Opinion
No. 601987/2009.
07-07-2014
JAMES RIVER MULTI–STRATEGY FUND, L.P. And James River Multi–Strategy Fund, Ltd., Plaintiffs, v. MOTHERROCK, L.P., Motherrock Incentive, L.P., Motherrock Incentive GP, L.L.C., J. Robert Collins, Jr. Conrad J. Goerl, John D'Agostino, Defendants.
Peter Foster, Esq. of Foster & Wolkind, P.C., for plaintiffs. Caroline Heller, Esq., of Greenberg Traurig, LLP, for defendants.
Peter Foster, Esq. of Foster & Wolkind, P.C., for plaintiffs.
Caroline Heller, Esq., of Greenberg Traurig, LLP, for defendants.
Opinion
CHARLES E. RAMOS, J.
In this investor fraud action, plaintiffs James River Multi–Strategy Fund L.P and James River Multi–Strategy Fund, Ltd. (collectively, James River) seek to recover damages for loss of investments in defendants' funds. In motion sequence 004, defendants move for summary judgment pursuant to CPLR 3212 dismissing James River's causes of action.
Background
The facts set forth herein are taken from the parties' submissions and Rule 19–A Statements, which are undisputed except where noted.
James River is an investment firm specializing in investments of other hedge funds. It was formed by Paul Saunders who acted as James River's chief investor and strategist.
Defendants MotherRock, L.P., MotherRock Incentive, L.P., and MotherRock Incentive GP, L.L.C., (collectively, MotherRock) is a group of entities comprising a hedge fund that focuses on energy markets.
U.S. investors invested in MotherRock Energy Fund, L.P. (the Onshore Fund), while foreign/tax-exempt investors invested directly in MotherRock Energy Fund, Ltd., a non-party to this action (Offshore Fund). The Offshore Fund invested its assets into non-party, MotherRock Energy Intermediate Fund, Ltd. (Intermediate Fund). MotherRock Energy Master Fund, Ltd.(the Master Fund) served as a master fund for the investment of assets by the Intermediate Fund and the Onshore Fund.
Defendants J. Robert Collins Jr., Conrad Goerl, and John D'Agostino (collectively, the Partners) founded MotherRock in 2004 and concentrated the investment firm on the trading of natural gas and crude oil.
Collins and Goerl were MotherRock's fund managers and were responsible for investments and executing trades. D'Agostino was the Chief Operating Officer (COO) at MotherRock and was responsible for raising funds, office management, and marketing. D'Agostino also conducted conference calls with potential investors where he would discuss MotherRock's investment strategies, makeup, structure and background of its partners. D'Agostino did not execute any trades at MotherRock, which was primarily done by Collins and Goerl.
In 2005, Mr. Saunders, on behalf of James River, made the decision to invest in MotherRock. The investment was governed by five documents: James River Multi–Strategy Fund, Ltd.'s Subscription Document, MotherRock's Confidential Memorandum–MotherRock Energy Derivative Fund LTD, James River Multi–Strategy Fund, L.P.'s Subscription Document, James River Multi–Strategy Fund, L.P.'s Limited Partnership Agreement (Limited Partnership Agreement), and MotherRock's Confidential Memorandum–MotherRock Energy Derivative Fund LP (Confidential Memorandum).
Telephone conferences were held between the parties before James River's investments in MotherRock whereby the Partners made several representations to James River about MotherRock and its investment strategies. These investor calls were recorded by James River.
On August 26, 2005, James River made an initial investment of & dollar; 6,000,000 in MotherRock. In September 2005, MotherRock experienced an 18.55 & percent; net loss which in turn led to James River experiencing a substantial loss in their initial investment. Despite the initial loss and Mr. Collins advising against further investment at that time, James River made an additional investment of & dollar;2, 200,000 in MotherRock on October 6, 2005. In June and July of 2006, MotherRock experienced a 24.5 & percent; and 25 & percent; loss, respectively.
