Title: IDT Corporation v. Morgan Stanley Dean Witter & Co.

State: new-york

Issuer: New York Appellate Court

Document:

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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 27  
IDT Corporation, 
            Respondent, 
        v. 
Morgan Stanley Dean Witter & Co. 
et al., 
            Appellants.
Guy Miller Struve, for appellants.
Stephen P. Younger, for respondent.
PIGOTT, J.:
IDT Corporation and Telefonica Internacional, S.A.,
both telecommunications companies, executed a Memorandum of
Understanding ("MOU") in August 1999 concerning SAm-1, a vast
underwater fiber-optic cable network Telefonica was building. 
Pursuant to the MOU, IDT was to buy from Telefonica a ten percent
equity share in NewCo, a corporation that would "construct,
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establish, operate and maintain . . . and . . . sell capacity on"
SAm-1.  A separate entity was to be created to market products
associated with the network.  IDT would have the right to buy
capacity in the network, at a favorable rate, during its
operational life.
In June 2000, Telefonica informed IDT that it intended
to modify the MOU, replacing NewCo with a larger entity, Emergia,
in which Telefonica offered IDT a five percent share.  According
to IDT, Morgan Stanley Dean Witter & Co. ("Morgan Stanley"),
Telefonica's investment banker, advised IDT in the summer of 2000
that the value of a five percent interest in Emergia was far
greater than that of a ten percent interest in NewCo. 
Nevertheless, IDT, unpersuaded, broke off negotiations with
Telefonica in October 2000.
Although Morgan Stanley acted as Telefonica's
investment banker in relation to SAm-1, it had previously acted
on IDT's behalf in 1999, in negotiations concerning a different
proposed fiber-optic cable network, and in subsequent matters. 
IDT engaged Morgan Stanley as its financial adviser in regard to
shares in Net2Phone, Inc. that it sold in the summer of 2000 for
about $1 billion.  According to IDT, in 1999-2000, Morgan Stanley
requested and received confidential business and financial
information concerning IDT, had access to IDT's records, and
enjoyed wide-ranging communications with its executives. 
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No. 27
1 The Panel rejected IDT's contention that NewCo and Emergia
were one and the same.  Rather, it found, NewCo was envisaged as
a company holding the infrastructure assets of SAm-1, and did not
encompass the marketing function and revenues of the enterprise. 
In reaching this conclusion, the Arbitration Panel relied on,
among other things, minutes of a July 2000 IDT board meeting,
indicating that IDT recognized that Emergia was a larger
enterprise, with greater growth potential, than NewCo.  The
Arbitration Panel expressed skepticism about Morgan Stanley's
summer 2000 valuation of NewCo and Emergia, noting that its
projections were "prepared by Telefonica and Morgan Stanley to be
presented to IDT as part of the process of negotiating IDT's
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IDT commenced an arbitration proceeding on May 25,
2001, against Telefonica, alleging that Telefonica had breached
the MOU, in particular its provisions entitling IDT to an equity
share in NewCo and giving it the right to buy capacity in SAm-1. 
IDT sought an award in an amount no less than $3.15 billion.  IDT
made no allegations against Morgan Stanley.  No representative of
Morgan Stanley testified, but a valuation memorandum concerning
NewCo and Emergia that Morgan Stanley had presented to IDT in
2000 was subpoenaed and submitted to the Arbitration Panel.
Following a lengthy hearing, the Panel concluded that
Telefonica had breached both the "capacity purchase" and "equity
purchase" provisions of the MOU.  It calculated IDT's aggregate
damages for Telefonica's capacity purchase breach to be
$16,883,817.  However, noting the weakness of the
telecommunications market in the second half of 2000, the Panel
calculated that the present value of IDT's interest in NewCo was
negative, and concluded that IDT had suffered no damages as a
result of Telefonica's breach of the equity purchase provisions.1 
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No. 27
ownership percentage in Emergia."
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Telefonica paid IDT $21.6 million, representing damages and
interest.
