Opinion
No. CV 09 5010098S
February 2, 2010
MEMORANDUM OF DECISION ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AS TO (#123)
Introduction
This is a contractual dispute between a limited partnership and several of its private limited partners. The plaintiff, Wall Street Technology Partners, LP (WST Partners), is a Delaware limited partnership based in Manhattan. The defendants are the private limited partners Warren B. Kanders (Kanders), and Burtt Ehrlich and Francine Ehrlich (Ehrlichs), all of whom are residents of Connecticut. The complaint is in two counts. The first count alleges a breach of the partnership agreement by Kanders, while the second count makes a similar allegation against the Ehrlichs. In their revised answer to the complaint, the defendants also collectively assert seven special defenses to WST Partner's allegations. Those special defenses are fraud, waiver, estoppel, unclean hands, laches, withdrawal, and statute of limitations. The defendants have also collectively filed a counterclaim against WST Partners for breach of the same partnership agreement.
Pursuant to Practice Book § 17-49, the plaintiff now moves for summary judgment on two grounds. The first is as to liability only (not damages) on its breach of contract complaint against the defendants. The second portion of the plaintiff's motion for summary judgment is as to all issues on the breach of contract counterclaim asserted by the defendants. As part of this process, the special defenses raised by the defendants must necessarily be addressed by the court before ruling on the plaintiff's motion for summary judgment.
As the plaintiff's motion for summary judgment speaks directly to the defendants' liability, the court must consider each of the special defenses asserted by the defendants, and weigh them under the standards for granting or denying summary judgment. Thus, although the defendants point out that the plaintiff has failed to specifically move for summary judgment with respect to each of their individual special defenses, the merits of all the special defenses must be addressed by the court when determining whether the plaintiff has met its burden with respect to liability. See Lienfactors, LLC v. Crandall, Superior Court, judicial district of New London, Docket No. CV075002929 (October 2, 2008, Martin, J.). Further, "[o]nly one of [the defendants'] defenses needs to be valid in order to overcome [a] motion for summary judgment. Since a single valid defense may defeat recovery, [a movant's] motion for summary judgment should be denied when any defense presents significant fact issues that should be tried." (Internal quotation marks omitted.) Union Trust Co. v. Jackson, 42 Conn.App. 413, 417, 679 A.2d 421 (1996).
Standards for Summary Judgment
The standards for ruling on motions for summary judgment are both well established and familiar, yet they bear repeating and articulating in each instance where such relief is sought, lest an inference be drawn that such standards were not adhered to in a given case, or a suspicion arises that a different standard of review was followed. "Practice Book § 17-49 provides that summary judgment shall be rendered forthwith if the pleadings, affidavits and any other proof submitted show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. In deciding a motion for summary judgment, the trial court must view the evidence in the light most favorable to the nonmoving party." (Internal quotation marks omitted.) Mazurek v. Great American Ins. Co., 284 Conn. 16, 26, 930 A.2d 682 (2007).
In cases such as this, where "summary judgment [is] rendered upon the issue of liability only, without deciding damages, [it] is not a final judgment from which an appeal lies." Balf Co. v. Spera Construction Co., 222 Conn. 211, 212, 608 A.2d 682 (1992). This is because of the principle of law that, "judgment is not completed until damages have been assessed." Tureck v. George, 44 Conn.App. 154, 157, 687 A.2d 1309, cert. denied, 240 Conn. 914, 691 A.2d 1080 (1997). "In ruling on a motion for summary judgment, the court's function is not to decide issues of material fact, but rather to determine whether any such issues exist." Nolan v. Borkowski, 206 Conn. 495, 500, 538 A.2d 1031 (1988). "In seeking summary judgment, it is the movant who has the burden of showing the nonexistence of any issue of fact. The courts are in entire agreement that the moving party for summary judgment has the burden of showing the absence of any genuine issue as to all the material facts, which, under applicable principles of substantive law, entitle him to a judgment as a matter of law." (Internal quotation marks omitted.) Zielinski v. Kotsoris, 279 Conn. 312, 318, 901 A.2d 1207 (2006).
"The courts hold the movant to a strict standard. To satisfy his burden the movant must make a showing that it is quite clear what the truth is, and that excludes any real doubt as to the existence of any genuine issue of material fact . . . As the burden of proof is on the movant, the evidence must be viewed in the light most favorable to the opponent . . . When documents submitted in support of a motion for summary judgment fail to establish that there is no genuine issue of material fact, the nonmoving party has no obligation to submit documents establishing the existence of such an issue . . . Once the moving party has met its burden, however, the opposing party must present evidence that demonstrates the existence of some disputed factual issue . . . It is not enough, however, for the opposing party merely to assert the existence of such a disputed issue. Mere assertions of fact . . . are insufficient to establish the existence of a material fact and, therefore, cannot refute evidence properly presented to the court under Practice Book § [17-45]." (Internal quotation marks omitted.) Id.
"A motion for summary judgment shall be supported by such documents as may be appropriate, including but not limited to affidavits, certified transcripts of testimony under oath, disclosures, written admissions and the like." Practice Book § 17-45. "[Section 17-46] sets forth three requirements necessary to permit the consideration of material contained in affidavits submitted in a summary judgment proceeding. The material must: (1) be based on personal knowledge; (2) constitute facts that would be admissible at trial; and (3) affirmatively show that the affiant is competent to testify to the matters stated in the affidavit." Barrett v. Danbury Hospital, 232 Conn. 242, 251, 654 A.2d 748 (1995).
