Sebastian Holdings, Inc. v Deutsche Bank, AG.

[*1] Sebastian Holdings, Inc. v Deutsche Bank, AG. 2009 NY Slip Op 52835(U) Decided on December 10, 2009 Supreme Court, New York County Kapnick, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 December 10, 2009
Supreme Court, New York County

Sebastian Holdings, Inc., Plaintiff,

against

Deutsche Bank, AG., Defendant.



603431/08



Plaintiff was represented by Richard M. Zaroff, Esq., ZAROFF & ZAROFF LLP, 300 Garden City Plaza, Garden City, New York 11530, Tel. 516-280-5590.

Defendant was represented by David G. Januszewski, Esq., CAHILL GORDON & REINDEL LLP, 80 Pine Street, New York, New York 10005, Tel. 212-701-3000.

Barbara R. Kapnick, J.

Background

Plaintiff Sebastian Holdings, Inc. ("Sebastian Holdings") was formed under the laws of the Turks and Caicos Islands for the purpose of holding investments, dealing in investments, securities and currencies trading, and other financial endeavors.

According to the Complaint, in 2004, Sebastian Holdings became a customer of the defendant Deutsche Bank, AG (the "Bank") when it opened accounts in Geneva, Switzerland. In or about November 2006, Sebastian Holdings allegedly opened a separate FX Prime Brokerage Account in New York with the Bank, which is the subject of this litigation (the "New York FX PB Account"), to facilitate foreign exchange trading ("FX trading") by Klaus Said ("Said") with a limited amount of capital.[FN1]

In connection with the opening of the New York FX PB Account and the FX trading to be done in such account, Sebastian Holdings and the Bank allegedly agreed that (a) Sebastian Holdings would pledge as collateral with the Bank the sum of $35,000,000.00 from an account with the Bank in Geneva, and (b) Sebastian Holdings' maximum exposure in connection with the FX trading in the soon to [*2]be opened New York FX PB Account was limited to $35,000,000.00 (the alleged "Collateral Limitation Agreement").[FN2]

Sebastian Holdings and the Bank also entered into:

(a) a Prime Brokerage Agreement dated November 3, 2006 which provides, in relevant part, as follows: 2.... [Deutsche Bank AG London ("DBAG")] agrees to provide [Sebastian Holdings, Inc. ("Agent")] with a summary of the outstanding trades and the net exposure with respect to each Counterparty, up to two times on each Business Day during which there are Counterparty Transactions outstanding;

(b) a Pledge and Pledgeholder Agreement dated November 28, 2006, by which Sebastian Holdings pledged to the Bank "[a]ny and all assets whatsoever deposited or relating to Account 2011084", an account maintained by Sebastian Holdings with the Bank in Geneva; and

(c) an International Swap Dealers Association, Inc. ("ISDA") Master Agreement dated November 22, 2006, which included a "Credit Support Annex".

Plaintiff claims that the Bank failed among other things to accurately calculate and report to plaintiff its net exposure and to provide both the required daily (if not twice daily) calculations of "Value at Risk" ("VaR") and mark to market pricing, as required under the Prime Brokerage Agreement.

The Complaint further allege that throughout the calendar year 2007, the FX trading in the New York FX PB Account was profitable and in 2007 approximately $30,000,000.00 was withdrawn from the New York FX PB Account by Sebastian Holdings.

Sometime in 2007, in addition to the standard FX transactions, Said engaged in certain "structured" options. The Bank allegedly approved such transactions and never requested collateral in excess of the $35,000,000.00 in the Collateral Limitation Agreement.

In January 2008, certain new accounts of Sebastian Holdings were opened at the Bank's offices in London, England. Plaintiff claims that these accounts were unrelated in any way to the New York FX PB Account. In connection with the opening of the London [*3]accounts, the Bank and Sebastian Holdings entered into various agreements, all drafted by the Bank, including another prime brokerage agreement dealing solely and exclusively with the accounts.