On November 5, 2004, IDT commenced this action against
Morgan Stanley, alleging that it had provided Telefonica with
confidential information about IDT, induced Telefonica to breach
the MOU and, moreover, presented false and misleading evidence to
the Arbitration Panel, affecting the Panel's assessment of IDT's
damages.  Its complaint contains five causes of action: (1)
breach of fiduciary duty, (2) intentional interference with
existing contract, (3) intentional interference with prospective
business relations, (4) misappropriation of confidential and
proprietary business information, and (5) unjust enrichment.  IDT
seeks compensatory damages, disgorgement of profits obtained by
Morgan Stanley in connection with SAm-1, punitive damages, and
the return of a $10,000,000 fee that IDT paid Morgan Stanley in
relation to the Net2Phone, Inc. transaction, plus interest and
fees.
Morgan Stanley moved to dismiss the complaint under
CPLR 3211, arguing, among other things, that IDT's claims were
barred by collateral estoppel and the statute of limitations. 
Supreme Court dismissed IDT's intentional interference with
prospective business relations claim, but otherwise denied the
motion.  On appeal, the Appellate Division affirmed, with one
Justice dissenting, holding that IDT's remaining claims were not
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2 After Supreme Court denied the motion to dismiss, the
parties proceeded to discovery and Morgan Stanley produced
documents that, according to IDT, reveal further wrongdoing by
Morgan Stanley during the arbitration proceeding.  IDT filed an
amended complaint.  Supreme Court granted Morgan Stanley's motion
to dismiss the new claims.  That decision is under appeal.
In June 2008, IDT moved to dismiss the present appeal as
moot, on the ground that the original complaint had been
significantly amended.  We denied the mootness motion on
September 4, 2008 (11 NY3d 750).
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barred by collateral estoppel, because IDT had not "had an
opportunity to conduct discovery on the extent of the damages it
suffered due to Morgan Stanley's alleged tortious conduct" (45
AD3d 419 [1st Dept 2007]).  The majority also concluded that the
claims stated valid causes of action and were not time-barred. 
The Appellate Division granted Morgan Stanley leave to appeal to
this Court, certifying the question whether its order was
properly made.  We answer that question in the negative and
reverse.2
Although the issue of whether IDT is collaterally
estopped from relitigating the amount of its compensatory damages
divided the Appellate Division in this case, we need not address
it, because all of IDT's claims are either time-barred or fail to
state a cause of action.  We conclude that IDT's breach of
fiduciary duty, tortious interference with contract, and
misappropriation of confidential and proprietary business
information claims are untimely and its unjust enrichment claim
fails to state a cause of action.  We address the causes of
action in the sequence they appear in the complaint.  
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IDT's first cause of action alleges that Morgan Stanley
breached fiduciary duties it owed to IDT, by "provid[ing]
Telefonica with IDT's confidential and proprietary business and
financial information without IDT's knowledge or consent," thus
inducing Telefonica to renege on the MOU, and by "devis[ing] a
fraudulent scheme to dupe both IDT and the Arbitration Panel as
to the 'distinction' between NewCo and Emergia and the valuation
of those companies."  IDT alleges that the Arbitration Panel was
misled into minimizing the amount of damages Telefonica owed to
IDT.  It seeks full compensatory damages -- in an amount it
describes at the outset of its complaint as "hundreds of millions
of dollars" -- as well as disgorgement of profits and punitive
damages.
IDT submits that its breach of fiduciary duty claim is
governed by a six-year statute of limitations and is therefore
timely.  Morgan Stanley asserts that a three-year limitations
period applies.  
New York law does not provide a single statute of
limitations for breach of fiduciary duty claims.  Rather, the
choice of the applicable limitations period depends on the
substantive remedy that the plaintiff seeks (Loengard v Santa Fe
Industries, Inc., 70 NY2d 262, 266 [1987]).  Where the remedy
sought is purely monetary in nature, courts construe the suit as
alleging "injuries to property" within the meaning of CPLR 214
(4), which has a three-year limitations period (see e.g. Yatter v
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William Morris Agency, 256 AD2d 260, 261 [1st Dept 1998]). 