James River sent a letter to MotherRock requesting the redemption of their entire investment in MotherRock as of September 30, 2006, twelve months after James River's initial investments. MotherRock refused to issue redemptions citing the one-year lock up provision in the parties' agreement whereby James River could not redeem their investment until the end of said period pursuant to the Confidential Memorandum.
Due to the losses, MotherRock winded-down its business and was placed into liquidation by Deloitte & Touch. Approximately seventy-two investors, including James River, lost their entire investment in MotherRock, with total losses in the hundreds of millions of dollars.
James River brought this action in June 2009 against MotherRock and its Partners alleging causes of action for common law fraud, fraud in the retention of securities, constructive fraud, constructive fraud in the retention of securities, negligent misrepresentation, gross negligence, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and rescission.
Discussion
MotherRock and its Partners move for summary judgment to dismiss James River's causes of action on the grounds that: 1) there is no evidence to support any of the causes of action; 2)there is no claim for gross negligence; 3) liability cannot be extended to other individual defendants for alleged aiding and abetting; and 4) the equitable remedy of rescission cannot be invoked.
As a threshold issue, this Court must address which state's law, New York or Delaware, governs the instant motion. The Limited Partnership Agreement provides that Delaware law governs construction of its provisions and both parties have agreed through citations in their respective briefs that Delaware law applies to the issue of whether fiduciary duties exist between the parties under the Limited Partnership Agreement. The parties otherwise consent that New York law governs the remaining issues of the motion. As such, New York law governs this action except as to the stated issue of fiduciary duties under the Limited Partnership Agreement, which is to be governed by Delaware Law.
Where no triable issue of fact is raised, summary judgment determination is appropriate (CPLR 3212 ). The moving party on such a motion has the burden of establishing that no material issues of fact exist with respect to the claims on which judgment is sought (Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324 [1986] ). The burden then shifts to the opposing party to produce admissible evidence to establish that material issues of fact do exist (id ).
Fraud (Counts I & II)
In order to assert a claim for fraud, there must be: 1) a false representation or omission of a material fact; 2) knowledge of the misrepresentation with an intent to deceive to induce reliance; 3) justifiable reliance upon the misrepresentation or omission and resulting damages (Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 [2009] ).
James River alleges that there is a genuine issue of material fact as to whether MotherRock and its Partners committed fraud when MotherRock's principles made the following statements: 1) D'Agostino stated they did not, and would not, engage the March and April spread trades for natural gas; 2) D'Agostino stated that the fund was “basically flat” and that the Funds had not lost money during the first days of October 2005; and, 3) Collins stated that MotherRock was restructuring the Funds' portfolio as a result of the September 2005 losses to make their positions smaller and to reduce risks of loss in the future.
As a matter of law, a sophisticated party cannot establish that it entered into an arm's length transaction in justifiable reliance on an alleged misrepresentation if that party failed to make use of the means of verification that were available to it, such as reviewing files of the adversary (HSH Nordbank AG v. UBS AG, 941 N.Y.S.2d 59, 66 [2012] ). There is an affirmative duty on sophisticated investors to protect themselves from misrepresentations ... by investigating the details of the transactions (id ). “Where a party has the means to discover the true nature of the transaction by the exercise of ordinary intelligence, and fails to make use of those means,” justifiable reliance cannot be shown (id ).
Both parties fail to address the issue of justifiable reliance in their respective briefs. Although, it is undisputed that James River is a sophisticated investment firm it is unclear from the record whether James River could have sought pertinent information through their own investigation to seek out files and documents to ensure that the representations were accurate.
James River is a sophisticated investor because it represented that it was an accredited investor and qualified purchaser engaged in the investment banking and securities business, and owned and invested assets valued at not less than $ 25,000,000 (See Subscription Agreement–LP at 16, 18–19); Subscription Agreement–Ltd., at 15, 18). Also, Saunders has over thirty years of experience in the investment business and has “interviewed probably thousands of [fund] managers, and invested in hundreds of [fund] managers” (Dep. Paul Saunders, at 20, 23). His investment experience includes the trading of energy futures, including crude oil, heating oil, and natural gas (id. at 8, 747 N.Y.S.2d 441 ). Further, Saunders himself characterized James River as being a “sophisticated investor” (id. at 85, 747 N.Y.S.2d 441 ).
