Claridge Associates, LLC et al v. Schepis et al
OPINION AND ORDER re: 41 AMENDED MOTION to Dismiss filed by Anthony Schepis, Ruth Canelas, Frank Canelas, Northeast Capital Management, LLC, 26 MOTION to Dismiss . MOTION to Compel Arbitration filed by Anthony Schepis, Ruth Canelas, Frank Canelas, Northeast Capital Management, LLC: For the foregoing reasons, Defendants' motion to dismiss Plaintiffs' conversion claim is GRANTED. The Court compels arbitration of the arb itrability of Defendants' res judicata defense; Plaintiff's remaining claims against Defendants are therefore STAYED pending resolution of arbitration proceedings. In light of the stay, Defendants' motion to dismiss Plaintiffs' remaining claims is DENIED WITHOUT PREJUDICE. The parties shall submit a joint letter to the Court by September 9, 2016, and every four months thereafter, updating the Court on the status of arbitration proceedings. The Clerk of Court is directed to terminate Docket Entries 26 and 41. (Signed by Judge Katherine Polk Failla on 5/10/2016) (tn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
CLARIDGE ASSOCIATES, LLC, et al.,
ANTHONY SCHEPIS, et al.,
DOC #: _________________
DATE FILED: May 10, 2016
15 Civ. 4514 (KPF)
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge:
This proceeding is but one of more than a dozen actions arising from the
failed relationship between the limited partners to an investment partnership
on one side, and the individuals who own and control the partnership’s general
partner on the other. Plaintiffs Leslie and Lillian Schneider, Claridge
Associates, LLC, and Jamiscott, LLC brought this action against Defendants
Anthony Schepis, Frank and Ruth Canelas, and Northeast Capital
Management, LLC, alleging breach of fiduciary duty, unjust enrichment,
promissory estoppel, and conversion. Defendants now move to dismiss
Plaintiffs’ Complaint in its entirety, asserting, inter alia, res judicata as an
affirmative defense. For the reasons detailed in this Opinion, Defendants’
motion is granted in part; the remaining case is compelled to arbitration and
stayed pending the arbitrator’s determination of the scope of the arbitration
clause at issue in this case.
Entity Plaintiffs Claridge Associates, LLC (“Claridge”), and Jamiscott, LLC
(“Jamiscott”), are both Delaware limited liability companies owned and
managed by family members of Individual Plaintiffs Lillian and Leslie Schneider
(the “Schneiders,” and together with Claridge and Jamiscott, “Plaintiffs”).
(Compl. ¶¶ 11-14). In 2007, Plaintiffs invested a total of $7 million in the
Pursuit Capital Management Fund I, L.P. (the “Fund”) and entered into the
Limited Partnership Agreement (the “LPA”), which was signed on behalf of the
Fund’s General Partner by the General Partner’s individual managers. (Id. at
¶ 21; Coleman Decl. Ex. A). At that time, Pursuit Capital Management, LLC
(“PCM”) served as the Fund’s General Partner, and was itself owned, managed,
and controlled by Defendants Anthony Schepis and Frank Canelas. (Compl.
¶¶ 2, 22). Defendant Ruth Canelas is the wife of Frank Canelas. 2
This Opinion draws on facts from Plaintiffs’ Complaint and the exhibits attached thereto
(Dkt. #1), which are taken as true for purposes of this motion. See Faber v. Metro. Life
Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (when reviewing a complaint for failure to state
a claim, the court will “assume all well-pleaded factual allegations to be true” (internal
quotation marks omitted)). Additional facts are drawn from documents relied upon by
or integral to the Complaint; these are attached as exhibits to defense counsel’s
declaration, and are referred to as “Coleman Decl. Ex.” (Dkt. #43). See Chambers v.
Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002). For convenience, the brief filed by
Defendants in support of their amended motion to dismiss (Dkt. #42) will be referred to
as “Def. Br.”; Plaintiffs’ opposition (Dkt. #49) as “Pl. Opp.”; and Defendants’ reply brief
(Dkt. #51) as “Def. Reply.”
The Complaint is curiously bereft of factual allegations regarding Ruth Canelas and,
despite Plaintiffs’ assertion of breach of fiduciary duty against her, she is not alleged to
have had any role in the management or control of the Fund’s General Partner.
Accordingly, unless otherwise specified, references to “Canelas” in this Opinion are to
As of 2009, the Fund had ceased making investments and had entered
“run-down mode,” with only three remaining groups of investors: Plaintiffs, an
investment group named Alpha Beta, and “insiders affiliated with Schepis and
Canelas.” (Compl. ¶ 25). Over the next three years, it is alleged, Schepis and
Canelas refused to provide Plaintiffs with financial information regarding the
Fund, ultimately leading Plaintiffs to file a Statement of Claim against PCM
with the American Arbitration Association (the “AAA”) on May 11, 2012. (Id. at
¶¶ 26-27). The Statement of Claim contained a multitude of accusations,
PCM permitted insiders to purchase an airplane
owned by the Fund for insufficient consideration
and via an unfair process (the “Airplane Claim”);
The Fund’s parent-entity had sold a claim against
Lehman Brothers, the proceeds of which should
have gone entirely to the Fund; but that the Fund
instead only received 90 percent, with the
remaining 10 percent going to an offshore sister
fund run by insiders (the “Lehman Split Claim”);
PCM improperly inflated its incentive fee on
Plaintiffs’ interest in the Fund (the “Incentive Fee
PCM improperly purported to terminate Plaintiffs’
interest in the Fund;
Monies held in reserve by PCM should have been
released to Plaintiffs;
Plaintiffs were entitled to an accounting from
PCM mishandled litigation of a claim that the
Fund held against UBS; and
(viii) PCM acquiesced in the excessive marking-up of
the price of certain securities bought on the
Fund’s behalf, some of which were the subject of
the UBS Litigation (the “Mark-Up Claim”).
