DECISION AND ORDER
MARCY S. FRIEDMAN, Judge.
Defendants The Bank of New York Mellon and The Bank of New York Mellon Corp., on behalf of themselves and dissolved entity BNY Alternative Investment Services, Inc., move to dismiss this action, pursuant to CPLR 3211 (a) (1) and (7), based on documentary evidence and for failure to state a cause of action. Defendants also move to dismiss on the ground that plaintiffs lack standing.
Plaintiffs are three law firms that represented two subclasses in consolidated federal class actions (
The nominal plaintiffs in the instant action, Rye Select Broad Market Fund LP, Rye Select Broad Market Prime Fund LP, and Rye Select Broad Market XL Fund LP (Rye Funds), were, at all relevant times, Delaware limited partnerships managed by their general partner, Tremont Partners, Inc. (First Am. Compl. [Am. Compl.], ¶ 24.) The Rye Funds invested substantially all of their clients' funds with Bernard L. Madoff Investment Securities LLC (BMIS). The investors that comprised the subclasses were limited partners in the Rye Funds. As of December 2008, when Madoff was arrested, the Rye Funds held accounts with BMIS valued at approximately $3 billion. (Am. Compl., ¶ 55.)
Defendant The Bank of New York Mellon Corporation (BNYM Corp.) is a Delaware corporation and the parent of defendant The Bank of New York Mellon (BNYM). Defendant BNY Alternative Investment Services, Inc. (BNY-AIS) is a division of BNYM. The three Bank of New York Mellon entities (collectively BNY Mellon or Bank) "acted as the fund Administrator, Sub-Administrator, and/or Custodian for the Rye Funds." (Am. Compl., ¶ 29.)
Pursuant to a Stipulation and Order in the Tremont action, dated December 9, 2009, the Rye Funds' claims against BNYM Corp. and BNY-AIS were voluntarily dismissed without prejudice. (Aff. of Nazneen Mehta [Ds.' Atty.] [Mehta Aff.], Ex A].) By judgment and order filed on August 19, 2011, the District Court approved a settlement of the Tremont action. The Court made findings, "for the purposes of the Settlement only," that the State Law Subclass and the Securities Subclass met the prerequisites for maintenance of a class action. (Mehta Aff, Ex. B, ¶¶ 4, 5.) By Stipulation of Partial Settlement, dated February 23, 2011, the Rye Funds agreed to assign their claims against "Bank of New York Mellon" to Plaintiffs' State Law and Securities Settlement Class Counsel "for the benefit of the State Law Subclass and Securities Subclass." The Stipulation further provided that such claims "may be prosecuted at the direction of Plaintiffs' State Law and Securities Settlement Class Counsel if prosecution of such claims is deemed to be in the best interest of the State Law Subclass and Securities Subclass." (Mehta Aff., Ex. C, § 2.17.) This assignment was confirmed by a May 29, 2012 letter from counsel for the Rye Funds. (Aff. of Arthur Nealon [Ps.' co-counsel], Ex. B.)
The Amended Complaint pleads three causes of action. The first is for gross negligence. (Am. Compl., ¶¶ 95-103.) The second is for "breach of fiduciary duty with gross negligence." (Am. Compl, ¶¶ 104-111.) The third, for professional malpractice, has been withdrawn. (Ps.' Memo. In Opp. at 14 n 11.)
In the first cause of action, the Amended Complaint alleges that "[b]y virtue of its superior knowledge, BNY MELLON owed a common law duty of care to the Rye Funds to disclose material adverse facts affecting assets under BNY MELLON's administration." (Am. Compl., ¶ 100.)
The second cause of action for breach of fiduciary duty is based on substantially the same allegations as the gross negligence cause of action. The Amended Complaint thus pleads that BNY MELLON breached its fiduciary duties to "fully and fairly disclose all material facts actually known to it and/or reasonably available to it about Madoff's operations," including: "(1) inadequate sub-custodial records of cash and cash flows; (2) inexplicable cash flows to and through the BMIS account at BNY MELLON ...; (3) the known red flags indicating that the Rye Funds' assets were at a risk for fraud; (4) the purported purchases of BNY MELLON's own stock that it knew never occurred; and (5) concerns about Madoff's operations raised by BNY MELLON's own subsidiary Ivy." (
As a threshold matter, the court rejects defendants' contention, on the record as briefed, that plaintiffs lack standing because an unincorporated association may not maintain an action in its own name, and plaintiffs sue not in their own names but as a fictional entity. (Ds.' Memo. In Support at 24.) The Amended Complaint pleads that "[t]he Nominal Plaintiff Rye Funds have assigned their claims against BNY MELLON to Settlement Counsel for the benefit of the State Law Subclass and the Securities Subclass, and not in their individual capacities." (Am. Compl., ¶ 25.) As noted above (
Failure to State a Cause of Action
It is well settled that on a motion to dismiss pursuant to CPLR 3211(a)(7), "the pleading is to be afforded a liberal construction (
The Rye Funds entered into two substantially similar Administrative Services Agreements — a July 1, 2007 agreement between Rye Select Broad Market Fund, L.P. and Rye Select Broad Market Prime Fund, L.P. and BNY-AIS (Mehta Aff., Ex. D); and a September 1, 2006 agreement between Rye Select Broad Market XL Fund, L.P. and BNY-AIS. (Mehta Aff., Ex. E). The Agreements provided for BNY-AIS to furnish the administrative services listed on Schedule I, which include: establishing and maintaining accounts in the name of the Rye Funds; receiving and disbursing subscription payments in connection with the sale of the Funds' shares; receiving and paying fees and expenses on behalf of the Funds; acting as registrar and transfer agent with respect to the Funds' shares and, in that capacity, processing subscription applications and maintaining subscriber registers and ledgers; preparing and maintaining customary financial and accounting books and records; acting as liaison with the Rye Funds' independent public accountants; computing the net asset value of the Funds' shares; and providing specified anti-money laundering services involving subscribers.
