Opinion
No. 651440–2011.
2012-05-24
PINE STREET ASSOCIATES, L.P., Plaintiff, v. Stephen M. HICKS, Defendant.
Lance Gotthoffer, Esq., John L. Scott, Jr., Esq., Reed Smith LLP, New York, for plaintiff. Steven R. Popofsky, Esq., Jason Canales, Esq., New York, Moses & Singer LLP, for defendant.
Lance Gotthoffer, Esq., John L. Scott, Jr., Esq., Reed Smith LLP, New York, for plaintiff. Steven R. Popofsky, Esq., Jason Canales, Esq., New York, Moses & Singer LLP, for defendant.
BERNARD J. FRIED, J.
Defendant Stephen M. Hicks (Hicks) moves, pursuant to CPLR 3211(a)(5) (collateral estoppel) and 3211(a)(7) (failure to state a cause of action), to dismiss the complaint against him. In this action, plaintiff Pine Street Associates, L.P. (Pine Street) seeks damages, including punitive damages, which allegedly arise from defendant's deceptive conduct, during the period from 2005 through 2009, in connection with the sale and redemption of its $8.3 million limited partnership interest in Southridge Partners, L.P. (referred to in the complaint as the Southridge Fund), an investment vehicle allegedly controlled by Hicks. The gravamen of Pine Street's complaint is that Hicks made material false statements and omissions, inducing it to invest, and remain invested, in securities that were unsuitable for it because they were illiquid. Four causes of action are asserted against Hicks: (1) fraud or intentional misrepresentation; (2) breach of fiduciary duty; (3) negligent misrepresentation; and (4) unjust enrichment.
Prior to bringing this action, Pine Street's breach of contract claims against the Southridge Fund were resolved in an arbitration proceeding. Hicks successfully opposed his inclusion in the arbitration proceeding, and just the Southridge Fund and its general partners proceeded to arbitration. Hicks's principal argument is that, under principles of collateral estoppel, Pine Street is barred from making its claims because it had a fair and full opportunity to litigate the fraudulent misrepresentation claims in the prior arbitration proceeding. Additionally, Hicks argues that Pine Street is seeking the same amount of damages it sought and received in the arbitration proceeding. In opposition, Pine Street contends that it is not estopped, as a matter of law, from seeking additional non-contract related damages against Hicks.
As set out below, I conclude that collateral estoppel is inapplicable to the facts of this case, and accordingly, defendant's motion to dismiss the complaint on this basis is denied. However, the motion to dismiss the unjust enrichment claim is granted.
Pine Street, which was founded in 1994, is a fund of hedge funds headquartered in New York City. Hicks was the principal of Southridge Fund's former general partner (Southridge Capital Management), and is the chief executive officer of its current general partner (Southridge Advisors). The Southridge Fund is based in Ridgefield, Connecticut. The purported strategy of the Southridge Fund was to invest in a specialized form of private investment in public entities (PIPEs), called equity lines of credit (ELCs).
Beginning in 2004, Pine Street commenced discussions with Hicks concerning a potential investment in the Southridge Fund. Hicks allegedly used the Southridge Fund's liquidity as an inducement for Pine Street to invest; previously, Pine Street had communicated its unwillingness to invest in illiquid investments where investors could not get their money back immediately. The complaint alleges that Pine Street received misleading representations that the Stoneridge Fund would remain 75% invested in liquid securities, cash or cash-like securities, and up to 25% invested in illiquid or restricted securities.
Following Hicks's solicitation, Pine Street invested, as a limited partner, the sum of $6 million in the Southridge Fund, which was managed by Hicks, on July 12, 2005. A month later, Pine Street invested an additional $2.3 million. The fund was governed by a limited partnership agreement (the Agreement).
Pursuant to the Agreement, investors were permitted to redeem their investment in the Southridge Fund. However, the Agreement also stated that: “The General Partner shall
have the right, exercisable in the General Partner's sole and absolute discretion, to suspend or postpone the payment and effective date of any redemption [under various specified circumstances including] at such other times as the General Partner, in its sole discretion, may determine” (affirmation of Popofsky annexing exhibits in support of defendant's motion to dismiss, exhibit 7, Sixth Amended and Restated Limited Partnership Agreement, Section 7.2[f], at A–16).
