Opinion
CA 98-0176ML
January 5, 2000
Robert D. Fine, Esq., and Annie Talbot, Esq., CHACE, RUTTENBERG FREEDMAN, for Plaintiffs.
W. Mark Russo, Esq., ADLER POLLOCK SHEEHAN, for Defendants.
REPORT AND RECOMMENDATION
Introduction
On August 14, 1998, plaintiffs filed a five count amended complaint against defendants pursuant to 28 U.S.C. § 1332. Plaintiffs constitute several limited partners in a real estate partnership. The plaintiffs responded to defendant Maynard's offer to invest in 178.8 acres of property in Charlestown, Rhode Island. Plaintiffs argue that there is no genuine issue of material fact as to plaintiffs' Counts III and IV and seek partial summary judgment as to those counts. Defendants have filed a three count counterclaim (which is not involved in the summary judgment motions), an opposition to plaintiffs' motion for partial summary judgment, and a cross motion for summary judgment as to all counts of plaintiffs' amended complaint. The District Court has referred this matter for preliminary review, findings, and recommended disposition. See 28 U.S.C. § 636 (b)(1)(B); Local Rule 32(c). Based upon my review of the legal memoranda, oral argument, and my independent research, I recommend that the District Court (1) grant the defendants' motion for summary judgment as to the part of plaintiffs' Count I alleging the failure to transfer Partnership Property, and all of plaintiffs' Counts IV and V, (2) deny defendants' motion for summary judgment as to the part of plaintiffs' Count I alleging the diversion of funds and all of plaintiffs' Count II, and (3) deny all parties' motions for summary judgment regarding plaintiffs' Count III.
The plaintiffs filed the original complaint on March 31, 1998.
Plaintiff Niehoff is a resident of New York; plaintiff Klughart is a resident of Texas; plaintiff Melcher is a United States Citizen presently residing in a foreign state; plaintiff Frascino is a resident of New Jersey; plaintiff Victor J. Melone is a resident of Florida; plaintiff Roseanna Cubelli Melone is a resident of Florida; and plaintiff Canzanella is a resident of North Carolina. Defendant Long Ridge Associates L.P. ("Long Ridge") is a Delaware partnership formed by general partner, defendant Kenneth L. Maynard, with its principal place of business in Rhode Island. Defendant Kenneth L. Maynard is a resident of Rhode Island. The amount in controversy exceeds $75,000.
The plaintiffs are purportedly sophisticated investors, some of whom have previously invested with defendant Maynard on other ventures.See Def. Ex. D Deposition of Chester Gan.
As of March 1, 1989, the plaintiffs made the following investments: plaintiff Niehoff invested $90,000; plaintiff Melcher invested $100,000; plaintiff Frascino invested $100,000; plaintiff Victor J. Melone invested $200,000; plaintiff Roseanna Cubelli Melone invested $50,000; and plaintiff Canzanella invested $100,000. By November 1, 1989, no additional limited partners had invested. A final and seventh, limited partner (plaintiff Klughart) invested $50,000 in February of 1990. In total, the plaintiffs invested $690,000 in Long Ridge.
Defendant Long Ridge planned to develop the property and sell condominium units. Long Ridge would then distribute the profits to the partners.
Background
A. Private Offering Memorandum
In 1985, defendant Maynard purchased 178.8 acres of land ("Partnership Property") to develop condominiums, and took title in his name. Subsequently, in December of 1988, defendant Maynard distributed a Private Offering Memorandum ("P.O.M."). The P.O.M. stated that Long Ridge was a "Delaware Limited Partnership formed to construct and sell 89 townhouse condominiums on 178.8 acres of land located in Charlestown, Rhode Island." The principal offices of the partnership were located in Charlestown, Rhode Island. Defendant Maynard, as general partner, contributed his interest in the 178.8 acres of land to the Partnership. The total offering constituted $1.8 million, meaning interested investors would purchase 18 units at $100,000 each.
The Partnership Property abutted land owned by the Narragansett Indian Tribe.
The parties dispute defendant Maynard's status. Defendant Maynard claims that he is both a general and limited partner. Plaintiffs contend that defendant Maynard is only a general partner.
The P.O.M. contains many significant provisions. First, the P.O.M. states that
[t]his offering will be withdrawn if the Partnership has not received subscriptions for all of the Units on or before March 1, 1989, unless extended by the General Partner to a date not later than November 1, 1989, at which time the General Partner will have the option to acquire all (but not less than all) unsold Units on the same terms and conditions as such Units are offered hereby. In the event the General Partner purchases Units, such purchases will be for investment and not for distribution.Pl. Ex. 1 P.O.M. at i.
Second, the P.O.M. considered what would happen if the offering was not completed.
The proceeds of the offering will be received and held for the benefit of investors in the offering and will be retained after closing to be used only for the purpose set forth herein under the caption "use of proceeds." In the event the offering is not completed or if the transactions referred to herein are not consummated for any reason, then all subscription payments will be refunded to subscribers without interest and without deduction.Pl. Ex. 1 P.O.M. at ii. The P.O.M. further provided that "[s]eparate accounts will be kept by the Partnership for each registered Partner."Id. at 37.
The P.O.M. set forth a description of how the Partnership would use its $1.8 million in proceeds if the 18 units were sold. Approximately $218,000 would go to defendant Maynard for development expenses already incurred. In addition, defendant Maynard would receive $500,000 for the land he contributed to the Partnership. The Partnership would use the rest for future development and construction expenses.
Third, the P.O.M. provided for the production and distribution of financial reports.
In the Partnership Agreement, the General Partner has agreed to take all steps reasonably necessary to cause to be delivered to the Partners within ninety (90) days after the expiration of each fiscal year, beginning with the fiscal year ending December 31, 1989, a balance sheet and profit and loss statement and a statement showing distributions to the Partners and allocations to the Partners of Partnership taxable income, gains, losses, deductions and credits. Such statements will be certified by an independent public accountant in any year if so requested by 30% in interest of the Limited Partners.Pl. Ex. 1 P.O.M. at 26.
Fourth, the P.O.M. describes the fiduciary responsibility of the general partner. The "general partner is accountable to the partnership and the limited partners as a fiduciary, and must exercise good faith and integrity in handling partnership affairs." Pl. Ex. 1 P.O.M. at 44. The P.O.M. also limits the right to bring suit for a general partner's alleged breach of fiduciary duties.
. . . the Partnership Agreement contains provisions which are intended to limit the General Partner's liability for any acts performed by him within the scope of his authority under the Partnership Agreement, with the exception of acts constituting willful misconduct, malfeasance, gross negligence or material misrepresentation . . . . The Partnership Agreement also provides indemnification in favor of the General Partner from the Partnership from any act performed within the scope of authority conferred on the General Partner by the Partnership Agreement, except for acts of willful misconduct, malfeasance, gross negligence or material misrepresentation.Id.
