Opinion
No. X05 CV 09 5012119S
October 20, 2010
MEMORANDUM OF DECISION ON DEFENDANT'S MOTION TO STRIKE (#110)
Introduction
This case involves a dispute over an accounting firm's audit of a hedge fund which traded with Bernard Madoff, who orchestrated a massive Ponzi scheme resulting in large losses to a number of investors, including allegedly the plaintiff, which is/was a limited partner in that hedge fund. The plaintiff/investor is The Calibre Fund, LLC (Calibre), which is a Greenwich-based investment firm organized under Delaware law. The named defendant is BDO Seidman, LLP (BDO), a national accounting and auditing firm. On September 14, 2009, the plaintiff filed a revised complaint sounding in six counts. In counts one and two, the plaintiff alleges that it was fraudulently induced into investing with the hedge fund, an entity called Ascot Partners, L.P. (Ascot). In count three, the plaintiff alleges that BDO aided and abetted the fraud perpetrated by the hedge fund manager of Ascot, an individual named J. Ezra Merkin (Merkin), who was the general partner of Ascot. In counts four and five, the plaintiff alleges that as a result of the defendant's negligent misrepresentations, it was induced into investing with Ascot and negligently induced into maintaining and increasing its investment in Ascot. Lastly, in count six, the plaintiff sets forth a cause of action sounding in innocent misrepresentation.
By way of a motion to strike, the defendant BDO moves to strike the entire complaint on the ground that none of Calibre's allegations are legally sufficient to state claims upon which relief can be granted. Specifically, the defendant moves to strike counts one and two, alleging fraudulent misrepresentation, on the ground that they fail to adequately allege the elements of fraud. The defendant also mounts a legal challenge to those portions of the pleadings the plaintiff characterizes as "holding claims" in counts two, three and five, on the ground that such claims are not actionable in Connecticut. The defendant also moves to strike count five on the ground that the plaintiff fails to allege an actionable injury. The defendant moves to strike count three, alleging aiding and abetting fraud, because the plaintiff fails to plead an actionable fraud by a third person, the defendant's awareness of such fraud, the defendant's intentional and knowing aid to such third party in committing the fraud and the defendant's assistance to such third party in committing the fraud. The defendant moves to strike count four on the ground that the plaintiff lacks standing to assert such claim. Additionally, the defendant moves to strike counts four and five on the ground that the plaintiff fails to allege a breach of a duty pursuant to the applicable standards of care. The defendant moves to strike count six, alleging innocent misrepresentation, because the plaintiff fails to allege that it was the party to a qualifying transaction and fails to set forth a factual basis for the required element of reliance. Finally, BDO invokes the statute of limitations, moving to strike counts one, four and the investment aspect of count three, on the ground that such counts are time-barred, as they rely on purchases before June 2006.
The court will first set forth the standards applicable to motions to strike, followed by an analysis of the pleadings. This includes the arguments of the parties in light of those pleadings and the legal standards.
Motion to Strike — Legal Standard
"The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). "It is fundamental that in determining the sufficiency of a [pleading] challenged by a [party's] motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted." (Internal quotation marks omitted.) Gazo v. Stamford, 255 Conn. 245, 260, 765 A.2d 505 (2001). "A motion to strike is the proper procedural vehicle . . . to test whether Connecticut is ready to recognize some newly emerging ground of liability." (Internal quotation marks omitted.) Ortiz v. Waterbury Hospital, judicial district of Waterbury, Docket No. CV 99 154112 (March 9, 2000, Pellegrino, J.) ( 26 Conn.L.Rptr. 547).