The global stock market stumbled dramatically in 2008. On October 3, 2008, Pine Street provided the requisite notice and requested the redemption of its remaining investment in Southridge Fund as of December 31, 2008. At that time, Pine Street's interest was reported to be worth $8,076,457.85. Pine Street sought the redemption in cash. The Southridge Fund acknowledged the redemption notice on October 6, 1008, and, as required under the Agreement, informed Pine Street that the valuation date for the redemption would be December 31, 2008.
While Hicks allegedly assured Pine Street that 75% of Southridge Fund's portfolio was in cash and free trading securities, he also admitted to being unable to immediately satisfy Pine Street's redemption request. Over the next few months, Hicks allegedly avoided responding to Pine Street's questions about its redemption request. The Southridge Fund failed to issue Pine Street's requested redemption in December 2008. Instead, Hicks requested that Pine Street delay its receipt, because of the current market environment and the difficulty in liquidating its positions in the uncertain and volatile environment that followed the collapse of the stock market. Four proposed redemption schedules were submitted by Hicks to Pine Street, and Pine Street rejected each of these proposals. Nonetheless, the Southridge Fund failed to redeem the balance of Pine Street's investment on the specified dates of all the proposed redemption schedules.
More than one year later, in April 2009, pursuant to the arbitration provision in the Agreement, Pine Street filed an arbitration demand against the Southridge Fund before the American Arbitration Association (AAA). In its demand, Pine Street named Hicks, the Southridge Fund, and Southridge Capital as respondents. The demand stated that Pine Street was seeking “an accounting and detailed portfolio of Pine Street's investment” in the Southridge Fund and “an award ordering Southridge [Fund] to buy back Pine Street's investment at the value that was set and determined by Southridge in October 2008, when Pine Street's redemption request was made.” The demand also asserted claims for fraudulent misrepresentation, unsuitable investments, dealing with investors in bad faith and breach of fiduciary duties.After the arbitration demand was filed, the Southridge Fund paid Pine Street the partial redemption sum of $88,797.66, with a remaining balance of more than $7.9 million.
Subsequently, the scope of the arbitration narrowed, and Pine Street limited its claims to an accounting and redemption-related issues. In voluntarily dropping its tort claims, Pine Street, nonetheless, expressly reserved the right to bring tort claims against Hicks and the other respondents in a later action. Hicks opposed his participation in the arbitration agreement, arguing that the relief sought (an accounting and redemption payments) could be granted only against the Southridge Fund. Pine Street agreed to stipulate that Hicks was not bound by the arbitration clause.Hicks was dismissed from the arbitration proceeding since he was not a “proper party.” In its December 10, 2009 pre-hearing memorandum, Pine Street reiterated that it only sought an accounting and specific performance of the redemption clause.
The arbitration hearing was held on December 14 and 15, 2009. Four witnesses testified, and the transcript covers 462 pages. Hicks did not testify. Both parties were represented by attorneys. During the arbitration, Pine Street did submit testimony, principally from Leon Cooperman, its founder, related to representations concerning the alleged liquidity of a limited partner's investment interest in the Southridge Fund.
Arbitrator Byrne issued his ruling on January 18, 2010 in a three-page decision. He began by reciting when Pine Street made its request for redemption, and describing the fund's response to the request, which included its unresponsiveness and delay. Byrne next covered the allegations made by the parties, including Pine Street's allegations of bad faith and the Southridge Fund's defense of having sole and absolute discretion, by virtue of Section 7.2 of the Agreement, in determining when redemptions can be made to investors. The arbitration award states, in part:
“Alleging Respondents' bad faith in connection with the liquidity of Claimant's investment in Southridge and Respondents' failure to honor the redemption request, Pine Street essentially seeks an Award compelling Respondents to redeem its interest in Southridge ... without further delay.”
He found that the Southridge Fund had “failed to establish a credible evidentiary basis” or explanation for its 15–month delay, or “the reasonableness of their exercising discretion, that delayed the redemption of Claimant's interest then or now” (affirmation of Popofsky, exhibit 8, Arbitration Award, at 2, ¶ 2). He further states:
“Respondents insist that Claimant, and this Arbitrator, must honor and enforce the Agreement as written; but so must Respondents—and it is clear that the only way promises are kept and the meaning of the provisions of Section 7.2 can be implemented is when Respondents are compelled to do so”
( id.).