(Id. Ex. 4; Ex. 5 at 3-4; Ex. 8 at 9). Additionally, Plaintiffs claim to have
learned for the first time at a March 2013 hearing that Schepis and Canelas
had “directed the secret transfer on the eve of the arbitration of $645,000 in
disputed funds from the Pursuit Fund to [PCM], and then onto themselves and
Ruth Canelas.” (Compl. ¶ 36, Ex. 5 at 32). Plaintiffs assert that counsel for
PCM had previously assured them that those funds, which represented the
disputed incentive fee, would not be transferred prior the arbitrator’s ruling on
Plaintiffs’ Incentive Fee Claim, and, further, that Plaintiffs had declined to seek
injunctive relief in reliance on that representation. (Id. at ¶ 36).
On September 27, 2012, PCM notified Plaintiffs that they “were being
mandatorily withdrawn from the Partnership” due to their filing of a claim for
arbitration, and that they consequently no longer had any rights as limited
partners or interest in the Fund. (Compl. Ex. 5 at 32). Plaintiffs dispute the
validity of this purportedly “mandatory” withdrawal. (Id. at ¶¶ 56-59).
The arbitration proceeded in two phases and yielded two separate
awards, each of which was memorialized in a lengthy decision from the
arbitrator. (Compl. ¶ 32). The Phase I Award, issued on June 5, 2013, found
that (i) PCM was liable to Plaintiffs on the Airplane Claim, the Lehman Split
Claim, and the Incentive Fee Claim, resulting in an award of $1,196,783.39,
plus interest; (ii) the $1,186,346.38 that was being held by PCM in reserve
should be returned to Plaintiffs; (iii) Plaintiffs retained their limited partnership
interests in the Fund; and (iv) Plaintiffs were entitled to sanctions against PCM
in the amount of $192,633.20. (Id. Ex. 5 at 56-57). The Phase II Award,
issued on December 19, 2013, found PCM liable to Plaintiffs on the Mark-Up
Claim and accordingly awarded Plaintiffs a total of $2,224,846.11, representing
both damages and a sanction, plus interest and $58,868.75 in attorneys’ fees.
(Id. Ex. 8 at 50). The New York State Supreme Court (Kenney, J.) confirmed
both Awards on March 20, 2014, entering judgments the following day (the
“March 21 Judgments”) that (i) held PCM liable for a total of $4,999,401.22 in
damages; (ii) required that the Fund release $1,186,346 of Plaintiffs’ improperly
withheld assets; and (iii) ordered an accounting. (Id. at ¶¶ 44-45). That same
day, PCM filed a Chapter 7 petition in the United States Bankruptcy Court for
the District of Delaware. (Id. at ¶ 48). As of the filing of the instant matter,
PCM had not complied with any part of the March 21 Judgments. (Id. at ¶ 45).
In September 2013, Plaintiffs obtained a restraining order (the
“Restraining Order”) in New York State Supreme Court to protect the
$1,186,346 of Plaintiffs’ assets that remained in the Fund. (Compl. ¶ 51). The
Restraining Order prohibited PCM from (i) transferring Fund assets to itself or
its affiliates, owners or principals, or family members of its owners or
principals, and (ii) transferring any Fund assets at all if, as a result, the assets
left in the Fund would equal less than $1,186,346. (Id.).
Plaintiffs allege that in February 2014, prior to the entry of the March 21
Judgments, Schepis and Canelas formed Defendant Northeast Capital
Management, LLC (“Northeast”), and, without the limited partners’ notice or
consent, replaced PCM with Northeast as the Fund’s General Partner. (Compl.
¶¶ 46-47). Plaintiffs state that “Northeast is owned, managed and controlled by
Schepis and Canelas; it is headquartered, managed and operated out of the
same office location as [PCM] … [; and] the only difference between Northeast
and [PCM] is the sign on the door.” (Id. at ¶ 49).
On April 29, 2014, at a creditors’ “341 Hearing” related to PCM’s
bankruptcy action, Schepis and his counsel vouched that the September 2013
Restraining Order would be respected, and that the Fund’s assets would
consequently not be transferred. (Compl. ¶ 53). See 11 U.S.C. § 341 (providing
for meeting of creditors and trustee). Nevertheless, Plaintiffs contend that on
June 30, 2014, Canelas, “with the knowledge and/or participation of Schepis
and Northeast,” secretly transferred the restricted funds to “the escrow account
of counsel for other entities controlled by Schepis and Canelas in the separate
UBS Litigation.” (Compl. ¶ 54).