"A motion to strike . . . does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 588, 693 A.2d 293 (1997). "[The court] construe[s] the complaint in the manner most favorable to sustaining its legal sufficiency . . . [I]f facts provable in the complaint would support a cause of action, the motion to strike must be denied." (Internal quotation marks omitted.) Sullivan v. Lake Compounce Theme Park, Inc., 277 Conn. 113, 117-18, 889 A.2d 810 (2006). "A motion to strike is properly granted if the complaint alleges mere conclusions of law that are unsupported by the facts alleged." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, supra, 262 Conn. 498. Further, our Supreme Court "will not uphold the granting of [a] motion to strike on a ground not alleged in the motion." Blancato v. Feldspar Corp., 203 Conn. 34, 44, 522 A.2d 1235 (1987).
"In ruling on a motion to strike, the court is limited to the facts alleged in the [challenged pleading]." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., supra, 240 Conn. 580. "Where the legal grounds for such a motion [to strike] are dependent upon underlying facts not alleged in the . . . pleadings, the [party that filed the motion] must await the evidence which may be adduced at trial, and the motion should be denied." (Citations omitted; internal quotation marks omitted.) Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 348, 576 A.2d 149 (1990). "It is of no moment that the defendants might prove facts which operate to bar the plaintiff's claim, the sole inquiry at this stage of the pleadings is whether the plaintiff's allegations, if proved, would state a basis for standing . . . [An] argument [that] would require the court to consider facts outside the face of the pleadings . . . would be improper on a motion to strike . . ." (Citations omitted.) Miller v. Insilco Corp., Superior Court, judicial district of New Haven, Docket No. 27 92 67 (May 22, 1990, Schimelman, J.) ( 1 Conn. L. Rptr. 651).
As previously stated, for the purposes of a motion to strike, the court must restrict itself to the allegations contained in the revised complaint, construing them in a manner most favorable to the plaintiff, and must accept those allegations as true.
Recognition of this principle of law avoids the repeated characterization of the allegations as allegations in this memorandum of decision.
The Allegations in the Complaint
The plaintiff alleges that BDO Seidman made false representations with respect to the audited financials of Ascot and that these representations were made as statements of fact that were untrue and known to be untrue by BDO. Further, the plaintiff claims that BDO made these statements to induce investors, like Calibre, to act upon them, which Calibre did, resulting in financial losses. Specifically, the plaintiff contends that BDO knew its representations regarding Ascot's financial statements were false because BDO: (i) knew that Ascot invested all of its capital with Madoff (ii) knew that Madoff acted as the sole custodian for the fund's assets while simultaneously making all investment decisions and clearing all trades that Madoff himself initiated; (iii) knew that Madoff used an audit firm that was not reputable; (iv) did nothing to verify the underlying financial information in the financial statements, all of which came from Madoff. Further, Calibre invested with Ascot in reliance upon the audited financials containing the aforementioned misrepresentations and omissions.
In 2007, BDO provided the fund's partners with audited financial statements that contained the same alleged flaws as described in the 2006 financial statements. Thus, had the 2007 audited financial statement revealed that substantially all of Ascot's capital was invested with Madoff, Calibre alleges that it would have demanded the return of its $10 million investment from Ascot. Calibre claims that it maintained its investment with Ascot in reliance upon BDO's financial statements which contained false representations made as statements of fact and omission of material fact, and as a result, lost substantially all of its investment.
Discussion Fraudulent Misrepresentation Claims
The defendant moves to strike counts one and two on the ground that the plaintiff fails to sufficiently allege the elements of fraud. Specifically, BDO contends that the plaintiff fails to allege false statements, scienter and the requisite intent to induce reliance. "The essential elements of a cause of action in [fraudulent misrepresentation] are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon the false representation to his injury." (Internal quotation marks omitted.) Centimark Corp. v. Village Manor Associates, Ltd. Partnership, 113 Conn.App. 509, 522, 967 A.2d 550 (2009).