"Mere assertions of fact . . . are insufficient to establish the existence of a material fact and, therefore, cannot refute evidence properly presented to the court under Practice Book § [17-45]." (Internal quotation marks omitted.) Allstate Ins. Co. v. Barron, 269 Conn. 394, 406, 848 A.2d 1165 (2004). "Such assertions are insufficient regardless of whether they are contained in a complaint or a brief." New Milford Savings Bank v. Roina, 38 Conn.App. 240, 245, 659 A.2d 1226, cert. denied, 235 Conn. 915, 665 A.2d 609 (1995). "Further, unadmitted allegations in the pleadings do not constitute proof of the existence of a genuine issue as to any material fact on a motion for summary judgment." Id. However, the court may consider not only the facts presented by the parties' affidavits and exhibits, but also the "inferences which could be reasonably and logically drawn from them." United Oil Co. v. Urban Redevelopment Commission, 158 Conn. 364, 381, 260 A.2d 596 (1969).
Facts
The complaint alleges that in the year 2000, the defendants entered into the Amended and Restated Agreement of Limited Partnership (the partnership agreement). This agreement created the plaintiff partnership WST Partners. The partnership agreement was signed on December 22, 2000. Upon joining the plaintiff as private limited partners, each of the defendants thereby committed to making set monetary contributions to fund the activities of WST Partners. As private limited partners, the defendants each paid a portion of their capital commitments upon joining the partnership, with the remainder to be paid in increments over time as needed. The partnership agreement requires that the private limited partners pay the balance of their capital commitments when requested by the general partner. The general partner is the entity which manages the business affairs of the partnership, and in this case the general partner for WST Partners is Wall Street Technology Managers, LP. These requests by the general partner for additional infusions of funds into the partnership by limited partners such as the defendants are known as "capital calls."
On December 2, 2002, a notice of a capital call on behalf of the partnership in the amount of $165,807.21 was sent to the defendant Kanders, and a notice of a capital call in the amount of $82,903.61 was sent to the defendant Ehrlichs. The notice instructed each defendant to pay their respective capital call to the partnership by December 17, 2002. However, the defendants failed to pay the capital call in the amount due by that date. On several dates thereafter, specifically, September 18, 2003, July 7, 2004, June 6, 2005, August 10, 2005, and September 26, 2008, the plaintiff sent additional notices of capital calls to the defendants. The defendants did not pay any of these capital calls by their due dates, nor have they paid these amounts to date. By agreement, the defendant Kanders' total capital commitment to the plaintiff is $1,000,000, and of that amount, Kanders has paid $201,339.62. The defendant Ehrlichs' agreement specified a total capital commitment to the plaintiff partnership of $500,000, and of that amount, only $100,669.81 has been paid.
The plaintiff contends that both defendants have breached the material terms of the partnership agreement by refusing to make the payments required by the capital calls. The defendants admit that they have not paid the amounts reflected in the above capital calls, but deny that any such amounts were due and owing. The defendants set forth the following seven special defenses to their non-payment of the capital calls: (1) fraudulent inducement; (2) waiver; (3) estoppel; (4) unclean hands; (5) laches; (6) withdrawal from the agreement; and finally, that (7) pursuant to § 52-576, the plaintiff's claims are time-barred by the statute of limitations. Each of these special defenses is addressed herein.
In connection with this motion for summary judgment, the court also reviewed two affidavits submitted on behalf of the plaintiff, as well as affidavits executed by two of the defendants, namely Kanders and Burtt Erlich. The plaintiff submitted affidavits of Robert Wolf and Victoria Katsov. The Wolf affidavit attached the WST Partners partnership agreement, along with executed copies of subscription agreements signed by the defendants. By signing the subscription agreements, the defendants, as private limited partners, became obligated to contribute specified amounts of capital to the partnership as requested. The amounts of such capital contributions varied by each private limited partner. The Katsov affidavit specifies the actual payments the defendants made to the partnership, along with the outstanding balances owed to the partnership by each defendant. Copies of the various capital call letters which were sent to the defendants are also attached.
Choice of Law
As a preliminary matter, while the parties agree that Connecticut's summary judgment procedure applies to the facts of this case, the plaintiff and the defendants are at odds as to which state's law of contract this court must apply when addressing the substance of the parties' claims. The defendants urge the court to apply New York law to certain of their special defenses, due to New York's "most substantial relationship" to the claims, and as the location of the initial partnership solicitation. Both agreements at issue contain a choice-of-law provision stating that the agreements "shall be governed, construed and enforced in accordance with the laws of the State of Delaware, excluding principles of conflict of laws." Notwithstanding this language, the defendants argue that their special defenses and counterclaims do not fall under Delaware law, because a narrowly drawn choice-of-law provision does not cover causes of action that are not based in contract. In response, the plaintiff argues that the choice-of-law provision found in both agreements is broad enough to apply to the defendants' special defenses and counterclaims. This is because their special defenses are merely contractual defenses, and the defendants' counterclaim is in fact also based on the contract itself.
