Opinion
No. 113346/09.
2010-07-21
Gary M. HOLLOWAY, Plaintiff, v. ERNST & YOUNG LLP, Defendant.
Joseph M. Fioravanti, Esq., Media, PA, for Plaintiff. Vinson & Elkins, LLP, Clifford Thau, Esq., New York City, for Defendant.
Joseph M. Fioravanti, Esq., Media, PA, for Plaintiff. Vinson & Elkins, LLP, Clifford Thau, Esq., New York City, for Defendant.
BERNARD J. FRIED, J.
This is a breach of contract action brought by plaintiff, Gary M. Holloway against defendant, Ernst & Young, LLP (“EY”). Before me is EY's motion to dismiss the amended complaint, pursuant to CPLR §§ 3211(a)(5) and (a)(7). For the reasons that follow, I grant the motion.
Holloway is the former Chairman, President and Chief Executive Officer of GMH Communities Trust (“GMH”), a Pennsylvania based publicly-traded real estate investment trust founded by Holloway in 2004. Am. Compl., ¶¶ 1, 4. GMH is the successor of GMH Associates, Inc. (“GMH Associates”), a private company formed by Holloway in 1985. Am. Compl., ¶ 4. EY was retained by GMH Associates and then subsequently by GMH to perform auditing and accounting services. Am. Compl., ¶ 7.
In engagement letters dated December 6, 2004 and October 10, 2005, EY outlined the services it was to provide for GMH, including its role as independent auditor and its assistance in preparing the books and records of GMH to become a public company.
Am. Compl ., ¶¶ 3, 21. The engagement letters evince an understanding of agreements between GMH and EY. There is no mention of Holloway, in his individual capacity, as a party to the agreements. See, e.g., Am. Compl., Ex. B. Although engagement letters and memoranda were sent from EY directly to Holloway, they do not indicate any intention on the part of EY to perform any acts with the purpose of benefitting Holloway in his individual capacity. They make reference solely to EY's intent to perform auditing and accounting services for GMH. See Am. Compl., ¶ 8, Ex. B.
GMH became a publicly-traded company following its initial public offering in November 2004 and was subsequently sold in a public merger to American Campus Communities in June 2008. Am. Compl., ¶¶ 5–6.
In his complaint, plaintiff alleges that “[EY] clearly understood that Mr. Holloway was a primary beneficiary of [EY's] audit and accounting services,” based upon the communication between Holloway and EY and on Holloway's GMH stock ownership. Am. Compl., ¶ 9.
The 2005 engagement letter provides in relevant part:
Any dispute or claim arising out of or relating to services covered by this agreement or any other services hereafter provided by or on behalf of EY or any of its subcontractors or agents to [GMH] or at its request (including any matter involving any third party for whose benefit any such services are provided), shall be resolved by mediation and arbitration conducted as set forth in the attachment to this agreement and incorporated herein by reference. Arbitration shall take place in New York, New York. Judgment on any arbitration award may be entered in any court having jurisdiction.
Am. Compl., Ex. B, ¶ 28. At argument, plaintiff contended that the phrase “any third party for whose benefit any such services are provided” can and does refer only to Holloway. See 5/27/10 Tr., at 21. Holloway further alleges that GMH was harmed by a delay in filing its 2005 Form 10–K. He attributes this delay to EY's alleged negligent misrepresentation and the release of a “whistleblower memorandum” by former GMH Chief Financial Officer, Brad Harris.
EY recommended to Holloway that he hire Brad Harris, a former EY employee, to act as Chief Financial Officer for GMH and assist in the preparations to enter the public market as a GAAP-compliant real estate investment trust. Am. Compl., ¶¶ 10–12. Plaintiff alleges that EY knew Harris had been accused of using extortionary tactics while with his previous employer and that EY knew that recommending Harris for the CFO position was not in the best interests of GMH. Id. at ¶ 15–19.
