New Greenwich Litig. Tr., LLC v. Citco Fund Servs. (Europe) B.V.

145 A.D.3d 16

41 N.Y.S.3d 1

2016 N.Y. Slip Op. 06796

NEW GREENWICH LITIGATION TRUSTEE, LLC, as Successor Trustee of Greenwich Sentry, L.P., Plaintiff–Appellant,

v.CITCO FUND SERVICES (EUROPE) B.V., et al., Defendants–Respondents,

GlobeOp Financial Services LLC,

New Greenwich Litigation Trustee, LLC, as Successor Trustee of Greenwich Sentry Partners, L.P., Plaintiff–Appellant,

v.Citco Fund Services (Europe) B.V., et al., Defendants–Respondents,GlobeOp Financial Services LLC, Defendant.

600498/09, 600469/09, 816.

Supreme Court, Appellate Division, First Department, New York.

Oct. 18, 2016.

Milberg LLP, New York (Robert A. Wallner of counsel), and Seeger Weiss LLP, New York (Stephen A. Weiss of counsel), for appellant.

Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York (Walter Rieman, Andrew G. Gordon and Gregory F. Laufer of counsel), for Citco Fund Services (Europe) B.V. and Citco (Canada) Inc., respondents.

Hughes Hubbard & Reed LLP, New York (William R. Maguire of counsel), for PricewaterhouseCoopers LLP and PricewaterhouseCoopers Accountants N.V., respondents, and (Sarah L. Cave and Karen L. Goldberg of counsel), for PricewaterhouseCoopers Accountants N.V., respondent.

Kirkland & Ellis LLP, New York (Andrew M. Genser of counsel), for PricewaterhouseCoopers LLP, respondent.

PETER TOM, J.P., RICHARD T. ANDRIAS, SALLIE MANZANET–DANIELS, BARBARA R. KAPNICK, ELLEN GESMER, JJ.

TOM, J.

In this appeal, we are asked to decide whether New York law, rather than Delaware law, applies to this corporate litigation resulting from the never ending saga of Bernard L. Madoff's Ponzi scheme. This appeal also raises issues concerning whether plaintiff's claims are precluded by the doctrine of in pari delicto;¹ whether the court correctly dismissed the claims of implied and contractual indemnification; and whether the forum selection clause in defendant PricewaterhouseCoopers Accountants, N.V.'s (PWC Netherlands) agreement with plaintiff's predecessors in interest is mandatory.

For the reasons set forth below, we find that the motion court correctly applied New York law and properly found that the in pari delicto doctrine mandates dismissal of all causes of action, with the exception of the claims for contribution, which were dismissed on other grounds not before us on this appeal.² We also find that the court properly dismissed the indemnification claims on separate grounds, and that the forum selection clause in defendant PWC Netherlands's agreement is mandatory and enforceable.

These two consolidated actions were originally commenced by Greenwich Sentry, L.P. and Greenwich Sentry Partners, L.P. (the funds), private investment limited partnerships operating as feeder funds which, as of November 2008, had about $325 million invested in Bernard L. Madoff Investment Securities, LLC. The funds sustained substantial losses in Madoff's Ponzi scheme, and on November 19, 2010, they filed Chapter 11 bankruptcy petitions in the Southern District of New York.

Plaintiff New Greenwich Litigation Trustee, LLC is successor trustee (Trustee) of the funds' litigation trusts, established in connection with the funds' jointly administered Chapter 11 reorganization plans. Defendants GlobeOp Financial Services LLC (GlobeOp) and Citco Fund Services (Europe) BV (Citco Europe) were administrators of the funds, and defendant Citco (Canada) Inc. was a sub-administrator of the funds. Defendant PWC Netherlands was the funds' outside accountant and auditor for 2005, and defendant PricewaterhouseCoopers LLP (PWC Canada) was the funds' outside accountant and auditor for 2006 and 2007.

The actions were originally commenced as derivative actions on behalf of the funds by limited partners of the funds in February 2009. The funds alleged that the “Fund Defendants”—which included affiliates of the funds' manager, Fairfield Greenwich Group; individual directors of the manager's affiliates; and the instant Citco defendants—breached their fiduciary duties by failing to conduct adequate due diligence of Madoff Securities, while collecting hundreds of millions of dollars in fees on fictitious assets. The derivative complaints asserted causes of action against the Fund Defendants for breach of fiduciary duty, negligence, unjust enrichment, and accounting; and asserted causes of action against the PWC defendants for professional negligence, breach of contract, and negligent misrepresentation.