Said allegedly decided in the beginning of 2008 to engage in "pivot accrual structured options". The Bank allegedly accepted and approved these structured transactions pursuant to the first [New York] Prime Brokerage Agreement, but never advised Sebastian Holdings that such trades would create a need for any collateral in excess of the $35,000,000.00 pursuant to the alleged Collateral Limitation Agreement.

Plaintiff claims that during most of 2008, a substantial number of these structured transactions were done by Said in the New York FX PB Account, each of which was approved by the Bank.

According to plaintiff, there was no noticeable or appreciable impact of the structured trades on any required collateral calculation done by the Bank pursuant to the [New York] Prime Brokerage Agreement or the Collateral Limitation Agreement during most of 2008.

In or about July 3, 2008, Sebastian Holdings withdrew an additional sum of approximately $66,000,000.00 from the New York FX PB Account. The Bank still made no demand for any additional collateral. However, sometime in August 2008, the Bank allegedly initiated discussions with Said to recalculate the collateral terms originally agreed to and notified Said in an e-mail dated October 6, 2008 that it was recalculating the collateral requirements and increasing it from 200% to "2.5x 10-day VaR with a Liquidity add on."[FN3] The Bank concluded that the collateral requirement was thus to be increased from $21,000,000.00 to $40,000,000.00 for the then existing trades in the New York FX PB Account.

On the morning of October 6, 2008, the Bank's website stated that the net equity in the New York FX PB Account was $27,011,056.16. However, plaintiff claims that, unknown to Sebastian Holdings, and inconsistent with the website information, the New York FX PB Account had actually accumulated losses amounting to hundreds of millions of dollars. [*4]

On October 7, 2008, during discussions with a representative of Sebastian Holdings, the Bank allegedly advised Sebastian Holdings that the equity value of the Pledged Account was in excess of $67,000,000.00.

Beginning on October 14, 2008 and continuing through October 21, 2008, Sebastian Holdings received by e-mail from the Bank's Geneva office "transfer instructions in favour of Deutsche Bank London to cover the margin call[s] in the FX account managed by Klaus". Each of these e-mails was allegedly accompanied by a one page document, to be signed by Sebastian Holdings, containing wire instructions on dates and in amounts as follows: (a) on October 14, 2008: $98,879,941.00; (b) on October 15,2008: $202,625,201.00;

(c) on October 17, 2008: $100,000,000.00; and (d) on October 21, 2008: $35,000,000.00.

The Bank's New York office sent separate e-mails to Said containing calculations of various items, including amounts "on deposit", "total equity", "total margin required" and "margin call". Plaintiff claims that these calculations were: (i) materially inconsistent with the e-mails and wire instructions from the Bank's Geneva office; and (ii) contained erroneous information.

Plaintiff claims that the Bank also threatened that if payments were not made, the assets of Sebastian Holdings on deposit with the Bank would be taken by the Bank and insisted that other profitable trades and positions of Sebastian Holdings would need to be liquidated, some with risk of significant losses, and the proceeds used to satisfy the purported margin calls.

Plaintiff contends that Sebastian Holdings had no independent basis on which to confirm the information being sent to it by the different branches of the Bank. Plaintiff thus paid the margin calls.

The Bank subsequently demanded that Sebastian Holdings pay to the Bank further amounts claimed by the Bank to be "deficiencies" in alleged "margin" requirements.

Plaintiff, however, alleges that despite the Bank's claims, there is nothing in any of the agreements relating to or governing the New York FX PB Account which permits the Bank to lend money to Sebastian Holdings or requires Sebastian Holdings to borrow and repay any money (on margin or otherwise) to the Bank.

On October 23, 2008, the Bank wrote to Sebastian Holdings, claiming that Sebastian Holdings was in default of the London so- called "prime brokerage agreement" and failed to pay "NOK [*5]2,007,534,737". The Bank also sent a letter to Said addressed to Sebastian Holdings on October 24, 2008 purporting to immediately terminate the [New York] Prime Brokerage Agreement dated November 3, 2006 between the Bank and Sebastian Holdings. The Bank thereafter terminated online access to the New York FX PB Account.

