JFK Family Ltd. Partnership v Millbrae Natural Gas Dev. Fund 2005, L.P.
Annotate this CaseDecided on September 16, 2008
Supreme Court, Westchester County
JFK Family Ltd. Partnership, JAMES KNOTT, SR., JAMES KNOTT, JR., CARROLL KNOTT, ALLISON KNOTT CARROLL KNOTT McGILL, AND JFK FAMILY LTD. PARTNERSHIP, JAMES KNOTT, SR., JAMES KNOTT, JR., CARROLL KNOTT, ALLISON KNOTT AND CARROLL KNOTT McGILL, DERIVATIVELY FOR THE BENEFIT OF MILLBRAE NATURAL GAS DEVELOPMENT FUND 2005, L.P., A LIMITED PARTNERSHIP, Plaintiffs,
against
Millbrae Natural Gas Development Fund 2005, L.P., MILLBRAE NATURAL GAS 2005 LLC, STEWART REID, ROBERT E. KING, AND CHARLES BOYCE, Defendants.
10591/07
WILSON, ELSER, MOSKOWITZ, EDLEMAN & DICKER LLPBy: Thomas Leghorn, Esq.
Attorneys for Plaintiff
3 Gannett Drive
White Plains, New York 10604
FRANCH, JARASHOW & SMITH, P.A.
By: Frank T. Laznovsky, Esq.
107 Ridgely Avenue, Suite 9
Annapolis, Maryland 21401
WILMER CUTLER PICKERING HALE & DORR, LLP
By: Thomas Trenchard, Esq.
Attorneys for Defendants Millbrae Natural Gas Development Fund 2005, L.P.
Millbrae Natural Gas 2005 LLC, Stewart Reid,
Robert King, and Charles Boyce
399 Park Avenue
New York, New York 10022
Alan D. Scheinkman, J.
Defendants Millbrae Natural Gas Development Fund 2005, L.P. ("Partnership"),
Millbrae Natural Gas 2005 LLC ("Millbrae Company"), Stewart Reid ("Reid"), Robert E. King.
("King") and Charles Boyce ("Boyce") (collectively "Defendants"), move, pursuant to CPLR
3211, to dismiss the Third through Twelfth Causes of Action in the First Amended Complaint
(Mot. Seq. No. 008). Plaintiffs JFK Family Ltd. Partnership, James Knott, Sr., James Knott Jr.,
Carroll Knott, Allison Knott, Carroll Knott McGill ("Individual Plaintiffs") and Individual
Plaintiffs, derivatively for the benefit of the Partnership (collectively "Plaintiffs") oppose the
motion.
Separately, Plaintiffs move to compel the disclosure from Defendants of information relating to the names, addresses, telephone numbers and investment units of the other investor partners in the Partnership (Seq. No. 007), which motion Defendants oppose. [*2]
The two motions are consolidated for purposes of
decision and disposition.
PROCEDURAL HISTORY
This action was filed on June 7, 2007. Plaintiffs are limited partners in
Partnership. They seek restitution of their investment in that entity, as well as judgment for the
profits accruing from their investment, disgorgement of any profits or benefits received by
Defendants, punitive damages and attorneys' fees.
There have been six previous decisions and orders in this case. Of these, the decision relevant to the motions at hand is the Decision and Order, dated January 23, 2008 (the "January 23, 2008 Decision").[FN1] Insofar as relevant here, the Court granted, in part, the motion of Defendants Partnership, Millbrae Company, Reid, King, and Boyce, collectively the "Millbrae Defendants", to dismiss the complaint pursuant to CPLR 3211 to the extent of dismissing the Third Cause of Action (Breach of Contract and Fiduciary Duty), Fourth Cause of Action (Breach of Duty of Good Faith and Fair Dealing), Fifth Cause of Action (Breach of Fiduciary Duty), Sixth and Seventh Causes of Action (Liability of Individual Defendants for Breaches of Fiduciary Duty), Eight Cause of Action (Punitive Damages). The Third, Fifth, Sixth and Seventh Causes of Action were dismissed as they alleged wrongs accruing to the Partnership, and therefore, were causes of action that could only be pursued derivatively on behalf of the Partnership. The Court dismissed the Fourth Cause of Action for Breach of the Duty of Good Faith and Fair Dealing because "Plaintiffs ... have not alleged what specifically they would imply into the contracts nor alleged what provisions of the agreements they claim would support such an implication. Nor have they alleged facts that tend to show Defendants sought to prevent performance of the contract of to withhold its benefits from Plaintiffs ... [And] because the alleged breach is intrinsically tied to the damages allegedly resulting from a breach of contract ... [t]he Fourth Cause of Action ... is nothing more than a duplication of the First and Second Causes of Action" (January 23, 2008 Decision at 19-20). The Court granted the motion to dismiss the Eighth Cause of Action because the tort claims were dismissed and because there exists no separate cause of action for punitive damages for pleading purposes. The Court denied dismissal of the First and Second Causes of Action alleging Defendants' breaches of various provisions of the Partnership Agreement based on Defendants' alleged refusal to allow Plaintiffs access to Partnership records and alleged failure to provide notice of capitalization increases.
On March 19, 2008, Plaintiffs filed their First Amended Complaint ("Amended Complaint"),
which is the subject of the present motion to dismiss.
[*3]A. The Parties
The Amended Complaint identifies Plaintiffs as limited partners in the Partnership, of which the Millbrae Company is the managing partner. Reid is the President and General Partner of the Millbrae Company, King is the Executive Vice President and Chief Legal Officer, and Boyce is the Chief Operating Officer and Director.
According to the pleading, the primary investment focus of the Partnership was a joint venture relationship with New Dominion, LLC ("New Dominion"), an oil exploration company engaged in oil and gas exploration in central Oklahoma. The Amended Complaint asserts that the Partnership anticipated investing in three different activities, depending upon the timing of the receipt of the proceeds from the offering, including (a) the Southern Dome Field located in the Oklahoma City Field operated by New Dominion; and (b) the Paradigm Fund, a dewatering project in Pottawatomie County, Oklahoma, also operated by New Dominion.
All of the Plaintiffs are from Maryland and all but one continue to reside there. Plaintiff JFK Family Ltd. Partnership ("JFK Partnership") is a Maryland limited partnership. Plaintiff James Knott, Sr. is the President of the corporation which is the general partner of JFK Partnership. The Partnership's principal place of business in Maryland, where Knott Senior resides.
The other Plaintiffs are members of Knott Senior's family. His wife, Carroll Knott, his son, James Knott, Jr., and his daughter, Carroll Knott McGill, are all residents of Maryland. Shortly before the commencement of this action, Allison Knott moved from Maryland to New York City in May 2007.
