In re Bayou Hedge Funds Investment Litigation, 06 MDL 1755.

• Decision Date: 18 January 2007
• Docket Number: No. 06 MDL 1755.,No. 06 Civ. 3026(CM).,06 MDL 1755.,06 Civ. 3026(CM).
• Citation: 472 F.Supp.2d 528
• Parties: In re BAYOU HEDGE FUNDS INVESTMENT LITIGATION. This Document Pertains to Broad-Bussel Family LP., et al., Plaintiffs, v. Bayou Group LLC et al., Defendants.
• Court: U.S. District Court — Southern District of New York

Page 528

472 F.Supp.2d 528

In re BAYOU HEDGE FUNDS INVESTMENT LITIGATION This Document Pertains to Broad-Bussel Family LP., et al., Plaintiffs, v. Bayou Group LLC et al., Defendants.

No. 06 MDL 1755.

No. 06 Civ. 3026(CM).

United States District Court, S.D. New York.

January 18, 2007.

DECISION AND ORDER GRANTING MOTION OF DEFENDANTS FAUST RABBACH & OPPENHEIM LLP AND STEVEN OPPENHEIM TO DISMISS THE AMENDED COMPLAINT AS AGAINST THEM

McMAHON, District Judge.

This is the latest in a series of decisions on motions to dismiss the Amended Class Action Complaint in the above-captioned proceeding. Familiarity with the Bayou litigation is assumed.

The moving defendants are a law firm (hereinafter referred to as FR & 0) and one of its partners, who at unspecified times performed unspecified legal services for unspecified entities among the Bayou Group hedge funds.¹ Plaintiffs have asserted a total of five claims against FR & 0 and its partner Steven Oppenheim:

The Seventh Cause of Action, sounding in negligence;

The Twelfth Cause of Action, sounding in aiding and abetting (securities) fraud;

The Thirteenth Cause of Action, sounding in aiding and abetting breach of fiduciary duty;

The Fourteenth Cause of Action, sounding in aiding and abetting negligence;

The Fifteenth Cause of Action, sounding in unjust enrichment.

The complaint alleges the following nonconclusory facts against FR & O:

FR & O was a "close associate" of Bayou and Bayou's principals, Samuel Israel and Daniel Marino. (¶ 4)

Bayou Management LLC, Bayou Advisors, LLC and Bayou Equities LLC allegedly maintained one of two "principal offices" at FR & O's law firm address, 488 Madison Avenue. (¶ 19).

FR & O is a limited liability partnership engaged in the practice of law. It served as counsel for "Bayou" during "all or some" of the Class Period, performing unspecified services at unspecified times.

Steven Oppenheim is a partner in FR & O and is also a certified public accountant. Prior to practicing law at FR & O, Oppenheim was the managing partner of Spicer & Oppenheim, an accounting firm that dissolved in or around December 1990. Thereafter, he joined the accounting firm of Grant Thornton, which served as Bayou's auditor until in or about 1998. However, Oppenheim left Grant Thornton in 1991 to join FR & O, which is not an accounting firm. (¶ 37)

As legal counsel for Bayou, FR & O and Oppenheim provided (unspecified) counsel and advice to the Bayou Defendants in planning, forming and operating the Bayou Hedge Funds, and the Firm was privy to (unspecified) non-public information and documents concerning the true structure, operations and finances of the Bayou Hedge Funds (¶ 38)

Oppenheim knew or ignored various (unspecified) aspects of the fraud and other misconduct that was being committed by the Bayou Defendants. (Id.)

There is no other mention of FR & O or Oppenheim in the 220 paragraph Amended Complaint.

Transferee Law and Conflict of Law Analysis

This action was originally brought in the District of Connecticut. This court should therefore apply the state/common law principles that would have been applied by the District of Connecticut. In re Rezulin Products Liability Litigation, 392 F.Supp.2d 597, 607 (S.D.N.Y.2005). However, the court agrees with FR & O that the laws of Connecticut and New York are not in conflict concerning the matters in suit. Connecticut courts recognize the so-called "false conflicts" rule, so when application of either state's law would lead to the same result, no conflict of laws analysis need be undertaken. Dugan v. Mobile Medical Testing Services, Inc., 265 Conn. 791, 798, 830 A.2d 752 (2003). Nonetheless, when Connecticut authority is available for a proposition, I will cite it.

A transferee court in this Circuit applies its own interpretation of federal law. In re Parmalat Securities Litigation, 412 F.Supp.2d 392, 399 (S.D.N.Y.2006).

Standards on a Motion to Dismiss

Rule 12(b) (6) of the Federal Rules of Civil Procedure provides for dismissal of a complaint that fails to state a claim upon which relief can be granted. The standard of review on a motion to dismiss is heavily weighted in favor of the plaintiff. The Court is required to read a complaint generously, drawing all reasonable inferences from the complaint's allegations. California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 515, 92 S.Ct. 609, 30 L.Ed.2d 642 (1972). "In ruling on a motion to dismiss for failure to state a claim upon which relief may be granted, the court is required to accept the material facts alleged in the complaint as true." Frasier v. General Electric Co., 930 F.2d 1004, 1007 (2d Cir.1991). The Court must deny the motion "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Stewart v. Jackson & Nash, 976 F.2d 86, 87 (2d Cir.1992) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).