In the amended complaint, Holloway asserts four causes of action: first, declaratory judgment naming plaintiff a third-party beneficiary of the agreements between defendant and GMH; second, monetary damages resulting from an alleged breach of contract on the part of defendant; third, damages based on defendant's alleged negligent misrepresentation of plaintiff's interests; and fourth, damages based on defendant's alleged breach of fiduciary duty owed to plaintiff. Defendant moves to dismiss the amended complaint, asserting that plaintiff was not in fact a third-party beneficiary to the agreements between EY and GMH and that plaintiff lacks privity with EY. Defendant also claims that plaintiff's breach of contract claim is invalid and EY owed no fiduciary duty to plaintiff. Furthermore, defendant asserts that the third and fourth causes of action should be dismissed, as the statute of limitations had tolled prior to the filing of the complaint. The outcome of this motion turns on determinations concerning Holloway's relationship with EY, his status as a third-party beneficiary of the agreements between EY and GMH and his entitlement to bring an individual action on his own behalf independent of GMH.
The first and second causes of action in the amended complaint allege that Holloway has standing as a third-party beneficiary, based in part on the intention of the parties to the agreement, in reliance upon the Restatement (Second) of Contracts definition of an intended third-party beneficiary
and case law holding that a third-party beneficiary is created where the parties manifest intent in the agreement to provide direct benefit to the third party. See Key Int'l Mfg. v. Morse/Diesel, Inc., 142 A.D.2d 448, 536 N.Y.S.2d 792 (2d Dep't 1988).
SeeRestatement (Second) of Contracts § 302 (a third party is an intended beneficiary who may enforce a contract between other parties if “recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance”).
However, Holloway, in his individual capacity, is not a third-party beneficiary to the engagement letters between EY and GMH. Indeed, in Alicea v. City of New York, 145 A.D.2d 315, 317, 534 N.Y.S.2d 983 (1st Dep't 1988), the First Department outlined three factors necessary to establish third-party beneficiary status:
(1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for his benefit and (3) that the benefit to him is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate him if the benefit is lost.
The first factor is clearly met here by the existence of the engagement letters between EY and GMH. However, the second and third factors are not satisfied.
The agreements between the contracting parties were for the benefit of GMH and not for the benefit of Holloway as an individual. See Am. Compl., Ex. B. Further, any benefits conveyed to Holloway as an individual by EY's services were strictly incidental as they would be for any GMH shareholder and did not burden either EY or GMH with a duty to compensate Holloway if the benefit of EY's services was lost. Plaintiff insists that an individual action is warranted based on Holloway's status as a third-party beneficiary because EY met with Holloway regarding his concerns about Harris, suggesting that this implied a personal connection between EY and Holloway as an individual. See Am. Compl., ¶ 56. He further concludes that “[g]iven the lengthy series of material communications between Mr. Holloway and EY, and given Mr. Holloway's position as the largest individual shareholder ... EY clearly understood that Mr. Holloway was a primary beneficiary of EY's audit and accounting services.” Am. Compl., ¶ 9. These assumptions are erroneous.
Holloway, as Chief Executive Officer of GMH and the GMH executive who complained of Harris' performance, would be the appropriate choice for a contact EY would seek to meet with at GMH. It is evident that it was Holloway's position as an officer of GMH, and not his prior relationship with EY, that caused EY to meet with Holloway. It is unlikely that any individual but the Chief Executive Officer would be a more appropriate contact for EY to meet with to attempt to alleviate its clients' concerns.
Plaintiff's allegations are conclusory and unsupported by the record. As such, I decline to accept them as true. See Marino v. Vunk, 39 A.D.3d 339, 340, 835 N.Y.S.2d 47 (1st Dep't 2007); Kapetanos v. City of New York, 37 A.D.3d 279, 831 N.Y.S.2d 38 (1st Dep't 2007) (holding that “bare and conclusory allegations [are] insufficient” to sustain a cause of action).
Indeed, in LaSalle National Bank v. Ernst & Young LLP, 285 A.D.2d 101, 109, 729 N.Y.S.2d 671 (1st Dep't 2001), the dismissal of a breach of contract claim was affirmed because the engagement letters at issue did not mention plaintiff in his individual capacity and did not “evince any intention ... [that the audit information would] be used for other purposes or relied upon by other parties,” and therefore did not provide any “basis upon which [to] construe the existence of third-party rights.” Similarly, the engagement letters between EY and GMH lack any reference to Holloway as an individual, and do not provide any reason for the parties to foresee that a GMH officer would rely on EY's audit information in their individual capacity.