Finally, Schepis and Canelas continue to deny that Plaintiffs remain
limited partners in the Fund. (Compl. ¶ 58). As a result, Plaintiffs have “been
forced to seek to intervene in the UBS Litigation at great cost and expense,
simply to protect their already judicially determined interest in that asset of the
Pursuit Fund.” (Id. at ¶ 60).
Plaintiffs filed their instant Complaint on June 10, 2015, alleging breach
of fiduciary duty against all Defendants; unjust enrichment against Schepis,
Canelas, and Ruth Canelas; promissory estoppel against Schepis, Canelas, and
Northeast; and conversion against Schepis and Canelas. (Dkt. #1). On
September 25, 2015, Defendants filed a motion to dismiss or, alternatively, to
compel arbitration. (Dkt. #26, 27). In response, Plaintiffs submitted a letter to
the Court stating that in light of Defendants’ apparent agreement that this
matter properly belongs in arbitration, the Court should simply compel
arbitration. (Dkt. #30). Following an October 22, 2015 telephone conference to
clarify the parties’ respective positions regarding the necessity of arbitration,
and subsequent communications indicating that the parties had failed to
represent the record accurately in their submissions, the Court gave the
parties leave “to file revised papers in connection with Defendants’ motion, in
order to ensure that their submissions are scrupulously faithful to the record
in each of the related proceedings.” (Dkt. #37).
Defendants filed their amended motion to dismiss on November 16,
2015, this time omitting any request for arbitration. (Dkt. #41, 42). Plaintiffs
filed their brief in opposition on January 5, 2016 (Dkt. #49), and Defendants
concluded the briefing with their reply on January 21, 2016 (Dkt. #51).
On April 25, 2016, Defendants submitted a letter notifying the Court that
Plaintiffs had filed a substantively identical complaint as an adversary
proceeding in PCM’s Chapter 7 bankruptcy action. (Dkt. #57). The Court held
a telephone conference with the parties to discuss whether, in light of this
adversary proceeding, the automatic stay mandated by 11 U.S.C. § 362
extended to the instant matter. The bankruptcy debtor, PCM, is not a party;
neither party has requested that the stay be applied to this action; and neither
party has argued that resolution of this action would have an immediate or
inevitable adverse impact on the property of PCM’s estate. Consequently, the
Court finds that the stay does not apply to the instant matter, and this Court
may decide the instant motion. Compare 11 U.S.C. §§ 362(a)(1), (2) (noting that
petition “operates as a stay” of a “judicial ... proceeding against the debtor,”
and of “any act to obtain possession or property of the estate”), with Queenie,
Ltd. v. Nygard Int’l, 321 F.3d 282, 287 (2d Cir. 2003) (“The automatic stay can
apply to non-debtors, but normally does so only when a claim against the nondebtor will have an immediate adverse economic consequence for the debtor’s
estate.”), and In re 48th St. Steakhouse, Inc., 835 F.2d 427, 431 (2d Cir. 1987)
(upholding stay as to non-debtor where action against it “would inevitably have
an adverse impact on property of the bankrupt estate”).
Motions to Dismiss Under Federal Rule of Civil Procedure 12(b)(6)
When considering a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6), a court should “draw all reasonable inferences in [the
plaintiff’s] favor, assume all well-pleaded factual allegations to be true, and
determine whether they plausibly give rise to an entitlement to relief.” Faber v.
Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks
omitted). Thus, “[t]o survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “While Twombly does not
require heightened fact pleading of specifics, it does require enough facts to
‘nudge [a plaintiff’s] claims across the line from conceivable to plausible.’” In re
Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (quoting Twombly, 550
U.S. at 570). “Where a complaint pleads facts that are ‘merely consistent with’
a defendant’s liability, it ‘stops short of the line between possibility and
plausibility of entitlement to relief.’” Iqbal, 556 U.S. at 678 (quoting Twombly,
550 U.S. at 557). Moreover, “the tenet that a court must accept a complaint’s
allegations as true is inapplicable to threadbare recitals of a cause of action’s
elements, supported by mere conclusory statements.” Id. at 663.
“In considering a motion to dismiss for failure to state a claim pursuant
to Rule 12(b)(6), a district court may consider the facts alleged in the
complaint, documents attached to the complaint as exhibits, and documents
incorporated by reference in the complaint.” DiFolco v. MSNBC Cable LLC, 622
F.3d 104, 111 (2d Cir. 2010). “Even where a document is not incorporated by
reference, the court may nevertheless consider it where the complaint ‘relies
heavily upon its terms and effect,’ which renders the document ‘integral’ to the
complaint.” Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)
(quoting Int’l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d
Cir. 1995) (per curiam)); see also Goel v. Bunge, Ltd., — F.3d —, No. 15-3023cv, 2016 WL 1696597, at *2-3 (2d Cir. Apr. 28, 2016) (discussing materials
that may properly be considered in resolving a motion brought under Fed. R.
Civ. P. 12(b)(6)).
