Futureselect Portfolio Mgmt., Inc., Apps. v. Tremont Group Holdings, Inc., Resps. ( 2013 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION ONE
FUTURESELECT PORTFOLIO No. 68130-3-
MANAGEMENT, INC., FUTURESELECT
PRIME ADVISOR II LLC, THE MERRIWELL
FUND, LP, and TELESIS IIW, LLC,
Appellants,
rv>
up
TREMONT GROUP HOLDINGS, INC.,
CO
TREMONT PARTNERS, INC.,
OPPENHEIMER ACQUISITION
CORPORATION, MASSACHUSETTS PUBLISHED OPINION
MUTUAL LIFE INSURANCE CO.,
GOLDSTEIN GOLUB KESSLER LLP, FILED: August 12, 2013
ERNST & YOUNG LLP and KPMG LLP,
Respondents.
Verellen, J. —Bernard Madoffs incredible "success" as an investor spurred some
investment firms to contract with Madoff to manage their'feeder funds."1 An investment
firm sold such funds to a group of local investors, who lost $195 million when Madoffs
notorious Ponzi scheme collapsed.
1A'feeder fund' is a structure "commonly associated with hedge funds and is used
to pool together assets from [a variety of] investors in order to keep costs down, achieve
better economies of scale and better tax efficiencies. Investors place their money in
one of several funds, known as feeders'. The feeders, in turn, invest their assets in one
"master fund,' which makes all the investment decisions for the portfolio." Lexicon, Fin.
Times, http://lexicon.ft.comfTerm?term=master_feeder-fund (last visited July 30, 2013).
No. 68130-3-1/2
The investors (FutureSelect) sued the investment firm (Tremont), its corporate
parent (Oppenheimer) and grandparent (Mass Mutual), as well as an auditor (Ernst &
Young) for Washington securities fraud and tort claims. The King County Superior
Court dismissed all of the claims pursuant to CR 12(b)(6) and the claims against
Oppenheimer also for lack of personal jurisdiction.
Ten points drive the outcome of this appeal. First, the "most significant
relationship" choice-of-law standards for misrepresentation and fraud claims favor the
application of Washington law to all but one of the claims asserted.
Second, under CR 12(b)(6) we consider the allegations of the complaint and
consistent hypothetical facts, but not limited samples of disputed transactional
documents.
Third, under the generous CR 12(b)(6) standard, the investors adequately allege
they relied upon representations and omissions by the investment firm in deciding to
invest and maintain their investments.
Fourth, an auditor may be liable as a "seller" under The Securities Act of
Washington (WSSA), chapter 21.20 RCW, if the auditor provides false and misleading
information that was a "substantial contributive factor" in investors' decisions to invest
and maintain their investments.
Fifth, the corporate parent and grandparent of an investment firm may face
liability as a "control person" under the WSSA if they actively managed and controlled
key aspects of the investment firm's operations, including the specific investments and
representations that give rise to the investor's claims.
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Sixth, the allegation that the investment firm failed to conduct the due diligence
and monitoring of Madoff that it promised its investors states a negligent
misrepresentation claim.
Seventh, in their role as limited partners, the investors lack standing to pursue
the derivative claim that the investment firm, as the general partner, negligently
managed the limited partnerships (applying Delaware law).
Eighth, the corporate parent and grandparent may be liable for the acts of the
investment firm under an agency theory if they actually controlled and actively managed
key operations of the investment firm, but apparent agency requires that the parent or
grandparent held the subsidiary out to others as their agent.
Ninth, an auditor may be liable for negligent misrepresentation if the auditor
included untrue statements and omissions in materials provided to the limited partners
knowing that the limited partners relied upon those materials.
Finally, the Washington contacts of the investment firm may be imputed to its
parent corporation for purposes of long-arm jurisdiction if the parent actively managed
and controlled key aspects of the investment firm's activities in Washington, which
activities gave rise to the claims of the investors.
We conclude that FutureSelect's complaint adequately alleges WSSA claims
against all respondents. Moreover, the complaint adequately alleges negligent
misrepresentation claims against Tremont and Ernst & Young, agency claims against
Mass Mutual and Oppenheimer, and an apparent agency claim against Mass Mutual.
Based upon the allegations of the complaint, the exercise of long-arm jurisdiction over
Oppenheimer does not offend due process.
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We affirm the dismissal of FutureSelect's apparent agency claim against
Oppenheimer and its negligence claim against Tremont. We reverse the dismissal of all
other claims.
FACTS
Because this is an appeal from a trial court order dismissing claims pursuant to
CR 12(b)(6), we focus on the facts as alleged in the complaint.
The Parties
Delaware corporation FutureSelect Portfolio Management Inc. is the operations
manager of Delaware limited liability companies FutureSelect Prime Advisor II and
Telesis IIW and Delaware limited partnership The Merriwell Fund (collectively
FutureSelect). These entities have their principal place of business in Redmond,
Washington.
Delaware corporation Tremont Group Holdings Inc. is the parent holding
company of Connecticut corporation Tremont Partners Inc. and has its principal office in
New York.2 Tremont was the general partner in Delaware limited partnerships the Rye
Select Broad Market Fund3 (Broad Market), Rye Select Broad Market Prime Fund
(Prime), and Rye Select Broad Market XL Fund (XL) (collectively Rye Funds).
Delaware corporation Oppenheimer Acquisition Corporation (Oppenheimer)
owns subsidiary entity OppenheimerFunds Inc. Oppenheimer acquired Tremont in
2Because the distinction between Tremont Group Holdings Inc. and Tremont
Partners Inc. has no impact on the issues raised in this appeal, we refer to them
collectively as Tremont.
3 Formerly American Masters Broad Market Fund.
No. 68130-3-1/5
2001 and made it a wholly owned subsidiary. Employees of Oppenheimer and
OppenheimerFunds Inc. served as Tremont board members and officers.
Massachusetts corporation Massachusetts Mutual Life Insurance Company
(Mass Mutual) wholly owns Oppenheimer. Mass Mutual conducts business in
Washington.
Delaware limited partnership Ernst & Young is an accounting firm conducting
business worldwide, including Washington. Ernst & Young audited the Broad Market
and Prime funds from 2000 to 2003 and issued annual financial statements.4 Ernst &
Young disseminated unqualified audit opinions5 to the Rye Funds partners, including
FutureSelect. Ernst & Young is headquartered in New York.
FutureSelect Invests with Tremont
Tremont was one of a limited number of investment firms that afforded investors
access to feeder funds managed by Bernard L. Madoff Investment Securities LLC (Madoff).
Investors accessed the funds by becoming limited partners in Rye Funds partnerships
managed by Tremont Partners Inc. as general partner. The Rye Funds partnerships
created accounts managed by Madoff. The Rye Funds' agreements with Madoff did not
require him to disclose key details of how he allegedly invested the accounts. In order to
4 FutureSelect also filed claims against the other firms that audited the Rye
Funds, Goldstein Golub Kessler LLP and KPMG LLP. However, those claims are not at
issue in this appeal because FutureSelect settled its claims against Goldstein Golub
Kessler and the trial court compelled separate arbitration of FutureSelect's claims
against KPMG.
5An "unqualified audit opinion" represents the auditor's opinion that the entity's
financial statements are free of material misstatements and are represented fairly in
accordance with the generally accepted accounting standards. See, e.g., Grant
Thornton. LLP v. Office of Comptroller of the Currency, 379 U.S. App. D.C. 419, 514
F.3d 1328, 1340-41 (2008).
No. 68130-3-1/6
invest in funds managed by Madoff, FutureSelect became a limited partner in the Rye
Funds and invested approximately $195 million between 1998 and 2007. The Rye Funds
assets managed by Madoff were lost as a result of his Ponzi scheme.
A Tremont representative visited FutureSelect principal Ron Ward in Redmond in
1997 to solicit investment in the Rye Funds. Ward soon visited Tremont's New York
office and discussed the funds and Madoff. In both meetings, "Tremont told Ward that
the Rye Funds invested all of their assets with Madoff and Madoff was given complete
investment discretion over those assets, subject to Tremont's oversight and ongoing
due diligence."6 Tremont provided Ward written materials, including "the 1996 audited
financial statements of Broad Market and Broad Market Prime prepared by [accounting
firm Goldstein Golub Kessler LLP], which certified that the funds had tens of millions in
assets.7
Relying on "Tremont's representations that it had a comprehensive
understanding of Madoffs operations and conducted continuous monitoring and
oversight" and on Goldstein Golub Kessler's unqualified audit report, FutureSelect
invested in the Rye Funds.8 Ward and Tremont communicated monthly thereafter
about Madoff and the Rye Funds.
Ward regularly visited Tremont in New York. During the visits, Tremont
"represented to Ward that its ongoing oversight and testing of Madoff were satisfactory
6 Clerk's Papers at 9-10.
7 Clerk's Papers at 10.
8 Clerk's Papers at 10. FutureSelect and Tremont entered into numerous
agreements in conjunction with FutureSelect's investments. These include the limited
partnership agreements that FutureSelect entered in order to invest in each ofthe Rye
Funds. The limited partnership agreements included exculpatory provisions relating to
Tremont's role as general partner.
No. 68130-3-1/7
in every respect."9 Ward learned from Tremont in June 2000 that the United States
Securities and Exchange Commission reviewed Madoff and identified "no issues" of
concern.10 After Mass Mutual acquired Tremont in 2001, Tremont told Ward that "Mass
Mutual and its investment banker... had sent due diligence teams who evaluated
Madoffs operations and had been completely satisfied."11 In both 2005 and 2007, Ward
had "lengthy phone calls" with Tremont employee Bob Schulman "reviewing Tremont's
ongoing due diligence of Madoff."12
Both during and after the initial 1997 meeting, Tremont explained the specific
monitoring it purported to conduct on Rye Funds accounts managed by Madoff. The
steps Tremont claimed to take were detailed in a July 10, 2001 letter sent to Ward. The
letter claimed that each month,
[w]e record the purchases and sales by security and analyze whether the
purchase and sale orders on the individual securities were within the
published traded range that particular day. We also analyze the trading
volume by stock to calculate the percentage of the overall activity. Once
we have reviewed each account, we then compare the accounts to each
other to insure that all accounts are treated equally.[13]
Tremont also claimed to monitor Madoffs option activity and the timing of his
investments. FutureSelect received annual audited financial statements for the Rye
Funds prepared by accounting firms Goldstein Golub Kessler, KPMG LLP, and Ernst &
Young. Ernst &Young specifically audited the Broad Market and Prime funds from
2000 through 2003.
