Opinion
FSTCV136018255S
06-19-2017
Reclaimant Corp. v. William J. Deutsch et al
UNPUBLISHED OPINION
As Corrected August 4, 2017.
MEMORANDUM OF DECISION RE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT (#142) AND THE DEFENDANTS' MOTION FOR SUMMARY JUDGMENT (#150)
Robert L. Genuario, J.
I. INTRODUCTION
The Plaintiff brings this complaint in two counts both sounding in unjust enrichment. The first count of the complaint is directed against the defendant William J. Deutsch (Deutsch) and the second count of the complaint is directed against the defendant Laurence B. Simon (Simon). The defendants were each former limited partners in a limited partnership organized and existing pursuant to the laws of the State of Delaware known as the SV Special Situation Funds, LP (the limited partnership). The Plaintiff is a corporation organized and existing under the laws of the State of Delaware who is the transferee and/or assignee of the limited partnership's right to recover the amount of the alleged unjust enrichment of Deutsch and Simon. Both Deutsch and Simon are Connecticut residents.
The allegations of the complaint are relatively straight forward. The plaintiff claims that in January 2008 Deutsch redeemed a portion of his investment in the limited partnership by withdrawing $15,000,000.00 from his capital account and that in February 2008 Deutsch notified the limited partnership that he sought to redeem the remaining portion of his investment in the limited partnership. The plaintiff claims that in 2007 and 2008 the limited partnership had miscalculated the net asset value of the assets of the partnership and mistakenly believed that Deutsch's capital account had a value in excess of $22.98 million dollars as of December 31, 2007 and a value in excess of $8.1 million dollars (after the initial $15 million dollar withdrawal) as of March 31, 2008. In May 2008 the limited partnership distributed three payments to Deutsch in the total amount of $7,305,473.93 based upon its erroneous belief as to the value of its assets. The plaintiff alleges that Deutsch, in May 2008, received an overpayment of $7,047,974.03 that he was not entitled to receive. Similarly, the plaintiff alleges as a result of similar withdrawals and similar mistakes that Simon received an overpayment of $724,557.80 when he withdrew his investment in May 2008.
The Chief Financial Officer of the limited partnership was subsequently convicted of criminal activity involving theft of the limited partnership assets. The plaintiff asserts that it was this criminal activity that resulted in the erroneous valuation of the limited partnership assets.
Pursuant to the LPA the limited partnership had the right to withhold 10% of the limited partner's capital account at the time of a limited partner's withdrawal from the limited partnership under terms and conditions set forth in the LPA. Both defendants have filed counterclaims seeking return of the amount that has been withheld but those counter claims are not the subject of the cross motions for summary judgment.
While neither defendant concedes the underlying allegations that they were paid more than they were entitled to receive, for purposes of these motions for summary judgment the court assumes that the defendants did receive more than they were entitled to receive, or more properly put, the court finds that there is a genuine issue of material fact as to whether or not each defendant received more funds at the time of their withdrawal then they were entitled to receive. The defendants have filed twelve special defenses and now move for summary judgment based on five of them including their second special defense which states that the plaintiffs have failed to state a cause of action pursuant to the Delaware Revised Uniform Limited Partnership Act (DRULPA) section 17-607(c).
The plaintiff has moved for summary judgment on the second and fourth special defenses. As a practical matter, the plaintiffs are not seeking the entry of a final judgment against the defendants on this motion but are seeking a judgment of the court that the defendants' second and fourth special defenses are not applicable to the case at bar.
Because the court holds that there is no genuine issue of material fact that: (1) the contract between the parties unambiguously chooses Delaware law as the applicable law, (2) Delaware law provides that the defendants " shall have no liability under [DRULPA] or other applicable law for the amount of the distribution after the expiration of three years from the date of the distribution" and (3) this action was not brought within three years from the date of the distributions that the plaintiff seeks to recover, the court denies the plaintiff's motion for summary judgment and grants the defendants' motion for summary judgment based upon their second special defense.