In Travel Services Network, Inc. v. Presidential Financial Corp., 959 F.Sup. 135, 146 (D.Conn. 1997), the plaintiff's claims arose out of a secured lending agreement. The agreement between the parties specified that "[t]he substantive Laws of the State of Massachusetts shall govern the construction of this Agreement and the rights and remedies of the parties hereto." (Internal quotation marks omitted.) Id., 139 n. 1. Based on this Massachusetts choice-of-law provision, the court held that the plaintiff could not maintain a cause of action under Connecticut's unfair trade practices statute, CUTPA. Id., 139. The court specifically noted the breadth of the choice-of-law provision in question, stating that "[a] broadly-worded choice-of-law provision in a contract may govern not only interpretation of the contract in which it is contained, but also tort claims arising out of or relating to the contract." Id.
Alternatively, a narrowly-drawn contractual choice-of-law provision does not necessarily preclude causes of action under the laws of another state. However, those causes of action must be different from the contract, and not based on that same contract. In Messler v. BarnesGroup, Inc., judicial district of Hartford, Docket No. CV 96 0560004 (February 1, 1999, Teller, J.) ( 24 Conn. L. Rptr. 107), the choice-of-law provision stated that the agreement "shall be construed in accordance" with Ohio law. The court noted that "[s]everal courts have held that similar narrowly-drawn choice-of-law provisions do not preclude causes of action under the laws of another state where such causes of action are not based in contract. See, e.g. Thompson Wallace of Memphis, Inc. v. Falconwood Corp., 100 F.3d 429, 432-33 (5th Cir. 1996) (plaintiff's tort claims were not governed by choice-of-law provision that provided that the chosen law applied to the `agreement and its enforcement'); Krock v. Lipsay, 97 F.3d 640, 645 (2nd Cir. 1996) (provision stating that parties' agreement would be `governed by and construed in accordance with' Massachusetts law was too narrowly-drawn to apply to claim for fraudulent misrepresentation); Caton v. Leach Corp., 896 F.2d 939, 942-43 (5th Cir. 1990) (choice-of-law provision stating that the agreement `shall be construed under' California law does not preclude causes of action for breach of the duty of good faith and fair dealing or quantum meruit under Texas law) . . ." Id.
Similarly, in George S. May International Co. v. Cabinet Crafters, Inc., United States District Court, Docket No. H-88-28 (D.Conn. August 10, 1988), the court held that a narrowly drawn choice-of-law provision stating that the operative agreement would be "governed" by Illinois law did not apply to the defendant's tort counterclaims, which included a claim under Connecticut's CUTPA statute. See also McKeown Distributors, Inc. v. Gyp-Crete, Corp., 618 F.Sup. 632, 643 n. 5 (D.Conn. 1985) (the parties' election to have the agreement "interpreted and governed by" Minnesota law does not preclude the plaintiff's CUTPA claim).
Before the court addresses whether the Delaware choice-of-law provision applies in the present case, the court must briefly restate some basic principles of Connecticut practice. "The purpose of a special defense is to plead facts that are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action." (Emphasis added; internal quotation marks omitted.) Danbury v. Dana Investment Corp., 249 Conn. 1, 17, 730 A.2d 1128 (1999). In a legal sense, a special defense is therefore tied to the allegations in the original complaint to which the special defense is asserted. In contrast, a counterclaim stands in a different legal posture as its own cause of action. Unlike a special defense, "[a] counterclaim is a cause of action existing in favor of the defendant against the plaintiff and on which the defendant might have secured affirmative relief had he sued the plaintiff in a separate action. It is a cause of action . . . which a defendant pleads to diminish, defeat or otherwise affect a plaintiff's claim and also allows a recovery by the defendant." (Citation omitted; internal quotation marks omitted.) Classic Limousine v. Alliance Limousine, LLC, Superior Court, Judicial District of Stamford-Norwalk at Stamford, Docket No. CV 99 0174911 (August 13, 2002, D'Andrea, J.T.R.), citing Home Oil Co. v. Todd, 195 Conn. 333, 341, 487 A.2d 1095 (1985). This basic distinction between a special defense and a counterclaim is significant to the court's analysis, and the determination of whether the Delaware choice of law provision contained in the partnership agreements encompasses both the defendants' special defenses and their counterclaim.
It is clear that a narrowly drawn choice-of-law provision such as the instant language would not cover tort counterclaims arising from the same underlying events. However, in the present case, there is no tort counterclaim on which the defendants might recover a judgment. The defendants' counterclaim alleges only a breach of the same contract, which clearly falls within the agreement's choice-of-law provision, and therefore, must be viewed under the Delaware law that governs the agreement. Further, merely because a counterclaim alleging tortious conduct might fall outside the scope of a narrowly drawn contractual choice-of-law provision, it does not follow that tortious conduct asserted as a special defense to a contract claim similarly falls outside the scope of that same choice-of-law provision. This is because unlike a counterclaim, a special defense is not a separate cause of action. Therefore, although the defendants argue that certain of their special defenses to the claimed breach of contract are tort-based, these special defenses cannot be viewed as "tort claims" for the purposes of a choice-of-law analysis. Rather, at their core, the defendants' special defenses are defenses to the enforceability of the contract itself, in this case the partnership agreement, which specifies Delaware law. Accordingly, these special defenses to the validity of the agreements must be viewed in light of the parties' choice of Delaware law, as expressed in their agreements.