The Partnership was formed under Delaware law, as was the Millbrae Company, the
Partnership's Managing Partner. However, both the Partnership and the Company are alleged to
have their principal places of business in Westchester County, New York. Reid and King are
claimed to be Westchester County residents. Defendant Boyce resides in Oklahoma.
B.The Substantive Allegations
The Amended Complaint contains Twelve Causes of Action.
In the First Cause of Action, Plaintiffs allege that, between October, 2005 and May, 2006, each of the Plaintiffs made investments in the Partnership which collectively total $19.5 million. Each of the investments was made pursuant to a Subscription Agreement, a Private Placement Memorandum, and a Limited Partnership Agreement (collectively the "contract documents"). The contract documents were executed by the Partnership and the Millbrae Company in New York. It is alleged that by virtue of their investments in the Partnership, Plaintiffs became investor partners, which entitled them to certain rights pursuant to the contract documents. [*4]
Plaintiffs allege that the contract documents promise that Millbrae Company will maintain a list of the names, addresses and telephone numbers of the investor partners and the amount of units owned by them (the "Participant List") and that the List would be available for view by any investor partner at reasonable times upon reasonable request. Plaintiffs assert that, under the documents, the Participant List was to be mailed to any investor partner within ten days of request and that request could be made for purposes of investor partnership voting rights under the Agreement and for the exercise of investor partner rights under state and federal law. Plaintiffs also aver that Millbrae Company promised to permit investor partners access to all books and records upon reasonable notice, though Plaintiffs acknowledge that Millbrae Company, as the Managing Partner, could refuse access to confidential information such as logs, well reports, and drilling data.
Plaintiffs assert that on or about July 25, 2006, their duly authorized representative, Ralph Lightner, sent an e-mail to Reid requesting information, including the Participant List. Boyce, allegedly in bad faith, refused to provide the List. On September 15, 2006, Lightner made another request, seeking to have the Participant List provided within ten days. On October 20, 2006, Knott signed a confidentiality agreement prepared by the Millbrae entities, which Boyce and Reid had demanded be signed as a condition of the release of confidential information, including the List. Nevertheless, and despite an alleged oral agreement to provide the List, the List was not provided.
Plaintiffs claim that the Millbrae entities materially breached the contract documents, deprived Plaintiffs of very significant rights, effectively froze them out and prevented them from effecting changes in management, such as changing the managing power and disapproving a sale of the core assets of the Partnership. According to Plaintiffs, they learned, in March 2007, that Defendants were negotiating to sell interests in certain oil fields to Constellation Energy, Inc. ("Constellation") interests that had been previously characterized as core assets of the Partnership. Plaintiffs made efforts to obtain information about this transaction but were unsuccessful and, due to the fact that they did not have access to the Participant List, Plaintiffs had no ability to have the sale disapproved. After the sale occurred, Plaintiffs again requested the Participant List, but were met with a request for a confidentiality agreement, which agreement would have modified the Partnership Agreement and contract documents. Plaintiffs refused to execute the agreement and the documents were not provided.
Plaintiffs claim that, by reason of the alleged conduct, they are entitled to a return of the money they paid into the Partnership and any profits due.
The Second Cause of Action alleges that the contract documents described the maximum number of partnership units as being 300 ($30,000,000), though Plaintiffs acknowledge that the documents provide that the maximum could be increased in the sole discretion of the Managing Partner, on written notice to the [*5]investors. Plaintiffs allege that, prior to the time that they signed the documents, the maximum number of units was increased to 650, with a potential capitalization of $650,000,000. Plaintiffs allege that, while they were making their investments, the maximum number of units was increased further, without their knowledge to 1150, permitting a potential capitalization of $115,000,000. They claim that the Partnership and Millbrae Company breached their agreements and acted wrongfully to dilute Plaintiffs' voting power. Plaintiffs seek return of their money and any profits due.
The Third Cause of Action asserts that Defendants breached their fiduciary duties to them by "interpret[ing] and contru[ing] the contract documents in bad faith, in an unreasonable and arbitrary manner, calculated frustrate plaintiffs' rights under the contract documents" by denying them access to the Participant List and the books and records of the Partnership and Millbrae Company (Amended Complaint at ¶¶ 90, 91). Again, Plaintiffs seek return of their investment and any profits due.
The Fourth Cause of Action alleges that by virtue of Defendants' wrongful conduct, Defendants have been unjustly enriched at the Plaintiffs' expense and it would be unconscionable to allow Defendants to retain the benefits conferred upon them. As such, Plaintiffs seek restitution of the money paid into the Partnership and any profits due.
The Fifth Cause of Action reasserts the previously dismissed Fourth Cause of Action for
breach of the covenant of good faith and fair dealing. The new claim alleges that
[a]lthough the contract documents are silent on the point, the parties would have
negotiated and agreed, had they thought to address the issue, that the partnership documents
should be interpreted and construed by the defendants in a fair and reasonable manner to give
effect to the reasonable expectations and spirit of the parties' agreement .... [and] that the
managing partner, Millbrae Company, would not erect unreasonable and unfair hurdles to the
plaintiffs' reasonable request for [the Participant List and Partnership's books and records]
(Amended Complaint at ¶¶ 102-104).
Plaintiffs allege that
the provisions of the Partnership Agreement that support these implied obligations are the
sections relating to the limited partners' access to the Participant List and other books and records
of the Partnership. Plaintiffs contend that Defendants breached the implied covenant of good
faith and fair dealing by their unfair, arbitrary and unreasonable construction and interpretation of
the contract documents which prevented Plaintiffs from receiving the fruits of the bargain.
Plaintiffs again seek restitution of their investment and any profits due.
In the Sixth Cause of Action, Plaintiffs sue in their derivative capacity on [*6]behalf of "themselves and the other limited partners for the benefit of ... the ... Partnership" (Amended Complaint at ¶ 119) and claim that Defendants breached the contract documents and their fiduciary duties by interpreting and applying the cost reimbursement provisions of the contract documents in such a way as to have charged the Partnership "twice for the same costs and expenses" (Amended Complaint at ¶ 135). Plaintiffs assert that they understood and/or interpreted the provisions in the contract documents concerning management and organization fees as covering Millbrae's internal expenses and a profit and that the expense reimbursement provisions were intended to cover incidental expenses paid on behalf of the Partnership as an administrative convenience. (Amended Complaint at ¶133). Plaintiffs allege that they have not made an effort to secure the initiation of this action by the general partner, Millbrae Company, because such an effort would be futile since the general partnerand its officers and directors sued in this action are the ones who committed the wrongful acts alleged in the Amended Complaint.