9 Clerk's Papers at 11.
10 Clerk's Papers at 11.
11 Clerk's Papers at 11.
12 Clerk's Papers at 12.
13 Clerk's Papers at 12.
No. 68130-3-1/8
Madoff later admitted that he never invested clients' funds in any securities but
instead deposited the funds into a bank account for personal use. He used his clients'
funds to pay other clients who requested redemptions.
FutureSelect filed its complaint in King County Superior Court, alleging that
(1) the respondents violated the WSSA, (2) Tremont committed the torts of negligence
and negligent misrepresentation, (3) Oppenheimer and Mass Mutual were liable for
Tremont's torts under theories of agency or apparent agency, and (4) Ernst &Young
was liable for the tort of negligent misrepresentation.
Respondents moved to dismiss on the basis that the complaint failed to state a
claim for which relief could be granted. Tremont, Oppenheimer and Ernst &Young
argued for dismissal on the grounds of forum non conveniens. Oppenheimer argued
that the court did not have personal jurisdiction. The trial court dismissed all of
FutureSelect's claims.14
FutureSelect appeals.
ANALYSIS
Choice of Law
Because the transactions at issue did not all occur in Washington, we must first
determine the law applicable to each claim.15 Where Washington law conflicts with the
14 The trial court orders dismissing claims against Ernst &Young and Mass
Mutual specified that dismissal was pursuant to CR 12(b)(6). The orders dismissing
claims against Tremont and Oppenheimer did not cite a specific rule. In its briefing to
this court, Tremont acknowledges that the trial court dismissed under CR 12(b)(6).
Oppenheimer argues that FutureSelect's claims were dismissed based on both
CR 12(b)(6) and CR 12(b)(2) (lack of personal jurisdiction).
15 Under the principle of depecage, different issues in a single case arising out of
a common nucleus of facts may be decided according to the substantive law of different
states. See Experience Hendrix. LLC v. HendrixLicensina.com. LTD, 766 F. Supp. 2d
No. 68130-3-1/9
law of another relevant state, this court determines which state has the most significant
relationship to the action.16 If more than one state has a significant relationship and the
contacts are "evenly balanced" between states, the court evaluates "the interests and
public policies of the concerned states, to determine which state has the greater interest
in determination ofthe particular issue."17
Washington courts have adopted section 145 of the Restatement (Second) of
Conflicts of Laws, which sets forth the general principles of the "most significant
relationship" test.18 It provides that the rights and liabilities ofthe parties with respect to
an issue "are determined by the local law of the state which, with respect to that issue,
has the most significant relationship to the occurrence and the parties under the
principles stated in § 6."19 This general rule is supplemented by related sections of the
Restatement applying the most significant relationship standard to particular categories
1122, 1136 (W.D. Wash. 2011) (citing Brewer v. Dodson Aviation. 447 F. Supp. 2d
1166, 1175 (W.D. Wash. 2006) (recognizing that Washington courts might "apply the
law of one forum to one issue while applying the law of a different forum to another
issue in the same case" (quoting Kelly Kunsch, 1 Washington Practice § 2.21 (4th
ed. 1997 & Supp. 2008)))); see also Singh v. Edwards Lifesciences Corp.. 151 Wn.
App. 137, 143, 210 P.3d 337 (2009) (indicating that, having abandoned the lex loci
delicti rule, Washington courts now "decide which law applies by determining which
jurisdiction has the most significant relationship to a given issue" (emphasis added)).
16 Johnson v. Spider Staging Corp.. 87 Wn.2d 577, 580, 555 P.2d 997 (1976);
Martin v. Goodyear Tire & Rubber Co.. 114 Wn. App. 823, 828, 61 P.3d 1196 (2003).
17 Zenaida-Garcia v. Recovery Svs. Tech.. Inc.. 128 Wn. App. 256, 260-61, 115
P.3d 1017(2005).
18 Restatement (Second) of Conflict of Laws § 145 (1971).
19 Restatement § 145(1). The Restatement provides the following broad choice-
of-law policy considerations: "(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum, (c) the relevant policies of other interested
states . . ., (d) the protection of justified expectations, (e) the basic policies underlying
the particular field of law, (f) certainty, predictability, and uniformity of result, and
(g) ease in the determination and application of the law to be applied." Restatement
§ 6(2).
No. 68130-3-1/10
of claims because it is possible "to state rules of greater precision" as to those
categories.20 The mostsignificant relationship test includes more precise standards for
claims of misrepresentation and fraud as set forth in section 148.21
Respondents argue that section 148 does not apply to FutureSelect's claims but
present no compelling rationale for restricting our analysis to the more general criteria of
section 145, where the more precise section 148 criteria fit the alleged claims. No
controlling cases limit the most significant relationship test to the section 145 criteria.
Ernst & Young contends our Supreme Court "declined" to adopt section 148 in
tort cases, citing Southwell v. Widing Transportation. Inc.22 However, the Southwell
court did not reject section 148. Rather, it found that the parties failed to present "a
record that is sufficiently developed to enable us to undertake the factual analysis
necessary for proper resolution of the conflicts issues involved."23 The court noted that
"the general principles" enunciated in section 6 and section 145 apply to choice-of-law
issues for claims sounding in tort24 butdid not reject consideration ofany ofthe more
precise standards cross-referenced in the comments to section 145, including the
standards of section 148. Southwell also makes clear that evaluation of a state's
contacts is not limited to a mechanical application of the section 145 factors:
These contacts are to be evaluated according to their relative importance
with respect to the particular issue. The approach is not merely to count
20 Restatement § 145 cmt. a.
21 Restatement § 148.
22 101 Wn.2d 200, 676 P.2d 477 (1984).
23 ]d at 205.
24 Id. at 204.
10
No. 68130-3-1/11
contacts, but rather to consider which contacts are most significant and to
determine where these contacts are found.[25]
Tremont contends that Haberman v. Washington Public Power Supply System
requires application of only the section 145 factors in a most significant relationship
test.26 This is not a precise reading of Haberman. In that case, "[n]o party contended]
that another state's securities act applie[d]"27 and the court rejected the argument that
"WSSA should not be applied extraterritorially to out-of-state defendants or
transactions."28 The Haberman court cited Southwell in discussing the most significant
relationship standard but did not directly refer to the Restatement.29
Even though no Washington court has formally adopted section 148, we may still
refer to that provision for guidance.30 We conclude that section 148 is instructive in this
case. Section 148 is best viewed as a refinement of the section 145 criteria,
25 Id,
26 109 Wn.2d 107, 744 P.2d 1032, 750 P.2d 254 (1987).
27 ]d at 135.
28 Id at 134.
29 Id,
30 See, e.g.. Bank of America. NA v. Prestance Corp.. 160 Wn.2d 560, 576 n.11,
160 P.3d 17 (2007) (recognizing cases where courts have considered the Restatement
approach as persuasive "but declined to clearly articulate a rule adopting the
Restatement approach" regarding Restatement (Third) of Property: Mortgages § 7.6
M997H: Niemann v. Vaughn Cmtv. Church. 154 Wn.2d 365, 381-82, 113P.3d463
(2005) (Supreme Court looked to Restatement (Third) of Trusts § 66 (2003) for
guidance but did not expressly adopt it); Nivens v. 7-11 Hoaov's Corner. 133 Wn.2d
192, 202-03, 943 P.2d 286 (1997) (applying Restatement (Second) of Torts § 314A
(1965), a section that was not formally adopted by a Washington court, as well as
§§ 315 and 344, which were previously adopted); Bennett v. Hardy. 113 Wn.2d 912,
920, 784 P.2d 1258 (1990) (citing but not formally adopting Restatement (Second) of
Torts § 874A (1979) as persuasive authority in adopting an analogous rule).
11
No. 68130-3-1/12
emphasizing more precise factors relevant to claims of misrepresentation or fraud.31
This is the express intent of the drafters of the Restatement and is consistent with
decisions applying Washington law.32 Section 148(2) sets forth six factors to assess
which state has the most significant relationship to the dispute and to the parties:33
(a) the place, or places, where the [injured party] acted in reliance
upon the defendants'] representations,
(b) the place where the [injured party] received the representations,
(c) the place where the defendants] made the representations,
(d) the domicil, . . . place of incorporation and place of business of the
parties,
(e) the place where a tangible thing which is the subject of the
transaction between the parties was situated at the time, and
31 See In re Countrywide Fin. Corp. Mortgage-Backed Sees. Litig.. 860 F. Supp.
2d 1062, 1074 (CD. Cal. 2012) ("Because the factors listed in § 148 are specific to the
fraud context and are a more detailed expression of the factors in § 145, the Court will
focus its discussion on § 148."); Value House, Inc. v. MCI Telecomms. Corp., 917 F.
Supp. 5, 6 (D.D.C. 1996) ("Section 145 contains the general principles with respect to
tort cases, while Section 148 contains the factors specifically applicable in fraud and
misrepresentation cases, such as . . . negligent misrepresentation.").
32 This approach is also consistent with the analyses undertaken by the United
States District Court for the Western District of Washington in Carideo v. Dell. Inc.. 706
F. Supp. 2d 1122, 1128-29 (W.D. Wash. 2010) (in Washington's statutory Consumer
Protection Act claims, § 148 "provides guidance" where reliance upon false or
fraudulent representations is a substantial factor in inducing a plaintiff to purchase a
defendant's goods or services) and Kellev v. Microsoft Corp.. 251 F.R.D. 544, 552
(W.D. Wash. 2008) (applying § 148 to claims raising a conflict between Washington
Consumer Protection Act and Illinois Consumer Fraud Act). The Carideo court relied in
part on the Court of Appeals' analysis under § 148 in Schnall v. AT&T Wireless Servs..
Inc. .139 Wn. App. 280, 293-94, 161 P.3d 395 (2007), reversed in part on other grounds
by Schnall v. AT & T Wireless Servs.. Inc.. 171 Wn.2d 260, 259 P.3d 129 (2011).
33 Section 148(2) applies because "the plaintiffs action in reliance took place in
whole or in part in a state [i.e., Washington] other than that where the false
representations were made [i.e., New York]." Restatement § 148(2). Section 148(1)
does not apply here because it is limited to situations where a "plaintiffs action in
reliance took place in the state where the false representations were made and
received." Restatement § 148(1).
12
No. 68130-3-1/13
(f) the place where the [injured party] is to render performance under a
contract which [it] has been induced to enter by the false
representations ofthe defendants].1341
Although no mechanical standard governs the selection of the applicable law,
one guideline is that when any two of those contacts are located wholly in a single state,
this will usually be the state of the applicable law with respect to most issues.35 In
addition, ifthe plaintiff is a corporation, the plaintiffs principal place of business (here,
Washington) is a contact "of substantial significance when the loss is pecuniary," as it is
in this case.36 Furthermore, the place of reliance (here, Washington) is a more
important contact than both the place of reception (Washington) and the place where
the defendant made the representations (New York).37
A. FutureSelect's WSSA Claims
We first apply the most significant relationship choice-of-law factors to
FutureSelect's WSSAclaims.38 Those claims focus upon allegations of
misrepresentations or fraud.
