Conwill v Arthur Andersen LLP

[*1] Conwill v Arthur Andersen LLP 2006 NY Slip Op 51142(U) [12 Misc 3d 1171(A)] Decided on June 21, 2006 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on June 21, 2006
Supreme Court, New York County

Daniel O. Conwill, IV, MARY CLARE CONWILL and DOC INVESTMENTS, INC., Plaintiffs,

against

Arthur Andersen LLP, JOHN NEWMAN DEUTSCHE BANK SECURITIES, INC. d/b/a DEUTSCHE BANK ALEX BROWN LLC, DEUTSCHE BANK, AG, DAVID PARSE, SMBC CAPITAL MARKETS, INC., ECLIPTIC FX PARTNERS LLC, GRANT THORNTON LLP, BRICOLAGE CAPITAL, LLC, ANDREW D. BEER, and SAMYAK C. VEERA, Defendants.



602023/05



Appearances:

For Plaintiffs:

Kane Kessler, P.C.

1350 Avenue of the Americas

New York, NY 10019-4896

By: Michael R. Futterman, Esq.

Dreary, Montgomery, DeFeo & Canada, LLP

2515 McKinney Avenue

Dallas, Texas 75201

By: Ralph Canada, Jr., Esq.

Jeven R. Sloan, Esq.

For Defendants:

McDermott, Will & Emery, LLP

For Arthur Andersen LLP

227 West Monroe Street

Chicago, Ill. 60606-5096

By: Douglas E. Whitney, Esq.

Jocelyn D. Francoeur, Esq.

Stroock & Stroock & Lavan LLP For Grant Thronton LLP

180 Maiden Lane

New York, NY 10038-4982

By: Bruce H. Schneider, Esq.

Tom A. Hakemi, Esq.

Dewey Ballantine LLP

For Deutsche Bank Securities and

Deutsche Bank AG

1301 Avenue of the Americas

New York, NY 10019-6092

By: Corinne D. Levy, Esq.

Leo Gagion, Esq.

Brune & Richard LLP

For David Parse

80 Broad Street

New York, NY 10004

Katsky Korins LLP

For Andrew D. Beer

605 Third Avenue

New York, NY 10158-0038

By: Robert C. Weisz, Esq.

Clifford Chance US LLP

For SMBC Capital Markets, Inc.

31 West 52nd Street

New York, NY 10019-6131

By: James D. Miller, Esq.

Kostelanetz & Fink, LLP

For Samyak Veera

530 Fifth Avenue

New York, NY 10036

By: Megan L. Brackney, Esq.

Bernard J. Fried, J.

In this action by Louisiana plaintiffs Daniel O. Conwill, IV (Conwill), Conwill's wholly owned corporation, DOC Investments, Inc., and his wife, Mary Clare Conwill, arising out of an Internal Revenue Service (IRS) determination to disallow losses claimed by plaintiffs in 2000 and [*2]2001 from the redemption of their interests in the defendant limited partnership Ecliptic FX Partners, LLC (Ecliptic FX), motion sequences 004 to 010 are consolidated for determination. Under motion sequence 004, defendant Samyak Veera, a Managing Director of defendant Bricolage Capital, LLC (Bricolage), the managing general partner of Ecliptic FX, moves to dismiss plaintiffs' complaint pursuant to CPLR 3211 (a) (1), (5), and (7), asserting, among other things, a defense based upon documentary evidence. Under motion sequences 005 and 006, defendant Arthur Andersen LLC moves, by estoppel, to stay the action pending arbitration, or, alternatively, to dismiss plaintiffs' complaint as time barred, pursuant to CPLR 3211 (a) (5). Under motion sequence 007, Grant Thornton, LLP, the Illinois accounting firm for Bricolage and the limited partnerships under its control, including Ecliptic FX, also moves to dismiss plaintiffs' complaint as time barred, pursuant to CPLR 202, and 3211 (a)(5), or, alternatively, to stay the action pending arbitration, which it asserts it is entitled to invoke by equitable estoppel. Under motion sequence 008, defendants Deutsche Bank AG, Deutsche Bank Securities, Inc. d/b/a Deutsche Bank Alex Brown LLC, and David Parse (the Deutsche Bank defendants), move to dismiss plaintiffs' complaint, pursuant to CPLR 3211(a) (5) and (7), or, alternatively, to compel any surviving claims to arbitration, and to stay the action, pursuant to Sections 3 and 4 of the Federal Arbitration Act (FAA)(9 USC § 3, CPLR 7503 [a]). Under motion sequence 009, SMBC Capital Markets, Inc. a/k/a Sumitomo Bank Capital Markets, Inc. (Sumitomo Bank), the party with whom Bricolage entered into two knock-in foreign currency option transactions on behalf of Conwill (the FX Option Agreements) that were included in the basis of plaintiffs' contribution to the Ecliptic FX limited partnership, moves to dismiss plaintiffs' complaint upon documentary evidence, pursuant to CPLR 3211 (a)(7). Under motion sequence 010, Bricolage founder Andrew D. Beer moves to dismiss, pursuant to CPLR 3211 (a) (1), (5) and (7). All moving parties additionally assert that plaintiffs' fraud claims lack specificity, pursuant to CPLR 3016 (b).