In the Seventh Cause of Action, Plaintiffs sue in their derivative capacity and allege that Defendants owed fiduciary duties to Plaintiffs which were allegedly breached by, inter alia, conflicts of interest, self-dealing, failure to disclose, and sales of assets to or by the Partnership on improper terms. Again, Plaintiffs seek the return of their investment and the profits due them as well as Defendants' disgorgement of any profits made by them or benefits accrued to them as a result of their breach of fiduciary duties.
In the Eighth and Ninth Causes of Action, Plaintiffs sue derivatively and assert claims against the Individual Defendants for their aiding and abetting and/or personal and active participation in the tortious conduct alleged elsewhere in the complaint based on the Individual Defendants' knowing participation, intentional inducement and aiding and abetting of the breaches of fiduciary duty engaged in by the Partnership and Millbrae Company. The Individual Defendants are alleged to have "authorized, directed, actively and personally participated in the decisions, judgments and wrongful tortious conduct that resulted in the breaches of fiduciary duty." Plaintiffs seek, on behalf of themselves and all the limited partners, money damages and/or restitution of the money invested in the Partnership and any profits due.
In the Tenth Cause of Action, Plaintiffs sue derivatively and assert that based on Defendants' acts involving a "high degree of moral turpitude, activated by malicious, evil and reprehensible motives or in such conscious disregard of the plaintiffs' rights that their behavior would be deemed willful and wonton dishonesty," Plaintiffs and all the limited partners are entitled to an award of punitive damages.
The Eleventh Cause of Action is for breach of contract based on the Defendants' alleged attempt to wrongfully terminate Plaintiffs' limited partnership interests on February 28, 2008, 20 days before Plaintiffs filed their Amended Complaint on March 19, 2008, which added derivative claims in addition to Plaintiffs' direct claims. Plaintiffs claim that based on the Defendants' breach of contract, breach of fiduciary [*7]duty, bad faith and unclean hands, Defendants "are estopped to terminate the plaintiffs' partnership interest as of February 28, 2008" (Amended Complaint at ¶ 198). Plaintiffs seek restitution of their investment and any profits due.
The Twelfth Cause of Action asserts a breach of the covenant of good faith and fair dealing
based on the Millbrae Defendants' alleged wrongful attempt to terminate Plaintiffs' limited
partnership interests. Plaintiffs seek restitution of their investment and any profits due.
DEFENDANTS' MOTION TO
DISMISS
A.Defendants' Contentions
Defendants seek to dismiss Plaintiffs' derivative claims, the Sixth through Tenth Causes of Action, on the ground that Plaintiffs are not qualified to serve in a fiduciary capacity due to conflicts of interest arising from their institution of a $20 million action against the Partnership. According to Defendants, even if Plaintiffs were adequate representatives on behalf of the Partnership, they lack standing to sue derivatively since they are not currently limited partners in the Partnership as the Managing Partner terminated their limited partnerships on February 28, 2008, 20 days before they filed their Amended Complaint.
With regard to the Plaintiffs' ability to stand in a fiduciary capacity, the Defendants argue that cases hold that "a plaintiff's direct claims create a conflict of interest that renders the plaintiff an inadequate derivative representative" (Defendants' Mem. of Law at 12). Further, Defendants state that the record makes clear that the Plaintiffs sole reason for pursuing this action derivatively was so that they could obtain " the scope of discovery that [they] seek' with respect to their personal claims" (id.) Citing to a number of cases, the Defendants argue that "[a]sserting derivative claims on behalf of the Partnership in order to gain leverage in personal claims against the Partnership renders [Plaintiffs] manifestly inadequate representatives" (id.) Defendants further point out that when Plaintiffs changed their claims to derivative ones, they did not change the self-interested remedy that they seek the return of their almost $20 million investment (as well as the other limited partners right to restitution), plus profits and punitive damages. Defendants contend that a $20 million payment to Plaintiffs can no way be viewed as benefitting the Partnership.
Defendants argue that, even if Plaintiffs could fairly represent the interests of the entire Partnership, they cannot sue in a derivative capacity since they were removed from the Partnership on February 28, 2008. Defendants also state that "[w]hile the Knotts anticipate this fatal flaw in their position by challenging their removal in the Eleventh and Twelfth Causes of Action, those claims have no merit ..." and likewise should be dismissed (id. at 13). [*8]
Defendants also attack the sufficiency of what is now the Sixth Cause of Action [FN2] because Plaintiffs' subjective belief that the Managing Partner should only be reimbursed for incidental costs flies in the face of the Partnership Agreement which Defendants contend entitles the Managing Partner to be reimbursed for all expenses (see Sections 7.1-7.3). Furthermore, Defendants maintain that, even if Plaintiffs could overcome the plain language of the Partnership Agreement, they still fail to set forth " when the breach occurred, what it consisted of, or how it occurred'" (id. at 14, quoting the January 23, 2008 Decision) as they "fail to identify a single instance when they claim that the Managing Partner was actually reimbursed improperly" (id.).
Defendants argue that Plaintiffs' Duty of Loyalty claims the Sixth [FN3] and Seventh [FN4]
Causes of Action are deficient as a matter of law because (1) Plaintiffs have not
alleged how the Managing Partner benefitted itself or its affiliates at the expense of the
Partnership; and (2) Plaintiffs have failed to satisfy the specificity requirements of CPLR 3016(b)
as, according to Defendants, the Amended Complaint contains conclusory allegations of conflicts
of interest which are insufficient to permit an inference that Defendants diverted Partnership
assets.
For example, Defendants contend that the allegations concerning the Managing Partner's affiliates' initial acquisition of interests in Paradigm and Southern Dome can only relate to a misappropriation of corporate opportunity claim and "the Knotts' failure to allege that the Partnership could have invested in lieu of the individuals or the Managing Partner's affiliates dooms their claim" (id. at 16). Defendants contend [*9]that these allegations further ignore the disclosures that were made in the contract documents concerning "the Managing Partner's affiliates' activities in the oil and gas marketplace, including previously acquired interests in Dome and Paradigm" which "necessarily circumscribe the scope of fiduciary duties that relate to the existence of separate interests" (id.). On the issue of the Managing Partner's affiliates' sales of their interests in Southern Dome and Paradigm at the time that the Partnership sold its interests, Defendants maintain that the claims fail as they do not plead facts that raise a reasonable inference that the compensation they received in the sale was at the expense of the Partnership. Defendants assert that Plaintiffs' claims regarding unspecified transactions between the Managing Partner's Affiliates and the Partnership are insufficient under CPLR 3016(b).