Plaintiffs Have Standing to Bring the Instant Claims
Defendants argue preliminarily that Plaintiffs lack standing to bring any
claim premised on Plaintiffs’ rights as limited partners because such claims
must be brought derivatively rather than directly. (Def. Br. 20-21). The
inquiry for determining the nature of a claim against a limited partnership
tracks that for determining the nature of claim against a corporation, which the
Delaware Supreme Court set forth in Tooley v. Donaldson, Lufkin & Jenrette,
Inc., 845 A.2d 1031 (Del. 2004). The Tooley Court set forth two questions that
courts must assess when classifying a claim as either derivative or direct:
(i) who suffered the alleged harm, and (ii) who would benefit from recovery. Id.
at 1033. Considering the first element, the “stockholder’s claimed direct injury
must be independent of any alleged injury to the corporation.... The
stockholder must demonstrate that the duty breached was owed to the
stockholder and that he or she can prevail without showing an injury to the
corporation.” Id. at 1039. Where a harm affects an entity as a whole such that
individual investors suffer only “as a function of and in proportion to [their] pro
rata investment in the [entity],” then the claim is derivative and must be
pursued on behalf of the entity. In regard to the second element, plaintiffs
asserting a direct claim must show that they will directly benefit from any
remedy. Id. at 1033.
Additionally, application of the Tooley standard to limited partnerships
may in some instances require more flexibility than is called for in the
traditional corporate context. This is because
“[i]n the partnership context, the relationships among
the parties may be so simple and the circumstances so
clear-cut that the distinction between direct and
derivative claims becomes irrelevant.” Similarly, in
some instances, the relationships among the parties
and the function and structure of the partnership itself
may diverge from the corporate model so dramatically
that some claims, which in a corporate context might be
classified as derivative, must be brought as direct
claims in order to enable the injured parties to recover
while preventing a windfall to individuals or entities
whose interests were not injured.
Anglo Am. Sec. Fund, L.P. v. S.R. Glob. Int’l Fund, L.P., 829 A.2d 143, 150-51
(Del. Ch. 2003) (quoting In re Cencom Cable Income Partners, L.P. Litig., 2000
WL 130629, at *3 (Del. Ch. Jan. 27, 2000)).
Plaintiffs argue that they may bring the instant claims directly, because
the asserted harms flow directly to Plaintiffs, as opposed to secondarily
affecting Plaintiffs by virtue of their status as limited partners; and also
because the composition of the partnership is such that a derivative action
would be impracticable. (Pl. Opp. 20-22). The Court agrees.
First, Delaware courts recognize a direct cause of action for violation of a
shareholder or partnership member’s contractual rights where such rights are
independent from rights held by the corporation or partnership as a whole.
Ruffalo v. Transtech Serv. Partners Inc., No. Civ. 5039-VCP, 2010 WL 3307487,
at *9 (Del. Ch. Aug. 23, 2010) (citing Kramer v. W. Pac. Indus., Inc., 546 A.2d
348, 351 (Del. 1988)). Here, as the arbitrator explained in response to
Defendants’ similar assertion that Plaintiffs lacked standing for their claims
against PCM, the General Partner “has a specific obligation under the [LPA] to
see that related party transactions [a]re performed at fair prices and with
independent scrutiny” — and, this Court additionally notes, to provide
accounting information to the limited partners. (Compl. Ex. 5 at 46; Coleman
Decl. Ex. A). Thus, to the extent that Plaintiffs’ claims involve a breach of these
contractual duties, their claims are properly characterized as direct. See In re
El Paso Pipeline Partners, L.P. Derivative Litig., 132 A.3d 67, 88-89 (Del. Ch.
2015) (finding that where a party possesses a contractual cause of action, it
may sue directly to enforce it, even where the harm from the breach was not
particular to the suing party); Allen v. El Paso Pipeline GP Co., 90 A.3d 1097,
1109 (Del. Ch. 2014) (“If a limited partnership agreement prohibits the actions
that were taken, then the limited partners have standing to enforce the limited
partnership agreement directly.”).
Second, even were Plaintiffs’ claims otherwise derivative in character, the
facts of the instant case, as alleged, counsel in favor of precisely the flexible
application of the Tooley test contemplated by the Delaware Chancery Court in
Anglo American Security Fund. The Fund is asserted to have a very limited
number of investors, namely, Plaintiffs, Alpha Beta, and insiders affiliated with
Schepis and Canelas — and Alpha Beta has purportedly settled its claims for
breach of fiduciary duty and gross negligence against PCM, Schepis, and
Canelas. (Compl. Ex. 4 ¶¶ 19, 26). 3 Under such circumstances, any recovery
to the Fund for Defendants’ breach of their fiduciary duties would
inappropriately benefit Defendants. See In re Cencom, 2000 WL 130629, at *4
(“It is an elementary principle of equity that defendants found liable for
breaches of either fiduciary duties or contractual arrangements should not
benefit from any remedy for these breaches.”); see also Anglo Am. Sec. Fund,
829 A.2d at 151.
Third, and relatedly, equity regards substance over form. Judah v.
