Court Opinion

ID: 4020029
Source: CourtListenerOpinion
Date Created: 2016-07-29 15:00:36.769698+00
Date Added: 2024-06-11T09:34:09.930266
License: Public Domain

14-3446-cv(L)
     Krys v. Klejna

                                UNITED STATES COURT OF APPEALS
                                    FOR THE SECOND CIRCUIT

                                          SUMMARY ORDER

     RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
     SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
     BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
     WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
     MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
     NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY
     OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

 1           At a stated term of the United States Court of Appeals for the Second Circuit, held at the
 2   Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the
 3   29th day of July, two thousand sixteen.
 4
 5   Present:
 6                    ROSEMARY S. POOLER,
 7                    PETER W. HALL,
 8                    SUSAN L. CARNEY,
 9
10                           Circuit Judges.
11   ____________________________________________________
12
13   KENNETH M. KRYS, AS JOINT OFFICIAL LIQUIDATOR
14    OF SPHINX LTD., SPHINX STRATEGY FUND, LTD.,           Nos. 14-3446(L), 14-3480(CON)
15   SPHINX PLUS SPC LTD., SPHINX DISTRESSED LTD.,
16   SPHINX MERGER ARBITRAGE LTD., SPHINX MACRO LTD.,
17   SPHINX LONG/SHORT EQUITY LTD., SPHINX MANAGED
18   FUTURES LTD., ET AL.; AS ASSIGNEE OF CLAIMS ASSIGNED
19   BY MIAMI CHILDRENS HOSPITAL FOUNDATION, OFI
20   ASSET MANAGEMENT, GREEN & SMITH INVESTMENT
21   MANAGEMENT LLC, THALES FUND MANAGEMENT LLC,
22   KELLNER DILEO & CO. LLC, MARTINGALE ASSET
23   MANAGEMENT LP, LONGACRE FUND MANAGEMENT LLC, ET AL.,
24   MARGOT MACINNIS, AS JOINT OFFICIAL LIQUIDATOR OF SPHINX
25   LTD., SPHINX STRATEGY FUND, LTD., SPHINX PLUS SPC LTD.,
26   SPHINX DISTRESSED LTD., SPHINX MERGER ARBITRAGE LTD.,
27   SPHINX MACRO LTD., SPHINX LONG/SHORT EQUITY LTD.,
28   SPHINX MANAGED FUTURES LTD., ET AL.; AS ASSIGNEE
29   OF CLAIMS ASSIGNED BY MIAMI CHILDRENS HOSPITAL
30   FOUNDATION, OFI ASSET MANAGEMENT, GREEN & SMITH
31   INVESTMENT MANAGEMENT LLC, THALES FUND MANAGEMENT
                                                     1
 1   LLC, KELLNER DILEO & CO. LLC, MARTINGALE ASSET
 2   MANAGEMENT LP, LONGACRE FUND MANAGEMENT LLC, ET AL.,
 3   HARBOUR TRUST CO. LTD., AS TRUSTEE OF THE SPHINX TRUST,
 4
 5                         Plaintiffs - Appellants,
 6
 7                         v.
 8
 9   DENNIS A. KLEJNA, JPMORGAN CHASE & CO.,
10
11                         Defendants - Appellees.
12
13   ____________________________________________________
14
15   For Plaintiffs-Appellants:   DAVID J. MOLTON (Andrew S. Dash, on the brief), Brown Rudnick
16                                LLP, New York, NY.
17
18                                Leo R. Beus & Lee M. Andelin, Beus Gilbert PLLC, Phoenix, AZ.
19
20   For Defendants-Appellees:    PHILIP D. ANKER (Ross E. Firsenbaum, Ari J. Savitsky, on the
21                                brief), Wilmer Cutler Pickering Hale and Dorr LLP, New York,
22                                NY, for JPMorgan Chase & Co.
23
24                           HELEN B. KIM, Thompson Coburn LLP, Los Angeles, CA, for
25                           Dennis A. Klejna.
26   ____________________________________________________
27
28          Appeal from a judgment of the United States District Court for the Southern District of

29   New York (Rakoff, J., Lynch, J.).

30          UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND

31   DECREED that the judgment of the district court is AFFIRMED.

32          Plaintiffs-Appellants, a group of now-defunct hedge funds, appeal from the district

33   court’s judgment adopting the Special Master’s Report and Recommendation and dismissing

34   their state law claims against Defendants-Appellees Dennis A. Klejna and JPMorgan Chase &

                                                      2
 1   Co. (“Chase”).1 We assume the parties’ familiarity with underlying facts, procedural history,

 2   and issues presented on appeal.

