Aetna Life Insurance v. Appalachian Asset Management Corp.Aetna Life Insurance v. Appalachian Asset Management Corp.
APPEARANCES OF COUNSEL
O‘Hare Parnagian LLP, New York City (Robert A. O‘Hare Jr., Jeffrey S. Lichtman, Andrew C. Levitt and Michael Zarocostas of counsel), for William Messmore, appellant-respondent.
DeCotiis, Fitzpatrick & Cole, LLP, Spring Valley (Gregory J. Bevelock, Alice M. Penna and Jeffrey D. Smith of counsel), for Douglas McBeth, appellant-respondent.
Seward & Kissel LLP, New York City (M. William Munno, John J. Galban and Celinda Metro of counsel), for Sameer Garg, appellant-respondent.
John V. Golaszewski, New York City, for appellant.
Bingham McCutchen LLP, New York City (Jason D. Frank, Jordan D. Hershman, Harold S. Horwich and Derek Care of counsel), for respondent-appellant/respondent.
OPINION OF THE COURT
Saxe, J.
Plaintiff Aetna Life Insurance Company alleges that defendants directed and arranged the removal from a trust account held for Aetna‘s benefit of $48.65 million of high-grade securities that were trading at or near par value, and their replacement with toxic, “sticky” subprime-mortgage-backed securities that were actually worth a small fraction of that amount, which securities had been held in the inventory of Lehman Brothers Holding, Inc. (LBHI). Aetna asserts that defendants did so as part of an effort to prop up Lehman Brothers’ financial position in the final days prior to its 2008 collapse. The complaint alleges
According to the complaint in each of the two (subsequently consolidated) actions at issue here, Lehman Re, Ltd., a wholly-owned subsidiary of LBHI, entered into a coinsurance agreement with Aetna, under which Lehman Re agreed to reinsure a block of fully paid-up life insurance policies that had been issued by Aetna, and to indemnify Aetna for all benefits paid by Aetna on the reinsured policies. In consideration for this indemnification obligation, Aetna paid Lehman Re a premium of $155,667,717, which was deposited in a trust account, to be held for Aetna‘s benefit. Under a contemporaneously executed trust agreement, Lehman Re, with Bank One Trust Company, as trustee, agreed to manage the assets in the trust account as security for Lehman Re‘s indemnity obligations. The agreement between Aetna and Lehman Re required Lehman Re to direct the trustee to invest trust account assets in specified types of “eligible securities,” defined as cash, certificates of deposit and certain types of investments permitted by the Connecticut Insurance Code; Lehman Re was authorized to withdraw assets from the trust account without Aetna‘s approval provided that the assets were replaced with other qualified assets.
However, Aetna alleges, pursuant to a longstanding investment advisory agreement between Lehman Re and defendant Appalachian Asset Management Corp.—a company which, like Lehman Re, was also a wholly-owned subsidiary of LBHI—Appalachian was given the authority to control and manage the assets in the Aetna trust account. That investment advisory agreement, Aetna says, gave Appalachian trading authority over the trust account assets.
The crux of the complaint is that on September 9, 2008, with the real estate market in crisis and the market for mortgage-backed securities drying up, Appalachian arranged for the removal from the Aetna trust account of $48.65 million of high-grade, CARAT securities that were trading at or near par value. In place of those valuable securities, Appalachian directed the substitution of securities then held in the inventory of LBHI with a purported face value of $44,500,000, issued by Ballantyne
Aetna‘s complaint further provides context for the troubling transaction, explaining that in early 2008, LBHI had recognized its problematic financial position, in that it was over-leveraged, with excessive “sticky” inventory positions that would be difficult to sell without incurring substantial losses or creating a loss of confidence in the inventory remaining on its balance sheet. LBHI was therefore attempting to take steps to make its financial position appear stronger than it actually was. Additionally, Aetna asserts that J.P. Morgan made a demand on LBHI in September 2008 to post an additional $3.6 billion in collateral to secure certain funding, to which demand LBHI agreed on September 9, 2008, the same date that the substitution was directed.