Under the terms of the arbitration award, respondents were ordered to pay Pine Street 40% of the $7,987,660.19 that was owed, in cash, within 30 days of the award. The balance of the monies owed ($4,792,596.11) was to be paid within 90 days from the date of the award “in cash or in kind,” plus interest at the legal rate. Byrne also required respondents to provide Pine Street with “an accounting of [Pine Street's] interest and position in Southridge (represented to be $8,079,457.85 [ sic ] as of December 31, 2008)....” He concluded his decision, stating that: “This Award is in full and complete settlement and satisfaction of any and all claims ... properly submitted to the jurisdiction of these proceedings, and any claim or counterclaim not specifically granted herein [is] ... deemed denied” ( id. at 3, ¶ 3).
On February 17, 2010, the Southridge Fund paid the 40% cash portion of the arbitration award, by delivering a check in the amount of $3,195,064.00 to Pine Street. On April 20, 2010, Southridge Fund, in purported satisfaction of the remaining balance, transferred the following securities from two companies over to Pine Street: (1) 4,543,990 shares of Technest Holdings, Inc. Common Stock; (2) 74.93 shares of Fonix Corporation Convertible Preferred Stock 9.0% Series O; (3) 61.36 shares of Foniz Convertible Preferred Stock 9.0% Series L; (4) 167.60 shares of Fonix Convertible Preferred Stock 9.0% Series N; and (5) 102.70 shares of Fonix Convertible Preferred Stock 9.0% Series P. On May 27, 2010, the Southridge Fund allegedly completed Pine Street's redemption by assigning to the company its interest in a promissory note. Pine Street contends that the transferred securities were virtually worthless.
On November 24, 2010, Pine Street filed a petition
to confirm the arbitration award before this court. On March 3, 2011, I issued a decision and order confirming the arbitration award. On May 12, 2011, a judgment was entered in Pine Street's favor. Thereafter, Pine Street moved to challenge the in-kind delivery as insufficient. The Southridge Fund moved for an order, pursuant to CPLR 5240, restraining Pine Street from seeking to enforce the purportedly already-satisfied judgment. On May 18, 2011, the Southridge Fund was granted a temporary restraining order.
Pine Street Associates, L.P. v. Southridge Partners L.P., et. al., # 651440/2011.
While these events were playing out, on October 25, 2010, the United States Securities and Exchange Commission (SEC) sued Southridge Capital and Hicks, and accused them of committing fraud in the valuation of portfolio assets, making misrepresentations regarding the fund's liquidity to investors, and misusing investor funds. On the same day, the Connecticut State Banking Department also commenced an action against Hicks. It accused Hicks of telling “lucrative lies” and preparing false financial statements that inflated Sourthridge Fund's assets, so that Hicks could illegally earn higher fees.
Additionally, while Pine Street and the Southridge Fund were litigating Pine Street's claim that the arbitration award was not satisfied, in late May 2011, Pine Street filed this action against Hicks. The complaint seeks to recover at least $5 million in damages, which Pine Street initially characterized as the amount which “remains outstanding on the arbitration award.” It now seeks to obtain its 2005 investment amount back no matter how its partnership interest was valued at the time of redemption.
CPLR 3211(a)(5) provides that a party may move for judgment dismissing one or more causes of action on the ground that “the cause of action may not be maintained because of arbitration and award, collateral estoppel, discharge in bankruptcy, infancy or other disability of the moving party, payment, release, res judicata, statute of limitations, or statute of frauds.” Collateral estoppel may be asserted in a subsequent action by a litigant who was not a party or in privity with a party in the original suit so long as the party against whom issue preclusion is asserted was a party or in privity with a party in that action ( seeRestatement [Second] of Judgments § 29; Buechel v. Bain, 97 N.Y.2d 295, 304 [2001],cert denied535 U.S. 1096 [2002] ).
