Opinion
600782/2007.
Decided March 16, 2010.
Butzel Long, A Professional Corporation, New York, New York, (Martin E. Karlinsky, Regina M. Alter), Ropes Gray LLP, New York, New, (Jerome C. Katz, Russell L. Lippman), for Plaintiff.
Stevens Lee, P.C., New York, New York, (Constantine D. Pourakis), Akerman Senterfitt, Miami, Florida, (Brian P. Miller, pro hac vice, Samantha J. Kavanaugh, pro hac vice), for Defendants and Nominal Defendant.
In this action alleging breach of fiduciary duty, defendants and nominal defendant move, pursuant to CPLR 3211, for an order dismissing the second amended complaint (the Complaint).
The facts and procedural background of this action have been set forth in prior decisions, and will not be repeated in detail here, familiarity with the prior decisions being assumed. In the Complaint as it is currently pleaded, plaintiff Casita, L.P. (Casita) — which owns more than 60% of the non-voting, Class A shares of stock in nominal defendant MapleWood Equity Partners (Offshore) Ltd. (the Fund) — asserts a single cause of action, derivatively on behalf of the Fund, alleging breach of fiduciary duty by defendants: MapleWood Management LP, the Fund's manager (the Manager); MapleWood Partners LP, the Fund's advisor (the Advisor); MapleWood Holdings LLC (Holdings), the general partner of both the Manager and the Advisor; and Robert Glaser, the managing member of Holdings.
Defendants allegedly had financial incentives to invest the Fund's money in, and to retain the Fund's investments in, portfolio companies — and not to liquidate or "write down" those investments, even if the investments were unprofitable or became worthless — because the amount of the management and/or advisory fees which defendants received was calculated as a percentage of the amount of the Fund's commitments to investments. Defendants allegedly breached their fiduciary duties to act in the Fund's and its shareholders' best interests by: making and managing the Fund's investments in a manner which was designed to maximize the amount of their management, advisory and consulting fees, and which was detrimental to the Fund and to the value of its investments; and making misleading statements and failing to disclose information concerning the Fund's investments, in order to prevent the Fund's shareholders from taking appropriate action to protect the Fund and the value of its investments.
Defendants allegedly breached their fiduciary duties to the Fund and its shareholders in connection with the Fund's investments in: (1) AMC Computer Corp. (AMC), by (a) causing the Fund to invest in AMC, beginning in 2000 ( see Pl. Mem. of Law, at 5 n 3; Def. Mem. of Law, at 16, 17 n 13), even though defendants' due diligence had disclosed problems relating to AMC's financial condition and its compliance with generally accepted accounting principles (GAAP), (b) thereafter continuing and aggravating, rather than ending, accounting fraud at AMC, which involved AMC's falsely inflating the amount of its accounts receivables by recognizing revenue before GAAP permitted such recognition, and by recognizing purely fictitious revenue, (c) failing to disclose the accounting fraud at AMC, or AMC's true financial condition, to the Fund and its investors, and (d) failing to write off the Fund's investment in AMC until the end of 2006, although the investment had become worthless by May 2005; (2) Parts Depot, Inc., by failing to keep the Fund and its shareholders informed concerning that company's deteriorating financial condition in 2007, and by refusing to sell the Fund's investment in the company at a time when it would still have been possible to obtain a reasonable price for the investment; and (3) Tia's Restaurant, by failing to write off the Fund's investment in that company in a timely manner after it had become a failed investment.
The Complaint's sole cause of action alleges breach of fiduciary duty and seeks: an injunction enjoining defendants from further breaches of their fiduciary duty; an order removing defendants from their control of the Fund, appointing a receiver for the Fund, and directing the receiver to liquidate the Fund; compensatory and punitive damages; and an award of attorneys' fees.
Defendants argue that all or parts of Casita's breach of fiduciary duty claim should be dismissed on four grounds: (1) collateral estoppel, (2) statute of limitations, (3) waiver, and (4) this court's lack of jurisdiction to appoint a receiver for the purpose set forth in the Complaint.