Defendants argue that the Eighth, Ninth and Tenth Causes must also fail because they are derivative in nature and suffer the same problems as the other derivative claims in this action. Furthermore, according to Defendants, these claims must be dismissed because (1) as this Court previously held in the January 23, 2008 Decision (at 22), the punitive damages claim (the Tenth Cause of Action) "possesses no viability absent its attachment to a substantive cause of action"; and (2) the claims of aiding and abetting and personal involvement in the alleged breaches of fiduciary duty fail to satisfy the particularity requirements of CPLR 3016(b).
Defendants attack the sufficiency of the allegations found in the Eleventh and Twelfth Causes of Action on two fronts. First, Defendants argue that Plaintiffs cannot rely on the prior alleged breaches of the contract documents as depriving the Managing Partner of asserting its right to terminate limited partners under the Partnership Agreement "for any reason it determines ... in its sole discretion" because (a) Plaintiffs failed to elect to terminate the contract on the grounds of a total breach and seek damages after they knew about the Partnership's alleged breaches set forth in the First and Second Causes of Action and, instead, chose to accept the Partnership distributions even after the filing of the action in June 2007; accordingly, Plaintiffs can only seek benefit of the bargain damages regarding partial breaches of the contract; and (b) Plaintiffs are not able to allege a total breach of the contract based on alleged breaches of provisions that "are only collateral to the primary goal of the partnership, which is to profit through the purchase and sale of interests in gas and oil properties" (Defendants' Mem. of Law at 20). As their second line of attack, Defendants argue that as a matter of law there can be no duty of good faith and fair dealing implied in this contract because (1) "there are no unanticipated developments or gaps to fill in the Agreement; Section 12.5(a) speaks for itself" (Defendants' Mem. of Law at 22); and (2) Plaintiffs have failed to cite to provisions in the contract documents that "support a finding that the parties would have agreed to prevent the Managing Partner from removing Investor Partners whose interests were adverse to those of the Partnership"; instead, Defendants argue that Section 12.5's purpose was to provide an efficient and [*10]litigation-free method of removing a limited partner.[FN5] Defendants argue that even if the duty of good faith and fair dealing were applicable, it has been satisfied because (1) "[t]he property due the Knotts has been tendered (albeit not accepted) ...." and (2) the Managing Partner has a good faith motive to have expelled Plaintiffs as limited partners because their $20 million lawsuit has put them at odds with the Partnership and Plaintiffs have either made false representations and warranties in the Subscription Agreement (the condition to entry in the Partnership) or in connection with this lawsuit.
Defendants finally argue that the claims in the Amended Complaint that merely add new
causes of action to the breaches of contract that are subject to the First and Second Causes of
Action breach of fiduciary duty, restitution, and breach of the duty of good faith and fair dealing
are legally insufficient. The breach of fiduciary duty claim is barred by Delaware law that holds
"contract law has primacy ... over fiduciary law,' and thus if the duty sought to be enforced
arises from the parties' contractual relationship, a contractual claim will preclude a fiduciary
claim'" (id. at 24). Plaintiffs' restitution claim fails, Defendants argue, because restitution
is a form of remedy not a cause of action and is only available in the event of a total breach
which is inapplicable here. Further, Defendants contend that if the claim were read generously to
assert a claim of unjust enrichment, that claim also fails because "[a] quasi-contract remedy like
unjust enrichment is inappropriate where an express, enforceable contract governs the subject
matter" (id.). And Defendants argue that the duty of good faith and fair dealing claim
fails based on the January 23, 2008 Decision (at 20) which held that "an independent cause of
action for breach of the implied covenant [of good faith and fair dealing] cannot be maintained
where the alleged breach is intrinsically tied to the damages allegedly resulting from a breach of
contract." In any event, Defendants posit that this claim as applied to the Individual defendants
fails because " [o]nly a party to a contract can breach the implied covenant of good faith and fair
dealing'" (Defendants' Mem. of Law at 25).
B.Plaintiffs' Contentions in Opposition
In opposition to Defendants' motion, Plaintiffs argue that Defendants' motion which attaches 18 exhibits and argues the operative facts rather than the sufficiency of Plaintiffs allegations is actually a more a motion for summary judgment than a motion to dismiss and is designed as a means of "short circuiting discovery and a resolution of the case ...." (Plaintiffs' Mem. of Law at 14). Plaintiffs also argue that Defendants are twisting CPLR 3211(a)(1) (dismissal based on documentary evidence) to suit their purposes. [*11]
With regard to Plaintiffs' standing to assert claims derivatively, Plaintiffs contend that it is premature for the Court to interpret the termination provision of the Partnership Agreement because "Plaintiffs have not had an opportunity to conduct discovery [FN6] on issues germaine to defendants right to terminate the plaintiffs under applicable case law" (Plaintiffs' Mem. of Law at 15). Plaintiffs further contend that Defendants have failed to establish that Plaintiffs' direct claims present a conflict of interest such that Plaintiffs cannot fairly represent the interests of the Partnership given that: (1) Plaintiffs hold a large financial stake in the Partnership ($19,500,000 of the total amount invested of $115,000,000); (2) "the gravamen of plaintiffs complaint is that the defendants, in breach of their fiduciary duties to the limited partners wrongfully diverted Partnership Fund assets into their own pockets"; and (3) the Amended Complaint does not assert legal theories that would benefit the Plaintiffs at the expense of the other limited partners;[FN7] rather, by seeking to obtain the Participant List and the books and records, Plaintiffs are seeking to include the other limited partners "in determining what actions to take in response to the defendants breach of their fiduciary duties" (id. at 18).
Alternatively, in the event that the Court delves into the interpretation of the termination clause, Plaintiffs maintain that the Court should hold that based on the allegations set forth in the Amended Complaint, because the Defendants "were in material breach of the Partnership Agreement at the time they sought to exercise the [termination] provision", Defendants should be precluded from relying on the termination provision as a basis for denying Plaintiffs' standing to pursue the derivative claims (id. at 19). Plaintiffs contend that Defendants are incorrect that Plaintiffs elected to continue to perform under the contract documents based on their acceptance of distributions after the filing of the complaint since the only performance required by Plaintiffs under the contract documents was their investments totaling $19.5 million, and the distributions received by Plaintiffs will act to reduce the ultimate amount required for restitution (id. at 19-20).