 3          1.      Abstention

 4          The plaintiffs argue that the district court was required to abstain from hearing the case

 5   under 28 U.S.C. § 1334(c)(2), which provides that, for state-law causes of action “related to”

 6   (but not “arising under” or “arising in”) title 11,

 7                   with respect to which an action could not have been commenced
 8                  in a court of the United States absent jurisdiction under this
 9                  section, the district court shall abstain from hearing such
10                  proceeding if an action is commenced, and can be timely
11                  adjudicated, in a State forum of appropriate jurisdiction.
12
13          “Four factors come into play in evaluating § 1334(c)(2) timeliness: (1) the backlog of the

14   state court’s calendar relative to the federal court’s calendar; (2) the complexity of the issues

15   presented and the respective expertise of each forum; (3) the status of the title 11 bankruptcy

16   proceeding to which the state law claims are related; and (4) whether the state court proceeding

17   would prolong the administration or liquidation of the estate.” Parmalat Capital Fin. Ltd. v.

18   Bank of Am. Corp., 639 F.3d 572, 580 (2d Cir. 2011) (Parmalat I). “Whether an action can be

19   timely adjudicated in state court is a mixed question of law and fact. The factual inquiry focuses

20   on how quickly a case can be adjudicated in state court; the legal inquiry asks if this pace is

21   sufficiently swift. Given this mixed question of law and fact, we review the court’s

22   determination de novo.” Id.

23

     1
       Since oral argument, the parties have stipulated pursuant to Fed. R. App. P. 42(b) to dismiss
     the appeals as to Defendants-Appellees Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
     successor-by-merger to Banc of America Securities LLC, and Credit Suisse Securities LLC,
     FKA Credit Suisse First Boston LLC. (See Order, ECF No. 232).
                                                           3
 1            The district court properly ruled that abstention was not required.2 The plaintiffs argue

 2   that their claims could be “timely adjudicated” in New York or New Jersey state courts.

 3   Although the plaintiffs rely on the general time-processing standards of those courts, this fails to

 4   account for the nature of their claims, which (as the district court found) were “one piece of a

 5   much larger, extremely complex litigation puzzle.” Krys v. Sugrue, No. 08CIV3065(GEL), 2008

 6 WL 4700920, at *9 (S.D.N.Y. Oct. 23, 2008) (internal quotation marks omitted). We have

 7   explained that “when the facts in a case are especially complex, the forum with greater

 8   familiarity with the record may likewise be expected to adjudicate the matter more quickly.”

 9   Parmalat I, 639 F.3d at 581. As the district court recognized, remanding these actions to state

10   court “would simply complicate and slow down the resolution of those claims, as well as of the

11   matters already pending before this Court.” Krys, 2008 WL 4700920, at *10 (internal quotation

12   marks omitted). The Second Circuit’s decisions in Parmalat I and Parmalat II do not change

13   this conclusion. In those cases, the Court emphasized that because the completed summary

14   judgment record could be transferred to Illinois state court, the “difference in timing appear[ed]

15   to be a matter of months, rather than years.” Parmalat Capital Fin. Ltd. v. Bank of Am. Corp.,

16   671 F.3d 261, 267 (2d Cir. 2012) (Parmalat II). In this case, by contrast, many of the defendants

17   were dismissed, and the claims against those defendants would need to be litigated from scratch.

18   Further, unlike the Parmalat litigation, this case does not raise any novel legal questions, and the

19   relevant state law was well-established. Cf. id. (noting uncertainty as to whether a in pari delicto

20   defense would be available against a bankruptcy trustee under Illinois state law). Finally, the

21   bankruptcy proceedings of SPhinX Ltd. (“SPhinX”), a plaintiff in this case, remain open, and

     2
      We need not address the defendants’ argument that the plaintiffs waived their abstention claim
     by failing timely to raise it because the plaintiffs’ arguments fail on the merits in any event.

                                                      4
 1   any damages awarded in this case could affect the administration of that estate, as the plaintiffs

 2   concede. We agree with the district court that, in these circumstances, abstention was not

 3   mandatory.

