Dimsey v Bank of N.Y.

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[*1] Dimsey v Bank of N.Y. 2006 NY Slip Op 52418(U) [14 Misc 3d 1205(A)] Decided on August 24, 2006 Supreme Court, New York County Moskowitz, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through January 5, 2007; it will not be published in the printed Official Reports.

Decided on August 24, 2006
Supreme Court, New York County

Peter Dimsey, Plaintiff,

against

The Bank of New York, Defendant.



600391/2006

Karla Moskowitz, J.

This lawsuit arose from a management agreement between the plaintiff, Peter Dimsey ("Dimsey"), and his bank, The Bank of New York ("BNY"), the defendant. The agreement was for BNY to act in a discretionary capacity while selling certain of Dimsey's shares at a target price within a specific time frame. Dimsey contends that the bank failed to follow the terms of their agreement, resulting in his financial detriment. Dimsey sued BNY for breach of contract, breach of fiduciary duty, negligence and gross negligence.

By this motion (sequence number 001), BNY moves pursuant to CPLR 3211 (a)(7) to dismiss Dimsey's (1) second cause of action for breach of fiduciary duty, (2) third cause of action for negligence and (3) fourth cause of action for gross negligence. BNY also moves to dismiss that portion of Dimsey's complaint seeking punitive damages. The first cause of action for breach of contract is not at issue in this motion. At oral argument on June 8, 2006, the court dismissed that part of plaintiff's complaint seeking punitive damages. (See Transcript, p 14).

FACTS

The court derives the following facts from the complaint.

On June 4, 2004, Dimsey opened an investment account with BNY. (Complaint, ¶ 6). The parties signed a Management Agreement that gave BNY complete discretionary control of the account. (Complaint, ¶ 7). Shares of the MBNA Corporation ("MBNA") primarily

comprised the portfolio. (Complaint, ¶ 6). The parties also agreed that BNY would sell Dimsey's 216,700 MBNA shares within the subsequent six to nine months at a target price of $28 per share. (Complaint, ¶¶ 6, 8).

During the first nine months that BNY managed Dimsey's portfolio, BNY sold less than eight percent of his MBNA stock (16,700 shares). (Complaint, ¶ 9). BNY sold the remaining 200,000 shares in five sales transactions within the following nine months. (Complaint, ¶¶ 13-28). BNY sold the shares for an average price of $24.31 per share. Dimsey alleges that BNY failed to sell any of his shares at or above the target price that he and BNY agreed upon. (Complaint, ¶¶ 9-28). This was notwithstanding a three week period during the first nine months when the stock traded above the target price. (Complaint, ¶ 9). Dimsey also contends that for more than 100 days during this period, the MBNA stock traded above the prices that BNY actually obtained from its sales of the shares. (Complaint, ¶ 9). [*2]

Dimsey contends that following the initial nine month period, BNY failed to share important information with him regarding the MBNA transaction. (Complaint, ¶¶ 13-14, 17). On May 4, 2005, following a meeting with BNY officials, Dimsey removed the discretionary authority BNY had over his account. (Complaint, ¶ 27). At the meeting, BNY officials claimed that the reason they had failed to sell Dimsey's MBNA shares within the nine months at the target price was that the BNY officials were confused about the account's taxes. Further, the account manager admitted that he did not have an alert feature set up to notify him when the MBNA shares reached the target price. (Complaint, ¶¶ 24-26).

DISCUSSION

"It is well settled that on a motion to dismiss a complaint for failure to state a cause of

action, the complaint must be construed in the light most favorable to the plaintiff and all factual

allegations must be accepted as true." (Allianz Underwriters Ins. Co. v Landmark Ins. Co., 13 AD3d 172, 174 [1st Dept 2004] [citations omitted]). Most importantly in a motion to dismiss is "whether the pleading states a cause of action, and if from its four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law a motion for dismissal will fail." (Id.).

Second Cause of Action: Breach of Fiduciary Duty

To state a valid cause of action of breach of fiduciary duty in New York State, the plaintiff must show that (1) a fiduciary relationship existed between the two parties and (2) that there was a breach of this relationship. (See Henneberry v Sumitomo Corp. of America, 415 F Supp 2d 423, 459 [SD NY 2006]). "A fiduciary relation exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation." (Restatement [Second] of Torts: Violation of Fiduciary Duty § 874, Comment a). "A fiduciary relationship may exist where one party reposes confidence in another and reasonably relied on the other's superior expertise or knowledge." (WIT Holding Corp. v Klein, 282 AD2d 527, 529 [2d Dept 2001]).