Plaintiffs further argue that Defendants cannot frustrate Plaintiffs' ability to pursue this action derivatively by "malevolently" exercising a contract right to deprive the [*12]other party of the benefits of the contract (id. at 20). Plaintiffs maintain that they have adequately alleged a breach of the covenant of good faith and fair dealing by setting forth (1) a specific implied contractual obligation, (2) Defendants' breach of that obligation, and (3) resultant damages. Plaintiffs claim that no reasonable investor would have understood that the termination provision could be used to terminate a limited partner who (1) requested copies of the Participant List, (2) requested access to the books and records, and (3) raised serious questions concerning the self-dealing of the Managing Partner and its officers and directors. Thus, according to Plaintiffs, the Court should reject Defendants' interpretation which would have the effect of holding that a Managing Partner may insulate himself from breaches of fiduciary duty and other wrongdoing by terminating the limited partner (id. at 23).
With regard to their claim of unjust enrichment (Fourth Cause of Action), Plaintiffs assert that it is indeed common practice, whenever a benefit has been conferred on defendants, for plaintiffs to plead both contract and quasi contract claims, even though they may be inconsistent (id. at 23-24).
To further support their breach of fiduciary duty claims, Plaintiffs submit two affidavits and an affirmation from their counsel. The affirmation of Plaintiffs' counsel, Thomas A. Leghorn, Esq. ("Leghorn Aff."), first asserts that given Defendants' denial of access to Plaintiffs of critical books and records, should the Court deem the allegations of the complaint to be insufficient, the Court should grant discovery pursuant to CPLR 3211(d) and allow Plaintiffs access to the Partnership's books and records.[FN8] Plaintiffs further contend that the affidavits of Fred Buxton, Vice President of Land and Legal for New Dominion LLC (NDL) (the company that operated the oil and gas wells for the Partnership as well as other funds and entities controlled by Defendants) and Ralph Lightner, Chief Financial Officer of the James F. Knott Realty Group, show that the Partnership was shorted in excess of $4.4 million, whereas Reid received over $5.5 million too much. Plaintiffs contend that this evidence "cobbled together" from public documents suggests "a credible basis from which this Court can infer that mismanagement or wrongdoing may have occurred" (Leghorn Aff. at ¶ 18).
Plaintiffs assert that, with regard to their claims against the Individual Defendants, as they are not parties to the contract documents, the jurisdiction provision [*13]in the contract documents does not apply and New York law [FN9] should apply to the claims alleging breach of fiduciary duties. Plaintiffs maintain that when the allegations are viewed in the context of the authorities Plaintiffs cite for causes of action for Aiding and Abetting Breach of Fiduciary Duty and Actively Participating in Tortious Conduct, Plaintiffs have stated viable claims against the officers and directors of Millbrae Company.
Finally, Plaintiffs contend that, in light of this Court's January 23, 2008 Decision and the
case law they have provided, they have set forth a viable claim for breach of fiduciary duty.
C.Defendants' Reply
In addition to repeating many of the arguments set forth in their moving papers, Defendants argue that Plaintiffs' failure to address some of the factual arguments set forth in Defendants' moving papers means that the claims should be dismissed as Plaintiffs have abandoned these claims.[FN10] With regard to Plaintiffs' standing to represent the Partnership derivatively, Defendants argue that Plaintiffs' claims which seek over $20 million in direct damages and at least $10 million in punitive damages necessarily reduce the Partnership's value, thereby "harming every investor pro rata to the extent of his or her investment" (Reply Mem. of Law at 4). Defendants also dispute, on a factual basis, what they contend is the Plaintiffs' remaining contention of misallocation of the Constellation sale proceeds set forth in their Seventh Cause of Action by refuting the analysis underlying the calculations performed by Fred Buxton and Ralph Lightner in their Affidavits, which support Plaintiffs' position that $4.4 in proceeds were diverted from the Partnership.[FN11] Defendants also dispute Plaintiffs' claim that they need access to the corporate books and records in order to plead with more specificity their claims of diversion/misallocation of Partnership assets since, according to Defendants, Plaintiffs have not met the standard set forth in Seinfeld v [*14]Verizon Communications, Inc. (909 A2d 117 [Del Sup Ct 2006]), namely, that shareholders must establish a credible basis for wrongdoing before access to books and records should be granted.
Defendants contend that whether or not Plaintiffs' retention of distributions after the complaint was filed constitutes Plaintiffs' performance under the contract documents such that they are precluded from declaring a total breach, is irrelevant because the " acceptance of performance'" [FN12] likewise precludes a party from declaring a total breach. Defendants also argue that "there is a fundamental inconsistency in the Knotts' position. On the one hand, they seek a ruling here that they are in fact still members of the Partnership. Yet, on the other hand, they simultaneously seek to avoid the Partnership Agreement's terms by declaring a total breach. The Knotts cannot have it both ways" (Reply Mem. of Law at 10).
With regard to the good faith and fair dealing claim regarding the Managing Partner's termination of Plaintiffs from the Partnership, Defendants assert that Plaintiffs inappropriately rely on a New York case to suggest that they have sufficiently alleged this claim by asserting that the "Managing Partner's real' motive was to avoid its own liability ...." (id. at 11). Instead, Defendants argue the claim fails under Delaware Law not only because such claims are strictly limited,[FN13] but also because the Partnership Agreement allows the Managing Partner to remove an investor for "any reason," with the only limitation being that it be done in good faith (i.e., grounded in fact, not irrational and related to the Partnership's affairs). Defendants contend that the provision is meant to allow for a speedy method for dissociation of investors and good faith is established in this case given Plaintiffs' suit against the Partnership for $20 million (id. at 12, citing Arvida/JMB Partners, L.P. v Vanderbilt Income and Growth Assoc., 1997 WL 294440 [Del Ch Ct 1997), lv dismissed 700 A2d 735 [Del Sup Ct 1997]). Defendants conclude that "[i]n light of these good faith bases for removing the Knotts, the fact that they allege that the Managing Partner had other motives for removing them is beside the point. Their claim should be dismissed" (Reply Mem. of Law at 13).
With regard to the Third Fourth and Fifth Causes of Action which rely on the access to records and notice of capitalization allegations underlying the First and Second Causes of Action, Defendants contend Plaintiffs have abandoned their breach [*15]of fiduciary duty and implied duty of good faith arguments by failing to offer any response to Defendants' arguments in their opposition. Further, Defendants point out that, while the treatise Plaintiffs cite expressly recognizes the ability to plead both breach of contract and unjust enrichment, recovery on both may not be had.
Finally, with regard to the Eighth, Ninth and Tenth Causes of Action, Defendants contend
that these claims should also be rejected the Eighth and Ninth due to their derivative nature and
lack of particularity and the Tenth due to this Court's January 23, 2008 Decision which dismissed
the prior punitive damage claim as insufficient.