On December 4, 2008, the Bank wrote to Sebastian Holdings, making certain demands, including the payment by Sebastian Holdings to the Bank of the amount of $120,650,166.

Plaintiff's Complaint dated January 20, 2009 in this action, which was commenced on or about November 25, 2008, sets forth causes of action against the Bank for:

(i) breach of the [New York] Prime Agreement Agreement (first cause of action);

(ii) breach of the Collateral Limitation Agreement (second cause of action);

(iii) breach of fiduciary duty in allegedly (a) failing to provide Sebastian Holdings with the reports, information and calculations to which Sebastian Holdings was allegedly entitled, (b) making misrepresentations to and concealing information from Sebastian Holdings, and (c) taking, receiving and converting assets allegedly rightfully belonging to Sebastian Holdings (third cause of action);

(iv) conversion of assets contained in the Sebastian Holdings' accounts at the Bank in London and Geneva (fourth cause of action);

(v) money had and received, i.e., the funds received by the Bank from Sebastian Holdings in payment of the improper and wrongful margin calls, and the wrongful transfers (fifth cause of action);

(vi) unjust enrichment (sixth cause of action);

(vii) fraudulent concealment, based on "[t]he Bank's conscious and intentional failure to calculate and report to Sebastian Holdings its net exposure and daily mark to market and value at risk (VaR) calculations", and "the omission of material facts by which the Bank intended to defraud Sebastian Holdings by withholding from Sebastian Holdings the truth about the exposure and losses in the New York FX PB Account and upon which Sebastian Holdings reasonably relied and for which Sebastian Holdings suffered damages as a result of such reliance" (seventh cause of action);

(viii) fraud, based on "[t]he Bank's unilateral recalculation of its collateral requirements as stated in its October 6, 2008 email to Said, ... while at or about the same time, during discussions with a representative of Sebastian Holdings, advising Sebastian Holdings that the equity value of the Pledged Account was in excess of $67,000,000.00" (eighth cause of action);

(ix) negligent misrepresentation (ninth cause of action); and [*6]

(x) a declaratory judgment declaring that Sebastian Holdings has no obligation or liability to pay any amounts to the Bank in connection with any purported deficiencies or margin calls (tenth cause of action).

Procedural History

On or about January 20, 2009, the Bank commenced its own action against Sebastian Holdings in the High Court of Justice, Queens Bench Division, Commercial Court, Royal Court of Justice in London, England (the "High Court Claim" or "London action"), based on Sebastian Holdings' failure to pay approximately $250 million which the Bank contends is due and owing after margin calls on, and the liquidation of, Sebastian Holdings' accounts.

Plaintiff now moves, under motion sequence number 001, for a preliminary injunction pursuant to CPLR §§ 6301 and 6311, pending the determination of this action, enjoining defendant and all persons acting in concert with defendant or on its behalf from prosecuting the High Court Claim or from commencing any other action related in any way to the instant action in New York in any other jurisdiction.[FN4]

Defendant opposes the motion and moves, under motion sequence number 002, for an order dismissing the Complaint in its entirety pursuant to CPLR §§ 327(a) and 3211(a)(1) and (7).

Discussion

Forum Non Conveniens

Defendant argues that this action should be dismissed on forum non conveniens grounds, or, alternatively, this action should be stayed pending the resolution of the London litigation, because:

(a) the litigation pending in London will resolve all issues;

(b) the parties agreed in several of their agreements - i.e. the FX ISDA Agreement, the Pledge Agreement, and the Equities Agreements - that England is the preferred forum; and

(c) all other factors weigh in favor of litigation of the dispute in England, e.g.,

i. this action lacks a substantial nexus to New York;

ii. neither of the parties is a resident of New York;

iii. the parties' relationship has been rooted in Europe; and

iv. the majority of the documents, records, witnesses, and [*7]other materials relevant to the dispute are in London or elsewhere in Europe.