The court will now discuss each of the defendants' seven special defenses to the breach of contract claim in light of Delaware law.
Typically, a party is only entitled to raise equitable defenses when an adverse party is seeking relief by way of an equitable cause of action. However, the defendants cite to dicta in a Delaware case, USH Ventures v. Global Telesystems Group, Inc., 796 A.2d 7, 20 (Del.Super. 2000), which states that "[f]ormal, impractical distinctions should be set aside, and the Superior Court now has and should have broad power to hear equitable defenses." The court finds the USH Ventures analysis of this issue to be persuasive as to the current state of Delaware law, and accordingly, will address the substance of the defendants' equitable defenses, as well as the defendants' other special defenses in this motion for summary judgment.
The Special Defenses Fraud
The first special defense alleges fraud. As previously stated, in opposing the plaintiff's motion for summary judgment, the defendants submitted affidavits from Burtt Ehrlich and Kanders. These affidavits largely re-state the allegations contained in the defendants' revised answer and special defenses, and in an attachment provide the court with a copy of the "Confidential Private Placement Memorandum" (PPM) which contains the alleged misrepresentations relied upon by the defendants.
In the fall of 2000, the defendants were contacted by Gaurav Burman (Burman), the senior executive of the investment banking firm of Dresdner Kleinwort Benson Bank (Dresdner). Burman advised the defendants that Dresdner was in the process of forming a partnership (plaintiff) for the purpose of investing in mid-and later-stage domestic companies in the information technology, internet, telecommunications and digital media industries. Thereafter, in an effort to induce the defendants to invest with the partnership, Burman arranged for a meeting attended by the defendants in September 2000. At that meeting, the defendants received an oral presentation and the PPM. Further, at the September meeting, the defendants aver that the following representations were made: (1) the investment team, consisting of Burman, Richard Wolf, Christopher Wright and George Fugelsang, was a critical factor in attracting both investors and investment opportunities, and the team was responsive for choosing and managing the plaintiff's investments; (2) the plaintiff represented that its investment philosophy was to invest in only mid-and later-stage domestic companies in the technology and media sectors, with an emphasis on hardware; (3) the plaintiff further represented that the investment team had access to superior and proprietary deal flow-through; and (4) the plaintiff's General Partner would waive its right to fees on capital committed to the partnership by the Small Business Administration (SBA).
The defendants claim that based on these representations, they agreed to invest in the partnership. Subsequent to their signing of the agreement, the defendants learned that, contrary to the representations conveyed to them, Wright, Fugelsang and Burman were leaving Dresdner and would not be part of the "investment team." Further, the defendants learned that, contrary to the investment strategy, the partnership, acting through its general partner, invested in early-stage companies and companies that engaged in software creation. Additionally, the defendants learned that the partnership drew down on the remainder of available SBA funds and then charged a management fee with respect to the SBA-committed capital. The defendants claim that these representations were knowingly false when made, and were made with the specific intent to defraud the defendants and to induce them to invest in the partnership.
The agreement the defendants signed contains a merger clause that states that the agreement reflects "the entire understanding among the parties relating to the subject matter of this Agreement," and further, that "[a]ny and all prior conversations, correspondence, memoranda or other writing are merged in, and replaced." Additionally, the merger clause states that "[a]ny and all prior conversations, correspondence, memoranda or other writing are . . . without further effect on" the agreement and that "[n]o promises, covenants, representations, or warranties of any character or nature other than those expressly stated in [the] Agreement and the SBA Agreements have been made to induce any party to enter into this Agreement or any SBA Agreement." (Limited Partnership Agreement § 10.11.) Further, the Subscription Agreements the defendants signed contain a specific representation that each private limited partner "received and carefully read the Limited Partnership Agreement" and "based its decision to invest on the information contained in the Limited Partnership Agreement." (Subscription Agreement, § III.E.1.)
Additionally, the agreement states that the partnership "may make, manage, own and supervise investments of every kind and character in conducting its business as a small business investment company." (Limited Partnership Agreement, § 2.01.) Lastly, the agreement further states that the management and operation of the partnership and the formulation of investment policy is vested "exclusively in the General Partner . . ." (Limited Partnership Agreement, § 3.01).
"Delaware courts have held that sophisticated parties may not rely on representations that are inconsistent with a negotiated contract, when the contract contains a provision explicitly disclaiming reliance upon such outside representations." Progressive International Corp. v. E.I. Du Pont De Nemours Co., 19209 (Del.Ch. 7-9-2002); see Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544 (Del.Ch. 2001). This is consistent with the idea that a merger and integration clause bars such efforts, lest a party who expressly disclaimed reliance upon a representation later turn around and claim such representation was fraudulent. "Under the objective theory, `intent' does not invite a tour through [the plaintiff's] cranium, with [the plaintiff] as the guide. This presumption that parties will be bound by the language of the contracts they negotiate holds even greater force when, as here, the parties are sophisticated entities that bargained at arm's length." Id.