Shanghai Power Co., 494 A.2d 1244, 1249 (Del. 1985); see also In re Cencom,
2000 WL 130629, at *6. Here, requiring the Plaintiffs to bring their claims
derivatively would “exalt the partnership form over the substance of this intrapartnership dispute,” In re Cencom, 2000 WL 130629, at *6, as the present
litigation allegedly pits all remaining interests in the Fund against one another,
rendering the distinction between direct and derivative action largely illusory.
Delaware courts have identified two primary purposes for requiring a claim to
be brought derivatively: (i) to consolidate claims and ensure that any remedy
accrues to the entity that sustained the harm, and (ii) to provide a “gatekeeping
function,” thereby promoting internal resolution of disagreements. Anglo Am.
Sec. Fund, 829 A.2d at 152; accord McBeth v. Porges, No. 15 Civ. 2742 (JMF),
2016 WL 1092692, at *10 (S.D.N.Y. Mar. 21, 2016). The former of these
Defendants argue that there are in fact additional non-insider investors remaining to
whom Defendants owe fiduciary duties. (Def. Br. 8). This is at best a contested fact not
determinable on a motion to dismiss; moreover, while the fact that Plaintiffs plead their
interest as functionally the only non-insider interest remaining in the Fund is certainly
relevant to the question of standing, it is not, as the Court discusses in this section, the
justifications actively counsels against characterizing the instant claims as
derivative, insofar as a derivative action would merely divert a portion of any
recovery to the alleged wrongdoer. As for the latter purpose, the Partnership
has been in “run-down mode” and no longer making investments since 2009
(Compl. ¶ 25), and Defendants maintain that Plaintiffs are in fact no longer
limited partners (see, e.g., Def. Br. 1 (describing Plaintiffs as “former investors”
who “voluntarily withdrew as limited partners of the PCM Partnership”); Compl.
¶¶ 9, 56-59). See In re Cencom, 2000 WL 130629, at *4-6 (finding the purposes
of derivative actions no longer served where the enterprise was no longer
ongoing, but rather had terminated and was in wind-up mode); McBeth, 2016
WL 1092692, at *10 (finding that while mismanagement claims are typically
derivative, plaintiffs’ claim could be brought directly where the “Fund was
dissolved and the only two members of the Fund … ‘are now clearly
adversaries’” (quoting In re Cencom, 2000 WL 130629, at *4)). Consequently,
requiring Plaintiffs to go through the formalities of bringing a derivative action
would serve no beneficial purpose, but would instead only delay resolution of
the instant matter. For all of these reasons, Defendants’ contention that the
Complaint must be dismissed for lack of standing fails. 4
Defendants additionally argue that Plaintiffs have acquired PCM, and that as a result,
they cannot bring this suit because were their claims to persist, they would effectively
be suing themselves. (Def. Br. 12). PCM has not, however, been named as a Defendant
in the instant action. Rather, the Complaint seeks liability against the managing
members, Schepis and Canelas, in their individual capacity, and against PCM’s
successor as the Pursuit General Partner, Northeast. (See generally Compl.). Plaintiffs
are therefore in no way “suing themselves,” and Defendants’ argument to the contrary
Certain of Plaintiffs’ Claims Are Time-Barred
Defendants further contend that Plaintiffs’ “pre-arbitration” claims for
breach of fiduciary duty and conversion are time-barred. (Def. Br. 21; Def.
Reply 7-9). Under Delaware law, a three-year statute of limitations applies to
causes of action for breach of fiduciary duty. In re Tyson Foods, Inc. Consol.
S’holder Litig., 919 A.2d 563, 584 (Del. Ch. 2007); 10 Del. C. § 8106 (listing
actions subject to a three-year limitations period). 5 As a general rule, the
statute of limitations for such a claim “begins to run when the cause of action
accrues, not upon the Plaintiff’s discovery of the injury.” Houseman v.
Sagerman, No. Civ. 8897-VCG, 2015 WL 7307323, at *8 (Del. Ch. Nov. 19,
2015) (citing Weiss v. Swanson, 948 A.2d 433, 451 (Del. Ch. 2008)); accord In
re Tyson Foods, Inc., 919 A.2d at 584. Under certain circumstances, however,
the limitations period will be tolled: Tolling is appropriate where (i) discovery of
a harm would be “practically impossible” at the time it occurred; (ii) defendants
“fraudulently concealed from a plaintiff the facts necessary to put him on
notice of the truth”; or (iii) plaintiff “reasonably relied upon the competence and
good faith of a fiduciary.” In re Tyson Foods, Inc., 919 A.2d at 584-85. Even
then, equitable tolling of the limitations period will extend only until a plaintiff
receives inquiry notice. In other words,
Plaintiffs’ claim for breach of fiduciary duty is analyzed under Delaware law, pursuant
to the LPA. (See Coleman Decl. Ex. A § 13.03). Plaintiffs’ claim for conversion, on the
other hand, is unrelated to the parties’ rights and obligations under the LPA;
Defendants assert, and Plaintiffs do not contest, that Connecticut law governs. (See
Def. Br. 20 n.19; Pl. Opp. 23; Def. Reply 9 n.10). The Court therefore applies
Connecticut law to Plaintiffs’ conversion claim.
no theory will toll the statute beyond the point where
the plaintiff was objectively aware, or should have been
aware, of facts giving rise to the wrong. Even where a
defendant uses every fraudulent device at its disposal
to mislead a victim or obfuscate the truth, no sanctuary
from the statute will be offered to the dilatory plaintiff
who was not or should not have been fooled.
