Thursday, October 1, 2015

SD NY Dismisses U.S. Depositor Suit Against UBS Seeking Damages (10/1/15)

In Giordano v. UBS, AG, 2015 U.S. Dist. LEXIS 129828 (SD NY 2015), here, a U.S. person maintained a secret joint account with UBS.  She did not report the income or file the FBAR.  She was ensnared in the offshore account drama and joined OVDP, paying the required taxes and penalties.  The testatrix for her estate sued UBS.  The Court dismissed the suit based principally upon enforcing the forum selection clause in the contract with UBS.  This is fairly standard stuff.

What was interesting was the Court's further discussion about the U.S. person's own complicity and how that might affect a claim for damages:  =
The Plaintiff's Causes of Action Are Inadequately Alleged and Barred as Claims for Indemnification 
Finally, Plaintiff's claims are barred. "On a motion to dismiss under Rule 12(b)(6), a court must assess whether the complaint 'contain[s] sufficient factual matters, accepted as true, to state a claim to relief that is plausible on its face.'" N.J. Carpenters Health Fund v. Royal Bank of Scotland Grp., 709 F.3d 109, 119-20 (2d Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009)). Plaintiff's Complaint fails to satisfy this standard for any of the claims alleged. Plaintiff's Complaint is one of a series of cases brought by former UBS accountholders seeking to hold UBS responsible for their own tax fraud. See, e.g., Thomas, 706 F.3d 846; Olenicoff v. UBS AG, 2012 U.S. Dist. LEXIS 57360, 2012 WL 1192911, at *1 (C.D. Cal. Apr. 10, 2012). UBS has acknowledged its role in facilitating U.S. clients' concealment of their accounts from the IRS but denies that it defrauded those clients. As the Complaint has alleged, Plaintiff's theory of the case is that UBS facilitated its clients' own knowing concealment of their Swiss accounts from the IRS. See, e.g., Compl. ¶ 50 (alleging that UBS "participat[ed] in a scheme to facilitate the evasion of US taxes" by its clients and was "actively assisting or otherwise facilitating a number of U.S. individual taxpayers in establishing accounts at UBS in a manner designed to conceal the U.S. taxpayers' ownership or beneficial interest in said accounts," thereby "allowing such U.S. taxpayers to evade reporting requirements"). 
In dismissing a similar claim, the court in Olenicoff v. UBS AG explained that UBS "only admitted to assisting willing clients with tax fraud, not forcing unsuspecting clients into tax evasion. While its argument is ironic, UBS is right. Even assuming that UBS gave Olenicoff fraudulent tax advice, that makes UBS a co-conspirator, not a defendant in this litigation." 2012 U.S. Dist. LEXIS 57360, 2012 WL 1192911, at * 1. Similarly, in affirming the dismissal of Thomas v. UBS AG on appeal, Judge Posner, writing for the Seventh Circuit, explained the absurdity of the claim, stating that "[t]he plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties . . . from the source, in this case UBS, of the income concealed from the IRS." 706 F.3d at 850. Judge Posner went on to call the Thomas negligence and malpractice claims "frivolous squared," and admonished plaintiffs that "[t]his lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn't asked for the imposition of sanctions on the plaintiffs and class counsel." Id. at 854. 
New York's "fundamental concept[]" of in pari delicto, which "has been wrought in the inmost texture of [New York] common law for at least two centuries," bars Plaintiff's claims, which all amount to an attempt to seek reimbursement from UBS for the consequences of her own filing of false tax returns. Kirschner v. KPMG LLP, 15 N.Y.3d 446, 464, 938 N.E.2d 941, 912 N.Y.S.2d 512 (2010). Even assuming for purposes of this motion to dismiss that Plaintiff's allegations of UBS's wrongdoing are correct, "[t]he doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers." Id. As the New York Court of Appeals has explained, "the principle that a wrongdoer should not profit from his own misconduct is so strong in New York" that it should apply even "where both parties acted willfully" and "in difficult cases," and it "should not be 'weakened by exceptions.'" Id. 
In addition, Plaintiff's concealment of her Swiss Account from the IRS prevents her from making a prima facie showing of causation for any of her claims, because on the face of her allegations, her own conduct is responsible for any harm she allegedly suffered. See, e.g., Rothstein v. UBS AG, 708 F.3d 82, 97 (2d Cir. 2013) (affirming dismissal of complaint because the plaintiff's "conclusory allegations [did] not meet Twombly's plausibility standard with respect to the need for a proximate causal relationship between the cash transferred by UBS to Iran and the terrorist attacks by Hizbollah and Hamas that injured plaintiffs"); Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1496 (2d Cir. 1992) (holding complaint was properly dismissed because the plaintiff failed to "adequately allege that the damages it suffered were proximately caused by the alleged misrepresentations"). 
