Krys v. Aaron

106 F.Supp.3d 472

Kenneth M. KRYS, Margot Macinnis, and the Harbour Trust Co. Ltd., Plaintiffs,

v.Robert AARON, Derivative Portfolio Management LLC, DPM–Mellon, LLC, Derivative Portfolio Management, Ltd., DPM–Mellon, Ltd., and Bank of New York Mellon Corporation, Defendants.

Civil Action No. 14–2098 (JBS/AMD).

United States District Court, D. New Jersey.

Signed May 20, 2015.

David J. Molton, Esq., Andrew S. Dash, Esq., Mason C. Simpson, Esq., Brown Rudnick LLP, Seven Times Square, New York, NY, and, Leo R. Beus, Esq., L. Richard Williams, Esq., Malcolm Loeb, Esq., Thomas A. Gilson, Esq., Lee M. Andelin, Esq., Beus Gilbert PLLC, Phoenix, AZ, for Plaintiffs.

B. John Pendleton, Jr., Esq., Andrew O. Bunn, Esq., Kristin A. Pacio, Esq., Gina Trimarco, Esq., DLA Piper LLP (US), Short Hills, NJ, for Defendants.

OPINION

SIMANDLE, Chief Judge:

I. INTRODUCTION

This lengthy multi-district securities litigation generally arises from the complex financial relationships between, and ultimate bankruptcy proceedings of, three entities (and the multitude of affiliates associated with each): PlusFunds Group, Inc. (hereinafter, "PlusFunds"), SPhinX Funds (hereinafter, "SPhinX"), and Refco, Inc. (hereinafter, "Refco")—all entities no longer in operation in the aftermath of Refco's dissolution. The parties presently seek a pretrial determination of whether the law of the Cayman Islands or of New Jersey/New York will apply to the fiduciary duty claims against a former director of SPhinX, namely, Robert Aaron.

As relevant here, in 2002, PlusFunds created SPhinX, a global hedge fund consisting of approximately seventy Cayman Islands funds, as an investment vehicle to track the Standard & Poor's hedge fund index. One of the seventy SPhinX funds, SPhinX Managed Futures Fund (hereinafter, "SMFF"), in turn, maintained brokerage accounts with the onshore and offshore affiliates of Refco, a then-existing financial services and brokerage firm. In connection with such accounts, PlusFunds agreed to sweep any of SMFF's excess cash on deposit with Refco, LLC, the onshore affiliate in New York, to Refco Capital Markets, Ltd, the offshore affiliate in the Cayman Islands.

After the revelation that several of Refco's officers and directors participated in a wide-scale, fraudulent underreporting of corporate liabilities, however, Refco filed for bankruptcy on October 17, 2005. At that time, Refco held $312 million of SMFF's excess cash in unsegregated accounts, all of which the bankruptcy proceeding placed beyond the reach of PlusFunds or SPhinX, and ultimately caused these entities to file their own bankruptcy proceedings.

In this action, Plaintiffs Kenneth M. Krys and Margot Macinnis, the Joint Official Liquidators of the SPhinX Trust, and The Harbour Trust Co. Ltd., the Trustee of the SPhinX Trust (collectively, "Plaintiffs"), allege in relevant part that one of the former directors of SPhinX, Defendant Robert Aaron (hereinafter, "Mr. Aaron"), facilitated the unauthorized movement of SMFF's excess cash into unsegregated accounts with Refco and failed to take certain corrective steps in the face of Refco's potential insolvency, in breach of his fiduciary duty to SPhinX.¹

Defendants now move for a determination of the choice of law applicable to Plaintiffs' fiduciary duty claim against Mr. Aaron. [Docket Item 571.]

Defendants, for their part, take the position that Cayman Islands Law must, under the circumstances, apply to the fiduciary duty claim against Mr. Aaron and to "any claims or defenses implicating the conduct of the other SPhinX directors," because an actual conflict exists between the concepts of fiduciary duties under Cayman and New Jersey/New York law, and because the organic documents that governed Mr. Aaron's directorship, the SPhinX Memorandum and Articles of Association (hereinafter, the "Articles") and by the SPhinX Group of Companies Director Services Agreement (hereinafter, the "Director Services Agreement" or the "Agreement"), uniformly call for the application of Cayman Islands Law. (Defs.' Br. at 2–10; Defs.' Reply at 2–10.)

Plaintiffs, however, argue that the law of the case doctrine, arising from earlier proceedings before the Multidistrict Litigation transferee judge in the Southern District of New York, requires the application of New York law and assert, in any event, that Defendants have failed to carry their burden of demonstrating an actual conflict between the relevant law of the Cayman Islands and that of either New Jersey or New York.² (See Pls.' Opp'n at 2–9.)

