Tuttle et al v. Sky Bell Asset Management LLC et al

Filing 118

ORDER GRANTING IN PART, DENYING IN PART, AND HOLDING IN ABEYANCE IN PART DEFENDANTS' MOTIONS TO DISMISS. Signed by Judge Alsup on April 11, 2011. (whalc2, COURT STAFF) (Filed on 4/11/2011)

1
2
3
4
5
6

IN THE UNITED STATES DISTRICT COURT

7
FOR THE NORTHERN DISTRICT OF CALIFORNIA

8
9
United States District Court
For the Northern District of California

10
11

EDGAR W. TUTTLE, ERIC BRAUN, THE
BRAUN FAMILY TRUST, and WENDY MEG
SIEGEL, on behalf of themselves and all others
similarly situated,
No. C 10-03588 WHA

12
Plaintiffs,
13
v.
14
15
16

SKY BELL ASSET MANAGEMENT, LLC, et
al.,
Defendants.
/

ORDER GRANTING IN PART,
DENYING IN PART, AND
HOLDING IN ABEYANCE IN
PART DEFENDANTS’
MOTIONS TO DISMISS

17
18
INTRODUCTION
19
After much motion practice, defendants make three motions to dismiss, now GRANTED
20
IN PART, DENIED IN PART, AND HELD IN ABEYANCE IN PART

for the reasons that follow.

21
STATEMENT
22
Plaintiffs bring this proposed class action on behalf of owners of limited partnership
23
units in seven limited partnerships controlled by defendants Sky Bell Asset Management, LLC,
24
and Gary Marks, along with co-general partners in certain of the limited partnerships. After
25
two rounds of unsuccessful motions to remand this action to state court, plaintiffs assert five
26
claims in their first amended class action complaint: (1) breach of fiduciary duty; (2) aiding and
27
abetting breach of fiduciary duty; (3) negligence; (4) unjust enrichment; and (5) for an
28
accounting (Dkt. No. 64).

1

The relationships between the entities involved in this action are difficult to keep

2

straight. There are seven proposed classes, consisting of individuals with financial interests in

3

each of seven limited partnerships. Yet the complaint defines ten groups of defendants, for a

4

total of 25 defendants, and summarizes the relationships among them in an appendix, which

5

shall be set forth below (with full defendant names):

6

Defendant Group:

Includes the Following Defendants:

Sky Bell Defendants

Sky Bell Asset Management LLC
Gary Marks
Geoffrey Gotsch
Michael Sell

Agile Sky Defendants

Agile Sky Limited Partnership
Agile Sky GP
Agile Group
Greenberg & Associates Securities
Neal Greenberg
Rothstein Kass & Company, P.C.
Sky Bell Asset Management LLC
Gary Marks
Geoffrey Gotsch
Michael Sell

Eden Rock Defendants

Eden Rock Limited Partnership
Solid Rock Management Limited
Eden Rock Capital Management
Santo Volpe
Ernst & Young LLC
Sky Bell Asset Management LLC
Gary Marks
Geoffrey Gotsch
Michael Sell

Night Watch Defendants

Night Watch Limited Partnership
Sky Bell Asset Management LLC
Gary Marks
Geoffrey Gotsch
Michael Sell
Rothstein Kass & Company, P.C.

Offshore Partners

Offshore Partners Limited Partnership
Sky Bell Asset Management LLC
Gary Marks
Geoffrey Gotsch
Michael Sell

7
8
9
United States District Court
For the Northern District of California

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

2

1

PipeLine Defendants

Pipeline Investors Limited Partnership
Sky Bell Asset Management LLC
Gary Marks
Geoffrey Gotsch
Michael Sell
Rothstein Kass & Company, P.C.

