Summary
In SSR II, which also involved the investment of excess cash value of a variable life policy, the court held that the relationship of the policyholder to the Madoff feeder fund "is best characterized as a client of a client [citation omitted]," and that there was no fiduciary or otherwise elevated duty between the fund and the policyholder.
Summary of this case from Pritsker v. Oppenheimer Acquisition Corp.Opinion
No. 652793/2011.
2012-09-28
SSR II, LLC, Plaintiff, v. JOHN HANCOCK LIFE INSURANCE COMPANY (U.S.A.), Security Life of Denver Insurance Company, Tremont Group Holdings, Inc., Tremont Partners, Inc., Tremont (Bermuda) Ltd., Tremont Opportunity Fund III, L.P., Rye Select Broad Market Prime Fund L.P., Rye Select Broad Market XL Fund L.P., Rye Select Broad Market Insurance Portfolio, LDC, Oppenheimer Acquisition Corp., MassMutual Holding LLC, Massachusetts Mutual Life Insurance Co., and Oppenheimerfunds, Inc., Defendants.
Motley Rice LLC, for SSR. Nixon Peabody LLP, for John Hancock.
Motley Rice LLC, for SSR. Nixon Peabody LLP, for John Hancock.
Skadden, Arps, Slate, Meagher & Flom LLP, for Tremont Defendants.
Bingham McCutchen LLP, MassMutual Defendants.
Dechert LLP, for Oppenheimer Defendants.
Tannenbaum Helpern Syracuse & Hirschtritt LLP, for Rye Defendants.
Drinker Biddle & Reath LLP, for Security Life of Denver.
SHIRLEY WERNER KORNREICH, J.
Motion Sequence Numbers 001, 002, 003, 004, 007, and 010 are consolidated for disposition. All of the defendants have filed motions to dismiss pursuant to CPLR 3211(a) and 3016(b).
Except for defendant Rye Select Broad Market Insurance Portfolio, LDC (the Rye Insurance Portfolio), which has not served an answer, filed a motion to dismiss, or otherwise appeared in this action. Thus, the disposition of the motions decided herein does not apply to the Rye Insurance Portfolio.
This case presents yet another complex way in which the ripples of the Ponzi scheme of Bernard L. Madoff managed to reach even the most seemingly innocuous investment—life insurance. In short, some of the excess cash value of plaintiff's variable life insurance policies was invested in Madoff.
Defendant Massachusetts Mutual Life Insurance Co. (MML) is the parent company of defendant MassMutual Holding LLC (MMH) (collectively, MassMutual). Mot. Seq. No. 002. MMH is the parent company of defendant Oppenheimer Acquisition Corp. (OAC), and defendant OppenheimerFunds, Inc. (OFI) is a subsidiary of OAC (collectively, Oppenheimer). Mot. Seq. No. 003. Defendant Tremont Group Holdings, Inc. (TGH) is a wholly owned subsidiary of defendant OAC. Defendant Tremont Partners, Inc. (TPI) is a subsidiary of TGH; Tremont (Bermuda) Ltd. (TBL) is wholly owned by TGH and provided investment advisory services for several off-shore Tremont funds (collectively, Tremont). Mot. Seq. 001. TPI managed, sold, and administered defendants the Rye Select Broad Market Prime Fund L.P. (Prime Fund), the Rye Select Broad Market XL Fund L.P. (XL Fund), and the Rye Insurance Portfolio (collectively, the Rye Funds) and was the General Partner of the Tremont Opportunity Fund III, L.P. (Opportunity Fund), the Prime Fund, and the XL Fund (the Rye Funds—excluding the Rye Insurance Portfolio—and the Opportunity Fund are collectively referred to as the Rye Defendants). Mot. Seq. No. 004. The Rye Funds fed into Bernard L. Madoff Investment Securities (BMIS).
The fifth motion (seq. no. 007) was filed by defendant John Hancock Life Insurance Company (U.S.A.) (John Hancock). The sixth motion (seq. no. 010) was filed by defendant Security Life of Denver Insurance Company (SLD). The motions are granted for the reasons that follow.
I. Background
This action was commenced by SSR II, LLC (SSR) on October 12, 2011. SSR is a South Dakota limited liability company. Compl. ¶ 14. Its sole member is a Delaware limited liability company whose members include trusts whose sole trustee is The Rockefeller Trust Company. Id. On October 28, 2003, SSR purchased three variable life insurance policies, each with a face value of $20 million, from John Hancock. ¶ 39. On March 23, 2004, SSR purchased three variable life insurance policies, each with a face value of $15 million, from SLD. Id. SSR was provided with a MAGNASTAR Variable Life Insurance Policy Private Offering Memorandum (the POM) in connection with its purchase of each of the policies. The POM offered SSR a selection of investment options in which it could allocate and invest its premiums. One such investment option was the Opportunity Fund. The Opportunity Fund is a limited partnership organized under the laws of Delaware.