THE LEGAL STANDARDS
The legal standards to be applied in evaluating a motion to dismiss are well-settled. In determining whether a complaint is sufficient to withstand a motion to dismiss pursuant to CPLR 3211(a)(7), the sole criterion is whether the pleading states a cause of action (Cooper v 620 Properties Associates, 242 AD2d 359 [2d Dept 1997], citing Weiss v. Cuddy & Feder, 200 AD2d 665 [2d Dept 1994]). If from the four corners of the complaint factual allegations are discerned which, taken together, manifest any cause of action cognizable at law, a motion to dismiss will fail (511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 152 [2002]; Cooper, supra, 242 AD2d at 360). The court's function is to " accept ... each and every allegation forwarded by the plaintiff without expressing any opinion as to the plaintiff's ability ultimately to establish the truth of these averments before the trier of the facts'" (id., quoting 219 Broadway Corp. v Alexander's, Inc., 46 NY2d 506, 509 [1979]). The pleading is to be liberally construed and the pleader afforded the benefit of every possible favorable inference (511 West 232nd Owners Corp., supra).
Where the plaintiff submits evidentiary material, the Court is required to determine whether the proponent of the pleading has a cause of action, not whether he or she has stated one (Leon v Martinez, 84 NY2d 83 [1994]; Simmons v Edelstein, 32 AD3d 464 [2d Dept 2006]; Hartman v Morganstern, 28 AD3d 423 [2d Dept 2006]; Meyer v Guinta, 262 AD2d 463 [2d Dept 1999]). On the other hand, a plaintiff may rest upon the matter asserted within the four corners of the complaint and need not make an evidentiary showing by submitting affidavits in support of the complaint. A plaintiff is at liberty to stand on the pleading alone and, if the allegations are sufficient to state all of the necessary elements of a cognizable cause of action, will not be penalized for not making an evidentiary showing in support of the complaint (Kemp v Magida, 37 AD3d 763 [2d Dept 2007]; see also Rovello v Orofino Realty Co., 40 NY2d 633, 635-636 [1976]).
Affidavits may be used to preserve inartfully pleaded, but potentially meritorious claims; however, absent conversion of the motion to a motion for summary [*16]judgment, affidavits are not to be examined in order to determine whether there is evidentiary support for the pleading (Rovello, supra; Pace v Perk, 81 AD2d 444, 449-450 [2d Dept 1981]; see Kemp, supra; Tsimerman v Janoff, 40 AD3d 242 [1st Dept 2007]). Affidavits may be properly considered where they conclusively establish that the plaintiff has no cause of action (Taylor v Pulvers, Pulvers, Thompson & Kuttner, P.C., 1 AD3d 128 [1st Dept 2003]; M & L Provisions, Inc. v Dominick's Italian Delights, Inc., 141 AD2d 616 [2d Dept 1988]; Fields v Leeponis, 95 AD2d 822 [2d Dept 1983]).
To succeed on a motion to dismiss pursuant to CPLR 3211(a)(1), the documentary evidence that forms the basis of the defense must be such that it resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff's claim (AG Capital Funding Partners, L.P. v State Street Bank and Trust Co., 5 NY3d 582, 590-591 [2005]; 511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 152 [2002]; Cohen v Nassau Educators Fed. Credit Union, 37 AD3d 751 [2d Dept 2007]; Sheridan v Town of Orangetown, 21 AD3d 365 [2d Dept 2005]; Teitler v Max J. Pollack & Sons, 288 AD2d 302 [2d Dept 2001]; see Held v Kaufman, 91 NY2d 425, 430-431 [1998]; Leon v Martinez, 84 NY2d 83, 88 [1994]; Museum Trading Co. v Bantry, 281 AD2d 524 [2d Dept 2001]; Jaslow v Pep Boys Manny, Moe & Jack, 279 AD2d 611 [2d Dept 2001]; Brunot v Joe Eisenberger & Co., 266 AD2d 421 [2d Dept 1999]) .
If the documentary evidence disproves an essential allegation of the complaint, dismissal is warranted even if the allegations, standing alone, could withstand a motion to dismiss for failure to state a cause of action (Peter F. Gaito Architecture, LLC v Simone Dev. Corp., 46 AD3d 530 [2d Dept 2007]).
Because the parties agreed that the Partnership Agreement would be governed by Delaware
law, the substantive law of that forum must be applied to determine whether Plaintiffs have
stated a cognizable claim (See, e.g., Zion v Kurtz, 50 NY2d 92 [1980]; Millennium
Falcon Corp.v WRD Sales, Inc., 46 AD3d 862 [2d Dept 2007]; Capital Z Fin. Serv. Fund II, L.P. v Health
Net, Inc., 43 AD3d 100 [1st Dept 2007]).
PLAINTIFFS' DERIVATIVE STANDING (SIXTH THROUGH TENTH CAUSES OF ACTION)
In the January 23, 2008 Decision, this Court dismissed Plaintiffs' Third Cause of Action (Breach of Contract/Breach of Fiduciary Duty arising from Defendants' alleged bad faith in interpreting the contract documents which caused a diversion of Partnership funds to the Millbrae Defendants based on their calculation and allocation of organization and expense reimbursement and management and expense reimbursement), Fifth Cause of Action (Breach of Fiduciary Duty based on claims of improper self-dealing and conflicts of interests which had the effect of diverting monies [*17]otherwise belonging to the Partnership), and Sixth and Seventh Causes of Action (brought against the Individual Defendants for aiding and abetting the aforementioned Breaches of Fiduciary Duty) because these claims were derivative in nature and Plaintiffs had "not alleged compliance with the Delaware requisites for a derivative action" (January 23, 2008 Decision at 19). In so holding, this Court applied the standard set forth in Delaware case law for determining whether a cause of action is direct or derivative: Under Delaware law, limited partners in a limited partnership have no greater rights to present claims belonging to the partnership than shareholders do to present claims belonging to corporations. Litman v Prudential-Bache Properties, Inc., 611 A.2d 12, 15 (Del. Ch. Ct. 1992). In order to decide whether a shareholder/limited partner may pursue a director, the Court must evaluate who suffered the alleged harm the entity or the suing investor and who would receive the benefit of any recovery or other remedy. Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. Sup. Ct. 2004); Captial Z Financial Services Fund II, L.P. v Health Net, Inc., 43 AD3d 100, 107-109 (1st Dept. 2007). A direct action may be brought in the name and right of a holder to redress an injury sustained by, or enforce a duty owed to, the holder. However, if the wrong is to the entity, it must be pursued in a derivative action ... The investor's claimed direct injury must be independent of any alleged injury to the entity and the investor must show that the duty breached was one owed to the investor and that the investor can prevail without having to first show an injury to the entity ....
