IN RE ENRON CORP. SECURITIES, DERIVATIVE MDL No. 1446, Civil Action Nos. 11-01-3624, H-03-1580, H-03-1579, H-03-1558.
511 F.Supp.2d 742 (2005)
In re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION. Mark Newby, et al., Plaintiffs v. Enron Corporation, et al., Defendants. Connecticut Resources Recovery Authority, Plaintiff, v. Murtha Cullina, LLP, et al., Defendants. Connecticut Resources Recovery Authority, Plaintiff, v. Kenneth L. Lay, et al., Defendants. Connecticut Resources Recovery Authority, Plaintiff, v. Kenneth L. Lay, et al., Defendants.
United States District Court, S.D. Texas, Houston Division.
February 16, 2005.
MEMORANDUM AND ORDER
MELINDA HARMON, District Judge.
ROADMAPI. Factual Background and H-03-1580 ....................................751 II. Pending Motions ..........................................................757 A. H-03-1580 .............................................................757 B. H-03-1579..............................................................757 C. H-03-1558..............................................................758 III. Motions in H-03-1580......................................................760 A. CRRA's Motion to Remand and/or Abstain or to Strike, Dismiss or Sever and Remand............................................................760 B. Court's Ruling on Key Issues...........................................761 1. "Related To" Bankruptcy Jurisdiction ...............................761 2. Well Pleaded Complaint Rule ........................................763 3. CRRA's Motion to Abstain ...........................................764 4. CRRA's Motion to Strike, Dismiss or Sever and Remand Apportionment Complaint ............................................765 IV. Motions in H-03-1558 .....................................................774 A. CRRA's Motion to Remand or Abstain or to Strike, Dismiss or Sever .....774 B. CRRA's Motion to Stay .................................................775 C. CRRA's Petition for Certification of Interlocutory Appeal .............775 D. Credit Agencies' Motion for Leave to File Motions to Dismiss or For Stay of Discovery .........................................................776 E. CRRA's Motion to Consolidate ..........................................777 F. CRRA's Motion to file Sur-Reply .......................................777 G. Defendant Andrews & Kurth LLP's Motion to Dismiss .................777 1. Allegations in the Complaint .......................................777 2. The Arguments and Court's Comments .................................778 3. Court's Rulings ....................................................788 a. Personal Jurisdiction ...........................................788 b. Applicable State Law ............................................790 c. Standing ........................................................797 d. CUTPA ...........................................................799 e. Aiding and Abetting Negligent and/or Fraudulent Misrepresentation .............................................801 (1.) General Challenges .........................................801 (2.) The Elements of a § 876(b) in Connecticut .............804 (a.) Scienter ..............................................804 (b.) Substantial Assistance ................................805 H. Credit Rating Agencies' Motions to Dismiss ............................808 1. Negligent Misrepresentation ........................................809 a. Rating Agencies' Arguments ......................................809 b. Court's Ruling on Negligent Misrepresentation Claim .............815 (1.) First Amendment Protection .................................817 (2.) Duty of Care ...............................................826 2. CUTPA ..............................................................827 a. Rating Agencies' Arguments ......................................827 b. Court's Ruling on CUTPA claims ..................................830 (1.) Professional Negligence Exemption ..........................830 (2.) Unfair Practice that Violates CUTPA: The Cigarette Rule ....833 V. Summary of Rulings .......................................................835 A. H-03-1580 .............................................................835 B. H-03-1558 .............................................................835 C. H-03-1579 .............................................................836
Plaintiff Connecticut Resources Recovery Authority ("CRRA") filed the three, above referenced, related actions in Connecticut state court, each of which was removed and ultimately transferred to this Court by the Judicial Panel on Multidisistrict
The suits in part arise out of the same nucleus of facts regarding purportedly ultra vires contractual agreements comprising the Enron Transaction, executed in December 2000 by CRRA, Connecticut Light & Power ("CL & P"), and Enron. CRRA on the one hand, in H-03-1558 and H-03-1579, claims that the Enron Transaction was part of the same fraudulent pyramid scheme that has been asserted in Newby and in many of the MDL 1446 action's (involving lawyers, accountants, investment banks, etc.) to misrepresent Enron's financial condition and to lure and defraud investors and businesses. Simultaneously CRRA maintains that its claims in H-043-1580 against three law firms for their role in advising CRRA and structuring the Enron Transaction are separate and unrelated to Enron's financial collapse, even though a substantial portion of its damages resulted when Enron filed for bankruptcy and stopped payments owed to CRRA under the Enron Transaction agreements.
I. Factual Background and H-03-1580
A malpractice suit, now designated H-03-1580, Connecticut Resources Recovery Authority v. Murtha Cullina, LLP, et al., was originally filed in the Superior Court for the Judicial District of Hartford, Connecticut under docket number CV 02 0818783 S, then transferred to the Waterbury Complex Litigation Docket under number (X06) CV 02 0174569 S, from which it was removed by some of the subsequently added Third-party Apportionment Complaint Defendants to the United States District Court of the District of Connecticut, before being transferred to the undersigned judge by the Judicial Panel on Multidistrict Litigation.
The causes of action asserted under Connecticut state law in the original Complaint, filed on August 7, 2002, are breach of a legal services agreement, negligence, and indemnification against CRRA's outside counsel, Murtha Cullina, L.L.P. ("Murtha") and Hawkins, Delafield and Wood ("Hawkins, Delafield"). Ex. A to # 1. On November 26, 2002, Defendant Leboeuf, Lamb, Greene & McCrae ("Leboeuf'), which served as outside counsel for Enron during the Enron Transaction and whose opinion letters were allegedly relied upon by CRRA in consummating the Enron Transaction, was added in an Amended Complaint, the governing pleading here. Part of Ex. C to # 1. The causes of action asserted against Leboeuf are negligent misrepresentation, fraudulent misrepresentation, and violation of the Connecticut Unfair Trade Practices Act
CRRA alleges the following background facts. H-03-1580 was brought by the Attorney General of the State of Connecticut, on behalf of CRRA, "a public instrumentality and political subdivision of the state of Connecticut pursuant to Conn. Gen.Stat. § 22a-257 et seq. (the Solid Waste Management Services Act)," which manages, recycles, and disposes of solid waste for most of Connecticut's towns. Under waste management services contracts, 169 Connecticut towns paid CRRA's operating expenses and provided at least minimum amounts of waste and recyclables for disposal, while CRRA operated facilities to burn solid waste and convert the resulting waste heat into steam or electricity, which CRRA then sold under energy purchase agreements, and used the funds generated to defray garbage hauling fees charged by CRRA to the member towns.
The towns are divided into, and financially guarantee, four regional "projects" that are financially independent of CRRA. Original Complaint at 1-3, Ex. A to Notice of Removal (instrument # 1). The project involved in this dispute is the Mid-Connecticut Project. A statutorily created state agency, CRRA is authorized by C.G.S. § 22a-269 to issue tax-exempt bonds to construct, operate and maintain the Projects; the bonds are secured by contracts that CRRA entered into with the member towns, which provide the waste and recyclables and pay CRRA's operating expenses, and by other CRRA assets. The statute limits CRRA's authority by allowing it to make only secured loans specifically for the acquisition, construction or reconstruction of waste management projects, and to make only safe, conservative investments in government securities. It may also only make loans of "funds not needed for immediate use" to municipal or regional waste management authorities to establish waste management projects. Id. at 7. Internal procedures allow CRRA to make loans to private entities "only as part of comprehensive financial agreements related to solid waste facility financings," and such loans must be approved by CRRA's Board of Directors or those to whom or to which such authority has been delegated by the Board of Directors.
For years CRRA used money derived from the sale of bonds to construct and maintain several "trash-to-energy" plants to burn solid waste from member towns to create steam, which it then sold to CL & P for conversion into electricity. CRRA then used the proceeds from the sale of the electric or steam energy and the perton garbage hauling ("tipping") fees charged to member towns to pay for CRRA's operating expenses and the principal and interest payments on its bonds.
In 1985, before deregulation, CRRA and CL & P entered into a long-term energy purchase agreement ("the 1985 EPA"), which was to govern until May 2012 and under which CRRA would sell to CL & P the steam from the plant generated by the burning of the solid waste in the Mid-Connecticut Project for conversion into electricity at a set rate of 8.5 cents per kilowatt hour of the electricity that was produced. This price was above the prevailing price in the New England regional wholesale electricity market.
In the wake of energy deregulation in 1998, the Connecticut Deregulation Act (P.A. 98-28) required utilities like CL & P to focus on distribution and transmission of electricity and to divest themselves of
According to the amended complaint in the main case, Murtha Cullina, CRRA's long-time counsel, in a purported conflict of interest, represented CRRA in these negotiations, while its lobbying arm simultaneously worked for Enron to open governmental work and business opportunities, in particular approval of a publicly funded fuel cell project, in Connecticut that would involve CRRA. In December 2002 Enron became involved in the Mid-Connecticut Project buydown, i.e., the allegedly illegal and statutorily unauthorized Enron Transaction, comprised of five main contracts and two agreements dated December 22 and December 28, 2000, which replaced the 1985 EPA between CRRA and CL & P. Of the $280 million received from sale of the. Rate Reduction Bonds, CRRA took $60 million, of which it used $10 million to buy the electricity-generating facilities, the land on which they sat, and the equipment owned by CL & P, $27 million to clean up the environmental contamination at the site, and $23 million for its own needs. CRRA instructed CL & P to provide the remaining $220 million directly to Enron and structured the repayment of this unsecured "loan" in two separate monthly payments, one of $2.2 million and the other $175,000, by Enron to CRRA over an eleven-and-one-half-year period (for a total of $294.8 million with interest). CRRA purportedly did not receive any collateral, surety bond, or risk-management interest to secure the deal with Enron outside of a contractual guarantee by Enron to repay Enron's obligations. Thus the complaints in these three actions contend that what was in actuality an illegal loan of $220 million by CRRA to Enron was disguised, camouflaged and/or manipulated by the law firms, which drafted the documents, so that it would instead appear on Enron's financial books as an energy transaction, creating a big cash infusion for the company. Murtha Cullina and Hawkins, Delafield purportedly set up the unsecured loan for CRRA, and Leboeuf acted as Enron's counsel on the transaction, which CRRA contends was illegal, ultra wires, and void ab initio because CRRA did not have the statutory authority to lend the $220 million to Enron. CRRA maintains that in actuality Enron's role in the Enron Transaction was limited to that of borrower obligated to repay the $220 million loan to CRRA with interest; Enron never had custody or control of the steam or electricity, never generated either type of energy, assumed none of the actual risk, which at all times was borne by CRRA, and made no profit on the energy transfer, nor did it handle
Enron's monthly payments to CRRA began in April 2001 and were to end in 2012; Enron made the payments only until it and Enron Power Marketing, Inc. ("EPMI"), a subsidiary of Enron, filed for protection under the bankruptcy laws on December 2, 2001.
In addition, the complaint asserts that Murtha Cullina and Hawkins, Delafield secretly developed a plan to divert monies from the financially independent Mid-Connecticut Project into CRRA's own accounts to fund a new and risky venture in alternative energy technologies. On the advice of Murtha Cullina and Hawkins, Delafield, which allegedly did not inform the towns of the Enron Transaction nor disclose the risk involved nor obtain the member
The complaint charges that the Enron Transaction, involving CRRA, CL & P, and Enron, developed and documented by Murtha Cullina and Hawkins, Delafield, was an illegal contract not only outside the scope of CRRA's statutory authority, but also in violation of CRRA's internal procedures, and that it threatened the financial stability of the Mid-Connecticut project.
Moreover under the tax arbitrage laws non-profit, tax-exempt entities like CRRA are not allowed to profit from their tax-exempt status and may not use capital raised by issuing tax-exempt bonds to make net profits on financial investments, but must rebate any such profits to the IRS. The complaint states that CRRA was paying its Mid-Connecticut bond holders about 5 and 1/2% from bond proceeds on any earnings, while Enron was paying CRRA 7%. Thus CRRA should have been paying the difference back to the IRS, as well as the diverted $175,000 monthly payment. However Murtha Cullina and Hawkins, Delafield drafted the contract to make it appear that the monthly payment in the Enron Transaction was an ongoing energy sale not covered by the arbitrage laws. Hawkins, Delafield also reassured the Board of Directors that the Enron Transaction had no federal tax arbitrage implications and issued an erroneous opinion that CRRA was authorized to enter into the transaction and did not need bond-holder consent. Murtha Cullina's and Hawkins, Delafield's advice and guidance in the Enron Transaction, undisclosed to the towns or to the bondholders and bond trustee, allegedly endangered the tax-exempt status of CRRA's bonds, created a substantial risk of higher operating costs for the Mid-Connecticut Project and of tipping fees for the towns, threatened the Project's ability to repay its bondholders, and menaced the Project's financial stability.
Procedurally, the malpractice suit against CRRA's and Enron's attorneys was significantly modified when, according to CRRA, on December 12, 2002, Hawkins, Delafield became an "Apportionment Plaintiff' by impleading forty-eight Third Party Defendants, including former Enron executives and directors, and Arthur Andersen LLP along with a number of partners in that accounting, auditing and consulting firm, by filing what Connecticut calls an "Apportionment Complaint" for potential liability for a proportionate share of the damages sought by CRRA under Connecticut General Statutes ("C.G.S.") §§ 52-102(b) and 52-572(h), as amended by Public Act ("P.A.") 99-69. Apportionment Complaint, Ex. B to the Notice of Removal (# 1).
Procedurally as well as substantively distinguishable from the other two suits, the legal malpractice suit, H-03-1580, was removed to federal, district court not by the Defendant law firms, but by some of the Third-Party "Apportionment Defendants" under C.G.S. § 52-102b(a).
II. Pending Motions
Pending before the Court in H-03-1580, initially alleging malpractice against Defendants Murtha Cullina and Hawkins, Delafield under Connecticut state law, arising out of legal services provided to CRRA relating to the Enron Transaction involving CRRA, CL & P, and Enron Corporation ("Enron"), are inter alia the following motions:
H-03-1579, Connecticut Resources Recover Authority v. Lay, et al., was removed from the Connecticut Superior Court for the Judicial District of Hartford to the United States District Court for the District of Connecticut on "related to" bankruptcy jurisdiction, based on claims in Adversary Proceeding No. 02-02727, The Connecticut Resources Recovery Authority v. Enron, and then transferred to, the undersigned judge by the Judicial Panel for Multidistrict Litigation for consolidation in MDL 1446. Pending before the Court in H-03-1579 is CRRA's motion to stay adjudication of any motions to transfer (instrument # 36 in H-03-1579; # 119 in H-03-1558) until CRRA files, and a court resolves, a motion to remand that will determine whether the court has subject matter jurisdiction. CRRA has filed such motions to remand in H-03-1558 (# 121), H-03-1579 (# 39, a duplicate of the one in H-03-1558), and in H-03-1580 (# 72). This Court will rule on these motions to remand in this memorandum and order, mooting the motions to stay adjudication in each case.
In H-03-1579, CRRA seeks to recover from various Enron officers and directors ("the Enron Defendants"
CRRA in H-03-1558, also removed from the Connecticut Superior Court for the Judicial District of Hartford to the United States District Court for the District of Connecticut, and then transferred here by the Judicial Panel for Multidistrict Litigation for consolidation with MDL 1446, sues the same Defendants that are charged in H-03-1579 and asserts "related to" bankruptcy jurisdiction because Enron may owe contribution and/or indemnity to some of the Defendants and because the claims are related to the Adversary Proceeding between CRRA and Enron in Judge Gonzalez's court.
The asserted causes of action under Connecticut state law are as follows: fraudulent misrepresentation against the Enron and Andersen Defendants; negligent misrepresentation against the Enron Defendants, the Andersen Defendants, and the Credit Agency Defendants; aiding and abetting fraudulent and negligent misrepresentation against the Enron Defendants, the Andersen Defendants, Vinson & Elkins, Kirkland & Ellis, J.P. Morgan Chase, Citigroup, Inc., Merrill Lynch, and Barclays Capital, Inc.; negligence against the
Pending in H-03-1558 are the following ripe motions:
The Court retroactively grants Credit Agency Defendants' motion for leave to file motions to dismiss (part of # 237), since the motions to dismiss have already been submitted and answered. In addition the Court grants Plaintiffs motion to file sur-reply (# 321) to Andrews & Kurth L.L.P.'s reply (surreply submitted as # 322). These parties' motions to dismiss have been fully briefed, and thus the Court will resolve them.