Select Defendants

Select Limited Partnership
Sky Bell Asset Management LLC
Gary Marks
Geoffrey Gotsch
Michael Sell

Wailea Defendants

Wailea Limited Partnership
Wailea Capital GP
Wailea Advisors
Prospect Capital
William Belhumeur
McGladrey & Pullen
Sky Bell Asset Management LLC
Gary Marks
Geoffrey Gotsch
Michael Sell

General Partner Defendants

Sky Bell Asset Management LLC
Agile Sky GP
Solid Rock
Prospect Capital

Auditor Defendants

Rothstein Kass & Company, P.C.
Ernst & Young LLC
McGladrey & Pullen

2
3
4
5
6
7
8
9
United States District Court
For the Northern District of California

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

The complaint alleges the unifying factor to be that the proposed classes are “owners of limited
partnership units [] in seven limited partnerships controlled by Defendants Sky Bell Asset
Management, LLC [] and Gary R. Marks [], along with co-general partners in some of the
limited partnerships” (Compl. ¶ 1 (emphasis added)).
The various defendants have appeared in the following groups, which is relevant to
explain which groups are bringing the instant motions to dismiss. The auditor defendants are
Rothstein Kass (represented by counsel from Blecher & Collins and Hodgson Russ),
McGladrey & Pullen (represented by counsel from Keker & Van Nest and Williams &
Connolly), and Ernst & Young, which has not appeared. All of the other defendants have been
referred to as “fund defendants,” most of which are represented by counsel from Thomas
Alexander & Forrester. Defendants Eden Rock Finance Fund, LP, Solid Rock Management
Limited, and Eden Rock Capital Management LLP are represented separately by counsel from
3

1

Paul, Hastings, Janofsky & Walker. Defendant Neal Greenberg is represented separately by

2

Attorneys Julian Baum and Steven Feder. Some defendants have yet to appear. Thus, the

3

groups of defendants that have thus far appeared include: two auditor defendants, a main group

4

of fund defendants, a group of fund defendants represented by Paul, Hastings (called the Eden

5

Rock defendants), and Neal Greenberg.

6

Defendants removed this action from state court. Plaintiffs moved to remand, their

7

motion was denied, and the order on the motion found the complaint to be precluded by

8

SLUSA, requiring plaintiffs to move for leave to file an amended complaint in order to proceed.

9

In conjunction with their motion for leave to file, plaintiffs filed a renewed motion to remand,

United States District Court
For the Northern District of California

10

which was also denied. A further case management conference was subsequently held on

11

February 10, 2011. Only counsel for the two auditor defendants who have appeared were

12

present. At that time, counsel for the main group of fund defendants had appeared in the case

13

but chose not to appear at the conference. The Eden Rock defendants had been served (though

14

they contest adequacy of service) and knew about the conference but chose not to appear. Neal

15

Greenberg had not yet been served at the time of the conference.

16

At the conference, defense counsel indicated their desire to file motions to dismiss. As

17

the assigned judge has begun a half-year, multi-defendant criminal trial, and because motion

18

practice had already been extensive in this case, defense counsel were ordered to file a joint

19

motion, with only five pages allotted to the fund defendants whose counsel chose not to appear.

20

That motion was filed as set forth in the second amended case management order. The Eden

21

Rock defendants filed a full motion apart from the joint motion from the other defendants, and

22

the Eden Rock defendants were thereafter ordered to show cause why their motion should not

23

be stricken for failure to comply with the second amended case management order. Subsequent

24

to service, Neal Greenberg appeared via a joinder to the fund defendants’ motion.

25

To recap, there are three sets of motions to dismiss, one from the auditor defendants, one

26

from the main fund defendants, and one from the Eden Rock defendants, as well as a joinder

27

from Neal Greenberg. These will all be addressed in this omnibus order as they concern

28

interlocking issues. A hearing was held on the motions on April 7.
4

1
2
3

ANALYSIS
A.

AUDITOR DEFENDANTS’ MOTION TO DISMISS
The moving auditor defendants are Rothstein, Kass & Company, P.C., and McGladrey

4

& Pullen, LLP. Ernst & Young LLC is also named as an auditor defendant but it has not

5

appeared, though it appears to have been served (Dkt. No. 52).