Fifth, the P.O.M. granted Karasu Corp. the right to act as general contractor for the site development and townhouse construction. Karasu Corp. is wholly-owned and operated by defendant Maynard. Karasu Corp. was to receive $60,000 per year for no more than four years as a project management fee. Karasu Corp. was also to receive the difference, if any, between the fixed price contract amount and the actual cost of construction and contractor's overhead.
Sixth, the P.O.M. required that investors have knowledge and experience in financial and business matters and a considerable net worth. See Pl. Ex. 1 P.O.M at 37 ("Subscriptions to the Partnership are being offered on a private basis to persons who it is believed prior to any sale have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the investment."). The P.O.M. also disclosed specific risk factors, including general economic conditions and the future use of the Tribal land which abutted the Partnership Property. See Def. Ex. C P.O.M. at 39 ("Further risks include . . . possible further action or litigation by Narragansett Indians. . . .").
B. A Failed Venture
As of November 1, 1989, the limited partners subscribed to 6.4 units for $640,000. Plaintiffs allege that as of that moment, defendant Maynard was contractually obligated to refund $640,000 to the limited partners pursuant to the P.O.M. Defendant Maynard did not do this. Rather, in February of 1990, he accepted $50,000 from plaintiff Klughart. Then, on March 21, 1990, defendant Maynard claimed the remaining 11.1 units for himself, but, according to the plaintiffs, contributed no cash to the partnership for the purchase of these unsold units. Plaintiffs also claim that defendant Maynard did not advise any of the plaintiffs that as of November 1, 1989, the Partnership had not received subscriptions for all of the units. Defendant Maynard retorts that no such notice was given because the Partnership was fully subscribed. Defendant Maynard maintains that he "converted $500,000 due and payable to him for partnership property and committed to a balance of $610,000," totaling the $1.1 million for the 11.1 units. Defendant Maynard's Statement of Undisputed Facts ¶ 6; see also Maynard Affidavit ¶ 7.
Defendant Maynard claims that he paid approximately $777,000 in cash and still owes the partnership $323,000. See Pl. Ex. 8 Defendant Maynard's Deposition at 16-7. This alleged payment of $777,000 occurred over an extended period of time and was not deposited in a Long Ridge account, but was used to pay "obligations of the partnership." Id. at 18. Plaintiffs respond by noting that defendant Maynard admitted in his counterclaim that the Partnership attempted to sell other units in 1990, which would be redundant if defendant Maynard had already purchased the units as of November of 1989. See Counterclaim ¶ 16.
Furthermore, plaintiffs contend that defendant Maynard failed to keep the limited partners "investments in escrow pending complete subscription. As of May 1989, defendant Maynard removed approximately $638,000 of the $640,000 deposited into the Long Ridge account during 1988 and 1989. Consequently, on November 1, 1989 Long Ridge's bank account had only $1,487.80. See Pl. Ex. 3 Checking Account Statements of Long Ridge Associates. Moreover, defendant Maynard spent the $50,000 invested in Long Ridge Associates in February of 1990 by Klughart and in June of 1990 defendant Maynard closed the account. See id.
Defendant Maynard argues that § 8.01 of the Limited Partnership Agreement allowed him to use the capital contributions to repay him for architectural, engineering, surveying, land planning, archeological, legal, taxes, and other expenses already incurred on behalf of the Partnership, to advance a partial payment to himself for the Partnership property, and to pay future development expenses.
Section 8.01 states:
Use of Capital Contributions. The Capital Contributions received pursuant to Article IV hereof shall be used to make the following payments:
(a) $218,080 to repay the General Partner for architectural, engineering, surveying, land planning, archaeological, legal, taxes and other expenses already paid by the General Partner on behalf of the Partnership.
(b) $500,000 as a partial payment to the General Partner for land contributed to the Partnership.
(c) $1,081,920 to be used for future development expenses.
Defendant Maynard made the following payments out of plaintiffs' $690,000 deposited in the Long Ridge account:
• In 1988, Long Ridge paid out $388,000 and of that, $371,000 went to Karasu Corporation. This $371,000 consists of a $60,000 project management fee; a $205,000 reimbursement for expense; a $6,000 reimbursement for road construction; and a $100,000 unidentified expense.
• In 1989, Long Ridge paid $185,900 to Karasu Corporation for project management fees.
• In 1990, Long Ridge paid $18,000 to Karasu Corporation for project management fees.See Pl. Ex. 6 and 7 Checks to Karasu from Long Ridge Associates.
Defendant Maynard claims that the projected development costs were $965,000, with a $200,000 contingency, totaling $1.165 million. See Maynard Affidavit ¶ 4. Defendant Maynard supplied all of the money invested in the Partnership above and beyond the $690,000 invested by the limited partners. See id. at ¶ 20.
Defendant Maynard justifies his payments to Karasu Corporation by citing § 5.04 of the Limited Partnership Agreement. Section 5.04 states in relevant part that "[t]he Partnership will employ Karasu Corp., an affiliate of the General Partner as general contractor to manage land development and townhouse construction . . . [p]ayments to this affiliate will be made from time to time during each year." Maynard has stated that the funds used to pay Karasu Corporation represents one of two things:
(1) a management fee pursuant to § 5.04 of the Long Ridge Partnership Agreement and as clearly detailed in the POM; and (2) reimbursement of direct development expenses, i.e., money advanced by Karasu to pay direct development expenses incurred as detailed in the categories listed on p. 49 of the POM.Maynard Affidavit ¶ 23.
Defendant Maynard failed to deliver to the limited partners a balance sheet, a profit and loss statement, or a statement showing distributions. Plaintiffs argue that they would have asked for their investment back if they knew that defendant Maynard had not put up any cash for the 11.1 units. Furthermore, defendant Maynard did not file any tax returns for Long Ridge, but he maintains that was because he was not yet in the business of selling townhouses. Lastly, defendant Maynard kept the 178.8 acres of land in his name.
In July of 1990, the Narragansett Indian Tribe ("Tribe") instituted a lawsuit alleging that the Partnership Property belonged to the Tribe. Throughout the latter part of 1990 and into the early part of 1991, plaintiffs inquired about the status of the project, including information about the development activities and expenditures to-date. Chester Gan, who had secured the subscriptions from the plaintiffs, also called regarding the status of the project. Defendant Maynard explained to those limited partners who made inquiries that the project was construction ready, but there had been delays encountered because of the approval process and because of the lawsuit by the Tribe. Defendant Maynard also told plaintiffs Niehoff and Melone, and Chester Gan that he [Maynard] "had a considerable amount of equity invested in the project and had converted the $500,000 partial payment due and owing from the partnership for the Partnership Property into limited partnership units." Maynard Affidavit ¶ 9 and 21.