The equitable doctrine of collateral estoppel “applies only if the issue in the second action is identical to an issue which was raised, necessarily decided and material in the first action, and the plaintiff had a full and fair opportunity to litigate the issue in the earlier action” (City of New York v. Welsbach Elec. Corp., 9 N.Y.3d 124, 128 [2007] [internal quotation marks and citations omitted] ). “T]he burden rests upon the proponent of collateral estoppel to demonstrate the identicality and decisiveness of the issue, while the burden rests upon the opponent to establish the absence of a full and fair opportunity to litigate the issue in [the] prior action or proceeding' “ (Parker v. Blauvelt Volunteer Fire Co., 93 N.Y.2d 343, 349 [1999] [internal citation omitted] ). “[T]he fundamental inquiry is whether relitigation should be permitted in a particular case in light of what are often competing policy considerations, including fairness to the parties, conservation of resources of the court and the litigants, and the societal interests in consistent and accurate results” (Soldiers', Sailors', Marines' & Airmen's Club, Inc. v. Carlton Regency Corp., 30 Misc.3d 352, 356, 911 N.Y.S.2d 774 [Sup Ct, N.Y. County 2010] ).
Since the effect of collateral estoppel is harsh, “strict requirements for application of the doctrine must be satisfied to insure that a party not be precluded from obtaining at least one full hearing on his or her claim' “ (North Shore–Long Is. Jewish Health Sys., Inc. v. Aetna U.S. Healthcare, Inc., 27 A.D.3d 439, 440, 811 N.Y.S.2d 424 [2d Dept 2006] [citation omitted]; see also Singleton Mgt. v. Compere, 243 A.D.2d 213, 217, 673 N.Y.S.2d 381 [1st Dept 1998] ).
To determine whether collateral estoppel is applicable, I must first determine what issues were, in fact, determined by the arbitrator. To that end, I have made an examination of the record, including the transcript of the arbitration ( see e.g., Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 569 [1951] ).
To begin, I find that the first requirement for collateral estoppel to apply is not met because the determinative issues in this case are not identical to the issues decided at the arbitration. In submitting its grievance to arbitration, Pine Street sought to vindicate its contractual rights under a limited partnership agreement. It sought specific performance of the redemption provision in the Agreement, and an interpretation of several provisions of the Agreement. By contrast, Pine Street, in filing a lawsuit grounded on tort claims of fraud, negligent misrepresentations, breach of fiduciary duty, and unjust enrichment asserts independent rights. The distinctly separate nature of these contractual and tort claims is not vitiated merely because both were violated as a result of the same factual occurrence ( see North Shore–Long Is. Jewish Health Sys., Inc. v. Aetna U.S. Healthcare, Inc., 27 A.D.3d at 440, 811 N.Y.S.2d 424). As a result, the precise issues on which Hicks is seeking preclusion have not been the product of full litigation. Pine Street is not getting a proverbial second bite of the same apple, as Hicks contends. Instead, Pine Street is seeking a bite from two different apples as it looks to enforce two different sets of rights in two available forums. Accordingly, I find that the reasoning of Ritchie v. Landau (475 F.2d 151 [2d Cir1973] ) and Norris v. Grosvenor Marketing Ltd. (803 F.2d 1281 [2d Cir1986] ), both cases raised by Hicks, unpersuasive. Both cases are factually distinguishable from this case.
The arbitrator clearly recognized that the arbitration award dealt solely with the redemption process, the delay in payment, Pine Street's request for an accounting and whether the fund was required to redeem Pine Street's interest in cash or inkind. In announcing his findings, the arbitrator indicated that Pine Street had proven its allegations of bad faith, but did not once reference Hicks's alleged misrepresentations or fraud.
Hicks correctly notes that the term “liquidity” was raised during the arbitration. But this alone proves little. While Hicks points to occasional references at the arbitration to “liquidity” and certain alleged misrepresentations, the testimony elicited on this point provided the history of the parties' relationship and a context for Pine Street's contractual expectations related to a quick, reasonable redemption process, not testimony establishing a fraud or misrepresentation claim.Further, the testimony was not material to the resolution of the ultimate legal issue ( see Hinchey v. Sellers, 7 N.Y.2d 287, 293 [1959] [limitation upon permission for use of automobile was a finding of fact essential to the judgment] ), and was largely elicited during cross-examination of Pine Street's witnesses (affirmation of Popofsky, exhibit 3, Dec. 14, 2009 Transcript, at 217–218, 231 and 256 [testimony of Cooperman and Frank Travers, who joined Pine Street Advisors in 2003] ). Hicks's own counsel clearly acknowledged on the first day of the arbitration that these were the only issues before the arbitrator (affirmation of Popofsky, exhibit 3, Dec. 14, 2009 Arbitration Transcript, at 3–5). As the arbitration transcript reflects, the great bulk of the evidence adduced at the arbitration dealt with whether the Southridge Fund had acted in bad faith, and unreasonably delayed payment. The arbitrator thus did not address the precise issues reflected in Pine Street's current complaint.