The Administrative Services Agreements expressly provided that "BNY-AIS shall have no duties or responsibilities whatsoever including any custodial duties, except such duties and responsibilities as are specifically set forth in this Agreement, including Schedule I, or as are otherwise required of BNY-AIS by laws or regulations applicable to BNY-AIS, and no covenant or obligation shall be implied against BNY-AIS in connection with this Agreement." (Mehta Aff., Exs. D, E ¶ 5 [m].)
The Rye Funds also entered into a Global Custody Agreement with the Bank of New York. Although the Agreement appointed the Bank as custodian of cash and securities (Mehta Aff., Ex. F, Art. II, § 1), it is undisputed that the Bank served as custodian only for cash, and that Madoff himself acted as custodian for the securities he purportedly purchased for the Rye Funds' accounts. (Am. Compl., ¶ 56.)
As the Amended Complaint alleges, "BNY MELLON was responsible for performing certain day-to-day administration tasks on behalf of the Rye Funds." (Am. Compl., ¶ 87.) BNY Mellon served as the Funds' administrator, sub-administrator, and cash custodian. (
The Administrative Services Agreements did not provide, and the Amended Complaint does not allege, that BNY Mellon had any responsibility for recommending or selecting the Funds' investments, or trading the securities. Moreover, the Administrative Services Agreements expressly authorized BNY Mellon to rely on information furnished by the Funds in performing its administrative services, including the calculation of net asset value. They thus stated that "[i]n the event BNY-AIS's computations hereunder rely, in whole or in part, upon ... prices or values supplied by the Fund or by brokers, dealers, market makers, or specialists described in the Offering Materials, BNY-AIS shall not be responsible for, under any duty to inquire into, or deemed to make any assurances with respect to, the accuracy or completeness of such information." (Mehta Aff., Exs. D, E, ¶ 5 [g].)
Plaintiffs do not allege any breach by BNY Mellon of its contractual duties under the Administrative Services Agreements. Nor do plaintiffs dispute that the Administrative Services Agreements permitted plaintiffs to calculate NAVs by relying, without verification, on information provided by third-parties such as the Funds. Rather, they claim that BNY Mellon owed the Rye Funds a non-contractual common law duty of due care as well as fiduciary duties. (Ps.' Memo. In Opp. at 2, 15.)
First, plaintiffs argue that defendants acted with gross negligence in performing its administrative and cash custody services. The Administrative Services Agreements contain a provision exculpating BNY Mellon from liability for ordinary negligence. They provide that BNY-AIS shall not be liable for damages or claims resulting from, arising out of, or in connection with its performance under the Agreements, except damages or claims for its "own bad faith, gross negligence or willful misconduct." (Mehta Aff., Ex. D, ¶ 7 [a]; Ex. E, ¶ 8 [a].) Under New York law, contractual provisions absolving a party from its own negligence are generally enforceable; but public policy prohibits enforcement of such clauses with respect to damages occasioned by gross negligence. (
The Amended Complaint fails to plead gross negligence. It does not allege that defendants breached, let alone recklessly disregarded, any contractual duty. For the reasons that follow, the law also does not impose any additional tort duty, or duty independent of contract, to exercise reasonable care. In arguing for such a duty, plaintiffs rely on
The Courts have expressly declined to extend the
As this action, similarly, involves only economic harm, the law does not impose a tort duty of due care independent of the parties' contracts. The complaint accordingly fails to state a cause of action for gross negligence.