On pre-joinder motions to dismiss, pursuant to CPLR 3211 (a), the subject pleading will be construed liberally, and the facts alleged will be accepted as true and afforded the benefit of every possible favorable inference (EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11,19 [2005]; Sokoloff v Harriman Estates Development Corp., 96 NY2d 409, 414 [2001]; P.T. Bank Central Asia v ABN AMRO Bank N.V., 301 AD2d 373, 375-6 [1st Dept 2003]), unless clearly contradicted by evidence submitted by the parties in connection with the motions (see Zanett Lombardier, Ltd. v Maslow, __AD2d__, 2006 WL 1460406 [1st Dept 2006], citing Robinson v Robinson, 303 AD2d 234, 235 [1st Dept 2003]). In that regard, and contrary to plaintiffs' contentions in opposition to the dismissal motions, where, as in this case, the parties submit affidavits and other evidentiary materials in support of their respective motions, courts are free to consider the affidavits and documents submitted to remedy any defects in the pleading (Leon v Martinez, 84 NY2d 83, 88 [1994]; Rovello v Orofino Realty Co., 40 NY2d 633, 636[1976]). In such instance, the inquiry is whether the proponent of the pleading has a cause of action, not whether one is stated (Guggenheimer v Ginzburg, 43 NY2d 268, 275 [1977]; Rovello v Orofino Realty Co., 40 NY2d at 636). In addition, as a threshold matter in this case, I must determine whether, and with respect to what parties, plaintiffs' claims are subject to arbitration under the Federal Arbitration Act (9 USC § 3, CPLR 7503 [a]; see Diamond Waterproofing Systems, Inc. v 55 Liberty Owners Corp., 4 NY3d 247 [2005]).

According to plaintiffs' complaint, as supplemented by the documents annexed in support of the motions interposed by the various defendants, in "mid 2000," plaintiff Conwill was [*3]approached by an unidentified accountant at Arthur Anderson about engaging in a tax advantaged strategy that involved hedging simultaneously executed and leveraged foreign currency digital options (the Strategy). Plaintiffs allege that Arthur Andersen's accountant induced them to engage in the Strategy by representing that the proposed transactions created a win/win situation in which plaintiffs would either make a huge profit, or receive a substantial reduction in taxable income, that the Strategy had already been successfully implemented for several other clients, and that in the event of an IRS audit, plaintiffs would be provided with an opinion letter from a reputable national law firm that would completely insulate them from any liability for penalties. Plaintiffs allege that Arthur Andersen's accountant told them that the strategy was designed in a way that could not be successfully challenged by the IRS, that they relied upon Arthur Andersen advice and expertise in deciding to enter into the transactions, and that Arthur Andersen, in conjunction with, and upon the advice of, Bricolage and Deutsche Bank assisted plaintiffs in setting up the various transactions necessary to accomplish the Strategy. Plaintiffs also allege that they relied upon the advice of Arthur Andersen in claiming the losses generated by implementation of the Strategy on their 2000 and 2001 income tax returns, as indicated in the K-1 limited partnership statements prepared and supplied to them by defendant Grant Thornton.

As alleged in plaintiffs' complaint, the first step in the Strategy required Conwill to open a brokerage account with Deutsche Bank Alex Brown LLC. A copy of the brokerage account agreement executed by Conwill on or about November 1, 2000 (the Brokerage Account Agreement) is annexed to the moving papers submitted on behalf of the Deutsche Bank defendants. Pursuant to the Brokerage Account Agreement, Deutsche Bank Alex Brown agreed to act as Conwill's broker on the "Account," "for the extension of credit or the purchase or sale of securities, options or other property." The Brokerage Account Agreement provided, in pertinent part, under paragraph 14: If My Account(s) has been introduced to you by arrangement with another broker-dealer, you are authorized to accept from such other broker-dealer, without inquiry or investigation by you (I) orders for the purchase or sale of securities or other property ... (ii) any other instructions ... I understand and agree that such other broker-dealer is not your agent and that you shall have no responsibility or liability to me for any acts or omissions of such other broker-dealer, its officers, employees or agents.

The Deutsche Bank Account Agreement also contains an arbitration clause at paragraph 19, pursuant to which Conwill agreed to arbitrate: ...any controversies which may arise, whether or not based on events occurring prior to the date of this agreement, including any controversy arising out of or relating to any account with you, to the construction, performance or breach of any agreement with you, or to transactions with or through you, only before the New York Stock Exchange or the National Association of Securities Dealers Regulation, Inc..." (Corrine Levy Aff.,Exh. 2). [FN1][*4]

In support of its motion to dismiss, Arthur Andersen annexes copies of two Investment Management Agreements dated October 30, 2000, and November 2, 2000. One is signed by Conwill in his individual capacity, and the other is signed by Conwill as "President" of a corporate entity that is not identified in the document. Pursuant to the Management Agreements, Conwill, either individually, or as President, represented, among other things, that he qualified as a "sophisticated investor," and that he received "tax, legal and accounting advice with respect to the Client's investments generally and in respect of the [brokerage] Account from persons other than [Bricolage]." The Investment Management Agreements gave Bricolage authority to: ...manage and supervise, on a fully discretionary basis, the investment of assets that are from time to time allotted to the Account ... including, but not limited to, ...currencies, swap agreements, options contracts,...or contracts of any nature whatsoever, ... interests in investment companies; interests in private investment funds, limited liability companies, or partnerships; ... repurchase or reverse repurchase agreements for any of the foregoing. ... to acquire or enter into investments and contracts for the Account that are denominated in US or foreign currency, issued by U.S. or foreign entities or counterparties, ...registered or unregistered under U.S. of foreign securities laws. ... with or through any market, broker, dealer, bank, issuer or counterparty at any location anywhere in the world ... to acquire or enter into illiquid positions for the Account in assets or contracts that cannot be readily converted into cash in the short term. ...to enter into transactions on behalf of the Account where the potential liability of the Account and of the Client is not limited to the amount of the initial investment, deposit, margin or other payment. ... to borrow or incur leverage on behalf of the Account to acquire assets or make payments due from the Account to a counterparty. ...."

Pursuant to the Investment Management Agreements, Conwill represented that he understood the Strategy, that he consented to the use of the Strategy, and that he understood that there was "no guarantee that these objectives will be achieved." Paragraph 5 of the Investment Management Agreements contains a limitation of liability clause stating, in pertinent part: [n]either the Manager nor any of its officers, directors, employees or agents shall be liable for any loss, expense, cost or liability arising out of any error in judgment or any action or omission hereunder, including any instruction given to the Custodian by anyone other than an officer, director, employee or agent of the Manager, unless arising out of their negligence, malfeasance or bad faith.

