts as true all well-pleaded factual

allegations and draws all reasonable inferences in favor of the non-moving party. See
Famous Horse Inc. v. 5th Ave. Photo Inc., 624 F.3d 106, 108 (2d Cir. 2010). The Court
may consider, in addition to the allegations contained in the complaint, “any documents
that are either incorporated into the complaint by reference or attached to the complaint
as exhibits.” Blue Tree Hotels Inv. (Can.), Ltd. v. Starwood Hotels & Resorts Worldwide,
Inc., 369 F.3d 212, 217 (2d Cir. 2004).
To withstand dismissal, a pleading “must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570
(2007)). “Threadbare recitals of the elements of a cause of action, supported by mere
conclusory statements, do not suffice.” Id. While “‘detailed factual allegations’” are not
necessary, the pleading must be supported by more than mere “‘labels and conclusions’

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or ‘formulaic recitation[s] of the elements of a cause of action.’” Id. (quoting Twombly,
550 U.S. at 555). “Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid
of ‘further factual enhancement.’” Id. (quoting Twombly, 550 U.S. at 557).
Rule 8 of the Federal Rules of Civil Procedure “requires factual allegations that
are sufficient to ‘give the defendant fair notice of what the . . . claim is and the grounds
upon which it rests.’” Anderson News, L.L.C. v. Am. Media, Inc., 680 F.3d 162, 182 (2d
Cir. 2012), cert. denied, 133 S. Ct. 846 (2013) (quoting Twombly, 550 U.S. at 555).
Moreover, “where the well-pleaded facts do not permit the court to infer more than the
mere possibility of misconduct, the complaint has alleged—but it has not shown—that
the pleader is entitled to relief.” Iqbal, 556 U.S. at 679 (internal punctuation omitted);
see also Fed. R. Civ. P. 8(a)(2).
III.

Discussion
A. Breach of Contract
Defendants make two arguments to support the dismissal of Plaintiff’s breach of

contract claim. First, Defendants argue that this claim is “time-barred because Mashreq
failed timely to object to the challenged securities’ purchases, as required by the express
terms of the [Agreement].” This argument fails.
Defendants point to section 2(d) of the Agreement, which states, “All transactions
effected for the Account will be deemed to be in compliance with the Investment
Guidelines unless written notice to the contrary is received by [ING] from Client within
30 days following first issue of the periodic report containing such transactions.”
Defendants argue that this provision creates a 30-day limitation period after which
Mashreq is barred from bringing any judicial claims relating to the securities at issue.

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Under New York law, parties may agree in writing to a shortened limitation
period, provided the period is reasonable. N.Y. C.P.L.R. § 201; Assured Guar. (UK) Ltd.
v. J.P. Morgan Inv. Mgmt. Inc., 915 N.Y.S.2d 7, 15 (1st Dep’t 2010), aff’d, 962 N.E.2d
765 (N.Y. 2011). The Court does not have to decide whether a 30-day limitation period
is reasonable in this case because the plain language of section 2(d) of the Agreement
does not evidence an agreement between the parties to create a shortened limitation
period.
The cases relied on by Defendants concern contract provisions that are explicit in
their intent to create limitation periods. In Assured Guaranty, the provision at issue
stated, “Except with respect to any act or transaction . . . as to which Client shall object in
writing . . . within a period of ninety (90) days . . . Investment Advisor . . . shall upon the
expiration of such period be released and discharged from any liability or
accountability.” First Amended Complaint, Ex. A, Assured Guar. (UK) Ltd. v. J.P.
Morgan Inv. Mgmt. Inc., 958 N.Y.S.2d 59 (N.Y. Sup. Ct. 2009) (No. 603755/08)
(emphasis added). In Kingsley Arms, the provision at issue stated, “[c]laims by either
party must be made within 21 days after occurrence of the event giving rise to such
[c]laim or within 21 days after the claimant first recognizes the condition giving rise to
the [c]laim, whichever is later”). Kingsley Arms, Inc. v. Sano Rubin Constr. Co., 791
N.Y.S.2d 196, 197 (3d Dep’t 2005) (alterations in original) (emphasis added).
Section 2(d) of the Agreement, on the other hand, does not contain any language
concerning the bringing of claims or the filing of lawsuits. It does not include any release
language. Moreover, it is found in the section of the Agreement titled “Discretionary
Management Powers,” not in the section concerning liability. It states that the securities

