The Administrative Committee of the American Excelsior Company Employee Stock Ownership Trust v. GreatBanc Trust Company et al
Filing
42
Memorandum Opinion and Order Granting 34 Motion to Dismiss filed by KPMG LLP. Plaintiff's claims against KPMG are hereby dismissed. (see order for further specifics) (Ordered by Judge John McBryde on 9/30/2015) (mpw)
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THE ADMINISTRATIVE COMMITTEE OF §
THE AMERICAN EXCELSIOR COMPANY §
EMPLOYEE STOCK OWNERSHIP TRUST, ~
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Plaintiff,
§
-----------
§
vs.
§
NO. 4:14-CV-825-A
§
GREATBANC TRUST COMPANY, ET AL.,§
§
Defendants.
§
MEMORANDUM OPINION AND ORDER
Came on for consideration the motion of defendant KPMG LLP
("KPMG") to dismiss and compel arbitration or, in the
alternative, to dismiss plaintiff's second amended complaint. The
court, having considered the motion, the response of plaintiff,
the Administrative Committee of the American Excelsior Company
Employee Stock Ownership Trust, the reply, the record, and
applicable authorities, finds that the motion to dismiss should
be granted.
I.
Background
On October 10, 2014, plaintiff filed its original complaint
in this action, asserting claims against GreatBanc Trust Company
("GreatBanc"), Pennant Management, Inc.
("Pennant"), and Salem
Trust Company ("Salem") (collectively "the GreatBank defendants").
On June 9, 2015, having obtained leave of court, plaintiff filed
a first amended complaint adding KPMG as a defendant. Thereafter,
on July 16, 2015, again having obtained leave of court, plaintiff
filed its second amended complaint.
Plaintiff alleges: Plaintiff is an ERISA fiduciary and is
authorized to bring, and brings, claims on behalf of "The
American Excelsior Company Employee Stock Ownership Trust, Plan,
or surviving plans"
(the "AEC ESOP"). GreatBanc is one of the
country's largest independent trust companies and has, since
November 2005, served as the trustee of the AEC ESOP, holding
discretionary authority to direct the investment of AEC ESOP's
trust fund. Pennant is a registered investment advisor of the
Securities and Exchange Commission and acts as an asset manager
for clients by locating and acquiring loans guaranteed by the
full faith and credit of the United States through the U.S. Small
Business Administration or U.S. Department of Agriculture Rural
Development Program. Salem is Florida's largest independent trust
company. Salem acts as trustee and with the investment advice of
Pennant manages short-term investment funds,
including the Salem
Trust Short-Term Investment Fund, CUSIP # 794527101 (the "Salem
STIF"). KPMG is one of the largest audit, tax, and advisory firms
in the United States.
Further: On June 19, 2014, the stock held in the AEC ESOP
was sold for over $13 million dollars. Plans were made for AEC
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ESOP participants to be able to transfer their accounts to their
401(k) savings plans or to withdraw some or all of their account
balances. For that plan to work, all AEC ESOP trust funds needed
to be put into cash. Nevertheless, on September 17, 2014,
GreatBanc invested all of the cash proceeds of the AEC ESOP trust
fund in the Salem STIF, offered through Pennant and Salem. On
September 30, 2014, GreatBanc was advised to liquidate the
investment so that the planned transfer could take place.
However, fraud was discovered in the Salem STIF, rendering
approximately 20% thereof illiquid, and the funds invested were
frozen.
Plaintiff alleges that the GreatBanc defendants breached
fiduciary duties owed to the AEC ESOP; and that Salem and Pennant
made negligent misrepresentations, were grossly negligent, and
committed "professional negligence."
Plaintiff alleges that KPMG performed its work as auditor of
the Salem STIF in a manner inconsistent with Generally Accepted
Auditing Standards and Generally Accepted Accounting Principles.
Plaintiff refers only to an annual report delivered by KPMG on
April 4, 2014 regarding Salem STIF's financial statements "as of
year-end." Doc. 28, , 35. 1 Plaintiff sues KPMG for negligent
'The "Doc." reference is to the court's docket in this action. Item 28 is plaintiff's second
amended complaint.
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misrepresentation, professional malpractice, and aiding and
abetting breach of fiduciary duties by the GreatBanc defendants.
II.