When the motions to dismiss were filed, the governing complaint to which they were directed was the First Amended
The Court now addresses the ripe motions, case by case, with subject matter jurisdiction issues to be resolved first, i.e., whether this Court has "related to" bankruptcy subject-matter jurisdiction over any of these three suits.
III. MOTIONS IN H-03-1580
A removing Defendant bears the burden of establishing federal jurisdiction. B., Inc. v. Miller Brewing Co., 663 F.2d 545, 549 (5th Cir.1981).
In its motion to remand in H-03-1580, CRRA emphasizes that (1) not only the complaint, but also the third-party complaint are based solely on Connecticut state law; (2) only 23 out of 48 third-party Apportionment Defendants removed or consented to removal of the suit, while the named Defendants did not, and one or more of the named Defendants oppose the removal; and (3) the third-party apportionment complaint is (a) impermissible under the Connecticut state law for apportionment and must be stricken or dismissed and (b) not related to the bankruptcy and contains no federal issues; and (4) even if the third-party complaint were permissible under Connecticut law and did relate to the Enron bankruptcy action, nevertheless the malpractice action contains no federal issues, and the removal is defective because not all main-suit Defendants and Apportionment Defendants consented to it. Alternatively, CRRA argues that if the Court finds the removal proper, this action satisfies all the criteria for mandatory abstention pursuant to 28 U.S.C. § 1334(c)(1) and for discretionary abstention under 28 U.S.C. § 1334(c)(2).
In opposition, the removing Apportionment Defendants argue that because the law firms may lose the malpractice case and Hawkins, Delafield may win on its Apportionment Complaint, the third-party complaint is "related to" Enron's bankruptcy proceeding based on potential claims of contribution or indemnification claims against Enron (and its insurers), which, if successful, might diminish the debtor's estate. CRRA objects that the legal malpractice claim against three law firms does not involve Enron.
Moreover, argues CRRA, the "rule of unanimity" requires that all co-defendants join in or consent to removal, but fewer than half have done so here. Furthermore, regarding Defendants' claim that the Apportionment Complaint is "related to" the bankruptcy proceeding, the factual circumstances underlying the two are completely unrelated: CRRA contends that its complaint in the Adversary Proceeding against Enron in the bankruptcy court is based on the illegality of the CRRA-Enron loan as ultra vires and beyond CRRA's statutory authority, while the Third-Party Apportionment Complaint here sues Enron executives, directors and others who aided Enron in concealing its true financial condition.
Additionally CRRA insists that Apportionment Defendants' two grounds for asserting related-to bankruptcy jurisdiction, i.e., that the third-party complaint is related to the Adversary Proceeding CRRA filed against Enron in the bankruptcy court and that if Apportionment Defendants are found liable, they will assert indemnification and contribution claims against Enron and could conceivably affect the bankruptcy estate, are wrong. With respect to the first, CRRA characterizes the Adversary complaint as "based on the illegality of the CRRA-Enron loan in that it was ultra vires and beyond CRRA's statutory authority" in contrast to the third party complaint against former Enron executives and accountants who helped conceal. Enron's actual financial condition. With respect to the second ground regarding potential diminishment of the bankruptcy estate, CRRA responds that the case does not involve. Enron but only advice given to CRRA by three law firms and that the indemnification claim "at some point in the future is so speculative and far removed from the action at bar that it cannot establish a basis for removal."
The Court hereby incorporates the conclusions of law in it earlier memoranda and orders in MDL 1446 cases regarding "related to" bankruptcy jurisdiction, in particular two entered in Newby as instruments # 1661 and # 1714 concluding that "related to" bankruptcy jurisdiction in this massive multidistrict litigation exists over third-party Defendants' claims for contribution and indemnity against Enron insurers with a reasonable basis (as directors and officers of Enron, some of Apportionment Defendants are insured by and have contractual rights to indemnity under approximately $450 million of insurance policies that have been declared part of the Enron estate) because they have a conceivable effect on the debtor's estate.
Title 28 U.S.C. § 1452 provides that "a party may remove"; in comparison to the general removal statute, 28, U.S.C. § 1441, section (a) of which allows removal only "by the defendant or the defendants,"
In # 1714 and # 2143 this Court previously rejected some of CRRA's legal conclusions and arguments and does again here. This Court has ruled that unanimity is not required for such removals under § 1452, that the debtor need not be a named defendant, and that under the facts alleged there is a "unity of identity" of the debtor and Third-Party Apportionment Defendants based on the same nucleus of wrongdoing in mutual participation in a scheme to hide Enron's actual financial status while personally enriching themselves. In this massive multidistrict litigation, claims vastly outstrip assets available for recovery, and should Plaintiffs prevail and trigger the indemnification claims, liability would have an enormous impact on the bankruptcy estate.
Thus the Court agrees with Judge Eginton and concludes that, if the Apportionment Complaint is cognizable under Connecticut law, there is "related to" bankruptcy jurisdiction over H-03-1580 based on the. Apportionment Complaint and that the Apportionment Defendants have properly removed the entire action to federal court The Court also finds that the alleged wrongdoing of the Apportionment Defendants here is inextricably intertwined both factually and legally with the alleged wrongdoing of Enron and its co-conspirators, as well as that of Murtha Cullina, Hawkins, Delafield, and Leboeuf in the malpractice complaint CRRA is a creditor in the bankruptcy for the same money damages arising out of the same Enron Transaction, although brought under a constructive trust theory that was subsequently rejected by Bankruptcy Judge Gonzalez.
CRRA argues that the removal here was impermissible because it was based on a claimed federal defense or counterclaim to the claims on the face of CRRA's complaint. In arguing for the applicability of the well-pleaded complaint rule to challenge removal of this suit from Connecticut state court, CRRA is confusing two different jurisdictional statutes, both providing original jurisdiction for federal district court.
First, 28 U.S.C. § 1331, the general federal question statute, recites, "The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." With respect to the "arising under" language, for purposes of removal "federal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Caterpillar, Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987); Franchise Tax Board v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 8-12, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). Thus a plaintiff is the master of his complaint, which he may choose to bring solely under state law to avoid federal jurisdiction, and, except where there is complete preemption by federal law, a case, may not be removed if the federal question does not appear on the face of the complaint, but is only raised in a defense to the petition. Id.; Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63-67, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987). (Cases grounded in state law may still "arise under' federal law if vindication of the state-law-created right must turn on a construction of federal law, but such is not relevant in this suit." Franchise Tax, 463 U.S. at 8-9, 103 S.Ct..2841.) Here it is undisputed that the malpractice complaint and the Apportionment Complaint assert only Connecticut state-law claims.
In contrast, for "related to" bankruptcy removal jurisdiction under 28 U.S.C. § 1452, the court has jurisdiction if it satisfies 28 U.S.C. § 1334. Section 1334 provides,
"Cases arising under title 11" pursuant to § 1334(a) are actions begun by the filing of a bankruptcy petition under 11 U.S.C. § 301-303 in federal district court or bankruptcy court. In re Wood, 825 F.2d 90, 92 (5th Cir.1987). The instant suit is not such a case, for the debtor is not a party and the complaints do not seek relief under Title 11 of the Bankruptcy Code. Section 1334(b), however, provides for original jurisdiction not only of proceedings "arising under" title 11, but also actions "related to cases under title 11," even if they are otherwise not subject to federal jurisdiction. An action is "related to bankruptcy" if the outcome of the proceeding could
The well-pleaded complaint rule is not applicable in "related to" bankruptcy removal cases. American National Red Cross v. S.G., 505 U.S. 247, 258, 112 S.Ct. 2465, 120 L.Ed.2d 201 (1992)("The `well-pleaded complaint' rule applies only to statutory `arising under' cases."), citing Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 494, 103 S.Ct. 1962, 76 L.Ed.2d 81 (1983).
CRRA's motion to abstain either under the mandatory-provision, § 1334(c)(2) or under the a permissive provision, § 1334(c)(1), is also denied.
In determining whether a district court is required under § 1334(c)(2) to abstain from hearing a proceeding based on state law that is before the court on "related to" bankruptcy-jurisdiction, the court must consider the following factors: (1) whether the abstention motion was "timely" filed; (2) whether the action consists of state law claims; (3) whether the action is "related to" a bankruptcy proceeding (i.e., "non-core" matters), in contrast to "arising under" the Bankruptcy Code or "arising in" a case (i.e., "core matters" under the Bankruptcy Code); (4) whether jurisdiction rests solely on § 1334; (5) whether there is an action "commenced" in state court; and (6) whether the action can be "timely adjudicated" in state court. In re Southmark Corp., 163 F.3d 925, 928 (5th Cir.1999), cert. denied, 527 U.S. 1004, 119 S.Ct. 2339, 144 L.Ed.2d 236 (1999); Matter of Gober, 100 F.3d 1195, 1206 (5th Cir. 1996); In re River Center Holdings, LLC, 288 B.R. 59, 66 (Bkrtcy.S.D.N.Y.2003); Renaissance Cosmetics, Inc. v. Development Specialists, Inc., 277 B.R. 5, 12 (S.D.N.Y. 2002). It is undisputed that the motion was timely filed in this suit. Furthermore the action asserts only state-law claims. The Court has determined that the Apportionment Complaint is "related to" the Enron bankruptcy and thus the only factors still at issue here are (5) and (6).
Clearly dispositive of the abstention question here is factor (5) under Second Circuit law, which diverges from Fifth Circuit law. Under the law of lower courts in the Second Circuit, mandatory abstention does not apply to a removed action where no parallel court proceeding exists because of the removal of the case; under Fifth Circuit law mandatory abstention may apply to cases removed under § 1452. Renaissance Cosmetics, 277 B.R. at 12-13 & nn. 4-6; River Center, 288 B.R. at 66-67; In re Southmark, 163 F.3d at 929. Because the Enron bankruptcy proceedings were filed in the bankruptcy court for the Southern District of New York, this Court's "related to" bankruptcy jurisdiction derives from that court and this Court has concluded that Second Circuit law should apply to MDL 1446 cases here based on such jurisdiction.
Regarding factor (6), with the Apportionment Complaint (discussed' below), the Court further finds that CRRA has not met its burden in demonstrating that this action could be timely adjudicated in a Connecticut state court given the complexity of the Enron-related litigation and given CRRA's claims in the bankruptcy proceeding.
As for permissive remand in the interests of justice, comity, or respect for state law under 28 U.S.C. § 1334(c)(1), or equitable remand under § 1452(b), courts have broad discretion. Gober, 100 F.3d at 1206-07. Among the factors considered are
In re NTL Inc., 295 B.R. 706, 719 (Bkrtcy. S.D.N.Y.2003), quoting Drexel Burnham Lambert Group, Inc. v. Vigilant Ins. Co., 130 B.R. 405, 407 (S.D.N.Y.1991). Two other central factors are "the duplicative and uneconomical use of judicial resources" and the "lessened possibility of inconsistent results." NTL, 295 B.R. at 719. Both are well served by this Court's retention of jurisdiction here. The civil actions in this court and the proceedings in Judge Gonzalez's bankruptcy court substantially overlap in parties and issues, and the judges have coordinated proceedings so there is no material obstacle to efficient administration of the debtor's estate and coordinated discovery provides efficient and equitable access for all. Although the suit is grounded solely in state law, the facts and the issues overlap with those in the federal claims cases and discovery for both federal and state claims will coincide. Here the desirability of dealing with civil actions related to the collapse of the debtor in a single forum, recognized by the Judicial Panel on Multidistrict Litigation, weighs heavily against permissive abstention. See, e.g., In re Global Crossing Ltd. Sec. Litig., 311 B.R. 345, 349 (S.D.N.Y. 2003). As Judge Cote has noted in In re WorldCom, Inc. Sec. Litig., 293 B.R. 308, 333-34 (S.D.N.Y.2003),
Moreover, while state law governs both the malpractice and the apportionment complaints, there are no unique or unsettled issues of state law that warrant abstention on comity grounds. In re WorldCom, 293 B.R. at 333. Thus the Court denies the motion to abstain.
Because the Court concludes that it would have "related to" bankruptcy jurisdiction over the Apportionment Complaint, and thus over the entire action, provided that the Apportionment Complaint is viable under Connecticut law, the Court examines the issue of striking or dismissing the Apportionment Complaint for failure to state a cognizable claim under Connecticut law.
CRRA argues that the Apportionment Complaint must be stricken or dismissed, and thus it cannot serve as a
Federal and Connecticut rules of procedure are quite different. Under Connecticut, law, "[t]he purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be, granted." Peter-Michael, Inc. v. Sea Shell Associates, 244 Conn. 269, 270-71, 709 A.2d 558, 559 (1998). Unlike under Fed.R.Civ.P. 12(b)(6), under Connecticut practice a party may only employ a motion to dismiss to question whether, on the face of the record, the court has jurisdiction over the suit. Flanagan v. Commission on Human Rights and Opportunities, 54 Conn.App. 89, 93-94 & n. 5 733 A.2d 881, 885 & n. 5 (1999), cert. denied, 250 Conn. 925, 738 A.2d 656 (Conn. 1999). The proper vehicle to challenge the legal sufficiency of a complaint under Connecticut law is a motion to strike. Id., citing Practice Book § 10-39. A motion to strike admits all well-pleaded facts and implications therefrom as true, but does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings. Emerick v. Kuhn, 52 Conn.App. 724, 728-29, 739, 737 A.2d 456, 461;467 (Conn. App.1999), cert. denied, 249 Conn. 929, 738 A.2d 653 (1999), cert. denied, 249 Conn. 929, 738 A.2d 653 (1999), cert. denied, 528 U.S. 1005, 120 S.Ct. 500, 145 L.Ed.2d 386 (1999); Napoletano v. CIGNA Healthcare of Connecticut, Inc., 238 Conn. 216, 232-33, 680 A.2d 127, 137 (1996) ("The role of the trial court was to examine the complaints, construed in favor of the plaintiffs, to determine whether the plaintiffs have stated a legally sufficient cause of action."), cert. denied, 520 U.S. 1103, 117 S.Ct. 1106, 137 L.Ed.2d 308 (1997); Doe v. Yale University, 252 Conn. 641, 667, 748 A.2d 834, 851 (2000). The court may grant a motion to strike if it only asserts conclusions of
In relevant part, C.G.S. § 52-102b (a) (emphasis added by the Court) states, "A defendant in any civil action
C.G.S. § 52-110h(a) in turn provides in relevant part,
Thus an apportionment complaint may be filed when Connecticut's tort reform statute, G.S. 52-572h, the state's contributory and comparative negligence
"`[A] civil action to which section 52-572h applies' within the meaning of § 52-102b, means a civil action based on negligence." Allard, 756 A.2d at 242. The clear language of § 52-572h(b) states that it applies only to negligence actions in which a party seeks damages for wrongful death, personal injury or damage to property. In the instant case, CRRA has not alleged that it suffered wrongful death and personal injury in its claims against the law firms.
The third category, "damages resulting from . . . damage to property," as used in § 52-102h(b), has been defined by the Connecticut Supreme Court as restricted to "damage to or the loss of use of tangible property" and thus does not apply to commercial losses, i.e., economic harm. Williams Ford, Inc. v. Hartford Courant Co., 232 Conn. 559, 581-83, 657 A.2d 212, 223-224 (1995). After examining the language of the statute and its legislative history, the Connecticut Supreme Court concluded that "the legislature intended the phrase `damage to property' to encompass only its usual and traditional meaning in the law of negligence actions, namely, damage to or the loss of use of tangible property, as opposed to damages from personal injury"; because the legislative history is silent about the intent behind the phrase "damage to property," it opined, "we simply cannot stretch the meaning of `damage to property,' as used in § 52-572h(b), to include commercial losses unaccompanied by physical damage to or loss of use of tangible property." Id. In Williams Ford, the plaintiffs injury was monetary, i.e., savings that the plaintiff would have realized. Id., 232 Conn. at 581, 657 A.2d at 222. In the wake of that decision, a number of lower courts have construed the high court's ruling to conclude that § 52-572h does not allow recovery of solely economic loss incurred as a result of legal malpractice. Carpenter v. Law Offices of Dressler, No. CV010804795S, 2002 WL 442304, *3 (Conn.Super. Feb. 22, 2002); Gauthier v. Kearns, 47 Conn.Sup. 166, 780 A.2d 1016 (2001); Whitaker v. Erdos & Maddox, No. CV000371896S, 2000 WL 1862127, *4 (Conn.Super. Nov. 14, 2000)(claim that lawyer's negligence caused plaintiff to suffer economic loss "is not a claim for personal injury [and] . . . [t]he Supreme Court has stated that monetary damage, or economic loss, does not fall within the purview of the phrase `damage to property' as used in § 52-572h," citing Williams Ford); Thomas v. Smith, No. 3:03CV1398, 2004 WL 1969401, *4 (D.Conn. Sept. 3, 2004) (The Connecticut Supreme Court held in Williams Ford that damages within the meaning of the statute do not "`include purely commercial losses, unaccompanied by damages to or loss of the use of some tangible property.'").
