Negrete v. Citibank ( 2019 )

17-2783-cv
Negrete v. Citibank
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT.
CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS
PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A
SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH
THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER
MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the
3rd day of January, two thousand nineteen.
PRESENT: PETER W. HALL,
GERARD E. LYNCH,
Circuit Judges,
PAUL G. GARDEPHE,
District Judge. *
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EDUARDO NEGRETE, GERVASIO NEGRETE,
Plaintiffs-Appellants,
v. No. 17-2783-cv
CITIBANK, N.A.,
Defendant-Appellee.
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FOR APPELLANTS: BLAINE H. BORTNICK, James W. Halter (on the brief),
Rasco Klock Perez & Nieto, LLC, New York, New
York.
FOR APPELLEE: MARSHALL FISHMAN, Samuel Joseph Rubin (on the
brief), Goodwin Proctor, LLP, New York, New York.
* Judge Paul G. Gardephe of the United States District Court for the Southern District of New
York, sitting by designation.
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Appeal from a judgment of the United States District Court for the Southern District of
New York (Sweet, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment of the district court is AFFIRMED.
We assume the parties’ familiarity with the facts, record of prior proceedings, and
arguments on appeal, which we reference only as necessary to explain our decision to affirm.
Background.
Plaintiffs-Appellants Eduardo and Gervasio Negrete (collectively, “the Negretes”), are
brothers and Mexican citizens who maintain several bank accounts with Defendant-Appellee
Citibank, N.A. and signed “International Swaps and Derivatives Association Master
Agreements with Citibank to enable [them] to execute FX transactions through Citibank,
among other transactions.” First Amended Complaint (“FAC”) FAC ¶ 6. Under these
ISDA Agreements the Negretes executed thousands of transactions through Citibank,
including pairing U.S. Dollars, Euros, Yen, Australian Dollars, Canadian Dollars, Great British
Pounds, Mexican Pesos, and other currencies, amounting to roughly $15 billion traded per
annum. As contemplated by the ISDA Agreements, the Negretes gave instructions for these
transactions via telephone to the Latin American desk in Citibank’s New York office. The
2010 ISDA Agreement, which was signed only be Gervasio Negrete, limited liability
thereunder by stating that “[n]o party shall be required to pay or be liable to the other party
for any consequential, indirect, or punitive damages, opportunity costs or lost profits” (the
“limitation of liability provision”). J. App’x at 148 (2010 ISDA Agreement provision 5(g)).
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The Negretes’ trading mostly consisted of placing “limit” and “market” orders. “[W]ith
respect to both types of trades, Citibank added an undisclosed markup to [the Negretes’]
instructions without informing them and, in fact, at times, affirmatively lying to [the Negretes]
that Citibank was adding such a markup.” FAC ¶ 19.
On May 20, 2015, Citicorp, parent of Citibank, pled guilty to conspiring to rig bids in the
FX spot market between December 2007 and January 2013, in violation of the Sherman
Antitrust Act, 15 U.S.C. § 1. In the relevant plea agreement Citicorp admitted that:
[T]hrough its currency traders and sales staff, [Citicorp] engaged in . . . currency
trading and sales practices in conducting FX Spot Market transactions with
customers via telephone, email, and/or electronic chat, to wit: (i) intentionally
working customers’ limit orders one or more levels, or “pips,” away from the
price confirmed with the customer; (ii) including sales markup, through the use
of live hand signals or undisclosed prior internal arrangements or
communications, to prices given to customers that communicated with sales
staff on open phone lines; (iii) accepting limit orders from customers and then
informing those customers that their orders could not be filled, in whole or in
part, when in fact the defendant was able to fill the order but decided not to do
so because the defendant expected it would be more profitable not to do so . . .
FAC ¶ 21.1 Under the terms of the plea agreement, Citibank made a disclosure to its FX
customers, including the Negretes. This was the first time the Negretes were aware that
Citibank was adding an undisclosed markup to their transactions. The brothers shortly
thereafter met with their banker at Citibank who “stated, in sum and substance, ‘I feel very
bad about lying to you two. I was ordered by my superiors at Citibank to add a markup to
all of your orders. I was also instructed that I could not let you know about the markups.
