Holloway v. Ernst & Young LLP

• Decision Date: 21 July 2010
• Docket Number: No. 113346/09.,113346/09.
• Citation: 958 N.Y.S.2d 61,28 Misc.3d 1214,2010 N.Y. Slip Op. 51319
• Court: New York Supreme Court
• Parties: Gary M. HOLLOWAY, Plaintiff, v. ERNST & YOUNG LLP, Defendant.

28 Misc.3d 1214

958 N.Y.S.2d 61

2010 N.Y. Slip Op. 51319

Gary M. HOLLOWAY, Plaintiff,

v.ERNST & YOUNG LLP, Defendant.

No. 113346/09.

Supreme Court, New York County, New York.

July 21, 2010.

Joseph M. Fioravanti, Esq., Media, PA, for Plaintiff.

Vinson & Elkins, LLP, Clifford Thau, Esq., New York City, for Defendant.

BERNARD J. FRIED, J.

This is a breach of contract action brought by plaintiff, Gary M. Holloway against defendant, Ernst & Young, LLP (“EY”). Before me is EY's motion to dismiss the amended complaint, pursuant to CPLR §§ 3211(a)(5) and (a)(7). For the reasons that follow, I grant the motion.

Holloway is the former Chairman, President and Chief Executive Officer of GMH Communities Trust (“GMH”), a Pennsylvania based publicly-traded real estate investment trust founded by Holloway in 2004. Am. Compl., ¶¶ 1, 4. GMH is the successor of GMH Associates, Inc. (“GMH Associates”), a private company formed by Holloway in 1985. Am. Compl., ¶ 4. EY was retained by GMH Associates and then subsequently by GMH to perform auditing and accounting services. Am. Compl., ¶ 7.

In engagement letters dated December 6, 2004 and October 10, 2005, EY outlined the services it was to provide for GMH, including its role as independent auditor and its assistance in preparing the books and records of GMH to become a public company.¹ Am. Compl ., ¶¶ 3, 21. The engagement letters evince an understanding of agreements between GMH and EY. There is no mention of Holloway, in his individual capacity, as a party to the agreements. See, e.g., Am. Compl., Ex. B. Although engagement letters and memoranda were sent from EY directly to Holloway, they do not indicate any intention on the part of EY to perform any acts with the purpose of benefitting Holloway in his individual capacity. They make reference solely to EY's intent to perform auditing and accounting services for GMH. See Am. Compl., ¶ 8, Ex. B.

In his complaint, plaintiff alleges that “[EY] clearly understood that Mr. Holloway was a primary beneficiary of [EY's] audit and accounting services,” based upon the communication between Holloway and EY and on Holloway's GMH stock ownership. Am. Compl., ¶ 9.

The 2005 engagement letter provides in relevant part:

Any dispute or claim arising out of or relating to services covered by this agreement or any other services hereafter provided by or on behalf of EY or any of its subcontractors or agents to [GMH] or at its request (including any matter involving any third party for whose benefit any such services are provided), shall be resolved by mediation and arbitration conducted as set forth in the attachment to this agreement and incorporated herein by reference. Arbitration shall take place in New York, New York. Judgment on any arbitration award may be entered in any court having jurisdiction.

Am. Compl., Ex. B, ¶ 28. At argument, plaintiff contended that the phrase “any third party for whose benefit any such services are provided” can and does refer only to Holloway. See 5/27/10 Tr., at 21. Holloway further alleges that GMH was harmed by a delay in filing its 2005 Form 10–K. He attributes this delay to EY's alleged negligent misrepresentation and the release of a “whistleblower memorandum” by former GMH Chief Financial Officer, Brad Harris. ²See Am. Compl., ¶¶ 42, 59–60.

In the amended complaint, Holloway asserts four causes of action: first, declaratory judgment naming plaintiff a third-party beneficiary of the agreements between defendant and GMH; second, monetary damages resulting from an alleged breach of contract on the part of defendant; third, damages based on defendant's alleged negligent misrepresentation of plaintiff's interests; and fourth, damages based on defendant's alleged breach of fiduciary duty owed to plaintiff. Defendant moves to dismiss the amended complaint, asserting that plaintiff was not in fact a third-party beneficiary to the agreements between EY and GMH and that plaintiff lacks privity with EY. Defendant also claims that plaintiff's breach of contract claim is invalid and EY owed no fiduciary duty to plaintiff. Furthermore, defendant asserts that the third and fourth causes of action should be dismissed, as the statute of limitations had tolled prior to the filing of the complaint. The outcome of this motion turns on determinations concerning Holloway's relationship with EY, his status as a third-party beneficiary of the agreements between EY and GMH and his entitlement to bring an individual action on his own behalf independent of GMH.