6

The initial argument of the moving auditor defendants is that plaintiffs’ claims,

7

including aiding and abetting breach of fiduciary duty and negligence, against them are

8

derivative, as opposed to direct, claims. Plaintiffs do not contest the general legal principles set

9

forth by defendants governing the difference between derivative and direct suits. “A

United States District Court
For the Northern District of California

10

shareholder does not have standing to sue in an individual capacity for injury to [a] corporation.

11

Such an action must be brought as a derivative action— ‘an equitable remedy in which a

12

shareholder asserts on behalf of a corporation a claim not belonging to the shareholder, but to

13

the corporation.’” In re Verisign, Inc., Derivative Litig., 531 F. Supp. 2d 1173, 1188 (N.D. Cal.

14

2007) (Hamilton, J.) (citation omitted).

15

The issue of whether a claim is direct or derivative is governed by the law of the state of

16

incorporation of the entity at issue. In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970,

17

989–90 (9th Cir. 1999) (citing Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96 (1991)) (“For

18

these standards, we turn to the law of the state of incorporation.”). In our case, each of the four

19

funds alleged to have been audited by the moving auditor defendants is a Delaware limited

20

partnership (Compl. ¶¶ 16, 21, 29, 33, 37, 42). Thus, Delaware law governs. See In re

21

Verisign, 531 F. Supp. 2d at 1188. Plaintiffs do not contest this.

22

Under Delaware law, whether a claim is direct or derivative is determined based on the

23

following questions: (1) who suffered the alleged harm, the corporation or the suing stockholder

24

individually, and (2) who would receive the benefit of the recovery or other remedy. Tooley v.

25

Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004). “The stockholder’s

26

claimed direct injury must be independent of any alleged injury to the corporation.” Id. at 1039.

27

“In determining the nature of the wrong alleged, a court must look to ‘the body of the

28

complaint, not to the plaintiff’s designation or stated intention.’” Kramer v. W. Pac. Indus.,
5

1

Inc., 546 A.2d 348, 352 (Del. 1988) (citation omitted). In addition, “[w]here all of a

2

corporation’s stockholders are harmed and would recover pro rata in proportion with their

3

ownership of the corporation’s stock solely because they are stockholders, then the claim is

4

derivative in nature.” Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008).

5

As alleged, plaintiffs’ claims against the moving auditors are derivative claims. As

6

alleged, any injury that plaintiffs suffered due to the actions of the moving auditor defendants

7

was suffered because of injury to the funds (see Compl. ¶ 81–82). Plaintiffs’ complaint states

8

claims on behalf of a putative class consisting of other limited partners, whom they claim also

9

suffered losses on their investments in the funds. As alleged, it does not state any injury

United States District Court
For the Northern District of California

10

specific to the named plaintiffs that was not also suffered pro rata by all limited partners in the

11

funds. Thus, as alleged, plaintiffs’ claims against the moving auditors are derivative, rather

12

than direct, claims. See, e.g., In re Charles Schwab Corp. Sec. Litig., 257 F.R.D. 534, 554

13

(N.D. Cal. 2009) (“Plaintiffs here [] identify no theory of individual injury and therefore fail to

14

establish that their claim may be directly asserted.”).

15

Plaintiffs state in opposition to the instant motion that they suffered “direct injuries that

16

are not merely incidental to those of the limited partnerships” (Opp. 6). Yet plaintiffs make this

17

assertion as to all defendants collectively, and fail to cite to any portion of the complaint that

18

would support this statement as to the auditor defendants.

19

“Once state law characterizes the action as either derivative or direct, the applicable

20

procedural rules are determined by federal law.” Sax v. World Wide Press, Inc., 809 F.2d 610,

21

613 (9th Cir. 1987). Under Federal Rule of Civil Procedure 23.1, “a shareholder seeking to

22

vindicate the interests of a corporation through a derivative suit must either first make a demand

23

on the corporation’s directors, or plead particularized facts showing why such a demand would

24

have been futile.” In re Verisign, 531 F. Supp. 2d at 1188. Plaintiffs have not alleged demand

25

or futility.