That is why, when you complained about orders not being filled, I had to come up with some
1
“[A] ‘pip’ is the smallest price move of a given exchange rate. As most currency pairs are
priced to four decimal places, a pip is often approximately equal to one basis point.” FAC ¶ 31.
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excuses, without revealing the real reason your orders were not filled as instructed.’” FAC ¶
28.
Citibank would also decline to execute FX trades on behalf of the Negretes where the
market reached the threshold for a limit order they had placed. When the Negretes noticed
such an occurrence, they would call Citibank to inquire, and this happened roughly 150 times.
The individuals on the Latin American trading desk (named in the First Amended Complaint)
specifically “assured [the Negretes], on each occasion, that Citibank was not adding markups
to [their] trade instructions.” FAC ¶ 60. In other instances, Citibank would partially fulfill
an order to retain inventory at a more advantageous price to Citibank.2
“Citibank made substantial profit off of [the Negretes] separate and apart from the
individual FX trades by extending margin loans to Plaintiffs to enable them to trade FX. The
interest payments on these loans made by Citibank to [the Negretes] totaled hundreds of
thousands of dollars.” FAC ¶ 99.
The Negretes filed their original Complaint on September 16, 2015, alleging fraud, breach
of the ISDA Agreements, and negligence, based on Citibank’s undisclosed markups and
allegedly erroneous margin calls. Citibank moved to dismiss the original Complaint, and the
Negretes filed a cross-motion for partial summary judgment with respect to the breach of
contract claim. On May 19, 2016, the district court dismissed the original Complaint in its
2
There are allegations of a total of 35 specific instances of wrongdoing in the First Amended
Complaint. These examples were included after the district court dismissed the original complaint
for lack of specificity.
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entirety with leave to amend, and denied the Negretes’ cross-motion for partial summary
judgment, finding that the Negretes had failed to plead fraud with sufficient particularity.
On June 20, 2016, the Negretes filed the FAC, which asserts six claims for relief: (1) fraud
by omission for the undisclosed markups; (2) fraudulent misrepresentation regarding the
undisclosed markups; (3) breach of the ISDA Agreements regarding the undisclosed markups;
(4) breach of the ISDA Agreements regarding the erroneous calculation of the Negretes’
collateral, and “making wrongful margin calls”; (6) breach of the covenant of good faith and
fair dealing; and (5) fraud regarding the margin calls. FAC ¶¶ 149 – 82.
Citibank moved to dismiss the First Amended Complaint and the Negretes moved for
partial summary judgment. On February 27, 2017, the district court denied the Negretes’
motion and partially granted Citibank’s motion. The district court held that the Negretes’
claims for covering trades [at a later time] at a worse price than the contract price,” were
adequately pled to survive the motion to dismiss because they pled actual damages. The
court dismissed all other claims. Sp. App’x at 86.
Citibank filed an answer to the remaining claim on March 13, 2017. The Negretes made
a request for a final, appealable judgment under Federal Rule of Civil Procedure 54(b), that
request was denied, and the Negretes voluntarily dismissed the remaining claim. This appeal
followed.
Discussion.
We review de novo the district court’s decisions on both motions to dismiss and motions
for summary judgment. Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996); Mullins v. City of New
York, 653 F.3d 104, 113 (2d Cir. 2011). In reviewing a district court’s grant of a motion to
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dismiss, this court “accept[s] as true the factual allegations made in the complaint and draw[s]
all inferences in favor of the plaintiffs.” BPP Illinois, LLC v. Royal Bank of Scotland Group PLC,
859 F.3d 188, 191 (2d Cir. 2017) (internal quotation marks omitted). To survive a motion to
dismiss, a complaint must contain “sufficient factual matter, accepted as true, to ‘state a claim
for relief plausible on its face.’” Aschcroft v. Iqbal, 556 U.S. 662, 663 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
I. The district court properly dismissed the Negretes’ breach of contract claims.
“Under New York law, a breach of contract claim requires proof of (1) an agreement, (2)
adequate performance by the plaintiff, (3) breach by the defendant, and (4) damages.” Fischer
& Mandell, LLP v. Citibank, N.A., 632 F.3d 793, 799 (2d Cir. 2011) (internal quotation marks
omitted).
a. The claims for undisclosed markups do not allege a breach by Citibank.