Id. at 585 (citations omitted); see also In re Dean Witter P’ship Litig., No. Civ.
A. 14816, 1998 WL 442456, at *6 (Del. Ch. July 17, 1998), aff’d, 725 A.2d 441
Plaintiff’s conversion claim is similarly subject to a three-year limitations
period. Certain Underwriters at Lloyd’s, London v. Cooperman, 289 Conn. 383,
408 (2008) (citing Conn. Gen. Stat. § 52-577). The Connecticut Supreme Court
has made clear, however, that, “[i]n construing [Connecticut’s] general tort
statute of limitations … [that court has] concluded that the history of [the]
legislative choice of language precludes any construction thereof delaying the
start of the limitation period until the cause of action has accrued or the injury
has occurred.” Id. (omission in original, quoting Fichera v. Mine Hill Corp., 207
Conn. 204, 212 (1988)). Accordingly, Connecticut courts have found that § 52577 is “an occurrence statute and that its limitation period does not begin
‘when the plaintiff first discovers an injury.’” Valentine v. LaBow, 95 Conn.
App. 436, 445-46 (2006) (quoting Farnsworth v. O’Doherty, 85 Conn. App. 145,
150 (2004)). Thus, unlike in the case of Plaintiffs’ claim for breach of fiduciary
duty, Plaintiffs need not have had inquiry notice of their conversion claim in
order for the limitations period to have been triggered.
Defendants argue that Plaintiffs necessarily had knowledge of the facts
underlying their conversion and breach of fiduciary duty claims more than
three years prior to the filing of this action, as Plaintiffs asserted practically
identical facts to those in the instant Complaint when they filed their
Statement of Claim for arbitration on May 11, 2012. (Def. Br. 21; Def. Reply 89). Plaintiffs respond that PCM’s withholding of information caused the
relevant facts to go undiscovered until during or after arbitration, thereby
placing the action within the three-year limitation period. (Pl. Opp. 22-23).
There can be no question that Plaintiffs were on notice of certain facts
underlying their breach of fiduciary duty claim more than three years before
the filing of the instant action. Plaintiffs’ Statement of Claim for arbitration
alleges that Schepis and Canelas engaged in a host of activities in violation of
their fiduciary duties, including “[b]reaching explicit promises to return
millions of dollars of capital to [Plaintiffs]”; “[i]mproperly using Partnership
funds to pay or advance legal fees to defend the General Partner and the
Insiders against an SEC investigation”; failing to honor record demands and
“[r]efusing to provide any meaningful information, including proper financial
reports and information about the Partnership’s expenses, to [Plaintiffs]”; and
“[p]urporting to unilaterally amend the Partnership Agreement to deprive
[Plaintiffs] of significant rights under the Agreement.” (Compl. Ex. 4 ¶ 8).
Consequently, any claim Plaintiffs had arising out of those facts would be timebarred.
Plaintiffs argue, however, that certain of Defendants’ actions either
occurred or could only have been discovered at a later date: (i) the excessive
mark-up of certain trades, in which PCM overpaid itself by $1.2 million; (ii) the
diversion of 10 percent of the Lehman claim; (iii) the improperly inflated
incentive fee and its subsequent improper distribution; (iv) Defendants’
continued denial of Plaintiffs’ current interest in the Fund; (v) Defendants’
failure to release funds from the sale of the aircraft; and (vi) Northeast’s
transfer of $1,186,777 owed to Plaintiffs to counsel in the UBS Litigation. (Pl.
Opp. 23). While some of these factual assertions are unlikely to support a valid
claim, others suffice to plead a claim for breach of fiduciary duty within the
The Statement of Claim for arbitration indicates that Plaintiffs had
inquiry notice of diversion of 10 percent of the Lehman claim prior to
arbitration. Plaintiffs stated in that document that “[w]ithout providing any
supporting information, the General Partner asserted that [an] Offshore Fund
owned 10% of the Lehman claim.” (Compl. Ex. 4 ¶ 46). The Offshore Fund at
issue was, according to Plaintiffs’ “information and belief” at that time, “also
run by the Insiders.” (Id. at ¶ 22). It may be that Plaintiffs’ belief regarding the
improper splitting of the Lehman claim was not confirmed until March 2013;
but by their own account, they believed, as of May 11, 2012, that 10 percent of
the Lehman claim had been siphoned off to an offshore fund run by Insiders
with no valid explanation. On such facts, Plaintiffs’ clearly had “inquiry notice”
of any claim based on the allocation of the Lehman claim.