Grounds of the Motion to Dismiss
KPMG urges alternate grounds for dismissal. First, KPMG says
that its engagement agreement to perform the audit at issue
contains a provision mandating binding arbitration. Although
plaintiff is not a signatory to the agreement, since plaintiff
seeks to bring claims as though it were a party, it should be
bound by the agreement to arbitrate. And, to the extent plaintiff
brings derivative claims, it is also bound by the agreement. In
addition, plaintiff lacks standing to pursue derivative claims,
having failed to allege that demand was made or would have been
futile.
(These are described as KPMG's Rule 12(b) (1) and (b) (3)
arguments.)
In the alternative, KPMG says that if plaintiff's claims are
not subject to arbitration, that each fails as a matter of law.
(This is described as KPMG's Rule 12(b) (6) argument.)
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III
Analysis
A.
Arbitration
The evidence adduced 2 to support KPMG's motion shows that on
January 23, 2014, KPMG and Salem entered into an engagement
agreement pursuant to which KPMG was to provide audit services to
the investment trust comprised of the Salem STIF. Doc. 34, at
APPOOS-012. The agreement provided that Salem was responsible for
the Salem STIF's financial statements, compliance with laws and
regulations, and prevention and detection of fraud. Id. at
APP008. Further, KPMG would "report to those charged with
governance." Id. at APP007. In addition, the agreement contains
provisions for dispute resolution by non-binding mediation, then
binding arbitration of all disputes arising out of or related to
the agreement. Id. at APPOOS-009.
KPMG contends that plaintiff's claims are subject to the
arbitration provision since the claims asserted could only be
brought by or on behalf of the Salem STIF. Plaintiff does not
purport to bring its claims in that capacity. Nor is there any
reason to believe it would have authority to do so. In this
regard, KPMG is correct: plaintiff would lack standing to assert
2
The court may consider and decide for itself the factual issues that determine jurisdiction and
venue. See, e.g., Ambraco, Inc. v. Bossclip B.V., 570 F.3d 233, 238 (5th Cir. 2009); Williamson v.
Tucker, 645 F.2d 404,413 (5th Cir. 1981).
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the claims. But, for this reason, compelling arbitration as KMPG
requests would not make sense.
B.
Failure to State a Claim
KPMG alternatively alleges that plaintiff has failed to
state a claim against it upon which relief can be granted. The
court agrees.
Rule 8(a) (2) of the Federal Rules of Civil Procedure
provides, in a general way, the applicable standard of pleading.
It requires that a complaint contain "a short and plain statement
of the claim showing that the pleader is entitled to relief,"
Fed. R. Civ. P. 8(a) (2),
"in order to give the defendant fair
notice of what the claim is and the grounds upon which it rests,"
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)
quotation marks and ellipsis omitted) .
(internal
Although a complaint need
not contain detailed factual allegations, the "showing"
contemplated by Rule 8 requires the plaintiff to do more than
simply allege legal conclusions or recite the elements of a cause
of action.
Twombly, 550 U.S. at 555 & n.3.
Thus, while a court
must accept all of the factual allegations in the complaint as
true, it need not credit bare legal conclusions that are
unsupported by any factual underpinnings.
556 U.S. 662, 679 (2009)
See Ashcroft v. Iqbal,
("While legal conclusions can provide
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the framework of a complaint, they must be supported by factual
allegations.").
Moreover, to survive a motion to dismiss for failure to
state a claim under Rule 12(b) (6), the facts pleaded must allow
the court to infer that the plaintiff's right to relief is
plausible.
Iqbal, 556
u.s.
at 678.
To allege a plausible right
to relief, the facts pleaded must suggest liability; allegations
that are merely consistent with unlawful conduct are
insufficient. Id. In other words, where the facts pleaded do no
more than permit the court to infer the possibility of
misconduct, the complaint has not shown that the pleader is
entitled to relief. Id. at 679. "Determining whether a complaint
states a plausible claim for relief . .
.
[is] a context-specific
task that requires the reviewing court to draw on its judicial
experience and common sense."
Id.
In considering a motion under Rule 12(b) (6), the court may
consider documents attached to the motion if they are referred to
in the plaintiff's complaint and are central to the plaintiff's
claims. Scanlan v. Tex. A&M Univ., 343. F.3d 533, 536 (5th Cir.
2003). The court may also refer to matters of public record.
Davis v. Bayless, 70 F.3d 367, 372 n.3
(5th Cir. 1995); Cinel v.
Connick, 15 F.3d 1338, 1343 n.6 (5th Cir. 1994). This includes
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taking notice of pending judicial proceedings. Patterson v. Mobil
Oil Corp., 335 F.3d 476, 481 n.1 (5th Cir. 2003).