The Negretes’ claims for breach of contract for undisclosed markups fail for the simple
reason that they do not allege breach of contract. Nothing in the ISDA Agreements, or
alleged to have occurred in the telephone conversations in which the Transactions were
ordered prohibit Citibank’s undisclosed markups.
The Negretes contend that they have adequately pled that the 35 contracts set out in the
FAC required Citibank to give them the “best price” available on the market for their limit
orders, and that Citibank failed to do so. The Negretes do not, however, cite any specific
instance where they or any agent of theirs agreed with Citibank, as part of a completed contract
under the ISDA Agreements, that Citibank would provide them with the “best price” in the
market. Instead, the Negretes merely rely on the fact that they allegedly understood the
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concept of a “limit order” to include an automatic assumption that they would be given the
best price. But that allegation is not sufficient to allege a meeting of the minds sufficient to
add a “best price” term to the oral FX trading contracts.
In the absence of any explicit agreement for Citibank to obtain the best price for the
Negretes, the district court correctly ruled that the ISDA Agreements imposed no such
obligation. The ISDA Agreements created an arms-length counterparty relationship
between the Negretes and Citibank, with respect to which each party acted as a principal,
rather than as a fiduciary of the other. Therefore, absent an explicit agreement to the
contrary, Citibank had no fiduciary obligation to provide the Negretes with the best execution
for their FX trades, because Citibank was not acting as the Negretes’ broker or agent.
b. The Negretes have not sufficiently alleged breach of contract with respect to the alleged erroneous margin
calls.
The district court held that the Negretes’ “fail[ure] to use the required dispute resolution
provision to contest margin calls under the [ISDA Agreements] . . . invalidates the claims of
invalid margin calls,” noting that such dispute resolution provisions have been held
enforceable by courts within the Second Circuit. Sp. App’x at 35 (citing VCG Special
Opportunities Master Fund Ltd. v. Citibank, N.A., No. 08 Civ. 1563 (BSJ), 2009 WL 311362, at *2
(S.D.N.Y. Jan. 29, 2009) (holding that a party’s failure to invoke a dispute resolution provision
precludes the party from later challenging its counterparty’s “request for additional collateral
without having first vetted [its] claim in the manner agreed upon in the . . . Contract.”)). We
agree. Even if the Negretes “complained” about certain margin calls that Citibank made, as
they argue on appeal, the FAC does not allege that the Negretes complied with the dispute
resolution procedure set forth in the ISDA Agreements. The Negretes’ breach of contract
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claims based on Citibank’s allegedly erroneous margin calls claims were therefore properly
dismissed by the district court as waived.
c. The breach of covenant of good faith and fair dealing claims are duplicative of the breach of contract
claims.
The First Amended Complaint alleges that Citibank breached the covenant of good faith
and fair dealing by taking and failing to disclose markups, FAC ¶ 165 (under Claim III), and
erroneously calculating their collateral and making associated wrongful margin calls, FAC ¶
174 (under Claim IV). The district court held that these claims were duplicative of the breach
of contract claims and dismissed them. Sp. App’x at 91 (quoting Harris v. Provident Life &
Accident Ins., 310 F.3d 73, 81 (2d Cir. 2002) (explaining that an implied covenant claim “will
not stand if it is duplicative of a breach of contract claim.”)). These claims were properly
dismissed for the reason stated by the district court. The Negretes argue on appeal that their
breach of the covenant of good faith and fair dealing claims are for Citibank’s “lying,” but that
assertion is not supported by the allegations in the First Amended Complaint. The claims
for breach of the covenant are expressly based on the same facts underlying the breach of
contract claims.
II. The district court properly dismissed the Negretes’ fraud claims.
The elements of fraud under New York law are: “[1] a representation of material fact, [2]
the falsity of that representation, [3] knowledge by the party who made the representation that
it was false when made, [4] justifiable reliance by the plaintiff, and [5] resulting injury.” Centro
Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C.V., 17 N.Y.3d 269, 276 (2011) (internal
quotation marks omitted); accord Evans v. Ottimo, 469 F.3d 278, 283 (2d Cir. 2006).