 4           2.      Dismissal of Defendant Klejna

 5           The plaintiffs further challenge the district court’s dismissal of Defendant-Appellee

 6   Klejna. We review de novo a district court’s decision to grant a motion to dismiss. Kassner v.

 7   2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007). To survive a motion to dismiss, a

 8   complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that

 9   is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

10           We agree with the Special Master’s reasoning and conclusion that the plaintiffs lacked

11   standing to sue Klejna. On a motion to dismiss, “it is the burden of the party [asserting standing

12   to sue] . . . clearly to allege facts demonstrating that he is a proper party to invoke judicial

13   resolution of the dispute.” Thompson v. Cty. of Franklin, 15 F.3d 245, 249 (2d Cir. 1994)

14   (quoting Warth v. Seldin, 422 U.S. 490, 518 (1975)). The Second Amended Complaint alleges

15   that Klejna was involved with diverting the plaintiffs’ funds from Refco LLC into unsegregated

16   accounts at its unregulated, offshore subsidiary, Refco Capital Markets (“RCM”), where the

17   funds were commingled for use in fraudulent activities designed to conceal Refco’s losses,

18   bolster Refco’s financial statements, and enrich various individuals. While the plaintiffs have

19   standing to sue for the excess funds that were taken out of the Refco accounts and moved to

20   RCM, the Special Master concluded that any damages to the plaintiffs would not have flowed

21   from that transfer, but instead they flowed from the underlying Refco fraud. The plaintiffs lack

22   standing to sue for the Refco fraud, however, because their claims are derivative of the harm that

23   occurred to Refco. The plaintiffs allege, in essence, that Refco could not pay them back because

                                                        5
 1   it was looted and went bankrupt. We conclude for that reason that their damages are thus no

 2   different from those suffered by any other creditor of Refco.

 3          To the extent that the plaintiffs’ damages arise from Refco’s insolvency, they must be

 4   resolved in the bankruptcy proceeding because they are property of the estate. See 11 U.S.C.

 5   § 541(a)(1). And those claims largely have been resolved. Klejna has settled with the Refco

 6   trustee, and payment pursuant to that settlement was made available for creditors to pursue.

 7   Further, the plaintiffs settled with the RCM trustee and agreed to relinquish their claims in

 8   exchange for approximately $50 million. Permitting the plaintiffs to bring civil suit against

 9   Klejna when they have already had the opportunity to recover as creditors to Refco in the

10   bankruptcy proceedings would give them the prospect of a double recovery, and it would

11   undermine “[t]he trustee’s single effort [which] eliminates the many wasteful and competitive

12   suits of individual creditors.” Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339,

13   1342–43 (7th Cir. 1987). For substantially the reasons set forth in the Special Master’s Report

14   and Recommendation, we find the plaintiffs’ arguments unpersuasive. Because the plaintiffs’

15   claims against Klejna for damages arising from Refco’s insolvency estate are derivative, the

16   plaintiffs lack standing to pursue them. Dismissal of the claims against Klejna was proper.

17          3.      Dismissal of claims against Chase

18          Finally, the plaintiffs challenge the district court’s dismissal of their claims against Chase

19   for aiding and abetting fraud (and related claims). To plead aiding and abetting under New York

20   law, the plaintiffs must allege (1) that there was a primary violation (e.g., fraud), (2) the

21   defendant had “actual knowledge” of the primary violation, and (3) the defendant provided

22   substantial assistance to advance the commission of the primary violation. Krys v. Pigott, 749

23 F.3d 117, 127 (2d Cir. 2014). Moreover, under Fed. R. Civ. P. 9(b), “[i]n asserting claims of

                                                       6
 1   fraud—including claims for aiding and abetting fraud or a breach of fiduciary duty that involves

 2   fraud—a complaint is required to plead the circumstances that allegedly constitute fraud with

 3   particularity.” Id. at 129.

 4          The district court properly dismissed these claims because the plaintiffs did not plead

 5   Chase’s knowledge with particularity. The plaintiffs’ complaint alleges a claim that some Refco

 6   party breached its fiduciary duty by transferring money to unsegregated accounts without

 7   authorization. Nothing in the complaint indicates, however, that Chase knew the transfers were

 8   unauthorized. While Chase may have known that the money was transferred from segregated to

 9   unsegregated accounts, this transfer in and of itself was not a breach of fiduciary duty without

10   Chase having knowledge that the transfers were unauthorized.

11                                              Conclusion

12          We have considered Appellants’ remaining arguments and find them to be without merit.

13   The judgment of the district court is AFFIRMED.

14                                                 FOR THE COURT:
15                                                 CATHERINE O’HAGAN WOLFE, CLERK

                                                      7