Plaintiff has asserted five causes of action: (1) breach of fiduciary duty; (2) malpractice/negligence; (3) breach of contract or in the alternative, unjust enrichment; (4) declaratory relief for equitable disgorgement of profits; and (5) fraud and constructive fraud. Plaintiff's own admitted failure to report her UBS Account and income to the IRS prevents her from establishing the required element of causation for each of those causes of action, particularly given the absence of any factual allegation that UBS advised Plaintiff not to report the Swiss Account on her tax returns or was in any way assisted with the preparation of Plaintiff's tax returns. Plaintiff has not alleged any conduct on the part of UBS that was the proximate cause of Plaintiff's purported injury—namely, the obligation to pay back taxes, penalties, and interest as part of her participation in the VDP. Plaintiff admits that she "failed to disclose [her] UBS Swiss Account on her U.S. tax returns or pay tax on the income derived from the assets and transactions in the UBS Swiss Account." Compl. 1 52. This means that she falsely answered "no," under penalty of perjury, to a straightforward question on Schedule B of her Form 1040: "did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account)  located in a foreign country?" Herrmann Decl. Ex. 2. She has not alleged that UBS told her to answer "no" to that question. She claims UBS should reimburse her for her tax penalties because it failed to prevent her from violating the law. That theory has no legal support. See, e.g., Thomas, 706 F.3d at 851 (there is "no common law duty to prevent another person from violating the law"). 
Plaintiff's own failure to disclose the Swiss Account to the IRS is an insurmountable barrier to proving causation for all of her claims, and it bars recovery under the fundamental doctrine of in pari delicto. Thus, even if all facts alleged are taken as true, Plaintiff fails to state a claim, and the entire Complaint should be dismissed under Rule 12(b)(6). 
Plaintiff's Opposition fails to address that the principle of in pari delicto prevents her from recovering damages relating to her own participation in a scheme to avoid paying taxes. Even accepting arguendo Plaintiff's allegation that a UBS representative told her she would not have to pay taxes on the income from her account, does not explain why she would conceal the existence of the account. 
Plaintiff's failure to disclose her foreign account therefore precludes her from suing UBS AG for damages resulting from her own misconduct. "The doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers." Kirschner v. KPMG LLP, 15 N.Y.3d 446, 464, 938 N.E.2d 941, 912 N.Y.S.2d 512 (2010). This "fundamental concept" of New York law holds that a "wrongdoer should not profit from his own misconduct," even "where both parties acted willfully." Id. Plaintiff fails to address (or even acknowledge) that settled principle, but she simply cannot hold UBS AG responsible for her own failure to meet her tax obligations. 
Plaintiff's eventual participation in the Voluntary Disclosure Program—and the back taxes and penalties she paid as a result—arose because she had filed false tax returns denying that she had an interest in foreign accounts when she knew that she did. Even taking the Plaintiff's allegations as true, the Complaint fails to satisfy the basic Rule 8(a) standard of stating a claim that is plausible on its face or the heightened Rule 9(b) standard for pleading fraud. Plaintiff has not alleged any facts that would relieve her of her own culpability for knowingly filing false tax returns, which is fatal to all of her claims. 
Moreover, each of Plaintiff's claims suffers from other fatal deficiencies. The fraud claim fails because Plaintiff cannot establish reasonable reliance, see, e.g., N.Y. City Educ. Constr. Fund v. Verizon N.Y. Inc., 114 A.D.3d 529, 530, 981 N.Y.S.2d 11 (1st Dep't 2014) (no reliance by plaintiff who "fail[ed] to use ordinary intelligence to ascertain the truth of defendant's representations"), and because she fails to allege specific facts—such as when and where misrepresentations were made—with particularity under Rule 9(b), see, e.g., DeBlasio v. Merrill Lynch & Co., 2009 U.S. Dist. LEXIS 64848, 2009 WL 2242605, at *14 (S.D.N.Y. July 27, 2009). The fiduciary duty claim sounds in fraud—it alleges that UBS AG's knowingly "failed to inform the Plaintiff" of her tax obligations, compl. ¶ 24—and thus fails for the same reasons. See, e.g., 2009 U.S. Dist. LEXIS 64848, [WL] at *10. The "malpractice/negligence" claim is barred by the economic-loss rule, County of Suffolk v. Long Island Lighting Co., 728 F.2d 52, 62 (2d Cir. 1984), and because UBS cannot be liable for "malpractice" here, see, e.g., Deutsche Bank Sec., Inc. v. Rhodes, 578 F. Supp. 2d 652, 670 (S.D.N.Y. 2008). The contract claim fails because it does not identify any contract provision that UBS AG breached. See, e.g., 767 Third Ave. LLC v. Greble & Finger, LLP, 8 A.D.3d 75, 75, 778 N.Y.S.2d 157 (1st Dep't 2004). The disgorgement claim fails because it seeks a remedy that is available only to the SEC—not to private litigants. See, e.g., SEC v. Wyly, 56 F. Supp. 3d 260, 2014 WL 3739415, at *7 (S.D.N.Y. 2014). 
The Plaintiff has failed to adequately allege her five causes of action.
For my earlier blog on Judge Posner's opinion in Thomas, see Judges Blast UBS Depositors Who Sued UBS (Federal Tax Crimes Blog 2/8/13), here,

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