The same can be said for Plaintiffs’ claim regarding Defendants’ failure to
release funds from the aircraft sale: Plaintiffs’ May 11, 2012 filing expressly
alleged (i) the sale of the airplane for inadequate consideration, and
(ii) Defendants’ subsequent refusal to “follow through and distribute” funds
representing the full value of Plaintiffs’ interest in the Partnership — which
would presumably include Plaintiffs’ share of the proceeds from the aircraft
sale. (Compl. Ex. 4 ¶ 44). Hence Plaintiffs’ claim for conversion relating to that
transaction is time-barred, as is any claim for breach of fiduciary duty arising
out of the same facts. 6
Plaintiffs were not, however, necessarily on notice of every bad act they
attribute to Defendants in their Complaint, and some of those acts may,
independently, suffice to state a claim for breach of fiduciary duty. For
instance, while the trades for which Plaintiffs allege excessive mark-ups
occurred in 2007, the arbitrator found that Plaintiffs had no inquiry notice
until “late 2012”; this creates, at the very least, a contested issue of fact
regarding when Plaintiffs were chargeable with knowledge of the mark-ups.
(Compl. Ex. 5 at 44). As for the incentive fees, the dispute over the fees’
propriety was indeed raised prior to arbitration, indicating that Plaintiffs were
on notice of their claim as it relates to the fees’ excessive accrual (id. Ex. 4 at
¶¶ 51-53); to the extent that Plaintiffs assert breach of fiduciary duty based on
Plaintiffs argue that their conversion claim is not time-barred because the failure to
distribute the sale proceeds occurred within the three-year limitations period, even if
the sale itself did not (Pl. Opp. 23); but this characterization of events is belied by the
Statement of Claim for arbitration, which plainly states that after the sale, Defendants
refused to payout Plaintiffs’ interest in the Fund (Compl. Ex. 4 ¶ 44).
the distribution of the fees, however, that did not occur until January 2013 (id.
at ¶ 36; Ex. 7). Moreover, counsel for Defendants represented to Plaintiffs prior
to arbitration that the fee was no more than an accrual, and that no
disbursement would occur until the dispute over accrual had been resolved by
the arbitrator. (Id. at ¶ 36; Ex. 5 at 32). Under these circumstances, Plaintiffs
have raised a question of fact regarding the timeliness of a fiduciary duty
breach claim predicated on the miscalculated incentive fee.
Considering next Defendants’ refusal to acknowledge Plaintiffs’ interests
in the Fund, the decision of the arbitrator indicates that Plaintiffs first received
notice that they “were being mandatorily withdrawn from the Partnership,” and
therefore could no longer assert an interest in the Fund, on September 27,
2012 — placing the denial of their interest within the three year period.
(Compl. Ex. 5 at 32). Finally, the transfer of $1,186,346.38 owed to Plaintiffs
occurred on June 30, 2014, well within the statute of limitations. (Id. at ¶¶ 5455).
The Complaint alleges a laundry list of wrongs committed by Defendants,
some of which fall within the limitations period and some of which do not.
Because the events supporting Plaintiffs’ claim for conversion of the Fund’s
airplane occurred more than three years prior to the instant litigation, that
claim is time-barred. However, as the foregoing illustrations indicate, Plaintiffs
have alleged sufficient predicates for their breach of fiduciary duty claim that
either fall within the limitations period or are potentially subject to tolling, such
that the Court cannot, as a matter of law, find their breach of fiduciary duty
claim to be time-barred at this stage.
The Preclusive Effect of the Prior Related Arbitration Must Be
Submitted to the Arbitrator
Defendants principally argue that the present action is precluded by the
prior arbitration under the doctrine of res judicata. (Def. Br. 13; Def. Reply 57). 7 Plaintiffs respond that res judicata does not bar the instant claims, and
that in any event, the preclusive effect of the prior arbitration should be
decided by the arbitrator. (Pl. Opp. 8-13). Plaintiffs’ assertion that the issue of
res judicata should be submitted to the arbitrator raises two questions: the
arbitrability of Defendants’ res judicata defense, and the proper party (as
between the Court and the arbitrator) to decide that threshold question of
Because the LPA, which contains the arbitration clause, establishes a
partnership for the purpose of investment activity occurring in interstate
commerce, it is governed by the Federal Arbitration Act (the “FAA”). See
9 U.S.C. § 2; Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56 (2003)
(interpreting FAA’s “involving commerce” language as signaling “the broadest
permissible exercise of Congress’ Commerce Clause power,” such that the FAA
applies to all transactions “affecting commerce” (emphasis added)). State law
See generally TechnoMarine SA v. Giftports, Inc., 758 F.3d 493, 498 (2d Cir. 2014) (“A
court may consider a res judicata defense on a Rule 12(b)(6) motion to dismiss when the
court’s inquiry is limited to the plaintiff’s complaint, documents attached or
incorporated therein, and materials appropriate for judicial notice.”).
applies to determine whether parties have obligated themselves to arbitrate
certain issues, including the question of arbitrability; nevertheless, the FAA
dictates that in determining whether a claim or defense should be submitted to
arbitration, “the federal policy in favor of arbitration requires that ‘any doubts
concerning the scope of arbitrable issues’ be resolved in favor of arbitration.”
Shaw Grp. Inc. v. Triplefine Int’l Corp., 322 F.3d 115, 120 (2d Cir. 2003).
Federal courts have recognized an exception to this policy, however,
when ruling on arbitrability: “[T]he issue of arbitrability may only be referred
to the arbitrator if there is clear and unmistakable evidence from the arbitration
agreement, as construed by the relevant state law, that the parties intended
that the question of arbitrability shall be decided by the arbitrator.’” Bell v.