It is clear that the agreements contain valid and enforceable merger and integration clauses that specifically exclude contrary parol evidence such as that proffered by the defendants. Further, the terms of the agreements are clear and unambiguous, and directly refute the defendants' allegations. As the Delaware Court of Chancery recently observed, "In Delaware . . . the meaning of an unambiguous contract is a question of law for the court to determine. In determining meaning, a contract is to be read as a whole, with a court giving effect to every term therein. Individual terms should not be read to frustrate the parties' clear purpose. And, where a contract is unambiguous, a court will apply that clear meaning and not use parol evidence to create ambiguity in an otherwise unambiguous contract. Extrinsic evidence can only be used to the extent the contract itself is susceptible to multiple reasonable interpretations." Viking Pump, LLC v. Century Indemnity Co., 1465-VCS (Del.Ch. 10-14-2009). In noting the appropriateness of summary judgment in another case involving unambiguous contract language, the Chancery Court stressed, "the legal policy of this State [Delaware], which strongly emphasizes contract text as the overridingly important guide to contractual interpretation." CT Page 4216 O'Brien v. USA Networks, Inc., 3892-VCP (Del.Ch. 8-14-2009).
The court also finds that the defendants are sophisticated investors, as they represented themselves in the subscription agreements they signed as "accredited investors," within the meaning of federal securities regulations. As such, they cannot claim that they justifiably relied on information not expressly contained within the agreement itself. The Delaware Court of Chancery addressed this very issue in H-M Wexford, LLC v. Encorp, Inc., 832 A.2d 129 (Del.Ch. 2003). The court was faced with a sophisticated investor plaintiff, a limited liability company which purchased securities as part of a private placement. The plaintiff's claims included breach of contract and fraud. As in the present case, the plaintiff there claimed that the defendants misrepresented certain facts contained in a private placement memorandum (PPM), facts that were not contained in the purchase agreement signed by the parties. The court dismissed the claims on the grounds that the PPM could not serve as a basis for the plaintiff's claims, because the PPM was excluded from the parties' agreement by the terms of the integration clause in the purchase agreement. Therefore, there could not have been any contractual obligation with regard to the PPM, and thus, none could be breached. Likewise, in light of the exclusionary provision in the purchase agreement, the Chancery Court held that the plaintiff's reliance on the PPM was not justifiable, and that therefore, the fraud claim based on the PPM also failed as a matter of law.
The court stated that, "[u]nder Delaware law, the elements of a breach of contract are: 1) a contractual obligation; 2) a breach of that obligation by the defendant; and 3) a resulting damage to the plaintiff. Here, the Purchase Agreement does not give rise to any contractual obligation predicated on the financial information set forth in the PPM." H-M Wexford, LLC v. Encorp, Inc., supra, 832 A.2d 140. As in this case, the PPM given to the plaintiff investor in that case contained disclaimer language limiting its legal import. In noting the sophistication of the plaintiff as an "accredited investor" as defined by federal securities regulations, the court went on to say that "[the plaintiff] presumptively understood the ramifications of the integration clause in the purchase agreement and the disclaimer in the PPM. [The plaintiff] cannot now profess ignorance with respect to these clauses, and state that it justifiably relied on the information in the PPM when it entered into the Purchase Agreement. To say this differently, if [the plaintiff] wanted to be able to rely on the PPM or particular facts represented therein, it had an obligation to negotiate to have those matters included within the scope of the integration clause of the contract." Id., 142.
Attached to the Kanders affidavit is the PPM he received. It contains a "Disclaimer" in bold face on its face sheet stating that the PPM is "a preliminary document being issued for information and discussion purposes . . . The information contained herein . . . should not be relied upon by any person for any purpose." (Kanders Aff., Exh. A, p. 2.) Further on, the PPM ends with this language: "This presentation is not intended to provide the basis of any investment decision . . ." (Kanders Aff., Exh. A, p. 39).
Similarly, the defendants in the present case are sophisticated investors that had a duty and obligation to be diligent in their review of the limited partnership agreement before signing it. In the face of these unambiguous contractual terms, the defendants cannot simply assert that prior to reviewing and signing the agreement, they relied on oral representations or terms in a private placement memorandum that are directly contravened by or expressly excluded from the terms of that agreement, and then claim under Delaware law that these allegations raise a genuine issue of material fact as to the validity of the agreements.
Waiver
"Waiver is the voluntary and intentional relinquishment of a known right . . . It implies knowledge of all material facts, and intent to waive." (Citations omitted; internal quotation marks omitted.) Realty Growth Investors v. Council of Unit Owners, 453 A.2d 450 (Del. 1982). The defendants contend that after they became aware of the alleged misrepresentations, their counsel sent a letter dated April 1, 2003, to the plaintiff's managing partner. The letter not only brought these alleged misrepresentations to the plaintiff's attention, but also indicated the defendants' belief that these misrepresentations relieved them of their obligations to provide capital contributions to the partnership. Specifically, the letter stated that "[the defendants] take the position that their, and any similarly situation limited partners', capital commitments are no longer binding. Furthermore, demand is hereby made on behalf of [the defendants] for rescission of their investment in the Partnership and return to them by April 16, 2003 of all investments in and payments to the Partnership, including payments made to finance payment of management fees."
