Reid v Ernst & Young Global Ltd.

[*1] Reid v Ernst & Young Global Ltd. 2006 NY Slip Op 52298(U) [13 Misc 3d 1242(A)] Decided on November 15, 2006 Supreme Court, New York County Moskowitz, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 November 15, 2006
Supreme Court, New York County

Nigel Reid, Plaintiff,

against

Ernst & Young Global Limited, EYGS LLP, Ernst & Young U.S. LLP and Ernst & Young LLP, Defendants.



604028/2005

Karla Moskowitz, J.

Motion sequence numbers 001 and 002 are consolidated for disposition.

Plaintiff Nigel Reid seeks damages resulting from defendants' alleged improper assignation of blame to him for accounting violations occurring in Hong Kong. The complaint asserts causes of action for breach of contract, tortious interference with contract, intentional infliction of emotional distress and defamation.

Defendants separately move to dismiss the complaint. Defendants Ernst & Young Global Limited (EYGL) and EYGS LLP (EYGS) move (001) to dismiss the complaint on the ground of forum non conveniens (CPLR 327), or alternatively, for failure to state a cause of action (CPLR 3211 [a][1]), and to strike the prayer for punitive damages.

Defendants Ernst & Young U.S. LLP (EY-US LLP) and Ernst & Young LLP (EY-LLP) do not join in that part of the motion seeking dismissal on forum non conveniens grounds and move (002) to dismiss the complaint on the grounds of failure to state a cause of action and a defense founded upon documentary evidence (CPLR 3211 [a][1], [7]).

For the reasons set forth below, the motions are denied, in part, and granted, in part.

Background

Plaintiff Nigel Reid is a certified public accountant, a UK citizen and resident of Hong Kong.

Defendants EYGL and EYGS are UK corporations that maintain headquarters in New York City. Defendants EY-LLP and EY-US LLP (collectively, EY-US), are Delaware corporations headquartered in New York City.

EYGL serves as a governing entity of an international network of affiliated public accounting firms, that includes defendants EYGS, EY-US, and non-party Ernst & Young, a Hong Kong partnership (EY-HKC) (collectively, the EY Network). In its capacity as governing entity, EYGL sets professional standards for members of the EY Network and establishes ethical standards for accountants employed within the EY Network, memorialized in the Ernst & Young Global Code of Conduct (Global Code) (Complaint, ¶ 4).

Reid held various positions within the EY Network, including serving on the EYGL Professional Practice Directors Committee, where he participated in developing professional standards for auditors of the EY Network and investigating violations of those standards. [*2]Additionally, Reid served as a partner in EY-HKC, pursuant to a written deed of partnership (Partnership Agreement).

According to the complaint, China requires foreign residents to file monthly taxes and attend monthly meetings with local tax authorities (Complaint, ¶ 41). EY-HKC performed cash handling and tax processing services for foreign residents living in China. These foreign residents were largely comprised of U.S. nationals of the Chinese subsidiaries of Securities and Exchange Commission (SEC) registered companies that EY-US audited. Because the Chinese subsidiaries of these SEC-registered companies allegedly did not want to lose the services of their employees once a month to allow them to attend meetings with Chinese tax authorities, the foreign clients transferred money to EY-HKC, which, in turn, sent its own employees to attend the meetings and to pay any tax liabilities.

Reid alleges that EYGL and SEC regulations prohibit these practices (Violations). Although advised that these services are prohibited, certain EY-HKC partners allegedly continued to perform them and actively concealed that they were taking place (Complaint, ¶¶ 51, 56). In response to growing awareness that the Violations were continuing, uninvolved EY-HKC partners designated certain employees, including Reid, to investigate and document the individuals perpetuating and concealing the Violations. Reid alleges that he personally reported the results of his investigations to EYGL and Tony Wu, the Chairman of EY-HKC.