Defendant Maynard proved successful against the Tribe in the lawsuit regarding ownership of the Partnership Property. In 1992, defendant Maynard brought a lawsuit against the Tribe to prevent repeated trespassing on the Partnership Property. The Court dismissed the case, however, because the Tribe was a sovereign entity and immune from suit. In 1994, the State of Rhode Island and the Tribe executed a Gaming Compact. In 1995, the Tribe undertook construction of a housing complex on the land near the Partnership Property without obtaining any local or state permits. In 1996, the Charlestown Town Council enacted a zoning ordinance that allegedly made vast sections of the Partnership Property unbuildable. Defendant Maynard brought a lawsuit to challenge the zoning ordinance. The matter was dismissed as premature. Defendant Maynard brought a second lawsuit seeking to defeat the amended zoning ordinance. That matter is currently pending in Superior Court in Washington County.
On February 28, 1991, defendant Maynard delivered a status report to all of the plaintiffs. This report discussed state and local permitting, archeology, surveying, land planning, engineering, architecture, lawsuits, the real estate market, and financial matters. The report notified the plaintiffs that the project had incurred approximately $928,000 in direct development expenses, which was right on target with what was projected in the P.O.M. See Def. Ex. H Defendant Maynard's Feb. 28, 1991 Status Report at 17. The report also indicated that the "original development concept had been frustrated by a downturn in the market and the intervention of the Narragansetts." Maynard Affidavit ¶ 10.
Defendant Maynard continued to answer inquiries from certain of the plaintiffs over the phone. In late 1993 and early 1994, some of the plaintiffs took the position that the purpose of the Partnership had been frustrated and they wanted their investment returned. See Maynard Affidavit ¶ 11 and 12. These plaintiffs inquired that perhaps the Partnership property should be sold to the Tribe. See id ¶ 12 and 14. Also in 1994, some of the plaintiffs inquired as to why the Partnership Property was not in the name of Long Ridge and why defendant Maynard had not issued financial reports. See id. ¶ 12. Defendant Maynard responded that he would not issue financial reports because the Partnership had not commenced any business. See id. Furthermore, defendant Maynard stated that the Limited Partnership Agreement allowed him to keep the Partnership Property in his name as nominee. See Def. Ex. B Limited Partnership Agreement § 4.01. Moreover, defendant Maynard told the plaintiffs that to make a meaningless transfer of the property into the partnership name would result in tax consequences. See Defendant Maynard's Statement of Undisputed Facts ¶ 12; Def. Ex. F Deposition of Victor J. Melone at 33-4.
In 1996 and 1997, defendant Maynard attempted to sell the Partnership Property, including the following potential buyers: Tribal-related companies, development companies, and telecommunication companies. See Maynard Affidavit ¶ 18. Plaintiff Melone knew of these developments. See id. Defendant Maynard claims that he did not receive any further inquiries from the plaintiffs regarding the zoning ordinance issues. In 1997, however, he received more requests for "financial reports" and to transfer the property into the actual name of the limited partnership.See id. ¶ 19.
C. Plaintiffs' Complaint and Defendants' Response
Then, on August 14, 1998, plaintiffs filed a five count amended complaint against the defendants and recorded a lis pendens on the Partnership Property. Count 1 alleges that defendant Maynard "knowingly made [a] false statement to the plaintiffs" and breached his contract with the plaintiffs. Compl. ¶¶ 11 and 13. Specifically, plaintiffs contend that "[i]nstead of transferring the property to defendant Long Ridge as promised . . . defendant Maynard kept the property in his own name and diverted the funds entrusted to him by the plaintiffs for his personal purposes." Compl. ¶ 12. Defendant Maynard asserts that he can hold the property in his name as nominee under § 4.01 of the Limited Partnership Agreement. Defendant Maynard told the plaintiffs to make a meaningless transfer of the property into the partnership name would only result in tax consequences. See Defendant Maynard's Statement of Undisputed Facts ¶ 12; Def. Ex. F Deposition of Victor J. Melone at 33-4. Furthermore, defendant Maynard denies diverting funds entrusted to him by the plaintiffs, except for a $3,000 legal bill that went to a New York law firm by mistake. Defendant Maynard also cites § 10.07 of the Long Ridge Partnership Agreement, which states that "[a]ll funds not currently needed in the operation of the Partnership Business shall . . . be deposited in such interest-bearing accounts or invested in such short-term obligations . . . as shall be designated by the General Partner." Defendant Maynard reasons from this provision that it is irrelevant whether he deposited his own capital contributions into the same account as the plaintiffs' capital contributions.
Lis pendens is defined as "a notice, recorded in the chain of title to real property, required or permitted in some jurisdictions to warn all persons that certain property is the subject matter of litigation, and that any interests acquired during the pendency of the suit are subject to its outcome." Black's Law Dictionary 942-43 (7th ed. 1999).
Title to the land may be held in the name of the partnership or in the name of the general partner, as nominee for the partnership." Def. Ex. B Limited Partnership Agreement at § 4.01.
Count II alleges that defendant Maynard "failed and refused to render an accounting of the finances of defendant Long Ridge, despite requests over several years and despite his obligations under the Partnership agreement. . . ." Compl. ¶ 15. Defendant Maynard told the plaintiffs that he would only issue financial reports when the partnership commenced its business constructing and selling condominium townhouse units. See Maynard Affidavit ¶ 12. Defendant Maynard asserts that the plaintiffs knew of his position on this issue in 1990, yet they did nothing until they filed this lawsuit in 1998 — ten years after the Partnership was created. Nevertheless, defendant Maynard said he did respond to the plaintiffs' request regarding monies spent on development and the status of the project with the February 1991 status report. The plaintiffs took no action after reading and analyzing that report.
Section 10.04 of the Limited Partnership Agreement states:
Financial Reports. The General Partner shall take all steps reasonably necessary to cause to be delivered to the Partners within ninety days after the expiration of each fiscal year beginning with the fiscal year ending December 31, 1989, a balance sheet and profit and loss statement and a statement showing distributions to the Partners and allocation to the Partners of Partnership taxable income, gains, losses, deductions and credits. If in any year, thirty percent of the Limited Partnership Interests request that the financial statements be certified, the Partnership will have such financial statements certified by an independent public accountant.
