Otto Candies, LLC v. KPMG LLP

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
OTTO CANDIES, LLC, et al.,
Plaintiffs,
C.A. No. N16C-02-260 PRW CCLD
V.
KPMG LLP, et al.,
Defendants.
Submitted: May 15, 2017
Decided: July 26, 2017
MEMORANDUM OPINION AND ORDER
Upon Plainti]j‘s ’Exceptions to the
Specl`al Master ’s Fz`nal Report and Recommendation,
Plal'ntijj{s‘ ’ Exceptz'ons are DENIED,'
the Special Master ’s Fz`nal Report and Recommendatl`on is ADOPTED, in whole.
David E. Ross, Esquire, Ross Aronstam & Moritz LLP, Wilmington, Delaware,
Terry L. Wit, Esquire (pro hac vice), Quinn Emanuel Urquhart & Sullivan, LLP,
San Francisco, California, A. William Urquhart, Esquire (pro hac vice), Derek L.
Shaffer, Esquire (pro hac vice), Quinn Emanuel Urquhart & Sullivan, LLP,
Washington, District of Columbia, Attorneys for Plaintiffs.
Timothy Jay Houseal, Esquire, Williarn 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,
District of Columbia, Attorneys for KPMG International Cooperative.
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, Wilmington, Delaware, Michael C. Kelley, Esquire
(pro hac vice), Jose F. Sanchez, Esquire (pro hac vice), Sidley Austin LLP, Los
Angeles, California, Gregory G. Ballard, Esquire (pro hac vice), Sidley AuStin LLP,
Attorneys for KPMG Cérdenas Dosal, S.C.
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, NeW York, Attorneys for KPMG LLP,
WALLACE, J.
I. INTRODUCTION
This jurisdictional discovery dispute stems from an allegedly poor audit of
three entities: Banamex, Citigroup, and Oceanografia. Oceanografla Was a large
offshore oil services company in Latin America.l Citigroup is a large, DelaWare-
incorporated bank.2 Banamex is Citigroup’s Mexican subsidiary.3
Citigroup allegedly provided hundreds of millions of dollars to Oceanografia
based on forged invoices.4 Plaintiffs, a group comprised of some of Oceanografla’s
largest creditors, 5 allege the Defendants failed to detect this scheme. 6
Oceanografla’s fraud Was exposed in February 2014 When MeXico’s state-owned oil
and gas company reported to Citigroup that several Oceangrafla invoices contained
forged signatures. 7 Citigroup canceled certain cash advances, precipitating
' Plaintiffs’ Complaint (“Pls.’ Compl.”) at 11 l.
2 Ia’.
3 Ia'.
4 ld. il 2.
5 Pls. Compl. at 11 45. Plaintiffs generally fall into three categories: (l) shipping companies
that sold or leased vessels to Oceanografla; (2) holders of bonds issued by Oceanografia; and
(3) a bank that loaned funds to Oceanografla. Id. at 11 46.
6 Pls.’ Compl. at 11 l.
7 1a 116.
Oceanografia’s collapse.8 Plaintiffs allege that Defendants should have caught on
to the fraud prior to the collapse.
An appointed Special Discovery Master issued a Report and Recommendation
denying Plaintiffs’ jurisdictional discovery requests. For the reasons set forth below,
the Court AGREES WITH the Special Master, and ADOPTS the Special Master’s
Final Report and Recommendation resolving this discovery dispute. In tum, the
Court DENIES Plaintiffs’ Exceptions to the Special Master’s Final Report and
Recommendation.
II. PROCEDURAL BACKGROUND9
A. THE JURISDICTIONAL DISCovERY DISPUTE
On February 26, 2016, Plaintiffs flled a negligent misrepresentation action
against three KPMG entities: KPMG International; KPMG LLP (“KPMG US”); and
KPMG Cardenas Dosal, S.C. (“KPMG Mexico”).lo In an attempt to establish
personal jurisdiction over all three defendants, Plaintiffs allege the parties have
created a “joint venture.” According to Plaintiffs, KPMG International, a Swiss
cooperative, is the overall head of that venture. KPMG MeXico and KPMG US, a
8 ld. 117.
