Court Opinion

ID: 4015609
Source: CourtListenerOpinion
Date Created: 2016-07-14 14:06:10.665648+00
Date Added: 2024-06-11T09:26:37.326668
License: Public Domain

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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.
                                                                     14

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.