The Negligence Claim Must Be Dismissed

The predicate for a claim in negligence is the running of a duty from the defendant to the plaintiff. Under both Connecticut and New York law, the question of whether a duty exists is a question of law for the court, and only if the court concludes that a duty exists will it be necessary to reach the question of breach. Gould v. Mellick and Sexton, 263 Conn. 140, 153, 819 A.2d 216 (2003); McCarthy v. Sturm Ruger & Co., Inc., 916 F.Supp. 366, 368 (S.D.N.Y.1996), aff'd 119 F.3d 148 (2d Cir.1997) (whether a legal duty exists presents a question of law).

It is well settled, in both Connecticut and New York, that an attorney's duty runs to his client and (ordinarily) not to third parties. National Westminster Bank USA v. Weksel, 124 A.D.2d 144, 146, 511 N.Y.S.2d 626 (1st Dept), appeal denied, 70 N.Y.2d 604, 519 N.Y.S.2d 1027, 513 N.E.2d 1307 (1987); Redhead v. Winston & Winston, P.C., 2002 WL 31106934, *16, 2002 U.S. Dist. LEXIS 17780 *16 (S.D.N.Y. Sept. 20, 2002); Krawczyk v. Stingle, 208 Conn. 239, 244, 543 A.2d 733 (1988). Because the existence of a legal duty is a prerequisite to any claim for the negligent performance of an attorney's duty, a party cannot generally sue someone else's attorney for negligence. Biller Associates v. Peterken, 269 Conn. 716, 849 A.2d 847 (2004). The only exception to this rule is where an attorney performs a specific act for the intended benefit of a non-client (example paying off a mortgage on behalf of a non-client). Old Republic National Title Insurance Company v. Garrell, 2004 WL 3105938, *4, 2004 Conn.Super. LEXIS 3670 *12 (Dec. 8, 2004).

Plaintiffs are clients of the Hennessee Group who invested in Bayou funds. The complaint in this case fails to allege any facts from which one could fairly infer that FR & O had any duty to the plaintiffs. Their status as investors or limited partner shareholders in the Bayou entities does not create the necessary attorney-client relationship with FR & O. Gould, 263 Conn. at 153, 819 A.2d 216; Friedman v. Hartman, 1994 U.S. Dist. LEXIS 3404 *21 (S.D.N.Y.1994); Ahmed v. Trupin, 809 F.Supp. 1100, 1106 (S.D.N.Y.1993); Griffin v. Anslow, 17 A.D.3d 889, 793 N.Y.S.2d 615 (3d Dept.2005). The complaint is also devoid of a single factual allegation tending to show that FR & O undertook any action for the intended benefit of plaintiffs. Accordingly, the negligence claim against FR & O (Seventh Cause of Action) is dismissed with prejudice.

The Unjust Enrichment Claim Must Be Dismissed

In their Fifteenth Cause of Action, Plaintiffs allege that legal fees earned by FR & O from Bayou constitute unjust enrichment. As a matter of law, they are wrong.

I will assume, for purposes of the motion, that FR & O was retained by Bayou to provide (unspecified) legal advice and services at some point in time, and that FR & O was paid for providing those services. However, under both Connecticut and New York law, unjust enrichment requires more. In New York, the plaintiff must plead and prove that the defendant was benefited or enriched at the plaintiffs expense, such that equity and good conscience require restitution of the funds. Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir.2000). In Connecticut, the analogous elements are benefit to the defendant by virtue of failing to pay plaintiff for the benefit, to plaintiffs detriment. Vertex, Inc., v. City of Waterbury, 898 A.2d 178, 190 (2006). Under the law of both states, the essence of unjust enrichment is that one party parted with money or a benefit that was received by another at the expense of the first party. Restatement (Third) Contracts, Restitution and Unjust Enrichment § 2(d), cited in United Coastal Industries, Inc., v. Clearheart Constr. Co., Inc., 71 Conn.App. 506, 512, 802 A.2d 901 (2002). The benefit must be "specific" and "direct" in order to support an unjust enrichment claim. Kaye, 202 F.3d at 616.

The Amended Complaint pleads no such claim. In fact, aside from the conclusory statement that FR & O (and other defendants) were "unjustly enriched," it does not even plead that FR & O received any money from Bayou during the class period — let alone that the money used to pay these ephemeral legal fees belonged to or came from plaintiffs or other class members. Assuming arguendo that FR & O performed legal work for some Bayou entity in which plaintiffs invested, and that it did so during the class period, and further assuming that FR & O was paid for doing that work — none of which, I emphasize, is alleged in the Amended Complaint — the unjust enrichment claim would still have to be dismissed, because the payment by Bayou of operating expenses (such as legal fees) using misappropriated funds does not confer a "direct" and "specific" benefit on FR & O at the expense of plaintiffs. Fed. Treasury Enterprise Sojuzplodoimport v. Spirits Intern. N. V., 425 F.Supp.2d 458 (S.D.N.Y.2005); Lieberman v. Emigrant Mortgage Co., 436 F.Supp.2d 357, 366 (D. Conn.2006). Moreover, the...