In any event, the substitution made in Aetna‘s trust account on September 9, 2008 was allegedly arranged on behalf of LBHI not only to increase the quantity and value of assets on LBHI‘s books, but to substantially reduce the amount of “sticky” assets on its books at a time when future funding and support were in question.
On September 15, 2008, LBHI filed for bankruptcy protection. Lehman Re commenced liquidation proceedings in Bermuda on September 23, 2008, and Aetna filed a proof of claim for its loss in that proceeding. Aetna‘s quantified loss was incurred because on September 19, 2008, it determined that the Ballantyne securities then held in its trust account were of a type that it was not permitted to carry on its books as admitted assets, because they did not meet the requirements of Connecticut insurance law. Accordingly, on October 14, 2008, Aetna sold the Ballantyne securities, at a price of $4.8 million, almost $44 million less than the value of the securities in the trust account for which they had been substituted five weeks earlier.
According to Aetna‘s complaint, a number of individuals were involved in Appalachian‘s control and management of the assets in the Aetna trust account. These individuals included: non-appealing defendant Gregory McDonald, an assistant vice-president
Plaintiff claims that the particular transaction in question was instigated by an email from defendant Christopher McDougal, a vice-president in the fixed income division of Lehman Brothers, Inc. (LBI), another wholly-owned subsidiary of LBHI, in which McDougal designated the specific securities to be removed from Aetna‘s trust account and the specific securities then held by LBHI to be substituted for them. Shortly after receiving this email from McDougal, McDonald forwarded it to the trustee and directed the trustee to remove the CARAT securities from the trust account and substitute the Ballantyne Re securities.
In seeking dismissal, Appalachian argued that the alleged facts did not state a violation of CUTPA. It also argued that whatever duty Lehman Re might have owed to Aetna under the coinsurance agreement and trust agreement, Appalachian owed no fiduciary duty to Aetna, and therefore breached no such duty. Indeed, Appalachian argued that it owed no duty at all to Aetna, requiring dismissal of the negligence and recklessness causes of action as well. Appalachian characterizes what happened to Aetna as merely “an arms-length business transaction between two sophisticated entities—Aetna and non-party Lehman Re—that resulted in a loss during the height of a terrible economic crisis.”
The individual defendants each moved for dismissal as well, arguing, like Appalachian, a lack of any duty. In addition, defendant Garg asserted as a factual matter that he played no role in controlling or managing the assets in the trust account, and, specifically, played no role in the substitution at issue; his motion also sought, in the alternative, summary judgment dismissing the claims against him.
The motion court denied the motions to dismiss, except to the extent it dismissed the negligence claims as against the individ-ual
Discussion
As an initial matter, we reject Aetna‘s contention that its service of the consolidated amended complaint renders defendants’ appeals moot. While an appeal taken from a denial of a dismissal motion may be moot when that complaint has been superseded by an amended complaint (see e.g. 100 Hudson Tenants Corp. v Laber, 98 AD2d 692 [1st Dept 1983]; Bennett v City of New York, 65 AD2d 731, 732 [1st Dept 1978]), that is not necessarily the case where the new pleading does not substantively alter the existing causes of action (see e.g. Anthony J. Demarco, Jr., P.C. v Bay Ridge Car World, 169 AD2d 808 [2d Dept 1991]). Here, Aetna acknowledged that the consolidated amended complaint, which primarily combined the complaint against McDougal with that against the remaining defendants, alleged no new claims or theories of recovery, but merely added more detail as to what defendants allegedly knew or should have known about the value of substituted securities. The legal issues raised on these appeals, relating to whether a CUTPA claim lies or whether there is a basis to hold defendants liable in tort given the nature of their relationships with plaintiff, may be fully addressed at this stage based on the pleadings before the motion court, and are not altered by the additional factual allegations.