Breach of Fiduciary Duty
Plaintiffs also fail to state a cause of action for breach of fiduciary duty. In order to plead breach of fiduciary duty, plaintiffs "must allege that (1) defendant owed them a fiduciary duty, (2) defendant committed misconduct, and (3) they suffered damages caused by that misconduct." (
The issue of the existence of a fiduciary relationship between contracting parties is fact-based and therefore not generally subject to dismissal on the pleadings. (
Assuming that BNY Mellon had a fiduciary duty within the scope of its undertaking — namely, the performance of services for the Rye Funds listed in Schedule I of the Agreements — plaintiffs do not allege that the Bank breached that duty in any respect. Rather, they allege that BNY Mellon had separate fiduciary duties arising out of the parties' relation and imposed by law. These alleged fiduciary duties were to verify the investments, including Madoff's alleged investments in BNY Mellon's own stock; investigate "red flags" of Madoff's fraud; ascertain from Ivy, a subsidiary, its knowledge of risks in investing with Madoff; monitor the bank account of BMIS at BNY Mellon; and generally safeguard the Rye Funds' assets. (
The asserted fiduciary duties are inconsistent with the expressly assumed duties under Schedule I, and with the parties' specific disclaimer in the Administrative Services Agreements that BNY Mellon shall have no duties or responsibilities except those expressly set forth in the Agreements or imposed by law. (Mehta Aff., Exs. D, E, ¶ 5 [m] [quoted
Nor may plaintiffs predicate their claim that BNY Mellon had a duty to safeguard the Funds' assets on BNY Mellon's role as cash custodian. Plaintiffs do not allege that BNY Mellon breached any duty to safeguard the cash account, which was the only account maintained at the Bank by the Rye Funds. Nor do they allege that Madoff misappropriated any cash from the account. Plaintiffs' claim is, rather, that Madoff made bogus trades of securities, which were held not by BNY Mellon but by Madoff.
The pleading of the fiduciary duty claim based on a conflict of interest also fails. Plaintiffs assert that the Bank "engaged in a conflict of interest by servicing and monitoring the BMIS master bank account while simultaneously acting as administrator and custodian to the Rye Funds." (Ps.' Memo. In Opp. at 2.) The complaint is devoid of any factual allegations that support a conflict of interest claim based on maintenance of custody accounts by separate investment funds at the same bank.
In sum, the Amended Complaint does not allege that BNY Mellon had any role in the Rye Funds' investment decisions, any duty to independently value the Funds' assets or to independently calculate the Funds' NAV, and any responsibility for monitoring sub-custodians. In addition, the Administrative Services Agreements by their terms required BNY Mellon to provide nondiscretionary administrative services. Under these circumstances, Courts have repeatedly held that an administrator of an investment fund does not owe it a fiduciary duty. (
The court accordingly holds that the Amended Complaint fails to plead a viable cause of action for breach of fiduciary duty against BNY Mellon.
Special Facts Doctrine
Finally, plaintiffs argue that BNY Mellon had "superior knowledge" about the nature and value of the Rye Funds' assets and Madoff's suspicious activities, and therefore had a duty to disclose this information to the Rye Funds. (Ps.' Memo. In Opp. at 17-22.) Under the "special facts" doctrine, a party may have a duty to disclose information peculiarly within its knowledge, even in the absence of a fiduciary duty, "where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair." (
In asserting the applicability of this doctrine (although not referring to it by name), plaintiffs contend that BNY Mellon had superior knowledge about Madoff from three principal sources: First, they claim that BNY Mellon's predecessor, The Bank of New York, "undoubtedly conducted substantial due diligence" in acquiring Ivy, a subsidiary that had evidence that Madoff was a fraud risk, and that BNY Mellon therefore "knew or should have known about the evidence that Madoff was misusing client funds." (
These allegations fail as a matter of law to support plaintiffs' claim that BNY Mellon had superior knowledge of Madoff's suspicious activities. To the extent that plaintiffs claim that the Bank acquired actual, as opposed to constructive, knowledge as a result of BNY Mellon's predecessor's acquisition of Ivy, the allegations of the Amended Complaint are wholly conclusory. This claim also ignores that the knowledge of a subsidiary is not imputed as a matter of law to a parent. (
Plaintiffs' further claims as to the Bank's knowledge of Madoff's wrongdoing, based on Madoff's purchases of BNY Mellon's own shares and on the Bank's obligation to monitor the BMIS account, allege not that the Bank had actual knowledge but that it should have had knowledge of Madoff's activities. Plaintiffs cite no authority that constructive, as opposed to actual, knowledge is sufficient to support a claim of a party's superior knowledge or to impose disclosure obligations upon it under the special facts doctrine. Moreover, the claim that the Bank should have had superior knowledge about Madoff's purchases of BNY Mellon shares is inconsistent with the Administrative Services Agreements permitting the Bank to rely, without verification, on information provided by third parties.
As the Amended Complaint does not adequately allege actual knowledge, the court does not reach the issue of whether the allegations otherwise support application of the special facts doctrine.
It is accordingly hereby ORDERED that the motion of The Bank of New York Mellon, The Bank of New York Mellon Corporation, and BNY Alternative Investment Services, Inc. to dismiss the complaint pursuant to CPLR 3211 (a) (1) and (7), and on the ground that plaintiffs lack standing, is granted; and it is further
ORDERED that the complaint is dismissed with prejudice; and it is further
ORDERED that the Clerk of the Court is directed to enter judgment accordingly.