Opinion
Civil Action No. 05-190.
December 16, 2005
MEMORANDUM
I. Introduction
This controversy arises from the court's January 17, 2003 Order, which placed Acorn Technology Fund, L.P. ("Acorn") in Receivership and appointed the United States Small Business Administration ("SBA") as Receiver. On December 21, 2004, the SBA requested and was granted leave to lift the receivership stay in order to pursue claims against certain individuals for tortious conduct toward Acorn and for unjust enrichment. On January 14, 2005, the SBA commenced the present action charging thirteen causes of action, including: (1) Negligence, (2) Breach of Fiduciary Duties, (3) Aiding and Abetting Breach of Fiduciary Duties, (4) Civil Conspiracy, (5) Aiding and Abetting Gross Negligence, (6) Aiding and Abetting Wrongful Conduct, (7) Aiding and Abetting Waste, and (8) Unjust Enrichment. Before the court is defendants Daniel Beharry's, Esq., Richard D. Propper's, M.D., and Acorn Connecticut Investments', L.P. ("ACI") (collectively "Defendants") Motion to Dismiss. For the reasons that follow, defendants' motion is denied.
II. Factual Background
The essence of plaintiff's claims against defendants is that they were knowledgeable and active participants in an alleged scheme to use Acorn and the Small Business Investment Program to defraud the SBA out of 32 million dollars. Acorn is a New Jersey Limited Partnership formed in 1997 which was licenced in 1999 to operate as a Small Business Investment Company ("SBIC"). SBICs are federally licensed and approved venture capital funds that provide financing to small businesses. For every dollar of private financing that a SBIC has available to invest, the SBA provides up to two matching dollars of federal funds, thus, leveraging each private investment dollar into three that can then be used to promote small businesses and the American economy.
The SBA has alleged here, as well as other proceedings before this court, that John Torkelsen, the President and Manager of Acorn's general partner, Acorn Technology Partners ("ATP"), together with his family, friends, and business associates, orchestrated a scheme to divert money to themselves intended to finance legitimate small businesses. The SBA has alleged that this scheme was effectuated in a variety of ways, including investment in companies owned and controlled by John Torkelsen or his associates, causing Acorn to pay illegitimate fees and expenses related to services rendered to it, and bolstering Acorn's available private capital in order to obtain higher leverage commitments from the SBA.
The SBA alleges that the named defendants, although nominally limited partners, actually participated in the management of Acorn and, as such, controlled Acorn's business affairs and investment decisions. (Pl.'s Compl. ¶ 29). Allegedly, defendants engaged in a series of conduct which caused Acorn to illegally apply for and receive $32 million in federal funds from the SBA. (Pl.'s Compl. ¶ 34).
Defendants invested money in Acorn, either directly or through ACI, for the purpose of increasing Acorn's available capital so that Acorn could receive federal matching funds which would then allegedly be redirected into companies owned and controlled by defendants. (Pl.'s Compl. ¶¶ 61, 68, 69, 70). For example, the SBA alleges that defendants invested money in Acorn with the understanding and agreement that the funds would be used in whole or in part to finance Medibuy.com and other companies under the control and direction of defendant Propper. (Pl.'s Compl. ¶¶ 68-71, 103, 108, 116, 118-119). It is also alleged that defendants received money either directly from Acorn or through Princeton Technology Management, L.L.C., ("PTM"), Acorn's Investment Advisor, in exchange for fictitious investment services rendered to Acorn. (Pl.'s Compl. ¶¶ 73-76, 117).
Defendants have filed a motion to dismiss all counts of the complaint arguing that (1) the complaint is premised solely on the Small Business Act and its Regulations, which do not create a private right of action, and (2) that as limited partners they do not owe a duty to Acorn and enjoy limited liability from suit. Defendants also argue that the SBA fails to state a claim for civil conspiracy.
In response to defendant's motion to dismiss, the SBA acknowledged that there is no private right of action under the Act, but argues that the complaint is independently founded on state law principles of negligence. (Receiver's Br. in Opp'n to Defs.' Mot. to Dismiss at 8-9). The SBA argues that while the defendants were technically limited partners, their actual conduct evidences the kind of control more typically associated with general partners, which control would therefore subject them to the same fiduciary duties and liabilities as a general partner of Acorn. (Receiver's Br. in Opp'n to Defs.' Mot. to Dismiss at 10-13). The SBA submits that the violation of essential rules and regulations for implementation of the Act constitutes breach of defendants' state law duties to Acorn. (Receiver's Br. in Opp'n to Defs.' Mot. to Dismiss at 8-9).
Further, the SBA argues that the claims of civil conspiracy and aiding and abetting are properly pled because if the defendants were not active participants in the conspiracy to defraud the SBA, they were at least knowledgeable of the conspiracy and therefore liable.
Defendants urge the court to find that the complaint fails to allege facts which would establish independent duties owed to Acorn. (Reply Br. of Defs. at 3-4, 6-15). They argue that the SBA's theory of negligence is premised on concepts of negligenceper se, which are inapplicable here. (Reply Br. of Defs. at 10-12). Finally, defendants argue that, because the SBA has not alleged the existence of an independent common law duty, the negligence claims are barred by the economic loss doctrine. (Reply Br. of Defs. at 12-13).