9 Given the limited purpose of this order, the background and the specifics of the discovery
requests are developed in a manner more cursory than usual for the Court. In short, the Court
writes here to the parties, each of which has a strong working knowledge of the particulars of the
specific disputed issues addressed
'0 Unless specificity is required, the Court will refer to all three KPMG entities as Defendants.
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Delaware limited liability partnership, are subsidiaries. Plaintiffs allege KPMG US
exercises controlling influence over KPMG International; So much so, they say, that
KPMG lnternational is KPMG US’s alter ego. So, Plaintiff’ s posit, KPMG US’s
Delaware-incorporation status, combined with its excessive influence over KPMG
International, results in Delaware’s personal jurisdiction over all Defendants.
Defendants have moved to dismiss. Specifically, KPMG lnternational and
KPMG Mexico moved to dismiss for lack of personal jurisdiction While KPMG
US moved to dismiss for failure to state a claim and lack of subject matter
jurisdiction, without contesting personal jurisdiction.
On July l3, 2016, Plaintiffs served jurisdictional discovery on all Defendants
to help them establish personal jurisdiction over KPMG Mexico and KPMG
International.ll On August 23, 2016, Defendants moved for protective orders. 12
Defendants argued jurisdictional discovery was unnecessary because the motion to
dismiss could be heard on the then-extant pleadings and record and could fiilly
ll Notice and Certificate of Service of (i) Plaintiffs’ Jurisdictional Discovery Requests to
Defendants KPMG [US], KPMG [Mexico], and KPMG [International] and (ii) this Notice and
Certificate of Service (Trans. ID 59276380).
12 KPMG lnternational Cooperative’s Motion for Protective Order Relating to Plaintiffs’
Jurisdictional Requests (Trans. ID 59449821) [hereinafter “KPMG lnternational Mot.”];
Defendant KPMG LLP’s Motion for Protective Order (Trans. ID 59449894); and KMPG Cardenas
Dosal, S.C.’s Motion for Protective Order (Trans. ID 59449910).
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adjudicate Plaintiffs’ claims.13 Plaintiffs argued that jurisdictional discovery was
appropriate to establish personal jurisdiction as long as their requests were not
clearly frivolous.14
On November 9, 2016, the Court issued an order granting in part, and denying
in part, Defendants’ motion for a protective order. Specifically, the Court ordered
that:
Defendants need to respond to “Category 2 Discovery”
and “Category 3 Discovery” requests only to the extent
that such requests: support a potential claim for specific
jurisdiction over KPMG lnternational and [KPMG]
Mexico as to their role, if any, in the Banamex audit or the
component audit of Banamex as part of the Citigroup
audit; seek information concerning the relationship and
interaction between the defendants; and are specifically
limited to conduct in Delaware that precisely gives rise to
the claims alleged in the Complaint[.]15
13 See, e.g., KPMG lnternational Mot. at 6 (“[C]ourts have granted motions to dismiss for
lack of personal jurisdiction despite allegations of far more relevant contacts than Plaintiffs make
here.”).
14 Pls.’ Opp’n. to Defs.’ Mots. For Protective Order at 8-10.
15 Order Granting KPMG lnternational Cooperative, KPMG [Mexico], and KPMG LLP’s
Motions for Protective Order Relating to Plaintiffs’ Jurisdictional Discovery Requests (Trans. ID
59815638) (emphasis in original). Category 2 Discovery “seek[s] information about the
relationship between Defendants both generally and in connection with the audits at issue in this
case, such as any communications and meetings or documents exchanged between and among
Defendants relating to the Citigroup, Banamex, and OSA engagements, which are relevant to the
jurisdictional analysis in showing where work was performed and by whom.” Pls.’ Opp’n. to
Defs.’ Mots. For Protective Order at 23-24, n. 35. Category 3 Discovery “seek[s] information
about KPMG’s audit procedures relevant to the component audits, as well as the relationship
between KPMG US and KPMG CD in connection with the audit of Citigroup’s consolidated
financial statements and component audit of Banamex.” Id. at 24-25, n. 38.