Paragraph 14 contains a choice of law provision stating, "[t]o the extent not inconsistent with federal law, this Agreement shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to its choice of law or conflicts of law provisions) applicable to agreements entered into and to be performed entirely within the State," and paragraph 16 of the [*5]Investment Management Agreements contains an arbitration provision stating, in part: [a]ny controversy arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration conducted in New York, New York in accordance with the Commercial Arbitration rules of the American Arbitration Association. .... (Anne E. Schoenfield aff., Exhs 1 & 2).

Plaintiffs' complaint alleges that the next step in the Strategy was for Bricolage to enter into or purchase two knock-in "digital" foreign currency options on Conwill's behalf from defendant Sumitomo Bank, as the named counterparty (the FX Option Agreements), which it did on or about November 3, 2000. In support of its motion to dismiss, Sumitomo annexes two unsigned "confirmations" dated November 7, 2000, which purport to represent the transaction completed on November 3, 2000. The first acknowledges a put option on Japanese Yen against U.S. dollars for a strike price of 50.0 yen to the dollar, for a premium leveraged by Bricolage on behalf of Conwill of U.S. $10,540,000.00. The second confirmation indicates that another knock-in foreign currency option was purchased on Conwill's behalf by Bricolage with a strike price of 50.24888 yen to the dollar, for a premium of U.S. $10,440,000.00. The execution date for both options was May 1, 2001. According to plaintiffs' complaint Conwill's total cash contribution to these transactions was $100,000.00, the exact amount of the differential in the premium paid for each option.

Plaintiffs' complaint alleges that the next step of the Strategy was for Conwill to assign all of his interest and liability under the FX Option Agreements to Ecliptic FX, a limited partnership created for that purpose. Annexed to the motion papers submitted by Sumitomo Bank (James D. Miller Aff., Exh 3), and to the motion papers of Samyak Veera (Meghan Brackney Aff., Exh A), is a copy of the November 10, 2000 Assignment and Assumption Agreement executed by plaintiff Conwill as assignor, Samyak Veera as Managing Member of the assignee, Ecliptic FX, and as its Managing Director of Bricolage, and by Sumitomo Bank. Pursuant to the Assignment and Assumption Agreement, Conwill agreed: (1) to assign, delegate and novate to Ecliptic FX, all of his "rights in, to and under each [FX Option Agreement] Transaction;" and (2) to release and discharge Sumitomo from its obligations to him, "arising and to be performed under each [FX Option Agreement] Transaction." In turn, Ecliptic FX agreed to assume and perform all of Conwill's obligations under the FX Option Agreements, and Sumitomo Bank consented to the assignment and assumption. Paragraph III (b) (I) of the Assignment and Assumption Agreement contains a representation by each of the parties that, among other things, they: ... made ... independent decisions to enter into this Agreement and each Transaction as to whether each Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary... is not relying on any communication (written or oral) of any other party hereto as investment advice or as a recommendation to enter into this Agreement or any Transaction, it being understood that information and explanations related to the terms and conditions hereof and of each Transaction shall not be considered investment advice or a recommendation to enter into this Agreement or any Transaction. No communication (written or oral) received from any other party hereto shall be deemed to be an assurance or guarantee as to the expected results of any Transaction.[*6]

Paragraph III (b) (iii) of the Assignment and Assumption Agreement is a representation that, "No party hereto is acting as a fiduciary for or an adviser to any other party hereto in respect hereof or of any Transaction." (Megan L. Brackney Aff., Exh. A; James D. Miller Aff., Exh. 3).

Sumitomo Bank also annexes two Termination Agreements dated December 12, 2000, executed by, or on behalf of, Ecliptic FX, memorializing the fact that Ecliptic FX exercised its option to terminate the FX Option Agreements effective November 28, 2000. Upon termination of the FX Option Agreements, Sumitomo paid Ecliptic FX $21,070,000.00 on the first FX Option Agreement, which was $10,530,000.00 above the $10,540,000.00 premium paid to enter into the transaction, and $20,875,703.00 on the second FX Option Agreement, which was $10,435,703.00 above the $10,440,000 premium price originally leveraged on Conwill's behalf (Miller Aff., Exhs 4 & 5).

Plaintiffs' complaint alleges that as part of the Strategy, plaintiffs redeemed their interests in Ecliptic FX in December 2000, in exchange for $2,386.00 US, $29,501.56 Euros, and 47,8000 shares of common stock in a non-party entity, Scient, which plaintiffs allege had a book value of $118,006.25. Plaintiffs allege that, in accordance with the advice given by Arthur Andersen, and as part of the Strategy, they sold the Scient common stock in December 2000 for an undisclosed price. Plaintiffs' complaint alleges that Arthur Andersen advised them that because their basis in the Scient common stock was so high, apparently including at least a part of the amount leveraged to purchase the FX Option Agreements and other expenses, they would be able to claim substantial capital losses to offset their capital gains for the 2000 tax year, and could carry the balance forward to 2001. Plaintiffs allege that before claiming the losses, and based on representations and assurances made by Arthur Andersen, they paid a law firm to prepare an opinion letter which stated, among other things, that it was "more likely than not" that: the IRS "Step Transaction" and "Sham Transaction" doctrines would not apply to disallow the results of the transactions described; the Strategy would have economic substance; the IRS anti-abuse regulations would not apply to the Strategy; the Strategy would not constitute a tax shelter within the meaning of Internal Revenue Code §6111(c)(1) or the tax shelter proposals by the Senate Finance Committee; and that the IRS should not be able to successfully assert a penalty against plaintiffs under Internal Revenue Code § 6662(b) (2) or (3). Plaintiffs allege that after obtaining the opinion letter, Arthur Andersen prepared their 2000 and 2001 tax returns, using $8.4 million in capital losses generated by the Strategy in 2000, and carrying over an additional $321,638 in capital losses which were claimed by plaintiffs in 2001. Based upon two tax bulletins issued by the IRS in 1999 (IRS Notice 1999-59) and 2000 (IRS Notice 2000-44), [FN2] plaintiffs further allege that at the time all of the defendants induced them to participate in the Strategy, and represented that it was safe to claim the losses, they knew that the Strategy would be deemed illegal and lacking economic substance.