In September of 2004, EYGL and EY-HKC executives attended a meeting in Oslo. At the meeting, Wu allegedly resisted efforts to punish those responsible for the Violations. Instead, he insisted that blame be placed squarely upon Reid. Wu additionally threatened to disaffiliate EY-HKC from the EY Network and join a competing accounting firm if the EYGL executives present did not agree to assign blame to Reid (Complaint, ¶¶ 75-78). Allegedly motivated by the fear of economic harm that would result if EY-HKC disaffiliated itself from the EY Network, EYGL executives schemed to assign blame for the Violations to Reid, despite knowing that he was innocent (Complaint, ¶¶ 80, 85).

In November of 2004, members of the EY Network, including EYGL and its Chief Operating Officer, Paul Ostling, organized a meeting in Rome and attempted to coerce Reid to accept blame for the Violations. Ostling subsequently met with Reid privately, and allegedly acknowledged that EYGL knew Reid was not responsible for the Violations. According to Ostling, EYGL was "buying time" to decide how best to deal with Wu and EY-HKC (Complaint, ¶ 100). Subsequently, in filings and presentations made to the SEC, EYGL, EYGS and EY-US allegedly identified Reid as the EY-HKC employee responsible for the Violations.

Because of these events, Reid determined that he was unable to remain at EY-HKC. He resigned and accepted a retirement package from EY-HKC in March of 2005 (Complaint, ¶¶ 102-103).

Discussion

I. Forum Non Conveniens

EYGL and EYGS argue that New York County is an inappropriate forum for this action because the action has no factual nexus with New York, Reid is a non-resident, both EYGL and EYGS are UK entities, most witnesses reside outside the U.S., Hong Kong law applies to most of Reid's claims and the most relevant discovery is located outside the U.S.

Reid contends that retaining the current forum is more convenient than litigating this action in Hong Kong. Further, Reid maintains that the key misconduct at issue in the action occurred in New York and Europe, where the majority of witnesses reside. [*3]

On a motion to dismiss based upon forum non conveniens, the burden is on the moving defendant to demonstrate private or public interest factors that militate against the selected forum (Bank Hapoalim [Switzerland] Ltd. v Banca Intesa S.p.A., 26 AD3d 286, 287 [1st Dept 2006]; Waterways Ltd. v Barclays Bank PLC, 174 AD2d 324, 327 [1st Dept 1991]). Courts give weight to the factual nexus between New York and the dispute, the availability of an alternative forum (Islamic Republic of Iran v Pahlavi, 62 NY2d 474, 474 [1984], cert denied 469 US 1108 [1985]), the residency of the parties, the burden on New York courts and the potential hardship to the defendant (Bank Hapoalim [Switzerland] Ltd., 26 AD3d at 287). While a plaintiff's residency outside the forum state is a factor that militates against retention of New York County as the forum (Waterways Ltd., 174 AD2d at 327), no one factor is controlling (Islamic Republic of Iran, 62 NY2d at 474). Moreover, "unless the balance is strongly in favor of the defendant, the plaintiff's choice of forum should rarely be disturbed" (Waterways Ltd., 174 AD2d at 327; see also Anagnostou v Stifel, 204 AD2d 61, 62 [1st Dept 1994] [a defendant's burden on a motion to dismiss based upon forum non conveniens is "heavy"]).

The complaint alleges facts sufficient to establish a factual nexus between New York and the underlying dispute, including allegations that defendants schemed to assign blame to Reid at EY-US headquarters in New York. Further, EYGL, EYGS and EY-US allegedly identified Reid either by name or title as the EY-HKC employee responsible for the Violations to the SEC, in New York. Given the global nature of this action, however, based upon improper conduct alleged in New York, Rome, Oslo and Hong Kong, the court is not convinced that Hong Kong would be a more convenient forum than New York (see Georgia-Pacific Corp. v Multimark's Intl. Ltd., 265 AD2d 109, 112 [1st Dept 2000] [motion to dismiss on forum non conveniens ground properly denied where defendants failed to identify a more convenient forum and all three parties involved were scattered around the world]).

Moreover, Reid has identified several potential key witnesses who reside in New York City, maintain offices here or are partners in New York-based EY-US, while other witnesses reside abroad. The presence of witnesses, however, even key witnesses, is not itself a determinative factor (Anagnostou, 204 AD2d at 62), particularly where, as here, numerous witnesses reside in New York City.