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Following entry of the Protective Order, Defendants responded to Plaintiffs’
jurisdictional discovery requests by largely objecting to them.16 The parties had
several unsuccessful meet-and-confers. 17 On February l3, 2017, the Court
appointed a Special Master to resolve the parties’ disputes.18
B. APPOINTMENT oF THE SPECIAL MASTER
The parties submitted briefs to the Special Master concerning three issues:
(l) the joint venture relationship between and among Defendants in connection with
the Citigroup/Banamex audits; (2) the consolidated Citigroup audit as it relates to
(a) establishing a joint venture relationship between and among Defendants, and
(b) identifying connections between the three KPMG entities; and (3) insurance and
indemnity arrangements among the Defendants.19 The Special Master heard oral
argument on March 28, 2017. On April 7, 2017, the Special Master issued a Draft
Report, and invited exceptions from the parties. Defendants filed exceptions. On
April 24, 2017, the Special Master issued his final report and recommendation
16 William B. Chandler lll, Esquire’s Special Master’s Final Report and Recommendation at
5 [hereinafter “Special Master’s Report.”].
l7 Id
18 Stipulation and [Proposed] Order of Reference to Special Discovery Master, signed Feb.
13, 2017. See Trans. ID 60202062.
19 Special Master’s Report at 6-7.
C. THE SPECIAL MAsTER’s REPoRT
The Special Master first determined whether Plaintiffs’ “j oint venture” theory
was so clearly frivolous that it did not warrant further investigation He determined
that Plaintiffs could, in fact, use their “joint venture” theory to attempt to establish
personal jurisdiction over all Defendants.20 But the Special Master rightly observed
that Plaintiffs’ alleged “joint venture” was insufficient alone to establish personal
jurisdiction Plaintiffs still must satisfy Delaware’s long-arm statute and establish
minimum contacts.21
Ten Del. C. § 3104(0), Delaware’s long-arm statute, provides that a
nonresident establishes legal presence within this State when the nonresident:
(l) Transacts any business or performs any character of
work or service in the State;
(2) Contracts to supply Services or things in this State;
(3) Causes tortious injury in the State by an act or
omission in this State;
(4) Causes tortious injury in the State or outside of the
State by an act or omission outside the State if the
person regularly does or solicits business, engages in
any other persistent course of conduct in the State or
derives substantial revenue from services, or things
used or consumed in the State;
20 Ia’. at l2.
21 Id. at 19. See also DEL. CoDE ANN. tit. 10, § 3104(c) (2016).
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(5) Has an interest in, uses or possesses real property in
the State; or
(6) Contracts to insure or act as surety for, or on, any
person, property, risk, contract, obligation or
agreement located, executed or to be performed within
the State at the time the contract is made, unless the
parties otherwise provide in writing.22
To determine the extent to which Plaintiffs could conduct their jurisdictional
discovery, the Special Master looked at the Protective Order’s text. Specifically, the
Special Master focused on the language requiring Defendants to provide responses
“as to their role, if any, in the Banamex audit or the component audit of Banamex as
part of the Citigroup audit.”23 The Special Master read this narrowly, determining
that Citigroup itself was not part of the Order; Plaintiffs could seek jurisdictional
discovery regarding the Banamex audit only.
The Special Master noted that Delaware courts look to the “nature of the acts
giving rise to the claim, rather than the nature of the claims, [to] determine[] whether
a cause of action arises from contacts with the forum.”24 And Plaintiffs’ claims
largely, if not solely, focused on Defendants’ conduct in auditing Banamex.25 ln
22 DEL. CODE ANN. tit 10, § 3104(c)(1)_(6) (2016).
23 See supra., note 15.
24 Special Master’s Report at 23 (quoting Sprint Nextel Corp, v. iPCS, 2008 WL 273 7409, at
*9 (Del. Ch_ July 14, 2008)).