Hicks also contends that the damages sought in this action are identical to the judgment shortfall from the arbitration proceeding, that I already ruled that the Stoneridge Fund satisfied the arbitration award, and that because Pine Street has failed to assert damages, the complaint should be dismissed. However, dismissal based on a lack of damages is unwarranted.
At oral argument, Pine Street clarified its request for damages. While Pine Street is estopped from litigating damages resulting from an alleged shortfall, it is not estopped from seeking damages from Hicks under its tort claims. Tort actions are based on wrongdoing and usually, through the payment of money, compensate the injured person for the harm suffered by him or her as a result of the wrongful conduct ( see Brown v. State of New York, 89 N.Y.2d 172, 178 [1996];Martin v. Curran, 303 N.Y. 276, 289 [1951] ).
For example, fraud damages are not intended to provide a victim with “benefit of the bargain damages,” and are limited to indemnifying the injured party for the actual losses sustained, that is, “out-of-pocket” damages ( see Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 422–423 [1996];Reno v. Bull, 226 N.Y. 546, 553 [1919] [“The purpose of an action for deceit is to indemnify the party injured”]; 164 Mulberry St. Corp. v. Columbia Univ., 4 A.D.3d 49, 60, 771 N.Y.S.2d 16 [1st Dept 2004] [“compensatory damages are limited to provable pecuniary losses, correlating with out-of-pocket losses” (internal citations omitted) ] ). Nonetheless, I see no basis to award punitive damages.
After the arbitration took place, Southridge Fund's obligation was to give back to Pine Street whatever monies was in its particular account. However, Pine Street, if it proves its fraud-related claims against Hicks, would be entitled to recover the actual pecuniary loss which it sustained as a result of Hicks's alleged fraud.
In this case, Pine Street paid $8.3 million for its interest in the Stoneridge Fund. If it is entitled to recover damages on its fraud-related claims, it would be the difference between that paid amount and the value of its interest (plus statutory interest) which it received since its initial investment. Pine Street would not be entitled to anything else.Pine Street also satisfied the second condition for not applying collateral estoppel because the prior arbitration proceeding failed to provide a fair and full opportunity for it to litigate the issues present in this case. A determination about whether the first proceeding genuinely provided a full and fair opportunity requires consideration of the realities of the prior arbitration. Among the factors I must consider are the nature of the forum and the importance of the issue in the prior arbitration, the actual extent of the arbitration, the differences in the applicable law and the foreseeability of future litigation ( see Buechel v. Bain, 97 N.Y.2d at 304, 740 N.Y.S.2d 252, 766 N.E.2d 914 [“The doctrine ... is a flexible one, and the enumeration of these elements is intended merely as a framework, not a substitute, for case-by-case analysis of the facts and realities”]; see also Ryan v. New York Tel. Co., 62 N.Y.2d 494, 501 [1984] ).
Pine Street never waived its right to pursue its tort claims against Hicks in a judicial forum when it stipulated that he could be dismissed from the arbitration proceeding. In fact, Pine Street withdrew its tort claims and expressly reserved its right to bring those claims against Hicks and the other respondents. The arbitrator accepted that withdrawal.
Further, Hicks was not a party to the arbitration because the arbitrator said he was not a proper party, and Pine Street had no power to take any action against him to enforce the arbitrator's decision. When the arbitrator issued his decision, the merits of the misrepresentation, fraud, breach of fiduciary duty and unjust enrichment issues and claims against Hicks were not implicated in the arbitration proceeding and award ( see Rembrandt Indus. v. Hodges Intl., 38 N.Y.2d 502, 504 [1976];see also Sneddon v. Koeppel Nissan, Inc., 46 A.D.3d 869, 870–871, 849 N.Y.S.2d 287 [2d Dept 2007] ). Nor did the Stoneridge Fund represent Hicks' interests at the arbitration. Because Pine Street had no opportunity to litigate the present issues, collateral estoppel is inapplicable.