While Reid is a non-resident of New York, that the two moving defendants, EYGL and EYGS, both maintain offices in New York City undermines any contention that litigating this action here would cause hardship to them.

As to the availability of an alternative forum, obtaining personal jurisdiction over all the present defendants in Hong Kong is uncertain. According to Reid's Hong Kong law expert, the likelihood of a Hong Kong court exercising personal jurisdiction over all defendants is "no higher than 50%" (Exhibit E, Annexed to the Affirmation of Mitchell Berns, Esq.). Further, EYGS and EYGL have not established that litigating this action here would burden New York courts. The Commercial Division of this State frequently resolves disputes of this nature (Georgia-Pacific Corp., 265 AD2d at 112; see also American Guar. and Liab. Ins. Co. v Xerox Corp., 183 Misc 2d 411, 416 [Sup Ct, NY County, 1999], affd 270 AD2d 187 [1st Dept 2000] [Commercial Division was designed to be a "world-class forum for the resolution of business disputes"]). Finally, the court is fully capable of applying Hong Kong law (Peregrine Myanmar Ltd. v Segal, 89 F3d 41, 47 [2d Cir 1996] [the need to apply the law of foreign jurisdictions is not alone a sufficient reason to dismiss under the doctrine of forum conveniens]; accord Intertec Contr. A/S v Turner Steiner Intl., S.A., 6 AD3d 1, 6 [1st Dept 2004] [application of Sri Lankan law does not render New York an inconvenient forum]). [*4]

Accordingly, because EYGL and EYGS have failed to demonstrate private and public interest factors that militate against retaining New York as the forum to litigate this action, the motion to dismiss based upon forum non conveniens is denied.

II. Breach of Contract

EYGS and EYGL maintain that the breach of contract claim fails under applicable Hong Kong law, because the complaint fails to set forth the elements of a binding contract. EY-US maintains that the Global Code is not a binding contract under either New York or Hong Kong law. Reid argues that the Global Code is an enforceable agreement binding all Ernst & Young employees, although he cites to no case law under either jurisdiction in support of his contention.Preliminarily, because the law of more than one jurisdiction is potentially applicable to this claim, the court must determine if the laws of the different jurisdictions conflict (Matter of Allstate Ins. Co. [Stolarz], 81 NY2d 219, 223 [1993]; J. Aron & Co. v Chown, 231 AD2d 426, 426 [1st Dept 1996]).

Here, the court discerns no actual conflict between Hong Kong law and New York law as they apply to a claim for breach of contract. According to a Hong Kong law expert that EYGL and EYGS cite, to properly state a claim for breach of contract under Hong Kong law, "a party must allege the existence of a binding and enforcable contract" (Sng Affidavit at ¶ 24; accord Exhibit C, Annexed to the Affidavit of Brooks R. Burdette). Similarly, under New York law, the existence of an enforceable and binding contract is necessarily the prerequisite to establishing a claim for breach of contract (Clalit Health Servs. v Israel Humanitarian Found., 385 F Supp 2d 392, 397 [SD NY], reconsideration denied 395 F Supp 2d 21 [SD NY 2005]). Accordingly, because New York law and Hong Kong law do not conflict, the law of the forum jurisdiction applies (SNS Bank, N.V. v Citibank, N.A., 7 AD3d 352, 354 [1st Dept 2004]).

The court concludes that the Global Code is not a binding and enforceable contract. Rather, it is an internal document designed to encourage EY Network employees to follow ethical guidelines (see Global Code at 3, the Global Code "creates a clear set of standards for our business conduct . . . [and] presents us with an ethical behavioral framework"). The Global Code does not bear any of the traditional indicia of a contract, including offer, acceptance, consideration and an intent to be bound (Register.com, Inc. v Verio, Inc., 356 F3d 393, 427 [2d Cir 2004]). Accordingly, because Reid has failed to demonstrate that the parties entered into a binding contract (Paz v Singer Co., 151 AD2d 234, 235 [1st Dept 1989]), the claim fails. Therefore, the court grants the motion to dismiss the claim for breach of contract.

III. Tortious Interference with Contract

EYGS and EYGL urge dismissal of the claim for tortious interference with contract under Hong Kong law because Reid fails to allege an actual breach of the Partnership Agreement. EY-US maintains that the claim is invalid under New York law and Hong Kong law for the same reason.