On October 22, 2004, through its variable life insurance policies, SSR invested $13,125,494.03 in the Opportunity Fund. ¶ 40. This investment was made pursuant to Participation Agreements with the Opportunity Fund, whereby John Hancock and SLD (collectively, the Carriers) purchased limited partnership interests in the Opportunity Fund. It is an undisputed fact that the Carriers were the limited partners and investors in the Opportunity Fund, not SSR. This was essential to ensure that the cash value of SSR's variable life insurance policies could earn investment returns without incurring income taxes. See ¶¶ 36–39.
In connection with its investment in the Opportunity Fund, SSR received an Amended and Restated Private Placement Memorandum (the PPM) issued by the Opportunity Fund. ¶ 54. Pursuant to the PPM, Tremont was responsible for managing the Opportunity Fund and the Carriers had no control over SSR's investment in the Opportunity Fund. Approximately 22% of the Opportunity Fund was invested in the Rye Funds, substantially all of which was invested in BMIS. ¶ 41. On November 11, 2008, defendants represented to SSR that its investments were worth approximately $15,320,157. ¶ 2.
On December 10, 2008, Madoff admitted that he was running a Ponzi scheme and that BMIS was insolvent. ¶ 4. On December 11, 2008, the SEC charged Madoff and BMIS with securities fraud. On December 12, 2008, Tremont reported to its clients that approximately 22% of the Opportunity Fund was invested in BMIS. ¶ 10. In early 2009, John Hancock sent SSR a report that notified SSR of Tremont's exposure to BMIS. See Ex. D. to the Jamberdino Aff. dated January 13, 2012.
SSR sued all of the defendants for fraud, negligent misrepresentation, and unjust enrichment based upon representations made in the POM and the PPM. SSR also brought a cause of action for breach of fiduciary duty against John Hancock, SLD, and Tremont, a cause of [Slip Op. 3]action for aiding and abetting breaches of fiduciary duty against Tremont, OFI, OAC, MMH, and MML, a cause of action for breach of the implied covenant of good faith and fair dealing against John Hancock and SLD, and a cause of action for violations of New York General Business Law (GBL) § 349 against John Hancock, SLD, and Tremont.
II. Discussion
On a motion to dismiss, the court must accept the facts alleged in the complaint and all reasonable inferences that may be gleaned from those facts, as true. Amaro v. Gani Realty Corp., 60 NY3d 491 (2009); Skillgames, L.L.C. v. Brody, 1 AD3d 247, 250 (1st Dept 2003) (citing McGill v. Parker, 179 A.D.2d 98, 105 (1992)); see also Cron v. Harago Fabrics, 91 N.Y.2d 362, 366 (1998). Moreover, it may not assess the merits of the complaint or any of its factual allegations, but must determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action. Skillgames, id. (citing Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275 (1977)). Deficiencies in the complaint may be remedied by affidavits submitted by the plaintiff. Amaro, 60 NY3d at 491. “However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration.” Skillgames, 1 AD3d at 250 (citing Caniglia v. Chicago Tribune–New York News Syndicate, 204 A.D.2d 233 (1st Dept 1994)). Further, where the defendant seeks to dismiss the complaint based upon documentary evidence, the motion will succeed if “the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law [citation omitted].” Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326 (2002); Leon v. Martinez, 84 N.Y.2d 83, 88 (1994).
A. Motion Seq. No. 001
Tremont moves to dismiss the complaint on the grounds that: (1) SSR lacks standing; (2) SSR's claims are time-barred; (3) Madoff's criminal act was a supervening cause; and (4) the complaint failed to state a claim.
1. Standing
SSR and Tremont dispute whether the claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust enrichment are direct or derivative. Tremont argues that if the claims are derivative, SSR lacks standing to bring them because they can only be brought by the party that was directly injured (the Opportunity Fund) or by an investor in the Opportunity Fund (the Carriers).
The determination of whether the claims in this case are direct or derivative is governed by Delaware law because the Opportunity Fund is a Delaware limited partnership. See Starr Foundation v. Am. Intel. Group, Inc., 76 AD3d 25, 37 (1st Dept 2010). Under Delaware law, the question of whether a claim is direct or derivative “must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?” Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del 2004) (emphasis in original).
SSR argues that its claims are direct because “it is not suing to recover the losses that the [Opportunity] Fund incurred by investing in Madoff, but to recover its own losses resulting from being induced to make and then maintain investments in the [Opportunity] Fund.” SSR Mem., p. 14 (emphasis in original). This argument is unconvincing for two reasons. First, the damages suffered by SSR are identical to those suffered by the Opportunity Fund—the lost value of the Opportunity Fund incurred due to investing in a Ponzi scheme. Second, the claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust enrichment fail because the underlying duties do not relate directly or derivatively to SSR. Rather, they relate to the Carriers because they were the partners in the Opportunity Fund, not SSR. SSR lacks standing. They were owed no duty relating to their three causes of action and the losses incurred are identical to those suffered by the Opportunity Fund.
