Krys v. Klejna

14-3446-cv(L)
Krys v. Klejna
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.
1 At a stated term of the United States Court of Appeals for the Second Circuit, held at the
2 Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the
3 29th day of July, two thousand sixteen.
4
5 Present:
6 ROSEMARY S. POOLER,
7 PETER W. HALL,
8 SUSAN L. CARNEY,
9
10 Circuit Judges.
11 ____________________________________________________
12
13 KENNETH M. KRYS, AS JOINT OFFICIAL LIQUIDATOR
14 OF SPHINX LTD., SPHINX STRATEGY FUND, LTD., Nos. 14-3446(L), 14-3480(CON)
15 SPHINX PLUS SPC LTD., SPHINX DISTRESSED LTD.,
16 SPHINX MERGER ARBITRAGE LTD., SPHINX MACRO LTD.,
17 SPHINX LONG/SHORT EQUITY LTD., SPHINX MANAGED
18 FUTURES LTD., ET AL.; AS ASSIGNEE OF CLAIMS ASSIGNED
19 BY MIAMI CHILDRENS HOSPITAL FOUNDATION, OFI
20 ASSET MANAGEMENT, GREEN & SMITH INVESTMENT
21 MANAGEMENT LLC, THALES FUND MANAGEMENT LLC,
22 KELLNER DILEO & CO. LLC, MARTINGALE ASSET
23 MANAGEMENT LP, LONGACRE FUND MANAGEMENT LLC, ET AL.,
24 MARGOT MACINNIS, AS JOINT OFFICIAL LIQUIDATOR OF SPHINX
25 LTD., SPHINX STRATEGY FUND, LTD., SPHINX PLUS SPC LTD.,
26 SPHINX DISTRESSED LTD., SPHINX MERGER ARBITRAGE LTD.,
27 SPHINX MACRO LTD., SPHINX LONG/SHORT EQUITY LTD.,
28 SPHINX MANAGED FUTURES LTD., ET AL.; AS ASSIGNEE
29 OF CLAIMS ASSIGNED BY MIAMI CHILDRENS HOSPITAL
30 FOUNDATION, OFI ASSET MANAGEMENT, GREEN & SMITH
31 INVESTMENT MANAGEMENT LLC, THALES FUND MANAGEMENT
1
1 LLC, KELLNER DILEO & CO. LLC, MARTINGALE ASSET
2 MANAGEMENT LP, LONGACRE FUND MANAGEMENT LLC, ET AL.,
3 HARBOUR TRUST CO. LTD., AS TRUSTEE OF THE SPHINX TRUST,
4
5 Plaintiffs - Appellants,
6
7 v.
8
9 DENNIS A. KLEJNA, JPMORGAN CHASE & CO.,
10
11 Defendants - Appellees.
12
13 ____________________________________________________
14
15 For Plaintiffs-Appellants: DAVID J. MOLTON (Andrew S. Dash, on the brief), Brown Rudnick
16 LLP, New York, NY.
17
18 Leo R. Beus & Lee M. Andelin, Beus Gilbert PLLC, Phoenix, AZ.
19
20 For Defendants-Appellees: PHILIP D. ANKER (Ross E. Firsenbaum, Ari J. Savitsky, on the
21 brief), Wilmer Cutler Pickering Hale and Dorr LLP, New York,
22 NY, for JPMorgan Chase & Co.
23
24 HELEN B. KIM, Thompson Coburn LLP, Los Angeles, CA, for
25 Dennis A. Klejna.
26 ____________________________________________________
27
28 Appeal from a judgment of the United States District Court for the Southern District of
29 New York (Rakoff, J., Lynch, J.).
30 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND
31 DECREED that the judgment of the district court is AFFIRMED.
32 Plaintiffs-Appellants, a group of now-defunct hedge funds, appeal from the district
33 court’s judgment adopting the Special Master’s Report and Recommendation and dismissing
34 their state law claims against Defendants-Appellees Dennis A. Klejna and JPMorgan Chase &
2
1 Co. (“Chase”).1 We assume the parties’ familiarity with underlying facts, procedural history,
2 and issues presented on appeal.