Reid alleges that under New York law, EYGL and EY-US intentionally induced a breach of the Partnership Agreement between himself and EY-HKC, by attempting to force him to take responsibility for the Violations and terminating him without cause (Reid Mem. of Law at 18). The Partnership Agreement prohibited Reid's unilateral resignation and retirement without one year's written notice.

In the first instance, the court determines that under New York's interest analysis approach to conflicts of law in tort claims, Hong Kong law applies to the claim. According to the Hong Kong law expert that EYGS and EYGL cite, to properly state a claim for tortious interference with contract under Hong Kong law, a plaintiff must plead knowledge by the [*5]defendant that a binding contract exists between the plaintiff and a third party, malicious intent to induce a breach and cause injury, an act of inducement causing an actual breach and special damages (Sng Affidavit at ¶ 24). In contrast to Hong Kong law, a plaintiff is not required to plead malicious intent under New York law to properly state a claim for tortious interference with contract (see Shared Communications Servs. of ESR, Inc. v Goldman Sachs & Co., 23 AD3d 162, 163 [1st Dept 2005] [the tort of tortious interference with prospective business relations requires pleading malice, but the tort of interference with contract does not]) or special damages. Under New York law, a plaintiff must merely plead the intent to induce a breach of contract without economic justification that causes damage (Levine v Yokell, 258 AD2d 296, 296 [1st Dept 1999]).

In the event of a conflict of laws, New York courts apply an interest analysis in tort cases in order to determine which of the competing jurisdictions has a greater interest in having its law applied to the dispute (Atsco Ltd. v Swanson, 29 AD3d 465, 466 [1st Dept 2006]). Where, as here, conduct regulating laws are implicated (Hidden Brook Air, Inc. v Thabet Aviation Intl. Inc., 241 F Supp 2d 246, 277 [SD NY 2002]), the law of the locus jurisdiction where the tort occurred applies, because that jurisdiction has the most significant contacts with the claim (Atsco Ltd., 29 AD3d at 466; see also Schultz v Boy Scouts of America, Inc., 65 NY2d 189, 195 [1985] [the locus jurisdiction is where plaintiff's injuries occurred]). Courts additionally consider the residency of the parties in order to determine their reasonable expectations as to which rules govern their conduct (Atsco Ltd., 29 AD3d at 466).

Reid is a Hong Kong resident and alleges injury from the induced breach of his Partnership Agreement with EY-HKC, a Hong Kong entity. The locus jurisdiction is Hong Kong, where Reid allegedly suffered injury because of the discontinuance of his membership in the EY-HKC partnership (Complaint, ¶ 143). Thus, because Hong Kong has the most significant contacts with the claim and in consideration of the residency of the parties, Hong Kong law applies.

While Reid alleges that defendants' improper assignation of blame to him for the Violations induced a breach of the Partnership Agreement, the allegations of the complaint undermine any assertion that the defendants actually breached the Partnership Agreement. Reid himself asserts that he personally resigned from the partnership and accepted a retirement package when his continued employment at EY-HKC became "untenable" (Complaint, ¶¶ 103, 130, 141, 145). Further, the complaint does not allege that defendants' improper conduct caused a breach of the Partnership Agreement, but a "rupture" (Complaint, ¶140). Moreover, Reid failed to plead that defendants were maliciously motivated, a required element under Hong Kong law (Sng Affidavit at ¶ 24). Rather, the complaint alleges that fear of economic harm motivated defendants (Complaint, ¶¶ 79, 100). Accordingly, because Reid failed to properly state a claim for tortious interference with contract under Hong Kong law, the motion to dismiss the claim is granted.

IV. Intentional Infliction of Emotional Distress

EGYS and EYGL argue that recovery under Hong Kong law for this claim is permissible under the tort of harassment per se, or intentional or reckless infliction of physical or mental injury (Sng Affidavit, ¶¶ 31, 33). EY-US asserts that it is not named in the third claim. However, the claim expressly incorporates allegations that EY-US participated in the alleged misconduct (Complaint ¶¶ 148-161).

