Fletcher Fixed Income Alpha Fund, Ltd. v. Grant Thornton LLP

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15-P-830 Appeals Court
FLETCHER FIXED INCOME ALPHA FUND, LTD., & another1 vs. GRANT
THORNTON LLP & others.2
No. 15-P-830.
Suffolk. January 6, 2016. - July 14, 2016.
Present: Cypher, Grainger, & Meade, JJ.
Auditor. Practice, Civil, Motion to dismiss. Jurisdiction,
Nonresident, Long-arm statute. Due Process of Law,
Jurisdiction over nonresident. Negligence,
Misrepresentation, Proximate cause. Proximate Cause.
Civil action commenced in the Superior Court Department on
January 17, 2014.
Motions to dismiss were heard by Janet L. Sanders, J.
Rachel S. Fleishman, of New York (Philip Y. Brown with her)
for the plaintiffs.
Grant J. Esposito, of New York, for Grant Thornton LLP.
William M. Connolly, of Pennsylvania, for EisnerAmper LLP &
another.
Jonathan D. Cogan, of New York, for SS&C Technologies, Inc.
1
Massachusetts Bay Transportation Authority Retirement
Fund.
2
EisnerAmper LLP, EisnerAmper (Cayman) Ltd., and SS&C
Technologies, Inc.
2
MEADE, J. The plaintiffs, Fletcher Fixed Income Alpha
Fund, Ltd. (Alpha), and Massachusetts Bay Transportation
Authority Retirement Fund (MBTARF), Alpha's sole shareholder,
appeal from the dismissal of their claims for accounting
malpractice and negligent misrepresentation against certain
entities that audited and administered Alpha, for failing to
discover the fund manager's fraud. The claims against the
defendants, Grant Thornton LLP (Grant Thornton), and EisnerAmper
LLP and EisnerAmper (Cayman) Ltd. (collectively, EisnerAmper),
who served as auditors, were dismissed for lack of personal
jurisdiction, a Superior Court judge ruling that the plaintiffs
failed to show that their claims arose from the defendants'
transaction of business in Massachusetts. The claims brought by
MBTARF against SS&C Technologies, Inc. (SS&C), a former Alpha
administrator, were dismissed for failure to state a claim upon
which relief can be granted, the judge reasoning that Alpha was
insolvent by the time SS&C was hired, thereby negating the
element of proximate cause.
Pending their appeal to this court, the plaintiffs settled
with EisnerAmper. As to the remaining defendants, the
plaintiffs principally argue that in deciding the issue of
specific jurisdiction, the judge should have taken into account
a broader range of contacts between Grant Thornton and
Massachusetts, and should have considered Grant Thornton's
3
knowledge that the audit reports would be sent to a
Massachusetts entity. MBTARF also maintains that the judge held
it to an incorrect pleading standard in dismissing its claims
against SS&C for failure to allege facts to support causation.
We affirm.
1. Background. We summarize the undisputed facts from the
judge's February 23, 2015, "Memorandum of Decision and Order on
the Defendants' Motions to Dismiss Plaintiffs' Amended
Complaint." MBTARF is a pension fund for public employees and
retirees of Massachusetts Bay Transportation Authority. In
June, 2007, MBTARF invested in Alpha. Alpha, along with FIA
Leveraged Fund, Ltd. (Leveraged), and Fletcher Income Arbitrage
Fund, Ltd. (Arbitrage) (collectively, the Fletcher funds), were
operated in the Cayman Islands as feeder funds for Fletcher
International, Ltd. (FILB), the master fund. The Fletcher funds
were managed by one Alphonse Fletcher, through Fletcher Asset
Management (FAM), based in New York. MBTARF invested $25
million in Alpha, all of which it lost the following year when
Alpha became insolvent.
In December, 2007, FAM hired Grant Thornton to provide
auditing services for a number of Fletcher funds, including
Alpha. Grant Thornton performed the work, and Grant Thornton
Cayman Islands, an entity organized under the laws of the Cayman
Islands, issued the audit reports. Grant Thornton Cayman
4
Islands issued audit reports for 2007 and 2008, addressed to the
board of directors and the shareholders of the audited funds.