II. SUMMARY JUDGMENT STANDARDS
The standards relating to the consideration by the court of a motion for summary judgment are well known. " Summary judgment is a method of resolving litigation when the pleadings, affidavits, and any other proofs submitted show that there is no genuine issue as to a material fact and that the moving party is entitled to judgment as a matter of law . . . The motion for summary judgment is designed to eliminate the delay and expense of litigating an issue when there is no real issue to be tried." Wilson v. New Haven, 213 Conn. 277, 279, 567 A.2d 829 (1989) (citations omitted). However since litigants ordinarily have a constitutional right to have issues of fact decided by a jury . . . the moving party for summary judgment is held to a strict standard . . . of demonstrating his entitlement to summary judgment." Kakadelis v. DeFabritis, 191 Conn. 276, 282, 464 A.2d 57 (1983) (Internal quotation marks omitted.).
Summary judgment may be granted where the claim is barred by the statute of limitations. Doty v. Mucci, 238 Conn. 800, 806, 679 A.2d 945 (1996). " Summary judgment is proper where the affidavits do not set forth circumstances which would serve to avoid or impede the normal application of the particular limitations period." LaBow v. Rubin, 95 Conn.App. 454, 471, 897 A.2d 136 (2006). Summary judgment in favor of the defendant is properly granted if the defendant and its motion raises at least one legally sufficient defense that would bar the plaintiff's claim and involves no triable issues of fact." Serrano v. Burns, 248 Conn. 419, 424, 727 A.2d 1276 (1999) (Internal quotation marks omitted).
III. NO GENUINE ISSUES OF MATERIAL FACT
The court finds that there are no genuine issues concerning the following material facts. The defendants were signatories to the Limited Partnership Agreement (LPA) and the plaintiff's predecessor in interest was a signatory to the LPA. There is no genuine issue of material fact as to the contents of the LPA. The limited partnership was a Delaware limited partnership formed for the purpose of investing and trading securities and other investments. The limited partnership's principal place of business was Greenwich, Connecticut. Both defendants were residents of the State of Connecticut. Both defendants acquired limited partnership interests and became limited partners in the limited partnership when it was formed in 2007. Both defendants redeemed their investments in early 2008 and withdrew from the partnership as of March 31, 2008. Demand has been made on both defendants for return of the alleged overpayments. The defendants have not returned the alleged overpayments and have refused to do so. The limited partnership's claims against the defendants in this action were assigned to the plaintiff. This action was initiated in May 2013.
IV. DISCUSSION
At the heart of the disagreement between the parties relating to the competing motions for summary judgment is the conflict of laws issue regarding the application of Delaware law or Connecticut law. In adjudicating conflict of laws issues a Connecticut court will apply Connecticut's conflict of laws principles. Connecticut has followed the modern trend in conflict of laws cases which is to implement the principles set forth in the Restatement (Second) of Conflict of Laws (Restatement Second). See Reichhold Chemicals, Inc. v. The Hartford Accident & Indemnity Company, 243 Conn. 401, 412-14, 703 A.2d 1132.
Particularly, in contract cases Connecticut has adopted the choice of law provisions set forth in Restatement (Second). Section 186 of the Restatement Second state Issues in contract are determined by the law chosen by the parties in accordance with the rule of section 187 and otherwise by the law selected in accordance with the rule of section 188.
Section 187 of Restatement (Second) states:
Law of the State Chosen by the Parties
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.
In Elgar v. Elgar, 238 Conn. 839, 679 A.2d 937 (1996), our Supreme Court adopted the approach set forth in section 187 of the Restatement (Second) in holding that a choice of law provision requiring the application of New York law in an antenuptial agreement was enforceable. Section 187(1) requires that the law of the State chosen by the parties to govern their contractual rights and duties will be applied if the particular issue was one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
Paragraph 11.8 of the LPA contains the following choice of law provision:
Law Governing . This agreement and all rights and liabilities of the parties hereto shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to its conflicts of law principles. (Emphasis added.)
The parties chose Delaware law to govern all of their rights and liabilities; and the right to limit the limited partnership's ability to pursue claims for overpayments after a certain date is an issue which the parties could have resolved by an explicit provision.