CRRA has not alleged that the three firms' negligent malpractice damaged tangible property of CRRA, to which damage the apportionment defendants might have contributed.
Nevertheless, in Williams Ford the Connecticut Supreme Court noted that its conclusion that Section 52-572h(b) does not apply "purely commercial losses," this
Id., 232 Conn. at 586, 657 A.2d at 225 (emphasis added by this Court).
In Somma v. Gracey, 15 Conn.App. 371, 544 A.2d 668 (Conn.App.Ct.1988), which is still good law, which is cited frequently, and which the federal District Court of Connecticut recently described as "the leading decision" on "[t]he scope of the Connecticut apportionment statute as it applies to claims of professional malpractice," the appellate court held that the comparative negligence defense doctrine applies to legal malpractice claims grounded in negligence and thus apportionment also applies. Thomas v. Smith, No. 3:03CV1398, 2004 WL 1969401, *3 (D.Conn. Sept. 3, 2004).
There is a key distinction between the posture of the instant case and the circumstances in Somma, however, the makes Somma inapplicable to H-03-1580. Here the Apportionment Complaint does not assert an
Moreover, Conn. Legislative Service Public Act 99-69 (West), which expressly governs all cases pending or filed on or after August 11, 1998, amended § 52-572h by adding subsection (o), in order to overrule a prior decision by the Connecticut Supreme Court, Bhinder v. Sun Co., Inc., 246 Conn. 223, 242, 717 A.2d 202, 208 (1998). In Bhinder the high court ignored the plain language of the statute and extended it by infusing it with common law principles to hold that liability may be apportioned between intentional and negligent tortfeasors. Id. (as a matter of common law the court should "extend the policy of apportionment to permit a defendant in a negligence case to bring in as an apportionment defendant a party whose conduct is alleged to be reckless, willful, and wanton.").
In sum, as stated by the Connecticut Supreme Court after examining the legislative history, "The general effect of P.A. 99-69, § 1(o), was to make clear that the apportionment principles of § 52-572h do not apply where the purported apportionment complaint rests `on any basis other than negligence. . . .'" Allard, 253 Conn. at 800-04, 756 A.2d at 245-47 (concluding that § 52-572h(o) does not allow apportionment between a defendant liable in negligence and a defendant liable on a strict liability product liability theory or for intentional, wanton or reckless misconduct or pursuant to any cause of action created by' statute). Thus the Court examines the Apportionment Complaint in H-03-1580 to determine whether its claims sound only in negligence.
CRRA contends that not only has it has sued the three law firms for breach of contract (legal service agreements) and negligence, but also Le Boeuf for fraudulent misrepresentation and statutory unfair trade practices.
As noted, in its Apportionment Complaint Hawkins, Delafield has sued 44 of the 54 defendants that were also sued in CRRA's global complaint in H-03-1558. The Apportionment Complaint (also part of Ex. C to # 1), in seeking apportionment of damages, references the amended complaint and the global complaint in H-03-1558 because they seek the same $220 million in damages relating to the Enron Transaction. While CRRA insists that its claims in the global complaint are not grounded in negligence, Hawkins, Delafield argues that over half of the twenty-five causes of action, including eight aiding and abetting claims asserting complicity in negligent misrepresentation, sound in negligence, according to CRRA's own pleadings.
The Court's review of the global complaint's claims, such as those against Enron directors and officers and Arthur Andersen employees, revealed that the factual allegations are substantially grounded in intentional fraud even though the causes of action are labeled as negligence by CRRA. Many of the Apportionment Complaint allegations are not properly negligence-based. As discussed infra, because aiding and abetting under Connecticut law requires that the aider and abettor to "be generally aware of [its] role as part of the overall illegal or tortious conduct" of the primary actor that aider and abettor is substantially assisting at the time it is assisting, aiding and abetting is by nature inconsistent with negligence's lack of such
Furthermore, CRRA has sued Hawkins, Delafield for breach of a fiduciary duty, a duty which CRRA argues is heightened by the fact that CRRA, its client, is a government agency. Section 52-572h(k)9 expressly states that it does not cover "breaches of trust or of other fiduciary obligations." As noted earlier, CRRA points out that the Connecticut Supreme Court has noted that the "relationship between an attorney and his client is highly fiduciary in its nature. . . ." Andrews v. Gorby, 237 Conn. 12, 675 A.2d 449, 453 (1996); Whitaker, 2000 WL 1862127, *4. This Court concurs.
In Whitaker v. Erdos & Maddox, the court concluded that § 52-572h(k), which expressly states that "[t]his section shall not apply to breaches of trust or of other fiduciary obligations," required the court to strike a plaintiffs claim that his attorney breached his fiduciary duty to the plaintiff because apportionment under the statute was inapplicable. 2000 WL 1862127 at *4-5. See also Andersen v. Bitondo, No. CV 970081677S, 1998 WL, 279810, *1 (Conn.Super.Ct. May 18, 1998). While CRRA has not expressly identified breach of fiduciary duty as one of its causes of action, in Whitaker, 2000 WL 1862127 at *4, the court noted,
Because of the intrinsic nature of that fiduciary duty, the Whitaker court found "the apportionment concept to be inapplicable to the present case" for legal malpractice. 2000 WL 1862127 at *5.
In sum, for all these reasons, the Court agrees with .CRRA that Hawkins, Delafield's Apportionment Complaint fails to meet the requirements of Connecticut law and that CRRA's motion to strike it should be granted.' Moreover, because the Apportionment Complaint is the sole source of this Court's "related to" bankruptcy jurisdiction over the entire action, the Court therefore has no subject matter jurisdiction over the remaining portion of the suit and accordingly grants CRRA's motion to remand the remainder of the case to the appropriate Connecticut state court. The motions constituting instruments # 15 and 94 are therefore MOOT, while # 61 and 62 will remain pending for ruling by the Connecticut state court following remand.
IV. MOTIONS IN H-03-1558
CRRA also moves to remand H-03-1558 under 28 U.S.C. § 1447(c) on the grounds
The Court has indicated in this memorandum and order, beginning on page 25, and in numerous other MDL 1446 cases its legal conclusions regarding "related to" bankruptcy jurisdiction based on contribution and indemnification claims and the unanimity rule as well as mandatory and permissive abstention with respect to the kind of claims asserted here and accordingly denies CRRA's motion.
Section 1292(b) provides,
28 U.S.C. 1292(b). "The decision to certify an interlocutory appeal pursuant to section 1292(b) is within the discretion of the trial court and unappealable." In re Air Crash Disaster, 821 F.2d 1147, 1167 (5th Cir.1987), citing In re McClelland Engineers, Inc., 742 F.2d 837, 839 (5th Cir.1984), cert. denied, 469 U.S. 1228, 105 S.Ct. 1228, 84 L.Ed.2d 366 (1985).
CRRA contends that there are controlling questions of law and substantial
It is apparent from this Court's memoranda and orders in MDL 1446 that it had independently come to the same conclusions as' Judge Eginton regarding these issues in the instant action. Moreover, while acknowledging that the scope of "related to" bankruptcy jurisdiction is unsettled, the Court is confident that its rulings are well founded and supported by substantial recent case law and that an exception from the rule against piecemeal appeals is not warranted here. With respect to the three conditions required for a petition for certification of interlocutory appeal, i.e., that the question be a controlling issue of law, that there is substantial ground for disagreement about the issue of law, and that an immediate appeal appears to advance the ultimate termination of the MDL 1446 litigation, the Court is persuaded by the last requirement and by its implications in the context of this huge MDL litigation, to deny the petition. The Court finds that not only would the appeal not materially advance the ultimate termination of the litigation, since the instant action is only tangentially related to the substantive claims of the Newby class action, but that such an appeal would obstruct the progress of this very complex action over which this Court has imposed an orderly and efficient discovery schedule. Furthermore, this issue relates to cases from a number of circuit courts of appeals with differing views. Indeed Judge Eginton's order was issued in the Second Circuit, but with the transfer here, would be reviewed by the Fifth Circuit. Because of the division among courts, this Court is convinced that ultimately a ruling by the Supreme Court or action by Congress, will be required to resolve the question, and such a process would be lengthy and most likely not final until after the resolution of this litigation.
Therefore the Court denies the petition for certification of an interlocutory appeal.
Describing themselves as "the three leading providers of rating opinions about the credit worthiness of securities and securities issuers in the United States" published "to subscribers and the general public,"
Obviously, any value in expedited consideration has been defeated at this point by the sheer size and volume of this litigation, which has severely taxed the Court's ability to address in a timely matter countless matters in the myriad MDL 1446 cases. Nevertheless, the Credit Rating Agencies represent that CRRA has consented to the relief they seek and to the extent that the parties have worked matters out by agreement, parts of the motion may no longer be in dispute, the matter is resolved. As indicated earlier, the Court grants the motion for leave, to file the motions to dismiss and, since the Court resolves the motions to dismiss infra, finds the request for a stay of discovery to be MOOT.
Apparently, while the case was pending in the United States District Court for the District of Connecticut, the docket sheet reflects entry of an order on 12/20/02 by Judge Eginton granting Rebecca Mark-Jusbasche's motion to consolidate these two actions, but there is no such instrument in the file.
The motion to file sur-reply, which was submitted as # 322, is unopposed. The Court therefore grants the motion and has considered the sur-reply in resolving the motion to dismiss.
The complaint identifies Andrews & Kurth as outside general counsel to Enron at all relevant times, i.e., between 1998 and December 2, 2001.
Three causes of action are asserted against Andrews & Kurth. With respect to the first two, Andrews & Kurth is charged with knowingly and intentionally aiding and abetting in fraudulent misrepresentations and aiding and abetting in negligent misrepresentations about Enron, including about its operations, performance, profitability, liquidity, debt structure, indebtedness, and debt and borrowing capacity, as issued in its financial statements and SEC filings, press releases, and publicly disseminated reports and disclosures, purportedly for the purpose of furthering Enron's illegitimate business interests and Ponzi scheme to deceive the business community and investing public, including CRRA, by inflating Enron's revenue and hiding billions of dollars of its debt. CRRA claims that it reasonably and justifiably relied on such numerous, false statements in making its decision to do business with Enron. In a third count against the law firm, the complaint asserts that Andrews
The First Amended Complaint at ¶ 280 asserts that the law firm represented Enron in twenty eight FAS 140.
According to the complaint, even though Andrews & Kurth knew that the transactions would not be recorded as debt, but instead as gain, on Enron's balance sheet and that Enron would retain control over, and ultimate ownership of, the purportedly transferred asset(s), Andrews & Kurth issued "true sales" opinion letters representing that Enron was "legally isolated" from these assets, as required by FAS 140. Moreover, it alleges that Andrews & Kurth knew that these opinion letters were provided to Arthur Andersen L.L.P. to serve as a basis for its materially misleading accounting treatment in Enron's financial statements. Enron did prepay and unwind many of the transactions before their contemplated maturity date, sometimes (with particular examples cited in the complaint) while Andrews & Kurth was still working on the opinion letter relating to a transaction's original creation. First Amended Complaint at ¶¶ 284-90. While drafting the related "true sale" opinion letters, Andrews & Kurth also purportedly helped Enron in the unwinding of fifteen related transactions, the documents for which had express provisions for prepayment and continuing retention of control over and immediate reacquisition of "sold" assets by Enron.
Andrews & Kurth moves to dismiss the complaint against it, which it claims "boils down to conclusory allegations that CRRA was fraudulently induced into a transaction
With respect to the CUTPA claim, Andrews & Kurth contends that it fails because "(1) Connecticut law does not apply to a Texas law firm's actions in representing a Texas client, writing opinion letters addressed to Enron in Texas and provided to Arthur Andersen in Texas or Illinois, and (2) the Connecticut Supreme Court has held that for public policy reasons such a CUTPA cause of action does not exist for attorney/client services.
Andrews & Kurth maintains that for CUTPA to apply, "the violation must be tied to a form of trade or commerce intimately associated with Connecticut [citation omitted]:" Titan Sports, Inc. v. Turner Broadcasting Sys., Inc., 981 F.Supp. 65, 71 (D.Conn.1997). Andrews & Kurth emphasizes that there is no nexus between Andrews & Kurth and Connecticut that implicates trade or commerce in Connecticut. The conclusory allegation that the law firm "derives substantial revenue from interstate international commerce, including from business within the State of Connecticut," is insufficient, to trigger the statute. Alexander Hamilton Life Ins. Co. v. James River Corp. of Va., No. 3:96cv1100(ARN), 1997 WL 13053, *7 (D.Conn. Jan. 14, 1997)(dismissing CUTPA claim where, as here, the plaintiff "failed to allege what trade or commerce occurred in Connecticut" that gave rise the "the alleged wrongdoing").
After researching the question, the Court finds that the geographical reach of CUTPA has not been definitively resolved. On the one hand the clear language of the statute seems to support applying the statute to conduct involving "trade and commerce" in Connecticut because in defining that phrase, § 42-110(4) restricts it to specific acts "in this state." Nevertheless, § 42-110g(b) provides that persons "entitled to bring an action under subsection (a) of this section may . . . bring a class action on behalf of themselves and other persons similarly situated who are residents of this state
Nevertheless, one treatise maintains that the legislative history, which the authors concede is not reliable because it consists of statements made long after the enactment of the statute, demonstrates that the legislature did not intend to allow CUTPA to cover conduct "merely `affecting' trade or commerce" in Connecticut and rejected language to that effect (i.e., "wherever situate, and shall include any trade or commerce directly or indirectly affecting the people of this state"), choosing instead to restrict its reach to conduct occurring "in this state." Robert M. Langer, John T. Morgan, and David L. Belt, 12 Conn. Prac., Unfair Trade Practice § 3.7 ("Conduct Outside Connecticut") (West 2004). The same treatise, without demonstrating similarities in the aim or nature of either statute, notes the use of a similar phrase in section 5 (authorizing the Federal Trade Commission to proceed only against "unfair methods of competition in commerce"
Because there is judicial authority for allowing a CUTPA claim based on violations outside of state that affect trade and commerce in Connecticut and where injury occurs to Connecticut residents, the Court finds that the statute applies to that extent.
Even if the statute is applicable to Andrews & Kurth's conduct outside of Connecticut that allegedly injured CRRA in Connecticut, Andrews & Kurth argues that acts taken by an attorney in the "representation of the client in a legal capacity" are "excluded for public policy reasons"; thus actions such as Andrews & Kurth's opinion letters for Enron are not actionable under CUTPA. Jackson v. R.G. Whipple, Inc., 225 Conn. 705, 731, 627 A.2d 374, 386 (1993)(Berdon, J., concurring)
Id. (citations omitted).
Next, Defendant argues that CRRA's claim for aiding and abetting negligent misrepresentation fails to identify any particular misrepresentations by Andrews & Kurth, no less to assert that CRRA relied on such. The only allegedly false statements that CRRA expressly claims to have relied upon were those in public filings, credit rating reports, and statements by Enron, in creation of which Andrews & Kurth had no role. Furthermore Andrews & Kurth contends that CRRA has not identified any duty Andrews & Kurth had to prevent, to police, or to stop the fraudulent accounting practices or the Enron Transaction in dispute, In which Andrews & Kurth maintains it had no role, for which the firm made no proposals, and regarding which the firm did not participate in the structuring or drafting. Andrews & Kurth cites this Court's decision in In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F.Supp.2d 549, 706 (S.D.Tex.2002)(dismissing claims against Kirkland & Ellis because there were no allegations against it of material misrepresentations or omissions to investors or the public generally, because the documents it drafted were for private transactions and were not included in or drafted for any public disclosure or shareholder solicitation, and because it was not Enron's counsel for securities or SEC filings).
As a threshold matter, the Court notes that the claims against Kirkland & Ellis were grounded in different law than the claims against Andrews & Kurth. Moreover, although Andrews & Kurth argues that this Court's decision granting Kirkland & Ellis' motion to dismiss supports a similar action here, the pleadings are distinguishable. The Court found the allegations against Kirkland and Ellis were conclusory and general, whereas here CRRA has identified twenty-eight separate and allegedly deceptive opinion letters drafted by Andrews & Kurth and unwindings by Andrews & Kurth of four of those transactions, contradicting the substance of those letters. In addition, and a key factor here, Andrews & Kurth did not prepare these documents to provide misleading information
In sum, Andrews & Kurth insists that "CRRA's attempt to manufacture secondary liability for alleged negligent misrepresentations by Enron and the Enron Defendants must fail." # 254 at 10.