First, the defendant first argues that the alleged misrepresentation, in form of an omission, that the financial statements failed to reflect that Madoff was a master fund and that Ascot was a feeder fund, is not a false statement because the plaintiff fails to allege that Madoff had a master fund. Rather, the defendant argues that the registered broker-dealer firm that Madoff controlled was no more than a broker given discretion to trade the Ascot account. BDO argues that this relationship does not give rise to a master fund-feeder fund relationship. Thus, the defendant argues that this omission is not actionable, as there is no master fund-feeder fund relationship, and further, § 5.49 of the Guide does not make the auditor's disclosure of such an arrangement mandatory. It is fund management (Merkin), not the auditor (BDO), which has the final decision as to whether such disclosure is appropriate. Section 5.49 states "[f]und management generally should consider whether an investment in a single underlying fund is so significant to the fund of funds as to make the presentation of financial statements in a manner similar to a master-feeder fund . . . more appropriate."
The determination of whether the relationship between Madoff and Ascot was a master fund-feeder fund relationship, as it is alleged to be in the complaint, or some other financial arrangement, is not an inquiry that is appropriate for a motion to strike, as it would require the court to make findings based on an inadequate factual record. Further, the defendant invites the court to make a finding of whether, pursuant to § 5.49 of the Guide, it was necessary to disclose the alleged master-feeder relationship. Again, there may be an appropriate time in this litigation for a fact finder to make such determinations, but a motion to strike is simply not that time.
Next, BDO contends that scienter requires actual knowledge that the statements made were untrue, and that Calibre's revised complaint does not satisfy this requirement. Namely, the defendant claims that, although the plaintiff alleges that BDO misrepresented that it conducted an audit in accordance with Generally Accepted Auditing Standards (GAAS) and that the financial statements were presented in accordance with Generally Accepted Accounting Principles (GAAP), the plaintiff does not allege that BDO knew that Ascot's financial statements were incorrect or acted recklessly without a genuine belief in the truth of its statements. The court is not persuaded by this argument. The plaintiff clearly alleges that Ascot's audited financial statements were represented by BDO to have been audited, "in accordance with auditing standards generally accepted in the United States (GAAS) and were prepared in accordance with accounting principles generally accepted in the United States (GAAP)." The plaintiff then alleges that BDO knew its representations regarding the financial statements were false or acted with reckless disregard for the truth, as it knew that Ascot invested all of its capital with Madoff; that Madoff acted as the sole custodian for the fund's assets while simultaneously making all investment decisions and clearing all trades that Madoff himself initiated and that BDO did nothing to verify the underlying financial information in the financial statements, all of which came from Madoff. Thus, in simple terms, the plaintiff alleges that BDO knew of the applicable auditing standards, and while claiming that the audited financials were prepared in accordance with GAAS and GAAP, knew that they in fact did not comply with such standards and principals. This clearly satisfies that scienter requirement for fraud. Again, this is a motion to strike, and the parsing of the meaning and legal significance of various clauses in the auditing guides that BDO seeks to preview as a defense will have to wait for a different motion.
Connecticut's Supreme Court has held that, "a misrepresentation made without belief in its truth or recklessly made can also provide the basis for a fraud claim." Kilduff v. Adams, Inc., 219 Conn. 314, n. 15 (1991).
Lastly, the defendant contends that the plaintiff Calibre failed to sufficiently plead a factual basis for the defendant BDO's intent to induce reliance. Specifically, the defendant claims that although there is a clear statement that BDO, "made these representations with the intent that investors . . . would rely upon then and would be induced to either maintain or increase investments in Ascot," BDO argues that this is not sufficient, and the plaintiff is required to plead more. However, this court finds that the plaintiff has alleged sufficient facts from which it may be inferred that the defendant was aware that its misrepresentations would induce the plaintiff to act.
Accordingly, the court finds that in counts one and two the plaintiff sufficiently alleges the elements of fraud. Many of the defendant's arguments in its motion to strike rely on the finding of facts outside of the revised complaint, and thus, are inappropriate for such a motion.