The tort of harassment per se or intentional infliction of mental injury under Hong Kong law is similar to the tort of intentional infliction of emotional distress under New York law, that [*6]requires the assertion of extreme and outrageous conduct causing injury (Lewittes v Blume, 18 AD3d 261, 261 [1st Dept 2005]). Therefore, in the absence of a conflict of laws, the court applies the law of the forum jurisdiction (SNS Bank, N.V., 7 AD3d at 354).

The allegations of the complaint do not rise to a level of outrageousness sufficient to state a claim for intentional infliction of emotional distress. To be sufficiently outrageous under New York law, the conduct must be so extreme as to be regarded as "atrocious and utterly intolerable in a civilized society" (Murphy v American Home Prods. Corp., 58 NY2d 293, 303 [1983]). More than mere insults and indignities are required (164 Mulberry Street Corp. v Columbia Univ., 4 AD3d 49, 56 [1st Dept], lv dismissed 2 NY3d 793 [2004]). So high is the standard for recovery that the Second Circuit, applying New York law, holds that even in cases where the defendant engaged in criminal conduct, or in conduct that would otherwise entitle the plaintiff to punitive damages for the commission of another tort, no claim will lie for intentional infliction of emotional distress unless the conduct is "utterly reprehensible" (Stuto v Fleishman, 164 F3d 820, 827 [2d Cir 1999]). Therefore, because Reid failed to allege conduct on the part of defendants that is sufficiently outrageous (id.), the court grants the motion to dismiss this claim.

V. Defamation

The claim for defamation is based upon statements that defendants made to the SEC that identified Reid, by name or position, as the EY-HKC partner responsible for the Violations. Reid requests further discovery to enable him to amplify the allegations of the defamation claim (Complaint, ¶¶ 166-168). Defendants assert that, notwithstanding the claim's failure to satisfy the heightened pleading requirements of CPLR 3016 (a), the statements are absolutely privileged.

Pleading requirements, such as those codified in CPLR 3016, are a matter of procedure governed by the law of the forum (Westdeutsche Landesbank Girozentrale v Learsy, 284 AD2d 251, 252 [1st Dept 2001]). Therefore, the heightened pleading standard of CPLR 3016 (a) applies to the claim for defamation.

Initially, the court rejects Reid's request for additional discovery in order to meet the pleading requirements of CPLR 3016 (a). Dismissal need not await discovery in the event a claim is otherwise deficient in failing to allege defamatory statements in detail (Cerick v MTB Bank, 240 AD2d 274, 274 [1st Dept 1997]). If the actual defamatory words are not evident from the face of the complaint, dismissal is warranted (Murganti v Weber, 248 AD2d 208, 208 [1st Dept 1998]). Because Reid failed to allege with particularity the defamatory words that defendants allegedly uttered to the SEC, dismissal is appropriate (id.).

Moreover, to the extent that defendants made the alleged defamatory statements in a quasi-judicial proceeding, they are subject to an absolute privilege. The SEC is instilled with oversight and regulatory functions of member firms to insure adherence to laws, rules and regulations. As part of these functions, it is authorized to investigate alleged violations, bring formal charges against suspected violators and discipline members, a process that is adversarial in nature. The First Department expressly holds that the adversarial process by which regulatory bodies investigate and discipline violators is quasi-judicial in nature, irrespective of whether formal charges are ever presented (Cicconi v McGinn, Smith & Co., 27 AD3d 59, 62 [1st Dept 2005], lv dismissed 6 NY3d 807 [2006]). Because of the quasi-judicial nature of the process, statements made at every stage of the proceedings are absolutely privileged, even those made at the investigatory stage (id.).

Here, the complaint alleges that defendants identified Reid in filings and presentations made to the SEC as the EY-HKC employee to be replaced for involvement in the Violations. [*7]The defendants made these filings and presentation containing these allegedly defamatory statements to the SEC in an "attempt to remediate the damage caused by the Violations and its coverup" (Complaint, ¶ 163). SEC investigations into the Violations were undoubtedly quasi-judicial in nature, because the inquiries were a function of the process by which the SEC discharges its regulatory and oversight functions. Thus, defendants' statements made in the course of this process of inquiry are absolutely privileged and cannot form the basis of liability for defamation. Therefore, the court grants defendants' motion to dismiss the claim for defamation.