In March, 2010, Grant Thornton notified FAM that it was
withdrawing its audit opinions for Arbitrage and Leveraged for
2007 and 2008, after the Securities and Exchange Commission
challenged the accounting treatment of two $80 million "cashless
notes" exchanged between the Fletcher funds. Grant Thornton
instructed FAM to notify persons likely to rely on the withdrawn
audit reports. Neither FAM nor Grant Thornton notified MBTARF,
which had invested only in Alpha, that the reports for Arbitrage
and Leveraged had been withdrawn. FAM then replaced Grant
Thornton with EisnerAmper.
SS&C was hired by FAM as Alpha's administrator in April,
2010. MBTARF previously had been informed by FAM in 2007 that
the calculation of Alpha's value would be made in consultation
with the fund administrator at the time. But MBTARF was not
informed that when SS&C took over that role from its
predecessor, SS&C would not participate in valuations. MBTARF
claims that had it been so informed, it immediately would have
redeemed its investment.
The amended complaint alleges that Alphonse Fletcher
committed fraud by inflating the value of the Fletcher funds.
The plaintiffs claim that Grant Thornton is liable for
improperly auditing the Fletcher funds, and that SS&C, as fund
5
administrator, misrepresented the nature of its services and the
value of MBTARF's investment.
2. Personal jurisdiction under G. L. c. 223A, § 3(a). For
a court to exercise personal jurisdiction over a nonresident,
"there must be a statute authorizing jurisdiction and the
exercise of jurisdiction must be consistent with basic due
process requirements mandated by the United States
Constitution." Bulldog Investors Gen. Partnership v. Secretary
of the Commonwealth, 457 Mass. 210, 215 (2010) (citation
omitted). If the long-arm statute does not provide a basis to
confer personal jurisdiction over the defendant, we need not
consider the constitutional question of due process. Roberts v.
Legendary Marine Sales, 447 Mass. 860, 865 (2006). The
plaintiff has the burden of production as to jurisdictional
facts once jurisdiction is challenged. See Bulldog Investors
Gen. Partnership v. Secretary of the Commonwealth, supra at 219.
See also Cepeda v. Kass, 62 Mass. App. Ct. 732, 739-740 (2004)
(describing burden of proof by preponderance of evidence
applicable to motion pursuant to Mass.R.Civ.P. 12[b][2], 365
Mass. 754 [1974]).
The plaintiffs direct their arguments to specific, rather
than general, jurisdiction. General jurisdiction requires that
a foreign corporation have affiliations with the forum State
that are so "continuous and systematic" as to render the
6
defendant essentially at home there. Daimler v. Bauman, 134 S.
Ct. 746, 754 (2014) (citation omitted). The factual allegations
in the amended complaint make clear that Grant Thornton did not
have continuous or systematic contact with Massachusetts to
warrant the exercise of general jurisdiction.
Specific jurisdiction, by contrast, "depends on an
affiliation between the forum and the underlying controversy."
Walden v. Fiore, 134 S. Ct. 1115, 1121 n.6 (2014) (citation
omitted). The plaintiffs contend that specific jurisdiction
over Grant Thornton is proper under the Massachusetts long-arm
statute, G. L. c. 223A, § 3, as amended by St. 1969, c. 623.
The statute provides, in relevant part:
"A court may exercise personal jurisdiction over a person,
who acts directly or by an agent, as to a cause of action
in law or equity arising from the person's
"(a) transacting any business in this commonwealth;
"(b) contracting to supply services or things in this
commonwealth;
"(c) causing tortious injury by an act or omission in this
commonwealth;
"(d) causing tortious injury in this commonwealth by an act
or omission outside this commonwealth if he regularly does
or solicits business, or engages in any other persistent
course of conduct, or derives substantial revenue from
goods used or consumed or services rendered, in this
commonwealth."
The plaintiffs rely on G. L. c. 223A, § 3(a) and (d). As
to § 3(a), the judge ruled that the evidence failed to show that
7
the plaintiffs' claims arose from Grant Thornton's transaction
of business in Massachusetts. The judge observed that the
audited funds were operated in the Cayman Islands and that the
work involved in the Alpha audit was performed outside of
Massachusetts. The judge further observed that Grant Thornton's
few contacts with Massachusetts bore little or no connection to
its audits of Alpha, and most took place after the audit
activities outlined in the amended complaint transpired.