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Claims for fraud must be pled with “particularity.” Fed. R. Civ. P. 9(b). “That ordinarily
requires a complaint alleging fraud to (1) specify the statements that the plaintiff contends
were fraudulent, (2) identify the speaker, (3) state where and when the statements were made,
and (4) explain why the statements were fraudulent. But the adequacy of particularized
allegations under Rule 9(b) is . . . case- and context-specific.” United States ex rel. Chorches for
Bankr. Estate of Fabula v. Am. Med. Response, Inc., 865 F.3d 71, 81 (2d Cir. 2017) (ellipses in
original, internal quotation marks omitted).
a. The Negretes have not alleged fraud regarding the undisclosed markups.
The First Amended Complaint alleges that Citibank committed fraud by failing to disclose
hidden markups, and by making deliberate and affirmative misrepresentations regarding those
hidden markups. Reasonable minds could differ as to whether the First Amended Complaint
sufficiently alleges the first four elements of fraud regarding these claims or alleges those
elements with the particularity required by Rule 9(b), but the fifth element, loss causation, or
resulting injury, is clearly unsatisfied.
The district court correctly held, however, that the Negretes’ claimed damages for fraud,
based on Citibank’s alleged misrepresentations about not charging markups, are all barred
from recovery by New York’s “out-of-pocket” rule, because “[t]he damages alleged here are
precisely the profits [that the Negretes] would have made were it not for the allegedly
fraudulent markup[s].” Sp. App’x at 77. And under New York’s “out-of-pocket” rule,
“there can be no recovery of profits which would have been realized in the absence of fraud”
because “[d]amages are to be calculated to compensate plaintiffs for what they lost because of
the fraud, not to compensate them for what they might have gained.” Lama Hldg. Co. v. Smith
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Barney Inc., 88 N.Y.2d 413, 421 (1996). “[T]he rationale for the out-of-pocket loss rule [is]
that losses based on ‘a hypothetical lost bargain [are] too undeterminable and speculative to
constitute a cognizable basis for damages.’ A misrepresentation is tortious, therefore, only if
it causes out-of-pocket losses. To hold otherwise would lead courts to award damages based
solely on a ‘speculative . . . allegation that [the plaintiff] was injured at all.’” AHW Inv. P’ship,
MFS, Inc. v. Citigroup Inc., 661 F. App’x 2, 4 – 5 (2d Cir. 2016) (quoting Starr Found. v. AIG, Inc.,
76 A.D.3d 25, 28 (1st Dep’t 2010)).
b. The district court properly dismissed the Negretes’ claim for fraud for erroneous margin calls as
duplicative of the breach of contract claim for margin calls.
The district court dismissed the fraud claim for erroneous margin calls as duplicative of
the breach of contract claims for margin calls. In so holding the district court relied on
Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 20 (2d Cir. 1996). In that case
this court held that where a claim for fraud is based on facts underlying breach of contract,
the “plaintiff must either: (i) demonstrate a legal duty separate from the duty to perform
under the contract . . . ; or (ii) demonstrate a fraudulent misrepresentation collateral or
extraneous to the contract . . .; or (iii) seek special damages that are caused by the
misrepresentation and unrecoverable as contract damages.” Bridgestone/Firestone, Inc., 98 F.3d
at 20.
The First Amended Complaint alleges that “pursuant to the ISDA Agreements, Citibank was
responsible for calculating Plaintiffs’ collateral for the purposes of determining when to make
margin calls.” J. App’x at 578, FAC ¶ 177 (emphasis added). The Negretes set forth no
reasoned argument as to how misstatements of these calculations, which they alleged Citibank
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was required to make under the contract between the parties, were not in fact germane to the
contract and therefore not collateral or extraneous to it.
III. The motion for partial summary judgment was properly denied.
The district court could not have granted partial summary judgment to the Negretes for
liability on their breach of contract claims because the district court correctly found that the
First Amended Complaint did not allege valid damages and the Negretes thus had failed to
plead a breach of contract claim sufficient to survive the motion to dismiss. Bigio v. Coca-Cola
Co., 675 F.3d 163, 178 (2d Cir. 2012).
We have considered all the Negretes’ arguments and conclude that they are without merit.
Accordingly, we AFFIRM the amended judgment of the district court.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk of Court
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