Plaintiff, on the other hand, argues that New York is an appropriate forum because the [New York] Prime Brokerage Agreement provides, in relevant part, as follows: 13.This Agreement shall be governed by, and construed in accordance with, the law of the State of New York, without reference to choice of law doctrine.14.Any action or proceeding relating in any way to this Agreement may be brought and enforced in the courts of the State of New York and the United States District Court, in each case located in the Borough of Manhattan, New York.

Plaintiff further argues that New York is the jurisdiction that has the greatest interest in the outcome of the dispute because the transactions at issue were performed in New York by a Bank doing business in New York, and - according to plaintiff - the vast majority of witnesses involved in the litigation are located within New York or the New York Metropolitan area.

Plaintiff also argues that in London there is no jury, or any discovery.

Generally, a court deciding a motion to dismiss on the basis of CPLR § 327 (a), the codification of the common-law doctrine of forum non conveniens, must weigh a number of factors. However, where a party has consented to the court's jurisdiction prior to litigation, that party may not, as a matter of law, subsequently seek dismissal of the action on the ground of inconvenient forum. See Sterling Natl. Bank v Eastern Shipping Worldwide, Inc., 35 AD3d 222 (1st Dept 2006); National Union Fire Ins. Co. of Pittsburgh, Pa. v Worley, 257 AD2d 228 (1st Dept 1999).

While the governing contract in Sterling Natl. Bank provided for exclusive jurisdiction in New York, the forum selection clause in the governing contract that was at issue in National Union Fire Ins. Co. of Pittsburgh, Pa. provided that an action arising out of that contract "may be brought in any state or federal court of competent jurisdiction in and of the County and State of New York, in addition to any other court in which such action might properly be brought." Id. at 231.

Here, it is undisputed that on November 3, 2006, the parties entered into a Prime Brokerage Agreement which, like the contract [*8]in National Union Fire Ins. Co., provides in Paragraph 14 for non-exclusive jurisdiction in New York. The Prime Brokerage Agreement also provides in Paragraph 13 that all disputes arising under it are to be governed by New York law, without regard to New York choice of law rules.

The Bank argues that certain other contracts between the parties, including the ISDA Master Agreement to which the transactions provided for in the Prime Brokerage Agreement were made subject, provide for exclusive jurisdiction in England, and that the gravamen of the complaint is "really" that those contracts did not authorize the Bank to take certain actions that it took pursuant to those contracts, including the liquidation of plaintiff's equity accounts. While those contracts may offer the Bank a defense to plaintiff's claims in this action, and certain of them are the basis of the Bank's claims in the London Action, they are irrelevant to the issue of inconvenient forum.

The contracts that this Complaint alleges to have been breached are the Prime Brokerage Agreement, and specifically paragraph 2, which is quoted in relevant part, supra, and an oral Collateral Limitation Agreement allegedly made in New York by the Bank's New York office, to limit Sebastian's exposure, arising from transactions made pursuant to the Prime Brokerage Agreement, to $35 million. While plaintiff does not allege that the oral agreement specifically provided for jurisdiction in New York, that agreement pertains directly to the Prime Brokerage Agreement, and was allegedly negotiated and made in New York with the Bank's New York office. In sum, that branch of the Bank's motion which is based upon CPLR § 327 must be denied.

BCL § 1312(a)

The Bank also argues that Business Corporation Law ("BCL") § 1312 (a) bars plaintiff from bringing this action. BCL § 1312(a) provides in relevant part that: [a] foreign corporation doing business in this state without authority shall not maintain any action ... in this state unless and until such corporation has been authorized to do business in this state ... ."

The Bank's argument fails because, leaving aside the fact that the Bank's Notice of Motion fails to mention BCL § 1312, it is undisputed that, prior to the commencement of this action, the Bank terminated the Prime Brokerage Agreement, pursuant to which Sebastian Holdings' agent, Klaus Said, had placed trades through [*9]the Bank's New York office. The Bank does not contend that, other than the placing of those trades, Sebastian Holdings did any business in New York. Moreover, had Sebastian Holdings, in fact, been doing business in New York at the time that it commenced this action, the proper course would be to stay the action pending plaintiff's compliance with the conditions set forth in BCL § 1312. See Uribe v Merchants Bank of NY, 266 AD2d 21 (1st Dept 1999) (non-compliance with BCL § 1312 is curable prior to resolution of action).