26

The moving auditor defendants also argue that the claims against them should be

27

dismissed because “an auditor’s liability for general negligence in the conduct of an audit of its

28

client financial statements is confined to the client, i.e., [sic] the person who contracts for or
6

1

engages the audit services.” Bily v. Arthur Young & Co., 3 Cal. 4th 370, 406 (1992). Yet, in

2

addition, “there is an additional class of persons who may be the practical and legal equivalent

3

of ‘clients.’ It is possible the audit engagement contract might expressly identify a particular

4

third party or parties so as to make them express third party beneficiaries of the contract. Third

5

party beneficiaries may under appropriate circumstances possess the rights of parties to the

6

contract.” Paulsen v. CNF Inc., 559 F.3d 1061, 1079 (9th Cir. 2009) (quoting Bily).

7

At the hearing, plaintiffs argued that they could state claims against the auditor

8

defendants based on this theory, though they acknowledged they had not yet. Because, as

9

alleged, plaintiffs’ claims against the moving auditor defendants are derivative and because

United States District Court
For the Northern District of California

10

plaintiffs seek another opportunity to plead these claims under the principles of Bily and

11

Paulsen, the moving auditor defendants’ motion is GRANTED, but plaintiffs are granted LEAVE

12

TO AMEND their

13

complaint within 14 CALENDAR DAYS of the date of this order. The changes shall be limited

14

solely to trying to state a direct Bily claim. Within 14 days thereafter, the auditor defendants

15

may again move to dismiss (or answer).

16

B.

claims against the auditor defendants. Plaintiffs shall file a second amended

FUND DEFENDANTS’ MOTION TO DISMISS

17

Plaintiffs invested in seven Delaware limited partnerships pursuant to seven limited

18

partnership agreements. The fund defendants’ motion is brought by the majority of general

19

partners in the seven fund groups targeted by the complaint, represented by counsel from

20

Thomas Alexander & Forrester.

21

The fund defendants first argue that the forum-selection clauses in the limited

22

partnership agreements require dismissal due to lack of venue. In their respective limited

23

partnership agreements, plaintiffs assertedly agreed to forum-selection clauses requiring that for

24

“any action arising out of this Agreement,” they consent “to exclusive jurisdiction and venue”

25

in either Florida or Delaware, as follows:

26

•

Sky Bell Select Agreement ¶ 8.5

“The parties hereby consent to exclusive
jurisdiction and venue for any action
arising out of this Agreement in the State of
Florida.”

27
28
7

1

•

Wailea Partners Agreement ¶ 8.5

“The parties hereby consent to exclusive
jurisdiction and venue for any action
arising out of this Agreement in
Hillsborough County, Florida.”

•

Night Watch Partners Agreement ¶ 8.5

“The parties hereby consent to exclusive
jurisdiction and venue for any action
arising out of this Agreement in the State of
Florida.”

•

Eden Rock Finance Fund Agreement ¶ 8.5 “The parties hereby consent to exclusive
jurisdiction and venue for any action
arising out of this Agreement in the State of
Delaware.”

•

Pipeline Investors Agreement ¶ 8.5

“The parties hereby consent to exclusive
jurisdiction and venue for any action
arising out of this Agreement in the State of
Florida.”

•

Agile Sky Alliance Fund Agreement ¶ 8.5

“The parties hereby consent to exclusive
jurisdiction and venue for any action
arising out of this Agreement in the State of
Delaware.”

2
3
4
5
6
7
8
9
United States District Court
For the Northern District of California

10
11
12
13

These clauses are properly considered in the context of a motion to dismiss. Argueta v. Banco
14
Mexicano, S.A., 87 F.3d 320, 324 (9th Cir. 1996).
15
Although the fund defendants make their forum-selection clause argument on behalf of
16
all fund defendants, the Sky Bell Offshore Partners agreement — the last of seven of the fund
17
groups — in fact does not have a forum-selection clause.
18
At the hearing on the instant motions, a discussion arose concerning the details of how
19
the limited partnership agreement documents were in reality signed and executed. Counsel for
20
the fund defendants explained (and diagrammed) how the partnership agreements and
21
subscription agreements, which have been submitted as exhibits in support of the instant
22
motion, were sent to the general partner to be co-signed and executed. Yet plaintiffs’ counsel
23
raised questions as to the propriety of finding the forum-selection clauses binding when the
24
completeness of the record as to these documents and process of execution is thin.
25
This order agrees. Plaintiffs will be allowed to conduct discovery into the facts
26
concerning these forum-selection clauses and execution of the agreements in which they are
27
found. The fund defendants’ motion to dismiss on this basis is therefore HELD IN ABEYANCE
28
during such discovery, which will proceed alongside fact discovery.
8

