Opinion ID: 710227
Heading Depth: 2
Heading Rank: 2

Heading: Standing of the Trustee.

Text: 34 As previously noted, because this case comes before us on an appeal from the grant of a motion to dismiss, we must accept as true all of the factual allegations in Hirsch's 1,136-page, 7,397-paragraph complaint asserting 465 separate causes of action. See Warth, 422 U.S. at 501, 95 S.Ct. at 2206-07 (1975). General, conclusory allegations need not be credited, however, when they are belied by more specific allegations of the complaint. See Jenkins v. S & A Chaissan & Sons, Inc., 449 F.Supp. 216, 227 (S.D.N.Y.1978); 5A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure Sec. 1363, at 464-65 (2d ed. 1990); cf. In re American Express Co. Shareholder Litig. (Lewis v. Robinson), 39 F.3d 395, 400-01 n. 3 (2d Cir.1994) ([C]onclusory allegations of the legal status of the defendants' acts need not be accepted as true for the purposes of ruling on a motion to dismiss.) (collecting cases). We may consider all papers and exhibits appended to the complaint, as well as any matters of which judicial notice may be taken. See Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir.1993); Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir.1991). The burden to establish standing remains with the party claiming that standing exists, i.e., Hirsch. See E.F. Hutton & Co. v. Hadley, 901 F.2d 979, 984 (11th Cir.1990); 13 Charles A. Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure Sec. 3522, at 63-65 (2d ed. 1984). 35 A careful review of the Complaint reveals that the alleged acts and omissions at issue in this case can be broken down into eight different categories: (1) fraud perpetrated upon the investors in the Colonial limited partnerships by all of the defendants-appellees in contributing to the misleading PPMs; (2) negligence and fraud by Andersen in rendering advice to the Debtors regarding the purchase and syndication of the Travelers Portfolio; (3) professional malpractice by all of the defendants-appellees in preparing and/or disseminating financial information for the PPMs; (4) breach of contract by all of the defendants-appellees in rendering deficient professional services to the Debtors; (5) breach of fiduciary duties owed to the Debtors by all of the defendants-appellees in knowingly participating in the fraud upon investors and/or deliberately withholding such knowledge from Googel and Sisti; (6) fraud and breach of fiduciary duty by (a) all of the defendants-appellees for tacitly condoning Shuch's failure to mail the rescission letters and PPM amendments to the investors in Constitution L.P., and (b) Andersen for helping Shuch to transfer $5.8 million to his wife and a trust so as to undermine Shuch's capacity as a guarantor of Colonial obligations, and failing to disclose the transfers to Googel and Sisti; (7) professional malpractice by Weinstein in preparing misleading personal financial statements for Googel and Sisti; and (8) one RICO claim against Anderson predicated upon the Ponzi Participants' use of the mails and wires in connection with their ongoing, illegal activity in furtherance of the Ponzi schemes of Colonial. 36 Each cause of action, however, is traceable to one of only two types of events alleged in the complaint: (1) the distribution of misleading PPMs to investors; or (2) the provision of deficient professional services directly to Googel, Sisti, and Colonial. See In re Wedtech Corp. (Wedtech Corp. v. KMG Main Hurdman), 81 B.R. 240, 241 (S.D.N.Y.1987) ([A]s alleged against an accountant, claims of fraud, malpractice, aiding and abetting a fraud ..., fraudulent transfer, breach of fiduciary duty, unjust enrichment, and monies had and received, allege what is essentially 'a single form of wrongdoing under different names.' ) (quoting Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 453 (7th Cir.), cert. denied, 459 U.S. 880, 103 S.Ct. 177, 74 L.Ed.2d 145 (1982)). 37 Under the Bankruptcy Code, the bankruptcy trustee may bring claims founded, inter alia, on the rights of the debtor and on certain rights of the debtor's creditors, see, e.g., 11 U.S.C. Secs. 541, 544, 547 (1982 & Supp. V 1987). Whether the rights belong to the debtor or the individual creditors is a question of state law. St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 700 (2d Cir.1989); see also In re Ionosphere Clubs, Inc. (Sobchack v. American Nat'l Bank & Trust Co.), 17 F.3d 600, 607 (2d Cir.1994) (Bankruptcy courts have long been charged with ascertaining, under state law, whether claims belong to the bankruptcy estate or to other claimants.). Thus, the trustee stands in the shoes of the debtors, and can only maintain those actions that the debtors could have brought prior to the bankruptcy proceedings. Wagoner, 944 F.2d at 118 (collecting cases). 38 Connecticut law has recognized the standing of creditors to maintain causes of action for negligence, breach of fiduciary duty, and fraud in precisely these circumstances. See Gengras v. Coopers & Lybrand, No. CV-92 0517836S, 1994 WL 133424, at  5 (Conn.Super.Ct. Mar. 31, 1994) (limited partner may maintain breach of fiduciary duty and fraud claims against accountant hired by general partner who fails to disclose general partner's fraudulent activities to limited partner); see also Tackling v. Shinerman, 42 Conn.Supp. 517, 630 A.2d 1381, 1384 & n. 2 (1993) (Connecticut law recognizes liability in negligence of attorneys and accountants to third parties whose reliance is foreseeable without regard to privity); Twin Mfg. Co. v. Blum Shapiro & Co., P.C., No. 380220, 1992 WL 38319 (Conn.Super.Ct. Feb. 18, 1992), at  2 (conduct approaching, but not constituting, privity adequate to establish liability in negligence of accountant). 