In June 2003, the IRS issued new regulations applicable to the Strategy which were made retroactive to October 18 1999, and on or about June 3, 2003 the IRS notified plaintiffs that their 2000 and 2001 tax returns were selected for audit. Plaintiffs allege that, due to the Opinion Letter [*7]provided by the unnamed major law firm, the audit notice did not put them on notice that there was a problem, because they continued to believe that Ecliptic FX limited partnership deductions would withstand IRS scrutiny. On or about May 5, 2004, pursuant to Notice 2004-46, the IRS offered to "settle" with plaintiffs, and other like-situated taxpayers, for reduced penalties ranging from 10% to 20%, deducting 50% of the fees and other "out of pocket" costs associated with the transactions. On June 22, 2004, plaintiffs opted to participate in an IRS settlement initiative, and thereafter, were required to pay over $3,842,385 in taxes, $521,824.01 in interest, and $436,255 in penalties.

On or about June 3, 2005, plaintiffs commenced the instant action, asserting nine causes of action, for both declaratory relief and damages, upon the grounds of unjust enrichment, fraud, breach of contract, breach of fiduciary duty, negligent misrepresentation, professional malpractice, and civil conspiracy. Defendant Bricolage filed a petition for Chapter 11 bankruptcy on October 14, 2005 in the U.S. Bankruptcy Court for the Southern District of New York, which automatically stayed the action as asserted against it (see Bruce Schnieder Aff., Exh. 3). With the exception of Bricolage and Ecliptic FX, all of the defendants have moved to dismiss the complaint, pursuant to CPLR 3211 (a). Defendant Ecliptic FX has neither interposed an answer to the complaint nor interposed a pre-joinder motion to dismiss pursuant to CPLR 3211, and none of the parties have raised the issue of whether the automatic stay or some other legal impediment extends to Ecliptic FX due to the status of Bricolage as the alleged managing general partner. Defendants Deutsche Bank, Arthur Andersen, and Grant Thornton also move to stay the action pending arbitration.

I agree with the observation made by the Deutsche Bank defendants, that the contracts entered into by, or on behalf of, Conwill, to execute the Strategy, affect interstate commerce, as they involve transactions that are international in nature, and citizens and legal entities domiciled and/or organized under the laws of different states (see Citizens Bank v Alafabco, Inc., 539 US 52, 53 [2003]; ImClone Systems Inc. v Waksal, 22 AD3d 387 [1st Dept 2005]; Merritt Engineering Consultants P.C. v 55 Liberty Owners' Corp., 18 AD3d 210 [1st Dept 2005]). That determination having been made, the arbitration provisions contained in the agreements, and any disputes arising under those agreements are governed by Federal Arbitration Act (FAA) (9 U.S.C. §1, et seq) ( Citizens Bank v Alafabco, Inc., 539 US at 53 [2003]; Diamond Waterproofing Systems, Inc. v 55 Liberty Owners Corp., 4 NY2d at 252; Fletcher v Kidder, Peabody & Co., Inc., 81 NY2d 623, cert denied, 510 U.S. 993 [1993]).

The FAA provides, in pertinent part, that written agreements to arbitrate disputes in contracts affecting commerce, "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract" ( 9 USC § 2). The statute creates a strong federal policy favoring arbitration, and compels that any doubts with respect to whether a claim falls within the scope of the agreement be resolved in favor of arbitration (see Moses H. Cone Mem. Hosp v Mercury Const. Corp., 460 US 1, 24-25 [1983]; Matter of Smith Barney, Harris Upham & Co. v Luckie, 85 NY2d 193, cert denied sub nom Manhard v Merrill Lynch, Pierce, Fenner & Smith, Inc., 516 US 811 [1995]; David L. Threlkeld & Co., Inc. v Metallgesellschaft Ltd. (London), 923 F 2d 245, 248 [2d Cir 1991]).

Issues of arbitrability with respect to agreements falling under the FAA are governed by substantive federal law, which supplants all inconsistent state law (Moses H. Cone Memorial Hospital v. Mercury Const. Corp., 460 US at 24; Oldroyd v. Elmira Sav. Bank, FSB, 134 F 3d 72, 75 [2d Cir 1998]; Fletcher v Kidder, Peabody & Co., Inc, 81 NY2d 623; Matter of Prudential [*8]Securities Inc., 205 AD2d 424, 425 [1st Dept 1994]). Thus, choice of law provisions, such as the one contained in the Investment Management Agreements, are ineffective to supercede federal policy on the issue of arbitrability, in the absence of a specific clause making New York law applicable to "enforcement" of the agreement (Diamond Waterproofing Systems, Inc. v 55 Liberty Owners Corp., 4 NY3d 247, supra; Merritt Engineering Consultants, P.C. v 55 Liberty Owners' Corp. 18 AD3d 210, supra). The required language is not included in the contracts under review in this case.