Count III maintains that defendant Maynard's "representations regarding the assets of defendant Long Ridge, the condition of the development of the property, the ownership status of the property and the value of plaintiffs' investment in Long Ridge were made with the intent and purpose to induce plaintiffs to invest in Long Ridge, to continue to invest in Long Ridge and to not inquire further regarding the status of their investments, all with the purpose of defrauding plaintiffs as to the true ownership of record of the property defendant Maynard claimed was owned by defendant Long Ridge. The false statements were also made with the purpose of avoiding inquiry as to the misappropriation of funds of the partnership by defendant Maynard." Compl. ¶ 18. Defendant denies making any false statements or representations.
Count IV alleges that "defendant Maynard breached his fiduciary duty to plaintiffs, all limited partners in defendant Long Ridge, of which defendant Maynard is general partner." Compl. ¶ 20. Defendant argues that he has honored all of his fiduciary duties.
Count V alleges that "defendant Maynard . . . breached his fiduciary responsibilities under ERISA 29 U.S.C. § 1105 by misappropriating assets of the limited partnership that were desiguated 'plan assets' under ERISA." Compl. ¶ 22. The parties have not discuss this count in their papers or during oral arguments.
In their prayer for relief, the plaintiffs seek: (1) "compensatory damages from defendant Kenneth L. Maynard in a sum not less than $640,000 in proportion to their investments in Long Ridge . . . ;" (2) punitive damages; (3) injunctive relief forcing Kenneth L. Maynard "to render financial reports of Long Ridge annually from December 31, 1989, and to produce all books and records of Long Ridge;" and (4) "affirmative injunctive relief ordering defendant Kenneth L. Maynard to transfer title to real property located in Charlestown, Rhode Island . . . and to remove defendant Kenneth L. Maynard as general partner of Long Ridge without any further compensation." Compl. at 4.
D. Defendants' Three Count Counterclaim
Defendants have filed a three count counterclaim against the plaintiffs. In Count I, defendants allege that plaintiffs have breached their fiduciary duty "by seeking to remove Maynard as general partner without cause for doing so." Counterclaim ¶ 33. In Count II, defendants contend that plaintiffs "breached their implied duty of good faith and fair dealing by seeking to remove Maynard as general partner without cause and without a good faith basis for doing so." Counterclaim ¶ 38. In Count III, defendants allege that plaintiffs "have acted in contravention of the Agreement by seeking to remove Maynard as general partner without cause and a good faith basis for doing so" because the agreement requires the plaintiffs to indemnify the defendants.Counterclaim ¶¶ 41 and 42. This counterclaim is not at issue in the summary judgment motions.
E. Procedural Posture
Plaintiffs have moved for partial summary judgment, arguing that there is no genuine issue of material fact regarding Counts III and IV of their amended complaint. Defendants oppose the plaintiffs' motion and have moved for summary judgment based on the plaintiffs' amended complaint, not the defendants' counterclaim. Specifically, defendants assert that plaintiffs' amended complaint is derivative in nature, yet plaintiff seeks personal recovery. Plaintiffs respond that their complaint contains direct causes of action.
Defendant Maynard makes the following arguments in his objection to plaintiffs' motion for partial summary judgment:
(1) the Long Ridge Partnership Agreement restricts the general partner's liability such that Maynard is not liable to limited partners for damages, including a return of capital contributions, except for acts of willful misconduct, malfeasance or gross negligence, or for damages arising out of any material misrepresentation; (2) the Long Ridge Partnership Agreement restricts the general partner's liability such that Maynard is not liable to the limited partners for interest accrued on Plaintiffs' capital contributions; (3) Maynard relied in good faith on the provisions of the Long Ridge Partnership Agreement; (4) Plaintiffs' claims are barred by the doctrines of waiver, estoppel and laches; (5) Plaintiffs' claims are barred by the applicable statute of limitations; (6) the Plaintiff's actions are derivative in nature, but Plaintiffs have failed to bring a derivative action; and (7) Plaintiffs have failed to allege any actions that amount to criminality, thus Plaintiffs' claim for punitive damages should be decided as a matter of law.Defendants' Memorandum of Law in Support of Their Objection to Plaintiffs' Motion for Partial Summary Judgment and Defendants' Cross Motion for Summary Judgment 11 (Aug. 13, 1999).
Issues
(1) Whether plaintiffs' amended complaint alleges derivative claims, direct claims, or both?
(2) If plaintiffs' amended complaint alleges any direct claims, does a genuine issue of material fact exist as to those claims?
Discussion
I. Summary Judgment StandardA court shall grant summary judgment only when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The purpose of summary judgment "is to pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Fed.R.Civ.P. 56(c) 1963 Amendment advisory committee's note. The Court must view all the evidence in the light most favorable to the nonmoving party and view all reasonable inferences in that party's favor. See United States v. One Parcel of Real Property, 960 F.2d 200, 204 (1st Cir. 1992). ". . . when the facts support plausible but conflicting inferences on a pivotal issue in the case, the judge may not choose between those inferences at the summary judgment stage." Coyne v. Taber Partners I, 53 F.3d 454, 460 (1st Cir. 1995) (citations omitted). Moreover, "[s]ummary judgment is not appropriate merely because the facts offered by the moving party seem more plausible, or because the opponent is unlikely to prevail at trial."Gannon v. Narragansett Elec. Co., 777 F. Supp. 167, 169 (D.R.I. 1991) (citations omitted).
The party seeking summary judgment must demonstrate the absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once a party seeking summary judgment has presented evidence that a nonmoving party cannot meet their prima facie case, the nonmoving party "must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (quoting First National Bank of Arizona v. Cities Service Co., 391 U.S. 253 (1968)).
Furthermore, "[i]f the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson v. Liberty Lobby, Inc., 477 U.S. at 249-50 (stating that "there is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party") (citations omitted). The Supreme Court held that "the mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party]." Id. at 252; see also Matsushita Electric Industrial Co. v. Zenith Radio Corp. et al., 475 U.S. 574, 586 (1986) (stating that a nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts"). In short, the Supreme Court construes Rule 56
not only for the rights of persons asserting claims and defenses that are adequately based in fact to have those claims and defenses tried to a jury, but also for the rights of persons opposing such claims and defenses to demonstrate in the manner provided by the Rule, prior to trial, that the claims and defenses have no factual basis.Celotex Corp. v. Catrett, 477 U.S. at 327 (emphasis added).
The First Circuit has followed the Supreme Court's rulings, holding that "evidence illustrating the factual controversy cannot be conjectural or problematic; it must have substance in the sense that it limns differing versions of the truth which a factfinder must resolve at an ensuing trial." Mack v. Great Atlantic and Pacific Tea Co., Inc., 871 F.2d 179, 181 (1St Cir. 1989); see also National Amusements, Inc. v. Town of Dedham, 43 F.3d 731, 735 (1st Cir. 1995) (". . . we need not credit purely conclusory allegations, indulge in rank speculation, or draw improbable inferences.").