Defendants contend that Casita is collaterally estopped from asserting the instant breach of fiduciary duty claim, insofar as it relates to AMC, by a decision and order that was issued by Judge Deborah Batts in the United States District Court for the Southern District of New York ( see In re Eugenia VI Venture Holdings, Ltd. Litig., 649 F Supp 2d 105 [SD NY 2008] [hereinafter, the Eugenia Decision]). In the Eugenia Decision, Judge Batts granted summary judgment dismissing claims which Eugenia VI Venture Holdings, Ltd. (Eugenia), an affiliate of Casita, had asserted against Glaser and certain of AMC's officers, directors, advisors and/or shareholders (collectively, with Glaser, the Eugenia Action Defendants) in six related actions. Those claims arose in connection with loans which Eugenia had advanced to AMC under a credit agreement dated January 30, 2003 (the Credit Agreement). According to defendants, "Casita is collaterally estopped from relitigating the issue of fraud or breach of fiduciary duty in connection with AMC . . . in this action," because Judge Batts determined "that there was no fraud or breach of fiduciary duty at AMC . . ., and dismissed . . . all claims asserted with respect to such a purported fraud," and because Casita "is in privity with Eugenia" (Def. Mem. of Law, at 10 [emphasis in original]).
Defendants have not established that collateral estoppel precludes any part of the breach of fiduciary duty claim that Casita asserts herein.
Federal principles of collateral estoppel, which [are applied] to establish the preclusive effect of a prior federal judgment, require that (1) the identical issue was raised in a previous proceeding; (2) the issue was actually litigated and decided in the previous proceeding; (3) the party had a full and fair opportunity to litigate the issue; and (4) the resolution of the issue was necessary to support a valid and final judgment on the merits.
( Ball v A.O. Smith Corp., 451 F3d 66, 69 [2d Cir 2006] [citation and internal quotation marks omitted].)
In the Eugenia Decision, Judge Batts granted summary judgment dismissing: (a) direct claims, brought by Euguenia individually, which alleged that the Eugenia Action Defendants had committed fraud, and/or aided and abetted fraud, by making or assisting the making of fraudulent misrepresentations and omissions to Eugenia — concerning AMC's true financial condition and the amount of its accounts receivable — in order to induce Eugenia to enter into the Credit Agreement in January 2003, and to continue to advance funds to AMC during the term of the Credit Agreement; and (b) derivative claims, brought by Eugenia on behalf of AMC, which alleged that the Eugenia Action Defendants had breached their fiduciary duties to AMC, and/or aided and abetted breaches of fiduciary duties to AMC, by causing AMC "to violate [the Credit Agreement], artificially inflate its accounts receivable, and borrow money after it was already deeply in debt, exacerbating [AMC's] insolvency and triggering its demise and liquidation in 2005" (Eugenia Decision, at 125).
Judge Batts dismissed the direct claims, for fraud and aiding and abetting fraud, on the specific grounds that Eugenia would be unable to establish two of the prerequisite elements for a fraud claim: reasonable reliance, because Eugenia's financial sophistication, and access to and possession of information about AMC, at the time when it entered into the Credit Agreement and thereafter, precluded Eugenia's claim that it had reasonably relied upon the alleged fraudulent misrepresentations and omissions; and damages, because Eugenia, having received more money back from AMC than Eugenia had paid out to it, would be unable to establish that Eugenia had suffered the sort of actual, out-of-pocket pecuniary loss necessary to support a fraud claim. Judge Batts dismissed the derivative claims, for breach of fiduciary and aiding and abetting breach of fiduciary duty, on the ground that Eugenia would be unable to establish that the Eugenia Action Defendants had caused the "actual harm to AMC" which was necessary to "sustain [those] claims under New York law" ( id.). Judge Batts determined that Eugenia would not be able to establish that the Eugenia Action Defendants had caused actual harm to AMC under New York law, insofar as they had "deepened" or exacerbated AMC's insolvency, because Eugenia had failed to raise an issue of fact as to whether the Eugenia Action Defendants had done so by means of acts which evinced bad faith or fraudulent intent vis-à-vis AMC ( id. at 126).
In view of this ground for dismissal, Judge Batts expressly declined to determine whether Glaser actually owed any fiduciary duty to AMC.