Holding Claims
In counts two and five, Calibre alleges that BDO fraudulently and negligently induced the plaintiff to retain or hold onto its investment in Ascot. The complaint alleges that in 2007, BDO provided the fund's partners with audited financial statements that contained the same alleged flaws as described in the 2006 financial statements. The plaintiff claims that had the 2007 audited financial statement revealed that substantially all Ascot's capital was invested with Madoff, Calibre alleges that it would have demanded the return of its $10 million investment. Calibre claims that it maintained its investment with Ascot in reliance upon BDO's financial statements which contained false representations made as statements of fact and omission of material fact, and as a result, lost substantially all of its investment.
The defendant's reasoning set forth regarding "holding claims" also applies to the holding aspect of count three.
The defendant contends that these types of claims have not been recognized under Connecticut law. There is a dearth of case law pertaining to the viability of "holding claims" under state law. Such a scarcity of authority does not enhance the plaintiff's position in this instance. For its part, the defendant cites to a Connecticut case from the federal district court in support of its motion to strike. In Chanoff v. U.S. Surgical Corp., 857 F.Sup. 1011 (D.Conn. 1994), the plaintiff shareholders alleged damages flowing from their stock purchases. The plaintiff alleged that the top executives at U.S. Surgical concealed and omitted pertinent financial information and affirmatively misled investors. As a result of these acts, the plaintiffs allege that they refrained from selling or hedging the company's stock. The court held that a majority of the plaintiffs failed to allege a "cognizable injury or damage that could be construed as directly or proximately caused by the alleged misconduct." Id., 1017. Specifically, the court stated: "[T]he claims for damages based on the plaintiffs' failure to sell or hedge their stock are too speculative to be actionable. It is an established principle that a plaintiff cannot recover profits which might have been realized if he had not been deceived, unless there is evidence by which such profits can be estimated with reasonable certainty." (Citations omitted; internal quotations omitted.) Id. The court, however, held that the plaintiffs had stated an actionable claim that they were induced to buy additional shares of stock at an artificially inflated price, as this claim was proximately related to the alleged fraud. Id.
It is worth noting that the defendant asks the court to look to New York law to govern some claims and Connecticut law to govern others, with the choice of law most favorable to the defendant dictating the result. The defendant, when addressing certain aspects of this motion with respect to counts four and five, goes into a choice of law inquiry and states that the most significant relationship to certain counts is New York. However, the defendant does not resort to this analysis for all counts. This is noteworthy with respect to the "holding claims" at issue, because such "holding claims" may be viable under New York law.
In response, the plaintiff Calibre argues that the facts of this case distinguish it from the typical "holder" claim which involve publicly-traded securities, and does not prevent the specific type of holder claim it alleged in this matter. The court disagrees, and does not find that the status of the securities as publicly or privately traded make the facts of this case sufficiently distinguishable from Chanoff. A decision not to sell but to hold onto securities may be regrettable, but such decisions must always be made without the power of hindsight. This court shares the concern expressed by Judge Nevas in Chanoff that failure to sell claims are "too speculative to be actionable." There has been too much speculation in the markets for this court to add to it here. The motion to strike is granted as to counts two and five.
In accordance with this ruling, it is further ordered that the following language be stricken from certain paragraphs of count 3, alleging aiding and abetting fraud: The words " and to hold onto that investment" are stricken from ¶ 117; the words " and holding" are stricken from ¶ 119; and the words " and subsequently maintained its investment" are stricken from ¶ 120. Count 3 is otherwise unaffected by the ruling herein.
Aiding and Abetting Fraud Claim
In count three, the plaintiff alleges that Merkin, as Ascot's manager, committed a fraud upon Calibre by failing to reveal that Ascot acted as a feeder fund for Madoff, and in the offering documents, portrayed Ascot as a fund that was managed by Merkin and depended on Merkin's investing skills to succeed. The plaintiff further claims that BDO knowingly facilitated the fraud by Merkin by continuing to issue audits that concealed the fact that Ascot acted purely as a feeder fund for Madoff, and that BDO knew that Merkin was concealing Madoff's involvement from investors. In particular, by omitting this information from Ascot's Offering Documents, BDO knowingly disregarded that Ascot's financials failed to conform with GAAS or GAAP. Additionally, the plaintiff contends that BDO's assistance and involvement allowed Merkin to persuade Calibre to invest in Ascot and to maintain its investments in Ascot.