In determining a motion to dismiss made pursuant to CPLR 3211(a)(7), the court must determine whether the pleader has a cognizable cause of action ( see Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275 [1977];Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 634 [1976];Frank v. DaimlerChrysler Corp., 292 A.D.2d 118, 120, 741 N.Y.S.2d 9 [1st Dept 2002] ). In making its determination, the complaint must be liberally construed, plaintiff must be given the benefit of every favorable inference and the court must accept as true all of the facts alleged in the complaint ( see 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 152 [2002];Leon v. Martinez, 84 N.Y.2d 83, 87–88 [1994] ). Dismissal is appropriate only if it appears beyond a doubt that plaintiff can prove no facts in support of its claims that would entitle it to relief.
Defendant's motion to dismiss based on the insufficiency of the complaint is granted only with respect to the unjust enrichment cause of action.
In its first cause of action, Pine Street alleges fraud in the inducement and fraudulent misrepresentations.
“In an action to recover damages for fraud, the plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.”
(Lama Holding Co. v. Smith Barney, 88 N.Y.2d at 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370 [citations omitted] ).
Further, “[w]here it is alleged that the defendant fraudulently concealed a material fact, the plaintiff must establish that the defendant had a duty to disclose the subject information” (Sitar v. Sitar, 61 A.D.3d 739, 741, 878 N.Y.S.2d 377 [2d Dept 2009] ).
Hicks seeks dismissal of the fraud-related claims based on the anti-reliance and exculpation provisions of the Agreement, which exculpate the Stoneridge Fund from responsibility from any misrepresentations. On the one hand, the provisions may be seen as immunizing fraudulent behavior. On the other hand, I do not lightly ignore contractual provisions, freely negotiated by the parties and the obligations they impose. A balance must be struck between the competing interests of permitting sophisticated parties to contract without intervention by the courts, and of protecting parties from persons attempting to evade their own lies and fraud.
At this early stage of the proceeding, however, the complaint must only “allege the basic facts to establish the elements of the cause of action” (Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 492 [2008] ). Accepting all of Pine Street's allegations as true, there is an actionable cause of action for fraud. The complaint alleges that Hicks knowingly made false and misleading statements to Pine Street representatives, from at least June 2005 through April 2009, including, without limitation, representations that at least 75% of Southridge Fund's portfolio was, and would remain, highly liquid (affirmation of Popofsky, exhibit 2, Complaint, at 2, 10, 24, ¶¶ 2, 32, 76); that Pine Street justifiably relied on those misrepresentations both to invest, and to remain invested, in the Southridge Fund (Complaint, at 10, ¶ 34); and that Pine Street suffered damages as a result of the misrepresentations when it sought to redeem its interest. As well, Hicks had a duty to disclose the fund's financial reports to Pine Street, and his failure to do so was a material omission.
Although the fraud allegations are duplicative of the allegations which support Pine Street's breach of fiduciary duty claim, viewing the complaint as a whole in the light most favorable to Pine Street, I find that Pine Street has adequately alleged each of the requisite elements for the claim of fraudulent misrepresentation. Accordingly, Hicks' motion for dismissal of the fraud-related cause of action is denied.
Under New York law, a fiduciary relationship between two persons arises “when one [person] is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation' “ (Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 561 [2009], quoting EBC I, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 19 [2005] ).
Hicks contends that the breach of fiduciary duty claim asserted against him should be dismissed without prejudice. However, he fails to assert any substantive basis to support his contention. I find no basis for dismissing this claim, as the complaint sufficiently alleges the required elements for asserting liability. It alleges that Pine Street, as a limited partner of the Stoneridge Fund was owed a fiduciary duty by Hicks, as fund manager, to act reasonably and prudently with regard to its investment, and that he breached that duty when he failed to operate the company in good faith and fairness, to avoid self-dealing and make full disclosure of all material facts. Accordingly, this claim survives the dismissal motion.
That branch of Hicks's motion which seeks to dismiss the third cause of action for negligent misrepresentation is also denied. “A claim for 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] [citations omitted]; see also Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 180 [2011];Parrott v. Coopers & Lybrand, 95 N.Y.2d 479, 483–484 [2000] ). In a commercial context, a party must demonstrate that the person making the misrepresentation possessed specialized or unique experience, or that the persons involved were in a special relationship of confidence and trust so that reliance on the negligent misrepresentation is justified ( see Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d at 180, 919 N.Y.S.2d 465, 944 N.E.2d 1104;Kimmell v. Schaefer, 89 N.Y.2d 257, 263 [1996] ).