Thus, the issues which Judge Batts actually and necessarily decided in the Eugenia Decision, and which were the basis for her dispositions therein, were: whether Eugenia, at the time when it entered into the January 2003 Credit Agreement and thereafter, could reasonably have relied upon misrepresentations and omissions that were allegedly made by the Eugenia Action Defendants to Eugenia concerning AMC's financial condition and the amount of its accounts receivable; whether Eugenia, having received more money back from AMC than Eugenia had paid out to it, could establish that Eugenia had suffered the sort of actual pecuniary loss that was necessary to support a fraud claim; and whether the Eugenia Action Defendants had breached their fiduciary duties to AMC, under New York law, by engaging in bad faith or fraudulent conduct, vis-à-vis AMC, which deepened AMC's insolvency.
Casita and defendants agree that, because the Fund was incorporated in the Cayman Islands, Casita's breach of fiduciary duty claim herein is governed by Cayman Islands law ( see Def. Mem. of Law, at 15; Def. Reply Mem. of Law, at 12; Pl. Mem. of Law, at 13-14; see e.g. Medical Self Care, Inc. ex rel. Dev. Specialists, Inc. v National Broadcasting Co., 2003 WL 1622181, *7 [SD NY 2003] [stating that, "(u)nder New York law, a claim for breach of a fiduciary duty owed to a corporation is governed by the law of the state of incorporation"]). As previously stated, Casita's claim alleges that defendants breached their fiduciary duties to the Fund and its shareholders, as regards the Fund's investment in AMC, by: (1) causing the Fund to invest in AMC in 2000, even though defendants' due diligence had disclosed problems relating to AMC's financial condition and its compliance with GAAP; (2) thereafter continuing and aggravating the alleged accounting fraud at AMC; (3) failing to disclose the accounting fraud at AMC, or AMC's true financial condition, to the Fund and its investors; and (4) failing to write off the Fund's investment in AMC until the end of 2006, although the investment had become worthless by May 2005.
Defendants have failed to establish that a determination in this action — as to whether defendants breached their fiduciary duties to the Fund and its investors, under Cayman Islands law, by reason of the foregoing alleged conduct — would require the relitigation of any of the issues that were actually and necessarily decided by Judge Batts as the basis for the dispositions made by her in the Eugenia Decision. Accordingly, defendants have failed to establish that Casita is collaterally estopped from asserting any part of the claim, relating to the Fund's investment in AMC.
Defendants further argue that parts of Casita's claim are barred by the applicable statute of limitations. Defendants assert, and Casita does not dispute, that the limitations law of the Cayman Islands governs the question of whether Casita's claim is time-barred. Defendants contend that Casita's breach of fiduciary duty claim is subject to a six-year limitations period under Cayman Islands law, that no toll applies to delay the commencement or extend the running of the limitations period with respect to Casita's claim, and that — because the initial complaint in this action was filed in March 2007 — the claim is barred insofar as it is premised upon events which occurred prior to March 2001. In particular, defendants argue that Casita's claim is time-barred insofar as it is predicated upon: (1) "the structure of [the Fund's] management and advisory fees," because that structure "was established in 1999, and Casita was well aware of, and agreed to, that structure when it contracted to invest in the . . . Fund in April 1999"; and (2) "the . . . Fund's investments in Corlund [Electronics Inc. (Corlund)] . . . and AMC . . . because the . . . Fund invested in Corlund in 1999 and 2000, and invested in AMC . . . in 2000" (Def. Mem. of Law, at 16).
Defendants' argument that some part of Casita's claim is time-barred, because the structure for the payment of the Fund's management and advisory fees was established and agreed to by Casita in 1999, is unpersuasive. Casita does not allege that the structure which the Fund's governing documents established for the payment of management and advisory fees, in and of itself, constituted a breach of fiduciary duty. Rather, Casita's claim, insofar as it relates to defendants' receipt of purportedly excessive fees, alleges that defendants breached their fiduciary duties by reason of specific conduct at specific times relating to specific Fund investments (e.g., the making of particular investments which should not have been made, the retention of particular investments which should not have been retained, and the failure to liquidate or write down particular investments in a timely manner) which was allegedly undertaken or engaged in primarily for the purpose of generating fees, rather than for the purpose of maximizing the value of the Fund's investments. In order to establish that a claim based upon any such conduct was time-barred, defendants were required to, but did not, establish the time-bar with respect to the particular conduct involved. Defendants' argument that Casita's claim is time-barred insofar as it relates to the Fund's investment in Corlund is misdirected, inasmuch as Casita does not predicate any part of its claim upon defendants' conduct relating to that investment.