The Connecticut Supreme Court has set forth the three elements required to prove a cause of action for aiding and abetting and provides that a party must plead: (i) the party whom the defendant aids must perform a wrongful act causing injury; (ii) the defendant must be generally aware of her role as part of an overall illegal or tortious activity at the time she provides the assistance; and (iii) the defendant must knowingly and substantially assist the principal violation. Efthimiou v. Smith, 268 Conn. 499, 505 (2004).
The defendant argues that this count should be stricken because the plaintiff failed to: (i) plead an actionable fraud of another person (Merkin) on the plaintiff; (ii) plead that the defendant was aware of Merkin's alleged underlying fraud; (iii) adequately allege that the defendant intentionally and knowingly aided Merkin in committing a fraud; and (iv) allege substantial assistance to Merkin in committing the fraud.
First, it is clear that from the allegations contained in the revised complaint, and the inferences drawn from those allegations, the plaintiff has alleged an actionable fraud claim against Merkin. The plaintiff alleges that Merkin made false representations of facts that were untrue and known to be untrue. The plaintiff further claims that these statements were made with the intent of inducing reliance and were relied upon to the plaintiff's detriment. Although the defendant argues that the fraud alleged, "failing to reveal that Ascot acted as a feeder fund for Madoff," is not actionable as Ascot was not acting as a true "feeder fund," the court has already stated that such a determination is one that requires the findings of facts and conclusions that are not readily available from the revised complaint, even when the attachments to the complaint are considered.
The defendant next argues that the plaintiff failed to plead that BDO was aware of Merkin's fraud. As stated above, a plaintiff alleging that a defendant aided and abetted a wrongful activity must allege that the defendant was "generally aware" of its participation in the wrongful activity. In the present case, the plaintiff alleges that BDO was aware of the fact that Ascot's Offering Documents concealed Ascot's involvement with Madoff. Further, the complaint alleges that BDO knowingly or recklessly facilitated the fraud by issuing audits that concealed the fact that Ascot acted purely as a feeder fund for Madoff. It is clear from the revised complaint that the plaintiff sufficiently alleges that the defendant was "generally aware" of its participation in the underlying fraud.
Lastly, the defendant contends that the plaintiff failed to allege substantial assistance to Merkin in committing the fraud. A plaintiff must plead that the defendant substantially assisted the principal violation. "The `substantial assistance' element requires plaintiffs to make some factual showing that the assistance provided by the alleged aider and abettor was a substantial factor in bringing about the violation . . . The Restatement suggests several factors to be considered in determining when the assistance is substantial: (1) the amount of assistance given by the defendant; (2) his presence or absence at the time of the tort; (3), his relation to the plaintiff; and (4) his state of mind. Restatement (Second) of Torts, § 876, Comment b . . ." Brunette v. Bristol Savings Bank, Superior Court, judicial district of New Britain, Docket No. CV 92 0453957 (Aug. 22, 1994, Berger, J.) [ 12 Conn. L. Rptr. 322]. Additionally, the lack of a fiduciary or contractual duty to speak does not bar an aiding and abetting claim, it only heightens the requirement that the plaintiff must show the defendant "knowingly" provided substantial assistance to the wrongdoing. See Fidelity National Title Ins. Co. v. Kissel, Superior Court, complex litigation docket at Stamford, Docket No. X04 CV 06 5002386 (August 18, 2008, Adams, J.) [ 46 Conn. L. Rptr. 211].