II. Derivative Suits
A. Applicable Law
Courts look to corporate law for guidance in determining the nature of a suit commenced by a limited partner. See Litman v. Prudential-Bache Properties, 611 A.2d 12, 15 (Del.Ch. 1992); Seidel v. Lee et al., 1994 WL 913930, *4 (D.Del. 1994) ("Under Delaware law, the determination of whether a fiduciary duty lawsuit involving a limited partnership is derivative or direct in nature is similar to that involving a corporation."). In the corporation context, the law of the state of incorporation governs whether a suit must be derivative. See J.P. Ludington, What Law Governs as to Shareholder's Right to Maintain Derivative Action, 93 A.L.R.2d 1354 (1964). In the partnership context, there is obviously no state of incorporation. In the case at bar, however, § 12.10 of the Limited Partnership Agreement states "[t]his Agreement shall be deemed to be made under and shall be construed and enforced in accordance with laws of the State of Delaware." Pl. Ex. 5 Limited Partnership Agreement § 12.10. Consequently, this Court will apply Delaware law.
The P.O.M. states that "Long Ridge Associates L.P. . . . has been formed pursuant to Delaware Partnership Law." It also says that "[t]he principal offices of the Partnership are located at 150 Southern Way, Charlestown, RI 02813." Pl. Ex. 1 P.O.M. at 1.
In any event, the plaintiffs concede that Rhode Island and Delaware law are the same regarding derivative suits. See Plaintiffs' Supplemental Memorandum of Law in Objection to Defendants' Motion for Summary Judgment 4 (Nov. 19, 1999).
B. Derivative Suits
A derivative action is ". . . a suit asserted by a shareholder on the corporation's behalf against a third party (usu. a corporate officer) because of the corporation's failure to take some action against the third party." Black's Law Dictionary 455 (7th ed. 1999); see also Litman v. Prudential-Bache Properties, 611 A.2d at 15 ("In a derivative suit, a shareholder sues on behalf of the corporation for harm done to the corporation."); Ralph C. Ferrara et al., Shareholder Derivative Litigation: Besieging the Board § 1.02 (5th ed. 1999) ("Literally, an action is derivative in nature when it is brought by a shareholder on behalf of the corporation as a whole for harm suffered by all shareholders in common.").
The purpose of a derivative action is to "authorize a limited partner . . . to bring a suit on behalf of a limited partnership in the event that the general partners who control the limited partnership have declined to assert a claim relating to the limited partnership." Martin I. Lubaroff Paul M. Altman, Lubaroff Altman on Delaware Limited Partnerships ch. 10, 10-1 (1999 Supp.);see also Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 95 (1991) (quoting Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 548 (1949) ("The purpose of the derivative action was to place in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of 'faithless directors and managers.'")).
One policy justification for derivative suits in the partnership context is to protect the partnership's creditors. For example,
[i]n a derivative action, any monetary award belongs to the partnership and creditors have first priority claims against it. If individual limited partners were allowed to bring a direct action against a third party any monetary award would accrue directly to them and might circumvent the claims of creditors. Similarly, if the general partners have converted the partnership's assets or opportunities, it is the partnership which has the primary interest, and it is an essential party.
59A Am. Jur. 2d Partnership § 1390 (1999 Cumulative Supp.); see also Watson v. Button, 235 F.2d 235, 237 (9th Cir. 1956) ("It is a well-established general rule that a stockholder of a corporation has no personal right of action against directors or officers who have defrauded or mismanaged it and thus affected the value of his stock. The wrong is against the corporation and the cause of action belongs to it. Any judgment obtained by reason of such wrongs is an asset of the corporation which inures first to the benefit of creditors and secondly to stockholders.") (citations omitted) (emphasis added). In a derivative suit, any recovery belongs to the corporation. See John L. Warden Garrard R. Beeney, Business and Commercial Litigation in Federal Courts § 16.2 (1998).
If an action is derivative in nature, the shareholders must first make a demand on the corporate officers or directors to bring the suit on behalf of the corporation. See Aronson v. Lewis, 473 A.2d 805, 808 (Del. 1984). This demand requirement "can only be excused where facts are alleged with particularity which create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule." Id. at 808. The business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption." Id. at 812 (citations omitted).
C. Direct Suits
A shareholder may bring a direct suit against the corporation if he has alleged a "special injury;" that is, if he alleges "an injury which is separate and distinct from that suffered by other shareholders, or a wrong involving a contractual right of a shareholder, such as the right to vote, or to assert majority control, which exists independently of any right of the corporation." Litman v. Prudential-Bache Properties, 611 A.2d at 15 (quoting Moran v. Household Int'l, Inc.,, 490 A.2d 1059, 1070 (Del.Ch. 1985) (citations omitted), aff'd, 500 A.2d 1346 (Del. 1985);Tri-Star Pictures, Inc., Litigation, 634 A.2d 319, 330 (Del. 1993);Katell v. Morgan Stanley Group, Inc., 1993 WL 10871, *3 (Del.Ch. 1993) ("If a plaintiff cannot show either factor, his claims are derivative.")). Stated differently, "[for a plaintiff to bring an individual action, he must be injured directly or independently of the corporation." Litman v. Prudential-Bache Properties, 611 A.2d at 15 (quoting Kramer v. Western Pac. Indus., Inc., 546 A.2d 348, 351 (Del. 1988) (emphasis in original). "The test is whether the Plaintiff has suffered an injury distinct from that suffered by other limited partners." Seidel v. Lee et al., 1994 WL 913930, at *4 (citing Brug v. The Enstar Group, Inc., 755 F. Supp. 1247, 1257 (D.Del. 1991)).
D. How A Court Determines Whether An Action is Derivative or Direct
To assess whether a plaintiff has brought a derivative or direct action, a court must look to the "nature of the wrongs alleged in the body of plaintiff's complaint, not plaintiff's characterization or stated intention." Litman v. Prudential-Bache Properties, 611 A.2d at 15; see also Elster v. American Airlines, Inc., 100 A.2d 219, 223 (Del.Ch. 1953) (citations omitted) ("the nature of the wrong alleged is what controls, not the pleader's assertion of an intention to sue as representative of the stockholders rather than in the right of the corporation."). In addition, a court must also look "to the relief that Plaintiff would be entitled if he were to prevail." Seidel v. Lee et al., 1994 WL 913930, at *4 (citing Kramer v. Western Pac. Indus., Inc., 546 A.2d at 352). In short, the "gravamen of the complaint" must portray "injury to the partnership and not to the partner individually . . ." to raise a derivative claim. Debra E. Wax, Right of Limited Partner to Maintain Derivative Action on Behalf of Partnership, 26 A.L.R.4th 264, 266 (1983).