The role of the court such instances is to determine: (1) whether the parties agreed to arbitrate; (2) whether the disputes fall within the scope of the arbitration clause; and (3) in the absence of any transcendent federal statutory claims, if some, but not all of the claims are arbitrable, whether to stay the balance of the proceedings pending arbitration (Hartford Acc. and Indem. Co. v Swiss Reins. Am. Corp., 246 F3d 219, 226 [2d Cir 2001]; National Union Fire Ins. Co. of Pittsburgh, PA v Belco Petroleum Corp., 88 F.3d 129, 135 [2d Cir 1996]; Vaughan v Leeds, Morelli & Brown, P.C., 2005 WL 1949468 [SD NY 2005]; Norcom Electronics Corp. v CIM USA Inc., 104 F Supp 2d 198, 202 [SD NY 2000)]; Orange Chicken, LLC v Nambe Mills, Inc., 2000 WL 1858556 [SD NY 2000]). Once it is determined that a binding arbitration clause exists, and that it is broad enough to encompass the subject matter of the dispute, courts have "no business" weighing the merits of the dispute or determining which claims are viable or have merit before submitting the matter to arbitration (JLM Industries, Inc. v Stolt-Nielsen SA, 387 F 3d 163,172 [2d Cir 2004], quoting AT&T Technologies Inc. v Communications Workers of Am., 475 US 643, 650 [1986]). All issues, including statute of limitations issues, and issues regarding whether or not the contract was induced by fraud, are to be determined by the arbitrator (see Prima Paint Corp. v Flood & Conklin Mfg. Co., 388 US 395, 402 [1967]; Denny v BDO Seidman, LLP, 412 F3d 58, 67 [2d Cir 2005]; Diamond Waterproofing Systems, Inc. v 55 Liberty Owners Corp., 4 NY3d 247, supra; Merritt Engineering Consultants, P.C. v 55 Liberty Owners' Corp. 18 AD3d 210 supra; Price Waterhouse Coopers LLP v Rutlen, 284 AD2d 200 [1st Dept 2001]). Accordingly, and contrary to the assertions made by the movants during oral argument, under the FAA, when a broadly worded arbitration clause is found to apply, statute of limitations issues may not be addressed prior to, or in lieu of, a determination of whether, and to what extent the action is subject to arbitration.

The Deutsche Bank defendants rely upon the broad arbitration provision contained in the Brokerage Account Agreement between plaintiff Conwill and its subsidiary, Deutsche Bank Securities, Inc. d/b/a Deutsche Bank Alex Brown. Plaintiffs concede that if a valid agreement to arbitrate exists, it is applicable to all of the named Deutsche Bank defendants (see Plaintiff's Memorandum in Opposition to Deutsche Bank Defendant's Motion, p 25, n. 81). Plaintiffs' complaint treats DOC Investments and Mary Conwill as one unified entity, and plaintiffs do not argue that the rights and obligations of DOC Investments and Mary Conwill should be considered separately from the rights and obligations of Conwill. Accordingly, for purposes of this analysis, any findings applicable to Conwill are applicable to all plaintiffs.

As indicated above, pursuant to the arbitration provision contained in the Investment Account Agreement, Conwill agreed to arbitrate "any controversies which may arise, whether or not based on events occurring prior to the date of this agreement, including any controversy arising out of or relating to any account with you, to the construction, performance or breach of any agreement with you, or to transactions with or through you." Plaintiffs' argument that the contract was void ab initio, as opposed to merely voidable (see Denny v BDO Seidman, LLP, 412 F3d at 67-68; Sphere [*9]Drake Ins. Ltd. v Clarendon Nat. Ins. Co., 263 F3d 26 [2d Cir. 2001]), is without merit, and unsupported by any allegations in the complaint. Moreover, federal precedent makes it clear that arbitration provisions, in any event, are separable from the balance of the contract alleged to be infirm, and clauses such as the one relied upon by the Deutsche Bank defendants in this case, are broad enough to encompass collateral and ancillary tort issues arising out of the relationship of the parties created under the contract, including plaintiffs claims of conspiracy and fraud in the inducement (Prima Paint Corp. v Flood & Conklin Mfg. Co., 388 US at 402 [1967] [arbitration clauses as a matter of federal law are separable from the contracts in which they are embedded so that a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud]; Denny v BDO Seidman, LLP, 412 F3d at 67-8; JLM Industries, Inc. v Stolt-Nielsen, 387 F3d at 175; Price Waterhouse Coopers LLP v Rutlen, 284 AD2d 200, supra; Stellmack Air Conditioning & Refrigeration Corp. v Contractors Management Systems of NH Inc., 293 AD2d 956 [3rd Dept 2002]). Therefore, as asserted against the Deutsche Bank defendants, including the individual defendant, David Parse, the action is stayed, and the parties are directed to proceed to arbitration.

Defendants Arthur Andersen and Grant Thornton, non-parties to any of the cited arbitration agreements, seek to compel plaintiffs to arbitrate by way of estoppel. Under substantive federal law, non-signatories to an arbitration agreement may compel signatories to arbitrate when, upon careful review, the relationship among the parties, the contracts they signed, the issues that have arisen among them, and the issues that the non-signatories seek to resolve in arbitration, are intertwined with the agreement the estopped party signed (see Denney v BDO Seidman, LLP, 412 F3d at 70; JLM Industries, Inc. v Stolt-Nielsen SA, 387 F3d at 177 [2d Cir 2004]). In this case, although the causes of action asserted by plaintiffs for negligent misrepresentation, breach of fiduciary duty and professional malpractice, arise out of tax services provided by Arthur Andersen and Grant Thornton, and are capable of analysis separate and apart from the series of transactions which comprise the Strategy (see e.g. Security Pacific Business Credit, Inc. v Peat Marwick Main & Co., 79 NY2d 695, 702-03 [1992]), when determining whether a party may be estopped from litigating with respect to non-signatories under federal substantive law, the focus is upon the factual allegations of the complaint, not upon the legal causes of action asserted (JLM Industries, Inc. v Stolt-Nielsen SA, 387 F3d at 173; Norcom Electronics Corp. v CIM USA Inc., 104 F Supp 2d at 203-4; see also e.g. Vaughan v Leeds, Morelli & Brown, P.C., 2005 WL 1949468, supra).

