Matana v. Merkin
989 F. Supp. 2d 313
S.D.N.Y.2013Background
- KM, an Israeli charity, invested $1.5 million in Ascot Fund, managed by Merkin and GCC, which funded Madoff’s scheme.
- Ascot Fund was a limited partner in Ascot Partners, making KM’s investment effectively in Ascot Partners.
- Madoff’s fraud caused KM’s $1.5 million to be wiped out upon revelation of the Ponzi scheme.
- KM asserted state-law claims for fraud and breach of the duty of good faith and fair dealing; defendants moved to dismiss.
- The court previously dismissed KM’s original complaint and afforded narrowly tailored leave to amend two claims but denied others as futile.
- The amended complaint adds alleged misstatements in Ascot Fund’s financials, Gabriel Letters, and omissions about Madoff, seeking to revive the fraud and implied-duty claims; the court denies those revisions and grants dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether KM can plead a breach of implied duty of good faith and fair dealing. | KM seeks third-party beneficiary or oral contract basis to imply duty. | KM lacks contractual privity and fails to plead a valid implied duty. | Claim dismissed. |
| Whether NY law recognizes holder fraud claims and KM adequately pleads fraud. | Holder claims for recovery of investment value may be cognizable. | Starr limits holder claims, especially for lost profits; but could foreclose some claims. | Holder claims limited but not categorically barred; fraud claim fails on pleading. |
| Whether KM adequately pleads reliance on Ascot Fund financial statements. | Statements about fees and brokers induced KM to keep investment. | KM failed to show plausible reliance on these specific statements. | No plausible reliance; claim fails. |
| Whether KM adequately pleads fraud through Gabriel Letters or omissions about Madoff. | Letters and omissions misled KM about diversification and Madoff exposure. | Letters addressed to Gabriel investors; statements were puffery or non-actionable; omissions lack scienter. | Claims insufficiently pled. |
| Whether any omissions about Madoff can sustain a fraud claim given statute of limitations and scienter requirements. | Non-disclosures breached fiduciary duty. | Misconduct not pled with requisite scienter; timely claims barred. | Fraud claims dismissed on pleadings and statute grounds. |
Key Cases Cited
- Starr Foundation v. American International Group, Inc., 901 N.Y.S.2d 246 (1st Dep’t 2010) (holder claims limited to out-of-pocket losses; profits not recoverable under out-of-pocket rule)
- Tradex Global Master Fund SPC Ltd v. Titan Capital Group III, LP, 944 N.Y.S.2d 527 (1st Dep’t 2012) (supports Starr distinction; confirms out-of-pocket damages framework)
- Starr Foundation v. American International Group, Inc., 76 A.D.3d 25 (1st Dep’t 2010) (holder claims not for lost profits; concern with damages)
- In re WorldCom, Inc. Sec. Litig., 382 F.Supp.2d 549 (S.D.N.Y. 2005) (predictive standard for state-law issues in securities cases)
- Eurycleia Partners, LP v. Seward & Kissel, LLP, 46 A.D.3d 400 (1st Dep’t 2007) (fiduciary duty and omissions; pleading standards in NY fraud claim)
- S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) (statute of frauds and reliance considerations; due diligence context)
- Matana v. Merkin, 957 F.Supp.2d 473 (S.D.N.Y. 2013) (initial dismissal and limited amendments; holder claim framework)
- Fuji Photo Film U.S.A., Inc. v. McNulty, 669 F.Supp.2d 405 (S.D.N.Y. 2009) (formation pleading requirements for contracts)
- GSC Capital Corp. v. Cobalt Partners, L.P., 97 A.D.3d 35 (1st Dep’t 2012) (reliance on fund documents; disclaimer of outside representations)