25 Special Master’s Report at 23 (citing Pls.’ Compl. 1111 211, 234-35, 260-61).
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turn, the Special Master determined that any attempts for jurisdictional discovery on
Citigroup and any other audits would be too tenuous to comport with Delaware’s
long-arm statute. And so, the Special Master properly understood “the Order [to]
limit[ ] jurisdictional discovery to discovery relating to the Banamex audit and the
Banamex component audit.”26
ln his initial draft report and recommendation, the Special Master allowed
Plaintiffs limited discovery into Defendants’ Citigroup audit for two reasons. First,
the Special Master held, “[t]o the extent that work was done on the Citigroup audit
in Delaware that affected the way in which the Banamex work was performed,
funded, or insured, Plaintiffs are entitled to discovery on that work.”27 Second, the
Special Master held Plaintiffs could have discovery regarding Defendants’
relationship with the Citigroup audit to the extent it pertained in some way to the
Banamex audit.28 The Special Master allowed this because “it may be that there are
documents or other discovery that do not necessarily discuss specifically the
Banamex component, but nevertheless are ‘reasonably calculated to lead to
26 Special Master’s Report at 24.
27 See Plaintiffs’ Br. in Supp. of Their Exceptions to the Special Master’s Final Report and
Recommendation, Ex. 30, App. A. (Special Master’s Draft Report and Recommendation) at 18.
28 Id
discovery of admissible evidence’ regarding the parties’ roles vis-a-vis the Banamex
audit.”29
After review of all parties’ filings, the Special Master ultimately found that no
work on the Banamex audit or the Banamex component audit occurred in Delaware;
the work occurred either in New York or Mexico.30 No conduct occurred in, or could
be imputed to, Delaware. As such, the Special Master found it “moot to grant
additional jurisdictional discovery to Support a joint venture/ agency theory of
jurisdiction.”31
D. PLAINTIFFS’ EXCEPTIONS
Pursuant to Superior Court Civil Rule 122,32 Plaintiffs have noticed exceptions
to the Special Master’s Final Report and Recommendation. Defendants oppose.
III. STANDARD OF REVIEW
A Special Master’s Report is subject to a’e novo review by this Court.33
29 Ia'.
30 Special Master’s Report at 25-26. See also Plaintiffs’ Br. in Supp. of Their Exceptions to
the Special Master’s Final Report and Recommendation Ex. 32 (Defs.’ Notice of Exceptions to
the Special Master’s April 7, 2017 Draft Report and Recommendation Regarding Jurisdictional
Discovery) at 6-8 (discussing how each KPMG entity did no work in Delaware relating to the
Citigroup and/or Banamex audit).
31 Special Master’s Report at 27. The Special Master did allow Plaintiffs to have additional
jurisdictional discovery on certain insurance and indemnity agreements between and amongst the
KPMG entities. See ia'. at 30.
32 Del. Super. Ct. Civ. R. 122(a) (“Exceptions [to the Master’s Final Report] shall be filed
within 10 days after notice of the filing of the final report has been mailed to the attorneys.”).
33 Del. Super. Ct. Civ. R. 122(c).
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IV. DISCUSSION
After careiill a’e novo review of the Special Master’s Report and
Recommendation, the Court adopts it in whole.