According to plaintiffs' complaint, Grant Thornton was retained by Bricolage as its accounting firm, and its defense, as indicated in the copies of correspondence annexed to its moving papers, is that it relied upon information provided to it by Bricolage. Plaintiffs' relationship with Grant Thornton, therefore, cannot be separated from its relationship or involvement with the Bricolage limited partnership. Plaintiffs' complaint alleges that Arthur Andersen and Grant Thornton were working in concert with Bricolage and Deutsche Bank to market the Strategy, and that even though they knew or should have known that the Strategy would be deemed illegal, and the losses disallowed by the IRS, all of the defendants "singly and in concert, directly or indirectly, engaged in a common plan, transaction and course of conduct," and conspired together to devise and promote the Strategy for the purpose of receiving and splitting millions of dollars in fees. Plaintiffs further allege that Arthur Andersen's advice and its assistance in executing the Strategy was rendered at the direction and under the instruction of Bricolage and the Deutsche Bank. Moreover, although the [*10]complaint alleges that the Conwill plaintiffs had a pre-existing relationship with Arthur Andersen, according to plaintiffs, all of the defendants made all of the purported misrepresentations and omissions together, without specification as to who did or said what. Under federal substantive law, having alleged that the defendants acted in concert to defraud them, and to market and implement the allegedly fraudulent and illegal tax Strategy, plaintiffs cannot escape the consequences of those allegations by arguing that the defendants lack the requisite close relationship, or that their claims are not connected to the moving defendants' relationship to Deutsche Bank and Bricolage (see Denney v BDO Seidman, LLP, 412 F3d at 70; Smith/Enron Cogeneration Ltd. Partnership, Inc. v Smith Cogeneration International Inc.,, 198 F3d 88, 98 [2d Cir 1999], cert denied 531 US 815 [2000]; see also Carroll v Leboeuf, Lamb, Greene & MacRae, LLP, 374 F Supp 2d 375 [SD NY 2005], disagreeing with Stechler v Sidley, Austin Brown & Wood, LLP, 382 F Supp 2d 580 [SD NY 2005]). Accordingly, the motions by Arthur Andersen (Motion Sequence 005) and Grant Thornton (Motion Sequence 007), to the extent that they seek a stay pending arbitration, are granted. Arthur Andersen's separate motion to dismiss the complaint (Motion Sequence 006) is denied.

In granting this relief, I am aware that the primary signatory to the contracts, Bricolage, is subject to an automatic bankruptcy stay, raising an issue of whether plaintiffs will be prejudiced by the fact that the party with whom these defendants claim a unity of interest may not be able to proceed to arbitration in a timely fashion. However, the expansive interpretation of the FAA and its mandate to enforce arbitration agreements are applicable to trustees in bankruptcy on "non core claims" (see e.g. Hays & Co. v Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F2d 1149 [3rd Cir 1989]; In re Winimo Realty Corp., 270 B.R. 108 [SD NY 2001]), and in the event that the Bricolage bankruptcy proves to unduly delay or impair plaintiffs' ability to arbitrate these matters, plaintiffs are granted leave to move to vacate the stay and, if granted, the action will proceed as asserted against Arthur Andersen and Grant Thornton.

The remaining motions to dismiss pursuant to CPLR 3211 (a) and 3016 (b), are interposed by defendants who are not parties to either the Management Agreements or the Brokerage Account Agreement, and who do not seek to compel plaintiffs to arbitrate. Under the FAA , the general rule is that non-parties to an arbitration agreement may not be compelled to participate in an arbitration proceeding, with five exception: (1) incorporation by reference; (2) assumption; (3) agency ; (4) veil-piercing/alter ego, and (5) estoppel (Denny v BDO Seidman LLP , 412 F3d at 70; Thomson-CSF, S.A. v American Arbitration Assoc., 64 F 3d 773, 776 [2d Cir 1995]; Veera v Janssen, 2005 WL 1606054, *3 [SD NY 2005]). None of the exceptions apply to Beer, Sumitomo or Veera, nor do plaintiffs assert that they do. Samyak Veera signed the Investment Management Agreements in his capacity as Managing Director of Bricolage, a limited liability corporation. An agreement to arbitrate does not bind an agent acting on behalf of a disclosed principal unless there is a clear explicit evidence of the agent's intention to substitute or add his personal liability for, or to that of the principal (Lerner v Amalgam Clothing & Textile Workers Union, 938 F 2d 2, 5 [2d Cir 1991]; Veera v Janssen, 2005 WL 1606054, supra), and plaintiffs complaint alleges no facts from which to infer an intention by Veera to be individually bound by the arbitration provisions in the Investment Management Agreements. There are no allegations made by any party that either Bricolage founder, Andrew D. Beer, or Sumitomo Bank, is a party to any agreement to arbitrate [*11]disputes with plaintiffs.[FN3] Thus, although these defendants could invoke the estoppel doctrine to compel plaintiffs to arbitrate, as signatories to the arbitration agreements (see Hoffman v Deloitte & Touche LLP, 143 F Supp 2d 995 [ND Ill 2001]; Dassero v Edwards, 190 F Supp 2d 544 [WD NY 2002]), Veera, Sumitomo and Beer cannot be compelled to do so under the facts alleged by plaintiffs in this case (see Veera v Janssen, 2005 WL 1606054, supra; Mionis v Bank Julius Baer & Co., Ltd, 301 AD2d 104 [1st Dept 2002]).

With respect to Beer, Sumitomo and Veera, therefore, the issue is whether to stay the balance of the action as asserted against them, as courts have inherent authority to do (see CPLR 2201 ; Denny v BDO Seidman, LLP, 412 F3d at 65; Norcom Electronics Corporation v CIM USA Inc., 104 F Supp 2d at 206), or to continue the action against the non-signatory defendants (see e.g. 212 Investment Corp. v Kaplan, 6 Misc 3d 1031 (A), 800 NYS2d 358, 2005 WL 502852, * 5 [Sup Ct NY County 2005] [allowing claims against non-parties to arbitration agreement to proceed in the action]). Factors considered include whether there are issues in common that will finally be determined by the arbitration, whether the arbitration may be resolved within a reasonable time and without undue hardship to the parties, and whether the imposition of a stay will promote judicial economy, avoid confusion, and circumvent possible inconsistent results (see Orange Chicken LLC v Nambe Mills, Inc., 2000 WL 1858556, *9, supra). Applying these factors to this case, if the pending dismissal motions result in a final determination against one or more of the remaining parties, without deciding issues which, either by necessity, or implication, must be determined by the arbitrators, the complaint as asserted against those parties will be dismissed.