CPLR § 3211(a)

The Bank seeks to dismiss the third through ninth causes of action on the grounds that the quasi-contractual causes of action may not be maintained, given the written (or oral) contracts between the parties; that there was no fiduciary relationship between the parties; and that the other claims sounding in tort merely restate the contractual claims. In addition, the Bank contends that the fraud claim must also be dismissed because it is not pled with sufficient specificity, and that the claim for conversion must be dismissed because the property allegedly converted is not specifically identified, and because plaintiff did not make a demand for its return prior to commencing this action.

At this early stage of the litigation, plaintiff's quasi-contractual claims, to wit, money had and received, and unjust enrichment, appear to be based on facts that are entirely different from the facts underlying plaintiff's claims that the Bank breached the Prime Brokerage Agreement and the oral agreement to limit plaintiff's exposure. Accordingly, the rule of Clark-Fitzpatrick, Inc. v Long Is. R.R. Co. (70 NY2d 382 [1987]) and its progeny, that the existence of a governing written contract bars recovery in quasi-contract for events arising out of the same subject matter, is inapplicable here. Moreover, even if the quasi-contractual claims pertained to the same matters as the breach of contract claims, the fact that the Bank disputes the existence of the alleged oral contract would, itself, be a reason not to dismiss the quasi-contractual claims at this stage. See, Foster v Kovner, 44 AD3d 23 (1st Dept 2007); IIG Capital LLC v Archipelago, L.L.C., 36 AD3d 401 (1st Dept 2007).

The breach of fiduciary duty claim rests on the allegation that plaintiff relied upon "sophisticated computer valuation models and other support systems available only to the Bank ... [and on the Bank's] superior expertise and abilities ... in providing accurate and timely information to [plaintiff]." Complaint, at ¶ 33. Sebastian Holdings is a sophisticated investor [*10]which entered into a set of contracts with the Bank for prime brokerage services. Arm's-length transactions, such as those between the parties here, do not give rise to fiduciary duties. EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11 (2005); Dembeck v 220 Cent. Park South, LLC, 33 AD3d 491 (1st Dept 2006).

The claim for conversion specifies the accounts from which the Bank allegedly converted funds. That suffices to describe the funds with sufficient specificity. Republic of Haiti v Duvalier, 211 AD2d 379 (1st Dept 1995). Given the allegation that the Bank knowingly appropriated for itself collateral pledged by plaintiff, as well as the proceeds of liquidating certain equity positions of plaintiff, a demand for the return of those funds was unnecessary. See Close-Barzin v Christie's, Inc., 51 AD3d 444 (1st Dept 2008).

The fraudulent concealment claim and the negligent misrepresentation claim must fail because of the absence of a fiduciary, or other special relationship between the parties. Blake v Ford Motor Co., 41 AD3d 150 (1st Dept 2007) (fraudulent concealment); Bailey v Gray, Siefert & Co., Inc., 300 AD2d 258 (1st Dept 2002) (negligent misrepresentation).

The claim for fraud alleges that, had the Bank not made the misrepresentations it did as alleged in paragraphs 54 and 56, as detailed supra, and had it complied with its reporting duties and used its knowledge to calculate its (and Sebastian Holdings') exposure, "Said should not have been permitted by the Bank to make the trades at all or if Sebastian Holdings had sufficient collateral and chose to make the trades, would have liquidated trades on an earlier and more timely basis and suffered substantially lesser ... losses." Complaint, at ¶ 115. This claim fails to allege that Sebastian Holdings, or Said, or the Bank, relied on the alleged misrepresentations in any way. What it appears to allege is that the misrepresentations show that the Bank had, all along, been failing to monitor, and to report to Sebastian Holdings, the exposure to which Said's trades exposed them. This claim duplicates the breach of contract claims. In any event, absent a claim that a plaintiff, or a third party, relied on misrepresentations made by a defendant, and that the plaintiff was injured by such reliance, there is no claim for fraud.

