Jurisdiction – Personal – Audits

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Where accounting malpractice and negligent misrepresentation claims were brought against entities that audited and administered one of the plaintiffs’ companies, the claims were properly dismissed for lack of personal jurisdiction despite the plaintiffs’ contentions that the judge should have (1) taken into account a broader range of contacts between one of the defendants and Massachusetts and (2) considered the defendants’ knowledge that the audit reports would be sent to a Massachusetts entity.

The judge also properly relied on lack of proximate cause as a basis for the dismissal of claims against another defendant.

Jurisdiction issue

“The plaintiffs rely on G.L.c. 223A, section3(a) and (d). As to section3(a), the judge ruled that the evidence failed to show that the plaintiffs’ claims arose from [defendant] Grant Thornton’s transaction of business in Massachusetts. The judge observed that the audited funds were operated in the Cayman Islands and that the work involved in the [plaintiff Fletcher Fixed Income Alpha Fund, Ltd. (Alpha)] audit was performed outside of Massachusetts. The judge further observed that Grant Thornton’s few contacts with Massachusetts bore little or no connection to its audits of Alpha, and most took place after the audit activities outlined in the amended complaint transpired.

“On appeal, the plaintiffs argue that in analyzing G.L.c. 223A, section3(a), the judge should have considered the totality of Grant Thornton’s contacts with Massachusetts, rather than only those connected to the audits. For this, the plaintiffs rely on an overly-broad reading of Tatro v. Manor Care, Inc., 416 Mass. 763 (1994). However, the tort claim in Tatro arose in the context of a contractual relationship between the parties. …

“The court in Tatro v. Manor Care, Inc., supra, did not include in its analysis the defendant’s general contacts with Massachusetts, but rather considered only those contacts that were directed at soliciting the same kind of contractual relationship, targeting Massachusetts business people who might schedule conferences at a California hotel, that the defendant ultimately procured with the plaintiff. Citing Hahn v. Vermont Law Sch., 698 F.2d 48, 50-52 (1st. Cir. 1983), the court observed that ‘[t]he defendant’s contact with the plaintiff was part of a larger systematic effort on its part to obtain business from Massachusetts businesses and residents.’ … The cases do not hold that unrelated contacts with the forum are relevant for specific jurisdiction under G.L.c. 223A, section3(a), as the plaintiffs insist. That argument ignores the court’s directive in Tatro that other forum-related activities must be associated with the challenged transaction between the parties in order to be relevant to the analysis. … We understand ‘associated’ to mean something more than mere coexistence.

“Moreover, such an expansive reading of Tatro would run afoul of due process, which provides that in order for a State to exercise specific jurisdiction, it is the defendant’s suit-related contacts that must create a substantial connection with the forum State. …

“Turning to the case against Grant Thornton, the plaintiffs point to evidence that the company registered to do business in Massachusetts in 1996. The evidence also indicates that in June, 2013, Grant Thornton had more than 175 employees in its Boston office. However, those contacts were not shown to be related to the Alpha audits performed by Grant Thornton for 2007 and 2008, nor do they support the contention that the Alpha audits, which were performed outside of Massachusetts pursuant to a contract with a Cayman Islands entity, were part of a larger systematic effort to obtain business in Massachusetts.

“The plaintiffs also claim that the judge failed to apply the but/for analysis, as set out in Tatro v. Manor Care, Inc., supra at 771, in determining whether their claims arose from Grant Thornton’s Massachusetts contacts. … However, as the judge properly determined, Grant Thornton’s knowledge that [Fletcher Asset Management (FAM)] would send the audit reports to Massachusetts does not constitute a contact with Massachusetts sufficient to support jurisdiction. …

“Section 3(d) of G.L.c. 223A requires a showing of tortious injury in Massachusetts caused by an out-of-State act or omission, and proof that the defendant regularly does or solicits business in Massachusetts or otherwise engages in a persistent course of conduct or derives substantial revenue from Massachusetts. Even assuming that the injury to [plaintiff Massachusetts Bay Transportation Authority Retirement Fund (MBTARF)] and Alpha occurred in Massachusetts, the record … fails to establish the latter requirement. Also, as the judge observed, due process considerations would not permit the exercise of specific jurisdiction over Grant Thornton on these facts, given the scant evidence of Grant Thornton’s activities in relation to Massachusetts at the time of the alleged wrongdoing.