Defendants Veera (motion sequence 004) and Sumitomo Bank (motion sequence 009) move to dismiss plaintiffs' complaint on documentary evidence, pursuant to CPLR 3211 [a][1]. A dismissal on the basis of documentary evidence is warranted where documentary evidence and undisputed facts negate or dispose of claims in the complaint or conclusively establish a defense (Zanett Lombardier, Ltd v Maslow, __AD2d__, 2006 WL 1460406, supra; see e.g. Silvester v Time-Warner, Inc., 14 AD3d 430 [1st Dept 2005]). The disclaimer language contained in the unsigned FX Option Agreement confirmations, annexed by Sumitomo Bank, do not bear the signature of any party, and will not be considered. I also will not consider the disclaimer language contained in the Investment Management Agreements which are subject to arbitration under the FAA. Consideration, therefore, will be limited to the disclaimer provisions contained in the Assignment and Assumption Agreement, which, as quoted above, contains a release against Sumitomo Bank, representations by Conwill that no oral or written representations were made to him by Bricolage, Ecliptic FX and Sumitomo Bank, and representations by Conwill that these parties were not acting as his fiduciaries with respect to either the FX Option Agreements or with respect to his decision to enter into the Assignment and Assumption Agreement. Plaintiffs' complaint acknowledges that the Assignment was in fact made, and does not assert a cause of action to set it aside.

Defendant Veera signed the Assignment and Assumption Agreement not only as the Managing Director of Bricolage, but also as a managing member of Ecliptic FX. Managing or [*12]general partners of a limited partnership are bound in a fiduciary relationship with limited partners (Friedman v Dalmazio, 228 AD2d 549 [2d Dept 1996] [managing or general partner of a limited partnership is bound in a fiduciary relationship with the limited partners]), and disclaimers of fiduciary responsibility in such instances have been determined to be ineffective (see e.g. Salm v Feldstein, 20 AD3d 469 [2d Dept 2005]; Friedman v Dalmazio, 228 AD2d 549, supra). As to Veera, therefore, the disclaimers contained in the Assignment and Assumption agreement do not provide a complete defense to the action.

In addition, although I find plaintiffs' fraud claim to be insufficiently pleaded, pursuant to CPLR 3016, and thus dismiss it as asserted against Veera, Sumitomo and Beer (see PT Bank Central Asia v ABN AMRO Bank, 301 AD2d at 377; Linden v Moskowitz, 294 AD2d 114 [1st Dept 2002]; Abrahami v UPC Construction Co., Inc., 176 AD2d 180 [1st Dept 1991]), a dismissal under CPLR 3016 does not finally determine the action as asserted against these parties.

The actions taken by Veera on plaintiffs' behalf, as can be determined from the allegations of the complaint and the documents annexed to the motion papers, are tied to the authority and language of the Investment Management Agreements. All matters arising under these agreements have been referred to arbitration, which may finally determine the issues sought to be litigated. As asserted against Veera, therefore, the action is stayed in the interest of justice and judicial economy pending the outcome of the arbitration (see CPLR §2201; Orange Chicken LLC v Nambe Mills, Inc., 2000 WL 1858556, *9, supra; Cohen v Ark Asset Holdings, Inc., 268 AD2d 285 [1st Dept 2000]). With respect to Sumitomo Bank (motion sequence 009), an arm's length transaction with a large financial institution acting as the counterparty on an option transaction, will not generally give rise to a fiduciary duty unless one is created by agreement (Enron Corp. v Bank of America, 292 BR 752 [Bnkr. SD NY 2003]; Asian Vegetable Research and Dev. Ctr. v Institute of Intl. Educ. 944 F Supp 1169 [SD NY 1996] [where parties deal at arms length in a commercial transaction, no relation of confidence or trust sufficient to find the existence of a fiduciary relationship will arise absent extraordinary circumstances]; CIBC Bank & Trust Co. [Cayman] Ltd. v Credit Lyonnais, 270 AD2d 138, 139 [1st Dept 2000]), and the mere assertion of a fiduciary duty in the complaint does not create one without a factual basis from which to infer its existence (Enron Corp v Bank of America, 292 BR 752, supra). Where no fiduciary duty is implied by law, contractual disclaimers may be given effect, and enforced in accordance with their terms (Seippel v Jenkens & Gilchrist, PC, 341 F Supp 2d 363, 381-82 [SD NY 2004] [contractual disclaimers of fiduciary duty effective under New York Law]; Asian Vegetable Research and Dev. Ctr. v Institute of Intl. Educ., 944 F Supp at 1178-79; see CIBC Bank & Trust Company [Cayman] Limited v Credit Lyonnais, 270 AD2d 138, supra). In this case, the disclaimer provisions of the Assignment and Assumption Agreement sufficiently "track the substance of the alleged misrepresentations" (see Harsco Corp. v Segui, 91 F3d 337, 345-46 [2d Cir. 1996]; Grumman Allied Indus., Inc. v Rohr Indus. Inc.,, 748 F2d 729 [2d Cir 1984]; cf. compare to this case Caiola v Citibank, N.A, NY., 295 F 3d 312 [2d Cir 2002]), negate, and provide a complete defense to any claims that require a finding of representations, reliance or fiduciary duty. As a matter of law, therefore, as asserted against Sumitomo Bank, plaintiffs' third (breach of fiduciary duty), fourth (fraud in the inducement), fifth (negligent misrepresentation and professional malpractice), sixth and seventh (breach of contract to provide tax and investment advisory services), eighth (civil conspiracy), and ninth (fraudulent inducement) causes of action are dismissed (see Asian Vegetable Research and Dev. Ctr. v Institute of Intl. Educ., 944 F Supp at 1178; CIBC Bank & Trust Company [*13][Cayman] Limited v Credit Lyonnais, 270 AD2d 138, supra).