34 Restatement § 148(2).
35 Restatement § 148 cmt. j.
36 Restatement § 148 cmt. i.
37 See Restatement § 148 cmt. g; see also Insituform Techs.. Inc. v. Per Aarsleff
A/S. 534 F. Supp. 2d 808, 815 (W.D. Tenn. 2008).
38 There is an actual conflict between WSSA and New York's securities law, the
Martin Act, N.Y. Gen. Bus. Law art. 23-A. Specifically, the WSSA affords FutureSelect
a private cause of action; the Martin Act does not. See CPC Int'l Inc. v. McKesson
Corp.. 70 N.Y.2d 268, 275, 514 N.E.2d 116, 519 N.Y.S.2d 804 (1987). The Martin Act,
nevertheless, does not preclude a private right of action for common law claims for
fraud or otherwise, provided the claim is not entirely dependent on the Martin Act
violation for its viability. Assured Guar. (U.K.) Ltd. v. J.P. Morgan Inv. Mgmt. Inc.. 18
N.Y.3d 341, 353, 962 N.E.2d 765, 939 N.Y.S.2d 274 (2011).
13
No. 68130-3-1/14
FutureSelect asserts Tremont "made untrue statements of material fact,"
"misrepresented," and made "misstatements."39 It asserts Oppenheimer controlled
Tremont and "knew or should have known" that Tremont "omitted material facts and
[made] untrue statements of material fact."40 It alleges Mass Mutual controlled Tremont
and "knew or should have known that Tremont's representations . .. omitted material
facts and [made] untrue statements of material fact."41 It also alleges Ernst &Young
"made untrue statements of material facts and engaged in acts offraud and deceit."42
We conclude that Washington has the most significant relationship to these
claims. FutureSelect asserts that the documents and communications underlying its
claims were provided or made available to it in its offices in Washington, including the
partnership offering materials, subscription agreements, and Rye Funds audit reports.
The complaint specifically states that "Tremont's relationship with FutureSelect began
when a Tremont representative visited [FutureSelect principal] Ward in Redmond in
1997 to solicit FutureSelect's investment in the Rye Funds."43 More generally,
FutureSelect alleges that Tremont "disseminat[ed] offering materials, financial
disclosures, audit reports and/or other written materials . .. through communications
with representatives of FutureSelect"44 and "made numerous misrepresentations and
omissions to FutureSelect in the [s]tate of Washington and thereby injured FutureSelect
39 Clerk's Papers at 31-32.
40 Clerk's Papers at 33.
41 Clerk's Papers at 34-35.
42 Clerk's Papers at 36.
43 Clerk's Papers at 9.
44 Clerk's Papers at 8.
14
No. 68130-3-1/15
in this [s]tate."45 The complaint specifically refers to a July 10, 2001 letter from Tremont
to Ward in which "Tremont claimed to perform numerous procedures to confirm that the
information Madoff was presenting to Tremont [about Rye Funds' investments] was
accurate."46
FutureSelect contends Ernst &Young "disseminated unqualified audit opinions"
and other materials to Tremont for delivery to FutureSelect in Washington, and "knew
[FutureSelect was] receiving and relying on its audits of the funds."47
FutureSelect asserts that it acted in reliance upon the misrepresentations in
Washington, where it is domiciled and has its principal place of business. As a result of
these communications, FutureSelect alleges it entered into the Rye Fund partnerships,
made ongoing decisions to maintain or increase its investments in those funds, and
rendered performance under those partnership agreements from its place of business in
Washington. Under the section 148 criteria, Washington has substantially more
significant contacts than any other state.
B. Negligent Misrepresentation/Agency Claims
The negligent misrepresentation claim against Tremont and the related agency
claims against Oppenheimer and Mass Mutual are premised on misrepresentation or
fraud. FutureSelect alleges Tremont supplied and disseminated "false information."48 It
alleges that Oppenheimer "had the right to control Tremont[,] including how Tremont
45 Clerk's Papers at 6.
46 Clerk's Papers at 12.
47 Clerk's Papers at 23.
48 Clerk's Papers at 43.
15
No. 68130-3-1/16
offered investment products and advice, including the Rye Funds."49 And it alleges
Mass Mutual had the "right to control. . . how Tremont offered investment products and
advice, including the Rye Funds."50 The complaint recites that most ofthe
misrepresentations were directed to FutureSelect in Washington, that FutureSelect
acted in reliance upon the misrepresentations in Washington, and that FutureSelect was
damaged in Washington. Accordingly, Washington has the most significant contacts
with the subject matter of these claims.
FutureSelect's negligent misrepresentation claim against Ernst &Young alleges
that Ernst & Young "supplied information . .. that was false," "omitted material facts,"
"communicat[ed] such false information," and "disseminat[ed] false information" that
FutureSelect received in Washington.51 Under the section 148 criteria, Washington and
New York both have significant contacts, but Washington's are more significant.52
49
Clerk's Papers at 39.
50 Clerk's Papers at 41.
51 Clerk's Papers at 45-46. FutureSelect alleges in its tort claim that Ernst &
Young "owed FutureSelect the duty to use reasonable care, or the competence or skill
of a professional independent auditor, in conducting audits . . . and rendering audit
opinions ... in accordance with [generally accepted auditing standards]," and "failed to
exercise reasonable care by negligently failing to conduct audits of the Rye Funds in
accordance with [generally accepted auditing standards] and by failing to inquire into
many crucial facts." Clerk's Papers at 45-46.
52 There is an actual conflict of laws applicable to FutureSelect's negligent
misrepresentation claim against Ernst & Young. New York law, unlike Washington law,
requires near privity between an auditor and a plaintiff as a condition precedent to a
negligent misrepresentation claim. Credit Alliance Corp. v. Arthur Andersen & Co.. 65
N.Y.2d 536, 551, 483 N.E.2d 110, 493 N.Y.S.2d 435 (1985). To demonstrate near
privity, a plaintiff must show (1) the auditor was aware when preparing its audit opinions
that the opinions would be used for the plaintiff's particular purposes; (2) the auditor
knew the plaintiff intended to rely on its audit opinions; and (3) the auditor engaged in
direct conduct linking them to the plaintiff, evidencing the auditor's understanding that
the plaintiff would rely on its opinion. ]d.
16
No. 68130-3-1/17
FutureSelect's complaint expressly alleges Ernst &Young was aware that FutureSelect
was in Washington, knew that its reports would be sent to Washington, and intended for
FutureSelect to act in reliance upon the reports in Washington. Specifically, the
complaint alleges that (1) with Ernst &Young's "consent and knowledge, Tremont used
the audited financials prepared by the [auditors to solicit investors to the Rye Funds";53
(2) Ernst &Young "knew and intended that FutureSelect would rely on their
misrepresentations when it invested in the Rye Funds";54 and (3) Ernst &Young knew
and intended to supply such information for the benefit and guidance of FutureSelect" in
its Rye Funds investment decisions. FutureSelect alleges that its injury occurred in
Washington.55 We conclude that Washington law applies to FutureSelect's tort claim
against Ernst & Young.
C. Negligence Claim
Delaware law applies to FutureSelect's negligence claim against Tremont. The
Rye Funds are Delaware partnerships. The Rye Funds' internal affairs, such as the
managing partner's duty to exercise reasonable care in managing the funds, are
governed by the laws of that state.56
53 Clerk's Papers at 20.
54 Clerk's Papers at 37.
55 Ernst &Young argues that when a misrepresentation is nationwide in scope,
the location of the plaintiff and thus the location of the injury is fortuitous. See Kellev.
251 F.R.D. at 552; Bryant v. Wveth. 879 F. Supp. 2d 1214, 1222-23 (W.D. Wash. 2012).
But here, where the loss is pecuniary, the place of business of FutureSelect (also the
location of the injury) is of substantial significance. Restatement § 148 cmt. i.
56 See Rodriguez v. Loudeve Corp.. 144 Wn. App. 709, 718, 189P.3d 168(2008)
("Shareholder claims involving a corporation's internal affairs are governed by the law of
the state in which the corporation was incorporated.").
17
No. 68130-3-1/18
We conclude that Washington law applies to FutureSelect's WSSA claims
against all respondents, its negligent misrepresentation claims against Tremont and
Ernst &Young, and its agency claims against Mass Mutual and Oppenheimer.
Delaware law applies to the negligence claim against Tremont.
CR 12(b)(6)
This court applies the de novo standard of review to a trial court's decision to
dismiss pursuant to CR 12(b)(6).57 Dismissal under CR 12(b)(6) is proper where "'it
appears beyond doubt that the plaintiff can prove no set of facts, consistent with the
complaint, which would entitle the plaintiff to relief.'"58 We regard the plaintiffs
allegations in the complaint as true, and consider hypothetical facts outside the record.59
Under notice pleading standards, a complaint need contain only "(1) a short and plain
statement of the claim showing that the pleader is entitled to relief and (2) a demand for
judgment for the relief to which he deems himself entitled."60 "'A pleading is insufficient
57 Gasoar v. Peshastin Hi-Up Growers. 131 Wn. App. 630, 634, 128 P.3d 627(2006).
58 Lawson v. State. 107 Wn.2d 444, 448, 730 P.2d 1308 (1986) (internal
quotation marks omitted) (quoting Bowman v. John Doe Two. 104 Wn.2d 181, 183, 704
P.2d 140 (1985)). A court may consider hypothetical facts not part of the formal record.
Halvorson v. Dahl. 89 Wn.2d 673, 675, 574 P.2d 1190 (1978).
59 Burton v. Lehman. 153 Wn.2d 416, 422, 103 P.3d 1230 (2005) (quoting
Tenore v. AT&T Wireless Servs.. 136 Wn.2d 322, 330, 962 P.2d 104 (1998)).
60 CR 8(a). "Under notice pleading, plaintiffs use the discovery process to
uncover the evidence necessary to pursue their claims." Putman v. Wenatchee Valley
Med. Ctr. PS. 166 Wn.2d 974, 983, 216 P.3d 374 (2009). "All pleadings shall be so
construed as to do substantial justice." CR 8(f).