CUTPA
Defendants all contend that the allegations of the complaints cannot support the CUTPA claim against any defendant. They point out that in Russell v Dean Witter Reynolds, Inc. (200 Conn 172, 175, 510 A2d 972, 974 [1986]), the Connecticut Supreme Court held that “CUTPA does not apply to the purchase and sale of securities,” which are covered instead by the Connecticut Uniform Securities Act (CUSA) (
However, as the motion court observed, the record does not specify exactly how such a “substitution” was carried out. Noth-ing
It is true that Connecticut law defines a “sale” of securities to include any “contract of sale of, contract to sell, or disposition of, a security or interest in a security for value” (see
Assuming that CUTPA does apply, we must determine whether the elements of such a claim are sufficiently stated by the complaints.
A cause of action under CUTPA is stated where
“(1) . . . the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise—in other words, it is within at least the penumbra of some common law, statutory, or other established concept of unfairness; (2) . . . it is immoral, unethical, oppressive, or unscrupulous; [or] (3) . . . it causes substantial injury to consumers, [competitors or other businesspersons]” (Hartford Elec. Supply Co. v Allen-Bradley Co., Inc., 250 Conn 334, 368, 736 A2d 824, 842-843 [1999] [internal quotation marks omitted]).
Contrary to the arguments of defendants McBeth and Garg, Connecticut law does not require that CUTPA claims be pleaded with particularity (see Macomber v Travelers Prop. & Cas. Corp., 261 Conn 620, 644, 804 A2d 180, 196 [2002]). The allegations
As to protests by the individual defendants that they may not be individually liable for CUTPA violations, the Appellate Court of Connecticut observed that a corporate officer who directly engaged in tortious conduct was properly held individually liable for CUTPA violations (see Cohen v Roll-A-Cover, LLC, 131 Conn App 443, 469, 27 A3d 1, 18 [2011], certification for appeal denied 303 Conn 915, 33 A3d 739 [2011]). The reasoning of that case supports the possibility of the individual defendants here being held liable under CUTPA, if they directly engaged in tortious conduct injuring Aetna.
Fiduciary Duty
All of the defendants contend that no breach of fiduciary duty may properly be asserted against Appalachian, and the individual defendants claim that no aiding and abetting such a breach may be pleaded against them, because there was no fiduciary relationship between Aetna and Appalachian, and any such duty owed to Aetna was owed by Lehman Re alone. However, while Aetna did not have a contractual relationship with Appalachian, the allegations permit a finding that Appalachian stepped into Lehman Re‘s position as created by the trust agreement, knowing of the trust agreement‘s provisions and limitations, thereby assuming Lehman Re‘s duties, including the specified obligations regarding the handling of Aetna‘s trust account. A fiduciary relationship “is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other” (Hi-Ho Tower, Inc. v Com-Tronics, Inc., 255 Conn 20, 38, 761 A2d 1268, 1278 [2000] [internal quotation marks omitted]). It is alleged that Appalachian, through its representatives, formed a direct relationship with Aetna, in which Appalachian was in the dominant position, asserting influence over Aetna and creating justifiable trust on Aetna‘s part (see Alaimo v Royer, 188 Conn 36, 41, 448 A2d 207, 209 [1982]).
The claim of aiding and abetting a breach of fiduciary duty is also upheld as against the individual defendants. Liability for aiding and abetting a breach of fiduciary duty requires establishing the following elements:
“(1) the party whom the defendant aids must perform a wrongful act that causes an injury; (2) the defendant must be generally aware of his role as part of an overall illegal or tortious activity at the time that he provides the assistance; (3) the defendant must knowingly and substantially assist the principal violation” (Halberstam v Welch, 705 F2d 472, 477 [DC Cir 1983]; see Efthimiou v Smith, 268 Conn 499, 505, 846 A2d 222, 226 [2004]).