Defendants assert that Casita's claim is time-barred — insofar as it alleges that defendants wrongly or imprudently caused the Fund to invest in AMC in 2000 — because a six-year limitations period applies to Casita's claim for breach of fiduciary duty under Cayman Islands law, and because the Fund made the investment in AMC more than six years before the initial complaint in this action was filed in March 2007.
The parties' respective experts in Cayman Islands law agree that, under Cayman Islands law, Casita's claim is an equitable claim, and an equitable claim is not subject to any limitations period unless: (1) an express provision of the Cayman Islands Limitation Law (1996 Revision) (the Limitation Law) applies; (2) a provision of the Limitation Law can be applied "by analogy"; or (3) the doctrine of laches, or undue delay, applies ( see Robinson Affid., ¶ 10; Imrie 5/7/08 Affid., ¶ 10). Defendants' expert asserts that a six-year limitations period applies to Casita's claim because: (a) under Limitation Law §§ 4 (1) and 7, a six-year limitations period applies to claims for breach of contract and negligence; and (b) that six-year limitations period applies to Casita's claim "by analogy," pursuant to Limitation Law § 42, which provides that certain specified "time limits" — including those applicable to tort and contract claims — "shall not apply to any claim . . . for other equitable relief, except insofar as any such time limit may be applied by the court by analogy . . ." (Imrie 5/7/08 Affid., ¶ 12).
Casita's expert asserts, on this motion, that Casita's claim is not subject to any limitations period, because the claim is governed by Limitation Law § 27 (1) (a) and (b), which provide that:
[n]o period of limitation prescribed by this Law applies to an action by a beneficiary under a trust, being an action —
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b) to recover from the trustee trust property, or the proceeds of trust property in the possession of the trustee or previously received by him and converted to his use.
(Robinson Affid., ¶¶ 11-13 and Ex. 6.) Casita's expert asserts on this motion, alternatively, that, insofar as Limitation Law § 42 is deemed to be applicable, Casita's claim should be deemed analogous to a claim brought exclusively in equity, to which no limitations period applies.
Casita submitted a memorandum of law, in connection with motion sequence number 008, which contained a section entitled "Casita's Claim is Timely Because the Complained of Conduct Occurred Within Six Years of Commencement of the Action . . .," and which stated that, "[w]hether governed by Cayman Islands law . . . or CPLR 213 . . ., Casita's claims are controlled by a six-year statute of limitations" (Pl. Mem. of Law in Opp. to Def. Motion to Dismiss, dated July 21, 2008, at 19). Casita's expert in Cayman Islands law submitted an affidavit in connection with that motion which also appeared to concede that a six-year limitations period applied to Casita's claim for breach of fiduciary duty.
Defendants' expert has better substantiated his argument that a six-year limitations period applies to Casita's claim than Casita's expert has substantiated his argument that no limitations period applies to the claim. However, assuming, arguendo, that Casita's claim is subject to a six-year limitations period, defendants have, nevertheless, failed to establish that Casita's claim should be dismissed as time-barred insofar as it is based upon defendants having caused the Fund to invest in AMC in 2000. As bases for defendants' application to dismiss part of Casita's claim on statute of limitations grounds, defendants' expert cites Order 14A, rule 1, and Order 18, rule 19 (1), of the Cayman Islands Grand Court Rules (the Rules). As set forth in a copy of the Rules that defendants' expert has submitted, Order 14A, which is entitled "Determination of questions of law or construction," provides, in rule 1 (a) thereof, that "[t]he Court may . . . determine any question of law or construction of any document . . . arising in any cause or matter at any stage of the proceedings where it appears to the Court that . . . such question is suitable for determination without a full trial of the action . . ." (Imrie 4/30/09 Affid., ¶ 9 and Ex. A [emphasis added]). Order 18, rule 19 (1) (a) provides that "[t]he Court may at any stage of the proceedings order to be struck out . . . anything in any pleading . . . on the ground that . . . it discloses no reasonable cause of action . . ." ( id.). However, Order 18, rule 19 (2) specifically provides that "[n]o evidence shall be admissible on an application under subparagraph (1) (a)" (Imrie 4/30/09 Affid., Ex. A [emphasis added]).