18
No. 68130-3-1/19
when it does not give the opposing party fair notice of what the claim is and the ground
upon which it rests.'"61
A. Additional Documents Provided by Tremont
As a threshold issue, we must decide which documents are pertinent to our
determination of whether FutureSelect adequately states its claims under the
CR 12(b)(6) and notice pleading standards. Most importantly in this case, Tremont
relies heavily on examples of the partnership memoranda, limited partnership
agreements, and subscription agreements to argue that FutureSelect fails to state a
claim. The trial court expressly relied on these documents in dismissing FutureSelect's
claims.62
"Documents whose contents are alleged in a complaint but which are not
physically attached to the pleading may also be considered in ruling on a CR 12(b)(6)
motion to dismiss," especially if"the parties do not dispute the authenticity of the
documents the court considered and they do not constitute testimony."63
61 Kirbvv. City of Tacoma. 124 Wn. App. 454, 470, 98 P.3d 827 (2004) (internal
quotation marks omitted) (quoting Dewey v. Tacoma Sch. Dist. No. 10. 95 Wn. App. 18,
23, 974 P.2d 847 (1999)).
62 See Clerk's Papers at 3344 (order dismissing claims against Tremont) and
Clerk's Papers at 3352-53 (dismissing claims against Mass Mutual) in which the trial
court states it relied upon the declaration of Jason C. Vigna. That declaration,
submitted in support of Tremont's motion to dismiss, includes as appendices sample
copies of some limited partnership agreements, partnership memoranda, and
subscription agreements for the Prime fund, the XL fund, and the Broad Market fund.
63 Rodriguez. 144 Wn. App. at 726 & n.45. The court also explained that the trial
court properly considered Loudeye's certificate of incorporation because it was a proper
"subject ofjudicial notice" as a matter of public record and its validity was capable of
"'accurate and ready determination.'" Id at 726 (quoting ER 201(b)); see also P^E
Systems. LLC v. CPI Corp.. 176 Wn.2d 198, 204-05, 289 P.3d 638 (2012).
19
No. 68130-3-1/20
But here, Tremont submitted only a small sampling of materials in conjunction
with its motion to dismiss—one example of a partnership agreement, a subscription
agreement, and a partnership memorandum for each Rye Fund. And the samples
Tremont provided were from a period late in the parties' 10-year relationship. Further,
at oral argument here, FutureSelect disputed the sample agreements' authenticity.
We decline to assume that the partnership memoranda, partnership agreements,
and subscription agreements Tremont submitted are representative of the relevant
documents throughout the parties' 10-year relationship. While documents of this type
may become relevant to determine the merits of portions of FutureSelect's claims, or in
narrowing or disposing of the claims in a summary judgment proceeding, the limited
sampling of the documents submitted by Tremont should not be the basis for
CR 12(b)(6) dismissal of the entirety of FutureSelect's claims against Tremont.
In evaluating FutureSelect's claims under CR 12(b)(6), we do not consider the
sample documents offered by Tremont.
B. WSSA
The WSSA provides, in part:
It is unlawful for any person, in connection with the offer, sale[64] or
purchase of any security, directly or indirectly:
(1) To employ any device, scheme, or artifice to defraud;
(2) To make any untrue statement of a material fact[65] or to omit to
state a material fact necessary in order to make the statements made, in
64 The terms "sale" and "sell" include "every contract of sale of, contract to sell, or
disposition of, a security or interest in a security for value." RCW 21.20.005(14).
65 Under the WSSA a "material fact" is a fact that may affect the desire of
investors to buy, sell, or hold the company's securities. Guarino v. Interactive Obiects.
Inc.. 122 Wn. App. 95, 114, 86 P.3d 1175(2004).
20
No. 68130-3-1/21
the light of the circumstances under which they are made, not misleading;
or
(3) To engage in any act, practice, or course of business which
operates orwould operate as a fraud ordeceit upon any person.[66]
To establish a claim under the WSSA, an investor must prove that (1) the seller
made material misrepresentations or omissions about the security and (2) the investor
relied on those misrepresentations or omissions.67 Such reliance must be reasonable
under the surrounding circumstances.68
Our Supreme Court expanded seller liability beyond the "strict privity" standard to
include persons who "substantially contribute" to a sale of securities.69 Because the
primary purpose of the WSSA is to protect investors, courts construe the statute
liberally.70
C. Tremont
FutureSelect alleges Tremont claimed to have conducted due diligence into
Madoffs operations and to have continually conducted regular oversight and review
measures over the Rye Funds' Madoff investments:
66 RCW 21.20.010.
67 Hines v. Data Line Systems. Inc., 114 Wn.2d 127, 134-35, 787 P.2d 8 (1990);
Stewart v. Estate of Steiner. 122 Wn. App. 258, 264, 93 P.3d 919 (2004); Graham-
Bingham Irrevocable Trust v. John Hancock Life Ins. Co. USA, 827 F. Supp. 2d 1275,
1284 (W.D. Wash. 2011).
68 Stewart. 122 Wn. App. at 265 n.9 (citing Clausing v. DeHart. 83 Wn.2d 70, 73,
515 P.2d 982 (1973) (adopting objective view of a "material fact" as "'a fact to which a
reasonable [person] would attach importance in determining [his/her] choice of action in
the transaction in question'" (emphasis omitted) (alterations in original))).
69 Haberman. 109 Wn.2d at 131 (a "seller" under RCW 21.20.430(1) includes
those whose participation was a substantial factor in the sales transaction).
70 Kinnev v. Cook. 159 Wn.2d 837, 844, 154 P.3d 206 (2007); Stewart. 122 Wn.
App. at 264.
21
No. 68130-3-1/22
Tremont emphasized in its offering materials, financial disclosures and
direct correspondence and conversations with FutureSelect that it had
conducted thorough due diligence of Madoff to verify, among other things,
the existence of the assets Madoff claimed to hold and manage for
Tremont's investors, and the occurrence of trades that Madoff claimed to
execute on the investors' behalf.^11
FutureSelect asserts that Tremont either failed to perform the monitoring it claimed or
"uncovered evidence of Madoffs Ponzi scheme, and knowingly or recklessly
misrepresented" the Rye Funds' assets.72
On these allegations, FutureSelect asserts Tremont violated the WSSA by
making untrue statements of material fact in connection with the sale of a security:
Specifically, in connection with offering the Rye Funds as an investment,
Tremont misrepresented that Tremont had conducted due diligence on
Madoff, was familiar with Madoffs operations, and was monitoring
Madoffs transactions, internal controls, and operational risk; that the
assets purportedly managed by Madoff on behalf of the Rye Funds
existed and were appreciating; and that the trades Madoff purported to be
making on behalf of Rye Funds occurred.[73]
Tremont argues that FutureSelect's WSSA claim is subject to CR 12(b)(6)
dismissal because it fails to "adequately allege reasonable reliance."74 But Tremont
primarily relies upon "exculpatory" language in its sample Rye Funds partnership
memoranda, limited partnership agreements, and subscription agreements, and we
have determined that those sample documents are not properly considered for
purposes of CR 12(b)(6).
71 Clerk's Papers at 9.
72 Clerk's Papers at 15.
73 Clerk's Papers at 31.
74
Br. of Resp't Tremont at 16.
22
No. 68130-3-1/23
Tremont also relies on federal CR 12(b)(6) case law to support its argument that
FutureSelect's complaint did not contain an adequate factual basis to establish
reasonable reliance.75 But Washington State CR 12(b)(6) case law is not so strict.76
Under Washington's liberal notice-pleading standard,77 FutureSelect's complaint
adequately states a WSSA seller claim against Tremont. RCW 21.20.010(2) prohibits
making "any untrue statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in the light of the circumstances
under which they are made, not misleading." The complaint also adequately alleges
justifiable reliance:
FutureSelect reasonably and justifiably relied on Tremont's
misstatements when it purchased securities in Tremont by investing in the
Rye Funds. FutureSelect would not have purchased the Rye Funds
securities if it had been aware that Tremont had not conducted due
diligence of Madoff and was not monitoring Madoffs transactions, internal
controls and operational risk, or that the assets purportedly managed by
Madoff on behalf of the Rye Funds did not exist, or that the trades Madoff
purported to be making on behalf of the Rye Funds had not occurred.1781
Because we determine that FutureSelect's WSSA claim against Tremont is
sufficient to survive a CR 12(b)(6) motion to dismiss, we reverse the dismissal of that
claim.
75 Fed. R. Civ. P. 12(b)(6) permits dismissal "unless the claim is plausibly based
upon the factual allegations in the complaint—a more difficult standard to satisfy."
McCurrv v. Chew Chase Bank. FSB. 169 Wn.2d 96, 101, 233 P.3d 861 (2010).
76 In McCurrv. our Supreme Court declined to adopt the federal standard for
dismissal. Id.77 Putman. 166 Wn.2d at 983.
78 Clerk's Papers at 32.
23
No. 68130-3-1/24
D. Ernst & Young
FutureSelect alleges Ernst & Young violated the WSSA as a "seller of a security"
in violation of RCW 21.20.010. A "seller" is any person who is a "substantial
contributive factor in the sales transaction."79 In order to be liable, the defendant must
exhibit attributes ofa seller, or be a catalyst to the sale.80
Ernst &Young contends FutureSelect fails to show it was a substantial
contributive factor to FutureSelect's investments, and thus is not liable as a "seller" of
securities under the WSSA. Quoting Hines. Ernst & Young asserts that professionals
"'whose role is confined to rendering routine professional services in connection with an
offer' cannot" incur seller liability under the WSSA.81 But Hines was decided on
summary judgment based on specific facts. Here, by contrast, we are reviewing
FutureSelect's allegations only in the context of the more forgiving CR 12(b)(6)
standards..
Due to the factual nature of the "substantial factor" test, its determination is
typically inappropriate for resolution on a motion to dismiss.82 Washington courts have
typically denied motions to dismiss that challenge "seller" status when the defendant is
an auditor who prepared statements that were provided to investors.83 This is because
"[t]he natural roles of. . . auditors .. .go beyond 'routine services' rendered to a client.
79 Haberman. 109 Wn.2d at 131.
80 Id.: Hines. 114 Wn.2d at 150.
81 Br. of Resp't Ernst &Young at 21 (quoting Hines. 114 Wn.2d at 149).
82 See Haberman. 109 Wn.2d at 132: Hoffer v. State. 110 Wn.2d 415, 430, 755
P.2d781 (1988).
83 See In re Metro. Sec. Litig.. 532 F. Supp. 2d 1260, 1300-01 (E.D. Wash. 2007)
(citing Haberman, 109 Wn.2d at 119; Hoffer. 110 Wn.2d at 417-18).