The plaintiff argues in its thorough and comprehensive briefs that a choice of law provision electing the law of a particular state will not be construed to include a choice of procedural issues such as the statute of limitation unless the contract expressly states so. Cole v. Mileti, 133 F.3d 433 (Sixth Cir. 1998). Cole applied the longer statute of limitations of the forum notwithstanding the fact that the parties had chosen California law to " govern their contract." Notably, the Cole court did not quote the particular language employed in the choice of law provision of the contract before it but stated, " Absent an express statement that the parties intended another state's limitations to apply, the procedural law of the forum governs time restrictions on an action for breach of contract." Cole at 437 (Emphasis added.). The court agrees with this principal of law but also determines that the choice of law provision contained in the LPA expressly elects Delaware law for all issues regarding the parties' rights and liabilities including those set forth in 17-607(c) of the DRULPA. The choice of law provision in the LPA is also broad enough to require the application of Delaware law to claims that are not strictly based upon the breach of the contractual provision contained in the LPA. Similarly, the application of Reichhold Chemicals, supra to the case at bar is limited. In Reichhold Chemicals the court engaged in an analysis of the factors set forth in section 188 of the Restatement(Second) because the parties had not chosen the law that would govern their rights and liabilities. Because the parties to the LPA have chosen the law that will govern all their rights and liabilities, section 187 applies.
The DRULPA gives " maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements." Norton v. K-Sea Transportation Partners, L.P., 67 A.3d 354, 360 (2013) (Citations omitted). In this regard the parties set forth their contractual choice of law in section 11.8 of the LPA. The provision itself is both broad and clear. It states that not only the agreement but importantly " all rights and liabilities of the parties hereto" (emphasis added) shall be governed by and construed in accordance with Delaware law. " All" is a simple term and in this context, an unambiguous term. Moreover, within the sentence it modifies both " rights" and " liabilities." Thus, it expresses the intent that all rights and all liabilities shall be governed by Delaware law. One of the Delaware laws that governs the parties liabilities is DRULPA section 17-607(c). When the plaintiff suggests that 17-607(c) is not included within the breadth of paragraph 11.8 of the LPA, the plaintiff effectively is arguing that the word " All" means something less than " All." While procedural issues must be expressly included in a choice of law provision to be applicable, that requirement is not the same as requiring every single procedural statute or rule to be individually identified within an agreement. It is sufficient if the agreement by its chosen language evidences an intent to include all issues (whether substantive or procedural) concerning rights and all issues concerning liabilities to be governed by Delaware law within the breadth of the choice of law election. In this regard the parties chose to have issues impacting their liability governed by Delaware law. It is difficult to read a provision that says all liabilities of the parties shall be governed by Delaware law as not including 17-607(c) which states that a limited partner that receives a distribution " shall have no liability under this chapter or other applicable law after the expiration of three years." (Emphasis added.)
In this regard and for purposes of this case the fundamental issue is not whether section 17-607(c) is procedural or substantive, or whether it is a statute of limitations or a statute of repose, or even whether or not it is " one of the congeries of elements necessary to establish the right." Baxter v. Sturm, Ruger and Company, Inc., 230 Conn. 335, 340, 644 A.2d 1297 (1994). What matters under Elgar and Section 187 of the Restatement (Second) is whether or not the parties clearly and unambiguously elected to have Delaware law govern their relationship even when it provides time limits on liabilities that are different than the time limits on liabilities that may be imposed by the State of Connecticut.
The defendants argue that section 17-607(c) is a statute of repose or one of the congeries of rights necessary to establish the right to recover a distribution of limited partnership funds. In the landmark Baxter case, the Supreme Court determined that for choice of law purposes it did not matter whether the enactment was a statute of repose or a statute of limitations and proceeded to discuss the fundamental elements that would control the choice of law. But Baxter was a products liability case. Such a tort case is fundamentally different than the case at bar, since here the parties had the opportunity to agree upon and did so agree upon the law that would govern future disputes, thus implicating the contractual choice of law rules of Elgar and section 187. In a tort case the principles of Baxter obviously control; here, the parties entered into an agreement so Elgar controls.
The parties disagree as to whether or not the Connecticut Statute of Limitations would bar the plaintiff's claim. Because of the conclusion reached by this court that Delaware law is applicable this court will not address that issue.
The parties even included in section 11.8 a clause that states that Delaware law would be applied " without regard to [Delaware's] conflicts of law principles." While this clause is technically not applicable, because it is Connecticut conflicts of law principles that will determine the applicable law, the clause further evidences the intent of the parties to provide the broadest application of Delaware law allowed, even to the extent of requiring the application of Delaware law where Delaware law conflicts principles would require the application of another state's law.