Third, regarding the cause of action for aiding and abetting fraudulent misrepresentation, Plaintiff fails to satisfy the knowledge requirement, which Andrews & Kurth contends turns on whether the abettor owed a duty to the Plaintiff. Here, it insists, Plaintiff has failed to show that Andrews & Kurth owed a duty to CRRA to prevent, intercept or disclose the alleged fraud in a transaction in which Andrews & Kurth maintains it played no role. Andrews & Kurth argues that for a claim of fraud by nondisclosure, there generally must be a duty to disclose arising from a fiduciary relationship or a previously incomplete and misleading representation, neither of which is pled here. Lesikar v. Rappeport, 33 S.W.3d 282, 319 (Tex. App.-Texarkana 2000, pet. den.); Renovitch v. Kaufman, 905 F.2d 1040, 1048 (7th Cir.1990). Because an attorney must protect the confidences of his client, a third party does not have a fraud claim against an attorney who fails to disclose information about a client, even a client perpetrating fraud. Lesikar, 33 S.W.3d at 319-20; Renovitch, 905 F.2d at 1047. Thus seven if Enron were defrauding CRRA, CRRA has no claim against Andrews & Kurth based on its silence or inaction.
Andrews & Kurth contends that where there is no fiduciary or contractual duty running from the alleged aider and abettor to the Plaintiff, as is the situation here, silence and inaction may satisfy the substantial assistance requirement only where the plaintiff shows that "the defendant . . . possess[es] a `high conscious intent' and a conscious and specific motivation to aid the fraud." Woodward v. Metro Bank of Dallas, 522 F.2d 84, 97 (5th Cir.1975).
In opposition, CRRA argues, and this Court agrees, that even if the "conscious intent" test does apply to common law aiding and abetting,
Andrews & Kurth contends that CRRA's pleading also fails to demonstrate that the law firm "substantially assisted" in any fraudulent misrepresentation for aiding and abetting liability because it fails to allege that Andrews & Kurth drafted, reviewed or authorized any statement on which CRRA claims to have relied in connection with the Enron Transaction. Morin, 711 F.Supp. at 113 ("In the context of aiding and abetting, where the primary violations consist of either misrepresentations in, or omissions from, a document, the substantial assistance must relate to the preparation or dissemination of the document itself."). Reading "preparation" and "document" narrowly, the firm insists that Andrews & Kurth's opinion letters, even if they contained misrepresentations,
CRRA disagrees with Andrews & Kurth's contention that CRRA has failed to plead substantial assistance for aiding and abetting liability. CRRA maintains that substantial assistance requires only that the allegations be "sufficiently specific to inform the defendant of the precise nature of the charges against him." Neilson v. Union Bank of California, N.A., 290 F.Supp.2d 1101, 1131 (C.D.Cal.2003) ("Where aiding and abetting is the gravamen of the claim, Rule 9(b) requires that the complaint . . . inform [the defendant] . . . what he did that constituted . . . `substantial assistance.'").
Specifically CRRA accuses Andrews & Kurth of providing essential assistance to Enron's fraudulent scheme to hide debt and build up revenue by its participation in twenty-eight FAS 140 transactions and in
Noting that it has not alleged that Andrews & Kurth committed a primary violation, even though the law firm's arguments seem to charge that CRRA has, CRRA maintains that it has adequately satisfied both the knowledge and substantial assistance prongs for aiding and abetting fraudulent misrepresentation. Under the Restatement (Second) of Torts § 876(b) (1977), "for harm resulting to a third person" (CRRA) from the tortious conduct of another (Enron), CRRA need only allege (1) that Enron committed a wrongful act that caused injury, (2) that Andrews & Kurth knew that Enron's conduct constituted a breach of duty and (3) that Andrews & Kurth gave substantial assistance or encouragement to Enron in breaching that duty. FDIC v. Romaniello, No. CV 92-0294248, 1992 WL 369557 (Conn.Super. Dec. 3, 1992)(Although Connecticut has not recognized a cause of action for aiding and abetting a common law fraud, following Halberstam v. Welch, 705 F.2d 472 (D.C.Cir.1983), it recognizes the theories of conspiracy, or concerted action by agreement, and aiding and abetting, or concerted action by substantial assistance, as embodied in the Restatement (Second) of Torts § 876 (1979), "Persons Acting in Concert": "For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he (a) does a tortious act in concert with the other or pursuant to a common design with him . . . or (b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself. . . ."). Indeed this Court observes that several lower courts in Connecticut have recognized the § 876(b) cause of action. See also Brunette v. Bristol Savings Bank, No. CV 92-0453957S, 1994 WL 468448, *2 (Conn.Super. Aug. 22, 1994) (following Romaniello and identifying as elements of aiding and abetting fraudulent actions of a co-defendant "(1) the party whom the defendant aids must perform a wrongful act that causes injury; (2) the defendant must be generally aware of [its] role as part of an overall illegal or tortious activity at the time [it] provides assistance; (2) the defendant must knowingly and substantially assist the principal violation."); In re Colonial Ltd. P'ship Litig., 854 F.Supp. 64, 102 (D.Conn.1994)(same); Shuster v. Lyons, No. CV910036302S, 1994 WL 472419, *6 (Conn.Super. Aug. 7, 1997)(Connecticut accepted a doctrine analogous to civil conspiracy in the theory of liability under § 876 of the Restatement (Second) Torts in Carney v. DeWees, 136 Conn. 256, 262, 70 A.2d 142 (1949)); Calore v. Town of Stratford, No. CV9803571475, 2001 WL 58364, *4 (Conn.Super. Jan. 8, 2001). Moreover the state's Supreme Court has long recognized a common law claim for aiding and abetting a tort or statutory violation. Carney v. DeWees, 136 Conn. 256, 262, 70 A.2d 142, 146 (1949) (for asserting an aiding and abetting claim, as stated in the Restatement (Second) § 876 (1965), "a person is liable if he . . . (b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct itself. If the encouragement or assistance is a substantial factor in causing the resulting tort, the one giving it is himself a tortfeasor and is responsible
Furthermore, § 876(b) applies to both intentional and negligent tortious acts. Comment d to § 876(b); Dudrow v. Ernst & Young, LLP, No. X01 CV 980144211, 1998 WL 800204, *12 (Conn.Super. Nov. 4, 1998)(aiding and abetting claims for intentional and negligent misrepresentations are cognizable under § 876). See also Fortae v. Holland, 334 Ill.App.3d 705, 720, 268 Ill.Dec. 173, 778 N.E.2d 159, 171 (2002)(in-concert liability under § 876(b) applies, to knowing, substantial assistance of either intentional or negligent wrongdoing of other actors), appeal denied, 202 Ill.2d 669, 272 Ill.Dec. 357, 787 N.E.2d 172 (2003); Wright v. Brooke Group Ltd., 652 N.W.2d 159, 172-74 (Iowa 2002)(under § 876 "the plaintiff may base a claim of civil conspiracy on wrongful conduct that does not constitute an intentional tort").
Finally, challenging CRRA's standing to bring this suit against the law firm, Andrews & Kurth urges that CRRA is merely one of many creditors to whom Enron owed money and that its claim can only be brought by the Creditors' Committee in the Enron bankruptcy proceedings. Alternatively, Andrews & Kurth argues that like other Enron creditors, CRRA has no standing to sue on any claim against Andrews & Kurth outside of the Enron bankruptcy because any cognizable claim against a professional working for the debtor, Enron, belongs exclusively to the bankruptcy estate since the alleged generalized injury is to the Enron estate and would affect all other creditors. CRRA does not allege a specific misrepresentation made by Andrews & Kurth to CRRA, but only that the law firm knew that the transactions for which it had been retained by Enron contributed to the false financial statements upon which creditors generally would rely; thus the claim arises out of Andrews & Kurth's relationship with Enron, not with individual creditor CRRA. Andrews & Kurth reiterates that CRRA has failed to allege any duty running from the law firm to itself and no direct injury to CRRA arising from a breach of such a duty. Any, duty Defendant breached was a duty to Enron, and thus any resulting injury was to Enron.
As an initial matter, CRRA argues that Andrews & Kurth belatedly claimed that Connecticut courts lack personal jurisdiction over the law firm; CRRA insists that Andrews & Kurth ha' s waived that defense because it failed to raise it in its motion to dismiss. Fed. R.Civ.P. 12(h)(1) ("A defense of lack of jurisdiction over the person . . . is waived (A) if omitted from a motion in the circumstances described in subdivision (g), or (B) if it is neither made by motion under this rule nor included in a responsive pleading or an amendment thereof permitted by Rule 14(a) to be made as a matter of course."). Titan Sports, Inc. v. Hellwig, No. 3:98-CV-467 (EBB), 1999 WL 301695, *7 (D.Conn. Apr. 26, 1999)("Under Federal Rule of Civil Procedure 12(h)(1), a party waives the defense of lack of personal jurisdiction when it is neither raised in the first pre-answer motion pursuant to Rule 12(b), nor included in a responsive pleading or an amendment to the pleading permitted as of right by Rule 51(a). . . . Thus
Andrews & Kurth contends that such waiver was impossible because it was never sued in Connecticut; instead CRRA added Andrews & Kurth as a defendant on December 23, 2003 by amended complaint, eight months after the case was transferred to this Court by the Judicial Panel on Multidistrict Litigation.
First, this Court observes that the Second Circuit prefers the term "forfeiture" rather than "waiver" of the personal jurisdiction defense in such circumstances. Hamilton v. Atlas Turner, Inc., 197 F.3d 58, 61 (2d Cir.1999)("The term `waiver' is best reserved for a litigant's intentional relinquishment of a known right. Where a litigant's action or inaction is deemed to incur the consequence of loss of a right, or, as here, a defense, the term `forfeiture is more appropriate.") (and cases cited therein).
The multidistrict litigation statute authorizes federal courts to exercise nationwide jurisdiction. 28 U.S.C. 1407 (providing for the transfer of actions pending in different districts "to any district for coordinated or consolidated pretrial proceedings"); In re "Agent Orange" Product Liability Litigation MDL No. 381, 818 F.2d 145, 163 (2d Cir.1987)(The Judicial Panel on Multidistrict Litigation "has recognized, `Transfers under Section 1407 are simply not encumbered by considerations of in personam jurisdiction and venue. . . . Following a transfer, the transferee judge has all the jurisdiction and powers over pretrial proceedings in the actions transferred to him that the transferor judge would have had in the absence of transfer.'"), cert. denied sub nom. Pinkney v. Dow Chemical Co., 484 U.S. 1004, 108 S.Ct. 695, 98 L.Ed.2d 648 (1988). Thus this Court would have the same in personam jurisdiction as the transferor Connecticut federal court, and no more.
Furthermore, the MDL Panel has held that the phrase "pretrial proceedings" encompasses a motion to dismiss for lack of personal jurisdiction. Hamilton v. Atlas Turner, Inc., 197 F.3d at 62, citing the following cases: In re Gypsum Wallboard, 302 F.Supp. 794, 794 (J.P.M.L.1969) ("[m]otions to. . . . dismiss for lack of jurisdiction are being routinely considered by courts to which multidistrict litigation has previously been transferred and we see no good reason why [the defendant] cannot pursue its remedies following transfer'"); In re Agent Orange Product Liability Litig., 996 F.2d 1425, 1435 (2d Cir. 1993), cert. denied, 510 U.S. 1140, 114 S.Ct. 1125, 127 L.Ed.2d 434 (1994); Stirling v. Chemical Bank, 382 F.Supp. 1146, 1150 (S.D.N.Y.1974), aff'd, 516 F.2d 1396 (2d Cir.1975); and 15 Charles A. Wright, Arthur R. Miller, Edward H. Cooper, Federal Practice and Procedure § 3866 (2d ed. Supp.1999) ("`Transferee courts have ruled on a wide range of preliminary and factual questions, such as . . . motions to dismiss for lack of jurisdiction.'").
Regardless, where there is "related to" bankruptcy jurisdiction, as here, the personal jurisdiction challenge based on minimum contacts with the forum state is irrelevant. 17 Charles A. Wright, Arthur R. Miller and Edward H. Cooper, Fed. Prac. & Procedure, § 4106 (2004 Supp.)("Bankruptcy Rule 7004 provides for nationwide service of process in adversary proceedings arising in the bankruptcy courts. Therefore in determining whether the bankruptcy court has personal jurisdiction over the adversary defendants, the relevant question to be asked is not whether defendants have minimum contacts with the forum state, but whether the defendants, have sufficient contacts with the United States for the exercise of personal jurisdiction to comport with traditional notions of fair play and substantial justice."); In re Enron Corp., 316 B.R. 434, 444 (Bkrtcy.S.D.N.Y.2004) (Bankruptcy Rule 7004(f) "does not require that a state `minimum contacts' analysis be undertaken to determine personal jurisdiction in a federal question case such as an adversary proceeding. . . . [O]nly a federal `minimum contacts' test in required, whereby the Fifth Amendment's Due Process Clause limits a bankruptcy court's exercise of personal jurisdiction over a defendant."); Cytomedix v. Little Rock Foot, 287 B.R. 901, 903 (N.D.Ill.2002)(Minimum contacts analysis of International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945), does not apply in bankruptcy context where the court has "related to" jurisdiction because the resolution of the action affects the bankrupt's estate). Here Andrews & Kurth clearly has contacts with the nation as a whole. Moreover the Court does not find that trying the case in New York or in Connecticut
The second threshold issue here is which state's choice of law rule applies.
In diversity jurisdiction cases, the choice of law rules of the state in which the court sits apply. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). In federal question jurisdiction cases, where a court is exercising supplemental jurisdiction over state-law claims, a federal court also applies the choice of law rules of the forum state to the state law claims. Id.; Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1164 (9th Cir.1996). In the instant case, however, which was transferred under § 1407, a different analysis applies. Generally if a case is transferred under 28 U.S.C. § 1406, the choice of law rules of the transferee court apply. Nelson v. Int'l Paint Co., 716 F.2d 640, 643 (9th Cir.1983). But when a case has been
In tort cases, including causes of action for misrepresentation, Connecticut previously followed the traditional lex loci delicti doctrine, i.e., that the law of the place of injury governs. Under that doctrine, in this action the state suffering the economic impact of CRRA's $220 million loan to Enron would be Connecticut and its law would govern the substantive rights and obligations of the parties to the litigation. O'Connor v. O'Connor, 201 Conn. 632, 637, 519 A.2d 13, 15 (1986). Subsequently in 1986 Connecticut modified that approach in tort actions where "application of the doctrine of lex loci would produce an arbitrary, irrational result" to embrace the "most significant relationship" analysis of the Restatement (Second) of Conflict of Laws §§ 6 and 145(1) and (2) (1971) because that test "represent[ed] the most comprehensive and equitably balanced approach to the conflict of laws." O'Connor v. O'Connor, 201 Conn. at 648-50, 519 A.2d at 21-22; Dugan v. Mobile Medical Testing Services, Inc., 265 Conn. 791, 800-01, 830 A.2d 752, 759 (2003). Thus only where application of lex loci will produce an irrational result does the Court apply the Restatement's more flexible balancing test.
Since Andrews & Kurth contends that Texas choice of law principles should apply, the Court notes that in 1979 Texas also adopted the Restatement (Second) of Conflict of Laws' approach. Gutierrez v. Collins, 583 S.W.2d 312, 318 (Tex.1979); Hughes Wood Products, Inc. v. Wagner, 18 S.W.3d 202, 205 (Tex.2000).
Section 145 of the Restatement, governing the choice of law decisions for tort issues generally, states,
Section 6 principles "are used in evaluating the significance of a relationship, with respect to
"[I]t is the significance, and not the number, of § 145(2) contacts that determines the outcome of the choice of law inquiry under the Restatement [Second] approach. As the concluding sentence of § 145(2) provides, [t]hese contacts are to be evaluated according to their relative importance with respect to the particular issue." Dugan, 265 Conn., at 803, 830 A.2d at 752. See generally Chang v. Chang, No. CVO40198722S, 2004 WL 2095116, *2 (Conn.Super. Aug. 23, 2004). The comments also indicate that factors such as the protection of justified expectations of the parties and predictability and uniformity are of lesser importance in tort cases that in other areas of law, such as contracts, thus making the remaining factors more important for tort actions. Comment b to § 145. Moreover the purpose of state policies effected in the interested states' tort rules becomes significant. "If the primary purpose of the tort rule involved is to deter or punish misconduct, . . . the state where the conduct took place may be the state of dominant interest and thus of the most significant relationship. On the other hand, when the tort rule is designed primarily to compensate the victim for his injuries, the state where the injury occurred, which is most often the state where the plaintiff resides, may have the greater interest in the matter." Id. Comment c to § 145. Nevertheless the comment recognized, "To some extent, at least, every tort rule is designed both to deter other wrongdoers and to compensate the injured person.". Id.