24
No. 68130-3-1/25
They serve the additional role of communicating to investors about corporations and
their securities."84
Given Washington's notice pleading standard, FutureSelect adequately alleges
that Ernst &Young's actions were a substantial factor in the securities sales occurring
after FutureSelect received Ernst & Young's first audit. FutureSelect's complaint
alleges that Ernst &Young "made untrue statements of material facts and engaged in
acts of fraud and deceit upon FutureSelect. .. that were a substantial factor
contributing to FutureSelect's investment in the Rye Funds."85 FutureSelect alleges that
Ernst &Young "misrepresented that they had conducted audits in conformity with"
generally accepted auditing standards and "omitted material facts," including that it had
not audited "Madoffs own books and records to verify the Rye Funds' assets."86
FutureSelect adequately alleges that it "reasonably and justifiably relied on [Ernst
& Young's] misrepresentations" and "would not have invested in the Rye Funds if the
funds were not audited by [Ernst &Young]."87 FutureSelect claimed Ernst &Young
"knew that its audits would be used by Tremont to solicit investors [and] also knew and
intended that current investors would rely on the audits when deciding to maintain and
increase their investments in the Rye Funds."88 Ernst &Young also "knew
84 Id at 1301 (citations omitted) (citing Haberman. 109 Wn.2d at 125-26).
85 Clerk's Papers at 36.
86 Clerk's Papers at 21, 37. Ernst &Young certified that the Broad Market fund
ended 2000 with $288 million in assets, 2001 with $364 million, 2002 with over $400
million, and 2003 with nearly $450 million. Ernst & Young certified that the Prime fund
ended 2000 with $497 million in assets, 2001 with $667 million, 2002 with $750 million,
and 2003 with $831 million.
87 Clerk's Papers at 37.
88 Clerk's Papers at 37.
25
No. 68130-3-1/26
[FutureSelect was] receiving and relying on its audits of the [Rye Funds]" because
"[e]ach audit was addressed to the 'Partners' of the fund[s], which [Ernst &Young] knew
included [FutureSelect]."89 FutureSelect's investment "in reliance on Ernst &Young's
audits totaled approximately $50 million."90
We reverse the dismissal of the WSSA claim against Ernst &Young. The
determination of whether Ernst & Young was a substantial contributive factor to the sale
requires an inquiry best conducted on specific facts.
E. Mass Mutual and Oppenheimer
FutureSelect alleges Oppenheimer and Mass Mutual were "control persons"
within the meaning of RCW 21.20.430(3), had control over Tremont, and knew Tremont
made false statements to FutureSelect. FutureSelect contends Mass Mutual and
Oppenheimer are liable to it for Tremont's false statements.
Under RCW 21.20.430(3),
[e]very person who directly or indirectly controls a seller.. . liable under
subsection (1) or (2) above . . . who materially aids in the transaction is
also liable jointly and severally with and to the same extent as the
seller. . . unless such person sustains the burden of proof that he or she
did not know, and in the exercise of reasonable care could not have
known, of the existence of the facts by reason of which the liability is
alleged to exist.
Our Supreme Court approved a two-step test to determine whether the required control
exists:
[Plaintiffs must] "establish, first, that the defendant. . . actually participated
in (i.e., exercised control over) the operations of the corporation in
general; then he must prove that the defendant possessed the power to
control the specific transaction or activity upon which the primary violation
89
Clerk's Papers at 23.
90 Clerk's Papers at 22-23.
26
No. 68130-3-1/27
is predicated, but he need not prove that this later power was
exercised."1911
FutureSelect's complaint alleges Mass Mutual and Oppenheimer controlled
Tremont, including "the manner by which Tremont offered investments, including the
Rye Funds."92 Specifically, FutureSelect alleges Oppenheimer was 100 percent owned
by Mass Mutual and Tremont was 100 percent owned by Oppenheimer. The complaint
alleges Oppenheimer and Mass Mutual actively managed marketing and solicitation of
investment activity, including the Rye Funds. FutureSelect alleges that, although the
Tremont board of directors changed over time, "the board always was made up of high
level employees of MassMutual and Oppenheimer entities."93 FutureSelect contends
Tremont's two coprincipals also were Oppenheimer employees. Moreover, the
complaint alleges Mass Mutual "was the principal of Oppenheimer and Tremont, who
were MassMutual's agents, and had the power to exercise complete control over those
entities, including control over their policies and procedures and the Rye Funds' manner
by which those funds invested their assets, including with Madoff."94
FutureSelect also alleges Oppenheimer "actively managed" marketing and
solicitation of investment activity at Tremont through selection of investment vehicles
and due diligence programs.95
91 Hines, 114 Wn.2d at 136 (emphasis omitted) (internal quotation marks omitted)
(quoting Metoe v. Baehler. 762 F.2d 621, 631 (8th Cir.1985)): see also Herrington v.
David P. Hawthorne. CPA. PS. 111 Wn. App. 824, 835-36, 47 P.3d 567 (2002) (Hines
adopted the two-step test and rejected the Ninth Circuit "culpable participation" test
requiring a finding that the control person culpably participated in the transaction.)
92 Clerk's Papers at 15.
93 Clerk's Papers at 18-19.
94 Clerk's Papers at 20 (emphasis added).
95 Clerk's Papers at 33.
27
No. 68130-3-1/28
Mass Mutual and Oppenheimer contend FutureSelect does not adequately allege
that they "actually participated" in Tremont's operation or possessed the power to
control Tremont's solicitation and sale of Rye Fund securities to FutureSelect by failing
to state "'the specific transaction or activity upon which the primary [WSSA] violation is
predicated.'"96
But Mass Mutual and Oppenheimer overstate the degree of specificity required.
Under CR 12(b)(6) pleading standards, FutureSelect's complaint adequately alleges
"control person" claims that Mass Mutual and Oppenheimer "actually participated" in
Tremont's operations in general and possessed the power to control the specific
transaction or activity upon which the primary violation is predicated.
We reverse the dismissal of FutureSelect's WSSA claims against Mass Mutual
and Oppenheimer.
Tort Claims
A. Negligent Misrepresentation—Tremont
A plaintiff claiming negligence must prove by clear, cogent, and convincing
evidence that the defendant, in the course of its "'business, profession, or employment,
or in any other transaction in which he has a pecuniary interest, supplie[d] false
information for the guidance of others in their business transactions'"; the defendant
'"fail[ed] to exercise reasonable care or competence in obtaining or communicating the
information'"; and the loss to the plaintiff was caused "'by their justifiable reliance upon
the information'" communicated by the defendant.97
96 Br. of Resp't Mass Mutual at 31 (quoting Hines. 114 Wn.2d at 136).
97 Haberman. 109 Wn.2d at 161-62 (quoting Restatement (Second) of Torts
§552(1) (1977)).
28
No. 68130-3-1/29
Liability for negligent misrepresentation is limited to cases where
(1) the defendant has knowledge of the specific injured party's reliance; or
(2) the plaintiff is a member of a group that the defendant seeks to
influence; or (3) the defendant has special reason to know that some
member of a limited group will rely on the information.1981
FutureSelect alleges Tremont supplied it with false information, including
statements that "Tremont had conducted due diligence on Madoff, was familiar with
Madoffs operations, and was monitoring Madoffs transactions, internal controls, and
operational risk; that the assets purportedly managed by Madoff on behalf of the Rye
Funds existed and were appreciating; and that the trades Madoff purported to be
making on behalf of Rye Funds occurred."99
In addition to claiming "Tremont had explained how it exercised oversight over
Madoff'100 repeatedly from the initial 1997 communication, the complaint quotes from
Tremont's July 10, 2001 letter to FutureSelect specifying procedures for monitoring
Madoff:
"Each month Tremont analyzes every account [held with Madoff]. We
record the purchases and sales by security and analyze whether the
purchase and sale orders on the individual securities were within the
published trading range that particular day. We also analyze the trading
volume by stock to calculate the percentage of the overall activity. Once
we have reviewed each account, we then compare the accounts to each
other to insure that all accounts are treated equally."11011
The complaint further states,
Tremont also stated that it had hired a company called Adviserware to do
all the accounting [of Madoff accounts] independent of Tremont's review.
They prepare the balance sheet, partnership reconciliation and statement.
98 Id, at 162-63.
99 Clerk's Papers at 42-43.
100 Clerk's Papers at 12.
101 Clerk's Papers at 12.
29
No. 68130-3-1/30
They also price the portfolio using a third party pricing system to verify the
value of the total portfolio.11021
The complaint also alleges that Tremont "knew and intended to supply such information
for the benefit and guidance of FutureSelect in making its investment decisions
regarding the Rye Funds," that FutureSelect "justifiably relied on Tremont's false
information," and that FutureSelect was damaged as a result.103 According to the
complaint,
[i]f Tremont had actually conducted the due diligence and monitoring of
Madoff that it claimed, it would have discovered the fraud. Tremont
should have known that the only evidence of the assets Madoff
purportedly held and the trades Madoff purportedly executed for the
benefit of the Rye Funds was from Madoff himself and that those assets
and trades could not be confirmed by independent third parties.'1041
Tremont contends the claim is barred by the exculpatory clauses in the sample
documents it submitted (the limited partnership agreements, the partnership
memoranda, and the subscription agreements). But those limited documents are not
pertinent to our CR 12(b)(6) review, for the reasons stated above.
FutureSelect's complaint adequately alleges Tremont's negligent
misrepresentation. We reverse the dismissal of FutureSelect's claim for negligent
misrepresentation as against Tremont.
B. Negligence—Tremont
FutureSelect's claim for negligence alleges Tremont owed it a fiduciary duty of
care as managing partner of the Rye Funds and failed to exercise reasonable care by
not overseeing Madoffs management of FutureSelect's investments in the Rye Funds.
102 Clerk's Papers at 13 (internal quotation marks omitted).
103 Clerk's Papers at 43.
104 Clerk's Papers at 14-15.
30
No. 68130-3-1/31
Standing to assert the negligence claim depends on whether the claim is direct or
derivative. Plaintiffs alleging an injury arising solely from an ownership interest in the
company do not assert direct claims because their harm is secondary to the direct harm
to the company.105 Under Delaware law, to determine whether a claim is direct or
derivative,
a court should look to the nature of the wrong and to whom the relief
should go. The stockholder's claimed direct injury must be independent of
any alleged injury to the corporation. The stockholder must demonstrate
that the duty breached was owed to the stockholder and that he or she
can prevail without showing an injury to the corporation.11061
The injury FutureSelect suffered as a result of the alleged negligent management
was solely the pro rata loss of the decline in the Rye Funds' value and was secondary
to the direct injury to the Rye Funds. FutureSelect's allegations do not demonstrate that
the injury it suffered was independent of the injury to all Rye Funds partners caused by
the same alleged breach. Under Delaware law, FutureSelect's claim is derivative.
FutureSelect lacks standing to assert the claim on behalf of the Rye Funds.107
We affirm the trial court's dismissal of FutureSelect's negligence claim against Tremont.
105 Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008).
106 Toolev v. Donaldson. Lufkin & Jenrette. Inc.. 845 A.2d 1031, 1039 (Del.
2004).