The principal issues before the Court are whether the law of the case doctrine compels the application of New York law to Plaintiffs' fiduciary duty claims against Mr. Aaron; whether an actual conflict exists between Cayman and New Jersey law;³ and whether New Jersey's interest in the fiduciary duty claim suffices to overcome the presumptive application of Cayman law under the internal affairs doctrine.

For the reasons that follow, Defendants' motion to apply Cayman Law to Plaintiffs' breach of fiduciary duty claim against Mr. Aaron will be granted, and Plaintiffs' cross-motion to apply Cayman law in the manner set forth by Plaintiffs' expert will be denied without prejudice.⁴

II. BACKGROUND

A. Factual and Procedural Background

Because resolution of the pending motion relates inextricably to the procedural posture of this lengthy litigation, the Court will discuss the factual predicate and procedural circumstances of this litigation in unison. For the purposes of the pending motion, however, the Court need not retrace every facet of the parties' convoluted history. Rather, the Court must only briefly introduce the relevant background of Mr. Aaron's directorship, in addition to the relevant procedural circumstances giving rise to the pending motion and the arguments advanced by the parties.

1. SPhinX Articles of Incorporation, and Director Services Agreement under Cayman Islands Law

In 2002, Mr. Aaron agreed to serve on the Board of Directors of SPhinX and its subportfolios, including SMFF, all entities incorporated under the laws of the Cayman Islands, subject to the terms of various documents. (See Exs. A, B, & C to Pendleton Dec.) The Director Services Agreement, in particular, provided the relevant "terms and conditions" under which Mr. Aaron, and his fellow directors, agreed to provide services to the various SPhinX entities. (See, e.g., Ex. C at 2.) The Agreement generally required the directors to exercise their "best endeavours" to ensure that their actions complied with the SPhinX Articles, and provided that SPhinX would indemnify the directors "against any or all liabilities (other than any loss or expense resulting from the wil[l]ful neglect, wil[l]ful default, fraud or dishonesty of any of the Directors) by reason of" any contract, act, or thing done by any director on behalf of the SPhinX entities. (Id. at ¶¶ 4–5, 11.) The Agreement further made clear, on its face, that it would, "in all respects be governed by and construed in accordance with the laws of the Cayman Islands."⁵ (Id. at ¶ 29.)

The Articles, the organic documents that established the SPhinX entities, and that the Agreement expressly incorporated by reference, then consistently defined the law applicable to these entities' existence and operations as "the Companies Law (2004 Revision) of the Cayman Islands as amended and every statutory re-enactment thereof for the time being in force." (Exs. A & B to Pendleton Dec.) These organic documents further delineated, in greater detail, the authority conferred upon the SPhinX directors, like Mr. Aaron, to oversee the SPhinX funds, and defined, at least in part, the scope of their fiduciary obligations. (See id. )

Mr. Aaron served in the capacity of director, subject to the Articles and the Director Services Agreement, until 2006, at which time SPhinX filed voluntary liquidation proceedings under the insolvency laws of the Cayman Islands on behalf of itself and twenty-two of its affiliates, including SMFF.

2. Plaintiffs, the JOLs and the SPhinX Trustee, Commence Litigation against Defendants

Following the dissolution of SPhinX, Plaintiffs filed their initial and Amended state court Complaints in this litigation in early 2008, seeking more than $263 million in monetary damages from Defendants based upon the value of the "cash wrongfully deposited" at Refco, in addition to the "lost business enterprise value" purportedly associated with Defendants' asserted malfeasance. (Id. )

In addition, Plaintiffs specifically asserted 10 causes of action against one or more of the Defendants, including claims for: (a) breach of the Director Services Agreement; (b) breach of the covenant of good faith and fair dealing imbedded in such Service Agreement; (c) contractual indemnification; (d) intentional breaches of Defendants' alleged fiduciary duties of loyalty, duties of disclosure, and duties to safeguard SPhinX's assets; (e) aiding and abetting the breach of fiduciary duty by certain defendants; (f) intentional interference with a contractual relationship as a result of Defendants' improper placement of cash balances with Refco; (g) fraud/misrepresentation regarding Refco's preservation and treatment of SPhinX's assets; and (h) violations of the civil Racketeer Influenced and Corrupt Organizations Act under New Jersey law, N.J.S.A. 2C:41–1, –6.2. [See Docket Item 1 in Civil Action No. 08–1902 (JBS/AMD) ]On April 17, 2008, Defendants removed the action to this Court. (Id. ) Following removal, the Judicial Panel on MultiDistrict Litigation issued an order conditionally transferring the Action to the Southern District of New York (hereinafter, the "MDL District Court") "for inclusion in MDL No. 1902," in light of the fact that it arose from a "factual core" common to Refco's insolvency proceeding. [See Docket Item 41 in Civil Action No. 08–1902 (JBS/AMD).] This action thereafter proceeded, among a multitude of others, before the MDL Court.

3. The MDL District Court's Decision on D...