Section 148 of the Restatement (Second) of Conflict of Laws, focusing on the specific torts of fraud and misrepresentation where the injury is pecuniary, for the purpose of determining the state with the most significant relationship, provides,
The Comment to § 148 state that it applies to fraudulent, negligent or innocent misrepresentations.
Because the aiding and abetting claims are secondary to and derivative of the underlying tort claims of fraudulent and negligent misrepresentation,
Andrews & Kurth contends that Texas, its place of business, where it performed the work for Enron,
Generally the two most important factors in the most significant relationship test for tortious conduct are where the tortious conduct took place and where the injury occurred.
Because a civil action for aiding and abetting cannot exist independently but must be based upon a valid underlying cause of action, the Court considers both the place of the aiding and abetting and the place where the misrepresentations were made to CRRA as places where the tort took place. Efthimiou, 268 Conn. at 504-05, 846 A.2d at 226, citing Marshak v. Marshak, 226 Conn. 652, 668, 628 A.2d 964, 971 (1993)("civil action of aiding and abetting cannot stand alone and depends on the existence of a valid underlying cause of action"). This Court notes that "[v]icarious liability can of course be based on acts of assistance as well as words of encouragement." Halberstam, 705 F.2d at 482. Furthermore, such encouragement or deed need not be "at the scene of the tort"; "aiding-abetting action may also be more distant in time and still substantial enough to create liability." Id.,citing Russell v. Marboro Books, 18 Misc.2d 166, 183 N.Y.S.2d 8 (N.Y.Sup.Ct.1959). See also Restatement (Second) of Conflict of Laws § 148 ("When the plaintiff has suffered pecuniary harm on account of his reliance on the defendant's false representations and when the plaintiffs reliance took place in the, state where the false representations were made and received, the local law of this state determines the rights and liabilities of the parties unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the occurrence and the parties, in which the local law of the other state will be applied."). In the instant case, the allegations in the complaint indicate that the relevant tortious conduct took place in Texas and in Connecticut. According to
The reliance by CRRA on those alleged misrepresentations and the injury to CRRA occurred wholly in Connecticut.
Moreover, the Court finds significant the fact that Plaintiff is a quasi-public agent of the State of Connecticut, therefore making its injury one that must be born by the taxpayers of Connecticut, a significant factor in the analysis of the states' relevant interests.
Furthermore, when a law firm works for a top Fortune 500 corporation with international dealings, like Enron, and that law firm prepares documents with information that it knows will be incorporated into required, key public financial statements that will be distributed nationwide, indeed worldwide, it is surely foreseeable that those who do business with that corporation may be injured by reasonable reliance on what are allegedly knowing and material misrepresentations in them that were provided by that law firm.
Under § 148, Connecticut law applies unless some other state has a more significant relationship to the substantive claim at issue and to the parties. Because in a tort action, factors such as protection of justified expectations of the parties and predictability and uniformity are of diminished importance, the Court's analysis under Sections 145 and 6 of the Restatement focuses on the purpose of the states: relevant local law rules, to the issue in dispute to determine Connecticut's and Texas' interest in the determination of the case.
Regarding the states' relevant policies and interests, Andrews & Kurth argues that under Texas law, an attorney owes a duty of care only to his client and that only a client in privity can sue a lawyer for professional negligence. As for charges of fraudulent and negligent misrepresentation, Andrews & Kurth asserts that this Court has ruled that an attorney is only liable in Texas if it takes an affirmative step of speaking out to the public or if the attorney knew or had reason to expect that the defendant was in a limited group that might reasonably have been expected to have access to the information and to act in reliance on it. # 1194. It also emphasizes that Texas has refused to adopt § 876's concert of action theory of liability. Juhl v. Airington, 936 S.W.2d 640, 643-44 (Tex.1996).
Finding Andrews & Kurth's argument misleading, this Court observes while it is true that Texas has not adopted the Restatement (Second) of Torts § 876 for concert of action liability for substantially assisting negligent or fraudulent misrepresentation, Texas also has not rejected it; instead the Texas Supreme Court stated, "whether such a theory of liability is recognized in Texas is an open question."
The Court observes that Comment c to § 145 states, "A rule which exempts the actor from liability is entitled to the same consideration in the choice-of-law process as is a rule which imposes liability." There is no Texas law expressly and affirmatively providing immunity for professionals from allegations of aiding and abetting; rather, in Texas the Court finds inaction and recognition that the issue is "an open question." And while Texas may have a policy of protecting professionals from third-party liability when a Texas attorney injures Texas residents, its interest in injury to persons and entities outside Texas, i.e., in Connecticut, is limited.
Nevertheless, this Court does not find Texas' policy toward attorneys whose performance is below professional standards to be so different from, or antithetical to, that of Connecticut so as to deny application of Connecticut law here. Both states have a policy of holding accountable to third-parties attorneys whose conduct falls below acceptable professional standards. Andrews & Kurth oversimplifies this Court's ruling regarding attorney liability to third parties under Texas law; that memorandum and order speaks for itself. See # 1194 at 73-98. While the Court has concluded that Texas does permit third-parties to sue attorneys for professional negligence under the circumstances alleged here, the Court agrees that Texas has not expressly adopted § 867 and has not applied derivative common-law aiding and abetting to professional negligence claims.
In contrast, Connecticut has a strong, express policy of, and interest in, protecting its residents from tortious conduct, even where that conduct occurred outside of its boundaries, when the conduct injures Connecticut residents within the state's boundaries. That policy is evidenced in the reach of one of Connecticut's two longarm statutes: it provides jurisdiction over foreign partnerships that commit torts with an impact in Connecticut as "consistent with the statute's remedial purpose of providing Connecticut residents with a convenient forum to seek redress for losses they suffer here as a result of a nonresident's tortious actions." Cody v. Ward,
Furthermore, the Court finds that Connecticut has a strong interest in adjudicating this dispute involving CRRA, not only because it is a Connecticut entity, but because it is a quasi-public state agency. CRRA is entitled to a forum that can provide it with convenient and effective relief.
As noted earlier, Connecticut traditionally followed the law of the place of injury, the lex loci delicti doctrine, for tort cases; that doctrine still controls in Connecticut except where its application "would produce an arbitrary, irrational result," but even then remains a factor to be considered in the most significant relationship analysis. Id. at 46 & n. 7; O'Connor v. O'Connor, 201 Conn. at 649-50, 519 A.2d at 21-22. The Court finds no reason to conclude that imposing the lex loci delicti doctrine here would produce an arbitrary or irrational result and thus need not even reach the most significant relationship analysis. The result is the same under either test. According to allegations in the complaint, Enron intentionally targeted "business opportunities" in states outside of Texas to further its scam and to raise money from non-Texans to feed its Ponzi
The Court concludes that Connecticut has the most significant relationship here and the law of Connecticut applies.
Thus the Court concludes that Connecticut law applies to this action.
The burden of establishing standing rests on the party claiming that status. Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1092 (2d Cir.1995)("To have standing, la] plaintiff must  allege personal injury  fairly traceable to the defendant's allegedly unlawful conduct and  likely to be redressed by the requested relief.'").
CRRA claims that Andrews & Kurth aided and abetted Enron in concealing debt and inflating income on its financial statements and public disclosures based on those financial statements, that CRRA relied on those financial statements and public disclosures, the CRRA suffered a direct injury while Enron, and the debtor's estate, suffered none, and thus neither Enron nor its trustee (in Enron's case the court-appointed reorganization specialist Stephen Cooper) could bring these claims against Andrews & Kurth.
The Court agrees with CRRA that it has standing to pursue its claims. It is well established that pursuant to the Bankruptcy Code a trustee in bankruptcy "stands in the shoes of the corporation and has standing to bring any suit that the bankrupt corporation could have instituted had it not petitioned for bankruptcy." Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir.1991). Furthermore, "a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's creditors, but may only assert claims held by the bankrupt corporation itself." Id. Thus the bankruptcy trustee may not assert claims of the creditors against third parties, but only claims belonging to the debtor against third parties. Id. (and cases cited therein).
Moreover, where the debtor "has joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors." Id.See also Breeden v. Kirkpatrick & Lockhart LLP (In re Bennett Funding Group, Inc.), 336 F.3d 94, 100 (2d Cir.2003)("Where `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.'") (quoting Hirsch, 72 F.3d at 1094). This rule applies to professional negligence claims. Bennett Funding Group, Inc., 336 F.3d at 100; Hirsch, 72 F.3d at 1094. If a debtor corporation's officers and directors and a third party "collaborated in the fraudulent scheme, the trustee can sue only if it can establish that there has been damage to the corporation apart from the damage to the third-party creditors." Bennett Funding Group, Inc., 336 F.3d at 100. A creditors' committee, acting on behalf of the corporate debtor, similarly lacks standing to assert causes of action against a third-party for aiding and abetting the debtor corporation. Lippe v. Bairnco Corp., 218 B.R. 294, 301 (S.D.N.Y.1988)(when professionals are alleged to have aided and abetted
Furthermore state law determines whether a creditor of a bankrupt corporation or the bankruptcy trustee (or a debtor in a bankruptcy proceeding) may bring a claim outside the bankruptcy proceedings. See, e.g., St. Paul Fire and Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 700 (2d Cir.1989) ("We agree with those courts that have held that the determination of whether a claim may be brought by a creditor of a bankrupt corporation outside of the bankruptcy proceedings depends on an analysis of state law"), citing Morton v. National Bank (In re Morton), 866 F.2d 561, 563 (2d Cir.1989) ("Whether the rights belong to the debtor or the individual creditors is a question of state law."); Bennett Funding Group, Inc., 336 F.3d at 100; Hirsch, 72 F.3d at 1093. It is well established that Connecticut law gives a creditor like CRRA standing to assert causes of action for negligence and fraud if its injury is foreseeable, inter alia. Hirsch, 72 F.3d at 1093, citing inter alia Tackling v. Shinerman, 42 Conn.Sup. 517, 520, 630 A.2d 1381, 1384 & n. 2 (Conn.Super.1993) ("Connecticut law recognizes liability in negligence of attorneys and accountants to third parties whose reliance is foreseeable without regard to privity").
A creditor must assert a direct injury to have standing to sue outside of the bankruptcy proceedings, unless the trustee abandons the claim. St. Paul Fire and Marine Ins. Co, 884 F.2d at 701. Where the claim against a third party is a general claim, with no particularized injury to a specific creditor, but instead a claim that could be brought by any creditor, the trustee is the proper plaintiff to bring suit because "[t]he claims, if proved, would have the effect of bringing the property of the third party into the debtor's estate, and thus would benefit all creditors." St. Paul Fire and Marine Ins. Co, 884 F.2d at 701 (and cases cited therein).
Here CRRA's claims against Andrews & Kurth for aiding and abetting negligent and fraudulent misrepresentation on which CRRA claims to have relied, arose out of a default on a purported illegal loan from CRRA to Enron as part of the Enron Transaction, and are individual to and caused direct harm specific to CRRA, but not to the debtor, and any recovery from Andrews & Kurth would not become the property of the bankruptcy estate. Thus here the claim belongs to the creditor, CRRA, and not to the debtor in bankruptcy or a creditors' committee. Because the Court concludes that there is no damage to the debtor corporation from Andrews & Kurth's conduct separate from that suffered by the third-party creditor, neither the trustee nor the creditors' committee, both of which stand in the shoes of the debtor, has standing to assert the
General Statutes § 42-110b(a) provides, "No person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." In turn, "trade or commerce" "is broadly defined as the advertising, the sale or rent or lease, the offering for sale or rent or lease, or the distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value in this state." General Statutes § 42-110a(4). "The entire act is remedial in character . . . and must be liberally construed in favor of those whom the legislature intended to benefit." Larsen Chelsey Realty Co. v. Larsen, 232 Conn. 480, 492, 656 A.2d 1009 (1995).
There is no requirement of heightened pleading with particularity under CUTPA. Macomber v. Travelers Property and Casualty Corp., 261 Conn. 620, 644, 804 A.2d 180, 196 (Conn.2002). Instead the Connecticut Supreme Court has
Id., quoting Hartford Electric Supply Co. v. Allen-Bradley Co., 250 Conn. 334, 367-68, 736 A.2d 824 (1999). See also Atlantic Richfield Co. v. Canaan Oil Co., 202 Conn. 234, 243, 520 A.2d 1008 (1987) ("a practice may be unfair because of the degree to which it meets one of the criteria [of the `cigarette rule'] or because to a lesser extent it meets all three."). Here there is no serious argument that the Credit Rating Agencies' conduct was corrupt, immoral or unscrupulous. "[A] violation of CUTPA may be established by showing either an actual deceptive, practice . . . or a practice amounting to a violation of public policy.
"[T]he liberal construction to which a remedial statute such as CUTPA is entitled, led the courts to construe its broad coverage to include unfair trade practices by attorneys." Heslin v. Connecticut Law Clinic of Trantolo & Trantolo, 190 Conn. 510, 520, 461 A.2d 938 (1983). Although CUTPA does apply to the conduct of attorneys because "the conduct of any trade or commerce" does not exclude such, the courts in Connecticut have held that the statute applies only to the entrepreneurial or commercial aspects of the practice of law, and not to the attorney's professional representation of a client. Thus a claim of malpractice, i.e., professional negligence, does not fall within the statute's reach. Suffield Development Associates, Ltd. Partnership v. National Loan Investors, L.P., 260 Conn. 766, 781, 802 A.2d 44, 53 (2002); Beverly Hills Concepts, Inc. v. Schatz & Schatz, Ribicoff & Kotkin, 247 Conn. 48, 79, 717 A.2d 724 (1998)("Our CUTPA cases illustrate that the most significant question in considering a CUTPA claim against an attorney is whether the allegedly improper conduct is part of the attorney's professional representation of a client or is part of the entrepreneurial aspect of practicing law.").
Suffield Development, 260 Conn. at 782, 802 A.2d 44. The distinction between entrepreneurial and professional representation roles is not based on whether the attorney acted for profit, as such a result would largely undermine the general rule. Suffield, 260 Conn. at 782-83, 802 A.2d at 53-54. The exemption from CUTPA liability applies to intentional misconduct as well as negligent misconduct that falls below the professional standards. Id. at 54.
Haynes, 243 Conn. at 34-35, 699 A.2d 964.
After reviewing the pleadings, this Court finds that allegations against Andrews & Kurth fall within the noncommercial, "strategy" area of professional representation and are therefore excluded from CUTPA liability for public policy reasons. Thus the Court finds that the motion to strike should be granted as to the CUTPA claim.
In arguing that logically there can be no cause of action for aiding and abetting negligent misrepresentation, Andrews & Kurth has selected cases from jurisdictions that agree with it, but fails to address those which do not and to cite any Connecticut cases.
As a threshold matter, this Court concludes that Connecticut does recognize an independent common law claim for aider and abettor liability as defined by § 876(b) of the Restatement (Second) of Torts. Connecticut Nat'l Bank v. Giacomi, 233 Conn. 304, 329, 659 A.2d 1166, 1178 (1995) (affirming that there is no cause of action for aider and abettor liability under the provision of the Connecticut Uniform Securities Act modeled on § 10(b) of the Securities Exchange Act and pointing out alternatively that common law aider and abettor liability is available under the Restatement (Second) of Torts § 876 if the elements for such a cause of action are satisfied). It is clear that such a claim reaches aiding and abetting fraud or intentional torts, and a couple of state cases suggest that it would also encompass aiding and abetting negligent misrepresentation. Carney v. DeWees, 136 Conn. 256, 262, 70 A.2d 142, 145-46 (Conn.1949)(recognizing claim for common law aiding and abetting in a wrongful death claim); Dudrow v. Ernst & Young LLC, No. X01 CV98-0144211S, 1999 WL 786261, *10 (Conn.Super. Sept. 15, 1999). See infra at 803-04, et seq. Nevertheless, while the tortfeasor in the underlying tort may merely be negligent, under Restatement (Second) of Torts § 876(b) the aider and abettor is required have scienter and not merely to meet a "should have known" standard. Dudrow, No. X01 CV 98 0144211, 1998 WL 800204, at *6; Restatement (Second) of Torts § 876(b) ("For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he . . . knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself. . . ."). See, e.g., Efthimiou, 268 Conn. at 504-05, 846 A.2d at 225 (emphasizing aiding and abetting as a derivative claim, following Halberstam's
Indeed, a number of Connecticut cases addressing § 876(b) rely on Halberstam, 705 F.2d at 477, which distinguished between conspiracy and aiding and abetting,
Although Andrews & Kurth contends that Connecticut only recognizes a claim for aiding and abetting in the context of dangerous physical activities like drag racing, the Court finds this claim is erroneous. See, e.g., Carney v. DeWees, 136 Conn. 256, 70 A.2d 142 (recognizing common law claim for aiding and abetting a statutory violation or a tort)
CRRA has pleaded that Andrews & Kurth knew that, under the direction of Enron which it initially questioned, its own acts in drafting opinion letters and unwinding improper transactions where Enron retained control over assets were deceptive and improper. Specifically, to fulfill the scienter requirement for aiding and abetting by Andrews & Kurth, CRRA has alleged in detail the times and contents of twenty-eight improper transactions over a three-year period and explained how they were fraudulent and intentionally designed to permit Enron to use these transactions to conceal improper financial manipulations. It has also claimed conclusorily, without specific facts to support the allegations, that Andrews & Kurth's actions were part of a larger scheme and that Andrews & Kurth knew that the representations in its opinion letters were being used by Arthur Andersen and Enron to produce fraudulent accounting and deceptive public financial statements on which the public would rely.