The first and second causes of action in the amended complaint allege that Holloway has standing as a third-party beneficiary, based in part on the intention of the parties to the agreement, in reliance upon the Restatement (Second) of Contracts definition of an intended third-party beneficiary ³ and case law holding that a third-party beneficiary is created where the parties manifest intent in the agreement to provide direct benefit to the third party. See Key Int'l Mfg. v. Morse/Diesel, Inc., 142 A.D.2d 448, 536 N.Y.S.2d 792 (2d Dep't 1988).

However, Holloway, in his individual capacity, is not a third-party beneficiary to the engagement letters between EY and GMH. Indeed, in Alicea v. City of New York, 145 A.D.2d 315, 317, 534 N.Y.S.2d 983 (1st Dep't 1988), the First Department outlined three factors necessary to establish third-party beneficiary status:

(1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for his benefit and (3) that the benefit to him is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate him if the benefit is lost.

The first factor is clearly met here by the existence of the engagement letters between EY and GMH. However, the second and third factors are not satisfied.

The agreements between the contracting parties were for the benefit of GMH and not for the benefit of Holloway as an individual. See Am. Compl., Ex. B. Further, any benefits conveyed to Holloway as an individual by EY's services were strictly incidental as they would be for any GMH shareholder and did not burden either EY or GMH with a duty to compensate Holloway if the benefit of EY's services was lost. Plaintiff insists that an individual action is warranted based on Holloway's status as a third-party beneficiary because EY met with Holloway regarding his concerns about Harris, suggesting that this implied a personal connection between EY and Holloway as an individual. See Am. Compl., ¶ 56. He further concludes that “[g]iven the lengthy series of material communications between Mr. Holloway and EY, and given Mr. Holloway's position as the largest individual shareholder ... EY clearly understood that Mr. Holloway was a primary beneficiary of EY's audit and accounting services.” Am. Compl., ¶ 9. These assumptions are erroneous.⁴ Holloway, as Chief Executive Officer of GMH and the GMH executive who complained of Harris' performance, would be the appropriate choice for a contact EY would seek to meet with at GMH. It is evident that it was Holloway's position as an officer of GMH, and not his prior relationship with EY, that caused EY to meet with Holloway. It is unlikely that any individual but the Chief Executive Officer would be a more appropriate contact for EY to meet with to attempt to alleviate its clients' concerns.

Indeed, in LaSalle National Bank v. Ernst & Young LLP, 285 A.D.2d 101, 109, 729 N.Y.S.2d 671 (1st Dep't 2001), the dismissal of a breach of contract claim was affirmed because the engagement letters at issue did not mention plaintiff in his individual capacity and did not “evince any intention ... [that the audit information would] be used for other purposes or relied upon by other parties,” and therefore did not provide any “basis upon which [to] construe the existence of third-party rights.” Similarly, the engagement letters between EY and GMH lack any reference to Holloway as an individual, and do not provide any reason for the parties to foresee that a GMH officer would rely on EY's audit information in their individual capacity.

Moreover, in Fireman's Fund Insurance Co. v. Glass, No. 94 Civ. 7375(WK), 1997 U.S. Dist. Lexis 7518, 1997 WL 289858 at *10–11 (S.D.NY May 30, 1997), a breach of contract claim was dismissed after it was brought by a non-party to an accounting agreement based on its assertion that it was a third-party beneficiary. Even though auditors were aware the company was relying on their audit, sent the audit reports directly to the company and met with the company repeatedly, the district court found that the company was merely an incidental beneficiary and not an intended beneficiary. Thus, it could not maintain a breach of contract claim. Similarly here, EY was allegedly aware that Holloway was relying on EY's auditing services to protect his individual interests as a GMH shareholder,⁵ Holloway was the addressee on several engagement letters and EY met with Holloway on multiple occasions. However, as in Fireman's Fund, these factors do not establish that Holloway was an intended beneficiary of the agreements between EY and GMH. Although Holloway was the addressee for several engagement letters and had met with EY employees, it is not indicative of his status as a third-party beneficiary. EY sought these contacts due to Holloway's position as CEO and President of GMH and not due to any previous personal relationship or his status as a GMH shareholder. Furthermore, although EY was allegedly aware that Holloway relied on the EY reports in his personal capacity as an investor, it is not dispositive of his status as a third-party beneficiary to the agreements.

Plaintiff seeks to distinguish Fireman's Fund by asserting that the district court held that a bonding company was not a third-party beneficiary because an accountant's engagement letters to the company did not mention the bonding company, whereas EY's...