The complaint sufficiently alleges substantial assistance as pleaded. As a motion to strike, that is the beginning and the end of the inquiry at this juncture, for it is clear that an actual finding of "substantial assistance" involves the weighing of facts and circumstances outside the complaint. It is therefore more appropriately addressed in another motion. See Brunette v. Bristol Savings Bank, supra, Docket No. CV 92 0453957. For the purposes of this motion to strike, the plaintiff has sufficiently alleged that the defendant was a substantial factor in aiding the underlying fraud.
Negligent Misrepresentation Claims
In counts four and five, the plaintiff alleges that negligent misrepresentations induced the plaintiff to invest in Ascot, and to maintain its investments in Ascot. With respect to count four, the defendant argues that the plaintiff lacks standing to sue under New York law. The defendant devotes pages of its brief to a conflicts of law analysis and ultimately concludes that the most significant relationship to the controversy is New York. For the purposes of this motion, the court will not entertain a choice of law analysis, as it is a fact-intensive inquiry and in this matter a more developed factual record is necessary. The court cannot resolve this issue with only the facts alleged on the face of the revised complaint and its attachments.
It should be noted that this count marks the first instance wherein the defendant injects New York law into its analysis. The defendant spends twenty-five pages in its brief first attacking the plaintiff's claims under Connecticut law, and now attempts to address counts four and five under New York law. The court is perplexed as to why New York law would govern these counts only, and not the other counts in the revised complaint as well. This is especially so because Calibre's entire complaint focuses on the same set of alleged misrepresentations and omissions. The defendant earlier claimed certain counts should be stricken because "holder claims" are not recognized under Connecticut law, yet later the defendant states in a footnote that "[t]his memorandum discusses Connecticut law with respect to the fraud counts because the two states' laws are substantially the same for that cause of action." If the defendant truly believes that New York law should apply, then it should address its choice of law analysis at the outset of its motion and address all counts under New York law. This regardless of whether these two states' laws are "substantially the same" when it comes to fraud (a statement that this court takes issue with, as New York requires justifiable reliance while Connecticut does not have such a requirement). If New York law governed the plaintiff's claims, then Connecticut law would be of limited utility. It appears that the defendant attempts to inject New York law into its analysis only when it is more favorable to the defendant's position with respect to a particular claim, whereas a uniform application of such forum's laws would place the defendant in a less favorable position with respect to the "holder claims" against it. See footnote 4, infra.
As the defendant failed to address this count under Connecticut law, the court cannot address its motion with respect to this count, as it is inadequately briefed.
Even if the court were to address the merits of the defendant's motion with respect to this count, again, many of the defendant's arguments rely on facts or findings outside of those contained in the revised complaint, and thus are inappropriate for a motion to strike.
Innocent Misrepresentation
In count six, the plaintiff sets forth a cause of action for innocent misrepresentation. Specifically, the plaintiff alleges that the actions of BDO in issuing audited financial statements of Ascot which stated that the financial statements were audited "in accordance with auditing standards generally accepted in the United States" and were prepared "in accordance with accounting principles generally accepted in the United States," as well as stating that Ascot utilizes various "brokers" and that these "brokers" have custody of the partnership's securities, constituted innocent misrepresentations of fact by BDO.
"[A]n innocent misrepresentation of fact may be actionable if the declarant has the means of knowing, ought to know, or has the duty of knowing the truth." (Internal quotation marks omitted.) Barton v. Bristol, 291 Conn. 84, 102, 967 A.2d 482 (2009). "In Connecticut, a claim of innocent misrepresentation . . . is based on principles of warranty, and . . . is not confined to contracts for the sale of goods . . . A person is subject to liability for an innocent misrepresentation if in a sale, rental or exchange transaction with another, [he or she] makes a representation of a material fact for the purpose of inducing the other to act or to refrain from acting in reliance upon it . . . even though it is not made fraudulently or negligently . . . [Our Supreme Court] ha[s] held that an innocent misrepresentation is actionable, even though there [is] no allegation of fraud or bad faith, because it [is] false and misleading . . ." (Citations omitted; internal quotation marks omitted.) Gibson v. Capano, 241 Conn. 725, 730, 699 A.2d 68 (1997).