Nor can SSR bring these derivative claims on behalf of the Opportunity Fund. It is not a partner or investor and has no other type of relation to the Opportunity Fund that would permit it to act on behalf of the Fund. In fact, although SSR seeks to be considered an “investor”, in the past, it has held itself out not to be an “investor” for the purposes of IRC §§ 817 & 7702. The parties' relationship was structured so that SSR was not an “investor” in order that it could realize the benefits of deferring taxes on the appreciation of the excess cash value of its variable life insurance policies. SSR cannot now maintain that it is an investor to avail itself of derivative claims that properly vest in the legal investors (the Carriers).
However, the remainder of SSR's claims against Tremont (fraud, negligent misrepresentation, and violations of GBL § 349) are direct. Tremont's argument that SSR lacks standing to bring these claims fails. Tremont argues that it neither owed nor breached a duty to SSR relating to these claims. Such an argument goes to the merits, not standing.
2. Statute of Limitations
Tremont withdrew its statute of limitations defense at oral arguments held on July 17, 2012. See Trans. at 26–27.
3. Madoff's Crimes as a Supervening Cause
Tremont argues that Madoff's Ponzi scheme was the cause of SSR's losses, not Tremont. Even if this is true, Tremont would still be liable if Madoff's actions were reasonably foreseeable. See Anwar v. Fairfield Greenwich Ltd., 728 FSupp2d 372, 446 (SDNY 2010) (citing Derdiarian v. Felix Contracting Corp., 51 N.Y.2d 308 (1980)). This is a question of fact not proper for resolution on a motion to dismiss. Id. 4. Failure to State a Claim I. Fraud
To properly plead a cause of action for fraud, the complaint must contain allegations of a representation of material fact, falsity, scienter, reliance, and injury. Small v. Lorillard Tobacco Co., 94 N.Y.2d 43, 57 (1999). Also, pursuant to CPLR 3016(b), the circumstances constituting the fraud must be stated in detail. Id .
SSR has identified numerous allegedly material misstatements made by Tremont in the PPM on which it claims to have reasonably relied. Such representations include that TPH would “actively manage and monitor the Tremont Fund's portfolio” and that “[in] selecting Managers, [TPH] collects, analyses and evaluates information regarding the personnel, history and background, and the investment styles, strategies and performance of professional investment management firms.” SSR's claim is that if Tremont had vetted the Opportunity Fund in the way it claimed that it vetted all investments in its portfolio, Tremont would never have invested in the Opportunity Fund—not necessarily because it would have discovered that Madoff was running a Ponzi scheme, but because Madoff never disclosed certain information that Tremont claimed it required before investing. As this is a motion to dismiss, the Court will not resolve the questions of fact raised as to what due diligence Tremont actually performed. Rather, the relevant inquiry for the purposes of CPLR 3016(b) is whether the complaint clearly informs the defendant of what its role in the fraud was. P.T. Bank Central Asia v. ABN AMRO Bank N.V., 301 A.D.2d 373, 377 (1st Dept 2003).
Tremont argues that the statements in the PPM were not made to SSR, since the PPM was written for prospective investors (the Carriers), not for SSR. SSR responds that the statements in the PPM were really aimed at policyholders, not the Carriers, because the policyholders made the initial decision as to the fund in which to invest. Assuming this is true, the fact that the policyholders are not technically the “investors” is irrelevant. Instead, what matters is to whom the statements were targeted. If Tremont made untrue representations in the PPM for the purpose of inducing policyholders to invest in the Opportunity Fund, the falsity of such statements might give rise to a fraud claim. Further, the fact that there is no contractual relationship between Tremont and SSR undercuts any argument that the fraud claim would be improperly duplicative. See Kaufman v. Torkan, 51 AD3d 977, 980 (2d Dept 2008).
Nonetheless, the claim fails for failure of SSR to properly plead scienter, the requisite intent to defraud. As Tremont argues, the motive to earn higher compensation is legally insufficient to infer scienter. See Tech. Support Servs., Inc. v. Intel. Bus. Machs. Corp., 18 Misc.3d 1106[A], 2007 N.Y. Slip Op 52428(U), at *30 (Sup Ct, Westchester County 2007) (the “desire for higher compensation ... is found in virtually all commercial transactions, making it an ill-suited motive from which to draw an inference of intent to defraud”). Following this reasoning, Justice Lowe, in Zutty v. Rye Select Broad Market Prime Fund, L.P., 2011 N.Y. Slip Op 52121(U), at *11 (Sup Ct, N.Y. County 2011), held that the allegation that “defendants had a motive to defraud plaintiffs—a pecuniary interest in causing unearned fees, commissions and bonuses to inure [to] the benefit of Tremont and the Tremont Principals' ... was legally insufficient to establish scienter.”