Under the Restatement (Second) of Torts § 876(b), the knowledge requirement is satisfied where the plaintiff pleads that the aider and abettor had a "general awareness that his role was a part of an overall activity that is improper." Aetna Casualty and Surety Co. v. Leahey Construction Co., 219 F.3d 519, 533 (6th Cir. 2000), citing Temporomandibular Joint (TMJ) Implant Recipients v. Dow Chem. Co., 113 F.3d 1484, 1495 (8th Cir.1997), and Camp v. Dema, 948 F.2d 455, 460 (8th Cir.1991). The degree of knowledge required for liability "remains flexible and must be decided on a case-by-case basis." Aetna Casualty, 219 F.3d at 535; Camp v. Dema, 948 F.2d at 459. According to the Fifth Circuit in Woodward, 522 F.2d at 95-96, to establish "general awareness," "the surrounding circumstances and expectations of the parties were critical, because knowledge of a violation must usually be inferred." Thus knowledge can be established by circumstantial evidence or by reckless conduct, but "the proof must demonstrate actual awareness of the party's role in the fraudulent scheme." Id. at 96. In this action the alleged wrongdoing of Enron goes beyond the forty-eight transactions deceptively documented by Andrews & Kurth to the larger scheme to deceive the public, in particular potential investors, lenders, business partners and
Andrews & Kurth relies on Schatz v. Rosenberg, 943 F.2d 485, 496 (4th Cir. 1991), cert. denied, 503 U.S. 936, 112 S.Ct. 1475, 117 L.Ed.2d 619 (1992),
The Court finds that the claims against Andrews & Kurth in the instant action are not of mere silence or inaction; the complaint alleges that Andrews & Kurth, in a perversion of the legal purpose of an opinion letter, affirmatively, actively, knowingly, and repeatedly participated in Enron's alleged tortious conduct by drafting not one, but twenty-eight deceptive "true sales" letters over a three-year period with express provisions that improperly authorized Enron to prepay and to retain control over the purportedly transferred assets. Moreover, the complaint charges the firm personally participated in the unwindings at least four times while it was in the process of drafting the "true sales" letters for the very transactions, being unwound. As noted, the nature of the letters demonstrates that they were written not for the law firm's client, which already knew what it was illicitly doing and wanted Andrews & Kurth to help hide it, but for deception of outside third parties. As for the law firm's state of mind, early in its representation Andrews & Kurth questioned Enron about the propriety of the substance of its opinion letters, but after directions from Enron, chose to continue the misrepresentations and unwindings and participated in the scheme: such conduct raises a strong inference that it, like Enron, intended the illicit scheme to succeed. Moreover, through such long-term, repetitive conduct the complaint adequately pleads "high conscious intent."
Thus the Court finds that CRRA has adequately pleaded scienter for its aiding and abetting claim against Andrews & Kurth.
The second essential element for an aiding and abetting claim is substantial assistance by the aider and abettor. In those jurisdictions recognizing claims under § 876(b) there is wide variation in what is
Primavera Familienstifung v. Askin, 130 F.Supp.2d 450, 511 (S.D.N.Y.2001).
The Fifth and Eleventh Circuits have concluded that "[s]ubstantiality is based upon all the circumstances surrounding the transaction in question." Woodward, 522 F.2d at 97; Woods, 765 F.2d at 1012. The Fifth Circuit's approach to determining substantiality from the totality of circumstances easily embraces the six-factor approach for measuring substantiality enumerated in comment d to the Restatement (Second) of Torts § 876:(1) the nature of the act encouraged; (2) the amount and kind of assistance given by the defendant
Connecticut courts are vague about the definition of "substantial assistance." In Carney v. DeWees, 136 Conn. 256, 70 A.2d 142, it appears to mean "mutual participation" in the misconduct, while sufficient "encouragement" "to harm the plaintiffs or engage in . . . tortious conduct" satisfies the requirement in Norman v. Distasio, No. CV960389982S, 2001 WL 761135, *4 (Conn.Super. June 15, 2001). Because
The Court finds that Andrews & Kurth's assistance to Enron, as detailed in the complaint, was adequate to state a claim against the firm for aiding and abetting Enron's purportedly fraudulent scheme that resulted in reasonably foreseeable injury to CRRA. The complaint makes clear the alleged deception which Andrews & Kurth's letters and unwindings not merely encouraged but made possible; moreover the opinion letters served as a basis for Arthur Andersen's allegedly crucial accounting fraud aimed at deceiving the public by inflating Enron's revenues and hiding its debt. As for the amount of assistance, the complaint presents Andrews & Kurth's aid as a significant factor, although by itself not necessarily an essential part of the fraudulent scheme nor a proximate cause of CRRA's injury
The Court does have some questions.
First, relating to foreseeable injury to parties like CRRA, to what extent did Andrews & Kurth know about the larger scheme to which it contributed, i.e., that the letters were a part of Enron's plot
A second question also remains. Because comment d and the illustrations accompanying it are the main guidelines the Court has for the aiding and abetting claim, it observes the comment's warning, "The assistance or participation of the defendant may be so slight that he is not liable for the act of the other." Among the illustrations to the comment are two that appear relevant here:
It is not clear from the complaint whether Andrews & Kurth was performing the attorney's traditional role of advisor and counseling its client, with confidentiality protected by the attorney/client privilege for public policy reasons, or whether it was merely carrying out the directions of its client in a reversal of the usual professional relationship and communicating its work product to Enron's employees and prospective business contacts, or both. These matters will need to be fleshed out as the litigation proceeds. For the time being, the Court denies the motion to dismiss the aiding and abetting claim.
The Amended Complaint alleges that each of the Credit Rating Agency Defendants,
The Amended Complaint asserts that "the Agencies negligently published false and misleading credit information concerning Enron when they had information available to them, and when they could have and should have requested information directly from Enron, that would have shown that Enron's financial situation was precarious and not what Enron was representing it to be. As the Agencies reasonably should have expected, CRRA relied on these misrepresentations in making its decision to enter the Enron Transaction, suffering harm as a result." Amended Complaint at ¶ 400. The complaint charges generally that the Rating Agencies accepted Enron's false representations about its financial health and failed to perform a reasonable and continuous investigation and to evaluate Enron's business, liquidity risk, corporate governance, accounting practices and conflicts of interest.
The CUTPA claims against the Rating Agencies assert that their conduct constituted deceptive, unscrupulous, immoral, unethical, and unfair acts and/or practices in violation of the statute. Amended Complaint ¶ 424.
While each agency has filed its own motion to dismiss, the issues raised are largely common to all three and thus the Court addresses them together.
First, characterizing themselves as members of the "financial press," the Rating Agencies maintain that their published credit ratings are protected from this tort action by the First Amendment because they "perform traditional journalistic functions"
Second, argue the Rating Agencies, even if their ratings were not entitled to protection as statements of opinion, to impose liability on a publisher for statements about matters of public concern, a plaintiff must show that a statement is made with "actual malice," i.e., "with knowledge that the statement was false or with reckless disregard for whether or not it was true." New York Times v. Sullivan, 376 U.S. 254, 279-80, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964); Hustler Magazine v. Falwell, 485 U.S. 46, 56, 108 S.Ct. 876, 99 L.Ed.2d 41 (1988); Rosenbloom v. Metromedia, Inc., 403 U.S. 29, 45, 91 S.Ct. 1811, 29 L.Ed.2d 296 (1971)(applicability of "actual malice" test depends on whether the publication is of "public or general interest"). Because "erroneous statement is inevitable in free debate . . . it must be protected if the freedoms of expression are to have the `breathing space' that they `need to survive.'" New York Times v. Sullivan, 376 U.S. at 271-72, 84 S.Ct. 710, quoting N.A.A.C.P. v. Button, 371 U.S. 415, 433, 83 S.Ct. 328, 9 L.Ed.2d 405 (1963). The Rating Agencies maintain that courts have regularly concluded that ratings and analysis of the creditworthiness of securities issuers are "matters of public concern" protected by the First Amendment from
The Supreme Court has declared that "recklessness" for purposes of "actual malice" "is not measured by whether a reasonably prudent man would have published or would have investigated before publishing." St. Amant v. Thompson, 390 U.S. 727, 731, 88 S.Ct. 1323, 20 L.Ed.2d 262 (1968). A plaintiff must demonstrate recklessness with "sufficient evidence to permit the conclusion that the defendant in fact entertained serious doubts as to the truth of his publication." Id. ("necessity for showing that a false publication was made with a `high degree of awareness of probable falsity'"); see also Church of Scientology Int'l v. Behar, 238 F.3d 168, 174 (2d Cir.2001), cert. denied, 534 U.S. 814, 122 S.Ct. 40, 151 L.Ed.2d 13 (2001); Scalamandre & Sons v. Kaufman, 113 F.3d 556, 560-61 (5th Cir.1997); First Equity Corp. v. Standard & Poor's Corp., 690 F.Supp. 256, 258-59 (S.D.N.Y.1988)(granting summary judgment because The Restatement's negligent misrepresentation standard did not apply to newspaper publisher Standard & Poor's and because plaintiffs failed to submit "sufficient evidence to permit the conclusion that the defendant in fact entertained serious doubts as to the truth of his publications" regarding a description of bonds), aff'd on other grounds, 869 F.2d 175 (2d Cir.1989)(characterizing Standard & Poor's as something between a publisher of a general newspaper and a publisher of an advisory newsletter with specific recommendations). "[F]ailure to investigate before publishing, even when a reasonably prudent person would have done so,"is not sufficient to establish reckless disregard." Harte-Hanks Communications v. Connaughton, 491 U.S. 657, 688, 109 S.Ct. 2678, 105 L.Ed.2d 562 (1989).
First Amendment protections and the actual malice standard, discussed in more detail infra, have been expanded to reach beyond the their traditional application to the law of defamation, slander and libel to reach other causes of action, e.g., breach of contract, misrepresentation, and tortious interference with contract or business. See, e.g., Bose v. Consumers Union, 466 U.S. 485, 104 S.Ct: 1949, 80 L.Ed.2d 502 (1984) (product disparagement); County of Orange v. McGraw-Hill Companies, Inc., 245 B.R. 138 (C.D.Cal.1997)(professional negligence); Compuware Corp. v. Moody's Investors Services, Inc., 222 F.R.D. 124, 127 (E.D.Mich.2004)(finding expansion of traditional scope persuasive and applying actual malice standard to alleged breach of contract dealing solely with publication of financial information and rating of defendant), reconsideration denied in part, 324 F.Supp.2d 860 (E.D.Mich.2004)(holding that credit rating service qualified for protection as a journalist under New York's reporter's privilege statute because plaintiff never alleged that Moody's stepped outside its role as an information gatherer nor played a significant role in structuring the transaction it rated).
Finally, the Ratings Agencies point out that, as reflected in CRRA's causes of action against its own attorneys, CRRA concedes that it acted beyond its statutory authority, ultra vires, in making the sham loan to Enron. They contend that CRRA's claims are therefore barred under the in pari delicto doctrine.
Furthermore, point out the Rating Agencies, Connecticut law requires the existence of a duty of care to sustain a claim of negligence. Games v. Commercial Union Ins. Co., 258 Conn. 603, 783 A.2d 462, 469 (2001). The Rating Agencies argue that "foreseeability is not commensurate with duty" under Connecticut law because
Furthermore, as an essential element of any claim of negligence, including negligent misrepresentation, there must be a duty of care, which is a question of law for the court to determine. Gomes v. Commercial Union Ins. Co., 258 Conn. 603; 614, 783 A.2d 462, 469-70 (2001). The Connecticut Supreme Court's test for the existence of a duty involves "(1) a determination of whether an ordinary person in the defendant's position, knowing what the defendant knew or should have known, would anticipate that harm of the general nature of that suffered was likely to result, and (2) a determination, on the basis of a public policy analysis, whether the defendant's responsibility for its negligent conduct should extend to the particular consequences or particular plaintiff in this case.'" Id., 258 Conn. at 616, 783 A.2d at 470.
The Rating Agencies cite Perodeau v. City of Hartford, 259 Conn. 729, 756-57, 792 A.2d 752, 768 (2002) for four factors to consider in determining "the extent of a legal duty as a matter of policy": "(1) the normal expectations of the participants in the activity under review; (2) the public policy of encouraging continued vigorous participation in the activity, while protecting the safety of the participants; (3) the avoidance of increased litigation; and (4) the decisions of other jurisdictions." See also Jaworski v. Kiernan, 241 Conn. 399, 407, 696 A.2d 332, 337 (1997) (same). They maintain that even if the harm to CRRA were foreseeable, analysis under the Perodeau factors demonstrates that no duty of care should exist here as a matter of public policy and thus CRRA fails to state a claim for negligent misrepresentation against them. They further insist that persons considering a bond rating in making an investment do not normally expect the rater to be a guarantor of the investment; instead potential investors normally expect the ratings opinion to provide one assessment of the risk of an investment, but not to eliminate that risk.
CRRA discounts taking such disclaimers at face value and points to court cases holding that boilerplate disclaimers and characterizing statements as opinions do not preclude liability. Milkovich v. Lorain Journal Co., 497 U.S. at 18-19, 110 S.Ct. 2695 (characterizing information as an opinion does not immunize a statement from liability); Jefferson County, 175 F.3d at 856 ("[T]he fact that Moody's article describes its evaluation as an opinion is not sufficient, standing alone, to establish that Moody's statements are protected. . . . If such an opinion were shown to have materially false components, the issuer would not be shielded from liability by raising the word `opinion' as a shibboleth."); Omega Engineering, Inc. v. Eastman Kodak Co., 908 F.Supp. 1084, 1097-98 (D.Conn. 1995)(court rejected Kodak's insistence that its publication consisted of statements of opinion, not fact, when it reviewed the statements in the context of surrounding circumstances); County of Orange v. McGraw-Hill Cos., No. CV96765, 1997 U.S. Dist. LEXIS, at *12-13 (C.D. Cal. June 2, 1997) (Noting that Standard & Poor's is "an expert in the municipal bond arena" which issues ratings on the "likely creditworthiness of certain debt issues," the court found that "the professional opinion cases imply the general tenor of opinions such as S & P's ratings is to support, not negate, the impression the rating is an assertion of fact, or at least substantially based on facts assessed by S & P.").
The Rating Agencies urge that the second and third factors also support a finding
As for the fourth factor under Perodeau, decisions from other jurisdictions, of which there are few in this instance, the Rating Agencies insist that other jurisdictions have consistently held that the rating agencies and other financial publishers do not have a duty of care to the general public and cite a few cases from courts outside Connecticut that have found that the Rating Agencies have no duty of care to those that read its publications. See, e.g., First Equity Corp. v. Standard & Poor's Corp., 670 F.Supp. 115, 117-18 (S.D.N.Y.1987), aff'd, 869 F.2d 175 (2d Cir. 1989); Quinn v. McGraw-Hill Cos., 168 F.3d 331, 336 (7th Cir.1999); Jefferson County, 175 F.3d at 856.
In addition, note the Rating Agencies, mere opinions are not actionable as negligent misrepresentation under Connecticut law; only false statements of material fact are. Daley v. Aetna Life and Casualty Co., 249 Conn. 766, 792-93, 734 A.2d 112, 128 (1999); Yurevich v. Sikorsky Aircraft Division, 51 F.Supp.2d 144, 152 (D.Conn. 1999); Omega Engineering, Inc. v. Eastman Kodak Co., 908 F.Supp. at 1097.