The quoted provisions appear to authorize a court to dismiss part of a pleading in accordance with the court's determination of an issue of law which does not require the submission of evidence. However, defendants' motion — insofar as it seeks dismissal, on statute of limitations grounds, of so much of Casita's claim as is based upon defendants having caused the Fund to invest in AMC in 2000 — would require the court to consider evidence and to determine an issue of fact.
Casita's expert asserts that, even if Casita's claim is subject to a six-year limitations period, as defendants contend, the claim would not be untimely, in any event, because the commencement of the running of the limitations period would have been delayed or tolled by Limitation Law § 37, which provides, in relevant part, that:
(1) . . . where in the case of any action for which a period of limitation is prescribed by this Law . . .
(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant . . .
the period of limitation does not begin to run until the plaintiff has discovered, or could with reasonable diligence have discovered, the . . . concealment . . .
(2) For the purposes of subsection (1), deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.
(Robinson Affid., ¶¶ 32-36 and Ex. 6.) Casita and its expert contend that, because defendants deliberately concealed facts relevant to defendants' breach of fiduciary duty relating to the Fund's investment in AMC, the limitations period did not begin to run with respect thereto until after March 2001.
As evidence that there was no deliberate concealment warranting a delay of the commencement of the limitations period under Limitation Law § 37, defendants cite statements contained in an affidavit, submitted by Glaser, which assert that Casita made its own $2.5 million investment in AMC in 2000, at the same time when the Fund was making its initial investment in AMC, and that Casita was, after the Fund and another MapleWood investment fund, the third largest shareholder in AMC ( see Def. Reply Mem. of Law, at 13). Defendants apparently maintain that, in view of Casita's substantial investment in AMC, Casita can be presumed to have conducted — or should reasonably have conducted — its own investigation into AMC's financial condition, and defendants cannot be deemed to have concealed from Casita the facts which Casita claims were concealed. However, as defendants' reliance upon Glaser's affidavit indicates, the question of whether there was concealment implicating Limitation Law § 37 is an issue of fact rather than of law, and the determination of that issue would required the consideration of evidence. Accordingly, defendants have not demonstrated, as a matter of law, that they are entitled to dismissal of Casita's claim, as time-barred, insofar as the claim is based upon defendants having caused the Fund to invest in AMC in 2000.
Defendants argue that — by reason of provisions contained in the documents which govern Casita's investment in the Fund — Casita waived its breach of fiduciary claim insofar as the claim is predicated upon defendants having allegedly managed the Fund's investments in a manner designed to maximize the amount of their management, advisory and consulting fees rather than to maximize the value of the Fund's investments.
The Subscription Agreement which Casita executed contains acknowledgments that the "Subscriber is aware of and understands . . . the proposed method of compensation to the Manager and the Advisor and the risks inherent in such a compensation arrangement," and that the subscription is being made "on the terms and conditions described [in the Subscription Agreement], in the . . . Private Placement Memorandum . . . and the . . . Articles of Association of the Fund . . ." (Subscription Agreement, §§ 1.1, 2.2 [e]). Section 66 of the Articles of Association authorizes the Fund's payment of management and advisory fees, and provides that the amount of the fees shall be calculated as a percentage of the Fund's total commitments. The Private Placement Memorandum states that:
[t]here will be occasions when the Manager, the Advisor, the Principals or their respective affiliates may encounter conflicts of interest in connection with the Fund. Certain actual and potential conflicts of interest are described below. By acquiring Shares, each Shareholder will be deemed to have acknowledged the existence of such actual and potential conflicts of interest and to have waived any claim with respect to the existence of any such conflict of interest.