SSR argues that this case is more akin to Anwar, supra, 728 FSupp2d 372, than Zutty. In Anwar, the court held that scienter was properly alleged against most of the individual fraud defendants. Anwar, 728 FSupp2d at 409. Although the court recognized that “[g]eneral profit-making motive alone is generally disclaimed as a sign of fraudulent intent” [Id. at 407 (citing Chill v. General Elec. Co., 101 F3d 263, 268 (2d Cir1996)) ], it held that the defendants' intentional or reckless disregard of “red flags” that indicated that Madoff might be running a Ponzi scheme, coupled with defendants' economic incentives and other bad acts, sufficed to establish scienter. Id. at 409. The court, however, believes Anwar is distinguishable.
On September 11, 2012, Judge Griesa issued a decision in Prickett v. N.Y. Life Ins. Co., No. 09 Civ. 3137, at *1–13 (SDNY 2012), a case that is almost identical to this case. There, the plaintiff, a variable life insurance policyholder, sued the defendants (including Tremont) for investing his premiums in Madoff via Tremont and the Rye Funds. Judge Griesa dismissed the complaint without leave to amend. See id. at *30. In holding that the plaintiff had failed to properly plead the scienter element of common law fraud, Judge Griesa held that “a general profit motive, such as the motive to earn fees, is not a sufficient motive to commit fraud.” Id. at *15 (citing Zutty, 2011 WL 5962804, at *11). The Court noted that “the failure to conduct due diligence or monitoring as promised, without more, does not support an inference that the defendants acted with scienter.” Id. at *16 (citing South Cherry Street, LLC v. Henessee Group LLC, 573 F3d 98, 113–14 (2d Cir2009)). Judge Griesa distinguished Prickett from Anwar by noting that “[i]n Anwar, there were allegations that, beyond the alleged “red flags”, two of the directors of defendant Fairfield Greenwich (“FG”) had conversations with Madoff before a meeting with the SEC where Madoff coached them on what to say ... Here, there are no facts plausibly suggesting that any defendant participated in conduct similar to that in Anwar.” Id. at *17 (citing Anwar, 728 FSupp2d at 408–09).
In this case, as in Prickett, there are no allegations that defendants acted in the nefarious manner alleged in Anwar. Rather, the basis for scienter merely rests on defendants' incentive to earn fees and their failure to act on “red flags.” This argument failed in Zutty and Prickett, and it fails here as well.
Indeed, in almost every case including Prickett, courts have not held investment advisors liable for failing to deduce that Madoff was running a Ponzi scheme. See, e.g., Saltz v. First Frontier, LP, 782 FSupp2d 61, 72 (SDNY 2010) (“For twenty years, Madoff operated this fraud without being discovered and with only a handful of investors withdrawing their funds as a result of their suspicions. An inference of scienter based on publicly available red flags is simply not as cogent and compelling as the opposing inference of nonfraudulent intent.”), citing S.E.C. v. Cohmad Sec. Corp., 2010 WL 363844, at *2 (SDNY 2010) (rejecting scienter allegations because “the complaint supports the reasonable inference that Madoff fooled the defendants as he did individual investors, financial institutions, and regulators.”)); see also Zutty, 2011 WL 5962804, at *12, citing In re J.P. Jeanneret Associates, Inc., 769 FSupp2d 340, 377 (SDNY 2011) (“Merely alleging that [defendant] would' or could' or even should' have known of Madoff's fraud if only it had paid attention to the red flags' is insufficient to make out a [federal securities fraud claim]”)).
Recently, the Second Circuit addressed the attempt to use “red flags” to establish scienter:Plaintiffs' allegations do not meet this demanding standard; indeed, they are an archetypical example of impermissible “allegations of fraud by hindsight.” Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir.2000) (quotation marks omitted). The Auditors were responsible for auditing the Tremont funds, not BLMIS. Many of the purported “red flags” that plaintiffs contend should have put the Auditors on notice of the Madoff fraud, such as the lack of an independent third-party custodian, and BLMIS's dual role as both investment manager and administrator, were risks inherent to BLMIS, not the Tremont entities. Further, these risks were not only plainly disclosed to plaintiffs in the Tremont offering materials, but also to, inter alios, investors in and auditors of other Madoff feeder funds, and the SEC, none of whom discovered the Madoff scheme. In light of the foregoing, we agree with the district court that “the more compelling inference as to why Madoff's fraud went undetected for two decades was his proficiency in covering up his scheme and deceiving the SEC and other financial professionals.” [Slip Op. 7]Meridian Horizon Fund, LP v. Tremont Grp. Holdings, Inc., 747 F.Supp.2d 406, 413 (S.D.N.Y.2010).
