New York Miscellaneous Reports
Unpublished
REID v. YOUNG GLOBAL LTD., 604028/2005 (11-15-2006) 2006 NY
Slip Op 52298(U) Nigel Reid, Plaintiff, v. Ernst & Young
Global Limited, EYGS LLP, Ernst & Young U.S. LLP and Ernst
& Young LLP, Defendants. 604028/2005. Supreme Court of the
State of New York. Decided on November 15, 2006.
[EDITOR’S NOTE: This case is unpublished as indicated by the
issuing court.] 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. 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.
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]).
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 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 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.
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 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.