While the court believes that section 11.8 is unambiguous, the court's holding is further bolstered by earlier provisions in the LPA which include the following:
WHEREAS, the parties hereto desire to form a limited partnership (the " Partnership"), in accordance with the provision of the Revised Uniformed Limited Partnership Act of the State of Delaware, for the purposes and upon the term set forth in this agreement.
Paragraph 1.1 of the LPA states: " Formation . The parties hereby create and form a limited partnership under the Revised Uniform Limited Partnership Act of the State of Delaware (the " Limited Partnership Act") (Emphasis added.)." The recitation of these particular statutes incorporates the terms of those statutes by reference into the agreement. See Greene v. City of Waterbury, 126 Conn.App. 746, 751, 12 A.3d 623 (2011). " When a party expressly incorporates a statutory enactment by reference, that enactment becomes part of the contract for the indicated purposes just as though the words of the enactment were set out in full in the contract ." Greene at 751 quoting 11 S. Williston, Contracts (4th Ed. Lord 1999) (emphasis in Greene not Williston). Thus the provisions of DRULPA including section 17-607(c) are incorporated by reference. This further clarifies the meaning of section 11.8.
Based upon its reading of the plain language of the LPA, the court concludes that the parties knew that they were choosing to have their relationship governed by Delaware law, including all their rights and all their liabilities, such as the limitations of liabilities imposed by Delaware law and did so effectively and without exception.
In asserting that the conflicts of law provision included in the LPA does not govern either unjust enrichment claims or statute of limitations law the plaintiff relies heavily on the case of Katcher v. 3V Capital Partners LP, 2011 WL 1105724, Judicial District of Stamford/Norwalk at Stamford Docket #X05-CV08-5008383S, February 1, 2011. It is neither surprising nor unreasonable for the plaintiff to cite Katcher since it apparently was based on a predecessor limited partnership agreement involving the defendants and the plaintiff's predecessor. Katcher was decided in this judicial district several years ago. However, the Court concludes that the plaintiff's reliance on Katcher is to no avail. First, within the context of a pre-judgment remedy proceeding involving multiple issues, the Katcher court determined that a similar, though not identical choice of law, provision would not bar a Connecticut Unfair Trade Practices Act (CUTPA) claim. In so concluding the Katcher court cited at least one case that held that such choice of law provisions should not bar CUTPA claims as a matter of CUTPA policy. Custer Insurance Adjusters, Inc. v. Nardi, Superior Court, judicial district of Ansonia/Milford Docket #CV90-80061967 (April 20, 2000).
The Katcher choice of law provision did not include the concluding clause set forth in the choice of law provision in the LPA that states " without regard to Delaware conflict of law principles."
More importantly, in concluding that the Katcher choice of law provision did not bar CUTPA claims the Katcher court relied on the cases of Blakeslee Arpaia Chapman, Inc. v. Helmsman Management Services, Inc. 31 Conn.L.Rptr. 214, (2002) and Graystone Community Reinvestment Associates v. First Union National Bank, (D.Conn. January 25, 2002). A review of the Blakeslee and Graystone cases reveals that each of them dealt with a choice of law provision in a contract that was much narrower than the choice of law provision contained in the LPA. In Blakeslee the agreement contained a provision which said that the agreement be " construed under and governed by" Massachusetts Law. The Blakeslee agreement did not contain the provision that is contained in the LPA choice of law provision that not only the agreement but " all rights and liabilities " will be governed by Delaware Law. Similarly in Graystone the choice of law provision provided that the agreement " shall be governed and construed in accordance with the laws of the State of New York." In interpreting the intent of the parties the language of the agreement which they signed is critical. In Blakeslee and Graystone the parties entered into an agreement that said that the agreement itself would be construed and interpreted in accordance with the laws of a particular state. Nothing in those agreements stated that laws of forum state that did not deal with the construction or governance of the agreement would be inapplicable. In the case of bar however the parties went to the length of expanding upon what might be construed as more typical and narrow choice of law provisions by setting forth that not only the agreement but all of their rights and liabilities would be governed by Delaware law. The choice of laws provision relied upon in Midland Funding, LLC v. Wieczorkowski, 2015 WL 3555383 (2015), also cited by the plaintiff is similarly distinguishable. The difference in the contractual language is critical and cannot be ignored by the court. Here the parties chose to include a significantly broader choice of law provision. This court will honor that choice.