On appeal, the plaintiffs argue that in analyzing G. L.
c. 223A, § 3(a), the judge should have considered the totality
of Grant Thornton's contacts with Massachusetts, rather than
only those connected to the audits. For this, the plaintiffs
rely on an overly-broad reading of Tatro v. Manor Care, Inc.,
416 Mass. 763 (1994). However, the tort claim in Tatro arose in
the context of a contractual relationship between the parties.
The issue was whether a single telephone call between the
plaintiff in Massachusetts and the defendant hotel owner in
California, in which the plaintiff reserved a hotel room, was
sufficient contact with Massachusetts to satisfy § 3(a), when
the plaintiff was subsequently injured on the defendant's
premises during her stay. The Supreme Judicial Court held that
"[p]articularly where a contract between the parties is
associated with other forum-related activities, a defendant's
relatively minor contacts with a Massachusetts plaintiff have
8
been held sufficient to satisfy the transacting business
requirement set out in § 3(a)." Id. at 768.
The court in Tatro v. Manor Care, Inc., supra, did not
include in its analysis the defendant's general contacts with
Massachusetts, but rather considered only those contacts that
were directed at soliciting the same kind of contractual
relationship, targeting Massachusetts business people who might
schedule conferences at a California hotel, that the defendant
ultimately procured with the plaintiff. Citing Hahn v. Vermont
Law Sch., 698 F.2d 48, 50-52 (1st. Cir. 1983), the court
observed that "[t]he defendant's contact with the plaintiff was
part of a larger systematic effort on its part to obtain
business from Massachusetts businesses and residents." Tatro v.
Manor Care, Inc., supra at 769. The cases do not hold that
unrelated contacts with the forum are relevant for specific
jurisdiction under G. L. c. 223A, § 3(a), as the plaintiffs
insist. That argument ignores the court's directive in Tatro
that other forum-related activities must be associated with the
challenged transaction between the parties in order to be
relevant to the analysis. Ibid. We understand "associated" to
mean something more than mere coexistence.
Moreover, such an expansive reading of Tatro would run
afoul of due process, which provides that in order for a State
to exercise specific jurisdiction, it is the defendant's suit-
9
related contacts that must create a substantial connection with
the forum State. See Walden v. Fiore, supra at 1121. In United
Elec., Radio & Mach. Wkrs. of America v. 163 Pleasant St. Corp.,
960 F.2d 1080, 1087 (1st Cir. 1992), the United States Court of
Appeals for the First Circuit explained that the Massachusetts
"long-arm statute also demands that plaintiffs' cause of action
arise from the defendant's transaction of business in the
commonwealth," and "[t]he statute's relatedness requirement
mirrors a key constitutional requirement for the exercise of
specific jurisdiction." See Cambridge Literary Properties, Ltd.
v. W. Goebel Porzellanfabrik G.m.b.H & Co. Kg., 295 F.3d 59, 63
(1st Cir. 2002) (constitutional limit on specific jurisdiction
under G. L. c. 223A, § 3[a], "requires a nexus between the claim
and the defendant's in-state activities").
Turning to the case against Grant Thornton, the plaintiffs
point to evidence that the company registered to do business in
Massachusetts in 1996. The evidence also indicates that in
June, 2013, Grant Thornton had more than 175 employees in its
Boston office. However, those contacts were not shown to be
related to the Alpha audits performed by Grant Thornton for 2007
and 2008, nor do they support the contention that the Alpha
audits, which were performed outside of Massachusetts pursuant
to a contract with a Cayman Islands entity, were part of a
larger systematic effort to obtain business in Massachusetts.
10
The plaintiffs also claim that the judge failed to apply
the but/for analysis, as set out in Tatro v. Manor Care, Inc.,
supra at 771, in determining whether their claims arose from
Grant Thornton's Massachusetts contacts. In particular, they
rely on an offering memorandum between FAM and MBTARF, which
indicated that Grant Thornton had been hired as Alpha's
independent auditors and that Alpha would send the audit report
to the shareholders. According to the plaintiffs, the offering
memorandum shows that Grant Thornton knew that MBTARF would
receive and rely on the reports in Massachusetts. In the
plaintiffs' view, Grant Thornton's knowledge that FAM would send
the Alpha audit reports to its Massachusetts shareholders
constituted a Massachusetts contact that was causally linked to
the plaintiffs' injury when MBTARF relied on them. However, as
the judge properly determined, Grant Thornton's knowledge that
FAM would send the audit reports to Massachusetts does not
constitute a contact with Massachusetts sufficient to support
jurisdiction. See Walden v. Fiore, 134 S. Ct. at 1124-1125
(defendant's knowledge that affidavit he drafted in Georgia
would affect plaintiffs in Nevada was not proper basis for
specific jurisdiction in Nevada). As explained in Walden v.