Four alleged categories of misrepresentations are found in the complaint: (1) misrepresentations made initially to Pine Street to induce it to invest in the Southridge Fund; (2) misrepresentations, in the form of periodic updates, to motivate Pine Street to retain its investments in the fund; (3) misrepresentations so that Pine Street would not take any actions to offset the loss of a substantial portion of its investments; and (4) misrepresentations related to paying “excessive and unwarranted fees” (Complaint, at 28, ¶ 97).
To the extent that Pine Street is asserting negligent misrepresentation claims against Hicks based on his inducing it to invest in the fund, Pine Street has not sufficiently asserted this claim. Prior to investing in the Stoneridge Fund, Hicks owed no duty to Pine Street based on the arms-length nature of their relationship and the lack of a special relationship. In sum, a claim for negligent misrepresentation does not lie to relieve a party of the consequences of the party's own failure to exercise caution with respect to a commercial transaction. Hence, the only misrepresentations that can be considered sufficient are those that allegedly occurred after the signing of the limited partnership agreement, when the relationship between Pine Street and Hicks became fiduciary in nature.
Unjust enrichment is a quasi-contract theory of recovery, and “is an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties concerned” (IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132, 142 [2009] ). In order state a claim of unjust enrichment, Pine Street must allege “(1) the performance of ... services in good faith, (2) the acceptance of the services by the person to whom they are rendered, (3) an expectation of compensation therefor, and (4) the reasonable value of the services” (Joan Hansen & Co. v. Everlast World's Boxing Headquarters Corp., 296 A.D.2d 103, 108, 744 N.Y.S.2d 384 [1st Dept 2002], quoting Moors v. Hall, 143 A.D.2d 336, 337–338, 532 N.Y.S.2d 412 [2d Dept 1988] ). Accordingly, in order for Pine Street to recover from Hicks, Pine Street must demonstrate that it “conferred a benefit upon the defendant, and that the defendant will obtain such benefit without adequately compensating plaintiff therefor” (Nakamura v. Fujii, 253 A.D.2d 387, 390, 677 N.Y.S.2d 113 [1st Dept 1998] ).
However, the existence of a valid and enforceable contract governing a particular subject matter ordinarily precludes recovery for unjust enrichment unless the conduct is predicated on conduct not covered by the contract ( see Sergeants Benevolent Assn. Annuity Fund v. Renck, 19 A.D.3d 107, 112, 796 N.Y.S.2d 77 [1st Dept 2005] ). Even in the absence of a preclusive contract,
“a plaintiff must demonstrate that services were performed for the defendant resulting in its unjust enrichment. It is not enough that the defendant received a benefit from the activities of the plaintiff; if services were performed at the behest of someone other than the defendant, the plaintiff must look to that person for recovery.”
(Kagan v. K–Tel Entertainment, 172 A.D.2d 375, 376, 568 N.Y.S.2d 756 [1st Dept 1991] [emphasis in original] [internal citations omitted] ).
There is no dispute between the parties that the limited partnership agreement exists, and that it covers the transactions and claims which form the basis for Pine Street's cause of action. The contract was with the Southridge Fund, and therefore Pine Street can only look to that particular entity for recovery ( see Kagan v. K–Tel Entertainment, 172 A.D.2d at 376, 568 N.Y.S.2d 756).
Moreover, while the complaint alleges that Hicks controlled the Southridge Fund and used it to collect excessive and unwarranted fees, there are no specific facts in the complaint to support these claims, which amount to bare allegations and conclusions ( see Retropolis, Inc. v. 14th St. Dev. LLC, 17 A.D.3d 209, 211, 797 N.Y.S.2d 1 [1st Dept 2005] ).
Based on all these reasons, the cause of action for unjust enrichment is dismissed.
Accordingly, it is hereby
ORDERED that the part of the motion filed by plaintiff Pine Street Associates, L.P., which seeks dismissal of the complaint, pursuant to CPLR 3211(a)(5), is denied; and it is further
ORDERED that the part of plaintiff's motion which seeks dismissal of the complaint, pursuant to CPLR 3211(a)(7), is granted to the extent of dismissing the fourth cause of action for unjust enrichment; and it is further
ORDERED that defendant Stephen M. Hicks is directed to serve an answer to the complaint within 20 days after service of a copy of this order with notice of entry; and it is further
ORDERED that counsel are directed to appear for a preliminary conference in Part 60 on June 28, 2012 at 10:00 a.m.