Request for a Stay

The Court turns now to the Bank's alternative argument, that this action should be stayed pending the outcome of the London Action. In that action, the Bank seeks to be made whole for the losses that it allegedly sustained as a result of plaintiff's trades made pursuant to the Prime Brokerage Agreement. This action [*11]and the London Action do overlap, but only in part.[FN5]

Plaintiff's breach of contract claims are independent of defendant's claims in the London Action. If the Bank failed to provide Sebastian Holdings with information that it was allegedly obligated to provide, pursuant to the Prime Brokerage Agreement, and if the Bank violated the alleged oral agreement to limit Sebastian Holdings' risk arising from trades made pursuant to the Prime Brokerage Agreement, then the contracts pursuant to which the Bank is pursuing its claims in the London Action will not offer the Bank a defense to plaintiff's breach of contract claims.

However, plaintiff's remaining tort claims, and its claims in quasi-contract, complain about actions that the Bank appears to have taken pursuant to the contracts upon which the Bank's claims in the London Action are based, and the declaration that plaintiff seeks here would directly deny the claims of the Bank in the London Action. Accordingly, to allow the simultaneous litigation of the London Action and of plaintiff's non-contractual claims might well lead to inconsistent results.

While the Bank could not have brought its claims here initially, because the contracts upon which it relies provide for exclusive jurisdiction in England, the Bank could certainly defend itself here against plaintiff's non-contractual claims, and it could raise its own claims as counterclaims. The "doctrine of comity militates against staying proceedings previously commenced in a foreign court of competent jurisdiction (citation omitted) and the additional expense and trouble of litigating in a foreign court is insufficient to warrant an injunction." Indosuez Intl. Fin. B.V. v National Reserve Bank, 263 AD2d 384, 384 (1st Dept 1999). However, the English Court has now stayed the High Court Claim [*12]pending the appeal. Thus, this Court will permit the remaining claims to proceed here.

Conclusion

Accordingly, it is hereby

ORDERED that plaintiff Sebastian Holdings, Inc.'s motion for a preliminary injunction is denied; and it is further

ORDERED that defendant Deutsche Bank, AG's motion to dismiss or to stay the action is granted to the extent that the third, seventh, eighth, and ninth causes of action of the complaint are dismissed, and it is further

ORDERED that defendant is directed to serve an answer to the first, second, fourth, fifth, sixth and tenth causes of action in the Complaint within 30 days after service of a copy of this order with notice of entry.

The parties are directed to appear for a conference in IA Part 39, 60 Centre Street, Room 208 on February 23, 2010 at 10:00 a.m. to enter into a discovery schedule as to the remaining causes of action.

This constitutes the decision and order of this Court.

Dated: December 10, 2009

Barbara R. Kapnick

J.S.C. Footnotes

Footnote 1:The goal of FX trading is to profit from fluctuations in currency values.

Footnote 2:There apparently is no written Collateral Limitation Agreement.

Footnote 3:The parties' original agreements contained a collateral requirement at 200% VaR, meaning that Sebastian Holdings would have to pledge as collateral to the Bank two times the calculated value at risk of its FX trades.

Footnote 4:After hearing oral argument on plaintiff's request for a temporary restraining order on February 23, 2009, this Court declined to grant a TRO.

Footnote 5:This Court notes that on August 14, 2009, the High Court of Justice in London ruled that it has jurisdiction to hear the claims brought by the Bank against Sebastian Holdings. By Order dated October 15, 2009, the Court of Appeal, Civil Division refused plaintiff's application for permission to appeal the lower court's Judgment. By Judgment dated December 1, 2009 the High Court of Justice, Queen's Bench Division, Commercial Court of the Royal Courts of Justice dismissed Sebastian Holdings' application for a stay of the English action. However, on December 3, 2009, the English Court of Appeal granted plaintiff permission to appeal the Judgment dated August 14, 2009 and has ordered that the London action be stayed pending the determination of the appeal except for the purposes of pursuing the appeal.