39 Further, when creditors, such as the investors in the Colonial limited partnerships, have a claim for injury that is particularized as to them, they are exclusively entitled to pursue that claim, and the bankruptcy trustee is precluded from doing so. As we stated in Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57 (2d Cir.1985): 40 The Trustee in bankruptcy has standing to represent only the interests of the debtor corporation. Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972). Therefore, he has no standing to assert claims of damage to the defrauded purchasers of securities. Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523, 527 (9th Cir.1976). 41 Id. at 62 n. 4; see also Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1101 (2d Cir.1988) (The conduct of defendants, officers of a bankrupt corporation, --bribery, perjury, fraud, and bankruptcy fraud--caused [plaintiff creditor] monetary damage, and the right to recover for that injury belongs, not to [the bankrupt corporation] or its bankrupt estate, but to [plaintiff].), cert. denied, 490 U.S. 1007, 109 S.Ct. 1642, 1643, 104 L.Ed.2d 158 (1989); Cumberland Oil Corp. v. Thropp, 791 F.2d 1037, 1042 (2d Cir.) (right to recover for alleged tort committed against creditor by officer of bankrupt corporation belongs to creditor, not the bankruptcy estate), cert. denied, 479 U.S. 950, 107 S.Ct. 436, 93 L.Ed.2d 385 (1986). 42 In a factually analogous case before the Eleventh Circuit, the court held that claims arising out of a Ponzi scheme belonged only to the defrauded investors, and the trustee lacked standing to sue. Hadley, 901 F.2d at 986-87. The court reasoned that the bankruptcy code precludes a trustee from seeking to collect money not owed to the bankruptcy estate, and that any action by the trustee would be duplicative of pending litigation brought by the defrauded investors. Id.; see also Williams v. California 1st Bank, 859 F.2d 664, 666-67 (9th Cir.1988) (defrauded investors, rather than bankruptcy trustee, entitled to pursue claims arising from bankrupt corporation's Ponzi scheme); In re Ozark Restaurant Equip. Co. (Mixon v. Anderson), 816 F.2d 1222, 1225 (8th Cir.1987) ([W]here ... 'the applicable state law makes such obligations or liabilities run to the corporate creditors personally, rather than to the corporation, such rights of action are not assets of the estate under Section 541(a) that are enforceable by the trustee [under Section 704(1) ].'  (quoting 4 Collier on Bankruptcy p 541.10, at 541-69 to 54170 (15th ed. 1986))) (final alteration in Ozark ), cert. denied, 484 U.S. 848, 108 S.Ct. 147, 98 L.Ed.2d 102 (1987). 43 It follows that claims predicated upon the distribution of misleading PPMs to investors in Colonial limited partnerships are the property of those investors, and may be asserted only by them and to the exclusion of Hirsch. We note in this regard that class actions are being vigorously litigated in behalf of the investors. See, e.g., Seeman v. Arthur Andersen & Co., 896 F.Supp. 250 (D.Conn.1995); In re Colonial Ltd. Partnership Litig. (Pasternak v. Colonial Equities Corp.), 854 F.Supp. 64 (D.Conn.1994). 44 There remain for consideration, however, the claims that are predicated upon professional malpractice alleged to have injured the Debtors. We ruled in Wagoner that when a bankrupt corporation has joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors. 944 F.2d at 118. Further, [a] claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors, not to the guilty corporation. Id. at 120 (collecting cases). We have also ruled that a corporation may not assert RICO claims against its agents for committing illegal actions ostensibly on the corporation's behalf that ultimately redound to its disadvantage. American Express, 39 F.3d at 400 (discussing In re Crazy Eddie Sec. Litig., 714 F.Supp. 1285, 1290-91 (E.D.N.Y.1989)). 45 These precedents would appear to foreclose any action by Hirsch to hold the defendants-appellees liable for professional malpractice on the basis that activities undertaken by them to effectuate the Ponzi scheme also impacted adversely upon Googel, Sisti, and Colonial. The district court did not rely upon this rationale, however, stating: 46 It is noteworthy that a trustee lacks standing to sue third parties who have joined in defrauding creditors. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir.1991). This principle appears to have been applied to bar standing only in cases where the third party is alleged to have aided and abetted the debtors in defrauding creditors. See id. at 120 (collecting cases). In the instant case, the trustee has alleged that Arthur Andersen controlled the debtors. Because this distinction is arguably significant, the court declined to expressly rely on this precedent to bar the trustee's suit in its Ruling. The court now notes, however, that the debtors' alleged participation in defrauding creditors is indeed relevant (if not dispositive) on the issue of trustee standing. 47 Hirsch II, slip op. at 6 n. 4. Thus, in addressing on reconsideration Hirsch's claims of malpractice by Andersen in performing the Due Diligence Investigation of the Travelers Portfolio, the district court reaffirmed its prior ruling on the basis that any damage suffered in connection with [the Travelers Portfolio] was ultimately passed on to the investors. Id. at 4. 