Shareholders may bring direct and derivative actions simultaneously.See Charles R.P. Keating Jim Perkowitz-Solheim, 12B Fletcher Cyclopedia of Private Corporations § 5908 (1993); John L. Warden and Garrard R. Beeney, Business and Commercial Litigation in Federal Courts § 16.2 (1998) (". . . the same conduct may give rise to both shareholder individual claims and derivative claims."); Lipton v. News Int'l. PLC, 514 A.2d 1075, 1079 (Del. 1986) ("A shareholder who suffers an injury peculiar to itself should be able to maintain an individual action, even though the corporation also suffers an injury from the same wrong.").
Courts have struggled to classify particular claims as derivative or individual. See Abelow v. Symonds, 156 A.2d 416, 420 (Del.Ch. 1959) ("[t]he line of distinction between derivative suits and those brought for the enforcement of personal rights asserted on behalf of a class of stockholders is often a narrow one. . . ."). Courts, however, have determined that the following activities give rise to derivative actions:
• Actions against directors or officers for breach of fiduciary duty to the corporation (e.g., waste of corporate assets, self-dealing, mismanagement of corporate business, misappropriation of corporate assets or business opportunities). See David Hittner et al., Federal Civil Procedure Before Trial ch. 10 (5th Circuit ed. 1999); Jesse A. Finkelstein et al., Practicing Law Institute, Derivative Suit Litigation, 866 PLI/Corp 543, 549 (1994); Litman v. Prudential-Bache Properties, 611 A.2d at 16 (Mismanagement which depresses the value of stock or results in the diminished income to the partnership, diminished distributions to limited partners, or diminished value of limited partnership interests raises a derivative claim); James D. Cox et al., Corporations § 15.3 (1995) ("As a rule, the shareholder's judicial remedy for mismanagement or other wrongful acts of directors, officers, or third parties is by a derivative or representative suit on behalf of the corporation.");
• Actions to recover damages for a consummated ultra vires act. See Starbird v. Lane, 203 Cal.App.2d 247, 254-55 (Cal.Ct.App. 1962) ("When an ultra vires, fraudulent, or illegal transaction has been consummated and a wrong has been done to the corporation, then the shareholder's right to sue the directors or wrongdoers for redress is derivative, and not primary, since any recovery must go to the corporation for the benefit of all stockholders.").
On the other hand, the following activities give rise to direct actions:
• Fraudulent statements which directly affect the value of securities held by the shareholder. See Hayes v. Gross, 982 F.2d 104, 108 (3d Cir. 1992) (claim that officers and directors misrepresented the financial condition of the association, causing the purchaser to pay an inflated price for the stock, stated a direct claim against the officers and directors); Dowling v. Narragansett Capital Corp., 735 F. Supp. 1105, 1110 (D.R.I. 1990)(". . . allegations that the defendants knowingly misled the shareholders regarding the true value of their stock by using inaccurate valuation methods, by recommending an inadequate sale price, and by failing to disclose material information. . . . .");
• A suit brought to inspect corporate books and records. See Gieselmann v. Stegeman, 443 S.W.2d 127, 131 (Mo. 1969) (citing 13 Fletcher, Cyclopedia of the Law of Private Corporations §§ 5911 5915 (perm. ed. 1993) ("Actions based upon torts where the injury is done directly to an individual shareholder, director or officer as such, depriving him of his rights, for instance, wrongfully expelling him or refusing to allow him to inspect the corporate books and records, are actions which may be brought by shareholders as individuals, and are not required to be brought as derivative actions."));
• A suit against directors for fraud in the sale or purchase of the individual shareholder's stock. See Siegel v. Engelmann, 143 N.Y.S.2d 193, 195 (Sup.Ct. 1955) (". . . the alleged misrepresentation consisted of the concealment of the fact that one of the corporations had more obligations than an audit and inspection of the books and records indicated. The fact that these obligations were normal debts incurred in the regular course of the business of the corporation and were eventually paid by it has no bearing on the situation. Therefore, it is obvious that no harm came to the corporation as a result of such alleged misrepresentation.");
• Actions to compel payment of dividends. See Cowin v. Bresler, 741 F.2d 410, 415 (D.C. Cir. 1984) ("Because dividends are an incident of stock ownership, an action to compel the payment of dividends withheld will not inure to the benefit of the corporation; the shareholders alone will gain by a judgment in their favor and, therefore, each shareholder may sue for his own account.");
• Actions to preserve shareholders' rights to vote. See Lipton v. News Int'l. PLC, 514 A.2d at 1079 ("The right to vote is a contractual right that News possesses as a shareholder of Warner which is independent of any right of Warner"); Condec Corp. v. Lunkenheimer Co., 230 A.2d 769, 777 (Del.Ch. 1967) ("This . . . is a case of a stockholder with a contractual right to assert voting control being deprived of such control by what is virtually a corporate legerdemain.");
• A claim that a transaction improperly dilutes a shareholder's ownership interest or infringes the shareholder's preemptive rights. See In re Tri-Star Pictures, Inc., Litig., 634 A.2d 319, 330 (Del. 1993) (". . . a claim of stock dilution and a corresponding reduction in a stockholder's voting power is an individual claim.");
• A claim that a proposed merger, recapitalization, or similar transaction unfairly affects minority shareholders. See Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1142 (Del. 1989) ("A shareholder who dissents from a cash-out merger is nonetheless entitled to receive the fair or intrinsic value of his shares.");
• A claim that a proposed corporate action should be enjoined as ultra vires, fraudulent, or designed to harm a specific shareholder illegitimately. See American Law Institute, Principles of Corporate Governance: Analysis and Recommendations, Direct and Derivative Actions Distinguished § 7.01 (1994).
E. Application
1. Count One
Count I of plaintiffs' complaint really states two allegations. First, plaintiffs allege that defendant Maynard kept the Property in his own name and second that defendant Maynard "diverted funds entrusted to him by the plaintiffs for his personal purposes." Compl. ¶ 12. This Court will address each allegation within Count I separately.
The allegation that defendant Maynard retained the Property in his own name, if true, placed a direct injury on the Partnership. The Partnership as a whole would suffer if it does not own the Property it purports to own. For example, the partnership itself would be inhibited from selling, improving, or utilizing the Property, if the Partnership did not hold title to the Property. No limited partner would incur a separate and distinct injury from that suffered by any other limited partners. Nor would any limited partner suffer a wrong involving a contractual right of that limited partner which exists independently of any right of the Partnership. In short, any injury incurred by the limited partners as a result of defendant Maynard's failure to transfer the Property into the Partnership name is incidental to the Partnership's injury. Consequently, the allegation that defendant Maynard failed to transfer the Property into the Partnership name is a derivative action, which has not been properly pled here.