The Plaintiffs bear the burden of showing a basis for the Court’s exercise of
jurisdiction over a nonresident To that end, Plaintiffs must show that “(1) there is
a statutory basis for exercising personal jurisdiction; and (2) subjecting nonresident
defendants to jurisdiction in Delaware would not violate the Due Process Clause of
the Fourteenth Amendment.”34
The burden of establishing jurisdiction “does not refer to a pleading burden,
but rather to the evidentiary burden of proof on the issue of defendant’s amenability
to suit.”35 “As a plaintiff does have an evidentiary burden, [it] may not be precluded
from attempting to prove that a defendant is subject to the jurisdiction of the court,
and may not ordinarily be precluded from reasonable discovery in aid of mounting
such proof.”36 “Only where the facts alleged in the complaint make any claim of
personal jurisdiction over defendant frivolous, might the trial court, in the exercise
of its discretionary control over the discovery process, preclude reasonable
34 Reia’ v. Siniscalchi, L.L.C., 2011 WL 378795, at *4 (Del. Ch. Jan. 31, 2011).
35 Hart Hola'ing Co. Inc. v. Drexel Burnham Lambert lnc., 593 A.2d 535, 538 (Del. Ch. 1991).
36 Id. ar 539.
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discovery in aid of establishing personal jurisdiction.”37 Delaware and federal courts
have recognized that as long as a plaintiff’ s claim is not “clearly frivolous,” the Court
should allow some discovery for the limited purpose of determining jurisdictional
ties.38 To that end, the Court should liberally grant Plaintiffs’ processes sought to
establish personal jurisdiction
The Court, however, “may exercise its sound discretion in delineating the
appropriate scope of discovery.”39 “Because, as a general matter, ‘[t]he scope of
allowable discovery, of course, is tied to the issues presented in the litigation,’
jurisdictional discovery here must relate to the factual allegations in the Complaint
and to the question of personal jurisdiction.”40 Plaintiffs “may not utilize ‘the benefit
of jurisdictional discovery so [they] can fish for a possible basis for this court’s
jurisdiction ”’41
37 Ia’. See In re Am. lnt’l Gp., Inc., 965 A.2d 763, 816 n.l95 (Del. Ch. 2009) (“Without a non-
frivolous ground for jurisdiction, jurisdictional discovery is not appropriate.”).
38 See Hart Hola’ing Co. Inc., 593 A.2d at 539; Compagm'e des Bauxl'tes de Guz'nee v. L ’Um'on
Atlantique S.A. D’Assurances, 723 F.2d 357, 362 (3rd Cir.1983); Toys “R” Us, Inc. v. Step Two,
S.A., 318 F.3d 446, 456 (3rd Cir. 2003).
39 Reia’, 2011 WL 378795, at *4 (quoting In re Tyson Fooa's, Inc., 2007 WL 2685011, at ’1‘3
(Del. Ch. sept 11, 2007)).
40 Ia'. (quoting Cal. Pub. Employees’Ret. Sys. v. Coulter, 2004 WL 1238443, at *l (Del. Ch.
May 26, 2004)).
41 Ia'. (quoting In re Am. lnt’l Gp., Inc., 965 A.2d at 816 n.l95). See Hea'ger v. Mea’line
lna'ustries, Inc., 2017 WL 396770 at *8 (Del. Super. Ct. Jan. 27, 2017) (parties “may not go on a
‘fishing expedition’ in search of a jurisdictional hook”).
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Plaintiffs have made several attempts to establish personal jurisdiction over
two foreign corporations and a Delaware corporation using a unique “joint venture”
theory. Unfortunately for Plaintiffs, they have failed to establish the requisite nexus
between the Defendants to show why this Court should exercise personal jurisdiction
over the two foreign entities. The Court is satisfied that the Special Master has
properly tailored this particular jurisdictional discovery consistent with the Court’s
previous order and applicable law. And, as the Special Master pointed out, Plaintiffs
still have access to the parties’ insurance and indemnity agreements as a tool to
establish personal jurisdiction
V. CONCLUSION
For the reasons Set forth above, the Court agrees with the Special Master, and
ADOPTS the Special Master’s Final Report and Recommendation. And, therefore,
the Court DENIES Plaintiffs’ Notice of Exceptions to the Special Master’s Final
Report and Recommendation.
IT rs So oRl)ERED. O 3
V"'¢-"dr
'Paul R. Wallace, Judge
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