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“will be deemed to be in compliance,” but does not specify by whom or what the
consequences of that shall be. Therefore, section 2(d) of the Agreement is not a statute of
limitations under N.Y. C.P.L.R. § 201. Mashreq filed its breach of contract claim well
within the applicable six-year limitation period under New York law. N.Y. C.P.L.R. §
213.
Second, Defendants argue that Plaintiff “fails plausibly to allege a breach”
because the Revised Guidelines “plainly permitted the purchases . . . at issue.” This
argument also fails. To state a claim for breach of contract, a party must allege: (1) the
existence of a contract, (2) performance of the contract by that party, (3) breach of the
contract by the other party and (4) damages as a result of the breach. See First Investors
Corp. v. Liberty Mut. Ins. Corp., 152 F.3d 162, 168 (2d Cir. 1998). Mashreq has alleged
in detail all of these elements.
Mashreq’s claim for breach of contract is plausible based on the facts alleged, and
there is nothing in the plain language of the Agreement or the Revised Guidelines that
negates this plausibility as a matter of law. Accordingly, Defendants’ motion to dismiss
Plaintiff’s claim for breach of contract is denied.
B. Breach of Fiduciary Duty and Common Law Fraud
“Under New York law, when a valid agreement governs the subject matter of a
dispute between parties, claims arising from that dispute are contractual; attempts to
repackage them as sounding in fraud . . . and other torts . . . are generally precluded,
unless based on a duty independent of the contract.” Poplar Lane Farm LLC v. Fathers
of Our Lady of Mercy, 449 F. App'x 57, 59 (2d Cir. 2011) (citing, inter alia, Baker v.
Norman, 643 N.Y.S.2d 30, 33 (1st Dep't 1996) (denying a claim for fraud as a

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repackaged contractual claim)). Because Plaintiff’s claims for breach of fiduciary duty
and fraud are duplicative of its claim for breach of contract, Defendants’ motion to
dismiss the claims for breach of fiduciary duty and fraud is granted.
i.

Breach of Fiduciary Duty

“A cause of action for breach of fiduciary duty which is merely duplicative of a
breach of contract claim cannot stand.” William Kaufman Org., Ltd. v. Graham & James
LLP, 703 N.Y.S.2d 439, 442 (1st Dep’t 2000). In order to survive a motion to dismiss, a
claim for breach of fiduciary duty must “‘set[] forth allegations that, apart from the terms
of the contract,’ the parties ‘created a relationship of higher trust than would arise from
[their contracts] alone.’” Brooks v. Key Trust Co. Nat. Ass'n, 809 N.Y.S.2d 270, 272-73
(3d Dep’t. 2006) (alterations in original) (quoting EBC I, Inc. v. Goldman, Sachs & Co.,
832 N.E. 2d 26, 31 (N.Y. 2005)) (internal citation omitted).
Here, the Complaint alleges that Defendants’ role as “financial advisor[s] with
discretionary authority to manage [its] investment accounts created a fiduciary duty.” Id.
at 272. However, the Complaint does not allege a fiduciary duty apart from the
Agreement and Revised Guidelines. Mashreq’s Complaint alleges that “[b]y entering
into the [Agreement]” Defendants “undertook to act as an agent and fiduciary” for
Mashreq.
Moreover, Mashreq’s breach of fiduciary duty claim is “based upon the same
facts and theories” as its breach of contract claim and comprised of allegations “either
expressly raised in plaintiff’s breach of contract claim or encompassed within the
contractual relationship by the requirement implicit in all contracts of fair dealings and

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good faith.” Id. Accordingly, Plaintiff’s claim for breach of fiduciary duty is dismissed
as duplicative.
ii.

Fraud

A complaint “fails to support a claim of fraud under New York law” where the
fraud claim is “duplicative of the breach of contract claim.” Guilbert v. Gardner, 480
F.3d 140, 148 (2d. Cir. 2007). A claim for fraud cannot survive where it “arises out of
the identical facts and circumstances, and even contains the same allegations, as the cause
of action alleging breach of contract.” 34-35th Corp. v. 1-10 Indus. Assocs., LLC, 768
N.Y.S.2d 644, 644 (2d Dep’t. 2003).
In order for a fraud claim to survive, it must “‘(i) demonstrate a legal duty
separate from the duty to perform under the contract, or (ii) demonstrate a fraudulent
misrepresentation collateral or extraneous to the contract, or (iii) seek special damages
that are caused by the misrepresentation and unrecoverable as contract damages.’”
Guilbert, 480 F.3d at 148 (quoting Bridgestone/Firestone v. Recovery Credit Serv. Inc.,
98 F.3d 13, 20 (2d Cir. 1996)). The Complaint does not allege any of these criteria.
First, as discussed above, any legal duty Defendants owed Mashreq by virtue of being its
investment advisors is also encompassed by the obligations in the Agreement and
Revised Guidelines.
Second, the Complaint does not allege misrepresentations collateral or extraneous
to the contracts between Mashreq and ING. To the contrary, the Complaint alleges that
“Defendants made materially false and misleading affirmative representations and
omissions to Mashreq in the [Revised Guidelines].” All of the fraud allegations are tied
to the contracts between the parties, and the core of these allegations actually repeat the

