Otto Candies, LLC v. KPMG LLP ( 2018 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
OTTO CANDIES, LLC, et al. )
)
Plaintiffs, )
)
v. ) C.A. No. N16C-02-260 PRW
) [CCLD]
KPMG LLP, et al. )
)
Defendants. )
Submitted: January 31, 2018
Decided: Apri125, 2018
Upon Defendants KPMG LLP, KPMG International Cooperative, and KPMG
Ccirdenas Dosal, S. C. ’s Motl``ons to Dl'smz``ss,
DENIED.
Upon Plaintl'ffOtto Candies, LLC, et al. ’s Motion Requesting Jua’z'cial Notice of
Defendant KPMG International ’s Press Releases,
DENIED.
MEMORANDUM OPINION AN_D ()RDER
David E. Ross, Esquire, Ross Aronstrom & Moritz LLP, Wilmington, Delaware,
Terry L. Wit, Esquire (pro hac vice), A. William Urquhart, Esquire (pro hac vice),
Derek L. Shaffer, Esquire (pro hac vice), Quinn Emanuel Urquhart & Sullivan, LLP,
San Francisco, California, Attorneys for Plaintiffs.
Timothy Jay Houseal, Esquire, Jennifer M. Kinkus, Esquire, William E. Gamgort,
Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware, John K.
Villa, Esquire (pro hac vice), Ana C. Reyes, Esquire (pro hac vice), Williams &
Connolly LLP, Washington, D.C., Attorneys for Defendant KPMG International
Cooperative.
Todd C. Schlitz, Esquire, Drinker Biddle & Reath LLP, Wilmington, Delaware,
Robert A. Scher, Esquire (pro hac vice), Jonathan H. Friedman, Esquire (pro hac
vice), Foley & Lardner LLP, New York, NY, Christopher M. Cutler, Esquire, Lori
A. Rubin, Esquire, Foley & Lardner LLP, Washington, D.C., Attorneys for
Defendant KPMG LLP.
Kevin R. Shannon, Esquire, Matthew F. Davis, Esquire, Christopher N. Kelly,
Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Jack B. Jacobs,
Esquire, Sidley Austin LLP, Wi'lmington, Delaware, Michael C. Kelley, Esquire
(pro hac vice), Jose F. Sanchez, Esquire (pro hac vice), Sidley Austin LLP, Los
Angeles, CA, Gregory G. Ballard, Esquire, Sidley Austin LLP, New York, NY,
Attorneys for Defendant KPMG Cérdenas Dosal, S.C.
WALLACE, J.
I. INTRODUCTION
Defendants KPMG International Cooperative (“KPMG lnternational”),
KPMG LLP (“KPMG US”), and KPMG Cardenas Dosal, S.C. (“KPMG Mexico”)
each move to dismiss Plaintiffs’ suit, Which arises from alleged fraud carried out by
Oceanografia S.A. de C.V. (“Oceanografia”), an offshore oil services company,
Citigroup Inc. (“Citigroup”), and Citigroup’s Mexican subsidiaries, Grupo
Financiero Banamex S.A. de C.V. and Banco Nacional de México, S.A.
(“Banamex”).l Plaintiffs allege that Citigroup and Banamex provided Oceanografia
With multimillion dollar cash advances on invoices later discovered to be forged.2
Plaintiffs further allege that had the defendant auditing firms “disclosed the systemic
internal control deficiencies and failures at Oceanografia, Banamex and Citigroup,
Which allowed the fraud to fester and groW, Plaintiffs’ damages Would have been
prevented or substantially reduced.”3
II. FACTUAL AND PROCEDURAL BACKGROUND
The plaintiffs in this action are creditors of Oceanografia and include:
(i) shipping companies that provided services or vessels to Oceanografia;4
' Compl. 11 l.