The Rating Agencies argue that if Connecticut were to adopt Section 552(2) of the Restatement (Second) of Torts (1977) for a claim of negligent misrepresentation, as the majority of states have done, CRRA would have to allege, but cannot credibly do so, that it is a member of a limited group for whose intended benefit the Rating Agencies issued their opinions. The Rating Agencies maintain that the ratings are published for the investing public at large, too numerous to calculate. See, e.g., Chanoff v. U.S. Surgical Corp., 857 F.Supp. 1011, 1022 (D.Conn.1994) ("[T]o recognize plaintiffs' claim and the potential liability `in an indeterminate amount for an indeterminate time to an indeterminate class' would be contrary to the language and intent of Section 552."), aff'd, 31 F.3d 66 (2d Cir.1994), cert. denied, 513 U.S. 1058, 115 S.Ct. 667, 130 L.Ed.2d 601 (1994); LaSalle Nat'l Bank v. Duff & Phelps Credit Rating Co., 951 F.Supp. 1071, 1093 (S.D.N.Y.1996)(rating agency will not owe duty based on a representation "designed to target . . . the public at large.'").
After reviewing the case law regarding
The Court observes that in its report, Financial Oversight of Enron: The SEC and Private-Sector Watchdogs, the Staff to the Senate Committee on Governmental Affairs was highly critical of the role in the Enron debacle of the three Credit Rating Agencies being sued here:
Id. at 108. The report details the failings of these Defendants, and the Committee staff concluded that "the credit rating agencies' approach to Enron fell short of what the public had a right to expect, having placed its trust in these firms to assess corporate creditworthiness for the purposes of federal and state standards. It is difficult not to wonder whether lack of accountability — the agencies' practical immunity to lawsuits and nonexistent regulatory oversight — is a major problem." Id. at 116. Thus it, too, impliedly recognized the absence of authority to impose liability.
For the reasons discussed below, this Court concludes that while there is no automatic, blanket, absolute First Amendment protection for reports from the credit rating agencies based on their status as credit rating agencies, the courts generally have shielded them from liability for allegedly negligent ratings for various reasons.
Nevertheless, the United States Supreme Court has held that publishers are not entitled to automatic protection under the First Amendment from liability for violating laws generally. First National Bank of Boston v. Bellotti, 435 U.S. 765, 802, 98 S.Ct. 1407, 55 L.Ed.2d 707 (1978). See also County of Orange, 245 B.R. at 154 ("S & P's status as a financial publisher does not necessarily entitle it to heightened protection under the First Amendment"; "`[t]he question is not whether the defendant is a publisher but whether the cause of action impacts expression'"), citing and quoting Cohen v. Cowles Media Co., 501 U.S. 663, 670, 111 S.Ct. 2513, 115 L.Ed.2d 586 (1991) (holding that "[t]he First Amendment does not grant the press limitless protection" and that the "`publisher of a newspaper has no special immunity from the application of general laws. He has no special privilege to invade the rights and liberties of others.'"). Thus such a privilege is qualified.
Others have questioned in particular the extension of the "journalist's privilege" recognized by some courts to extend to credit rating agencies. See, e.g., American Savings Bank, FSB v. UBS Painewebber, Inc., No. M8-85, 2002 WL 31833223, *2-3 (S.D.N.Y. Dec. 16, 2002) (and cases discussed therein) (holding that "[t]he journalist privilege is a qualified one. Fitch is not primarily engaged in newsgathering generally, nor was it doing so when procuring the information sought by the subpoenas. The Court finds that Fitch is not entitled to the protections offered by the journalist privilege."). See also Oberman v. Dun & Bradstreet, Inc., 460 F.2d 1381, 1384 (7th Cir.1972) (reversing summary judgment in favor of newsgatherer credit reporting service representative in libel case based in part on a fact issue, i.e., whether the credit service made a proper investigation before publishing its report; in dicta, "We are not persuaded that the credit rating of Oberman's business was entitled to the same treatment that the Supreme Court has afforded newspapers and magazines. . . ."). In Oberman, the Seventh Circuit reflected that under Illinois law the credit rating agency's "qualified or conditional privilege" might have been abused if the agency "did not believe in the truth of [its rating] . . . or had no reasonable grounds for believing [its material] to be true, . . . a fact which may be inferred from `[a]ll the circumstances surrounding the transaction . . . including the failure to make proper investigation.'" Id.
The Staff to the Senate Committee on Governmental Affairs in its negative report about the role of the credit rating agencies in the Enron debacles, commented,
Financial Oversight of Enron: The SEC and Private Sector Watchdogs, Report of the Staff to the Senate Committee on Governmental Affairs, at 124, Oct. 8, 2002.
Accordingly, in view of the division of opinion, this Court will not assume blanket protection for the Credit Agency ratings, but will consider any First Amendment protection for credit rating reports as qualified and will scrutinize the facts alleged according to standards and heightened pleading requirements developed by courts to determine whether CRRA has stated a claim that is not precluded by First Amendment protection.
As a starting point, it appears to the Court that nationally published credit agency ratings reports regarding Enron, a top Fortune 500 company, in 2000 are matters of public concern. The sheer size of the MDL 1446 litigation, not to mention the numerous related criminal actions, attests to the public import of Enron and its sudden collapse in 2001.
In Milkovich v. Lorain Journal Co., 497 U.S. 1, 18-20, 110 S.Ct. 2695, 111 L.Ed.2d 1 (1990), rejecting "an artificial dichotomy between `opinion' and `fact,'" the United States Supreme Court limited the scope of defamation laws in concluding that "at least in situations . . . where a media defendant is involved, a statement on matters of public concern must be provable as false before there can be liability under state defamation law." Therefore "a statement of opinion relating to matters of public concern which does not contain a provably false factual connotation will receive full constitutional protection." Id. at 20, 110 S.Ct. 2695. In other words, if a statement "cannot reasonably [be] interpreted as stating actual facts," it is shielded by the First Amendment. Id. As factors to consider in the determination of whether a statement can reasonably be interpreted as one of fact, the court may examine the language employed, e.g., whether it is "loose, figurative, or hyperbolic language which would negate the impression" that it was a statement of fact, as well as the context of the statement and the "general tenor of the article." Id. at 21, 110 S.Ct. 2695.
Moreover an examination of the specific facts and circumstances of a credit rating agency's report is necessary to determine the extent, if any, of First Amendment protection it should receive. In Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 761, 105 S.Ct. 2939, 86 L.Ed.2d 593 (1985), in a libel action brought by a private plaintiff against a credit reporting agency based on false statements that the agency made on an individual's credit report that he had filed for bankruptcy and that damaged his business reputation, the United States Supreme Court emphasized that "`[w]hether . . . speech addresses a matter of public concern must be determined by [the expression's] content, form, and context . . . as revealed by the whole record.'" Id.,quoting Connick v. Myers, 461 U.S. 138, 147-49, 103 S.Ct. 1684, 75 L.Ed.2d 708 (1983). In Greenmoss Builders, the Supreme Court found that the credit report of a private construction contractor was not entitled to First Amendment protection because it concerned "no public issue, . . . [but] was speech solely in the interest of the speaker and its specific business audience," since it concerned solely a private plaintiff and was sent to only five subscribers who were under agreement to keep the information confidential; therefore the report did not involve any "strong
Id. at 762-63, 105 S.Ct. 2939.
The credit rating reports regarding Enron by national credit rating agencies were not private or confidential, but distributed "to the world" and were related to the creditworthiness of a powerful public corporation that operated internationally. See Oberman, 460 F.2d at 1387 (Hastings, J., dissenting) ("The financial data circulated by Dun & Bradstreet, Inc. are part of national commercial communication. There is no doubt that an adverse credit rating can injure a subject."). While not making a per se rule about the level of First Amendment protection that should be accorded to such speech, in dicta in Lowe v. S.E.C., the Supreme Court noted that it had previously "held that expression of opinion about a commercial product such as a loudspeaker is protected by the First Amendment" and stated, "[I]t is difficult to see why the expression of opinion about a marketable security should not also be protected." Lowe v. S.E.C., 472 U.S. 181, 210 n. 58, 105 S.Ct. 2557, 86 L.Ed.2d 130 (1985). As noted, credit rating agencies do not profit from the sale of the bonds of any company that they rate for creditworthiness and they perform an essential service for economy and efficiency of the capital markets.
Relying on Milkovich, the Tenth Circuit has concluded that for a reasonable factfinder to find that a credit agency's published article implies a false assertion of fact about a corporation's financial condition, the statement must be sufficiently specific to show that the credit agency's statement evaluating that corporation's creditworthiness is provably false. Jefferson County School District No. R-1 v. Moody's Investors Services, Inc., 175 F.3d 848, 855 (10th Cir.1999). Where vague phrases like "negative outlook" or "ongoing financial pressures" are used by the credit agency and could be based on an unidentified "myriad of factors, many of them not provably true or false," the Tenth Circuit has determined that they are "too indefinite to imply a false statement of fact" and thus the evaluation is a "protected expression of opinion." Id. at 855-56. It also concluded that standing alone, a credit agency's characterization of its evaluation as an "opinion" is insufficient to establish First Amendment protection where a plaintiff demonstrates that the opinion has specifically identified "materially false components." Id. at 856.
In Biospherics, Inc. v. Forbes, Inc., 151 F.3d 180 (4th Cir.1998), the. Fourth Circuit Court of Appeals examined a statement in a stock tip column regularly published by Forbes magazine that stated that Biospherics stock was overvalued. Id. at 182. The article, titled "Sweet-Talkin' Guys," focused on Biospherics' development of a non-fattening sweetener called D-tagatose or "Sugaree." Representing that the stock was high because of "hype and hope" for, such a product, which Biospherics bragged would even delay aging, the article stated, "Investors will sour on Biospherics when they realize that Sugaree isn't up to the company's claims," that its cost would be five times that of sugar, and that other cheaper sweeteners from competitors would soon be available. Id. Finally the article stated, "Biospherics shares are easy to borrow; the few independent analysts who follow the company think its stock is worth $2 on current business." Id.
The Fourth Circuit observed that "the context and `general tenor of the article' . . . indicate that the piece contains constitutionally protected subjective views and not factual statements." Id. at 184. The article made no claim to "first-hand knowledge of facts and certainly no accusations of perjury. It has a breezy rather than solemn tone, appearing in a magazine column denominated `Streetwalker.'" Id. The panel found that it "reflects the writer's subjective and speculative supposition." Id. at 184. The court maintained that it was not "propos[ing] a `doctrinal exemption' for stock tip articles." Id. Moreover it described the first challenged statement, "Hype and hope for a natural, noncaloric sugar substitute — called Sugaree — that the company's been `developing' for 15 years," as containing "irreverent and indefinite language (`hype and hope') that permeates the story, all `negating the impression that the writer is stating fact.'" Id. at 184-85, quoting Milkovich, 497 U.S. at 21, 110 S.Ct. 2695, and Levinsky's, Inc. v. Wal-Mart Stores, Inc., 127 F.3d 122, 129 (1st Cir.1997) ("`The vaguer a term, or the more meanings it reasonably can convey, the less likely it is to be actionable.'"). The appellate court found that the quotation remarks around "developing" "may suggest that the product is not worth years of development, or that its development has been slow," but rejected Biospherics' argument that they "imply the company lied about its claims that it developed Sugaree." Id. at 185. The panel pointed to the play on words in the statement, "Investors will sour on Biospherics when they realize Sugaree isn't up to the company's claims" as demonstrating that it is not a statement of fact but "the tipster's own interpretation." Id. Finally, the court examined the sentences, "Even if the FDA okays [Biospherics] to produce Sugaree — a big if — its cost to consumers could be at best five times the price of sugar. Meanwhile, Johnson & Johnson and Hoechst are working on their own, cheaper, sweeteners. Monsanto is perfecting its Nutra-Sweet sugar substitute." Id. According to the panel, these lines "state the factual basis for the entire article and Biospherics does not challenge their accuracy." Id. The tipster's interpretation or opinion is based on these fully disclosed facts, which the reader is permitted to interpret in his own way, and thus is not actionable as
The United States Supreme Court has also held that to preserve the "breathing space" essential for freedom of expression, a publisher will not be liable for a false statement about matters of public concern unless it made that statement with "actual malice," i.e., "with knowledge that the statement was false or with reckless disregard for whether or not it was true." Hustler Magazine v. Falwell, 485 U.S. 46, 52, 56, 108 S.Ct. 876, 99 L.Ed.2d 41 (1988); New York Times v. Sullivan, 376 U.S. 254, 280, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964); Gertz v. Robert Welch, Inc., 418 U.S. 323, 34849, 94 S.Ct. 2997, 41 L.Ed.2d 789 (1974)
Regarding H-03-1558, this Court observes that while a credit rating agency's latitude for expressing opinion is not without limits, it must be given "constitutional `breathing space' appropriate to the genre." Moldea, 22 F.3d at 315, citing New York Times v. Sullivan, 376 U.S. at 272, 84 S.Ct. 710. This Court further finds as significant here that rating creditworthiness is far from an exact science (as the disclaimers explicitly warn), that the rating agencies rely on information provided by the issuer of the debt securities, and that an evaluation necessarily involves interpretive skills that may produce unverifiable statements of the rater's opinion. Moreover, there is as yet no clearly established obligation defining the extent to which that they should investigate or should pressure a debt-issuing entity for further information or verify information. As noted by the Washington D.C. Circuit Court of Appeals in Moldea, one must consider context and the type of evaluation readers expect in that context in determining whether an evaluation is actionable. 22 F.3d at 314-15.
Nevertheless, in. Commercial Financial Services, Inc. v. Arthur Andersen LLP, 94 P.3d 106 (Okla.Civ.App.2004), the court
Commercial Financial, 94 P.3d at 110.
Moreover the court observed,
Id. at 111. The court in Commercial Services again distinguished the case before it and First Equity Corp., which involved a suit by subscribers to Standard & Poor's newsletter, based on the special relationship of privity between the parties in Commercial Services that created a duty of care not owed to a general reader or a subscriber. 94 P.3d at 111-12. See also American Savings Bank, FSB v. UBS Painewebber, No. M8-85, 2002 WL 31833223, at *1-2 (S.D.N.Y. Dec. 16, 2002)(because unlike Standard & Poor's, Fitch, in addition to functioning as a newsgatherer, "does not operate publications with complete circulation to the general public[,] . . . performs ratings based on a private contractual agreement[, and] . . . rates transactions at the request of issuers or investment bankers for a fee," and thus Fitch "is not entitled to the protections afforded by the journalistic privilege").
Even where one lower court allowed a negligent and fraudulent misrepresentation action to go forward under Illinois law (both causes of action requiring reasonable reliance on the statements at issue) against a credit rating agency,
In contrast to the situation in Jefferson County, where the credit rating agency had not been asked to rate the bonds at issue, here CRRA claims that it specifically retained Standard & Poor's and Moody's to rate the bonds that Enron issued in the fall of 2000, and that they gave the bonds a positive rating. Thus
CRRA has alleged professional negligence claims against the Rating Agencies: specifically that the Rating Agencies accepted Enron's false representations about its financial health, failed to perform a reasonable and continuous investigation and to evaluate Enron's business, liquidity risk, corporate governance, accounting practices and conflicts of interest, negligently published false and misleading credit information concerning Enron, despite the fact that they had contradictory information available to them and could have and should have requested information directly from Enron, which would have shown that Enron's financial situation was precarious and not what Enron was representing it to be. Amended Complaint at ¶ 400. The Court finds that the challenged ratings reports are a combination of subjective, nonactionable evaluation and verifiable facts. The Court concludes that the actual malice standard should apply here because the nationally published credit ratings focus upon matters of public concern, a top Fortune 500 company's creditworthiness. Thus CRRA must also demonstrate that the ratings were made with "actual malice," i.e., "with knowledge that the statement was false or with reckless disregard for whether or not it was true." Hustler Magazine v. Falwell, 485 U.S. at 56, 108 S.Ct. 876; New York Times v. Sullivan, 376 U.S. at 280, 84 S.Ct. 710.
This Court has previously indicated that there is no blanket First Amendment protection for published credit ratings; one must examine any underlying facts, the circumstances under which the statements were made (context), the nature of the content, and the language of the statements to determine whether they are protected by the First Amendment. Since the First Amendment protection for credit rating agencies as members of the "financial press" performing "traditional journalistic functions" is not universally acknowledged, the Court addresses more specific standards applied by the courts to determine if the creditworthiness reports are protected.