Moreover, in Fireman's Fund Insurance Co. v. Glass, No. 94 Civ. 7375(WK), 1997 U.S. Dist. Lexis 7518, 1997 WL 289858 at *10–11 (S.D.NY May 30, 1997), a breach of contract claim was dismissed after it was brought by a non-party to an accounting agreement based on its assertion that it was a third-party beneficiary. Even though auditors were aware the company was relying on their audit, sent the audit reports directly to the company and met with the company repeatedly, the district court found that the company was merely an incidental beneficiary and not an intended beneficiary. Thus, it could not maintain a breach of contract claim. Similarly here, EY was allegedly aware that Holloway was relying on EY's auditing services to protect his individual interests as a GMH shareholder,
Holloway was the addressee on several engagement letters and EY met with Holloway on multiple occasions. However, as in Fireman's Fund, these factors do not establish that Holloway was an intended beneficiary of the agreements between EY and GMH. Although Holloway was the addressee for several engagement letters and had met with EY employees, it is not indicative of his status as a third-party beneficiary. EY sought these contacts due to Holloway's position as CEO and President of GMH and not due to any previous personal relationship or his status as a GMH shareholder. Furthermore, although EY was allegedly aware that Holloway relied on the EY reports in his personal capacity as an investor, it is not dispositive of his status as a third-party beneficiary to the agreements.
Holloway claims that he “stated multiple times to high-level EY representatives that (1) he was relying on their audit work, expertise, and supervisory oversight over Brad Harris, and (2) EY's work was extremely important to him due to his substantial stake in GMH.” Opp. Memo., at 4 (internal citations omitted).
Plaintiff seeks to distinguish Fireman's Fund by asserting that the district court held that a bonding company was not a third-party beneficiary because an accountant's engagement letters to the company did not mention the bonding company, whereas EY's engagement letters reference “third parties.” See Am. Compl., Ex. B, ¶ 28. This distinction is unpersuasive. Although the letters included the phrase “involving any third party for whose benefit any such services are provided,” it does not demonstrate that Holloway is a third-party beneficiary or was at any time intended to be. The benefit of EY's auditing services was intended to be conferred upon GMH as a corporate entity, not its individual officers or shareholders.
Furthermore, Raffa v. Louis A. Stilloe Roofing & Siding Inc., 182 A.D.2d 901, 902, 581 N.Y.S.2d 888 (3d Dep't 1992) holds that although a person holds shares in a company, it does not entitle that person to benefit from that company's agreements as a third-party beneficiary. Plaintiff seeks to distinguish Raffa from this case by claiming that the plaintiffs in Raffa were not found to be third-party beneficiaries because they owned only a small number of shares,
whereas Holloway owned almost 25 percent of the outstanding GMH shares. Thus, plaintiff proposes that because he owned a larger percentage of shares than the plaintiffs in Raffa, he should be treated differently and viewed as a third-party beneficiary. However, plaintiff provides no support for this proposition. To accept plaintiff's position would imply that a shareholder with a certain percentage of stock in a company could become a third-party beneficiary to contractual agreements entered into by that company.
Holloway assumes that the plaintiffs in Raffa owned only a small number of shares because the cooperative at issue likely had many shareholders. See Opp. Memo., at 13, n. 4. There is no basis in the decision for this assumption.