The elements of a cause of action for innocent misrepresentation are: (i) a representation of material fact; (ii) made for the purpose of inducing the purchase; (iii) the representation is untrue; (iv) there is justifiable reliance by the plaintiff on the representation by the defendant; and (v) damages. Matyas v. Minck, 37 Conn.App. 321, 333, 655 A.2d 1155 (1995).
The defendant argues that in order for the defendant to be subject to liability for an innocent misrepresentation, Calibre must allege a qualifying transaction. The defendant relies on Gibson v. Capano, supra, 241 Conn. 730 (citing Restatement (Second) Torts § 552c) which stated that: "A person is subject to liability for an innocent misrepresentation if `in a sale, rental or exchange transaction with another, [he or she] makes a representation of material fact for the purpose of inducing the other to act or to refrain from acting in reliance upon it . . . even though it is not made fraudulently or negligently." The defendant contends that it cannot find a Connecticut case in which an auditor is liable for damages to a third party under a claim for innocent misrepresentations.
In response, the plaintiff relies on Schwartz v. Blum, Shapiro Co., P.C., Superior Court, judicial district of Middlesex, Docket No. CV 02 0100080 (April 17, 2006, Beach, J.), which it claims supports the proposition that an auditor can be liable to a third party under a claim of innocent misrepresentation. In Schwartz, the court denied summary judgment on claims for a negligent and innocent misrepresentation brought against the defendant for alleged accounting errors that were relied upon by the plaintiff's advisors during the course of negotiations for the sale of the plaintiff's shares in a company. The court's analysis regarding negligent and innocent misrepresentation consists entirely of the following. "[The defendant] claims that there is no evidence of reliance for the purpose of the claims of negligent and innocent misrepresentation. Reliance of course is a necessary element of those torts . . . As noted in Williams Ford., Inc. v. Courant Co., 232 Conn. 559, 575, `Although we conclude that no special relationship is required to state a claim of negligent misrepresentation, the plaintiff must allege and prove that reliance on the misstatement was justified or reasonable. We have consistently held that reasonableness is a question of fact for the trier to determine based on all of the circumstances." (Citations omitted.) Schwartz v. Blum, Shapiro Co., P.C., supra, Docket No. CV 02 0100080.
Over 30 years ago, the Connecticut Supreme Court gave a brief overview of the law's development in this area. "The scope of liability for innocent misrepresentation has varied with time and with context, in American law generally and in this court. Traditionally, no cause of action lay in contract for damages for innocent misrepresentation; if the plaintiff could establish reliance on a material innocent misstatement, he could sue for rescission, and avoid the contract, but he could not get affirmative relief. See Restatement (Second), Contracts 304, 306, and Introductory Note to Chapter 13 (Tentative Draft No. 11, 1976). In tort, the basis of responsibility, although at first undifferentiated, was narrowed, at the end of the 19th century, to intentional misconduct, and only gradually expanded, in this century, to permit recovery in damages for negligent misstatements. Prosser, Torts (4th Ed. 1971) 107. At the same time, liability in warranty, that curious hybrid of tort and contract law, became firmly established, no later than the promulgation of the Uniform Sales Act in 1906. In contracts for the sale of tangible chattels, express warranty encompasses material representations which are false, without regard to the state of mind or the due care of the person making the representation. For breach of express warranty, the injured plaintiff has always been entitled to choose between rescission and damages. Although the description of warranty liability has undergone clarification in the Uniform Commercial Code, which supersedes the Uniform Sales Act, these basic remedial principles remain unaffected. At the same time, liability in tort, even for misrepresentations which are innocent, has come to be the emergent rule for transactions that involve a commercial exchange. See Restatement (Second), Torts 552C (1977); Prosser, Torts (4th Ed. 1971) 107, pp. 710-14." Johnson v. Healy, 176 Conn. 97, 100-02 (1978).