Given what appears to be a policy of heightened protection for credit reports under the First Amendment, which are matters of public concern and opinion even if negligently prepared, in light of the conclusory allegations regarding the Credit Rating Agencies in CRRA's amended complaint the Court finds that CRRA has failed to satisfy any of the specific, enhanced pleading requirements established by courts to overcome First Amendment protection for alleged negligent misrepresentation against any of the Defendant Credit Rating Agencies. CRRA's complaint does not detail the circumstances or the language of any of the agencies' reports, it has not identified factual statements that are provably false, and it has not alleged facts showing that the Rating Agencies were at fault because they knew or had significant suspicions that their statements were false and thus acted with actual malice. While the complaint claims that the Rating Agencies "could have and should have known" of the misrepresentations or omissions of their creditworthiness reports regarding Enron, the phrase "could have and should have known" does not reach the standard of St. Amant v. Thompson, 390 U.S. 727, 731, 88 S.Ct. 1323, 20 L.Ed.2d 262 (1968), i.e., that "the defendant in fact entertained serious doubts as to the truth of his publication." As noted, the Agencies are not held to a reasonable person standard that might require investigation: "[F]ailure to investigate before publishing, even when a reasonably prudent person would have done
Even if CRRA's Amended Complaint had adequately pleaded that the challenged credit reports were not entitled to constitutional protection by showing that they contained specific provably false factual connotations made with actual malice in response to the Credit Rating Agencies' First Amendment defenses,
The Connecticut Supreme Court has explained, under Connecticut law,
Id., 258 Conn. at 615, 783 A.2d at 470, quoting Lombard v. Edward J. Peters, Jr., P.C., 252 Conn. 623, 632-33, 749 A.2d 630 (2000). Thus this Court must make "(1) a
It could be argued, and CRRA has done so, that the nature of the harm suffered by CRRA was a foreseeable result of the allegedly misleading ratings reports about Enron's creditworthiness. Focusing on the second prong, the Court finds that the critical issue here is whether the relationship between the Credit Rating Agencies' alleged negligent misrepresentation and the injury to CRRA is too removed as a matter of public policy to impose a duty.
In Connecticut there is no statute or articulated policy reason for holding the Credit Rating Agencies liable for their alleged failure to perform adequate investigations or to challenge the information given to them by Enron. "In the absence of a controlling statute or overriding public policy consideration," the Court measures the "attenuation between [the third party tortfeasor's] conduct, on the one hand, and the consequences and identity of the plaintiff on the other hand." Gomes, 258 Conn. at 616, 783 A.2d at 470-71. Here, the Court finds that relationship between the alleged negligent misrepresentation by the Credit Rating Agencies and the harm to CRRA too remote, as a matter of public policy, to impose a duty. The credit reports were distributed to the world at large. At most, the Credit Rating Agencies were rating Enron's creditworthiness for repayment of specific bonds issued during 2000. CRRA did not purchase these bonds. Instead, it made a loan to Enron that was independent of the bonds.
Circumstances of lesser import support the finding of no duty. While insufficient by themselves to preclude liability, the credit reports had clear, unambiguous disclaimers that they were opinions and not guarantees. Moreover CRRA was an experienced business entity with substantial business acumen. Furthermore there is a fact issue as to whether CRRA knew that it was acting ultra vires and improperly in making an allegedly disguised, unsecured loan to Enron, a matter that cannot be determined at this stage. This Court has previously discussed the significant rule played by the Credit Rating Agencies in the efficient operation of capital markets, which would be chilled by unlimited potential liability for creditworthiness ratings, while public policy clearly encourages "continued vigorous participation in the activity." Jaworski v. Kiernan, 241 Conn. 399, 407, 696 A.2d 332, 337 (1997). While new regulation of the agencies may well be in order to "protect the safety of the participants," id., allowing anyone to sue credit rating agencies who had read the credit rating reports and claimed to have relied upon them and lost money in any endeavor that person undertook would be far more deleterious than beneficial to society as a whole.
In conclusion, because CRRA has failed to meet the requirements of heightened pleading to pierce First Amendment protection and because the Court concludes as a matter of law and public policy that there was no duty of care owed by the Credit Rating Agencies to CRRA regarding its loan to Enron, the Court grants the Rating Agencies' motion to dismiss the negligent misrepresentation claim.
As for the claims against them under CUTPA, in addition to denying that they
Nor does the complaint assert that the Rating Agencies engaged in any deceptive or unfair acts, under the cigarette rule standard, which must be pled with particularity under CUTPA. With respect to the first factor under the cigarette rule, the complaint fails to allege that the Rating Agencies' conduct violated public policy. For the second factor, it fails to assert and cannot' assert that the Rating Agencies engaged in immoral, unethical, oppressive or unscrupulous actions in publishing the ratings of Enron, especially because CRRA has pled that the Rating Agencies were purposely misled by Enron, which provided them with falsely inflated financial information.
Furthermore the Credit Rating Agencies contend that, as a matter of law, CRRA has not alleged that the Rating Agencies' acts caused CRRA substantial damage. To constitute a "substantial injury" under Connecticut law, the injury must be substantial, not outweighed by any countervailing benefits to consumers or competition, and not one that consumers could reasonably have avoided. Web Press Services Corp. v. New London Motors, Inc., 205 Conn. 479, 484, 533 A.2d 1211, 1214 (1987). While CRRA has alleged that it lost a substantial sum of money in the Enron Transaction, it has failed to plead the remaining two prongs adequately. Defendants contend that CRRA has conceded that it should not have entered into the disguised loan, which was unsecured and ultra vires, exceeding its statutory authority. and could reasonably have avoided its injury. Moreover, CUTPA does not apply when a claim is grounded solely in negligence and the plaintiff was contributorily negligent. Williams Ford, 657 A.2d at 227. Therefore CRRA is therefore barred from recovering from the Rating Agencies.
In addition the Rating Agencies insist that the CUTPA claim fails because CRRA's claimed damages were not directly caused by their conduct. Conn. Gen. Stat. § 42-110g(a) (plaintiff may assert a CUTPA claim if he "suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment of a method, act or practice prohibited by section 42-110b."). Connecticut
Fitch adds that because securities ratings are a form of speech protected by the First Amendment, and because CRRA has failed to allege that it acted with actual malice, CRRA has failed to assert a CUTPA claim. Jones v. New Haven Register, Inc., No. 393657, 2000 WL 157704, at *9 (Conn.Super.Ct. Jan. 31, 2000)
Fitch, a Delaware Corporation with its principal place of business in New York, also challenges the Connecticut court's personal jurisdiction over it. Noting that the Connecticut long-arm statute covering foreign corporations, Connecticut General Statutes § 33-929(e) & (f),
CRRA's response in opposition in essence argues that the Rating Agencies knew or should have know of Enron's dire financial situation because they had access to information that would have revealed the numerous parts of the fraudulent scheme involving off the balance sheet special purpose entities participating in deceptive and risky transactions, hedges, swaps, prepays, loans disguised as business deals, aggressive accounting practices to hide Enron's debt and inflate its revenue, conflicts of interest, etc.
The Credit Rating Agencies contend that the CUTPA claims against them "are indistinguishable from other forms of professional negligence excluded by Connecticut courts" (# 238 at 26) under the statute. The Connecticut Supreme Court's exception from CUTPA liability for professional negligence of lawyers
As a remedial statute CUTPA should be broadly construed and exceptions narrowly construed. This Court finds that the rationale of some cases establishing or extending the professional negligence exemption do not fit the Credit Rating Agencies. Unlike the relationships between clients or patients and their lawyers, doctors, accountants, architects and/or engineers, there is no direct or personal relationship here, but only an attenuated link, between the Credit Rating Agencies and vast audience who read and may rely on their creditworthiness reports. Those to whom the credit report is distributed are merely potential investors whom the Credit Rating Agencies do not know, cannot specifically identify, and are not even subscribers to their newsletters or publications. Indeed CRRA was not even
CUTPA's purpose is not to provide an alternative statutory basis for malpractice. Advest Group, 1998 WL 457697, at *7; Willow Springs Condominium Ass'n, Inc. v. 7th BRT Development Corp., 245 Conn. 1, 42-43, 717 A.2d 77, 99-100 (1998) ("CUTPA reflects a public policy that favors remedying wrongs that may not be actionable under other bodies of law."); Hendriks Associates, Llc v. Old Lyme Marina, Inc., No. 546496, 2001 WL 496883, *6 (Conn.Super. Apr. 26, 2001). As discussed, some courts expanding the application of the CUTPA exemption have done so with the result of barring CUTPA claims against professionals for malpractice. The gravamen of the complaint against the Credit Rating Agencies here is professional negligence. In Haynes v. Yale-New Haven Hospital, the plaintiff asserted that the defendant hospital represented to the public that it was a "major trauma center," but did not meet the standards of such an entity. 243 Conn. at 38, 699 A.2d 964. The Supreme Court found that such a claim was in essence a claim for professional malpractice. By analogy, the Credit Rating Agencies, holding themselves out as the most prominent and respected rating agencies, designated as NRSROs by the SEC, imply they are meeting the high standards of their field in their ratings of Enron's creditworthiness. Thus, under the reasoning of some of the cases, the remedy for the alleged failure to satisfy those standards should not be grounded in CUTPA, but in negligence, a failure to meet a duty of care if Plaintiff can establish that one exists between the Rating Agencies and CRRA.
Nevertheless, in contrast to the situation in The Advest Group, where the court reasoned that extensive regulation of accountants provided alternative and more appropriate remedies, as discussed earlier there is minimal if any regulation of the Credit Rating Agencies by the state or federal government, and thus no other source of restraint of misconduct. Thus the "implication of this argument . . . that their professional conduct should be judged by the carefully articulated standards of their own profession, as would be done in a malpractice action, not by other, potentially inconsistent standards that might otherwise be applied by an untutored factfinder in a CUTPA claim," flounders under the circumstances here. Morin v. Tracy, Driscoll & Co., No. CV030823241S, 2004 WL 1395945, *6 (Conn.Super. May 26, 2004). This Court is also aware that the statute "by its own terms applies to a broad spectrum of commercial activity." Willow Springs, 245 Conn. at 42, 717 A.2d at 99. "Trade or commerce, in turn, is broadly defined as the advertising, sale or rent or lease, the offering for sale or rent or lease, of
Because the Connecticut courts have not addressed the question of extending the CUTPA exemption to credit rating agencies and because as a remedial statute the reach of CUTPA should be liberally construed, this Court is unwilling to conclude that the professional negligence exemption
Therefore the Court examines the criteria of the cigarette rule of the federal trade commission to determine whether the alleged conduct is unfair and violates CUTPA: (1) whether the alleged practice offends public policy as established by statute, common law or some "other established concept of unfairness," (2) whether it is immoral, unethical, oppressive, or unscrupulous, and (3) whether it causes substantial injury to consumers, competitors or business persons. Willow Springs, 245 Conn. at 43, 717 A.2d at 99-100.
There does not appear to be any common law or statute or other legal authority in Connecticut establishing a public policy against the distribution of credit ratings that are negligently misleading by the Credit Rating Agencies.
"`Although a failure to disclose can constitute a CUTPA violation, it will do so only if, in light of all the circumstances, there is a duty to disclose.'" Willow Springs, 245 Conn. at 43-44, 717 A.2d 77, quoted in Gladue v. Cummins, No. 547927, 1999 WL 793783 (Conn.Super.Sept.27, 1999); see also Normand Josef Enterprises, Inc. v. Conn. Nat'l Bank, 230 Conn. 486, 523, 646 A.2d 1289, 1307 (1994) ("A failure to disclose can be deceptive only if, in the light of all the circumstances, there is a duty to disclose."). "A duty to disclose will be imposed . . . on a party insofar as he voluntarily makes disclosure. A party who assumes to speak must make a full and fair disclosure as to the matters about which he assumes to speak." Macomber, 261 Conn. at 636, 804 A.2d at 191-92; Catucci v. Ouellette, 25 Conn.App. 56, 59, 592 A.2d 962, 963-64 (1991)(same; adding that the party "must avoid deliberate nondisclosures."). The allegations here are that the Credit Rating Agencies could have or should have known of Enron's risky financial state, not that they did know. One cannot be held liable for failing to disclose something one did not know. Therefore CRRA has not established a duty to disclose based on the
The factual allegations in the complaint supporting a negligent misrepresentation cause of action clearly do not amount to immoral, unethical, oppressive or unscrupulous conduct. Thames River Recycling v. Gallo, 50 Conn.App. 767, 784, 720 A.2d 242, 254 (1998) ("proof that a party acted negligently is not sufficient to establish that the party's conduct was immoral, unethical, or unscrupulous" and is not adequate to show a CUTPA violation "unless the party claiming the act was violated also proved by a preponderance of the evidence that the third factor [caused substantial injury to consumers, competitors or other business people] . . . was violated.").
Regarding this third factor, the Court finds that CRRA is a business person that suffered substantial monetary loss when Enron filed for bankruptcy and defaulted on CRRA's loan. For conduct to cause substantial, unjustified injury, the injury must not only be substantial but it must "not be outweighed by any countervailing benefits to consumers or by competition that the practice produces" and must be "an injury that the consumer, competitor, or other business person could not reasonably have avoided." Thames River Recycling v. Gallo, 50 Conn.App. 767, 785-86, 720 A.2d 242, 255 (1998). Here the Court has discussed at length the strong policies protecting credit rating agencies because the benefits to the capital markets generally are deemed to outweigh the injuries to consumers, in particular where there are warnings that the reports are opinions and not guarantees.
The Connecticut Supreme. Court has held that a plaintiff who is contributorily negligent fails to establish the third element. Williams Ford, 232 Conn. at 592-93, 657 A.2d at 228 ("because the jury found that the dealerships were 10 percent contributorily negligent, the dealerships have not proved that they `could not reasonably have avoided any injury.'"). The Court has already observed that in this action CRRA charges its lawyers with that negligence, not itself. The issue of contributory or comparative negligence cannot be determined at this stage of the litigation.
Moreover, CUTPA provides a private cause of action to "[a]ny person who suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment of a method, act or practice prohibited by section 42-110b. . . ." General Statutes § 42-110g(a); Abrahams v. Young and Rubicam, Inc., 240 Conn. 300, 306, 692 A.2d 709, 712 (Conn.1997), citing Fink v. Golenbock, 238 Conn. 183, 212-13, 680 A.2d 1243 (1996). The Connecticut Supreme Court construes the phrase, "as a result of," as requiring that the plaintiff show that the prohibited act proximately caused the harm to the plaintiff. Abrahams, 240 Conn. at 306, 692 A.2d at 712. Proximate cause is "`[a]n actual cause that is a substantial factor in the resulting harm.'" Id., quoting Stewart v. Federated Dept. Stores, Inc., 234 Conn. 597, 606, 662 A.2d 753 (1995). In other words "proximate cause" requires a determination "`whether the harm which occurred was of the same general nature as the foreseeable risk' created by the defendant's act." Id., quoting Doe v. Manheimer, 212 Conn. 748, 758, 563 A.2d 699 (1989). Proximate cause is more limited than cause in fact: "`Philosophically cause in fact is limitless; but for the creation of this world, no crime or injury would ever have occurred. . . . Lines must be drawn determining how far down the causal continuum individuals will be held liable for the consequences of their actions.'"
The pleadings allege that the credit ratings were a substantial factor in CRRA's decision to do business with Enron by allegedly providing an unsecured loan to Enron. The questions of substantial injury, proximate cause and even foreseeability of that harm being of the same general nature as the foreseeable risk created by Defendants' alleged negligence, require considerations similar to the factors for imposing a duty to disclose as a matter of public policy on the allegedly negligent Credit Rating. Agency Defendants for a negligent misrepresentation claim, discussed supra. For the reasons cited by the Court under that analysis, it finds that CRRA has failed to plead proximate cause under CUTPA because the mind of a fair and reasonable person could reach only one conclusion on the causation issue, i.e., that CRRA's decision to make the purported loan was far too attenuated from the alleged negligent creditworthiness reports to impose liability under CUTPA.
V. Summary of Rulings
Accordingly, for reasons stated above, the Court
ORDERS the following:
Responses to the following motions shall be filed within thirty days of entry of this memorandum and order: (1) Defendant Joseph W. Sutton's motion to dismiss (# 125) for lack of personal jurisdiction; (2) Defendant Mark-Jusbasche's motion to dismiss (# 158) for lack of personal jurisdiction.
CRRA's motion to stay adjudication of any motions to transfer (instrument # 36 in H-03-1579; # 119 in H-03-1558) is MOOT.
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