3 1. Abstention
4 The plaintiffs argue that the district court was required to abstain from hearing the case
5 under 28 U.S.C. § 1334(c)(2), which provides that, for state-law causes of action “related to”
6 (but not “arising under” or “arising in”) title 11,
7 with respect to which an action could not have been commenced
8 in a court of the United States absent jurisdiction under this
9 section, the district court shall abstain from hearing such
10 proceeding if an action is commenced, and can be timely
11 adjudicated, in a State forum of appropriate jurisdiction.
12
13 “Four factors come into play in evaluating § 1334(c)(2) timeliness: (1) the backlog of the
14 state court’s calendar relative to the federal court’s calendar; (2) the complexity of the issues
15 presented and the respective expertise of each forum; (3) the status of the title 11 bankruptcy
16 proceeding to which the state law claims are related; and (4) whether the state court proceeding
17 would prolong the administration or liquidation of the estate.” Parmalat Capital Fin. Ltd. v.
18 Bank of Am. Corp., 639 F.3d 572, 580 (2d Cir. 2011) (Parmalat I). “Whether an action can be
19 timely adjudicated in state court is a mixed question of law and fact. The factual inquiry focuses
20 on how quickly a case can be adjudicated in state court; the legal inquiry asks if this pace is
21 sufficiently swift. Given this mixed question of law and fact, we review the court’s
22 determination de novo.” Id.
23
1
Since oral argument, the parties have stipulated pursuant to Fed. R. App. P. 42(b) to dismiss
the appeals as to Defendants-Appellees Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
successor-by-merger to Banc of America Securities LLC, and Credit Suisse Securities LLC,
FKA Credit Suisse First Boston LLC. (See Order, ECF No. 232).
3
1 The district court properly ruled that abstention was not required.2 The plaintiffs argue
2 that their claims could be “timely adjudicated” in New York or New Jersey state courts.
3 Although the plaintiffs rely on the general time-processing standards of those courts, this fails to
4 account for the nature of their claims, which (as the district court found) were “one piece of a
5 much larger, extremely complex litigation puzzle.” Krys v. Sugrue, No. 08CIV3065(GEL), 2008
6 WL 4700920, at *9 (S.D.N.Y. Oct. 23, 2008) (internal quotation marks omitted). We have
7 explained that “when the facts in a case are especially complex, the forum with greater
8 familiarity with the record may likewise be expected to adjudicate the matter more quickly.”
9 Parmalat I, 639 F.3d at 581. As the district court recognized, remanding these actions to state
10 court “would simply complicate and slow down the resolution of those claims, as well as of the
11 matters already pending before this Court.” Krys, 2008 WL 4700920, at *10 (internal quotation
12 marks omitted). The Second Circuit’s decisions in Parmalat I and Parmalat II do not change
13 this conclusion. In those cases, the Court emphasized that because the completed summary
14 judgment record could be transferred to Illinois state court, the “difference in timing appear[ed]
15 to be a matter of months, rather than years.” Parmalat Capital Fin. Ltd. v. Bank of Am. Corp.,
16 671 F.3d 261, 267 (2d Cir. 2012) (Parmalat II). In this case, by contrast, many of the defendants
17 were dismissed, and the claims against those defendants would need to be litigated from scratch.
18 Further, unlike the Parmalat litigation, this case does not raise any novel legal questions, and the
19 relevant state law was well-established. Cf. id. (noting uncertainty as to whether a in pari delicto
20 defense would be available against a bankruptcy trustee under Illinois state law). Finally, the
21 bankruptcy proceedings of SPhinX Ltd. (“SPhinX”), a plaintiff in this case, remain open, and
2
We need not address the defendants’ argument that the plaintiffs waived their abstention claim
by failing timely to raise it because the plaintiffs’ arguments fail on the merits in any event.
4
1 any damages awarded in this case could affect the administration of that estate, as the plaintiffs
2 concede. We agree with the district court that, in these circumstances, abstention was not
3 mandatory.