107 Under Delaware law, where "all of a corporation's shareholders are harmed
and would recover pro rata in proportion with their ownership [interest]," the claim is
derivative. Feldman. 951 A.2d at 733. Such derivative claims may be pursued only by
the partnership and not by individual investors. See, e.g.. Kramer v. W. Pac. Indus..
Inc., 546 A.2d 348, 351-53 (Del. 1988).
31
No. 68130-3-1/32
C. Agency—Mass Mutual and Oppenheimer
FutureSelect alleges Mass Mutual and Oppenheimer are liable for Tremont's
negligent misrepresentations under the theory of agency.108 The extent of control
exercised by the principal over an agent is essential in determining liability:
When we distill the principles evident in our case law, the proper inquiry
becomes whether there is a retention of the right to direct the manner in
which the work is performed, not simply whether there is an actual
exercise of control over the manner in which the work is performed.11091
Whether or not a principal-agent relationship exists is generally a question of
fact.110 The right to control is determined byfactors such as the conduct of the parties,
the contract between them, and the right of the principal to interfere in the independent
contractor's work.111
FutureSelect's complaint adequately states a claim against Mass Mutual and
Oppenheimer based on agency. FutureSelect alleges that in 2001, Tremont came
under their control, which included the manner by which Tremont offered investments,
including the Rye Funds.112
FutureSelect alleges Mass Mutual and Oppenheimer "learned of Tremont's
enormous exposure with Madoff [and] that Tremont's representations to the Rye Funds'
108 Mass Mutual argues that the complaint as drafted conflates the entities Mass
Mutual Holdings and Mass Mutual Life Insurance. But Mass Mutual makes no
compelling argument that more precise references to those two entities in the complaint
would have any significant impact upon the outcome under the applicable CR 12(b)(6)
standards.
109 Kamla v. Space Needle Corp.. 147Wn.2d114, 121, 52 P.3d 472 (2002).
110 O'Brien v. Hafer. 122 Wn. App. 279, 284, 93 P.3d 930 (2004).
111 See Arnold v. Saberhagen Holdings. Inc.. 157 Wn. App. 649, 664, 240 P.3d
162(2010).
112 According to the complaint, "Oppenheimer was the MassMutual subsidiary
designated to pursue a deal [to purchase] Tremont." Clerk's Papers at 16.
32
No. 68130-3-1/33
investors regarding its oversight and monitoring of Madoff were false or, at a minimum,
highly suspect."113 The complaint states, "MassMutual and Oppenheimer knew
firsthand that Tremont had little to no ability to oversee and monitor Madoffs
operations."114
FutureSelect's complaint alleges details of Mass Mutual's and Oppenheimer's
control of Tremont:
At the time of the Tremont acquisition, MassMutual controlled
Oppenheimer [and] OppenheimerFunds, another subsidiary of
Oppenheimer, and that control included the manner in which Tremont
solicited its investment business. Specifically, MassMutual and
Oppenheimer had the right to control Tremont such that they could have
prevented Tremont from offering investments with Madoff.
.. . Once Oppenheimer's acquisition of Tremont ended in October
2001, Tremont's operations—including the marketing and investment
activities of the Rye Funds—were brought directly under the MassMutual
umbrella. MassMutual and Oppenheimer directed and influenced the
management of the company and provided extensive support services to
Tremont, including compliance, audit, finance and human resources.
. . . Tremont's management structure was overhauled to reflect
MassMutual's and Oppenheimer's deep involvement in and control over
its operations.
. . . Specifically, as part of the acquisition, all five of Tremont's
board members became MassMutual, Oppenheimer and/or
OppenheimerFunds employees. John V. Murphy, a MassMutual
executive vice president and Oppenheimer director (as well as chairman,
CEO and president of OppenheimerFunds) was named a director of
Tremont. Kurt Wolfgruber, management director and assistant treasurer
of Oppenheimer (as well as president, chief investment officer and director
of OppenheimerFunds) and Howard E. Gunton, executive vice president
and chief financial officer of MassMutual, both became Tremont directors.
. .. Further, as part of the acquisition, Sandra Manzke and Robert
Schulman, Tremont's co-chief executive officers and board members,
became employees of OppenheimerFunds.
113 Clerk's Papers at 17.
114 Clerk's Papers at 17.
33
No. 68130-3-1/34
. . . Though there were changes in the directors on the Tremont
board over time, post-acquisition, the board always was made up of high
level employees of MassMutual and Oppenheimer entities. As board
members, they had ultimate control over the manner of Tremont's
investment strategy.
. . . Lynn Oberist Keaton, who served as a senior vice president of
OppenheimerFunds, served as Tremont's chief financial officer and a
senior vice president from 2005 through 2007. Margaret Weaver, an
OppenheimerFunds employee, served as a senior vice president of
Tremont and was described as a member of the "Tremont management
team" on Tremont's website.11151
FutureSelect expressly alleges that Oppenheimer did in fact control Tremont:
At all relevant times, Oppenheimer had the power, both direct and indirect,
to control Tremont and in fact did exercise such control:
. . . Oppenheimer actively managed the marketing and solicitation
of investment activity at Tremont, including through selection of
investment vehicles and due diligence programs.'1161
FutureSelect's complaint and hypothetical facts support the claim that
Oppenheimer and Mass Mutual controlled Tremont and retained the right to direct the
manner in which Tremont's work was performed. While mere overlapping of directors
and officers would not establish liability, the alleged dual roles of Tremont directors and
officers who were simultaneously employees, directors, or officers of Mass Mutual or
Oppenheimer, if true, could be consistent with FutureSelect's theory that Mass Mutual
and Oppenheimer had control of Tremont's affairs, including the offering and
management of the Rye Funds securities.117 These allegations go beyond a pure
115 Clerk's Papers at 17-19.
116 Clerk's Papers at 33.
117 FutureSelect contends that Oppenheimer was "100% owned by MassMutual,"
and Tremont was "100% owned by Oppenheimer." Clerk's Papers at 34. FutureSelect
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parent/subsidiary relationship and, for purposes of CR 12(b)(6), support a claim that
Mass Mutual and Oppenheimer controlled Tremont's Rye Funds transactions with
FutureSelect.
Because FutureSelect's negligent misrepresentation claim against Tremont is
sufficient for purposes of a CR 12(b)(6) ruling, we reverse the dismissal of the claims
against Oppenheimer and Mass Mutual based on actual agency for Tremont's alleged
misrepresentations.
D. Apparent Agency—Mass Mutual and Oppenheimer
FutureSelect contends Mass Mutual's and Oppenheimer's statements and
conduct conveyed that Tremont had the authority to offer and sell the Rye Funds on
their behalf. "Apparent agency occurs, and vicarious liability for the principal follows,
where a principal makes objective manifestations leading a third person to believe the
wrongdoer is an agent ofthe principal."118 Whether apparent authority exists is
ordinarily a question offact.119
In support of its apparent agency claims, FutureSelect contends Mass Mutual
marketed Tremont as a "member of the MassMutual family of companies" and listed
Tremont in its annual reports as one of its "General Agencies and Other Offices."120
FutureSelect alleges these statements "conveyed to FutureSelect that Tremont had the
also alleges that all five of Tremont's directors and both of its co-principals were
Oppenheimer and MassMutual employees.
118 D.L.S. v. Mavbin. 130 Wn. App. 94, 98, 121 P.3d 1210 (2005) (trial court
properly dismissed claim against franchisor based on claim of apparent agency
relationship with franchisee); Restatement (Second) of Agency § 267 (1958).
119 See, e.g.. Mohr v. Grantham. 172 Wn.2d 844, 860-61, 262 P.3d 490 (2011);
Ranger Ins. Co. v. Pierce County. 164 Wn.2d 545, 555, 192 P.3d 886 (2008).
120 Clerk's Papers at 20.
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No. 68130-3-1/36
authority to offer and sell the Rye Funds' investments on MassMutual's behalf," "led
FutureSelect to believe that Tremont had the authority to so act," and "would have led a
reasonably careful person under the circumstances" to believe that Tremont had such
authority.121
These allegations could potentially establish that Mass Mutual held out Tremont
as its agent and that FutureSelect reasonably believed the statements. The claim of
apparent agency against Mass Mutual is sufficient for purposes of CR 12(b)(6).
Accordingly, we conclude that the claim should not have been dismissed under
CR 12(b)(6).
FutureSelect fails to identify any actions by Oppenheimer manifesting such an
apparent agency. FutureSelect contends that while under Mass Mutual's and
Oppenheimer's control, Tremont represented itself as "[a]n Oppenheimer Funds
[c]ompany" on its stationery and marketing materials and listed Mass Mutual,
Oppenheimer, and OppenheimerFunds as "control persons" of Tremont in documents
filed with the Securities and Exchange Commission.122 But Tremont's representations
purportedly manifesting its apparent agency are not attributable to Oppenheimer as
principal.123 We conclude that the complaint does not set forth a claim against
Oppenheimer for which relief can be granted on the basis of apparent agency.
These manifestations by Tremont are insufficient to demonstrate the existence of
an apparent agency relationship between Oppenheimer and Tremont, even when
121 Clerk's Papers at 41.
122 Clerk's Papers at 19.
123 See, e.g.. Estep v. Hamilton. 148 Wn. App. 246, 258, 201 P.3d 331 (2008);
Mauch v. Kissling. 56 Wn. App. 312, 316, 783 P.2d 601 (1989) ("Apparent authority can
only be inferred from the acts of the principal and not from the acts of the agent.").
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No. 68130-3-1/37
considering hypothetical facts. FutureSelect's apparent agency claim against
Oppenheimer was properly dismissed.
We reverse the dismissal of FutureSelect's apparent agency claim against Mass
Mutual as to Tremont's negligent misrepresentation but affirm dismissal of its apparent
agency claim against Oppenheimer.
E. Negligent Misrepresentation—Ernst & Young
Accountants may face liability for negligent misrepresentation in audit reports,124
provided that the maker of the representation knows that its recipient intended to
transmit the information to a similar person, persons, or group.125
FutureSelect's complaint alleges Ernst & Young "made untrue statements of
material facts and engaged in acts of fraud and deceit upon FutureSelect... that were
a substantial factor contributing to FutureSelect's investment in the Rye Funds."126
Specifically, Ernst & Young "misrepresented that they had conducted audits in
conformity with" generally accepted auditing standards and "omitted material facts."127
FutureSelect asserts that it acted in reliance upon the misrepresentations and that its
investments made "in reliance on Ernst &Young's audits totaled approximately $50
124 See ESCA Corp. v. KPMG Peat Marwick. 135 Wn.2d 820, 828, 959 P.2d 651(1998) (accounting firm found liable to bank for negligent misrepresentation contained in
audit of customer to whom bank loaned money).