2 Compl. 11 2.
3 Compl. 1l 8.
4 The shipping companies are Otto Candies, LLC (“Otto Candies”), a Louisiana-based
company, and Otto Candies’s Mexican affiliate, Candies Mexican Investments S. de R.L. de C.V.;
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(ii) holders of bonds issued by Oceanografia;5 and (iii) a bank that had loaned funds
to Oceanografia (collectively, “Plaintiffs”).6
Defendants are KPMG International, a SWiss-incorporated cooperative;7
KPMG US, a member firm of KPMG International incorporated in Delavvare;8 and
KPMG Mexico, another member firm of KPMG International, incorporated in
Mexico (collectively, “KPMG Defendants”).9
The cash advance program began in 2008, When Citigroup opened a credit
line for Oceanografia.m Oceanografia increasingly utilized the credit line, and by
Coastline Maritime Pte., Ltd. (“Coastline”), a Singapore company, and its subsidiaries, Marfield
Ltd. Inc. and Shanara Maritime International, S.A., both of Which are Panamanian companies;
Gulf Investments and Services Ltd., a United Arab Emirates company; Blue Marine Technology
Group and its affiliates Calvi Shipping C.V., a Dutch company, and Blue Marine Shipping II, S.A.
de C.V. and Ocean Mexicana, S.A. de C.V., Mexican companies; Halani International Ltd., a St.
Vincent & Grenadines company; and Shipyard De Hoop B.V. and its subsidiary Hoop Lobith
International B.V., incorporated in The Netherlands. Compl. M 50-105.
5 The bondholders are Waypoint Asset Management LLC, incorporated in Delaware;
Ashmore Investment Advisors Limited and Ashmore Investment Management Limited,
incorporated in England; EIG Management Company, LLC, a Delaware company; ICE Canyon
LLC, a Delaware company; Larrain Vial S.A. Sociedad Administradora de Fondos de Inversion,
a Peruvian company; Moneda International Inc., a British Virgin Islands company; Moneda S.A.
Administradora General de Fondos, a Chilean company; Nordic Trustee, ASA; and additional
bondholders, unnamed in the Complaint but referred to collectively as “Goliath Bondholders.”
Compl.1l‘|l 115_184.
6 The bank is Cooperatieve Rabobank U.A., a Dutch company. Compl. M 185-194.
7 Compl.1l 197.
8 Compl. 11 195.
9 Compl. 1l 198.
'0 Compl.1l 13.
2014, the cash advance limits on the line had grown by approximately 500%.ll The
advances were secured by invoices reflecting services provided to Pemex, Mexico’s
oil and gas company. Plaintiffs allege that these invoices were forged “from at least
August 2013 to February 2014,” but that “[o]n information and belief, even before
September 2013, starting as early as 2010, Oceanografia submitted invoices with
false signatures of Pemex employees to Citigroup to obtain cash advances from
Citigroup.”12
The forgeries were reported in February 2014.13 The Mexican government
placed Oceanografia in receivership following the discovery.14 Criminal
proceedings were brought against Oceanografia and Citigroup in Mexico, and by the
United States Department of Justice and the Securities and EXchange Commission
against Citigroup here in the United States.15
KPMG Mexico began auditing Oceanografia in 2010 and served as its
independent auditor until 2014.16 KPMG Mexico has additionally served as
" Compl. 11 14.
12 Compl. 1111 260_61.
'3 Compl. 1[ 6.
14 Compl. 11 32.
'5 Compl. 1111 32~33.
16 Compl. 11 199.
independent auditor to Banamex since 2005.17 KPMG US has served as Citigroup’s
independent auditor since 2010.18
Plaintiffs brought suit in February 2016, alleging three counts of negligent
misrepresentation claiming that KPMG Mexico and KPMG US negligently
misrepresented their audit opinions for Oceanografia, Citigroup and Banamex, and
that KPMG International is vicariously liable for those failures Plaintiffs say that
the firms’ failure to detect and prevent Oceanografia’s fraudulent scheme has cost
them $1.1 billion in damages.