The Management Agreement gave BNY "sole discretion" to manage Dimsey's account. (Complaint, ¶ 7). This meant that BNY was not required to obtain Dimsey's approval before executing each sales transaction. Dimsey alleges that BNY owed him a fiduciary duty because of BNY's discretionary control over his account. (Complaint, ¶ 36). Further, Dimsey alleges that BNY's failure to adequately monitor his account directly resulted in his financial losses and constituted BNY's breach of the fiduciary duty it owed to Dimsey. (Complaint, ¶¶ 37-39).

The broker of a discretionary account owes a fiduciary duty to its customer. (See Leib v Merrill Lynch, Pierce, Fenner & Smith, Inc. 461 F Supp 951, 953 [ED Mich. 1978] ["[u]nlike the broker who handles a non-discretionary account, the broker handling a discretionary account becomes the fiduciary of his customer in a broad sense."]; see also Thermal Imaging, Inc. v Sandgrain Securities, Inc. 158 F Supp 2d 335, 344 [SD NY 2001] ["a broker/customer relationship ordinarily does not give rise to a fiduciary duty under New York law . . . a fiduciary obligation will arise where the customer has delegated discretionary trading authority to the broker.'"]; see also Lowenbraun v L.F. Rothschild, 685 F Supp 336, 343 [SD NY 1988] ["A broker who has discretionary powers over an account owes his client fiduciary duties, and shares a principal-agent relationship with the client."]; see also Howell v Freifeld, 631 F Supp 1222, 1224 [SD NY 1986] ["[I]t is significant that plaintiff maintained a discretionary account with [*3][defendant]. This imposed upon [the defendant] broad' fiduciary duties to plaintiff with respect to the management of the account."]; see also Tradewinds Financial Corp. v Refco Securities, Inc., 5 AD3d 229, 230 [1st Dept 2004] [holding that no fiduciary relationship existed between the parties because the nature of the account was non-discretionary]).

Citing Clark Fitzpatrick, Inc. v Long Island R. Co. (70 NY2d 382, 389 [1987]), BNY contends that Dimsey cannot bring tort claims unless they are independent of the contract in a breach of contract claim. BNY argues that, although it assumed discretionary control of Dimsey's account, any fiduciary duty it owed to Dimsey was dependent on the Management Agreement. (Memorandum of Law of Defendant in Support of Motion to Dismiss the Second, Third, and Fourth Causes of Action Brought by Plaintiff and to Dismiss Plaintiff's Demand for Punitive Damages, p 5) ("Defendant's Memorandum"). However, at this pre-discovery phase of the proceedings, Dimsey may plead alternative theories.

In addition, the failure to execute a customer's instructions may give rise to a breach of fiduciary duty claim. (See e.g. Saboundjian v Bank Audi (USA), 157 AD2d 278, 283 [1st Dept 1990] [even in a non-discretionary account, failure to execute sale when security reached price plaintiff had specified stated claim for breach of fiduciary duty]).

Third Cause of Action: Negligence

In his complaint, in his papers on this motion and at oral argument, Dimsey couches his negligence claim in professional malpractice. To support this cause of action, Dimsey alleges that "[a]s investment manager with control over the Account, defendant owed plaintiff a duty to manage the Account with reasonable care" and that "[b]y failing to monitor the price movements of MBNA stock and/or by failing to take reasonable opportunities to sell the MBNA stock at appropriate times, defendant breached its duty of care." (Complaint, ¶¶ 41-42). Further, that "[a]s a proximate result of defendant's breach of its duty to exercise reasonable care, the MBNA stock was sold at levels substantially lower than that which would have been available to plaintiff but for defendant's breach." (Complaint, ¶ 43).

In order to maintain a claim for professional malpractice, the defendant must be a professional as a matter of law. In Chase Scientific Research, Inc. v NIA Group, Inc., (96 NY2d 20, 29 [2001]), the Court of Appeals defined a professional as being "commonly understood to refer to the learned professions exemplified by law and medicine." (Id.). In 1996 the New York State Bar Association specifically named " architect[s], engineer[s], lawyer[s] or accountant[s]'" when discussing professional malpractice. (Id.).

The Court of Appeals described the qualities of professionals as including "extensive formal learning and training, licensor and regulation indicating a qualification to practice, a code of conduct imposing standards beyond those accepted in the marketplace and a system of discipline for violation of those standards." (Id.). Finally the court concluded that "insurance agents and brokers are not within the ambit of CPLR 214 (6)." (Id.). The court reasoned that "[w]hile agents and brokers must be licensed, they are not required to engage in extensive specialized education and training." (Id. at 30). Concededly, in Chase the defendants were not financial planners or advisers like BNY but were rather insurance agents or brokers; however, the decision illustrates the level of expertise required for one to wear the label of professional.