Meridian Horizon Fund, LP v. KPMG (Cayman), 2012 WL 2754933, at *3 (2d Cir2012) (emphasis added). This Court agrees with the Second Circuit that it would not be proper to impose liability on Tremont for its failure to discover Madoff's fraud. Ergo, if neither “red flags” nor the incentive to earn fees is proof of scienter, the two together cannot establish scienter.
SSR's fraud claim, therefore, is dismissed.
It should be noted that, as the Second Circuit observed, “[a]lthough the elements are essentially the same ... it is unclear whether the standard for pleading scienter under federal securities law is the same as the standard for pleading scienter under common law fraud.” Meridian Horizon Fund, 2012 WL 2754933, at *3 n. 3. However, the Court cannot discern a meaningful difference, if any, between the federal and New York state standard for establishing scienter. This Court views both the federal cases, such as Anwar and Prickett, and New York Supreme Court cases, such as Zutty, as persuasive authority on applying the scienter requirement to this case.
See also In re Merrill Lynch & Co., Inc. Research Reports Securities Litigation, 289 FSupp2d 416, 428 (SDNY 2003) (“If this Court were to accept the plaintiffs' allegations of scienter as adequate, it would essentially read the scienter element out of existence. All firms in the securities industry want to increase profits and all individuals are assumed to desire to increase their compensation. Allegations such as these are inadequate to plead motive to commit a fraud on the market or the public under the securities laws and the Reform Act and will not be endorsed by this Court”).
ii. Negligent Misrepresentation
“A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.” J.A.O. Acquisition Corp. v. Stavitsky, 8 NY3d 144, 148 (2007). “To establish liability for negligent misrepresentation arising out of a commercial transaction, a party must demonstrate that the person making the misrepresentation possessed specialized or unique experience, or the persons involved are in a special relationship of confidence and trust such that reliance on the negligent misrepresentation is justified.” Salesian Socy., Inc. v. Nutmeg Partners Ltd., 271 A.D.2d 671, 673 (2d Dept 2000) (citing Kimmell v. Schaefer, 89 N.Y.2d 257, 263 (1996)). The special relationship is limited to situations involving a “fiduciary relationship or a position of trust or confidence ... [and][c]ommercial parties acting at arms' length in negotiating a contract are not in a special relationship.” Mitsubishi Power Sys. of Am., Inc. v. Babcock & Brown Infrastructure Group US, LLC, 2010 WL 303492 (Del Ch Ct 2010) (citing H & R Project Assoc. v. City of Syracuse, 289 A.D.2d 967 (4th Dept 2001)); Fleet Bank v. Pine Knoll Corp., 290 A.D.2d 792 (3d Dept 2002); see also HSH Nordbank AG v. UBS AG and UBS Sec. LLC, 2008 WL 4819599 at *5 (Sup Ct, N.Y. County 2008).
As discussed in Part II(A)(4)(iv), infra, SSR had no fiduciary relationship with Tremont. Rather, their relationship is best characterized as “a client of a client.” See Jordan (Bermuda) Inv. Co. v. Hunter Green Investments LLC, 2007 WL 2948115, at *23–24 (SDNY 2007) (dismissing claim for negligent misrepresentation where plaintiff was “at most, a client of a client [and] they engaged in no direct transaction”). Here, the extent of Tremont's relationship with SSR is that it managed the fund in which the Carriers were partners. This does not give rise to a special relationship between Tremont and SSR. Thus, SSR's claim for negligent misrepresentation fails and is dismissed.
iii. Unjust Enrichment
“To state a cause of action for unjust enrichment, a plaintiff must allege that it conferred a benefit upon the defendant, and that the defendant will obtain such benefit without adequately compensating plaintiff.” Nakamura v. Fujii, 253 A.D.2d 387, 390 (1st Dept 1998).
SSR's claim for unjust enrichment relates to fees paid by the Opportunity Fund, not plaintiffs, to Tremont. As discussed in Part II(A)(1), supra, SSR lacks standing to bring such a derivative claim. However, even if such claim was direct, the payment of fees is governed by contract (the Opportunity Fund Limited Partnership Agreement), precluding this quasi contractual claim for unjust enrichment. See IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 NY3d 132, 142 (2009); see also Prickett, supra, at *21–23.
iv. Breach of Fiduciary Duty
A fiduciary duty is a relationship of higher trust that arises out of an obligation to act for or give advice to another upon matters within the scope of the relation. EBCI, Inc. v. Goldman Sachs, 5 NY3d 11, 31 (2005). It is a fact specific relationship, grounded in a higher level of trust than normally is present in the marketplace in an arms-length business transaction. Id.; RNK Capital LLC v. Natsource, 76 AD3d 840 (1st Dept 2010).