KPMG Defendants moved immediately for protective orders on Plaintiffs’
jurisdictional discovery requests.19 This Court granted the orders in part, and
appointed a Special Master to resolve the parties’ disputes.20 The Court later adopted
the Special Master’s report.21
KPMG Defendants now move to dismiss Plaintiffs’ suit on the following
grounds: lack of jurisdiction; forum non conveniens; the statute of limitations; and
failure to state a claim.
17 Compl. 11 200.
18 Compl. 11 196.
19 Otto Candies LLC v. KPMG LLP, 2017 WL 3175619, at *1 (Del. Super. Ct. July 26, 2017).
20 Id.2‘ Ia’.
III. STANDARD OF REVIEW
Where a Superior Court Civil Rule 12(b)(1) argument is raised alongside a
12(b)(6) claim in a motion to dismiss, the Court must first consider whether the
claims are properly analyzed under l2(b)(l) or 12(b)(6). “Although both defenses
may result in dismissal, whether a motion to dismiss is based upon subject matter
jurisdiction or upon failure to state a claim is a question having important
implications.”22 The burden of establishing the Court’s subject matter jurisdiction
lies with the party seeking the Court’s intervention.23
When considering a motion to dismiss pursuant to Superior Court Civil Rule
l2(b)(6)_that is, for failure to adequately state a claim_the Court will:
(1) accept all well pleaded factual allegations as true,
(2) accept even vague allegations as “well pleaded” if they
give the opposing party notice of the claim, (3) draw all
reasonable inferences in favor of the non-moving party,
and (4) [not dismiss the claims] unless the plaintiff would
not be entitled to recover under any reasonably
conceivable set of circumstances24
22 Appriva S’holder Liti'g. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1284 (Del. 2007).
23 Ropp v. King, 2007 WL 2198771, at *2 (Del. Ch. July 25, 2007).
24 Cent. M0rtg. C0. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 535 (Del.
201 i).
The Court must accept as true all well-pleaded allegations.25 And every reasonable
factual inference will be drawn in the non-moving party’s favor.26 But the Court
will “ignore conclusory allegations that lack specific supporting factual
allegations.”27
“Dismissal is warranted where the plaintiff has failed to plead facts supporting
an element of the claim, or that under no reasonable interpretation of the facts alleged
could the complaint state a claim for which relief might be granted.”28 But, if the
Court engages the standards described and finds the claimant may recover, the Court
must deny the motion to dismiss.29
IV. DISCUSSION
A. THIS COURT LACKS SUBJECT MATTER JURISDICTION To HEAR THIs
CAsE.
“Whenever a question of subject matter jurisdiction is brought to the attention
of the trial court, the issue must be decided before any further action is taken, and
25 Cent. Mortg. Co., 27 A.3d at 535.
26 Wilmington Sciv. Funa'. Soc ’y, F.S.B. v. Anderson, et al., 2009 WL 597268, at *2 (Del.
Super. Ct. Mar. 9, 2009) (citing Doe v. Cahill, 884 A.2d 451, 458 (Del. 2005)).
27 Anderson v. Tingle, 2011 WL 3654531, at *2 (Del. Super. Ct. Aug. 15, 2011).
28 Hedenberg v. Raber, 2004 WL 2191164, at *1 (Del. Super. Ct. Aug. 20, 2004).
29 Spence v. Funk & Commc ’n Consultants, Inc., 396 A.2d 967, 968 (Del. 1978).
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the issue of jurisdiction must be disposed of regardless of the form of motion.”30
The Court must act under Superior Court Civil Rule 12(b)(1) when it appears from
the record that the Court does not have jurisdiction over the claim.31 “Notably, ‘[t]he
burden of establishing the Court’s subject matter jurisdiction rests with the party
seeking the Court’s intervention.”’32
KPMG US and KPMG International first argue that this Court does not have
Subject matter jurisdiction over the Complaint, because Plaintiffs raise only claims
of negligent misrepresentation33 Plaintiffs counter that this Court has exercised
jurisdiction over negligent misrepresentation claims where “plaintiffs alleged
negligence of an accounting firm to a third party ‘with whom there was no privity of
contract’ and where ‘the only suffered harm was economic in nature.”’34
30 Texcei v. Commercial Fibergiass, 1987 WL 19717, at *2 (Dei. super. Ct. Nov. 3, 1987).
31 Al'rbase Carpet Mart, Inc. v. AYA Assocs., Inc., 2015 WL 9302894, at *2 (Del. Super. Ct.
D€C. 15, 2015), aff’d, 148 A.3d 257 (D€l. 2016).