125 Haberman. 109 Wn.2d at 163 (quoting Restatement (Second) of Torts
§ 552 cmt. h (1977)).
126 Clerk's Papers at 36.
127 Clerk's Papers at 21, 37. Ernst &Young certified that the Broad Market fund
ended 2000 with $288 million in assets, 2001 with $364 million, 2002 with over $400
million, and 2003 with nearly $450 million. Ernst & Young certified that the Prime fund
ended 2000 with $497 million in assets, 2001 with $667 million, 2002 with $750 million,
and 2003 with $831 million.
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No. 68130-3-1/38
million."128 FutureSelect contends that Ernst &Young "knew that its audits would be
used by Tremont to solicit investors" and "knew and intended that current investors
would rely on the audits when deciding to maintain and increase" their investments in
the Rye Funds.129 Ernst &Young knew FutureSelect was "receiving and relying on its
audits of the [Rye] funds," because "each audit was addressed to the 'Partners' of the
fund[s], which [Ernst &Young] knew included [FutureSelect]."130
These allegations and consistent hypothetical facts state a claim that (1) Ernst &
Young supplied false information for the guidance of FutureSelect in their investments,
(2) Ernst & Young knew or should have known that the information it supplied to
Tremont was intended by Tremont to guide FutureSelect in its investments, (3) Ernst &
Young was negligent in obtaining or communicating false information, (4) FutureSelect
relied on the false information, (5) FutureSelect's reliance was reasonable, and (6) the
false information proximately caused FutureSelect's damages. We conclude that
FutureSelect's complaint is adequate for purposes of CR 12(b)(6) to state a claim for
negligent misrepresentation against Ernst & Young.
We reverse the trial court's dismissal of FutureSelect's negligent
misrepresentation claim against Ernst & Young.
FutureSelect's Motion to Amend Complaint
FutureSelect contends this court should allow it to amend its complaint to correct
any CR 12(b)(6) deficiencies but does not provide compelling authority for such relief on
appeal, especially where it makes no showing in this court, or in the trial court, that it
128 Clerk's Papers at 22-23.
129 Clerk's Papers at 37.
130
Clerk's Papers at 23.
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No. 68130-3-1/39
has grounds for a good faith amendment that would address the deficiencies we have
identified.131 The motion is denied.
Long-Arm Jurisdiction over Oppenheimer
Oppenheimer argues that it is not subject to personal jurisdiction in Washington
because it had no contacts with Washington and that FutureSelect's claims are nothing
more than an attempt to hold a parent company liable for the acts of its subsidiary.
Oppenheimer contends that an assertion of personal jurisdiction based upon acts of its
subsidiary does not comport with constitutional due process requirements. These
arguments are not persuasive.
The plaintiff has the burden of demonstrating jurisdiction, but when a motion to
dismiss for lack of personal jurisdiction is resolved without an evidentiary hearing "'only
a prima facie showing ofjurisdiction is required.'"132 In this setting, "[w]e treat the
allegations ofthe complaint as true."133
Personal jurisdiction over a nonresident defendant may be general or specific.134
If a nonresident is doing business in this state on a substantial and continuous basis,
then the courts may exercise general jurisdiction over the defendant as to any cause of
action.135 The courts may gain specific personal jurisdiction over a nonresident based
131 CR 15(a) states, in pertinent part, "If a party moves to amend a pleading, a
copy of the proposed amended pleading, denominated 'proposed' and unsigned, shall
be attached to the motion."
132 Precision Lab. Plastics. Inc. v. Micro Test. Inc.. 96 Wn. App. 721, 725, 981
P.2d 454 (1999) (quoting MBM Fisheries. Inc. v. Bollinger Mach. Shop & Shipyard. Inc..
60 Wn. App. 414, 418, 804 P.2d 627 (1991)).
133 SeaHAVN. Ltd. v. Glitnir Bank. 154 Wn. App. 550, 563, 226 P.3d 141 (2010).
134 CTVC of Hawaii Co. v. Shinawatra. 82 Wn. App. 699, 708, 919 P.2d 1243(1996).
135 |d_
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No. 68130-3-1/40
on much more limited contacts with Washington, but specific jurisdiction extends only to
causes of action that arise out of those limited contacts.136 FutureSelect claims specific
jurisdiction over Oppenheimer based on the Washington contacts of Tremont acting as
its agent.
Similar to many states, Washington's long-arm statute expressly provides that
agency is a proper means for asserting personal jurisdiction over a principal for a cause
of action that arises out of the agent transacting business or committing a tort in
Washington:
Any person, whether or not a citizen or resident of this state, who in
person or through an agent does any of the acts in this section
enumerated, thereby submits said person ... to the jurisdiction of the
courts of this state as to any cause of action arising from the doing of any
said acts:
(a) The transaction of any business within this state;
(b) The commission of a tortious act within this state.'1371
The Washington long-arm statute "extends jurisdiction to the limit offederal due
process."138 We apply three factors to the due process inquiry:
"(1) The nonresident defendant or foreign corporation must purposefully
do some act or consummate some transaction in the forum state; (2) the
cause of action must arise from, or be connected with, such act or
transaction; and (3) the assumption of jurisdiction by the forum state must
not offend traditional notions of fair play and substantial justice,
consideration being given to the quality, nature, and extent of the activity
in the forum state, the relative convenience of the parties, the benefits and
136 jd, at 709.
137 RCW 4.28.185(1) (emphasis added).
138 Shute v. Carnival Cruise Lines. 113 Wn.2d 763, 771, 783 P.2d 78 (1989).
40
No. 68130-3-1/41
protection of the laws of the forum state afforded the respective parties,
and the basic equities of the situation."[139]
The long-arm jurisdiction question presented is whether a subsidiary acting as
the agent for its parent subjects the parent to long-arm jurisdiction for claims arising out
of the agent's transactions and torts in Washington. Oppenheimer argues that mere
agency is inadequate and that due process requires that the subsidiary be the alter ego
of the parent, allowing the corporate veil to be pierced. Only then could contacts by the
subsidiary be imputed to the parent for purposes of long-arm jurisdiction.
Historically, the acts of a subsidiary do not subject the parent corporation to
general jurisdiction, sometimes referred to as the Cannon doctrine.140 Several
exceptions to the Cannon doctrine have developed over time.141 In International Shoe
Co. v. Washington, the United States Supreme Court departed from the fiction of
"presence" and concluded that for specific jurisdiction purposes, due process is properly
measured in terms of minimum contacts:
Since the corporate personality is a fiction, although a fiction
intended to be acted upon as though it were a fact, it is clear that unlike an
individual its "presence" without, as well as within, the state of its origin
can be manifested only by activities carried on in its behalf by those who
are authorized to act for it. To say that the corporation is so far "present"
there as to satisfy due process requirements, for purposes of... the
maintenance of suits against it in the courts of the state, is to beg the
question to be decided. For the terms "present" or "presence" are used
merely to symbolize those activities of the corporation's agent within the
state which courts will deem to be sufficient to satisfy the demands of due
process. Those demands may be met by such contacts of the corporation
139 Precision Lab. Plastics, 96 Wn. App. at 726 (emphasis omitted) (quoting Tyee
Constr. Co. v. Dulien Steel Prods.. Inc.. 62 Wn.2d 106. 115-16,381 P.2d 245 (1963)).
140 Cannon Mfg. Co. v. Cudahv Packing Co.. 267 U.S. 333, 45 S. Ct. 250, 69 L.
Ed. 634(1925).
141 See 14 Karl B. Tegland, Washington Practice: Civil Procedure § 4:27, at
117 (2d ed. 2009).
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No. 68130-3-1/42
with the state of the forum as make it reasonable, in the context of our
federal system of government, to require the corporation to defend the
particular suit which is brought there.'1421
Few Washington cases discuss the impact of the parent-subsidiary relationship
upon personal jurisdiction, and those discussions focus upon general, rather than
specific, jurisdiction.143 But Washington's long-arm statute expressly provides for
jurisdiction based on agency, and Washington courts have acknowledged that
principle.144
Both Oppenheimer and FutureSelect point to federal case law, where numerous
cases hold a subsidiary's contacts should or should not be imputed to the parent for
personal jurisdiction.145 Many ofthose cases involve concepts ofdoing business for
142
326 U.S. 310, 316-17, 66 S. Ct. 154, 90 L. Ed. 95 (1945) (citations omitted).
143 See Williams v. Canadian Fishing Co.. 8 Wn. App. 765, 768, 509 P.2d 64(1973) ("We agree with respondent that ownership of a subsidiary by a parent, with
nothing more, is not sufficient to constitute 'doing business' for jurisdictional purposes.
Although in the case at bar the parent and subsidiary corporations share a common
director, there is no showing in the record that the officers of the subsidiary do not act
independently of the parent corporation or that the subsidiary is a 'mere instrumentality'
of the parent." (citations omitted)); State v. Nw. Magnesite Co.. 28 Wn.2d 1, 41, 182
P.2d 643 (1947) ("it is the general rule that a foreign corporation which holds a
controlling interest in a subsidiary corporation doing business within a particular state is
not thereby subject to service of process through service upon an agent of the
subsidiary within that state"); Osborne v. Spokane. 48 Wn. App. 296, 299, 738 P.2d
1072 (1987) ("A foreign corporation is not 'doing business' in this state for purposes of
jurisdiction merely because it is a wholly owned subsidiary of a domestic corporation.");
see 14 Tegland. supra. §§4:27,4:30, at 117-18, 120-22.
144 See, e.g.. CTVC. 82 Wn. App. at 717 (plaintiffs sued an individual and two
corporations controlled by the individual and relied upon two contacts by the individual
to support long-arm jurisdiction; court concluded agent can subject principal to long-arm
jurisdiction).
145 See, e.g.. 4A Charles Alan Wright &Arthur R. Miller, Federal Practice
And Procedure § 1069.4 nn.2 & 10 (3d ed. 2002 & Supp. 2013) (illustrative cases
where federal courts have exercised or declined to exercise personal jurisdiction based
on subsidiary contacts).
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No. 68130-3-1/43
purposes of general jurisdiction, but some also apply the same standards to long-arm
issues. Many federal courts recognize an alter ego standard, often related to piercing
the corporate veil concepts. Some include an agency standard. Widely discussed, but
not so widely adopted, is a merger (alterego) and attribution (agency) framework.146
Some decry the conflation of the liability concept of alter ego/piercing the corporate veil
with the jurisdiction "minimum contacts" question.147 The Ninth Circuit Court ofAppeals
in particular has refined its analysis to acknowledge both an alter ego test and an
agency test.148 The Ninth Circuit's agency test requires a showing of"significant
importance," i.e., that the business activity of the subsidiary is so important to the
principal that in the absence of a subsidiary, the principal would engage in the same
business activity itself.149 The Ninth Circuit further refined the significant importance
test to clarify it is not necessary that the parent would undertake the agent's activities
itself:
For the agency test, we ask: Are the services provided by [the subsidiary]
sufficiently important to the [parent] that if [the subsidiary] went out of
146 In re Telectronics Pacing Svs.. Inc.. 953 F. Supp. 909, 918 (S.D. Ohio 1997)
("We find persuasive the view that International Shoe has supplanted Cannon in the
context of personal jurisdiction. . . . [T]he formalistic alter ego principles of Cannon are
no longer applicable in the analysis of whether the exercise of personal jurisdiction over
a foreign corporation is constitutional.").