As discussed above in Part II(A)(1), supra, SSR lacks standing to bring its derivative claim for breach of fiduciary duty. However, even if such claim was direct, SSR and Tremont had no formal relationship. While an investment advisor may have a fiduciary relationship to an investor, SSR was not the investor in the funds managed by Tremont. The cause of action for breach of fiduciary duty against Tremont is dismissed.
v. Aiding and Abetting Breach of Fiduciary Duty
Again, as discussed in Part II(A)(1), supra, SSR lacks standing to bring its derivative claim for aiding and abetting breach of fiduciary duty. Further, as discussed in Parts II(B)-(E), infra, none of the defendants in this case breached a fiduciary duty to SSR. Hence, the claim for aiding and abetting breach of fiduciary duty against Tremont is dismissed.
vi. GBL § 349
“Section 349 (a) of the General Business Law encompasses deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this State. Section 349 governs consumer-oriented conduct, and on its face, applies to virtually all economic activity. Generally, claims under the statute are available to an individual consumer who falls victim to misrepresentations made by a seller of consumer goods through false or misleading advertising.” Small, 94 N.Y.2d at 55 (internal citations omitted). To state a claim under GBL § 349, a plaintiff must allege that “(1) the challenged transaction was consumer-oriented'; (2) defendant engaged in deceptive or materially misleading acts or practices; and (3) plaintiff was injured by reason of defendant's deceptive or misleading conduct.” Denenberg v. Rosen, 71 AD3d 187, 194 (1st Dept 2010).
SSR argues that Tremont is subject to a GBL § 349 claim since: (1) Tremont operated out of New York; (2) the core facts of the case arose from actions taken in New York; (3) the sale of a variable life insurance policy is subject to such a claim; and (4) Tremont acted as an investment advisor to SSR. Even if all of this were true, “[SSR] has not met the threshold requirement because defendants' acts ... do not constitute consumer-oriented conduct .” See N.Y. Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 321 (1995). The underlying investments are complex, and the parties are all sophisticated. “Therefore, this transaction was not the modest' type of transaction the statute was primarily intended to reach.' “ Denenberg, 71 AD3d at 195 (citing NY Univ., 87 N.Y.2d at 321);see also Prickett, supra, at *27–30. SSR's GBL § 349 claim against Tremont is dismissed.
B. Motion Seq. Nos. 002 and 003
MassMutual and Oppenheimer move to dismiss the complaint on the grounds that: (1) SSR lacks standing; (2) SSR's claims are time-barred; and (3) failure to state a claim.
As discussed above in Part II(A)(1), supra, SSR lacks standing to bring its derivative claims for unjust enrichment and aiding and abetting breach of fiduciary duty, though SSR does have standing to bring its direct claims for fraud and negligent misrepresentation. However, as discussed in Part II(A)(4)(i) & (ii), supra, SSR has failed to state a claim for fraud or negligent misrepresentation. Additionally, as discussed in Part II(C)(1), infra, SSR's fraud claims are barred by the statute of limitations.
All of the claims against MassMutual and Oppenheimer fail for the same reasons articulated by Justice Lowe in Zutty, 2011 WL 5962804, at *13, where he noted that “[p]laintiffs do not base their fraud claims against MassMutual and OAC on any alleged act or omission, but rather, solely on their corporate status as owners of TPI.” Here, as in Zutty, “[SSR] cannot demonstrate that, simply by virtue of ownership, MassMutual and [Oppenheimer] represented anything to plaintiffs, or committed fraud” because “a corporation may not be held liable for the actions of another company merely because it has an ownership interest in it.' “ Id . at *14 (citing Maung Ng We v. Merrill Lynch & Co., 2000 WL 1159835, at *3 (SDNY 2000)). As a result, all of SSR's causes of action against MassMutual and Oppenheimer are dismissed.
C. Motion Seq. No. 004
The Rye Defendants move to dismiss the complaint on the grounds that: (1) SSR lacks standing; (2) SSR's claims are time-barred; (3) Madoff's criminal act was a supervening cause; and (4) failure to state a claim.
As discussed in Part II(A)(4)(iii), supra, SSR lacks standing to bring its derivative claim for unjust enrichment, though SSR does have standing to bring its direct claims for fraud and negligent misrepresentation. Whether Madoff's criminal act was a supervening cause is a question of fact not proper for resolution on a motion to dismiss. See Part II(A)(3), supra. SSR has failed to state a claim for negligent misrepresentation
[ see Part II(A)(4)(ii) ], and SSR has failed to state a claim for fraud. See Part II(A)(4)(i). However, if the fraud claim was viable, it would be time-barred.
SSR's relationship with the Rye Defendants is just as attenuated as its relationship with Tremont.