******** Here, the gist of Plaintiffs' allegations is that the Millbrae Defendants paid themselves improper fees and expenses, thus taking money out of the Partnership. The injury from this alleged conduct was suffered by the Partnership ... [and] would damage Plaintiffs only to the extent of their proportionate interest in the Partnership (January 23, 2008 Decision at 18).
It is Defendants' contention, which is supported by a transcript attached as Exhibit 1 to the Affirmation of Defendants' Counsel, Robert Trenchard, Esq. ("Trenchard Aff."), that Plaintiffs amended their complaint to assert derivative claims based on the Court's statements made at the Preliminary Conference held in this action on February 8, 2008 during a discussion as to the scope of discovery. The Court indicated that discovery would be circumscribed given that only two claims for breach of [*18]contract (denial of access to the Participant List and dilution of Plaintiffs' membership interest) remained in the action as a result of the January 23, 2008 Decision. In response to the Court's statement concerning the relatively narrow scope of discovery, Plaintiffs' counsel stated I think based on what you're saying, I will recommend to my client that we consider a derivative action, as you wrote about in your order, so we could get the scope of discovery that we seek here (Transcript of Conference held on February 8, 2008 at 30, Trenchard Aff., Ex. 1).
Defendants contend this statement is an admission by Plaintiffs that the derivative claims are merely asserted as a pretense to push the boundaries of discovery and obtaining leverage in this action (see Defendants' Mem. of Law at 12). Defendants contend that the case law is clear that if a Plaintiff pursues direct and derivative causes of action, that Plaintiff is not a proper representative in a derivative action as he/she has conflicts of interest (e.g. economic antagonism) with the partnership and the other partners (id. at 11). Plaintiffs rejoin that there are no conflicts (Plaintiffs' Mem. of Law at 17-18).
Plaintiffs' standing to sue the derivative causes of action the Sixth through Tenth Causes of Action is governed by Delaware law since it is the state under which the limited partnership was created. "Under Delaware law, a plaintiff in a shareholder derivative action, to have standing, must show both shareholder status at the time of the complained of transaction and qualification to serve in a fiduciary capacity as a representative of the shareholder class" (Matter of CPF Acquisition Co. v CPF Acquisition Co., 255 AD2d 200 [1st Dept 1998], citing Youngman v Tahmoush, 457 A2d 376, 379 [Del Ch Ct 1983]). The qualification aspect is dependent upon the plaintiff's ability "to serve in a fiduciary capacity as a representative of a class, whose interest is dependent upon the representative's adequate and fair prosecution" (Youngman, supra, 457A2d at 379). Delaware Chancery Court Rule 23.1 controls the adequacy of representation in derivative actions and requires "that a court consider any extrinsic factors which might indicate that a representative might disregard the interests of the other members of the class" (Emerald Partners v Berlin, 564 A2d 670, 673 [Del Ch Ct 1989]).
The Delaware Supreme Court in Youngman, supra, set forth the
considerations as follows:
Among the elements which the courts have evaluated in considering whether the
derivative plaintiff meets Rule 23.1's representation requirements are: economic antagonisms
between representative and class; the remedy sought by the plaintiff in the derivative action;
indications that the named [*19]plaintiff was not the driving force
behind the litigation; plaintiff's unfamiliarity with the litigation; other litigation pending between
the plaintiff and defendants; the relative magnitude of plaintiff's personal interests as compared
to his interest in the derivative action itself; plaintiff's vindictiveness toward defendants and,
finally, the degree of support plaintiff was receiving from the shareholders he purported to
represent (Youngman, 457 A2d at 379-380).
The Court in
Youngman made clear, however, that "[t]he fact that the plaintiff may have interests
which go beyond the interests of the class, but are at least co-extensive with the class interest,
will not defeat his serving as a representative of the class" (id. at 380). It is defendant's
burden to "show that a serious conflict of interest exists, by virtue of one factor or a combination
of factors, and that the plaintiff cannot be expected to act in the interests of others because doing
so would harm his other interests. The defendant, therefore, must show a substantial likelihood
that the derivative action is not being used as a device for the benefit of all the stockholders"
(id. at 381).
Defendants cite to several cases which hold that "[a]ny individual claims raised by a
shareholder present an impermissible conflict of interest" (Tuscano v Tusano, 403 F
Supp 2d 214, 223 [ED NY 2005]) such "that he or she cannot adequately represent other
shareholders for purposes of [Fed. R. Civ P.] Rule 23.1" (Wall St. Sys., Inc. v Lemence,
2005 WL 292744 [SD NY 2005]; see also Pacemaker Plastics Co. v AFM Corp., 139 F
Supp 2d 851 [ND Ohio 2001]; Scopas Tech. v Lord, 1984 WL 8266 [Del Ch Ct 1984]).
One court explained the rationale in the context of a class action lawsuit as follows:
The plaintiffs' dual representative status prevents an inherent conflict of interest ....
The conflict arises because the derivative action seeks to enhance the value of the corporation
generally by seeking recovery for the corporation on its own behalf. Conversely, plaintiffs in the
class action, some of whom are former shareholders, seek a recovery against the
corporation. Naturally, plaintiffs will pursue more vigorously the claim, individual or derivative,
which will bring them the greatest economic benefit. Vigorous presentation of one claim will
suffer. Therefore, the same plaintiffs cannot fairly and adequately protect the interests of
both the class and derivative action shareholders (Keyser v Commonwealth Nat. Fin.
Corp., 120 FRD 489, 490 [MD Pa 1988]).
While there is some
authority to the contrary (see, e.g., Keyser, supra; Dollens v Zionts, 2001 WL
1543524 at 3 [ND Ill 2001]; First American Bank and Trust by Levitt v Frogel, [*20]726 F Supp 1292 [SD Fla 1989]; Grace v Rosenstock,
1986 WL 2709 [ED NY 1986]; Bertozzi v King Louie Intern., Inc., 420 F Supp 1166 [D
RI 1976]), the Court agrees with the rationale found in the majority of decisions addressing this
issue a plaintiff who asserts substantial direct (whether as a representative as a class or
individually) as well as derivative claims cannot adequately represent the interests of the
corporation/limited partnership for purposes of the derivative action (see, e.g., Wall
Street Systems, Inc., supra; Pacemaker Plastics Co., supra; Scopas Techonolgy,
supra; see also St. Clair Shores General Empl. Retirement Sys. v Eibeler, 2006 WL
2849783 [SDNY 2006]; Ryan v Aetna Life Ins. Co., 765 F Supp 133 [SD NY 1991]).