The defendants contend that the plaintiff waived enforcement of the terms of the partnership agreement because it failed to bring suit within a reasonable time after the defendants' April 1, 2003 letter. In the defendant's view, that letter provided their "unequivocal" communication that the defendants would not make further contributions to the partnership, and that the capital commitments were no longer binding. The defendants contend that the plaintiff's silence over a five-year period, in the face of the defendants' assertion that their capital commitments to the partnership were no longer binding, raises an issue of material fact as to whether the plaintiff intended to waive its right to enforce the capital commitments. However, the only support for this proposition is the letter the defendants sent to the plaintiff. As discussed infra, the letter does not comport with the means of withdrawal specified in the partnership agreement, and standing alone, it is insufficient to raise a genuine issue of material fact as to whether the plaintiff intended to waive its contractual right to enforce the capital commitments.
The special defense of the statute of limitations is addressed separately.
The Subscription Agreements signed by the defendants also supports this conclusion. It provides in paragraph I. B., captioned "Irrevocable Subscription; Penalty for Default," "The [defendant understands that he/she is not entitled to cancel, terminate or revoke this Subscription or any agreement hereunder and that he/she is unconditionally obligated to make all payments of the Commitment and any unpaid Commitment regardless of any adverse change in the Partnership's properties, business, financial condition or prospects or any adverse change, financial or otherwise, in the [defendant]. The [defendant] understands that a failure to pay the Commitment may result in a substantial detriment to the [defendant] as detailed in the Limited Partnership Agreement."
Estoppel
The third special defense is estoppel. "Equitable estoppel arises when a party by his conduct intentionally or unintentionally leads another, in reliance upon that conduct, to change position to his detriment. To prove equitable estoppel, a party must show by clear and convincing evidence that it (1) lacked knowledge of the truth of the facts in question, (2) relied on the other party's conduct, and (3) suffered prejudice as a result of such reliance. Furthermore, a person's reliance on the other party's actions must be reasonable, and that individual must not have misled himself through his own negligence." (Internal quotation marks omitted.) Lawhon v. Winding Ridge Homeowners Assoc., 3654-VCN (Del.Ch. 12-31-2008).
The defendants do not allege in their special defense as pleaded that they were prejudiced in any way by the plaintiff's delay in bringing this cause of action. However, the defendants now contend in their sur-reply brief that they were prejudiced by the plaintiff's delay, in that "[d]uring the five and a half years while the [the plaintiff] remained silent after receiving [the] [d]efendants' letter, [the defendants'] claims against [the plaintiff] for fraud and rescission became time-barred, and [the] defendants are not precluded from asserting them directly or as counterclaims." The plaintiff's failure to bring suit earlier cannot be used as a reason for the defendants themselves not bringing what they perceived to be valid tort claims against the plaintiffs within the respective statute of limitations of the above-mentioned torts. After the April 1, 2003 letter, in which the defendants clearly allege that the plaintiff misrepresented certain facts in order to induce them to invest in the partnership, the defendants were not prevented from bringing a cause of action against the plaintiff for fraud, rescission, or any other claim they deemed applicable. Rather, from 2003 up until the institution of this action in 2009, the defendants chose not to do so.
It is worth noting that the defendants do not provide any case law to support the proposition that based on these alleged "prejudices," the defendants' special defense of laches, as alleged, evidences the existence of a genuine issue as to any material fact.
Furthermore, as previously stated, the defendants are sophisticated investors with a duty and obligation to be diligent in their review of the limited partnership agreement before signing it. As the defendants acknowledge reviewing and understanding the unambiguous terms of the agreements, they cannot now raise an issue of material fact by claiming that they relied on oral representations, or terms that were not contained in the signed agreements.
Unclean Hands
The fourth special defense is one of unclean hands. "The doctrine of unclean hands exists to protect the integrity of the processes of the Court, which will refuse to consider requests for equitable relief in circumstances where the litigant's own acts offend the very sense of equity to which he appeals. The inequitable conduct, however, must be related directly to the issue before the court. The timing of the alleged misconduct plays an important role in determining whether the inequitable acts preclude relief; and the Court may therefore decline to apply unclean hands when the conduct occurs subsequent to the plaintiff's cause of action." (Internal quotation marks omitted.) Mangano v. Pericor Therapeutics, Inc., 3777-VCN (Del.Ch. 12-1-2009).
"The maxim of equity that [he] who comes into equity must do so with clean hands dates back to the late eighteenth century when it was gleaned by a British barrister from a collection of cases in which plaintiffs had been denied relief on the basis of their inequitable conduct. While the doctrine might be considered relatively new in light of the long history of maxims of equity it is well embedded in American jurisprudence . . .
"The unclean hands doctrine is aimed at providing courts of equity with a shield from the potentially entangling misdeeds of the litigants in any given case. The Court invokes the doctrine when faced with a litigant whose acts threaten to tarnish the Court's good name. In effect, the Court refuses to consider requests for equitable relief in circumstances where the litigant's own acts offend the very sense of equity to which he appeals . . . [T]he purpose of the clean hands maxim is to protect the public and the court against misuse by one who, because of his conduct, has forfeited his right to have the court consider his claims, regardless of their merit. Thus, the doctrine should not be seen as a means to aid a party who faces an unscrupulous opponent; rather it is a rule of public policy." (Citations omitted; internal quotation marks omitted.) Nakahara v. NS 1981 American Trust, 718 A.2d 518 (Del.Ch. 1998).