1

*

*

*

2

The fund defendants also argue that the claims against them should be dismissed

3

because this Court has neither general nor specific jurisdiction over them. Personal jurisdiction

4

may be either general or specific to the allegations in the complaint. See Schwarzenegger v.

5

Fred Martin Motor Co., 374 F.3d 797, 801–02 (9th Cir. 2004). Jurisdiction over each

6

defendant must be evaluated separately, and plaintiff bears the burden of demonstrating that

7

jurisdiction is appropriate. See Scher v. Johnson, 911 F.2d 1357, 1361, 1365 (9th Cir. 1990).

8

For general jurisdiction to exist over a nonresident defendant, “the defendant must engage in

9

continuous and systematic general business contacts that approximate physical presence in the

United States District Court
For the Northern District of California

10

forum state.” Schwarzenegger, 374 F.3d at 801 (citations and quotation marks omitted).

11

Specific jurisdiction lies only where a defendant (1) directs his activities at the forum; (2) the

12

claim arises out of or relates to the forum-related activities; and (3) exercise of jurisdiction is

13

reasonable. Id. at 802. Plaintiffs must satisfy the first two prongs of this test, and if they do

14

defendants must show the exercise of jurisdiction would not be reasonable. Ibid.

15

Sky Bell Asset Management, the common general partner among the funds targeted by

16

the complaint, is alleged to have its principal place of business in California (Compl. ¶ 11 and

17

Dkt. Nos. 35-2 and 35-3). Defense counsel state that Sky Bell’s principal place of business is

18

really in Hawaii, and cite in support a declaration of defendant Marks so stating (Dkt. No.

19

32-1). Given that plaintiffs submit seemingly reliable documents to support their contention

20

that Sky Bell’s principal place of business is in California, however, plaintiffs have made a

21

sufficient prima facie showing of general jurisdiction over defendant Sky Bell.

22

Plaintiffs argue that the other fund defendants’ involvement with Sky Bell in the

23

ventures at issue establishes personal jurisdiction over the others. Furthermore, they argue that

24

jurisdiction exists because “significant activities were undertaken by the General Partner

25

Defendants in California, including communicating with certain of the plaintiffs and other

26

Limited Partners who are members of the Class” (Opp. 19). This order finds that jurisdictional

27

discovery as to the fund defendants is warranted. The fund defendants’ motion to dismiss on

28
9

1

this basis is therefore HELD IN ABEYANCE during such discovery, which will proceed alongside

2

fact discovery.

3

*

4

*

*

Lastly, the fund defendants argue that the limited partnership agreements allow liability

5

only for willful misconduct, recklessness, or gross negligence primarily attributable to

6

defendants, which the complaint does not allege. For the reasons stated above, discovery will

7

proceed as to the execution of the limited partnership agreements, so these arguments will be

8

held in abeyance as well.

9

C.

United States District Court
For the Northern District of California

10

EDEN ROCK DEFENDANTS’ MOTION TO DISMISS
Defendants Eden Rock Finance Fund, LP, Solid Rock Management Limited, and Eden

11

Rock Capital Management LLP, although they appeared later and through separate counsel

12

from the other fund defendants, are also fund defendants. Despite the fact that these defendants

13

had been served prior to the case management conference on February 10, 2011, counsel for the

14

Eden Rock defendants chose not to attend. The defendants who did attend indicated their

15

intention to file motions to dismiss, but limitations to their briefing were imposed at the

16

conference. Rather than file a précis pursuant to the second amended case management order,

17

and regardless of the fact that the other defendants were held to limited briefing, the Eden Rock

18

defendants filed their own full-blown motion with many pages of exhibits.