In a case with a remarkably similar fact pattern, the Appellate Court of Illinois ruled that section 17-607(c) prevented a trustee from recovering distributions to former limited partners made more than three years before the institution of suit. Freeman v. Williamson, 383 Ill.App.3d 933, 890 N.E.2d 1127, 322 Ill.Dec. 208 (2008). In ruling that Delaware law applied as opposed to the statute of limitations of the forum, the Freeman court reasoned that section 17-607(c) constituted a statute of repose rather than a statute of limitations and applying Illinois conflict rules determined that the Delaware statute of repose must be applied. The difference between the Freeman court's analysis and this court's approach is that under Connecticut conflict principles (and particularly under Elgar and Section 187 of the Restatement (Second)), the initial inquiry is whether the parties entered into an agreement to have their rights and liabilities determined under Delaware law.
Having determined that Delaware law and specifically 17-607(c) is applicable the court must determine whether 17-607(c) requires that judgment enter against the plaintiff on its unjust enrichment claims.
In its unjust enrichment claims the plaintiff is seeking to hold the defendants liable for distributions which the plaintiff claims (and for purpose of this motion the court assumes) were in excess of that to which the defendants were entitled. Section 17-607(c) is broad and clear. It states that a limited partner " shall have no liability under this chapter or other applicable law ." (Emphasis added.) By stating that the limited partner shall have no liability, section 17-607(c) effectively extinguishes the liability of the limited partner three years after the distribution. But more importantly, it goes on to state that the limited partner will not have liability under this chapter " or other applicable law ." It extinguishes liability not only pursuant to DRULPA but under any other theory of law. Thus, even though the plaintiff seeks recovery under a different legal theory, i.e. the law of unjust enrichment, section 17-607(c) extinguishes liability pursuant to that other applicable law that the plaintiff claims is the basis of its recovery.
Like the contract, the statute is clear and broad. The plaintiff has not cited and the court has not found any Delaware case which interprets the law more narrowly than the broad language would otherwise indicate.
Finally, the plaintiff argues that 17-607(c) is not applicable because upon their withdrawal the defendant ceased to be limited partners under the terms of the LPA. The plaintiff argues that since the defendants are no longer limited partners they cannot claim the protections of 17-607(c) since 17-607(c) provides that " a limited partner" shall have no liability. But a thorough reading of 17-607 as a whole makes it clear that the words " limited partner" refer to the person or entity who receives the distribution by virtue of the partner's status as a limited partner and applies even to withdrawing limited partners. By using the term " limited partner" section 17-607(c) makes clear that one who is or was a general partner is not protected by the provision of 17-607(c). Indeed, 17-607(b) sets forth the circumstances in which a limited partner shall be liable for an excessive distribution. Surely a limited partner who receives an excessive distribution upon his withdrawal does not escape liability under 17-607(b) because he has withdrawn from the partnership and is no longer a limited partner. Such an interpretation would render both sections 17-607(b) and 17-607(c) inapplicable in many if not most situations when a limited partner receives a distribution as a part of a redemption of investments. Such an interpretation would in fact prevent the primary purpose of section 17-607(c) which is to provide finality and certainty with regard to investors' financial status.
The court observes that, in a significantly different context, in Schuss v. Penfield Partners, L.P., 2008 WL 2433842 (Del Ch. 2008), the court stated that once a partner withdraws, the partner becomes " simply a contract claimant holding fixed rights and can sue in contract." [WL] at 4. The Schuss court preceded its statement by quoting DRULPA section 17-606(a) which states: " Subject to sections 17-607 and 17-804 of this title, and unless otherwise provided in the partnership agreement, at the time a partner becomes entitled to receive a distribution, he or she has the status of, and is entitled to all remedies available to, a creditor of the limited partnership with respect to the distribution." (Emphasis added.) The Schuss court was addressing the rights of limited partners to pursue collection of their distributions and did not expressly address protections granted to limited partners by DRULPA. The section of DRULPA that provides for those rights in its introductory clause provides that those rights and the change in status are subject to the provisions of section 17-607.
V. CONCLUSION
For all these reasons the court grants the defendants' motion for summary judgment based upon its second special defense and denies the plaintiff's motion for summary judgment.