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Otto Candies, LLC v. KPMG LLP

Superior Court of Delaware

July 26, 2017

OTTO CANDIES, LLC, et al, Plaintiffs,
v.
KPMG LLP, et al, Defendants.

          Submitted: May 15, 2017

         Upon Plaintiffs' Exceptions to the Special Master's Final Report and Recommendation, Plaintiffs' Exceptions are DENIED; the Special Master's Final Report and Recommendation is ADOPTED, in whole.

          David E. Ross, Esquire, Ross Aronstam & Moritz LLP, Wilmington, Delaware, Terry L. Wit, Esquire (pro hac vice), Quinn Emanuel Urquhart & Sullivan, LLP, San Francisco, California, A. William Urquhart, Esquire (pro hac vice), Derek L. Shaffer, Esquire (pro hac vice), Quinn Emanuel Urquhart & Sullivan, LLP, Washington, District of Columbia, Attorneys for Plaintiffs.

          Timothy Jay Houseal, Esquire, William E. Gamgort, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware, John K. Villa, Esquire (pro hac vice), Ana C. Reyes, Esquire (pro hac vice), Williams & Connolly LLP, Washington, District of Columbia, Attorneys for KPMG International Cooperative.

          Kevin R. Shannon, Esquire, Matthew F. Davis, Esquire, Christopher N. Kelly, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Jack B. Jacobs, Esquire, Sidley Austin LLP, Wilmington, Delaware, Michael C. Kelley, Esquire (pro hac vice), Jose F. Sanchez, Esquire (pro hac vice), Sidley Austin LLP, Los Angeles, California, Gregory G. Ballard, Esquire (pro hac vice), Sidley Austin LLP, Attorneys for KPMG Cardenas Dosal, S.C.

          Todd C. Schlitz, Esquire, Drinker Biddle & Reath LLP, Wilmington, Delaware, Robert A. Scher, Esquire (pro hac vice), Jonathan H. Friedman, Esquire (pro hac vice), Foley & Lardner LLP, New York, New York, Attorneys for KPMG LLP.

          MEMORANDUM OPINION AND ORDER

          Paul R. Wallace, Judge

         I. INTRODUCTION

         This jurisdictional discovery dispute stems from an allegedly poor audit of three entities: Banamex, Citigroup, and Oceanografia. Oceanografia was a large offshore oil services company in Latin America.[1] Citigroup is a large, Delaware-incorporated bank.[2] Banamex is Citigroup's Mexican subsidiary.[3]

         Citigroup allegedly provided hundreds of millions of dollars to Oceanografia based on forged invoices.[4] Plaintiffs, a group comprised of some of Oceanografia's largest creditors, [5] allege the Defendants failed to detect this scheme. [6]Oceanografia's fraud was exposed in February 2014 when Mexico's state-owned oil and gas company reported to Citigroup that several Oceangrafia invoices contained forged signatures. [7] Citigroup canceled certain cash advances, precipitating Oceanografia's collapse.[8] Plaintiffs allege that Defendants should have caught on to the fraud prior to the collapse.

         An appointed Special Discovery Master issued a Report and Recommendation denying Plaintiffs' jurisdictional discovery requests. For the reasons set forth below, the Court AGREES WITH the Special Master, and ADOPTS the Special Master's Final Report and Recommendation resolving this discovery dispute. In turn, the Court DENIES Plaintiffs' Exceptions to the Special Master's Final Report and Recommendation.

         II. PROCEDURAL BACKGROUND [9]

         A. The Jurisdictional Discovery Dispute

         On February 26, 2016, Plaintiffs filed a negligent misrepresentation action against three KPMG entities: KPMG International; KPMG LLP ("KPMG US"); and KPMG Cardenas Dosal, SC ("KPMG Mexico").[10] In an attempt to establish personal jurisdiction over all three defendants, Plaintiffs allege the parties have created a "joint venture." According to Plaintiffs, KPMG International, a Swiss cooperative, is the overall head of that venture. KPMG Mexico and KPMG US, a Delaware limited liability partnership, are subsidiaries. Plaintiffs allege KPMG U.S. exercises controlling influence over KPMG International; so much so, they say, that KPMG International is KPMG US's alter ego. So, Plaintiffs posit, KPMG US's Delaware-incorporation status, combined with its excessive influence over KPMG International, results in Delaware's personal jurisdiction over all Defendants.

         Defendants have moved to dismiss. Specifically, KPMG International and KPMG Mexico moved to dismiss for lack of personal jurisdiction. While KPMG U.S. moved to dismiss for failure to state a claim and lack of subject matter jurisdiction, without contesting personal jurisdiction.

         On July 13, 2016, Plaintiffs served jurisdictional discovery on all Defendants to help them establish personal jurisdiction over KPMG Mexico and KPMG International.[11] On August 23, 2016, Defendants moved for protective orders.[12]Defendants argued jurisdictional discovery was unnecessary because the motion to dismiss could be heard on the then-extant pleadings and record and could fully adjudicate Plaintiffs' claims.[13] Plaintiffs argued that jurisdictional discovery was appropriate to establish personal jurisdiction as long as their requests were not clearly frivolous.[14]

         On November 9, 2016, the Court issued an order granting in part, and denying in part, Defendants' motion for a protective order. Specifically, the Court ordered that:

Defendants need to respond to "Category 2 Discovery" and "Category 3 Discovery" requests only to the extent that such requests: support a potential claim for specific jurisdiction over KPMG International and [KPMG] Mexico as to their role, if any, in the Banamex audit or the component audit of Banamex as part of the Citigroup audit; seek information concerning the relationship and interaction between the defendants; and are specifically limited to conduct in Delaware that precisely gives rise to the claims alleged in the Complaint[.][15]

          Following entry of the Protective Order, Defendants responded to Plaintiffs' jurisdictional discovery requests by largely objecting to them.[16] The parties had several unsuccessful meet-and-confers. [17] On February 13, 2017, the Court appointed a Special Master to resolve the parties' disputes.[18]

         B. Appointment of the Special Master

         The parties submitted briefs to the Special Master concerning three issues: (1) the joint venture relationship between and among Defendants in connection with the Citigroup/Banamex audits; (2) the consolidated Citigroup audit as it relates to(a) establishing a joint venture relationship between and among Defendants, and (b)identifying connections between the three KPMG entities; and (3) insurance and indemnity arrangements among the Defendants.[19] The Special Master heard oral argument on March 28, 2017. On April 7, 2017, the Special Master issued a Draft Report, and invited exceptions from the parties. Defendants filed exceptions. On April 24, 2017, the Special Master issued his final report and recommendation.

          C. The Special Master's Report

The Special Master first determined whether Plaintiffs' "joint venture" theory was so clearly frivolous that it did not warrant further investigation. He determined that Plaintiffs could, in fact, use their "joint venture" theory to attempt to establish personal jurisdiction over all Defendants.[20] But the Special Master rightly observed that Plaintiffs' alleged "joint venture" was insufficient alone to establish personal jurisdiction. Plaintiffs still must satisfy Delaware's long-arm statute and establish minimum contacts.[21]

         Ten Del. C. § 3104(c), Delaware's long-arm statute, provides that a nonresident establishes legal presence within this State when the nonresident:

(1) Transacts any business or performs any character of work or service in the State;
(2) Contracts to supply services or things in this State;
(3) Causes tortious injury in the State by an act or omission ...

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