The nature of the second allegation that defendant Maynard "diverted funds entrusted to him by the plaintiffs for his personal purposes" is one of self dealing, misappropriation, and mismanagement. For example, plaintiffs contend that defendant Maynard diverted the plaintiffs' investment to himself by paying Karasu, a company wholly owned and operated by defendant Maynard. As stated above, such allegations are derivative in nature. The Partnership itself suffers a direct injury when the general partner allegedly misappropriates the Partnership assets and depletes the Partnership of its capital investment. Nevertheless, the limited partners had a contractual right which existed independently of any right of the corporation to have their investment returned to them if the Partnership did not attain full subscription. This contractual right is independent of the Partnership's right to redress for misappropriation of its assets. The existence of an injury to the Partnership does not extinguish the plaintiffs' breach of contract suit. Consequently, the allegation of diversion of funds is both derivative and direct and, therefore, is appropriately pled here.
The P.O.M. states that "In the event the offering is not completed or if the transactions referred to herein are not consummated for any reason, then all subscription payments will be refunded to subscribers without interest and without deduction." Pl. Ex. 1 P.O.M. at ii.
2. Count Two
Count II of plaintiffs' complaint alleges that defendant Maynard "failed and refused to render an accounting of the finances of defendant Long Ridge, despite requests over several years and despite his obligations under the Partnership agreement. . . ." Compl. ¶ 15. Plaintiffs seek injunctive relief to remedy this situation. Specifically, plaintiffs want defendant Maynard "to render financial reports of Long Ridge annually from December 31, 1989, and to produce all books and records of Long Ridge." Compl. at 4. The nature of this allegation, coupled with the relief sought by the plaintiffs, raises a claim similar to one brought to inspect corporate books and records. Such actions may be direct or derivative in nature. As a result, Count II is appropriately pled as a direct action.
3. Count Three
The nature of the allegations in Count III of plaintiffs' amended complaint are misrepresentation, fraud, and deceit. Specifically, plaintiffs maintain that defendant Maynard's "representations regarding the assets of defendant Long Ridge, the condition of the development of the property, the ownership status of the property and the value of plaintiffs' investment in Long Ridge were made with the intent and purpose to induce plaintiffs to invest in Long Ridge, to continue to invest in Long Ridge and to not [sic] inquire further regarding the status of their investments, all with the purpose of defrauding plaintiffs as to the true ownership of record of the property defendant Maynard claimed was owned by defendant Long Ridge. The false statements were also made with the purpose of avoiding inquiry as to the misappropriation of funds of the partnership by defendant Maynard." Compl. ¶ 18. These allegations present an injury that is separate and distinct from that suffered by other limited partners. If true, each plaintiff suffered a direct injury because each was defrauded of his or her investment. The Partnership itself was not defrauded by these alleged false statements and misrepresentations. Each individual partner dispensed with different amounts of capital on the representations of defendant Maynard. Consequently, Count III states a direct action.
4. Counts Four and Five
Counts IV and V allege that defendant Maynard breached his fiduciary duties. Specifically, Count IV alleges that "defendant Maynard breached his fiduciary duty to plaintiffs, all limited partners in defendant Long Ridge, of which defendant Maynard is general partner." Compl. ¶ 20. Count V alleges that "defendant Maynard . . . breached his fiduciary responsibilities under ERISA 29 U.S.C. § 1105 by misappropriating assets of the limited partnership that were designated 'plan assets' under ERISA." Compl. ¶ 22. As stated above, actions against general partners for breach of fiduciary duties are derivative in nature. For example, actions for waste of corporate assets, self dealing, mismanagement of corporate business, or misappropriation of corporate assets or business opportunities raise derivative claims. In the case at bar, plaintiffs essentially argue that defendant Maynard conducted self-dealing by diverting funds from partnership accounts into his wholly-owned company, Karasu. Furthermore, plaintiffs contend that defendant Maynard misappropriated Partnership assets when he depleted the Partnership accounts, including plaintiffs' investment capital. These allegations are simply derivative in nature. Note, however, that plaintiffs are free to pursue a direct action for breach of contract under Count I. Consequently, Counts IV and V are inappropriately pled here.
5. Summary
In summary, (1) the claim in Count I that defendant Maynard failed to transfer the property into the partnership name is derivative, while the claim in Count I that defendant Maynard diverted funds is both derivative and direct; (2) Count II is direct; (3) Count III is direct; (4) Count IV is derivative; and (5) Count V is derivative. Consequently, this Court recommends that the District Court grant defendants' motion for summary judgment as to the first part of Count I and all of Counts IV and V because plaintiffs have failed to plead derivative claims.
III. Disputed Genuine Issues of Material Fact
The question remains whether plaintiffs' direct claims raise genuine issues of material fact preventing this Court from recommending summary judgment. The aforementioned facts present questions of who knew what, when, and how. M such, this Court recommends that the District Court deny defendants' motion for summary judgment as to the second part of Count I and all of Count II, and deny all parties' motions for summary judgment regarding Count III.
A. Plaintiffs' Sophistication
The first genuine issue of material fact in dispute is the extent of plaintiffs' sophistication regarding investment and finance. Plaintiffs essentially argue that defendant Maynard conned them, calling him a "confidence man." Plaintiffs' Supplemental Memorandum of Law in Objection to Defendants' Motion for Summary Judgment 3 (Nov. 19, 1999) ("Mr. Maynard never informed the limited partners of the financial condition of the partnership and, in fact, in the tradition of any good confidence man, resisted their efforts to obtain an accounting or a financial report of any kind, despite a duty to do so set forth in the Private Offering Memorandum."). The plaintiffs take the position that they were naive, too trusting, and only learned of defendant Maynard's alleged violations of his fiduciary and contractual obligations during the discovery phase of this lawsuit. This position, however, raises a question of fact for the jury. A reasonable jury could conclude that given the plaintiffs' sophistication with financial matters, coupled with the information supplied in the February 1991 status report, the plaintiffs were not conned, but rather acquiesced to defendant Maynard's conduct through their silence. In addition, according to defendant Maynard, some of the plaintiffs knew that he converted $500,000 due him for the land he contributed from the Partnership into his own partnership units. See Maynard Affidavit ¶ 9. Also, some of the plaintiffs had prior experience investing with defendant Maynard. See Def. Ex. D Deposition of Chester Gan. Yet, the plaintiffs did not take any action against defendant Maynard's conduct until 1998, ten years after the Partnership was formed, and seven years after receiving the status report. Consequently, a genuine issue of material fact exists as to the plaintiffs' sophistication or naivete.