VI. Breach of Fiduciary Duty

Finally, Reid argues that, although the complaint does not currently identify a cause of action for participation in breach of fiduciary duty against defendants, it is a viable claim (Reid Mem. of Law at 2). Although Reid did not formally move to amend the complaint, all defendants address the sufficiency of the claim in their motion papers. Thus, the court will address Reid's assertion that a claim for participation in breach of fiduciary duty is viable.

Under a conflicts of law analysis, Hong Kong law applies to the claim for participation in breach of fiduciary duty. To state a claim for aiding and abetting breach of fiduciary duty under Hong Kong law, a plaintiff must allege that the defendant provided substantial assistance to the primary violator and that ordinary people would regard his conduct as dishonest (Supp. Sng Affidavit at ¶¶ 3-5). In contrast, New York law does not require a plaintiff to plead that a defendant's assistance in the breach is dishonest to state adequately a claim for participation of breach of fiduciary duty (Kaufman v Cohen, 307 AD2d 113, 125 [1st Dept 2003]). Because a conflict of laws exists, the court must conduct an interest analysis of the laws implicating conduct regulating behavior in tort claims (Atsco Ltd., 29 AD3d at 466; see also Saab v Citibank, N.A., 2001 WL 1382577, *7 [SD NY 2001], affd 50 Fed Appx 467 [2d Cir 2002] [participation in breach of fiduciary duty is a conduct regulating tort]). As discussed above, the law of the jurisdiction that has the most significant contacts with the claim applies (Atsco Ltd., 29 AD3d at 466).

Notwithstanding Reid's residency in Hong Kong, EY-US's headquarters in New York and EYGL's and EYGS's incorporation in the UK, Reid alleges injury in Hong Kong, that defendants' alleged participation in breach of fiduciary duty caused, forcing him to give up his "nearly 30-year career with Ernst & Young [EY-HKC] some ten years before his mandatory retirement date" (Reid Mem. of Law at 8). Because Hong Kong has the most significant contacts to the claim, Hong Kong law applies.

Reid alleges that EY-HKC owed him a fiduciary duty by virtue of their partnership relationship. EY-HKC's alleged attempt to place blame squarely upon Reid for the Violations amounted to a breach of that duty. Further, defendants allegedly participated in that breach by substantially assisting in the campaign to place blame upon him and actively concealing that he was not responsible for the Violations, despite knowing that he was innocent in addition to concealing the identity of the true perpetrators. In contrast to defendants' assertion, these allegations sufficiently allege dishonesty on the part of defendants in their alleged participation in the breach of fiduciary duty, in accord with Hong Kong law.

Therefore, Reid's demonstration of a good ground for the assertion of this claim justifies the granting of leave to replead, if so advised, to afford him the opportunity to adequately plead the claim (CPLR 3211 [e]; Dweck v Oppenheimer & Co., 30 AD3d 163 [1st Dept 2006]; see also EBC I, Inc. v Goldman Sachs & Co., 5 NY3d 11, 23 [2005] [whether to grant leave to replead is [*8]within the court's discretion, if the plaintiff's allegations are accompanied in sufficient detail]).Accordingly, it is

ORDERED the court denies that branch of Ernst & Young Global Limited and EYGS LLP's motion (001) to dismiss on the ground of forum non conveniens and grants that branch of the motion to dismiss on the ground of failure to state a cause of action. The complaint is dismissed with leave to replead a claim for participation in breach of fiduciary duty within 30 days from service of this order with notice of entry; and it is further

ORDERED that the court grants Ernst & Young U.S. LLP and Ernst & Young LLP's motion (002) to dismiss the complaint on the ground of failure to state a cause of action. The complaint is dismissed with leave to replead a claim for participation in breach of fiduciary duty within 30 days from service of this order with notice of entry; and it is further

ORDERED that the Clerk is directed to enter judgment dismissing complaint accordingly.

Dated:November __, 2006

ENTER:

________________________

J.S.C.