The derivative actions were stayed by various orders, as the funds' bankruptcy petition was adjudicated. By order dated December 22, 2011, the bankruptcy court confirmed the funds' Chapter 11 reorganization plan and appointed plaintiff as trustee of the funds' litigation trust.

By order dated July 7, 2011, the bankruptcy court approved settlement of a clawback claim brought by the trustee of Madoff Securities (Madoff Trustee) against the funds, pursuant to which the funds agreed to judgment against them for approximately $200 million for amounts withdrawn from Madoff Securities before it went into bankruptcy. As part of the settlement, the funds also assigned to the Madoff Trustee all of their claims against their manager (the Fairfield Greenwich Group), and against their former general partner, investment managers, and investment advisors, who are not parties to these actions.

After Supreme Court lifted the stay of the derivative actions in April 2012, the Trustee was substituted for the derivative plaintiffs, and two substantively identical amended complaints, both dated May 11, 2012, were filed on behalf of each Fund.

As against the administrator defendants (i.e., Citco Europe, Citco Canada, and GlobeOp), the Trustee asserted causes of action for breach of fiduciary duty, negligent misrepresentation, negligence and gross negligence, breach of contract, common-law fraud, unjust enrichment, and accounting. As against the PWC defendants, the Trustee asserted causes of action for common-law fraud, negligent misrepresentation, professional negligence (malpractice), breach of contract, and aiding and abetting breach of fiduciary duty. Both complaints asserted against all of the defendants a cause of action for contribution and indemnification for the approximately $200 million consent judgment the funds paid to the Madoff Trustee in settlement of the Madoff Securities clawback claim.

Notably, contrary to the allegations asserted against the funds' manager and administrators in the original derivative complaints, both complaints state that “[t]he Fund was not a culpable participant in the Ponzi scheme, and did not know of the scheme prior to its December 11, 2008 disclosure.”

The Citco defendants and both PWC defendants moved to dismiss the amended complaints pursuant to CPLR 3211, based on the doctrine of in pari delicto. In addition, the PWC defendants sought dismissal based on the forum selection clauses in their administrator agreements with the funds.

Supreme Court granted the dismissal motions. In so doing, the court rejected plaintiff's claim that the internal affairs doctrine requires the application of Delaware law to this litigation and concluded that the in pari delicto doctrine, as interpreted by New York courts, requires dismissal of the claims. The court also rejected plaintiff's assertion of various exceptions to the doctrine. As for the indemnification claims, the court found that these are untenable since plaintiff cannot show that it has “committed no wrong” and cannot show it received the contractually required written consent from the Citco defendants to indemnify the funds. The court also found that the forum selection clause in defendant PWC Netherlands' agreement is mandatory and requires those claims to be heard in Amsterdam. We now affirm.

The parties contend that either Delaware law or New York law should be applied to this litigation. Plaintiff argues that under the internal affairs doctrine, Delaware law governs this matter, including the in pari delicto analysis. Specifically, plaintiff urges that the claims in these actions involve the internal affairs of the funds which are Delaware partnerships, and that under Delaware law, the claims against the PWC defendants are not barred by the in pari delicto doctrine. However, plaintiff's argument fails.

The internal affairs doctrine is a “conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands” (Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629 [1982] [emphasis added]; see also Culligan Soft Water Co. v. Clayton Dubilier & Rice LLC, 118 A.D.3d 422, 988 N.Y.S.2d 134 [1st Dept.2014] ). Stated another way, “Under the internal affairs doctrine, claims concerning the relationship between the corporation, its directors, and a shareholder are governed by the substantive law of the state or country of incorporation” (Davis v. Scottish Re Group, Ltd., 138 A.D.3d 230, 233, 28 N.Y.S.3d 18 [1st Dept.2016] ).

However, as the Delaware Chancery Court explained in In re American Intl. Group, Inc. , 965 A.2d 763, 817 (Del.Ch.2009), the “internal affairs doctrine, although potent, has very specific applications.” In particular, the Chancery Court noted that the doctrine only “governs the choice of law determinations involving matters peculiar to corporations, that is, those activities concerning the relationships inter se of the corporation, its directors, officers and shareholders” (965 A.2d at 817 [internal quotation marks omitted] ). Accordingly, “[s]ince the internal affairs doctrine does not apply to those defendants who are not current officers, directors, and shareholders” of the plaintiff corporation (Culligan Soft Water Co., 118 A.D.3d at 422, 988 N.Y.S.2d 134 ), as none of the instant defendants are with respect to the funds, the internal affairs doctrine does...