There must be privity (or something closely akin to privity)
to state a malpractice claim, no matter which state's law should
apply. See, e.g., Blu-J v. Kemper CPA Group, 916 F.2d 637, 640
(11th Cir. 1990); McCamish, Martin, Brown & Loeffler v. F.E.
Appling Interests, 991 S.W.2d 787, 792
(Tex. 1999); Credit
Alliance Corp. v. Arthur Andersen & Co., 483 N.E.2d 110, 118
(N.Y. 1985) . 3 Here, there is no privity between KPMG and
plaintiff; nor is there any allegation sufficient to state a
claim that KPMG knew or should have known that plaintiff was or
would be relying on its audit. To the contrary, such a claim
would not be plausible inasmuch as plaintiff admits that it had
already entered into an agreement with Salem dated August 1,
2012, long before KPMG's
retention, to invest the AEC ESOP. That
same agreement provided that Salem would obtain an audit by "by
an independent auditor responsible only to [Salem]." Doc. 40, at
52.
With regard to plaintiff's negligent misrepresentation
claim, plaintiff has pleaded nothing more than conclusory
3
Under New York law, for a nonparty to assert a malpractice claim against an accountant, it must
show that ( 1) the accountant was aware that the financial reports would be used for a particular purpose;
(2) in the furtherance of which that party was intended to rely; and (3) some conduct on the part ofthe
accountant linking him to that party, evincing the accountant's understanding of that party's reliance.
Credit Alliance Corp. v. Arthur Andersen & Co., 483 N.E.2d 110, 118 (N.Y. 1985).
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allegations regarding its reliance. Plaintiff has pleaded:
GreatBanc had full power and discretion with regard to the
investment of the AEC ESOP. Doc. 28, at
~18.
On September 18,
2014, GreatBanc invested the AEC ESOP in the Salem STIF. Id., at
~
22. Plaintiff relied on the GreatBanc defendants, who concealed
information and made decisions that resulted in great financial
harm to plaintiff. Id.,
on April 4, 2014. Id.,
at~
at~
30. KPMG delivered an annual report
35. The audit was inadequate. Id., at
~ 45.
There are no facts pleaded as to reliance. Rather, the only
facts pleaded show that plaintiff relied on GreatBanc to make the
investment. And, plaintiff has admitted that the agreement
regarding investment was entered almost five months before KPMG
was retained, Doc. 40, at 6, and that, pursuant to the Salem STIF
agreement, an annual financial statement would be provided to
investors "[i]f required by applicable law. Id., at 53. There is
no allegation that plaintiff received, much less reviewed, the
KPMG audit. 4
An accountant or auditor may limit its liability by
disclaimers or other provisions in its agreement for services.
4
The court notes that the complaint says that Pennant was advised on September 18, 2014, that
the "suspect loans did not exist." Doc. 28, at~ 27. One wonders, as a practical matter, how or why
KPMG should have addressed the issue in the 2013 audit delivered in April2014. In other words, no
facts are pleaded to show that KPMG knew its audit was unsupported, as plaintiff now claims.
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McCamish, 991 S.W.2d at 794. Here, the audit agreement
specifically provides that KPMG's responsibility is to "those
charged with governance" of the Salem STIF. Doc. 34, at APP007.
Moreover, the agreement does not call for the preparation of any
additional reports to be issued for any other persons or
purposes. Id., at APPOlO , APP012. Further, the audit report is
addressed to "The Participants and Salem Trust Company as Trustee
of the Salem Trust Short Term Investment Fund." Doc. 40, at 69.
It is not addressed to potential participants or any other class
into which plaintiff might fall. Plaintiff has not pleaded any
facts to show that it was a person "charged with governance" or
that KPMG otherwise knew that plaintiff would receive or rely on
its report.
KPMG's motion spells out why plaintiff cannot state a claim
for aiding and abetting liability. Plaintiff has not responded to
that argument and the court interprets plaintiff's failure to do
so as an abandonment of that claim.
IV.
ORDER
For the reasons discussed herein,
The court ORDERS that KPMG's motion to dismiss for failure
to state a claim upon which relief may be granted be, and is
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hereby, granted, and plaintiff's claims against KPMG be, and are
hereby, dismissed.
The court determines that there is no just reason for delay
in, and hereby directs, entry of final judgment as to the
dismissal of plaintiff's claims against KPMG.
SIGNED September 30, 2015.
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