Defendant J.P. Morgan and its broker, defendant Ufferfilge, were hired to oversee and manage plaintiffs discretionary investment account. Plaintiff and J.P. Morgan entered into an investment management agreement (IMA) which, inter alia, gave J.P. Morgan "complete discretion and authority . . . to make . . . sales, exchanges, investments or reinvestments or to take any action that it deems necessary or desirable in connection with the assets in the Account."
The IMA required J.P. Morgan to provide monthly statements to plaintiff setting forth the property in the portfolio as well as past transactions. It also contained a disclaimer of liability, stating, inter alia, that J.P. Morgan did not guarantee the success of any investment and would not be liable to plaintiff for any losses suffered in the account unless caused by negligent or willful misconduct by J.P. Morgan. The agreement also set out the investment guidelines to be followed.
Plaintiff subsequently suffered heavy losses in its account when the financial industry went through the subprime mortgage meltdown and the ensuing crisis. Plaintiff alleged that defendants breached the terms of the investment contract as well as their fiduciary duties by saturating plaintiffs portfolio with nonagency collateralized mortgage obligations and asset-backed securities. The complaint further alleged defendants' failure to provide plaintiff with accurate information as to the assets in its portfolio and their value, as well as adequate investment advice, and that their misleading of plaintiff as to the value and marketability of the securities held in its investment account.
The court granted defendants' motion to dismiss to the extent of limiting the cause of action for J.P. Morgan's breach of contract to the factual issue of violation of the investment sector guidelines, dismissing the causes of action for breach of fiduciary duty and negligence as duplicative of the breach of contract claims, and denied dismissal of the claim for negligent misrepresentation.
At the outset, we grant the motion by the Securities Industry and Financial Markets Association to file an amicus curiae brief, and we have considered the arguments raised therein in arriving at our decision.
The court correctly limited the breach of contract cause of action to the allegation that J.P. Morgan violated the sector diversification guidelines set forth in the investment contract. An investment manager with discretionary authority cannot be held liable under a breach of contract theory for failure to achieve an investment objective ( see Vladimir v Cowperthwait, 42 AD3d 413, 415).
The court also properly declined to bar dismissal of the causes of action for negligence, breach of fiduciary duty and negligent misrepresentation on the theory that they "mimic" the Martin Act (General Business Law art 23-A) and are thus preempted by the provisions of that statute. In Assured Guar. (UK) Ltd. v J.P. Morgan Inv. Mgt. Inc. ( ___ AD3d ___, 2010 NY Slip Op 08644 [decided simultaneously herewith]), we held that while no private right of action may be based on the Martin Act ( see CPC Int'l. v McKesson Corp., 70 NY2d 268, 276-277; see also Kerusa Co. LLC v W10Z/515 Real Estate Ltd. Partnership, 12 NY3d 236, 245), "there is nothing in the plain language of the Martin Act, its legislative history or appellate level decisions in this State that supports defendant's argument that the act preempts otherwise validly pleaded common-law causes of action" (___ AD3d at ___, 2010 NY Slip Op 08644, *8). Indeed, we also observed that where the facts as alleged in a complaint fit within a cognizable legal theory and are not precluded by the Martin Act because they do not rely entirely on alleged omissions from filings required by the Martin Act and the Attorney General's implementing regulations ( Board of Mgrs. of Marke Gardens Condominium v 2401242 Franklin Ave., LLC, 71 AD3d 935, 936), "such action will be permitted to proceed and a motion to dismiss predicated on a Martin Act preemption theory will be properly denied" ( Assured Guar, ___ AD3d at ___, 2010 NY Slip Op 08644, *6). The key therefore, is whether the causes of action in question "fit within a cognizable legal theory" without relying wholly on the provisions of the Martin Act. In this case, that test has been met.
We grant the Attorney General's motion for judicial notice of certain memoranda of law filed in People v Merkin (Sup Ct, NY County, index No. 450879/09) ( see RGH Liquidating Trust v Deloitte Touche LLP, 71 AD3d 198, 207 [a court may take judicial notice of court records arid files]). Merkin involved an action by the Attorney General for breach of fiduciary duty. The defendants there moved to dismiss, arguing that such claims were preempted by the Martin Act. While acknowledging that some courts held that common-law claims brought by private plaintiffs were preempted by the Martin Act, the Attorney General distinguished those cases as they were brought by private parties, rather than by the State's Attorney. Indeed, in a footnote, the Attorney General argued, as they do here, that "the breach of fiduciary duty claims are wholly independent of the Martin Act and are not preempted," citing Scalp Blade v Advest, Inc. ( 281 AD2d 882, 883) and Caboara v Babylon Cove Dev., LLC ( 54 AD3d 79).