B. Validity of Payments to Karasu
A second issue of material fact exists as to the validity of defendant Maynard's payments to Karasu, the general contractor for the land development. Plaintiffs argue that defendant Maynard's payments to Karasu depleted their investment and violated the P.O.M. They argue that defendant Maynard's conduct essentially amounts to self-dealing and misappropriation. Defendant Maynard, on the other hand, asserts that the Limited Partnership Agreement allowed him to make payments for expenses already incurred by the Partnership, including those incurred to Karasu. Whether the various payments made to Karasu violated the P.O.M. or the Limited Partnership Agreement is a question of fact for a jury. This Court cannot decide as a matter of law whether defendant Maynard engaged in misappropriation or self-dealing when defendant Maynard has come forward with competent evidence showing that there is a genuine issue of material fact regarding the validity of the payments to Karasu. For example, defendant Maynard argues that the payment to Karasu fell within § 5.04 of the Limited Partnership Agreement and page 46 of the P.O.M. Defendant Maynard rebuttal of plaintiffs' evidence presents a genuine issue of material fact prohibiting summary judgment.
Section 5.04 states in part:
[t]he Partnership will employ Karasu Corp., an affiliate of the General Partner as general contractor to manage land development and townhouse construction . . . [p]ayments to this affiliate will be made from time to time during each year.
The P.O.M. includes a use of proceeds schedule that provides for the (1) repayment to the general partner for development expenses already incurred totaling $218,080; (2) partial payment to the general partner for land contributed to the Partnership totaling $500,000; and (3) payment for future development and construction expenses totaling $1,081,920. See Pl. Ex. 1 P.O.M. at 46.
C. Extent of Defendant Maynard's Conduct
The third genuine issue of material fact is whether defendant Maynard's alleged conduct constitutes willful misconduct, malfeasance, gross negligence, or material misrepresentation. As stated earlier, the P.O.M. limits the general partner's liability "for acts performed by him within the scope of his authority under the Partnership Agreement, with the exception of acts constituting willful misconduct, malfeasance, gross negligence or material misrepresentation." Pl. Ex. 1 P.O.M. at 44. Plaintiffs simply state that defendant Maynard meets this standard. They contend that the reason why defendant Maynard did not withdraw the offering and return their investment was to cover up his deceit. This is not enough. Plaintiffs are engaging in pure speculation as to defendant Maynard's motives. Defendant Maynard has brought forth evidence which a reasonable jury may find does not meet the standard articulated in the P.O.M. For example, defendant Maynard demonstrated that he placed a great deal of his own capital into the Partnership. Furthermore, defendant Maynard relied on the language in the Limited Partnership Agreement and the P.O.M. when making disbursements and conducting himself as general partner. A reasonable jury could find that his reliance on those documents was in good faith and not in violation of the standard set forth in the P.O.M. Consequently, this Court finds that there are genuine issues of material fact as to the extent of defendant Maynard's conduct that prevent summary judgment.
D. Statute of Limitations
The fourth genuine issue of material fact relates to the statute of limitations. The defendants argue that the Delaware statute of limitations applies. Delaware law provides that a three-year statute of limitations applies to claims for breach of contract or breach of fiduciary duty. See Fike v. Ruger, 1999 WL 1083881, *5 (Del.Ch. 1999). Plaintiffs, on the other hand, argue that the Rhode Island statute of limitations should apply. Rhode Island law provides a ten-year statute of limitations for breach of contract. See R.I. Gen. Laws § 9-1-13(a) (1999) ("Except as otherwise specifically provided, all civil actions shall be commenced within ten (10) years next after the cause of action shall accrue, and not after."). This Court will apply Delaware law for two reasons. First, § 12.10 of the Limited Partnership Agreement states "[t]his Agreement shall be deemed to be made under and shall be construed and enforced in accordance with laws of the State of Delaware."Pl. Ex. 5 Agreement § 12.10. Second, the P.O.M. states that "Long Ridge Associates L.P. . . . has been formed pursuant to Delaware Partnership Law." Pl. Ex. 1 P.O.M. at 1.
A cause of action for breach of contract begins to accrue at the time the contract was breached. See Nardo v. Guido DeAscanis, 254 A.2d 254, 256 (Del. 1969). According to the plaintiffs, defendant Maynard breached the P.O.M. when he did not return their investments on November 2, 1989. As plaintiffs did not bring their claims until March of 1998, on first blush it appears their claims are time barred. Plaintiffs argue, however, that the Delaware discovery rule equitably tolls the statute of limitations to when the plaintiffs first discovered defendant Maynard's alleged conduct. Under Delaware law, however, "[i]t is not the actual discovery of the reason for the injury that starts the clock, but the discovery of facts sufficient to put a person of ordinary intelligence on inquiry which, if pursued, would lead to discovery." SR Associates v. Shell Oil Co., 725 A.2d 431, 439 (Del.Super.Ct. 1998) (stating that "the limitations period does not begin to run until the plaintiff has reason to know that a wrong has been committed provided the injuries are 'inherently unknowable' and sustained by a 'blamelessly ignorant' plaintiff") (citations omitted).
Consequently, plaintiffs are begging the question: when did the plaintiffs know or when should they have known about defendant Maynard's alleged breach of contract? A reasonable jury could find that the plaintiffs knew or should have known about defendant Maynard's conduct as early as 1991, given their purported sophistication, the February 28, 1991 status report, and the telephone conversations described in the record. On the other hand, a reasonable jury could find that the plaintiffs did not know nor should they have known of defendant Maynard's conduct until the discovery phase of these proceedings, when they allege they first discovered that defendant Maynard had diverted their funds. Consequently, this Court cannot determine as a matter of law when the plaintiffs knew or should have known about defendant Maynard's conduct on the current record. Therefore, this Court cannot recommend summary judgment on the statute of limitations issue.
Conclusion
For the aforementioned reasons, I recommend that the District Court (1) grant the defendants' motion for summary judgment as to the part of plaintiffs' Count I alleging the failure to transfer Partnership Property and all of plaintiffs' Counts IV and V, (2) deny defendants' motion for summary judgment as to the part of plaintiffs' Count I alleging the diversion of funds and all of plaintiffs' Count II, and (3) deny all parties' motions for summary judgment regarding plaintiffs' Count III. Any objection to this Report and Recommendation must be specific and must be filed with the Clerk of Court within ten (10) days of its receipt. See Rule 32, Local Rules of Court; Fed.R.Civ.P. 72(b). Failure to file specific objections in a timely manner constitutes a waiver of the right to review by the District Court and the right to appeal the District Court's decision. See United States v. Valencia-Copete, 792 F.2d 4 (1st Cir. 1986); Park Motor Mart, Inc. v. Ford Motor Co., 616 F.2d 603 (1st Cir. 1980).