48 We agree with the district court that there is likely to be little significant injury that accrues separately to the Debtors in this case. We also note in this connection Hirsch's assurance in his main appeal brief that in light of Colonial's distressed financial condition, any recovery in this case will inure in toto to creditors, and the Debtors will be entirely excluded from any participation. Nonetheless, there is at least a theoretical possibility that some independent financial injury to the Debtors might be established (however remote the prospect of any actual net recovery therefor) as a result of the alleged professional malpractice by defendants-appellees. 49 In any event, we are persuaded that the Wagoner rule should be applied here, and that Hirsch is precluded from asserting the professional malpractice claims alleged in the Complaint because of the Debtors' collaboration with the defendants-appellees in promulgating and promoting the Colonial Ponzi schemes. 6 Hirsch points, in opposition to this view, to the Complaint's allegations that Andersen controlled the Debtors, and invokes Kalb, Voorhis & Co. v. American Fin. Corp., 8 F.3d 130 (2d Cir.1993), in support of his position. 50 In Kalb, we ruled that a trustee for a bankrupt corporation had standing under applicable Texas and Ninth Circuit law to bring an action against another corporation that was the former controlling stockholder of the bankrupt corporation. We held that the trustee would not be barred from proceeding on the basis that the bankrupt corporation was in pari delicto with the putative defendant, because the latter entity forced the [bankrupt] corporation to act for the benefit of the [controlling] shareholder through domination and control. Id. at 133. 51 Kalb is not dispositive in this case. As noted earlier, we are not bound by the Complaint's conclusory allegations of control. Further, even what Hirsch alleges is something less than control, and certainly something far less than the position of the controlling stockholder in Kalb. We focus the following analysis upon those allegations of the Complaint that Hirsch cites in his main appeal brief in support of his argument that Andersen controlled the Debtors. 52 The Complaint alleges that Andersen sought to place Shuch as an employee of Colonial so as to obtain control of Colonial, but immediately thereafter adds: 53 88. Notwithstanding that Colonial eventually retained Shuch, Googel and Sisti were skeptical of making Shuch a full partner of Colonial. Rather, Googel, Sisti and Shuch formed Colonial Realty II, a general partnership in which each of Googel, Sisti and Shuch maintained a one-third ( 1/3) interest. 54 89. In partnerships in which Colonial Realty II was a general partner, Colonial, Googel and/or Sisti were also general partners. In this way, Googel and Sisti sought to control Shuch's participation in the projects. 55 The Complaint also asserts Andersen's control over the Colonial syndications, adding that Googel and Sisti may not have fully understood the impact of the vast losses in many of the syndications, but that Andersen knew everything, was [sophisticated] and highly skilled in real estate finance and syndication, and took the lead in preparing the PPMs for the various syndications. This hardly amounts to total domination and control by Andersen of the Debtors. Indeed, it is the ordinary situation for generalist business executives to be less skilled and knowledgeable concerning specialized areas of activity than the professionals, whether employees or independent contractors, engaged in those areas of activity on behalf of the business enterprise. 56 Further, it is undisputed that Googel and Sisti were the general partners of Colonial, and that they or entities that they controlled were the general partners in the various limited partnerships used to syndicate their real estate ventures. In addition, the Complaint specifically alleges that the Financial Forecasts were revised in more favorable terms if not suitable to Andersen and Colonial, and that both Colonial and Andersen were aware of the continuing inability of the limited partnerships to generate income adequate to meet their commitments to the investors. The Complaint itself describes the Debtors as Ponzi Participants, see supra note 3, an unlikely description for entirely subordinate, dominated toilers in the Ponzi vineyard. Finally, we may take judicial notice that both Googel and Sisti pled guilty to multiple felonies arising from their involvement in Colonial's activities. 57 In sum, domination and control of the Debtors by Andersen is not even meaningfully alleged in the Complaint. Further, the Complaint's attenuated allegations of control are contradicted both by more specific allegations in the Complaint and by facts of which we may take judicial notice. Thus Wagoner, rather than Kalb, controls decision, and Hirsch lacks standing to assert claims of malpractice against defendants-appellees. 58 Finally, in light of the very fundamental deficiencies in Hirsch's assertions of standing and the overall history of this litigation, the district court did not abuse its discretion by dismissing the Complaint without granting leave to amend. See Manson v. Stacescu, 11 F.3d 1127, 1133 (2d Cir.1993), cert. denied, --- U.S. ----, 115 S.Ct. 292, 130 L.Ed.2d 206 (1994).