Here, the court correctly determined that plaintiffs causes of action for negligence and breach of fiduciary duty are not precluded by the Martin Act. That turned out to be a pyrrhic victory, since the court went on to properly dismiss those claims as being duplicative of the breach of contract cause of action ( see Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382, 389). Moreover, the motion court correctly denied defendants' motion to dismiss the cause of action for negligent misrepresentation, which was properly pleaded and is not precluded by the Martin Act.
It is well established that a cause of action alleging "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). Furthermore, "liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified" ( Kimmell v Schaefer, 89 NY2d 257, 263).
Here, plaintiffs complaint provided specific allegations as to: (1) misrepresentations regarding the number of collateralized mortgage obligations in its portfolio; (2) use of meaningless and misleading ratings as an indicator of the portfolio's health in the context of subprime securities; (3) misrepresentation as to which real estate-backed securities in the portfolio were collateralized; and (4) misleading pricing information regarding liquidation of the portfolio's assets and that the service they used was experiencing problems in accurately pricing securities due to the mortgage crisis. The complaint then clearly stated that plaintiff relied upon the information provided by defendants, and was damaged as a result of the misrepresentations. Since there remain questions of fact as to whether the information defendants provided was incorrect and whether plaintiff justifiably relied thereon, defendants' motion to dismiss was properly denied.
Nor do we find any merit to defendants' claim that the court erred in not dismissing plaintiffs entire breach of contract claim. It is well settled that "[i]n the context of a CPLR 3211 motion to dismiss, the pleadings are necessarily afforded a liberal construction" ( Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 326) and the plaintiff will be accorded "the benefit of every possible favorable inference" ( Leon v Martinez, 84 NY2d 83, 87).
Here, defendants argue that the classification of securities they used comports with industry practice, and that any deviations from sector limits as set forth in the agreements resulted from plaintiffs withdrawal of funds. They also argue that plaintiffs contractual period of limitations ran, further prompting dismissal of this claim. However, the record does not contain any of the monthly statements or portfolio securities holdings reports, rendering it impossible to ascertain what information was provided. Moreover, defendants' arguments are fact-based, particularly with respect to their assertion regarding the effect plaintiffs withdrawal of funds from its account had on deviating from the sector limits, thus precluding the dismissal.
We have reviewed the parties' remaining contentions and find them unavailing.
Motion seeking leave to file amicus curiae brief and motion for judicial notice granted.
gate; rather, it is liable because it was the recipient of the transfers.
See TEX. BUS. COM. CODE ANN. § 24.009(b)(1). Moreover, no damages for fraudulent transfer were awarded against 5E as Westgate's alter ego in the original July 15, 2008 judgment.
Although the trial court's finding that 5E was the alter ego of Westgate would have been relevant had the trial court entered judgment against 5E on BP and Empire's breach of contract claims against Westgate, we have already determined that the trial court was without plenary power when it substantively and materially amended the July 15, 2008 judgment by awarding BP and Empire contract damages against 5E in its June 5, 2009 judgment, and that judgment is therefore void. Thus, this issue is moot.
We overrule the Esses' fourth issue.
Breach of Fiduciary Duties
In their third issue, the Esses argue that the evidence is legally and factually insufficient to support the trial court's finding that Todd and Brent Esse breached their fiduciary duties to Westgate. However, this was an alternative theory, and the Esses admit that "the trial court entered judgment on the fraudulent transfer claims," while arguing only that "the fiduciary duty claims fail for the same reasons discussed above." They also complain about the trial court's findings of usurpation of corporate opportunity.
None of these findings was necessary to support the Esses' liability for fraudulent transfer about which they complain on appeal. Because no relief is sought from any action of the trial court in entering these findings and we have already sustained the trial court's findings as to the Esses' liability for fraudulent transfer, this issue is moot.
Attorney's Fees
In their fifth issue, the Esses argue that the trial court erred in awarding attorney's fees to Havis, the trustee for Westgate.