32 Id. (quoting Ropp, 2007 WL 2198771, at *2).
33 KPMG Int’l Coop.’s Op. Br. in Supp. of its Mot. to Dismiss, Otto Candies, et al, v. KPMG
LLP, et al., C.A. No. N16C-02-260-PRW [CCLD], at 10 (Del. Super. Ct. June 27, 2016)
(hereinafter “KPMG Int’l’s Op. Br.”); KPMG LLP’s Op. Br. in Supp. of its Mot. to Dismiss, Otto
Candies, et al. v. KPMG LLP, et al., C.A. No. N16C-02-260-PRW [CCLD], at 10 (Del. Super. Ct.
June 27, 2016) (hereinafter “KPMG US’s Op. Br”).
34 Pls.’ Opp. to Defs.’ Mot. to Dismiss, Otto Cana'i'es, et al. v. KPMG LLP, et al., C.A. No.
N16C-02-260-PRW [CCLD], at 16 (Del. Super. Ct. Sept. 13, 2017) (hereinafter “Pls.’ Opp.”).
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Plaintiffs point to Carello v. PricewaterhouseCoopers LLP.35 In Carello,
shareholders of a company filed counts of negligent misrepresentation in this Court
claiming they had relied on a public accountant’s assessment of another company
when deciding to sell their business.36 Plaintiffs assert that “[f]or the same reasons
the Carello court had subject matter jurisdiction, this Court does here as well.” But
they ignore the fact that Carello never addresses the issue of subject matter
jurisdiction. A careful reading of Carello reveals that no party raised the jurisdiction
issue and the Court was simply never called upon to address it. So, far from issuing
some pronouncement on this Court’s subject matter jurisdiction over negligent
misrepresentation claims, Carello is, instead, silent on the matter.37
When this Court has been called to speak thereon it has held that “[t]he Court
of Chancery has exclusive jurisdiction over claims of equitable fraud, which is also
known as negligent or innocent misrepresentation To the extent that Plaintiffs’
claims do not have any foundation of Defendants’ knowledge of falsity, they cannot
be heard in this Court.”38
35 Carello v, Prz'cewaterhouseCoopers LLP, 2002 WL 1454111, at *1 (Del. Super. Ct. July
3,2002)
36 Id.37 See id.38 Johnson v. Preferrea' Prof'l Ins. Co., 91 A.3d 994, 1017 (Del. Super. Ct. 2014); see also
Mark Fox Grp., Inc. v. E.I. duPont de Nemours & Co., 2003 WL 21524886, at *5 (Del. Ch. July
2, 2003) (“In addition to developing the concept of claims for negligent or innocent
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And when the Court has had to squarely address the issue, it has repeatedly
observed that the only true exception to the Court of Chancery’s exclusive
jurisdiction occurs when a claim is raised under the Consumer Frauds Act.39 lt might
be said that this Court has previously observed a second “exception” to this
jurisdictional rule: where the Court examined a claim’s “substance” and found that
a plaintiff ultimately “pled simple negligence,” rather than negligent
misrepresentation.40 Yet, more recently, this Court has abandoned even that
distinction.41 In WyPi``e Investments, LLC v. Homschek, the Court held that “the
negligent providing of false information relied upon by the claiming party is a matter
for the Court of Chancery and not the Superior Court.”‘12
misrepresentation, the Court of Chancery has retained exclusive, rather than concurrent,
jurisdiction over such causes of action.”). Notably, Carello was decided pre-Mark Fox Grp.