Where, however, the relief sought is equitable in nature, the
six-year limitations period of CPLR 213 (1) applies (Loengard, 70
NY2d at 266-267).  Moreover, where an allegation of fraud is
essential to a breach of fiduciary duty claim, courts have
applied a six-year statute of limitations under CPLR 213 (8)
(Kaufman v Cohen, 307 AD2d 113, 119 [1st Dept 2003]).
Here, IDT primarily seeks damages -- in the amount of
"hundreds of millions of dollars" -- and the equitable relief it
seeks, including the disgorgement of profits, is incidental to
that relief.  This is not an action in which it can reasonably be
asserted that "the relief demanded in the complaint . . . is
equitable in nature and that a legal remedy would not be
adequate" (Loengard, 70 NY2d at 267).  Thus, looking to the
reality, rather than the form, of this action (see Paver &
Wildfoerster v Catholic High Sch. Ass'n, 38 NY2d 669, 674
[1976]), we conclude that IDT seeks a monetary remedy.  
Moreover, we are not persuaded by IDT's argument that
its breach of fiduciary duty claim is essentially a fraud action
and therefore governed by a six-year statute of limitations.  The
fiduciary relationship alleged by IDT exists between Morgan
Stanley and IDT, not between Morgan Stanley and the Arbitration
Panel.  For us to conclude that IDT's breach of fiduciary duty
cause of action is a sufficiently pleaded fraud action, we would
have to discern a claim that IDT acted in "justifiable reliance"
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(Lama Holding Co. v Smith Barney Inc., 88 NY2d 413, 421 [1996])
on Morgan Stanley's alleged misrepresentation or material
omission.  Although IDT asserts that Morgan Stanley attempted to
deceive it in 2000, with regard to the relative values of Emergia
and NewCo, IDT does not claim that it was actually duped.  In
fact, IDT refused to accept a modified MOU, contrary to Morgan
Stanley's recommendations.  Consequently, we conclude that this
is not a fraud allegation, and that the three-year limitations
period of CPLR 214 (4) applies.
We now turn to the question of when IDT's breach of
fiduciary duty claim accrued.  A tort claim accrues as soon as
"the claim becomes enforceable, i.e., when all elements of the
tort can be truthfully alleged in a complaint" (Kronos, Inc. v
AVX Corp., 81 NY2d 90, 94 [1993]).  As with other torts in which
damage is an essential element, the claim "is not enforceable
until damages are sustained" (id. at 94).  To determine
timeliness, we consider whether plaintiff's complaint must, as a
matter of law, be read to allege damages suffered so early as to
render the claim time-barred (id. at 94-97).  Here, the only
reasonable inference to be drawn from IDT's allegations is that
it first suffered loss, as a result of Morgan Stanley's alleged
breach of fiduciary duty, after Telefonica refused to comply with
the MOU.  The exact date of the injury is not alleged but must
have been before May 25, 2001, when IDT commenced the arbitration
against Telefonica, alleging that it had sustained a loss of some
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No. 27
3 Morgan Stanley contends that the breach of fiduciary duty
claim fails on the merits, because there was no fiduciary
relationship between IDT and Morgan Stanley on the transaction in
suit, but this too is a question we need not reach because the
claim, even if meritorious, is time-barred.
4 IDT did not appeal Supreme Court's dismissal of its third
claim.
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$3.15 billion as a result of Telefonica's breach of their binding
agreement.  More than three years passed, therefore, before IDT
commenced this action, rendering IDT's breach of fiduciary duty
claim time-barred.3
Turning to IDT's second and fourth causes of action4 -- 
interference with existing contract and misappropriation of
confidential and proprietary business information,
respectively -- the statute of limitations in each case is three
years, under CPLR 214 (4), which the parties do not dispute.  As
with IDT's first cause of action, the claims were not enforceable
until IDT first suffered damages.  The damages are those
resulting from Telefonica's refusal to comply with the MOU --
intransigence that was allegedly induced by Morgan Stanley by
means of the disclosure of confidential IDT business information. 