Parties claiming attorney's fees must "segregate fees between claims for which they are recoverable and claims for which they are not" and are "required to show that attorney's fees were incurred while suing the defendant sought to be charged with the fees on a claim which allows recovery of such fees." Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 311 (Tex. 2006) (quoting Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 10 (Tex. 1991)). However, an exception to the duty to segregate attorney's fees applies when "claims aris[e] out of the same transaction and are so interrelated that their `prosecution or defense entails proof or denial of essentially the same facts.'" See Stewart Title Guar. Co., 822 S.W.2d at 11 (quoting Flint Assoc. v. Intercont'l Pipe Steel, Inc., 739 S.W.2d 622, 624-25 (Tex. App.-Dallas 1987, writ denied)).
Here, when the Esses placed Westgate in bankruptcy after suit had been filed against them by Empire and BP, all causes of action in this lawsuit against Westgate's corporate fiduciaries and for improper use and transfer of its assets became the property of the bankruptcy trustee, Havis, and subject to collection by him. See 11 U.S.C.A. § 548(a)(1) (West 2004 Supp. 2010) (empowering trustee to avoid fraudulent transfers); § 704(a)(1) (West Supp. 2010) (requiring trustee to "collect and reduce to money the property of the estate for which such trustee serves"); La. World Expo. v. Fed. Ins. Co., 858 F.2d 233, 246 (5th Cir. 1988) (holding that trustee is bound to assert cause of action pursuant to section 704(a) if doing so would maximize value of estate). Havis authorized the continuation of the suit against the Esses and 5E, and he hired Chris DiFerrante, BP and Empire's attorney, to prosecute the Plaintiffs' and Westgate's claims against the Esses and 5E.
The trial court found that Westgate and Havis were entitled to attorney's fees for bringing Westgate's fraudulent transfer cause of action against the Esses and 5E. The trial court also found that BP and Empire were entitled to attorney's fees on their breach of contract action and on the fraudulent transfer claims. Finally, the trial court found that there was "no evidence or legally insufficient evidence" for it to determine what amount of attorney's fees "spent or actually incurred in this case" applied to the breach of contract action and which applied to the fraudulent transfer cause of action. The trial court's July 15, 2008 order awarded Westgate and Havis $150,000 from the Esses and 5E, jointly and severally, for "attorney's fees for the services of their counsel through completion of trial."
In order to prove a claim for fraudulent transfer of Westgate's assets, the trustee had to prove (1) that a transfer made by Westgate was fraudulent as to a creditor whose claim arose before the transfer was made, (2) Westgate made the transfer without receiving a reasonably equivalent value in exchange, and (3) Westgate was insolvent at that time or became insolvent as a result of the transfer. TEX. Bus. COM. CODE ANN. § 24.006(a). Specifically, the trustee had to prove that the Esses' transfer of corporate funds to pay Boone, the transfer of payment for the Mallet prospect, and the transfer to HWA were made after the claims of breach of BP and Empire, Westgate's creditors, had arisen under their contracts with Westgate. Thus, proof of BP's and Empire's breach of contract claims against Westgate was required in this case to establish an essential element of the trustee's fraudulent transfer claim, and that claim could not be proved without proof of the intertwined contract claims.
The trustee, Havis, is clearly entitled to attorney's fees for successfully prosecuting Westgate's fraudulent transfer cause of action under section 24.013 of the Fraudulent Transfer Act, which provides, "In any proceeding under this chapter, the court may award costs and reasonable attorney's fees as are equitable and just." Id., § 24.013 (Vernon 2009). Likewise, BP and Empire are entitled under section 24.013 to recovery of attorney's fees for the successful prosecution of the breach of contract action that served as the necessary foundation for the fraudulent transfer action. See id. (permitting recovery of such fees as are "equitable and just"). Moreover, the same attorney, DiFerrante, represented the bankruptcy trustee, Havis, and BP and Empire in continuing and successfully completing the prosecution of the fraudulent transfer and contract action begun by BP and Empire against Westgate that resulted in the judgment awarded against the Esses and 5E. Nor was it necessary, or even possible, that the fees be segregated. Rather, the exception to the duty to segregate attorney's fees applies because the trustee's and BP and Empire's "claims aris[e] out of the same transaction and are so interrelated that their `prosecution or defense entails proof or denial of essentially the same facts.'" See Stewart Title Guar. Co., 822 S.W.2d at 11.
We overrule the Esses' fifth issue.
Conclusion
We affirm the judgment of the trial court.