19

The Eden Rock defendants assert many of the same arguments as those of the fund

20

defendants discussed above. The Eden Rock defendants are in the same boat as the other fund

21

defendants, but just happen to have different counsel. For the reasons stated above and as to the

22

common arguments, the motion to dismiss by the Eden Rock defendants will be HELD IN

23

ABEYANCE while

24

and personal jurisdiction. The Eden Rock defendants’ extraneous arguments that assert the

25

complaint fails to state claims generally that were not advanced by the fund defendants do not

26

warrant dismissal, and the motion on this basis is accordingly DENIED.

27
28

discovery is conducted into execution of the limited partnership agreements

As to the additional argument by the Eden Rock defendants that the complaint should be
dismissed against them due to ineffective service of process, defendants have not even
10

1

attempted to demonstrate that they have been prejudiced by any defects in service. Even

2

assuming there were such defects, “dismissal is generally not justified absent a showing of

3

prejudice.” United Food & Commercial Workers Union v. Alpha Beta Co., 736 F.2d 1371,

4

1382 (9th Cir. 1984). Defendants have wholly failed to make such a showing, and their actions

5

demonstrate that they have been fully apprised of the case against them. Their motion to

6

dismiss on this basis is DENIED.

7

D.

GREENBERG DEFENDANTS’ JOINDER TO FUND DEFENDANTS’ MOTION TO DISMISS

8

Defendant Neal Greenberg was served later and appeared later than the other

9

defendants, and he has since filed a “joinder” to the fund defendants’ motion to dismiss (Dkt.

United States District Court
For the Northern District of California

10

No. 96). Plaintiffs have filed a brief response (Dkt. No. 109). Greenberg is alleged to be one of

11

the Agile Sky defendants, defined above in the list of plaintiffs’ appendix to the complaint.

12

Although Greenberg’s joinder does not qualify as a response to the complaint

13

recognized by Federal Rule of Civil Procedure 12, it does qualify as an appearance in the suit.

14

See Direct Mail Specialists, Inc. v. Eclat Computerized Technologies, Inc., 840 F.2d 685, 689

15

(9th Cir. 1988). Given the strict limitations on asserting motions to dismiss set forth in the

16

second amended case management order, it was not unreasonable for Greenberg to appear via a

17

joinder to other defendants’ motion as opposed to filing a separate motion to be heard at a time

18

later than what is provided in the case management order. Greenberg’s joinder is GRANTED,

19

but, for the reasons stated above, the action is not dismissed.

20

CONCLUSION

21

For the foregoing reasons, defendants’ motions to dismiss are GRANTED IN PART,

22

DENIED IN PART, AND HELD IN ABEYANCE IN PART.

23

Within 14 CALENDAR DAYS of the date of this order, plaintiffs must file an amended

24

complaint in accordance with this order (addressing the Bily claim). The auditor defendants

25

may move to dismiss or answer within 14 days thereafter. All other defendants must answer the

26

new complaint within 14 days of its filing.

27

In FOUR MONTHS from the date of this order, i.e., on August 11, 2011, both sides may

28

file supplemental submissions concerning the matters that are being held in abeyance by this
11

1

order, namely personal jurisdiction and the execution process of the limited partnership

2

agreements (the forum-selection issue). All defendants must join in a single coordinated

3

submission on the forum-selection/execution issue and all defendants must join in a single

4

coordinated submission on all personal jurisdiction issues, each submission limited to 25 pages

5

(not counting exhibits). In the interim and to be clear, discovery should be fully proceeding on

6

the merits. Failure to cooperate in discovery may be deemed an admission as to the relevant

7

issue by the non-cooperative party. Even if the action is eventually moved to a different forum,

8

the discovery will be useful on both sides. The submissions should be limited to what has been

9

unearthed via discovery.

United States District Court
For the Northern District of California

10
11

IT IS SO ORDERED.

12
13

Dated: April 11, 2011.

William Alsup
United States District Judge

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
12