James River fails to raise a triable issue as to the element of scienter. There is no evidence in the record showing that MotherRock and the Partners knew the statements to be false and willfully made the representations with intent to defraud James River into investing in MotherRock. Moreover, Saunders states that the reason the pre-investment statements communicated to James River by MotherRock and its partners were false was based solely on the bad performance of the fund, and not any evidence showing that the defendants knowingly made false representations (Saunders Deposition at P44–69).
James River does not provide any evidence that connects MotherRock's subsequent poor performance to its pre-investment statements or that any statements were intentionally made to defraud James River. Thus, there is no triable issue of fact as to whether MotherRock and it Partners intentionally made false representation to induce James River to invest.
Summary judgment is granted with respect to the causes of action for fraud and fraud in the retention of securities. Fraud in the retention of securities carries the same essential elements as fraud.
Constructive Fraud and Negligent Misrepresentation (Counts III, IV, V)
“Constructive fraud may be defined as a breach of a duty which, irrespective of moral guilt and intent, the law declares fraudulent because of its tendency to deceive, to violate a confidence or to injure public or private interests which the law deems worthy of special protection” (Brown v. Lockwood, 76 A.D.2d 721, 730–731, 432 N.Y.S.2d 186 [2nd Dept 1980] ).
The elements of constructive fraud are the same as those for actual fraud with the important exception that the element of scienter upon the part of the defendant is dropped and replaced by a requirement that the plaintiff prove the existence of a fiduciary or confidential relationship warranting the trusting party to repose his confidence in the defendant and therefore to relax the care and vigilance he would ordinarily exercise in the circumstances (id ). “The law regards the making of a misrepresentation by a defendant who possesses a position of superiority and influence over the plaintiff by reason of the confidential relationship between them as a breach of duty actionable as constructive fraud” (id ).
Negligent misrepresentation requires the plaintiff to demonstrate: (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information (J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148 [2007] ).
James River, alleges that it was in a fiduciary relationship with MotherRock and the Partners that was created when the parties entered into the Limited Partnership Agreement.
Under Delaware Law, it is undisputed that general partners owe a fiduciary duty to the limited partners in a partnership (Feeley v. NHAOCG, LLC, 62 A3d 649 [Del Ch 2012] ).
New York law also recognizes that a limited partnership agreement creates fiduciary duties between general partners and limited partners (See Strain v. Seven Hills Associates, 75 A.D.2d 360, 367, 429 N.Y.S.2d 424 [1st Dept 1980], citing: Lichtyger v. Franchard, 18 N.Y.2d 528, 536 [1966] ).
The Delaware Revised Uniform Limited Partnership Act (DRULPA), § 17–1101(d) provides that a general partner's duties to a limited partnership or its unit-holders, including fiduciary duties “may be expanded or restricted or eliminated by provision in the [limited] partnership agreement; provided that the [limited] partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing” (Gerber v. Enterprise Products Holdings, LLC, 67 A3d 400, 409 [2013], overruled on other grounds).It is without question that there is a limited partnership agreement between MotherRock Incentive, L.P. as general partner and James River as limited partner since those are the party signatories to the Limited Partnership Agreement.
The Limited Partnership Agreement provided for MotherRock to have broad discretion in its investment activity and that:
“neither the General Partner, the management Company nor any Affiliate shall be liable to any Partner or the Partnership for any acts or omissions arising out of or in connection with the Partnership, any investment made or held by the Partnership or this Agreement unless such action or inaction was made in bad faith or constitutes fraud, willful misconduct or gross negligence” (Limited Partnership Agreement, Sec. 1.06; 2.05).
Since there is no specific language that the Limited Partnership Agreement or any other agreement between the parties contracted away fiduciary duties, it is clear that such a relationship does exist between MotherRock Incentive, L.P. and James River (See Lonegran v. EPE Holdings, LLC, 5 A3d 1008 [Del Ch 2010] [Court found that the parties had contracted away fiduciary duties bases on the following language in limited partnership agreement: “except as expressly set forth in this Agreement, neither [Holdings GP] nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner and the provisions of this Agreement ...”] ).