1. Statute of Limitations
Pursuant to CPLR 213(8), “[a] cause of action sounding in fraud must be commenced within 6 years from the date of the fraudulent act or 2 years from the date the party discovered the fraud or could, with due diligence, have discovered it.” Ghandour v. Shearson Lehman Bros. Inc., 213 A.D.2d 304, 305 (1st Dept 1995). “A cause of action for fraud does not accrue when the fraudulent act is committed, but rather when the plaintiff suffers a loss, i.e., when a plaintiff with assumed knowledge of the fraudulent wrong may assert a claim for relief.' “ Asbeka Indus. v. Travelers Indemnity Co., 831 FSupp 74, 81 (E.D.N.Y.1993) (quoting Cruden v. Bank of New York, 957 F.2d 961, 974 (2d Cir1992)).
The allegedly fraudulent statements relate to the POM and the PPM which were both issued before the investment in the Opportunity Fund was made. The latest time at which a fraudulent act can be said to have occurred here was October 22, 2004, when the Carriers purchased their interests in the Opportunity Fund. Since this action was commenced on October 12, 2011, almost seven years later, the fraud claim is time barred by the six year limitations period. Moreover, the latest time when SSR can be found to be on notice of the fraud is early 2009, when John Hancock sent SSR a report that notified SSR of Tremont's exposure to BMIS. Consequently, by October 12, 2011, more than two years had passed since SSR was on notice of the fraud.
However, SSR argues that the six year statute of limitations did not begin to run until Madoff's fraud was revealed in December 2008. This argument is unconvincing. SSR correctly notes that its claims are not based on Madoff's fraud. Rather, SSR's claims are based on defendants' fraud, which are defendants' false statements about how they vetted funds before investing.
In addition, SSR's contention that it did not suffer an injury until December 2008 is unpersuasive. SSR suffered an injury in 2004 when its money was invested in the Madoff Ponzi scheme. It would be unduly speculative for the Court to try and pinpoint the last moment in time when, if SSR knew about the fraud (the defendants' false statements, not the existence of the Ponzi scheme), it could have gotten its money back. The whole point of the extra two years in the case of fraud is to provide a victim of fraud more time to bring a claim because many, if not most frauds (at least those perpetrated by competent fraudsters, such as Madoff), will not be discovered within six years of their initial perpetration. The fact that SSR failed to avail itself of this extra time cannot be remedied by its unconvincing contention that it did not suffer an injury until December 2008.
D. Motion Seq. No. 007
John Hancock moves to dismiss the complaint on the grounds that: (1) SSR's claims are time-barred; (2) Madoff's criminal act was a supervening cause; and (3) failure to state a claim.
First, as discussed in Part II(A)(4)(ii), supra, SSR lacks standing to bring its derivative claim for unjust enrichment. However, its breach of fiduciary duty claim against John Hancock is direct, not derivative, because such claim is based on the relationship between SSR and John Hancock, not on the relationship between a fund manager (such as Tremont) and the Opportunity Fund. Second, as discussed in Part II(A)(4)(i), supra, SSR has failed to state a claim for fraud, which is also time-barred by the statute of limitations. See Part II(C)(1), supra. Third, as discussed in Part II(A)(3), supra, whether Madoff's criminal act was a supervening cause is a question of fact not proper for resolution on a motion to dismiss. Fourth, SSR's GBL § 349 claim fails because § 349 does not apply to the underlying transactions. See Part II(A)(4)(vi), supra. For these reasons, the Court will only discuss negligent misrepresentation, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing, as plead against John Hancock.
1. Negligent Misrepresentation and Breach of Fiduciary Duty
SSR's claims for negligent misrepresentation and breach of fiduciary duty are intertwined because the first element of a negligent misrepresentation claim requires a showing that the parties had a “special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff.”
J.A.O. Acquisition Corp., 8 NY3d at 148. It has long been the law in New York that “the holder of a policy of insurance, even in a mutual company, was in no sense a partner of the corporation which issued the policy, and the relation between the policyholder and the company was one of contract, measure by the terms of the policy.” Uhlman v. New York Life Ins. Co., 109 N.Y. 421, 429 (1888); see Muller–Paisner v. TIAA, 2012 WL 3205583, at *12 (SDNY 2012) (citing Murphy v. Kuhn, 90 N.Y.2d 266, 270 (1997) (“New York courts have consistently held that a fiduciary relationship does not exist between an insurance company and its insured.”)). Instead, “the relationship between the parties to a contract of insurance is strictly contractual in nature. No special relationship of trust or confidence arises out of an insurance contract between the insured and the insurer; the relationship is legal rather than equitable.” Batas v. Prudential Ins. Co. of America, 281 A.D.2d 260, 264 (1st Dept 2001).
Nor does the court find that the insurer had knowledge not available to the insureds. Here, plaintiffs were sophisticated investors. Additionally, entities such as the SEC failed to uncover the Madoff scheme.
