Krys v. Aaron
826 F. Supp. 2d 478
S.D.N.Y.2011Background
- MDL action reviewing Special Master Capra’s Report & Recommendation on motions to dismiss related to Refco-related fund losses (SPhinX/PlusFunds).
- Plaintiffs allege SMFF excess cash was swept from Refco segregated accounts to unprotected RCM accounts, leading to losses in Refco scandal.
- Defendants include DPM and DPM-Mellon entities, Mellon Financial/Mellon, and individuals Aaron and Castranova; Service Agreement governs DPM's duties.
- Court assumes for purposes of R&R that SMFF had segregated-cash rights and that transfer to RCM was unauthorized and wrongful, subject to later rulings.
- Special Master recommends dismissals or denials on multiple counts; Court adopts R&R, affirming most outcomes and denying/awarding several dismissals with prejudice.
- Dispositive posture centers on contractual/fiduciary duties, choice-of-law issues, and NJRICO claims arising from alleged misrepresentations and intra-firm transfers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Breach of contract liability against Mellon | Mellon assumed DPM’s duties; breached Service Agreement. | Mellon never party to contract or assumed duties; cannot be liable. | Count I/III: Mellon dismissed with prejudice. |
| Implied covenant of good faith and fair dealing duplicative of contract | Implied duties may cover non-explicit duties on excess cash. | Duplicative of contract; no independent implied duty. | Count II dismissed in full, with prejudice. |
| Indemnity under the Service Agreement | DPM/Mellon owe indemnity for SMFF losses. | Mellon did not assume Service Agreement obligations; no indemnity. | Count III dismissed as to Mellon, with prejudice. |
| Declaratory relief regarding indemnity | Clarify that indemnity claims are improper and unenforceable. | Castranova has no indemnity claim; declaratory relief improper. | Count IV dismissed as to Castranova, with prejudice. |
| Breach of fiduciary duty—DPM and Aaron liability | DPM/ Aaron owed fiduciary duties to SPhinX/PlusFunds; mismanagement and misrepresentation. | No fiduciary duty where no contract or misapplication; veil concerns; scope limited. | Count V largely denied as to DPM/Aaron, but Mellon severed; follows detailed proximate-cause analysis. |
Key Cases Cited
- Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168 (2d Cir. 2004) (strong inference standard for fraudulent intent under Rule 9(b))
- In re Parmalat Sec. Lib., 501 F. Supp. 2d 560 (S.D.N.Y. 2007) (proximate cause and fraud pleading standards in NJRICO context)
- AR I and Co., Inc. v. Regent Intl. Corp., 273 F. Supp. 2d 518 (S.D.N.Y. 2003) (implied covenant duplicative of contract unless independent duties shown)
- Blank v. Baronowski, 959 F. Supp. 172 (S.D.N.Y. 1997) (fraud claims must be distinct from contract claims when based on present facts)
- Montreal Pension Plan v. Banc of America Sec., LLC, 446 F. Supp. 2d 163 (S.D.N.Y. 2006) (choice of law/territorial considerations in fiduciary duties; no conflict between NY/NJ law here)