James River contends that the Partners of MotherRock also held fiduciary duties to James River even though they were not executors and named general partners in the agreement. Delaware law does recognize that a controlling director of a corporate general partner bears a fiduciary duty towards the limited partnership (Feeley, at 670–672, citing In re USACafes, L.P., 600 A.2d 43 [Del Ch 1990] ). As such, MotherRock's directors do owe such a duty to James River since there is no dispute that they were controlling partners of MotherRock Incentive, L.P..
James River also contends that fiduciary duties should be extended to the other entities, MotherRock, L.P. and MotherRock Incentive GP, L.L.C., given their interrelated structure with MotherRock Incentive, L.P.. Delaware courts have held that fiduciary duties may be imputed to a separate entity formed and controlled by fiduciaries for the purpose of engaging in a transaction with an entity to whom those duties are owed (Barbieri v. Swing–N–Slide Corp., 1997 WL 55956, *1 [Del Ch 1997]. While mere ownership of the general partner does not result in the establishment of a fiduciary relationship, those affiliates of a general partner who exercise control over the partnership's property may find themselves owing fiduciary duties to both the partnership and its limited partners (Bigelow/Diversified Secondary P'ship Fund 1990 v. Damson/Birtcher Partners, CIV A 16630–NC, 2001 WL 1641239, *8 [Del Ch 2001] ).
MotherRock Incentive, L.P., was the general partner of the Onshore Fund and responsible for the investment strategy of all of the Funds, including the Master Fund. MotherRock Incentive, L.P. also delegated the day-to-day investment advisory activities of the Funds to MotherRock L.P. MotherRock Incentive GP, LLC was the general partner of MotherRock Incentive, L.P. Given that these entities were interrelated and had the authority to make business decisions on behalf of the partnership and were ultimately controlled by the directors, fiduciary duties are imputed to them as to the partnership and limited partners.
Genuine issues of material fact are raised including the statements that MotherRock would not engage in the March/April spread trades, that MotherRock would impose layers of risk management including a stress test and a VAR of five percent of the net asset value for one day at a ninety-five percent confidence level, and that liquidity of the Funds' book was such that MotherRock and its partners could and would get out of any position in five days or less.
The fact-finder must assess whether the statements were made with the intent to make James River rely on them in making their investment and whether James River did rely on the representations without knowledge of their alleged falsity.
Summary judgment is denied with respect to the claims of constructive fraud, constructive fraud in the retention of securities, and negligent misrepresentation as to all defendants.
Gross Negligence (Count VI)
Gross negligence differs in kind and degree from claims of ordinary negligence (Colnaghi, U.S.A., LTD., et al, v. Jewelers Protection Services, LTD., et al, 81 N.Y.2d 821, 823 [1993] ). It is conduct that evinces a reckless disregard for the rights of others or “smacks” of intentional wrongdoing (Id. at 823–824, 595 N.Y.S.2d 381, 611 N.E.2d 282 ).
James River contends that MotherRock and its Partners committed gross negligence when: 1) they made certain misrepresentations regarding trading strategies, risk measurement practices, liquidity and amount of leverage exposure; and 2) committed certain acts such as exposing the Funds to excessive risks that were beyond what they informed James River they would take, failed to implement risk measurements to prevent losses to the Funds, and overexposed the Funds to leveraged positions (Amended Complaint at & ¶¶ 163, 165).
There is no evidence that MotherRock or any of its Partners made willful misrepresentations in order to induce James River to invest in the Funds or that certain actions or that certain actions or omissions were recklessly made to cause James River to lose its investments.
Summary judgment is granted as to the claim of gross negligence against all defendants.