The SBA counters that violation of the Act and its regulations do establish the basis for liability under the theory of negligence per se and that the economic loss doctrine is not applicable given the allegations that defendants' conduct evidences the type of control generally associated with general partners and therefore the nature of the duty owing between defendants and Acorn is non-contractual, rather than contractual. (Pl.'s Sur-Reply Br. at 3-7).
On November 8, 2005 the court heard oral argument on the motion to dismiss. For the following reasons, the court finds that the complaint sufficiently alleges facts which, if proved, could subject defendants to liability. Therefore, the defendants' motion to dismiss must be denied.
III. Discussion
Acorn is a New Jersey limited partnership. Therefore, the laws of the State of New Jersey apply to the interpretation of the rights and obligations owing between Acorn and both its general and limited partners.
Acorn's Agreement of Limited Partnership at § 13.7 provides that "[a]ll questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by and construed under the internal laws, not the law of conflicts, of the State of New Jersey."
A. Negligence
The first substantive claim by the SBA against defendants is negligence. (Pl.'s Compl. Counts II, III, IV, VI, VII). Negligence "is the failure to do what a reasonable and prudent person would ordinarily have done under the circumstances of the situation. . . ." Baltimore P.R. Co. v. Jones, 95 U.S. 439, 441-42 (1877). The essential elements of a negligence claim are "(1) a duty of care owed by defendant to plaintiff; (2) a breach of that duty by defendant; and (3) an injury to plaintiff proximately caused by defendant's breach."Endre v. Arnold, 692 A.2d 97, 100 (N.J.Super.Ct. App. Div. 1997).
In their motion to dismiss, defendants argue that the complaint should be dismissed because there is no legal basis which creates a duty by defendants to Acorn. The SBA argues that the defendants owe a duty to Acorn based on common law principles of fiduciary duty. The SBA further argues that the allegations that defendants violated the Act and its applicable regulations constitute "negligence per se."
1. Duty
New Jersey originally adopted the Uniform Limited Partnership Act in 1976 and, later, in 1996 adopted various reforms suggested by the Revised Uniform Limited Partnership Act (collectively "ULPA"). N.J. Stat. Ann. § 42:2A-1 to -73 (West 2004). The basic principle of ULPA "is a differentiation between the broad liability of a general partner for the obligations of a limited partnership and the non-liability of a limited partner for such obligations." Zeiger v. Wilf, 755 A.2d 608, 616 (N.J.Super.Ct. App. Div. 2000). The liability of limited partners under New Jersey law is "severely limited." Id.
N.J. Stat. Ann. 42:2A-27 outlines the liability of limited partners. Section (a) thereof reads that "[e]xcept as provided in subsection d., a limited partner is not liable for the obligations of the limited partnership unless he is also a general partner, or, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business." That section continues: "if the limited partner's participation in the control of the business is not substantially the same as the exercise of the powers of a general partner, he is liable only to persons who transact business with the limited partnership with actual knowledge of, and reliance on, his participation."
Subsection (b) of N.J. Stat. Ann. 42:2A-27 describes certain "safe harbor" activities which, if engaged in, do not subject limited partners to liability as a general partner. N.J. Stat. Ann. 42:2A-27(b). It reads:
A limited partner does not participate in the control of the business within the meaning of subsection a. solely by doing one or more of the following:
(1) Being a contractor for or an agent or employee of the limited partnership or being a contractor, agent, employee, corporate officer, corporate director, or shareholder of a general partner;
(2) Consulting with or advising a general partner with respect to any matter, including the business of the limited partnership;
(3) Acting as surety, guarantor, or endorser for the limited partnership or assuming one or more specific obligations of the limited partnership or providing collateral for the partnership;
(4) (Deleted by amendment, P.L. 1988, c. 130).
(5) (Deleted by amendment, P.L. 1988, c. 130).
(6) Serving as an officer, director or shareholder of a corporate general partner; or
(7) Approving or disapproving matters related to the business of the partnership as shall be stated in the certificate and partnership agreement;
(8) Calling, requesting, attending or participating at a meeting of the partners or the limited partners;
(9) Winding up a limited partnership pursuant to section 52 of P.L. 1983, c. 489 (C. 42:2A-53);
(10) Taking any action required or permitted by law to bring or pursue a derivative action in the right of the limited partnership;
(11) Serving on a committee of the limited partnership or the limited partners;
(12) Proposing, approving or disapproving, by voting (by number, financial interest, class, group or as otherwise provided in the partnership agreement) or otherwise, on one or more of the following matters:
(a) The dissolution and winding up of the limited partnership;
(b) The sale, exchange, lease, mortgage, pledge, or other transfer of all or substantially all the assets of the limited partnership other than in the ordinary course of its business;
(c) The incurrence of indebtedness by the limited partnership other than in the ordinary course of its business;
(d) A change in the nature of the business;
(e) The admission, removal or retention of a partner;
(f) A transaction or other matter involving an actual or potential conflict of interest;
(g) An amendment to the partnership agreement or certificate of limited partnership; or
(13) Exercising any right or power granted or permitted to limited partners under this chapter and not specifically enumerated in this subsection.