“We reject the plaintiffs’ contention that Grant Thornton’s more recent Massachusetts contacts should be considered in the G.L.c. 223A, section3(d), analysis. In establishing specific jurisdiction, particularly in the absence of a contractual or other continuing relationship with a Massachusetts plaintiff, our focus is directed to the defendant’s contacts at the time the cause of action arose, rather than when the complaint was filed. … The factual allegations do not establish that Grant Thornton’s work relative to the plaintiffs’ claims was ongoing at the time of the complaint so as to render its contacts with Massachusetts in 2013 and 2014 relevant under section3(d).

“As a final matter, contrary to the plaintiffs’ assertion, this case bears no resemblance to Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985), which involved a long-term franchise contract between the parties and, as a result, a continuing obligation on the part of the Michigan defendant to maintain a substantial connection with Burger King Corporation in the forum State of Florida. … Here, significantly, there was no contractual relationship between Grant Thornton and a Massachusetts plaintiff, nor was there a continuous obligation or other course of contact directed at Massachusetts by Grant Thornton. As noted above, knowledge that FAM would send the audit reports to Massachusetts was not sufficient contact between Grant Thornton and the forum to establish jurisdiction for purposes of either G.L.c. 223A, section3(a) or (d).”

Proximate cause issue

“MBTARF brought claims against [defendant SS&C Technologies, Inc. (SS&C)] for negligent misrepresentation, aiding and abetting fraud, and violation of G.L.c. 93A, section11. The amended complaint alleges that MBTARF would have redeemed its investment in Alpha when SS&C took over as administrator in 2010 had MBTARF known that SS&C had disavowed its duty to take part in Alpha’s asset valuation. Yet according to the amended complaint, Alpha was ‘hopelessly insolvent’ by the end of 2008, or ‘likely earlier.’

“On appeal, MBTARF argues that the judge applied the wrong standard, at this stage of the litigation, because MBTARF was not required to demonstrate that its allegation that SS&C was the proximate cause of its loss was true or to produce evidence to that effect. However, as SS&C argues, dismissal under Mass.R.Civ.P. 12(b)(6), 365 Mass. 754 (1974), is appropriate ‘where the allegations in the complaint clearly demonstrate that the plaintiff’s claim is legally insufficient.’ … Causation is a necessary element of the plaintiff’s claims against SS&C. … Also contrary to MBTARF’s assertion, lack of proximate cause is appropriate for determination under rule 12(b)(6), where the complaint itself demonstrates that causation, as alleged, was not proximate. … Given the allegations indicating that Alpha was insolvent when SS&C took over as fund administrator, the judge properly relied on lack of proximate cause as a basis for dismissal.

“MBTARF suggests that it did not have to allege that SS&C was the sole cause of the loss, but only that SS&C’s conduct was a substantial factor in the loss … The distinction does not help MBTARF’s position on the facts alleged, as MBTARF must still show a causal connection between SS&C’s role at Alpha and MBTARF’s failure to redeem prior to Alpha’s insolvency. Given the timeline alleged in the amended complaint, MBTARF has not shown that SS&C was a substantial factor in MBTARF’s loss.

“MBTARF further posits that despite Alpha’s insolvency by the time SS&C was hired, there might have been some assets at that time that could have been used to satisfy MBTARF’s redemption request. Facts to support that position were not identified in the amended complaint. … We agree with SS&C that the argument is speculative and does not warrant reversal.”

Fletcher Fixed Income Alpha Fund, Ltd., et al. v. Grant Thornton LLP, et al. (Lawyers Weekly No. 11-085-16) (16 pages) (Meade, J.) (Appeals Court) Motions to dismiss heard by Sanders, J., in Superior Court. Rachel S. Fleishman (Philip Y. Brown with her) for the plaintiff; Grant J. Esposito for Grant Thornton LLP; William M. Connolly for EisnerAmper LLP & another; Jonathan D. Cogan for SS&C Technologies, Inc. (Docket No. 15-P-830) (July 14, 2016).