Breach of Fiduciary Duty (Count VII)
To prevail on a claim for breach of fiduciary duty, James River must prove: 1) the existence of a fiduciary relationship between the parties; 2) misconduct by the defendant; and 3) damages directly caused by the defendant's conduct (Burry v. Madison Park Owner LLC, 84 A.D.3d 699, 924 N.Y.S.2d 77, 78 [1st Dept 2011] ).
James River alleges that the defendants had fiduciary duties of honesty, care, loyalty and disclosure to plaintiffs (Amended Complaint at ¶ 175). As stated above, under Delaware law, the parties were in a fiduciary relationship with one another pursuant to the Limited Partnership Agreement.
James River alleges that MotherRock and its Partners breached fiduciary duties when they: 1) failed to manage the Funds according to stated trading strategies, risk measurements, and leverage exposure limits; 2) misrepresented the trading strategy, risk measurements, and level of leverage they intended to take; and 3) failed to disclose to James River when the deviation from the stated trading strategy, risk measurements and level of leverage exposure (id. at ¶¶ 179–181).
According to James River's expert affidavit, MotherRock failed because Defendants veered from the investment strategy and risk profile that had been represented to James River (Citing Beloreshki Affidavit, Exhibit J, ¶ 11).
In contrast, MotherRock alleges that based on Deloitte & Touche's study there was no evidence to suggest that the actions of MotherRock and the Partners were improper (citing Deloitte & Touche Liquidator's Report, Ex. S, P39). MotherRock also alleges based on the U.S. Senate's Permanent Subcommittee on Investigations that all of the losses were sustained due tomarket forces or improper speculative actions by Amaranth and its natural gas trader Brian Hunter (Citing U.S. Senate Permanent Subcommittee On Investigations, Staff Report at P6). Clearly, at this juncture, issues of fact predominate.
Amaranth was a hedge fund which dominated the U.S. natural gas market in 2006 (See U.S. Senate Permanent Subcommittee On Investigations, Staff Report at P6).
Aiding and Abetting Breach of Fiduciary Duty (Count VIII)
A claim for aiding and abetting a breach of fiduciary duty requires: (1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damage as a result of the breach(Kaufman v. Cohen, 307 A.D.2d 113 [2003] ).
A person knowingly participates in a breach of fiduciary duty only when he or she provides “substantial assistance” to the primary violator (id. at 170, 760 N.Y.S.2d 157 ). Substantial assistance occurs when a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur (id. ). The mere inaction of an alleged aider and abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff (id. ).
James River alleges each defendant was aware of each others' activities, and they substantially assisted one another in breaching their fiduciary duties (Amended Complaint at ¶¶ 193–195). However, James River fails to allege any facts that could support a finding of specific incidents of affirmative assistance. Further, there are no facts alleged to show that the defendants were aware or had knowledge of the representation made to James River by other defendants.
Summary Judgment is granted with respect to the claim for aiding and abetting breach of fiduciary duty as to each defendant. Rescission (Count IX)
Rescission is an equitable remedy, invoked only when there is no complete and adequate remedy at law (Sokolow, Dunaud, Mercadier & Carreras LLP v. Lacher, 299 A.D.2d 64, 71, 747 N.Y.S.2d 441 [1st Dept 2002] ).
James River alleges that “based upon the fraudulent and negligent inducements and otherwise tortious conduct alleged above, Plaintiffs seek rescission of Plaintiffs' total investments” (Amended Complaint at ¶ 199).
James River's memorandum of law is lacking in both argument and authority as to why it is entitled to the remedy of rescission, and ultimately fails to raise any triable issues of fact with respect to the remedy of rescission.
Summary judgment is granted as to the cause of action of rescission with respect to all defendants.
ORDERED that defendant's motion for summary judgment (004) is granted with respect to the causes of action for common law fraud, fraud in the retention of securities, gross negligence, aiding and abetting breach of fiduciary duty, and rescission, which are severed and dismissed,
ORDERED that defendant's motion for summary judgment (004) is denied with respect to the causes of action for constructive fraud, constructive fraud in the retention of securities, breach of fiduciary duty, negligent misrepresentation,
ORDERED that the parties contact the part clerk to schedule a pre-trial conference.