SSR contends that its relationship with John Hancock was not the normal insurer-insured relationship since this was a variable life policy and John Hancock served in an investment advisory role. The court, however, does not believe the rule differs in a variable life policy. See Wilmington Trust Co. v. Metropolitan Life Ins. Co., 2008 WL 3819698 (Sup Ct, N.Y. County 2008) (no fiduciary relationship between insurance company and insured related to a variable life insurance policy); Bello v. New England Financial, 3 Misc.3d 1109(A), at *4 (Sup Ct, Nassau County 2004) (same). Indeed, Uhlman involved a whole life policy in which the insurer invested the insured's moneys. Moreover, the documentary evidence here clearly demonstrates that John Hancock did not serve as an investment advisor in any meaningful way. It merely passed on prospectuses (such as the PPM) to its insureds from the funds in which the insureds could choose investments. Plaintiffs chose a number of investments from these prospectuses, including the Opportunity Fund. This does not amount to an advisory role that gives rise to a fiduciary relationship.
As a consequence, SSR's claims against John Hancock for negligent misrepresentation and breach of fiduciary duty are dismissed.
It should be noted that SSR also alleges that the POM required John Hancock “to monitor the performance of each Portfolio to review continuing compliance with diversification ... requirements.” As pointed out by John Hancock both in its briefs and during oral arguments, such “monitoring” merely related to compliance with the diversification requirements of IRC § 817(h), and had nothing to do with John Hancock allegedly actively managing or overseeing SSR's investments. The Court is convinced that John Hancock's understanding of the word “monitor” is correct. SSR does not allege that § 817(h) was violated.
2. Breach of the Implied Covenant of Good Faith and Fair Dealing
The covenant of good faith and fair dealing in the course of performance is implied in every contract. 511 West 232nd Owners Corp. v. Jennifer Realty, 98 N.Y.2d 144, 153 (2002). The implied covenant is a pledge that neither party will do anything which destroys or injures the right of the other party to receive the benefits of the contract. Id. The duty of good faith and fair dealing does not imply obligations inconsistent with the contractual obligations, but it encompasses any promises that a reasonable person in the position of the promisee would be justified in understanding were included. Id. at 153–54.
SSR bases this cause of action on John Hancock's alleged bad faith in connection with the POM in its “[selecting] the investments of the Separate Account Subaccount.” A breach of this provision would give rise to a claim for breach of contract, a claim not made by SSR. SSR has failed to plead facts suggesting that John Hancock acted in bad faith as opposed to merely breaching its contractual obligations to SSR. See Triton Partners LLC v. Prudential Securities Inc., 301 A.D.2d 411 (1st Dept 2003) (breach of the covenant of good faith and fair dealing claim dismissed because it was merely a substitute for a breach of contract claim). This cause of action, therefore, is dismissed.
E. Motion Seq. No. 010
SLD moves to dismiss the complaint on the grounds that: (1) SSR's claims are time-barred; and (2) failure to state a claim. SSR's claims against SLD are identical to its claims against John Hancock. There is no meaningful difference between SSR's relationship with SLD and John Hancock. Therefore, all claims against SLD are dismissed for the reasons discussed in Part II(D), supra. Accordingly, it is
ORDERED that the motion by defendants Tremont Group Holdings, Inc ., Tremont Partners, Inc., and Tremont (Bermuda) Ltd. against plaintiff SSR II, LLC is granted, the complaint is dismissed in its entirety against said defendants, and the Clerk is directed to enter judgment accordingly; and it is further
ORDERED that the motion to dismiss by defendants MassMutual Holding LLC and Massachusetts Mutual Life Insurance Co. against plaintiff SSR II, LLC is granted, the complaint is dismissed in its entirety against said defendants, and the Clerk is directed to enter judgment accordingly; and it is further
ORDERED that the motion to dismiss by defendants Oppenheimer Acquisition Corp. and OppenheimerFunds, Inc. against plaintiff SSR II, LLC is granted, the complaint is dismissed in its entirety against said defendants, and the Clerk is directed to enter judgment accordingly; and it is further
ORDERED that the motion to dismiss by defendants Rye Select Broad Market Prime Fund L.P., Rye Select Broad Market XL Fund L.P., and Tremont Opportunity Fund III, L.P. against plaintiff SSR II, LLC is granted, the complaint is dismissed in its entirety against said mdefendants, and the Clerk is directed to enter judgment accordingly; and it is further
ORDERED that the motion to dismiss by defendant John Hancock Life Insurance Company (U.S.A.) against plaintiff SSR II, LLC is granted, the complaint is dismissed in its entirety against said defendant, and the Clerk is directed to enter judgment accordingly;; and it is further
ORDERED that the motion to dismiss by defendant Security Life of Denver Insurance Company against plaintiff SSR II, LLC is granted, the complaint is dismissed in its entirety against said defendant, and the Clerk is directed to enter judgment accordingly.