When the plain language of the partnership agreement is considered, along with the rights and obligations of the sophisticated parties under it, the court's sense of equity is not stirred. As such, the defendants have failed to show a genuine issue of material fact with respect to this special defense.
Laches
In their special defense of laches, the defendants allege that the plaintiff made capital calls to the defendants on December 2, 2002, September 18, 2003, July 7, 2004, June 6, 2005, and September 26, 2008. The defendants' revised answer admits that none of the capital calls were paid. However, the defendants further allege that they "unequivocally" stated in writing that they objected to the payment of the further capital contributions, and argue that any such commitments had been extinguished by the wrongful acts of the plaintiff. As with their special defense of equitable estoppel, the defendants contend that "[d]uring the five and a half years while the [the plaintiff] remained silent after receiving [the] [d]efendants' letter, [the defendants'] claims against [the plaintiff] for fraud and rescission became time-barred, and [the] defendants are not precluded from asserting them directly or as counterclaims."
"The essential elements of laches are: (i) plaintiff must have knowledge of the claim and (ii) there must be prejudice to the defendant arising from an unreasonable delay by plaintiff in bringing the claim." Fike v. Ruger, 752 A.2d 112, 113 (Del. 2000). "A statute of limitations period at law does not automatically bar an action in equity because actions in equity are time-barred only by the equitable doctrine of laches . . . Laches, like a statute of limitations, functions as a time bar to lawsuits. Unlike a statute of limitations, the equitable doctrine of laches does not prescribe a specific time period as `unreasonable.' Rather, laches is an unreasonable delay by a party, without any specific reference to duration, in the enforcement of a right. An unreasonable delay can range from as long as several years to as little as one month. The temporal aspect of the delay is less critical than the reasons for it, because in some circumstances even a long delay might be excused." (Citation omitted; internal quotation marks omitted.) O'Brien v. USA Networks, Inc., supra, 3892-VCP.
"A court of equity moves upon considerations of conscience, good faith, and reasonable diligence. Thus, although a statute of limitations defense is premised solely on the passage of time, the lapse of time between the challenged conduct and the filing of a suit to prevent or correct the wrong is not, in itself, determinative of laches. Instead, the laches inquiry is principally whether it is inequitable to permit a claim to be enforced, the touchstone of which is inexcusable delay leading to an adverse change in the condition or relations of the property or the parties. Under ordinary circumstances, a suit in equity will not be stayed for laches before, and will be stayed after, the time fixed by the analogous statute of limitations at law; but, if unusual conditions or extraordinary circumstances make it inequitable to allow the prosecution of a suit after a briefer, or to forbid its maintenance after a longer period than that fixed by the statute, the court will not be bound by the statute, but will determine the extraordinary case in accordance with the equities which condition it." (Citation omitted.) Id.
The court incorporates and adopts the reasoning stated in its discussion of the special defense of equitable estoppel. The court cannot find that there exists a genuine issue of material fact with respect to the defendants' special defense of laches.
Withdrawal
Pursuant to the agreement, a limited partner may withdraw by following the procedures set forth in §§ 5.07, 5.08 and 8.6-8.10. The agreement provides in relevant part that, "[a]ny [p]rivate [l]imited [p]artner may elect to terminate its obligation in whole or in part to make capital contribution required under this Agreement . . . if the [p]rivate [l]imited [p]artner obtains an opinion of counsel as provided under Section 5.08 to the effect that making such contribution would require [p]rivate [l]imited [p]artner to withdraw from the Partnership under Section 8.06 through 8.10." Sections 8.06 through 8.10 enumerate the types of entities that are permitted to withdraw from the partnership. The sections provide that an ERISA plan, a government entity, a tax exempt entity, or an investment company, may withdraw.
While the defendants contend that they validly withdrew from WST Partners, they do not allege that they attempted to withdraw from the partnership pursuant to the provisions of either of the applicable agreements (partnership agreement and subscription agreement). The defendants have failed to show that their alleged attempts to withdraw from the partnership complied with procedures set forth in the agreement. Rather, they contend that the April 2003 letter evidences their withdrawal from the partnership.
The agreement clearly provides the procedure for effectively withdrawing from the partnership. It is also clear that the defendants did not attempt to follow this procedure. It cannot be said that the April 2003 letter, standing alone, raises a genuine issue of material fact as to this special defense, as the means employed fall outside the terms of the agreement.
The Statute of Limitations
In their final special defense to the claimed breach of contract, the defendants invoke a Connecticut statute, and contend that pursuant to General Statutes § 52-576, the plaintiff's claims are time barred by the statute of limitations. Section 52-576(a) provides: "No action for an account, or on any simple or implied contract, or on any contract in writing, shall be brought but within six years after the right of action accrues, except as provided in subsection (b) of this section." The defendants, however, argue in their sur-reply brief that the agreements' choice-of-law provision should govern the plaintiff's cause of action. Thus, they now contend that Delaware's much shorter (three-year) statute of limitations regarding breach of contract claims is applicable to the present matter.
Title 10, § 8106 of the Delaware Code governs the limitation period for breach of contract actions, and provides that that "no such action shall be brought after the expiration of three years from the accruing of the cause of action."