Indeed, in Topor v. Enbar, No. 603182/06, 2007 WL 1501647, at *7 (Sup.Ct., N.Y. County 2007), I held that a 25 percent shareholder was not a foreseeable third-party beneficiary of the company's contract with its attorneys. Holloway's approximate 25 percent interest in GMH provides no grounds upon which to base a third-party beneficiary status that differs materially from the plaintiff in Topor. Holloway seeks to distinguish this case from Topor, which held that the plaintiff was not a third-party beneficiary because he failed to demonstrate that there was an explicit contractual duty to perform a specific task on behalf of the plaintiff personally, that the law firm knew plaintiff was personally relying on its services or that there was any direct contact between the law firm and the plaintiff. Id. at *4. In contrast, Holloway alleges that “EY undertook tasks on Holloway's behalf, made promises to him directly, and knew he personally relied on EY's services.” Opp. Memo., at 14. However, plaintiff offers no support for these allegations. While it is true that Holloway was in direct contact with EY and that EY may have been aware of Holloway's individual reliance, he provides no support for the claim that EY undertook tasks on his individual behalf. Rather, the engagement letters are clear that tasks were undertaken on behalf of GMH, not Holloway personally. See Allianz Underwriters Ins. Co. v. Landmark Ins. Co., 13 A.D.3d 172, 174, 787 N.Y.S.2d 15 (1st Dep't 2004) (holding that plaintiff must allege that the attorney was aware that its services were being used for a specific purpose, that the plaintiff relied upon those services and that the attorney engaged in some conduct evincing an understanding of the plaintiff's reliance). Moreover, plaintiff alleges that “EY knew that Holloway relied on its work, given his position as GMH's chairman, president, and CEO.” Opp. Memo., at 12. Clearly, EY knew Holloway was relying on its services in his official capacity and not that he was relying on them personally.
Thus, plaintiff fails to demonstrate that he possesses an individual cause of action. Nor does he have a corporate shareholder derivative action.
Plaintiff asks me to consider circumstances outside of the agreements that existed between Holloway and EY extending back to 1995.
To bring a shareholder derivative action, plaintiff would first have to have made a demand on the GMH board to proceed with the action or, in the alternative, to allege that it would have been futile to do so. See4A N.Y.Prac., Com. Litig. in New York State Courts §§ 74:9, 74:14 (2d ed.). Although he had the opportunity, Holloway neither made a demand nor alleged that it would have been futile to do so.
See 5/27/10 Tr., at 29, 31. However, despite any prior relationship between Holloway and EY, while GMH was privately held by Holloway, the relationship was transformed when Holloway sought to create a new company (GMH), and GMH entered into an agreement with EY. The agreements with EY after GMH went public do not indicate that EY was working for the benefit of Gary M. Holloway. They state that EY was working for the benefit of GMH as a corporate entity. See, e.g., Am. Compl., Ex. B, ¶ 1. It appears that this is a shareholder derivatives action masquerading as an individual action.
The circumstances plaintiff refers to are Holloway's retaining of EY to perform audit services for GMH Associates, which was privately and wholly owned by Holloway, and Holloway's resulting communications with EY.
Plaintiff attributes the failure to bring a derivative action to the fact that in the two years following the harm incurred by GMH from the whistleblower memorandum, there were a number of lawsuits pending against GMH.
However, GMH's involvement in litigation and investigations does not justify transforming what is essentially a derivative action into an individual cause of action where the plaintiff is not a third-party beneficiary. Plaintiff erroneously argues that because Topor and Credit Alliance
Plaintiff concedes that a derivative cause of action was appropriate for this dispute but asserts that Mr. Holloway was not bound to bring a derivatives action and instead had the option to bring an individual action. 5/27/10 Tr., at 36–39.
suggest that I could look past the four corners of the agreement to determine intention regarding third-party beneficiary status, the circumstances of this case establish that Holloway was an intended third-party beneficiary. See 5/27/10 Tr., at 39. However, plaintiff offers no support for this position. Indeed, neither Holloway's relationship with EY prior to the hiring of EY to prepare GMH to go public, nor EY's contact with Holloway in his official capacity demonstrate that Holloway was an intended third-party beneficiary to the agreements.
Credit Alliance Corp. v. Arthur Anderson & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110 (1985), amended by 66 N.Y.2d 812, 498 N.Y.S.2d 362, 489 N.E.2d 249 (1985).
Having concluded that Plaintiff lacks standing to bring an individual action against EY, it is unnecessary to consider the portions of the complaint concerning privity between Holloway and EY, EY's alleged negligent misrepresentation as to GMH's financial condition or the alleged fiduciary duty EY owed to Holloway. Furthermore, any wrongdoing on the part of Brad Harris, or EY's knowledge of such wrongdoing, is not dispositive in determining the propriety of Holloway bringing an individual action against EY.
Accordingly, it is
ORDERED that the motion to dismiss is granted and the amended complaint is dismissed, with costs and disbursements to defendants as taxed by this Clerk upon submission of an appropriate bill of costs.
ORDERED that the Clerk is directed to enter judgment accordingly.