Fiore, supra at 1125, a defendant's actions outside the forum,
in that case the State of Nevada, did not create sufficient
11
contacts with the forum "simply because he allegedly directed
his conduct at plaintiffs whom he knew had Nevada connections."
This court applied similar reasoning in Morris v. UNUM Life
Ins. Co., 66 Mass. App. Ct. 716, 721-722 (2006), where telephone
calls and letters sent from two Maine physicians to a
Massachusetts physician, concerning an insured's ineligibility
for disability coverage, were deemed insufficient in-forum
contacts to confer jurisdiction in Massachusetts for the
insured's claims of misrepresentation against the out-of-State
physicians. That the information provided by the Maine
defendants was communicated to and utilized in Massachusetts to
deny coverage to the plaintiff did not supply the requisite
contacts for specific jurisdiction under G. L. c. 223A, § 3(a)
or (d). Id. at 722.
3. Personal jurisdiction under c. 223A, § 3(d). As a
threshold matter, the parties debate whether c. 223A, § 3(d),
may be relied upon to establish specific jurisdiction. Grant
Thornton maintains that § 3(d) can support only general
jurisdiction and that, since the plaintiffs have waived general
jurisdiction, they have no claim under that section of the long-
arm statute. See, e.g., Connecticut Natl. Bank v. Hoover
Treated Wood Prod., Inc., 37 Mass. App. Ct. 231, 233 n.6 (1994)
(§ 3(d) "is predicated on general jurisdiction," i.e., defendant
having engaged in continuous and systematic activity in the
12
forum, unrelated to the suit); Fern v. Immergut, 55 Mass. App.
Ct. 577, 581 n.9 (2002) (referring to claim under § 3[d] as one
for general jurisdiction). In any event, while the cases tend
to support Grant Thornton's view, the judge properly ruled that
the plaintiffs failed to satisfy their burden of showing that
specific jurisdiction may be exercised over Grant Thornton under
§ 3(d).
Section 3(d) of G. L. c. 223A requires a showing of
tortious injury in Massachusetts caused by an out-of-State act
or omission, and proof that the defendant regularly does or
solicits business in Massachusetts or otherwise engages in a
persistent course of conduct or derives substantial revenue from
Massachusetts. Even assuming that the injury to MBTARF and
Alpha occurred in Massachusetts, the record, as delineated above
in our discussion of G. L. c. 223A, § 3(a), fails to establish
the latter requirement. Also, as the judge observed, due
process considerations would not permit the exercise of specific
jurisdiction over Grant Thornton on these facts, given the scant
evidence of Grant Thornton's activities in relation to
Massachusetts at the time of the alleged wrongdoing.3
3
The plaintiffs maintain that Grant Thornton derived
substantial revenues from Massachusetts in 2013 and 2014, but
the judge emphasized that the plaintiffs provided no evidence to
support the claim, even if relevant.
13
We reject the plaintiffs' contention that Grant Thornton's
more recent Massachusetts contacts should be considered in the
G. L. c. 223A, § 3(d), analysis. In establishing specific
jurisdiction, particularly in the absence of a contractual or
other continuing relationship with a Massachusetts plaintiff,
our focus is directed to the defendant's contacts at the time
the cause of action arose, rather than when the complaint was
filed. See Cambridge Literary Properties Ltd. v. Goebel
Porzellanfabrik G.m.b.H & Co. Kg., 295 F.3d at 66. The factual
allegations do not establish that Grant Thornton's work relative
to the plaintiffs' claims was ongoing at the time of the
complaint so as to render its contacts with Massachusetts in
2013 and 2014 relevant under § 3(d).4
As a final matter, contrary to the plaintiffs' assertion,
this case bears no resemblance to Burger King Corp. v.