Practice Book § 10-3(a) provides in pertinent part that, "[w]hen any claim in a . . . special defense . . . is grounded on a statute, the statute shall be specifically identified by its number." Further, Practice Book § 10-3(b) provides that "[a] party to an action who intends to raise an issue concerning the law of an outside or governmental unit thereof outside this state shall give notice in his or her pleadings or other reasonable written notice." In Connecticut, parties are bound by their pleadings. O'Halloran v. Charlotte Hungerford Hospital, 63 Conn.App. 460, 463, 776 A.2d 514 (2001) (stating that "[t]he interpretation of pleadings is always a question of law for the court . . . It is axiomatic that the parties are bound by their pleadings"). Accordingly, the court will view the defendants' statute of limitations defense as stated in their revised answer.
The parties agree that the accrual of the earliest breach of contract occurred on December 17, 2002, which was the date of the first capital call that the defendants failed to respond to. Thus, the statute of limitations begins to run from that date. Based on the return of service in this case, the plaintiff personally delivered to the state marshal the writ, summons and complaint on December 16, 2008. The state marshal served both defendants in this case on January 12, 2009. Although each defendant was therefore served outside of the six-year statute of limitations, that is not the end of the inquiry. General Statutes § 52-593a states that "a cause of action shall not be lost because of the passage of time limited by law within which the action may be brought, if the process to be served is personally delivered to a state marshal authorized to serve the process and the process was served, as provided by law, within thirty days of the delivery." Accordingly, as process was served in accordance with §§ 52-576 and 52-593a, there is no genuine issue of material fact as to this special defense.
The Defendants' Counterclaim Breach of Contract
In their counterclaim, the defendants restate a majority of the allegations that make up their first special defense. Specifically, the defendants re-allege that in the fall of 2000, the defendants were contacted by Burman. Thereafter, in an effort to induce the defendants to invest with the partnership, Burman arranged for a meeting in September 2000, at which the defendants received a presentation and the PPM. At the September meeting, the following representations were made: (1) the investment team, consisting of Burman, Wolf, Wright and Fugelsang, was a critical factor in attracting both investors and investment opportunities and the team was responsive for choosing and managing the plaintiff's investments; (2) the plaintiff represented that its investment philosophy was to invest in only mid-and later-stage domestic companies in the technology and media sectors, with an emphasis on hardware; (3) the plaintiff further represented that the investment team had access to superior and proprietary deal flow-through; (4) the plaintiff's managers waived all rights to management fees. The defendants' claim that, in reliance on the above representations, they agreed to invest in the partnership, only to later find out that the plaintiff breached the agreement by failing to adhere to its investment strategy, and instead invested in early-stage companies, and companies that did not emphasize hardware.
`To establish a claim for breach of contract a plaintiff must show (1) the existence of a valid contract, express or implied, (2) breach by defendant of that contract, and (3) damages to them as a result of the breach." Patterson-Woods Associates, LLC v. Realty Enterprises, LLC, 05C-01-224-JOH (Del.Super. 5-27-2008). As previously stated, the parties' agreement contains a comprehensive merger clause that states that the agreement reflects "the entire understanding among the parties relating to the subject matter of this Agreement," and further, that "[a]ny and all prior conversations, correspondence, memoranda or other writing are merged in, and replaced." Additionally, the merger clause states that "[a]ny and all prior conversations, correspondence, memoranda or other writing are . . . without further effect on" the agreement and that "[n]o promises, covenants, representations, or warranties of any character or nature other than those expressly stated in [the] Agreement and the SBA Agreements have been made to induce any party to enter into this Agreement or any SBA Agreement." (Limited Partnership Agreement § 10.11.) Further, the Subscription Agreements contain a specific representation that each private limited partner "received and carefully read the Limited Partnership Agreement" and "based its decision to invest on the information contained in the Limited Partnership Agreement." (Subscription Agreement, § III.E.1.)
Because the breach of contract alleged in this counterclaim is based on the same agreement underlying the plaintiff's claim, it is also governed by Delaware law, as previously discussed. Although the defendants allege that representatives of the plaintiff breached certain oral representations, the agreement itself which both sides executed contains a valid merger clause, and the alleged oral representations do not appear in the agreement constituting the final agreement of the parties. For the reasons previously stated, nor can the defendants allege a "breach" of the PPM. As such, the defendants' counterclaim fails to direct the court to a specific contractual provision that the plaintiffs allegedly breached. Thus, the court cannot find that there exists a genuine issue of material fact as to the defendants' counterclaim.
Conclusion
As the defendants themselves concede in their answer, "[t]he defendants neither admit nor deny what the Partnership Agreement requires, as the Partnership Agreement speaks for itself." (Defendants' Answer, ¶ 13.) The fair expectations of the parties were secured in the partnership agreement by the use of appropriate express conditions. The court finds that the parties expressly agreed that the agreement was to be a complete and final embodiment of both the terms of the partnership, and the roles of the respective parties. The contentions of the defendants as expressed in their affidavits in opposition to summary judgment, if accepted, would frustrate and contradict the obviously declared written intentions of the parties to the contrary when they executed the partnership agreement. Because this would run counter to the law of contract of the state of Delaware, the defendants have failed to raise a genuine issue of material fact.
Accordingly, the plaintiff's motions for summary judgment as to liability and on the defendants' counterclaim are granted.
SO ORDERED,