Here, plaintiff alleges that each individual defendant knew of the substitution and its impropriety, and played some role in effecting the securities swap; whether or not the assistance provided may be categorized as substantial cannot be determined here. McDougal allegedly directed the substitution in question; Messmore, McBeth, and Garg are all alleged to have been aware of Appalachian‘s actions and to have taken actions substantially assisting the alleged breach of fiduciary duty. The allegation that they participated in controlling and managing the trust account assets is sufficient to satisfy the pleading requirement. Moreover, as to Garg in particular, Aetna states that he, personally, was specifically informed by Aetna that the trust account must comply with Connecticut insurance regulations.
Negligence and Recklessness
To state a claim for negligence, a plaintiff must sufficiently allege (1) a duty; (2) a breach of that duty; (3) causation; and
“[a] duty to use care may arise from a contract, from a statute, or from circumstances under which a reasonable person, knowing what he knew or should have known, would anticipate that harm of the general nature of that suffered was likely to result from his act or failure to act” (see Coburn v Lenox Homes, Inc., 186 Conn 370, 375, 441 A2d 620, 624 [1982]), and where a determination is made that the defendant‘s responsibility should extend to such results (RK Constructors, 231 Conn at 386, 650 A2d at 156).
“[T]he test for the existence of a legal duty of care entails (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, of whether the defendant‘s responsibility for its negligent conduct should extend to the particular consequences or particular plaintiff in the case” (Neuhaus v DeCholnoky, 280 Conn 190, 217-218, 905 A2d 1135, 1152 [2006] [internal quotation marks omitted]; see also Assured Guar. [UK] Ltd. v J.P. Morgan Inv. Mgt. Inc., 80 AD3d 293, 306 [1st Dept 2010], affd 18 NY3d 341 [2011]).
As the motion court held, although Aetna‘s agreement was with Lehman Re, the allegations permit a finding that Appalachian assumed a duty of care to Aetna in connection with the management of the trust account assets. Appalachian‘s denial of any duty to manage the assets in a reasonable manner fails to negate the inference that may be drawn from the allegations.
In addition, Connecticut allows for liability in tort of a corporate officer or agent who engages in the tortious conduct (see Sturm v Harb Dev., LLC, 298 Conn 124, 133-134, 2 A3d 859, 867 [2010]). Plaintiff‘s allegations that each of these individual defendants took actions in connection with the substitution that they knew were not reasonably prudent with respect to the management of the trust assets are sufficient to state claims for negligence.
Summary Judgment
Garg argues that he is entitled to summary judgment based on his unrebutted affidavit testimony establishing that he had no role in controlling or managing assets in the trust account, played no role in the substitution, was not even aware it had taken place, and was a mere intermediary between plaintiff and LBHI‘s investment department. He further relies on McDougal‘s deposition testimony as confirming that he did not direct the substitution, as well as the deposition testimony of LBI‘s Thomas Rogers, who indicated that Lehman mortgage traders directed substitutions. In addition, Garg maintains that a genuine issue of fact is not raised by the statement of John Sullivan, an employee of plaintiff, that he had “a series of telephone conferences with Mr. Garg and other individuals whom [he] understood were involved in the management of the Trust Account.” Finally, Garg argues that plaintiff failed to make the required showing under
The motion court properly denied Garg‘s summary judgment motion as premature, since facts essential to the opposition may exist but could not have then been provided.
Finally, the motion court properly granted Aetna‘s motion to consolidate the two actions.
We have considered the parties’ remaining arguments and find them unavailing.
Mazzarelli, J.P, Acosta, Renwick and Clark, JJ., concur.
Order, Supreme Court, New York County, entered April 13, 2012, modified, on the law, to deny the motions to dismiss the negligence cause of action as against the individual defendants, and otherwise affirmed, without costs. Order, same court, entered on or about May 8, 2012, affirmed, without costs.