Therefore, the first question in determining whether or not a limited partner should be subjected to the same liability as a general partner is whether the limited partner "[took] part in the control of the business." N.J. Stat. Ann. 42:2A-27(a). If it were determined that the limited partner did take part in the control of the business, then it must be determined if the participation was substantially the same as the exercise of power by a general partner. N.J. Stat. Ann. 42:2A-27(a). If so, then the limited partner would in fact be operating as a general partner and would be subject to the rights and responsibilities of general partners, which include the fiduciary duties of loyalty and care. N.J. Stat. Ann. 42:2A-27(a); N.J. Stat. Ann. 42:2A-32; N.J. Stat. Ann. 42:1A-24. If the limited partner's participation is not substantially the same as that exercised by a general partner, the limited partner is only liable to third parties who relied on the limited partner's representations. N.J. Stat. Ann. 42:2A-27(a).
The complaint alleges in numerous instances that the defendants participated in the management of Acorn and participated jointly in the control of Acorn's business activities and decisions. (Pl.'s Compl. ¶¶ 29, 62, 71, 101, 103, 108). The essence of the SBA's complaint is that the defendants, although limited partners in name, participated with John Torkelsen and others in the control and use of Acorn to divert $32 million of federal dollars into their own pockets. These allegations do not fit into the safe harbor provisions of mere consulting and advising, N.J. Stat. Ann. 42:2A-27(b)(2), acting as a surety, guarantor, or endorser for the partnership, N.J. Stat. Ann. 42:2A-27(b)(3), or participating in meetings of the partnership, N.J. Stat. Ann. 42:2A-27(b)(8). Furthermore, intentional misconduct by defendants was not envisioned by the Partnership Agreement and therefore does not come within the provision of "approving or disapproving matters related to the business of the partnership as . . . stated in the certificate and partnership agreement." N.J. Stat. Ann. 42:2A-27(b)(7).
The allegations of the complaint suffice to survive defendants' motion to dismiss.
2. Negligence Per Se
The parties dispute the application of the negligence per se doctrine. In New Jersey, "the violation of a statutory duty of care is not conclusive on the issue of negligence in a civil action but it is a circumstance which the trier of fact should consider in assessing liability."Braitman v. Overlook Terrace Corp., 346 A.2d 76, 85 (N.J. 1975). In other words, violation of a statute does not constitute negligence per se, but is "evidence which may be considered by a jury together with all of the evidence in determining issues of negligence. . . ." Mattero v. Silverman, 176 A.2d 270, 275 (N.J.Super.Ct. App. Div. 1962). Therefore, the SBA's allegations that defendants violated their duty of care to Acorn by engaging in conduct, or causing Acorn to engage in conduct, that violated the Act and its regulations may be presented for the purpose of attempting to persuade the factfinder that defendants' conduct was negligent under state law.
B. Civil Conspiracy
A civil conspiracy is "a combination of two or more persons acting in concert to commit an unlawful act, or to commit a lawful act by unlawful means, the principal element of which is an agreement between the parties `to inflict a wrong against or injury upon another,' and `an overt act that results in damage.'"Morgan v. Union County Bd. of Chosen Freeholders, 633 A.2d 985, 998 (N.J.Super.Ct. App. Div. 1993) (quoting Rotermund v. U.S. Steel Corp., 474 F.2d 1139, 1145 (8th Cir. 1973)). The gist of "an action in civil conspiracy is not the conspiracy itself but the underlying wrong which, absent the conspiracy, would give a right of action." Board of Educ. v. Hoek, 183 A.2d 633, 646 (N.J. 1962).
Defendants argue that the civil conspiracy claim should be dismissed because the underlying act on which the claim is premised is a private right of action by the SBA under the Act. (Memo. of Law in Supp. of Defs.' Mot. to Dismiss at 19). This is incorrect. The SBA has already acknowledged that it is not, and cannot, pursue defendants solely under the Act and its regulations. However, jointly causing Acorn to violate the Act and its regulations is the type of illegal activity which satisfies all the elements of a civil conspiracy.
C. Economic Loss Doctrine
Finally, defendants argue that the plaintiff's claims are barred by the economic loss doctrine. When the relationship between parties in an action arises solely from contract, and thus the only duties owing between the parties are contractual in nature, courts impose the economic loss doctrine to limit recovery to the terms of the contract. Saltiel v. GSI Consultants, Inc., 788 A.2d 268, 275-76 (N.J. 2002). Here, the complaint has alleged the basis for non-contractual duties owed by defendants to Acorn, and therefore, the economic loss doctrine is inapplicable.
IV. Conclusion
For the foregoing reasons, Defendants' Motion to Dismiss is granted. An appropriate Order follows.