39 See Van Lake v. Sorin CRM USA, Inc., 2013 WL 1087583, at *11 (Del. Super. Ct. Feb. 15,
2013); Farm Fami``ly Cas. Co. v. Cumberlana' Ins. C0., 2013 WL 5488656, at *4 (Del. Super. Ct.
Oct. 2, 2013); Alwell v. RHIS, Inc., 2006 WL 2686532, at *1 (Del. Super. Ct. Aug. 18, 2006).
Carello might be read to have observed this second “exception.” Carello, 2002 WL 1454111, at
*1 n.2 (noting that amended complaint “avers only negligence.”).
40 Van Lake, 2013 WL 1087583, at *12. See also Smith v. Peninsula Aa'justing Co., 2011
WL 2791252, at *4 (Del. Super. Ct. June 16, 2011).
41 WyPi'e Invs., LLC, v. Homschek, 2018 WL 1581981, at *16 (Del. Super. Ct. Mar. 28, 2018)
(finding that “[t]he elements of duty of care and the exercise of reasonable care are common in
both [claims of negligence and claims of negligent misrepresentation] and seldom does the Court
fail to see an allegation of justifiable reliance regardless of how the complaint is made.”).
42 WyPl'e, 2018 WL 1581981,at*16.
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Therefore, outside of the narrow exception for claims raised under the
Consumer Fraud Act (which is not invoked here), the Court of Chancery has
exclusive jurisdiction over claims of negligent misrepresentation But though this
Court lacks subject matter jurisdiction to hear the case, KPMG Defendants’ Motions
to Dismiss are DENIED as to dismissal of the suit; Plaintiffs may seek transfer to
43
the appropriate venue.
B. THE MOTION REQUESTING JUDICIAL NoTICE oF DEFENDANT KPMG
INTERNATIONAL’s PRESS RELEASES Is DENIED AS MooT.
Plaintiffs request judicial notice of two press releases issued by KPMG
International regarding an investigation into a South African KPMG firm following
allegations of misconduct, arguing that the press releases “would be relevant to a
proposed amended complaint should Defendants’ motions to dismiss not be denied
and Plaintiffs be granted leave to replead.”44
Because this Court has granted KPMG Defendants’ Motions to Dismiss, the
issue is moot. Plaintiffs’ Motion Requesting Judicial Notice is therefore DENIED.
43 See DEL. CODE ANN. tit. 10, § 1902 (2018) (“No civil action, suit or other proceeding
brought in any court of this State shall be dismissed solely on the ground that such court is without
jurisdiction of the subject matter . . . . Such proceeding may be transferred to an appropriate court
for hearing and determination, provided that the party otherwise adversely affected, within 60 days
after the order denying the jurisdiction of the first court has become final, files in that court a
written election of transfer, discharges all costs accrued in the first court, and makes the usual
deposit for costs in the second court.”).
44 Pls.’ Mot. at 11 1.
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V. CONCLUSION
Because Plaintiffs have failed to carry their burden to prove that this Court
has subject matter jurisdiction to hear their claims on the merits, this Court need not
consider the further bases Defendants urge for dismissal.45 The Motions to Dismiss
are DENIED insofar as they seek outright dismissal of this suit. Plaintiffs may seek
transfer to the appropriate venue pursuant to 10 Del. C. § 1902, or elect to have this
Court enter an order of dismissal without prej udice.46 Plaintiffs’ counsel are directed
to submit an order on notice within 10 days.
IT IS SO ORDERED. \ §
// " ZZ/ '
" -(__,..--'-'--'<’..-( L- -»__ __/-
Paul R. Wallace, Judge
45 Thompson v. Lynch, 990 A.2d 432, 434 (Del. 2010) (“If a court lacks subject matter
jurisdiction, its decision is a nullity.”).
46 See Mark Fox Grp., 2003 WL 21524886, at *7,
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