147 id. at 916 ("Many courts, however continue to conflate the requirements of
due process and the alter ego doctrine.")
148 Wells Fargo &Co. v. Wells Fargo Express Co.. 556 F.2d 406, 419-20 (9th Cir.
1977) (specific jurisdiction); Chan v. Society Expeditions. Inc.. 39 F.3d 1398, 1404-06
(9th Cir. 1994) (specific jurisdiction); Bauman v. DaimlerChrvsler Corp.. 644 F.3d 909,
920-22 (9th Cir. 2011) (general jurisdiction); Metro-Goldwvn-Maver Studios. Inc.. v.
Grokster. Ltd.. 243 F. Supp. 2d 1073, 1098-1100 (CD. Cal. 2003) (specific jurisdiction);
John Doe I v. Unocal Corp.. 248 F.3d 915, 923-30 (9th Cir. 2001) (both).
149 Chan. 39 F.3d at 1404-06; Unocal. 248 F.3d at 923-30; Wells Fargo. 556 F.2d
at 419-20.
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No. 68130-3-1/44
business, [the parent] would continue [the business activity] itself, or
alternatively by selling them through a new representative?'1501
But the court acknowledged a "lack of clarity and consistency" on this question.151
Against this backdrop, we turn to the application of the minimum contacts standard to
analyze the due process limits for specific jurisdiction.152
A. Purposeful Availment
To establish specific personal jurisdiction under RCW 4.28.185(1 )(a) by
transacting business in Washington, FutureSelect must show that Oppenheimer
"'purposefully avail[ed] itself of the privilege of conducting activities within the forum
state, thereby invoking the benefits and protections of its laws.'"153 Deliberately
engaging in significant business activities within a state is adequate.154
The purposeful availment analysis in the tort context permits the exercise of
jurisdiction when the claimant makes a prima facie showing that an out-of-state party's
intentional actions were expressly aimed at the forum state and caused harm in the
forum state.155 Where defendants "'purposefully derive benefit' from their interstate
150 Bauman. 644 F.3d at 920.
151 Id, at 922 n. 13.
152 Refreshingly, one district court in the Western District ofWashington has
reconciled the Ninth Circuit alter ego analysis with the minimum contacts standard. See
Langlois v. Deia Vu. Inc.. 984 F. Supp. 1327, 1338 (W.D. Wash. 1997) (court
"convinced that the analysis actually applied by the Ninth Circuit is a minimum contacts
analysis").
153 SeaHAVN. 154 Wn. App. at 564 (alteration in original) (quoting Walker v
Bonnev-Watson Co.. 64 Wn. App. 27, 34, 823 P.2d 518 (1992)).
154 ]d at 564-65 (quoting Burger King Corp. v. Rudzewicz. 471 U.S. 462, 475-76,
105 S. Ct. 2174, 85 L. Ed. 2d 528 (1985)).
155 See Precision Lab. Plastics. 96 Wn. App. at 727-28; Kvsar v. Lambert. 76 Wn.
App. 470, 487, 887 P.2d 431 (1995).
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No. 68130-3-1/45
activities, it would be unfair to allow them to escape the consequences that proximately
arise from these activities in otherjurisdictions."156
Based upon the complaint, Tremont clearly had significant contacts with
Washington. Oppenheimer argues its parent-subsidiary relationship with Tremont is
insufficient to attribute the minimum contacts of the subsidiary to the parent. But
FutureSelect's complaint alleges Oppenheimer's involvement with Tremont was much
more than a standard parent-subsidiary relationship.
Consistent with International Shoe, we must focus upon the alleged activities of
Oppenheimer. FutureSelect alleges that Oppenheimer controlled the manner in which
Tremont solicited its Rye Fund investments and that Oppenheimer "actively managed
the marketing and solicitation of investment activity at Tremont, including .. . selection
of investment vehicles and due diligence programs."157 FutureSelect further alleges that
Oppenheimer and Mass Mutual benefited from the Tremont operations they controlled,
with up to $29 million in fees generated by the Rye Funds in 2007 alone.
Soliciting Rye Funds investors, marketing the funds' access to Madoff, and
making representations about the due diligence programs used to monitor those funds
are key to Tremont's business and central to the claims asserted by FutureSelect.
Oppenheimer's alleged active management and control of those activities is significant
in terms of Tremont's success, the financial rewards to Oppenheimer, and the impact on
FutureSelect. Whether or not Oppenheimer itself would have engaged in the activities
of Tremont or would have found another to solicit and market Madoff feeder funds, the
156 Grange Ins. Ass'n v. State. 110 Wn.2d 752, 760, 757 P.2d 933 (1988)
(internal quotation marks omitted) (quoting Burger King. 471 U.S. at 473-74).
157 Clerk's Papers at 33.
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No. 68130-3-1/46
alleged activities of Oppenheimer directed to and impacting Washington are significant
and purposeful.
Oppenheimer argues that a plaintiffmay not use a liability theory as a substitute
for personal jurisdiction. While liability theories should not be conflated with jurisdiction
standards, the application of the due process purposeful availment standard may
include practical policy considerations. In Harbison v. Garden Valley Outfitters. Inc.. the
court considered the successor liability of one corporation for the acts of another when
deciding whether to impute the predecessor's contacts to the successor for purposes of
long-arm jurisdiction:
The rationale of substantive successor liability is equally applicable
to the question of personal jurisdiction. When a successor has assumed
its predecessor's liabilities, the forum-related contacts of the predecessor
should be attributed to the successor for jurisdictional purposes. This is
because the assets purchased by the successor were, in part, derived
from the forum, and the successor presumably had knowledge thereof.
We perceive no policy basis in such a case for insulating the successor
entity from liability in the same jurisdiction where its predecessor would
have been exposed.'1581
Similarly, FutureSelect's complaint alleges a viable claim that Oppenheimer was not
merely a parent corporation but actively controlled and managed key marketing and
solicitation activities of Tremont as its agent. The alleged activity is purposeful.
Oppenheimer benefited from the acts of its agent in Washington. There is no policy
basis for insulating Oppenheimer from liability in the same jurisdiction where its alleged
agent transacted business and committed torts.
The complaint alleges that Oppenheimer deliberately engaged in significant
transactions in Washington through its agent, Tremont, by controlling and actively
158 69 Wn. App. 590, 599, 849 P.2d 669 (1993) (citation omitted).
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No. 68130-3-1/47
managing Tremont's marketing and solicitation of investments aimed at FutureSelect.
And the misrepresentations arising out of Tremont's business transactions had a
significant impact on FutureSelect in Washington. We conclude that the complaint
makes a prima facie showing of purposeful availment by Oppenheimer.
B. Claim Arises Out of Oppenheimer's Forum-Related Activities
FutureSelect alleges it was harmed by Tremont's acts in Washington, committed
as Oppenheimer's agent. As a general rule, a business entity suffers harm at its
principal place of business.159 Our Supreme Court "has held many times thatwhen an
injury occurs in Washington, it is an inseparable part of the 'tortious act' and that act is
deemed to have occurred in this state for purposes of the long-arm statute."160 There is
a prima facie showing that the causes of action arise out of the contacts in Washington.
C. Notions of Fair Play and Substantial Justice
Finally, we look to the nature, quality, and extent of Oppenheimer's activity in this
state; the convenience of the parties; the benefits and protections of Washington law;
"'and the basic equities ofthe situation.'"161 Oppenheimer makes no showing that
litigation in Washington would be "so gravely difficult and inconvenient" that it is unfairly
at a "severe disadvantage" in comparison to its opponent.162 On the other hand,
159 SeaHAVN. 154Wn. App. at 570 n.3.
160 Grange Ins. Ass'n. 110 Wn.2d at 757.
161 Precision Lab. Plastics. 96 Wn. App. at 726 (quoting Tvee Constr.. 62 Wn.2d
at 116).
162 Burger King. 471 U.S. at 478; Bauman. 644 F.3d at 925 (burden on
defendant, a large corporation, to litigate the case in another state "is not so weighty as
to preclude jurisdiction—particularly since 'modern advances in communications and
transportation have significantly reduced the burden of litigating'" in a foreign state
(guoting Sinatra v. Naf I Enguirer. Inc.. 854 F.2d 1191, 1199 (9th Cir. 1988))).
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No. 68130-3-1/48
Washington has a legitimate interest in holding a defendant answerable on a claim
related to its Washington contacts.163
Due process would not be satisfied by mere allegations that Tremont is a
subsidiary of Oppenheimer. Neither would a generic allegation of an agency
relationship suffice. An allegation that the parent has the power to control the
subsidiary but was oblivious to or failed to monitor the conduct of the subsidiary would
not be compelling. Here, FutureSelect alleges Oppenheimer is actively controlling and
managing key activities of its subsidiary, the subsidiary is acting as its agent in
Washington, those activities are financially significant to Oppenheimer, FutureSelect's
claims arise out of those activities, and the activities significantly impacted FutureSelect
in Washington.
The assertion of specific personal jurisdiction over Oppenheimer satisfies the
"through an agent" provision of the long-arm statute and comports with due process.
CONCLUSION
The court has personal jurisdiction over Oppenheimer. We conclude that
FutureSelect's WSSA claims against all respondents, FutureSelect's negligent
misrepresentation claims against Tremont and Ernst & Young, its actual agency claims
against Mass Mutual and Oppenheimer, and its apparent agency claim against Mass
Mutual are sufficient to survive the respondents' CR 12(b)(6) challenges. We reverse
the dismissal of those claims.
163 Precision Lab Plastics. 96 Wn. App. at 729-30; see also McGee v. Int'l Life
Ins. Co.. 355 U.S. 220, 223, 78 S. Ct. 199, 2 L. Ed. 2d 223 (1957) (a state frequently will
have a "manifest interest in providing effective means of redress for its residents").
48
No. 68130-3-1/49
We affirm the dismissal of FutureSelecfs apparent agency claim against
Oppenheimer and its negligence claim against Tremont.
Affirmed in part, reversed in part, and remanded for further proceedings
consistent with this opinion.
WE CONCUR:
A^/t <*..4, &?c,vi.
49