Cendant Corp., 293 F.3d 563, 566 (2d Cir. 2002) (emphasis in original)
(internal quotation marks omitted); accord Shaw Grp. Inc., 322 F.3d at 121.
Similarly, Delaware law holds that “[c]ourts should not assume that the parties
agreed to arbitrate arbitrability unless there is ‘clear and unmistakable’
evidence that they did so.” McLaughlin v. McCann, 942 A.2d 616, 621-22 (Del.
Ch. 2008) (quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 94445 (1995)).
Plaintiffs assert that, pursuant to Citigroup, Inc. v. Abu Dhabi Investment
Authority, 776 F.3d 126 (2d Cir. 2015), and National Union Fire Insurance Co. of
Pittsburgh v. Belco Petroleum Corp., 88 F.3d 129 (2d Cir 1996), the arbitrator
should determine the preclusive effect of his prior Awards. (Pl. Opp. 12).
Because the Court finds, however, that the antecedent question of arbitrability
should be determined by the arbitrator, it does not consider the merits of
Plaintiffs’ argument. 8
The arbitration clause contained in the LPA states that “ANY
CONTROVERSY BETWEEN THE PARTNERSHIP AND ANY PARTNER OR
BETWEEN ANY PARTY HERETO ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE BREACH THEREOF SHALL BE SETTLED
EXCLUSIVELY BY ARBITRATION IN ACCORDANCE WITH THE RULES THEN
IN EFFECT OF THE COMMERCIAL DIVISION OF THE AMERICAN
ARBITRATION ASSOCIATION.” (Coleman Decl. Ex. A § 13.04 (capitalization in
original)). The Delaware courts have “adopt[ed] the majority federal view that
reference to the [AAA] rules evidences a clear and unmistakable intent to
submit arbitrability issues to an arbitrator.” James & Jackson, LLC v. Willie
Gary, LLC, 906 A.2d 76, 81 (Del. 2006). The Delaware Supreme Court has
additionally clarified that arbitrators need not “decide arbitrability in all cases
where an arbitration clause incorporates the AAA rules,” but rather only “in
those cases where the arbitration clause generally provides for arbitration of all
disputes and also incorporates a set of arbitration rules that empower
arbitrators to decide arbitrability.” Id. (collecting cases) (emphasis in original).
Defendants ask that, should the Court determine that the res judicata inquiry is
properly committed to the arbitrator, the Court stay the instant matter and submit to
arbitration only the “single issue” of whether claims against Schepis and Canelas could
have been brought in the prior arbitration. (Def. Br. 7). To the extent Defendants are
asking the Court to circumscribe the arbitrator’s ability in a manner contrary to the law
set forth in the text of this Opinion, the Court declines to do so.
Here, the arbitration clause requires “any controversy … between any
party hereto arising out of or relating to [the] agreement” to be arbitrated. This
constitutes precisely the sort of agreement to arbitrate “all disputes”
contemplated in James & Jackson. 906 A.2d at 81 (citing, e.g., Terminix Int’l
Co., LP v. Palmer Ranch LP, 432 F.3d 1327, 1329 (11th Cir. 2005) (arbitration
clause covered “any controversy or claim... arising out of or relating to” the
agreement); Contec Corp. v. Remote Solution Co., Ltd., 398 F.3d 205, 208 (2d
Cir. 2005) (arbitration clause covered “any controversy arising with respect to
this Agreement”); Citifinancial, Inc. v. Newton, 359 F. Supp. 2d 545, 549 (S.D.
Miss. 2005) (arbitration clause provided that “any Claim ... shall be resolved by
binding arbitration”)). The claims asserted by Plaintiffs derive from their rights
as limited partners to the LPA, and consequently “arise out of” or “relate to”
that Agreement. The broadly sweeping agreement to arbitrate all such claims,
paired with the explicit incorporation of the AAA’s rules, places the arbitrability
of Defendants’ preclusion defense within the scope of matters properly
committed to arbitration. 9
In light of the Court’s decision to refer the remaining claims in this case to the
arbitrator to consider the issues of arbitrability and res judicata, the proper course of
action is for the Court to stay this matter during the period of referral. Katz v. Cellco
P’ship, 794 F.3d 341, 345 (2d Cir.), cert. denied, 136 S. Ct. 596 (2015).
For the foregoing reasons, Defendants’ motion to dismiss Plaintiffs’
conversion claim is GRANTED. The Court compels arbitration of the
arbitrability of Defendants’ res judicata defense; Plaintiff’s remaining claims
against Defendants are therefore STAYED pending resolution of arbitration
proceedings. In light of the stay, Defendants’ motion to dismiss Plaintiffs’
remaining claims is DENIED WITHOUT PREJUDICE. The parties shall submit
a joint letter to the Court by September 9, 2016, and every four months
thereafter, updating the Court on the status of arbitration proceedings.
The Clerk of Court is directed to terminate Docket Entries 26 and 41.
May 10, 2016
New York, New York
KATHERINE POLK FAILLA
United States District Judge
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