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substance of the breach of contract allegations. This is fatal to Mashreq’s fraud claim, as
“a fraud claim may not be used as a means of restating what is, in substance, a claim for
breach of contract.” Wall v. CSX Transp., Inc., 471 F.3d 410, 416 (2d Cir. 2006).
Finally, the Complaint does not allege any damages attributable to Defendants’
alleged fraud that are not also attributable to Defendants’ alleged breach of contract. The
Complaint alleges $43,623,755 in losses that Mashreq suffered from Defendants’ alleged
improper investing, which is the basis for the breach of contract claim. The Complaint
also pleads the same losses of “approximately $43 million” as a result of Defendants’
alleged fraud. While Mashreq does request punitive damages, this does not suffice to
sustain a fraud claim where “the alleged misrepresentations did not result in any loss
independent of the damages allegedly incurred for breach of contract.” Church of South
India Malayalam Congregation of Greater New York v. Bryant Installations, Inc., 925
N.Y.S.2d 131, 132 (2d Dep’t. 2011).
Plaintiff argues that its causes of action for fraud and breach of contract should be
able to stand together because Defendants’ misrepresentations fraudulently induced
Plaintiff to enter into the Revised Guidelines. While a claim for fraudulent inducement
“is separate and distinct from a breach of contract claim under New York law,” the law
“distinguishes between a promissory statement of what will be done in the future that
gives rise only to a breach of contract cause of action and a misrepresentation of a present
fact that gives rise to a separate cause of action for fraudulent inducement.” Merrill
Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 184 (2d Cir. 2007).
Here, the Complaint does not plead facts sufficient to support a fraudulent
inducement claim separate from a breach of contract claim. Mashreq alleges Defendants

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fraudulently induced it to enter into the Revised Guidelines by making promises they had
no intention of keeping, such as “investment guidelines to which they would adhere” and
“types of securities in which they would invest” and “not invest.” Mashreq in short
alleges that Defendants “never intended to comply” with the Revised Guidelines.
However, “under New York law, where a fraud claim arises out of the same facts
as plaintiff’s breach of contract claim, with the addition only of an allegation that
defendant never intended to perform the precise promises spelled out in the contract
between the parties, the fraud claim is redundant and plaintiff’s sole remedy is for breach
of contract.” Telecom Intern. America, Ltd. v. AT & T Corp., 280 F.3d 175, 196 (2d. Cir.
2001) (internal quotations omitted). “In other words, simply dressing up a breach of
contract claim by further alleging that the promisor had no intention, at the time of the
contract’s making, to perform its obligations thereunder, is insufficient to state an
independent tort claim.” Id.; accord Wall, 471 F.3d at 416. Accordingly, Plaintiff’s
claim for fraud is dismissed as duplicative.
iii.

Punitive Damages

Punitive damages generally are not available for breach of contract under New
York law. U.S. for Use and Benefit of Evergreen Pipeline Const. Co., Inc. v. Merritt
Meridian Const. Corp., 95 F.3d 153, 160 (2d. Cir. 1996). In order to recover punitive
damages, the breach must involve “a fraud evincing a ‘high degree of moral turpitude’
and demonstrating ‘such wanton dishonesty as to imply a criminal indifference to civil
obligations,’” as well as be “‘aimed at the public generally.’” Id. (quoting Rocanova v.
Equitable Life Assur. Soc. of U.S., 634 N.E.2d 940, 943-44 (N.Y. 1994)); accord New
York Marine & General Ins. Co. v. Tradeline (L.L.C.), 266 F.3d 112, 130 (2d Cir. 2001).

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The Complaint does not allege that Defendants’ conduct was aimed at or harmed
the general public, and the allegations by their nature do not suggest any public harm.
Thus, Plaintiff is precluded from recovering punitive damages for its breach of contract
claim as a matter of law. As breach of contract is Plaintiff’s only remaining cause of
action in this case, Defendants’ motion to strike Plaintiff’s demand for punitive damages
is granted.
IV.

Conclusion
Defendants’ motion to dismiss is DENIED with respect to Plaintiff’s breach of

contract claim and GRANTED with respect to Plaintiff’s breach of fiduciary duty and
fraud claims, and Plaintiff’s demand for punitive damages is stricken.
SO ORDERED.

October 25, 2013
New York, NY

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