Rudzewicz, 471 U.S. 462 (1985), which involved a long-term
franchise contract between the parties and, as a result, a
4
The Federal cases cited by the plaintiffs from other
jurisdictions involved manufacturers marketing their defective
products to the forum State and are factually and procedurally
distinct. See, e.g., Clune v. Alimak AB, 233 F.3d 538, 544 n.8
(8th Cir. 2000) (relevant contacts were manufacturer's presence
in forum while crane was present there, not only when crane
accident occurred); Logan Prod., Inc. v. Optibase, Inc., 103
F.3d 49, 52-53 (7th Cir. 1996) (constitutional analysis of
purposeful availment, defendant manufacturer having conceded
specific jurisdiction under State long-arm statute for claim
brought by a distributor). The plaintiffs also cite Grupo
Dataflux v. Atlas Global Group L.P., 541 U.S. 567 (2004), but
that case addressed subject matter jurisdiction.
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continuing obligation on the part of the Michigan defendant to
maintain a substantial connection with Burger King Corporation
in the forum State of Florida. The defendant there knowingly
"entered into a carefully structured 20-year relationship that
envisioned continuing and wide-reaching contacts with Burger
King in Florida." Id. at 480. Here, significantly, there was
no contractual relationship between Grant Thornton and a
Massachusetts plaintiff, nor was there a continuous obligation
or other course of contact directed at Massachusetts by Grant
Thornton. As noted above, knowledge that FAM would send the
audit reports to Massachusetts was not sufficient contact
between Grant Thornton and the forum to establish jurisdiction
for purposes of either G. L. c. 223A, § 3(a) or (d).
4. Claims against SS&C. MBTARF brought claims against
SS&C for negligent misrepresentation, aiding and abetting fraud,
and violation of G. L. c. 93A, § 11. The amended complaint
alleges that MBTARF would have redeemed its investment in Alpha
when SS&C took over as administrator in 2010 had MBTARF known
that SS&C had disavowed its duty to take part in Alpha's asset
valuation. Yet according to the amended complaint, Alpha was
"hopelessly insolvent" by the end of 2008, or "likely earlier."
On appeal, MBTARF argues that the judge applied the wrong
standard, at this stage of the litigation, because MBTARF was
not required to demonstrate that its allegation that SS&C was
15
the proximate cause of its loss was true or to produce evidence
to that effect. However, as SS&C argues, dismissal under
Mass.R.Civ.P. 12(b)(6), 365 Mass. 754 (1974), is appropriate
"where the allegations in the complaint clearly demonstrate that
the plaintiff's claim is legally insufficient." Harvard
Crimson, Inc. v. President & Fellows of Harvard College, 445
Mass. 745, 748 (2006). Causation is a necessary element of the
plaintiff's claims against SS&C. "Before liability for
negligence can be imposed, there must first be a legal duty owed
by the defendant to the plaintiff, and a breach of that duty
proximately resulting in the injury." Davis v. Westwood Group,
420 Mass. 739, 742-743 (1995). Also contrary to MBTARF's
assertion, lack of proximate cause is appropriate for
determination under rule 12(b)(6), where the complaint itself
demonstrates that causation, as alleged, was not proximate. See
Leavitt v. Brockton Hosp., Inc., 454 Mass. 37, 44-45 (2009).
Given the allegations indicating that Alpha was insolvent when
SS&C took over as fund administrator, the judge properly relied
on lack of proximate cause as a basis for dismissal.
MBTARF suggests that it did not have to allege that SS&C
was the sole cause of the loss, but only that SS&C's conduct was
a substantial factor in the loss, citing Lawrence Sav. Bank v.
Levenson, 59 Mass. App. Ct. 699, 707 (2003). The distinction
does not help MBTARF's position on the facts alleged, as MBTARF
16
must still show a causal connection between SS&C's role at Alpha
and MBTARF's failure to redeem prior to Alpha's insolvency.
Given the timeline alleged in the amended complaint, MBTARF has
not shown that SS&C was a substantial factor in MBTARF's loss.
MBTARF further posits that despite Alpha's insolvency by
the time SS&C was hired, there might have been some assets at
that time that could have been used to satisfy MBTARF's
redemption request. Facts to support that position were not
identified in the amended complaint. "The plaintiff's claim
must be based on facts set forth in the complaint; all materials
outside the pleadings are excluded in this review." General
Motors Acceptance Corp. v. Abington Cas. Ins. Co., 413 Mass.
583, 584 (1992). We agree with SS&C that the argument is
speculative and does not warrant reversal.
Judgment affirmed.