Again, we must conclude from IDT's complaint that it first
suffered loss -- as a result of Morgan Stanley's alleged
interference with contractual relations and misappropriation of
confidential business information -- when Telefonica refused to
comply with the MOU.  And again, although the exact date of the
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injury is not alleged, it must have been before May 25, 2001,
rendering the claims time-barred.
IDT argues that Morgan Stanley's statute of limitations
defenses should be barred by equitable estoppel.  However, IDT
fails to demonstrate that any action or inaction by Morgan
Stanley caused IDT's delay in bringing this action (see Zumpano v
Quinn, 6 NY3d 666, 673-676 [2006]).  According to its complaint,
IDT learned in 2000 that Morgan Stanley was denigrating it in
discussions with Telefonica.  IDT, given its awareness that
Telefonica's financial adviser had disparaged it, should have
made further inquiry before the statute of limitations expired
(see Putter v North Shore Univ. Hosp., 7 NY3d 548, 553-554
[2006]).
Finally, IDT alleges that Morgan Stanley was unduly
enriched by the investment banking fees it obtained from IDT and
from Telefonica "and any other fees Morgan Stanley received for
its 'search' for a replacement anchor tenant, as well as any
other fees of any kind that Morgan Stanley had earned for
additional, presently-unknown misappropriations and misuses of
IDT's confidential and financial information."  On appeal, Morgan
Stanley does not argue that the unjust enrichment claim is time-
barred.  Instead it contends that IDT's fifth claim fails to
state a cause of action.  We agree.  
"The theory of unjust enrichment lies as a
quasi-contract claim" (Goldman v Metro. Life Ins. Co., 5 NY3d
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5  IDT's argument that it engaged Morgan Stanley under
duress is unpersuasive, in that the coercion by Morgan Stanley
that IDT alleged in its complaint occurred after IDT refused to
pay the fee, not before the fee was agreed on.
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561, 572 [2005]).  It is an obligation imposed by equity to
prevent injustice, in the absence of an actual agreement between
the parties concerned.  Where the parties executed a valid and
enforceable written contract governing a particular subject
matter, recovery on a theory of unjust enrichment for events
arising out of that subject matter is ordinarily precluded
(Clark-Fitzpatrick, Inc. v Long Island R. Co., 70 NY2d 382, 388
[1987]).  
It follows that the unjust enrichment claim cannot form
the basis of IDT's demand that Morgan Stanley return the
$10,000,000 fee paid in relation to the Net2Phone, Inc.
transaction, because that fee arose from services governed by an
engagement letter signed by IDT on July 26, 2000.5  Nor can the
unjust enrichment claim support the disgorgement of any profits
Morgan Stanley obtained from Telefonica or other companies, in
connection with SAm-1.  An unjust enrichment claim "rests upon
the equitable principle that a person shall not be allowed to
enrich himself unjustly at the expense of another" (Miller v
Schloss, 218 NY 400, 407 [1916]; see also Restatement [1st] of
Restitution § 1).  In seeking Morgan Stanley's profits from SAm-
1, IDT does not, and cannot, allege that Morgan Stanley has been
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unjustly enriched at IDT's expense, because IDT did not pay the
alleged fees.
Accordingly, the order of the Appellate Division should
be reversed, with costs, defendants' motion to dismiss the
remaining causes of action granted, the complaint dismissed in
the entirety, and the certified question answered in the
negative.
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   * 
Order reversed, with costs, defendants' motion to dismiss the
remaining causes of action granted, complaint dismissed in the
entirety, and certified question answered in the negative. 
Opinion by Judge Pigott. Judges Ciparick, Graffeo, Read, Smith
and Jones concur.  Chief Judge Lippman took no part.
Decided March 26, 2009