The Assignment and Assumption Agreement, pursuant to which plaintiff Conwill agreed to release Sumitomo Bank from any liability arising out of the FX Options Agreements, also provides a complete defense to the first and second causes of action alleged in plaintiffs' complaint, and even if it did not, those causes of action would be dismissed, pursuant to CPLR 3211 (a)(7). The first cause of action, alleged against all defendants, seeks a declaration that the FX Option Agreements are not enforceable against plaintiffs upon the ground of unjust enrichment. However, as demonstrated above, any rights and obligations plaintiffs had under those agreements were assigned to Ecliptic FX, terminated and fully performed, with Sumitomo Bank paying out a net gain to Ecliptic FX of around $20,000,000.00. Plaintiffs' complaint does not allege what remains to be enforced against them under the FX Option Agreements, and no injustice arising out of, or as a result of, the FX Option Agreements can be inferred or discerned. The first cause of action alleged in plaintiffs complaint thus fails to state a claim upon which relief may be granted (CPLR 3211 [a] [1], [7]).

The second cause of action, alleged solely against Sumitomo Bank, asserts that Sumitomo Bank breached its duty of good faith and fair dealing under the FX Option Agreements by "failing to disclose the true likelihood that the FX Contracts would pay out; failing to disclose the Sumitomo Bank retained discretion to determine whether the options would pay out; and failing to appraise plaintiffs that the digital options they were purchasing and selling had no reasonable possibility of profit, net of all fees." Aside from the factually unsupported nature of these claims, in the absence of a fiduciary relationship, Sumitomo Bank cannot be imputed with a duty to make such disclosures (see Credit Alliance Corp v Arthur Andersen & Co., 65 NY2d 536, 545-48 [1985]; P.T. Bank Cent. Asia v ABN AMRO Bank N.V., 301 AD2d at 378; Mayes v UVI Holdings, Inc., 280 AD2d at 161-62), and the implied covenant of good faith and fair dealing applies only to the performance of existing contracts. It does not operate to create new contractual rights (Enron Corp v Bank of America, N.A., 292 BR at 783). Accordingly, the balance of plaintiffs' complaint, as asserted against Sumitomo Bank is dismissed, pursuant to CPLR 3211 (a) (1) and (7).

Having dismissed the fourth cause of action alleged in plaintiffs' complaint for fraud, pursuant to CPLR 3016 (b), as asserted against Veera, Sumitomo and Beer, the lone allegation in the complaint against Beer, that he was a founder of Bricolage in 1999, does not provide a basis from which to assert individual liability arising out of any of the contracts or transactions alleged (see Maranga v McDonald & T. Corp., 8 AD3d 351 [2d Dept 2004]; see also Worthy v. New York City Housing Authority, 21 AD3d 284 [1ST Dept 2005]; Metropolitan Switch Board Co., Inc. v. Amici Assocs., Inc., 20 AD3d 455 [2nd Dept 2005]). Plaintiffs' complaint, as asserted against Beer, therefore, is dismissed pursuant to CPLR 3211 (a) (7), and to the extent that plaintiffs seek leave to replead any of the causes of action asserted against Beer or Sumitomo Bank, the action is stayed pending the outcome of the arbitration (CPLR 2201; see Genesco, Inc. v T. Kakiuchi & Co., 815 F 2d 840, 856 [2d Cir 1987]; NPS Communications, Inc. v Continental Group, Inc., 760 F 2d 463, 465 [2d Cir 1985]; Norcom Electronics Corp v CIM USA Inc., 104 F Supp 2d at 207 [broad stay orders are particularly appropriate if the arbitrable claims predominate the lawsuit and the nonarbitrable claims are of questionable merit]).

Accordingly, and for the reasons set forth above, it is:

ORDERED, that the motions to dismiss by defendants SMBC Capital Markets, Inc. a/k/a [*14]Sumitomo Bank Capital Markets, Inc. and Andrew D. Beer, under motion sequences 009 and 010, are granted pursuant to CPLR (a)(1), (7) and CPLR 3211 (a) (7), respectively, and pursuant to CPLR 3016 (b); and it is further

ORDERED, that the motions by defendants Arthur Andersen, LLP, Deutsche Bank AG, Deutsche Bank Securities, Inc. d/b/a/ Deutsche Bank Alex Brown, David Parse, and Grant Thornton LLP, under motion sequences 005, 007 and 008 are granted to the extent of directing that plaintiffs, Arthur Andersen, LLP, Deutsche Bank AG, Deutsche Bank Securities, Inc. d/b/a/ Deutsche Bank Alex Brown, David Parse and Grant Thornton LLC to proceed to arbitration forthwith. Arthur Andersen's motion (motion sequence 006) is denied; and it is further

ORDERED, that the motion by Samyak Veera (motion sequence 004), is granted, in part, to the extent of dismissing the fourth cause of action alleged in plaintiffs' complaint for fraud pursuant to CPLR 3016 (b), and staying the balance of the action, as asserted against Veera pending the outcome of the above ordered arbitration proceedings; and it is further

ORDERED, that further prosecution of and proceedings in this action are stayed pending the outcome of the arbitrations, except for an application to vacate or modify the stay as indicated herein, and it is further

ORDERED, that any party may make application by order to show cause to vacate or modify this stay upon final determination of the arbitrators.

DATED:June 21, 2006

________________________

J.S.C. Footnotes

Footnote 1:The Deutsche Bank defendants also annex a Trading Authorization Contract executed by Conwill which gives a non-party entity, Equilibrium Currency Trading LLC, full trading authorization with respect to Conwill's Deutsche Bank brokerage account (Corrine Levy Aff., Exh. 3). Pursuant to the Trading Authorization Contract, William Conwill agreed to indemnify and hold harmless Deutsche Bank Alex Brown LLC from any losses arising from Equilibrium trading activities. Plaintiffs' complaint, however, makes no reference to this entity.

Footnote 2: IRS Notices 1999-59 and 2000-44, which are annexed to all of the memoranda submitted by plaintiffs in opposition to the various motions to dismiss, warned, in part, that losses claimed by limited partner investors, on leveraged transactions with respect to which they were never truly "at risk," would be disallowed.

Footnote 3:Although there is case law indicating that Andrew Beers was a Managing Director of Equilibrium Currency Trading, LLC (Veera v Janssen, 2005 WL 1606054, supra, his signature does not appear on the trading authorization annexed by Deutsche Bank (Corrinne Levy Aff., Exh. 3).