The Restatement § 522C comment d states that a claim for innocent misrepresentation "does not apply in favor of third parties who are not parties to the transaction, even though that party acts according to expectation in taking or refraining from it in reliance upon the misrepresentation." Without further exposition, this court cannot read into the Schwartz decision a blanket rule that would be contrary to comment d of the Restatement. It appears that the trial court's analysis in Schwartz focused solely on the issue of whether there was a genuine issue of material fact as to whether the plaintiff relied on the alleged misrepresentations. There is no indication that the defendant moved for summary judgment on other grounds. Moreover, it is not the province of the court to articulate arguments not made by a party, and this court will not assume that the Schwartz court addressed any issues except those stated in its decision. As such, the defendant's motion to strike this count is granted, as the third party plaintiff Calibre has not sufficiently pleaded a qualifying transaction between it and BDO.
Statute of Limitations
Lastly, the defendant moves to strike counts one, four and the investment aspect of count three, as they rely on purchases before June 2006 and are time-barred by the statute of limitations. The defendant contends that the statute of limitations on the aforementioned claims is the shorter of two years from the time when the plaintiff knew or should have known of the tort, or three years from the wrongful act itself. See General Statutes §§ 52-577 and 52-584. In response, Calibre contends that its claims fall well within the statute of limitations, as the investments at issue were made in December 2007 and this suit was brought in 2009.
A brief recitation of facts is necessary to address this argument. Calibre is a limited liability company that manages investments on behalf of its owners, who include Stanford J. Grossman and his family. Grossman, through his firm QFS Asset Management, L.P.(QFS), manages a hedge fund formerly called The Grossman Currency Fund, Ltd. (Currency Fund). Grossman elected to index a portion of his deferred fees payable to an entity named the Ascot Fund Ltd. The Ascot Fund merely invested this money in Ascot. In total, the Currency Fund invested a total of $6 million on or before January 1, 2006. In December 2007, Grossman elected to have the Currency Fund pay the deferred fees owed to QFS during 2008. This included $10.1 million that had been indexed to the investment in the Ascot Fund. Concurrently, the Currency Fund redeemed its $10.1 million investment in the Ascot Fund. Also in December 2007, Calibre completed a subscription agreement to invest ten million dollars in Ascot, to replace the exposure that Grossman previously had through the Currency Fund's deferred fee index arrangement. Thus, Grossman maintained some investment with Ascot without interruption up until the time the Madoff fraud came to light.
It is clear that the revised complaint alleges that Calibre invested $10 million in Ascot in December 2007. The plaintiff is correct in pointing out that the Grossman Currency Fund and Calibre are distinct legal entities, and the money that Calibre invested in Ascot is separate and distinct from the investments that occurred prior to 2007. Thus, the defendant's argument as to the statute of limitations is without merit.
Conclusion
Having chosen a motion to strike as the vehicle with which to attack the validity of the allegations, the defendant must abide by the limited parameters of such a motion. It is elementary, but bears repeating, that the court's ability to decide the merits of this motion at the pleading stage is not the same as when the court rules on the pleadings on a later, more dispositive motion. That includes such matters as summary judgment or a motion to dismiss, because the criteria for judging are different here. It has to do with certain presumptions the court must adhere to in favor of the non-moving party in its ruling. It is not that the allegations are true. It is first and foremost that all of the allegations that the plaintiff Calibre is making must be taken as true for purposes of this — or any other — motion to strike. Many of the defendant's arguments rely on the finding of facts and legal conclusions that lie outside of the revised complaint and its attachments, and thus are inappropriate for such a motion.
Accordingly, the defendant's motion to strike is DENIED with respect to counts one, three, and four of the revised complaint. The defendant's motion to strike is GRANTED as to count two, five and six.
IT IS SO ORDERED,