4 2. Dismissal of Defendant Klejna
5 The plaintiffs further challenge the district court’s dismissal of Defendant-Appellee
6 Klejna. We review de novo a district court’s decision to grant a motion to dismiss. Kassner v.
7 2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007). To survive a motion to dismiss, a
8 complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that
9 is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
10 We agree with the Special Master’s reasoning and conclusion that the plaintiffs lacked
11 standing to sue Klejna. On a motion to dismiss, “it is the burden of the party [asserting standing
12 to sue] . . . clearly to allege facts demonstrating that he is a proper party to invoke judicial
13 resolution of the dispute.” Thompson v. Cty. of Franklin, 15 F.3d 245, 249 (2d Cir. 1994)
14 (quoting Warth v. Seldin, 422 U.S. 490, 518 (1975)). The Second Amended Complaint alleges
15 that Klejna was involved with diverting the plaintiffs’ funds from Refco LLC into unsegregated
16 accounts at its unregulated, offshore subsidiary, Refco Capital Markets (“RCM”), where the
17 funds were commingled for use in fraudulent activities designed to conceal Refco’s losses,
18 bolster Refco’s financial statements, and enrich various individuals. While the plaintiffs have
19 standing to sue for the excess funds that were taken out of the Refco accounts and moved to
20 RCM, the Special Master concluded that any damages to the plaintiffs would not have flowed
21 from that transfer, but instead they flowed from the underlying Refco fraud. The plaintiffs lack
22 standing to sue for the Refco fraud, however, because their claims are derivative of the harm that
23 occurred to Refco. The plaintiffs allege, in essence, that Refco could not pay them back because
5
1 it was looted and went bankrupt. We conclude for that reason that their damages are thus no
2 different from those suffered by any other creditor of Refco.
3 To the extent that the plaintiffs’ damages arise from Refco’s insolvency, they must be
4 resolved in the bankruptcy proceeding because they are property of the estate. See 11 U.S.C.
5 § 541(a)(1). And those claims largely have been resolved. Klejna has settled with the Refco
6 trustee, and payment pursuant to that settlement was made available for creditors to pursue.
7 Further, the plaintiffs settled with the RCM trustee and agreed to relinquish their claims in
8 exchange for approximately $50 million. Permitting the plaintiffs to bring civil suit against
9 Klejna when they have already had the opportunity to recover as creditors to Refco in the
10 bankruptcy proceedings would give them the prospect of a double recovery, and it would
11 undermine “[t]he trustee’s single effort [which] eliminates the many wasteful and competitive
12 suits of individual creditors.” Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339,
13 1342–43 (7th Cir. 1987). For substantially the reasons set forth in the Special Master’s Report
14 and Recommendation, we find the plaintiffs’ arguments unpersuasive. Because the plaintiffs’
15 claims against Klejna for damages arising from Refco’s insolvency estate are derivative, the
16 plaintiffs lack standing to pursue them. Dismissal of the claims against Klejna was proper.
17 3. Dismissal of claims against Chase
18 Finally, the plaintiffs challenge the district court’s dismissal of their claims against Chase
19 for aiding and abetting fraud (and related claims). To plead aiding and abetting under New York
20 law, the plaintiffs must allege (1) that there was a primary violation (e.g., fraud), (2) the
21 defendant had “actual knowledge” of the primary violation, and (3) the defendant provided
22 substantial assistance to advance the commission of the primary violation. Krys v. Pigott, 749
23 F.3d 117, 127 (2d Cir. 2014). Moreover, under Fed. R. Civ. P. 9(b), “[i]n asserting claims of
6
1 fraud—including claims for aiding and abetting fraud or a breach of fiduciary duty that involves
2 fraud—a complaint is required to plead the circumstances that allegedly constitute fraud with
3 particularity.” Id. at 129.
4 The district court properly dismissed these claims because the plaintiffs did not plead
5 Chase’s knowledge with particularity. The plaintiffs’ complaint alleges a claim that some Refco
6 party breached its fiduciary duty by transferring money to unsegregated accounts without
7 authorization. Nothing in the complaint indicates, however, that Chase knew the transfers were
8 unauthorized. While Chase may have known that the money was transferred from segregated to
9 unsegregated accounts, this transfer in and of itself was not a breach of fiduciary duty without
10 Chase having knowledge that the transfers were unauthorized.
11 Conclusion
12 We have considered Appellants’ remaining arguments and find them to be without merit.
13 The judgment of the district court is AFFIRMED.
14 FOR THE COURT:
15 CATHERINE O’HAGAN WOLFE, CLERK
7