The Appellate Division, First Department found that financial planners are not professionals for the purpose of professional malpractice. (See Leather v US Trust Co. of New [*4]York, 279 AD2d 311, 312 [1st Dept 2001] ["plaintiff makes no showing that defendants [financial planners] were engaged in a profession', i.e., an occupation generally associated with long-term educational requirements leading to an advanced degree, licensor evidencing qualifications met prior to engaging in the occupation, and control of the occupation by adherence to standards of conduct, ethics and malpractice liability'"] [citations omitted]).

Here, BNY had no more training than did the financial planners in Leather (i.e., licensure, graduate education or a code of conduct is not required). Accordingly, BNY is not a professional for the purpose of professional malpractice. Dimsey's arguments to the contrary are unavailing. He alleges that BNY owed him a duty of reasonable care because BNY was acting in the capacity of investment managers, and, thus, Dimsey implies that BNY committed negligence by way of professional malpractice in not exercising that reasonable care. (Complaint, ¶ 41). However, Dimsey only cites a note from a federal case that implies that financial advisers may be viewed as professionals. (Am. Tissue, Inc. v Donaldson, Lufkin & Jenrette Secs., Corp., 351 F Supp 2d 79, 99 n 21 [SD NY 2004] ["[t]here is no reason why financial advisers, unlike lawyers, doctors, and accountants, should be exempt from liability for negligent performance of their professional duties."]).

BNY cites Sommer v Federal Signal Corp. (79 NY2d 540, 551 [1992]) to support its position that Dimsey bringing the negligence claim along with his breach of contract claim does not transform his claim from contract to tort. (Defendant's Memorandum, p 6).

Dimsey responds by stating that in Sommer, the Court of Appeals permitted the plaintiff to bring simultaneous contract and tort claims despite both claims arising from the same contract. (79 NY2d at 551 ["Professionals, common carriers and bailees . . . may be subject to tort liability irrespective of their contractual duties."]). However, Dimsey's attempt to find support in Sommer for his contention that BNY was acting as a professional is unavailing. As previously

discussed, BNY in its capacity as financial adviser is not considered a professional for the purpose of professional malpractice. Therefore, BNY cannot be found liable for the breach of a duty that did not exist.

To the extent that plaintiff asserts a claim for simple negligence, the economic loss rule would bar it. (See Sung Hwan Co., Ltd. v Rite Aid Corp., 7 NY3d 78, 84-85, [2006] [noting that generally New York does not allow recovery for economic loss based on negligence]).

Fourth Cause of Action: Gross Negligence

"Gross negligence . . . differs in kind as well as degree from ordinary negligence . . . . It is conduct that evinces a reckless disregard for the rights of others or smacks' of intentional wrongdoing.'" (Sutton Park Development Cor. Trading Co. Inc. et al. v Guerin & Guerin Agency Inc., 297 AD2d 430, 431 [3d Dept 2002] [citations omitted]).

Dimsey alleges that BNY recklessly disregarded his interests by not monitoring his account and that this mismanagement constituted gross negligence. (Complaint, ¶ 47). Having established that BNY is not a professional for the purpose of professional malpractice and not liable for negligence, it logically follows that a gross negligence cause of action cannot survive. Further, Dimsey fails to state specific facts to support his gross negligence claim. (Defendant's Memorandum, p 10).

Citing New York Fruit Market v Western Union Tel. Co. (190 AD 60, 64 [3d Dept 1919]), BNY asserts that gross negligence is "the commission or omission of an act or duty owing by one [*5]person to a second party which discloses a failure to exercise slight diligence. In other words, the act or omission must be of an aggravated character as distinguished from the failure to exercise ordinary care." (Defendant's Memorandum, p 10). Additionally, BNY relies on Meyer v Guinta (262 AD2d 463, 464 [2d Dept 1999]) to assert that "bare legal conclusions and factual claims which are flatly contradicted by the evidence are not presumed to be true on a motion to dismiss for failure to state a cause of action." (Defendant's Memorandum, pp 10-11).

For the foregoing reasons, this court grants BNY's motion to dismiss the fourth cause of action.

CONCLUSION

Accordingly, it is

ORDERED that that part of the motion of BNY to dismiss the second cause of action (breach of fiduciary duty) is denied; and it is further

ORDERED that that part of the motion of BNY to dismiss the third and fourth causes of action (negligence and gross negligence) is granted; and it is further

ORDERED that the complaint is deemed amended accordingly.

Dated: August ___, 2006

ENTER:

____________________

J.S.C.