(Private Placement Memorandum, at 62.)
Defendants' assertions to the contrary notwithstanding, the foregoing provisions did not constitute a waiver by Casita of so much of its claim as is predicated upon defendants' having allegedly managed the Fund's investments in a manner designed to maximize the amount of their fees rather than to maximize the value of the Fund's investments. Defendants' waiver argument depends primarily upon the quoted language from the Private Placement Memorandum, which provides for a waiver of claims "with respect to the existence of" certain "actual and potential conflicts of interest" which the Manager, the Advisor and certain other parties "may encounter . . . in connection with the Fund" (emphasis added). The existence of a conflict of interest merely indicates that a person who is affected thereby will or may be subject to divergent or clashing interests, pressures or obligations, which may hinder, or prevent, the person's satisfaction of the divergent interests or obligations. The existence of a conflict of interest, in and of itself, does not necessarily presage, and is not necessarily accompanied by, any wrongful conduct by a person who is affected by or subject to the conflict of interest. A waiver of the existence of a conflict of interest does not constitute a waiver of wrongful conduct, even insofar as the wrongful conduct may have been occasioned, or rendered more likely to occur, by the conflict of interest. Accordingly, Casita's claim, which alleges specific wrongful conduct by defendants relating to their fees, and not merely the existence of a conflict of interest relating to those fees, was not waived by the language contained in the Private Placement Memorandum.
Moreover, the parties apparently agree that the Private Placement Memorandum must be interpreted and construed in accordance with New York law ( see Pl. Mem. of Law, at 23; Def. Reply Mem. of Law, at 17 n 11). Under New York law, "[a] waiver . . . must be clear, unequivocal and deliberate" ( Silverman v Silverman, 304 AD2d 41, 46 [1st Dept 2003]). The Private Placement Memorandum is clear and unequivocal insofar as it purports to waive claims with respect to the existence of " [c]ertain actual and potential conflicts of interest [that] are described below " (emphasis added). However, the conflicts of interest "described [therein] below," to the extent that they specifically encompass conflicts relating to defendants' receipt of fees, would appear to encompass only conflicts relating to the Advisor's receipt of "customary investment banking compensation" (Private Placement Memorandum, at 62). Thus, the waiver language in the Private Placement Memorandum cannot be deemed to have clearly and unequivocally waived the claim alleged in the Complaint which — arguably, at the very least — does not allege a breach of fiduciary duty merely by reason of the Advisor's receipt of "customary investment banking compensation."
Finally, certain of the Complaint's allegations allege intentional wrongful conduct and, "[u]nder announced public policy," an exculpatory agreement "will not apply to exemption of willful . . . acts . . ." ( Kalisch-Jarcho, Inc. v City of New York, 58 NY2d 377, 384-385). "More pointedly, an exculpatory clause is unenforceable when, in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing" ( id. at 385; see also A.H.A. Gen. Constr., Inc. v New York City Hous. Auth., 92 NY2d 20, 31).
Defendants' motion is granted insofar as it seeks dismissal of Casita's application for the appointment of a receiver. The Complaint's only reference to a receiver, or the appointment of a receiver, is contained in the "demand for relief," on the Complaint's last page, which demands, inter alia, a judgment "appointing a neutral receiver for the [Fund] and removing defendants from their control of the [Fund]," and "ordering that the receiver liquidate the [Fund] as soon as commercially practicable" (Complaint, at 21). The Complaint alleges that the Fund is a foreign corporation ( id., ¶ 3), and, as Casita itself concedes in its opposition papers, a New York court lacks jurisdiction to appoint a general receiver for a foreign corporation ( see Pl. Mem. of Law, at 24).
For the foregoing reasons, it is hereby
ORDERED that the motion to dismiss is granted, but only in part — to the extent that the Second Amended Complaint, insofar as it demands judgment appointing a receiver, and ordering that the receiver liquidate nominal defendant MapleWood Equity Partners (Offshore) Ltd., is dismissed — and the motion is otherwise denied.