Perhaps most importantly, this is the rule in Delaware and it is Delaware law that applies
here.[FN14]
The Court cannot ignore the practical realities of this litigation. Plaintiffs have always sought, and continue to seek, the return of their investment, in cash, together with the profits thereon, also in cash. The contract documents do not create a right in the investor partners withdraw, much less to demand the return of their investments in cash. The Partnership Agreement actually prohibits a voluntary withdrawal of an investor partner (see Affirmation of Thomas A. Leghorn, dated May16, 2008, "Leghorn Compel Aff.", Ex. G at ¶12.4). While one might suppose that Plaintiffs would have been pleased at Defendants' attempt to terminate Plaintiffs' participation in the Partnership, with concomitant return of capital to Plaintiffs, as that is what Plaintiffs seek in this action, the reality is that Plaintiffs object to how Defendants would, if left to their own devices, implement the termination provision. Defendants read that provision as entitling them to return only the capital account of the terminated investor and giving the Partnership the option as to whether the distribution is to be in kind or in cash (see Leghorn Compel Aff., Ex. G at §`1.5).
Plaintiffs can decide for themselves what remedy to seek in connection with their direct claims. But curiously, in connection with their derivative claims, the [*21]remedy that they seek is a remedy asserted on behalf of all investor partners, rather than the Partnership itself. Rather than asserting a classical demand for recovery on behalf of the Partnership, one that would end up in the Partnership's coffers, Plaintiffs request restitution of all moneys paid into the Partnership by all limited partners and any profits due thereon (see, e.g., Amended Complaint at ¶¶137, 167, 176, 182). This would diminish the Partnership assets, not augment them. While Plaintiffs desire this result for themselves, and they believe that they might be the largest investors (Plaintiff Mem. of Law at 17), there is no basis upon which the Court could conclude that permitting all of the investor partners to obtain their money out in cash (or even, otherwise) would benefit the Partnership. Rather, it would seem that likely that having to come up with cash, or sell assets, under the gun of a judgment requiring liquidation of all of the interests of all limited partners, would lead to a fire sale and a diminishment of the value of the Partnership. Moreover, a derivative action on behalf of the Partnership would necessarily have to be presented on the Partnership's behalf, not just on behalf of the class of limited partners.
While it is true that Plaintiffs have suggested, in some instances, an alternative remedy in the form of "money damages" or in the form of disgorgement of wrongfully obtained monies by Defendants (see Amended Complaint, ¶¶176-177, 182-183), this only heightens, not lessens, the conflict. Plaintiffs have incentive to push for the restitution remedy, rather than the other remedies. Particularly if the Partnership could not timely raise enough money to promptly return all monies found due to all investor partners, Plaintiffs would clearly have an incentive to make sure that their money was returned to them first; after all, that is precisely the result that they have sought since the institution of this action. Moreover, the provision prohibiting the investor partners from voluntarily withdrawing may tend to protect investor partners (as well as the Partnership) from having the finances of the Partnership disrupted by a decision from another investor partner to pull out, particularly an investor partner with a large stake, and the existence of this provision, at least potentially, may have been relied upon by investors in making their investments. The invocation of the restitution remedy sought by Plaintiffs could work to the disadvantage of both the Partnership and the investor partners.
Here, Defendants have shown a substantial likelihood that the derivative action is not being used as a device for the benefit of the Partnership. As a result, Plaintiffs cannot adequately represent the Partnership's interests in this action. Accordingly, Plaintiffs' Sixth, Seventh, Eighth, Ninth and Tenth Causes of Action, shall be dismissed as pleaded.[FN15]
The Court notes, however, that, in these Causes of Action, Plaintiffs have conflated the interests of the limited partners as a group with the interests of the [*22]Partnership, as an entity. A derivative action is the vehicle by which investors may maintain an action, on behalf of the entity, for the benefit of the entity, not a vehicle by which disgruntled investors may band together for the purposes of obtaining a recovery for themselves that is the stuff of class actions. In reality, Plaintiffs are really trying to represent all limited partners, not the Partnership itself. Approaching this as a class action, rather than as a derivative suit, has the advantage, as well, of assuring that, if the matter proceeds as a class action, notice (in some fashion) will be given to all class members (see CPLR 904) and that in the event of a settlement, all class members will be entitled to notice and judicial approval (see CPLR 908).
For this reason, the Court, though reluctant to have another round of pleading and motion
practice following pleading, will make its dismissal of the Sixth through Tenth Causes of Action
without prejudice to a re-pleading of direct claims, provided, however, that any re-pleading shall
be limited by the parameters set in the January 23, 2008 Decision and by this Decision and Order.
PLAINTIFFS' CLAIMS OF BREACHES OF FIDUCIARY DUTY
AND AIDING AND ABETTING/PERSONAL PARTICIPATION
IN TORTIOUS CONDUCT (THIRD, EIGHTH AND NINTH CAUSES OF ACTION)
In their Third Cause of Action, Plaintiffs claim that Defendants breached their fiduciary duty based on Defendants' "bad faith" in interpreting and construing the provisions of the contract documents pertaining to the right of Plaintiffs to obtain a list of the unit holders (limited partners) and their respective shares in Partnership, as well as those provisions pertaining to Plaintiffs' right to gain access to the books and records of the Partnership and MIllbrae Company. Plaintiffs contend that Defendants' actions were "calculated to frustrate plaintiffs' rights under the contract documents" (Amended Complaint ¶¶ 90, 91). Plaintiffs claim that Defendants' breach of fiduciary duty caused Plaintiffs to be unable to exercise their contract rights [FN16] which caused them damage. For these breaches of fiduciary duty, Plaintiffs seek "restitution of the money that they have paid into the Partnership Fund and any profit properly accrued to them under statutory authority and/or principles of the common law arising out of the operation of their investment in the Partnership Fund" (id. at ¶ 93). [*23]
In their Eighth and Ninth Causes of Action,[FN17] Plaintiffs seek to hold the Individual Defendants, as officers, directorsand general partners of the Partnership and the Millbrae Company, individually liable for the wrongful conduct of the Partnership and the Millbrae Company. They argue that the Individual Defendants may be held liable for aiding and abetting the breach of fiduciary duty by the Partnership and the Managing Partner.
Defendants argue that the Third Cause of Action should be dismissed because it is based on the same breach of contract allegations found in the First and Second Causes of Action and, under Delaware Law, "if the duty sought to be enforced arises from the parties contractual relationship, a contractual claim will preclude a fiduciary claim" (Defendants' Memorandum of Law at 24). Plaintiffs, relying on Chief Judge Cardozo's statement in Meinhart v Salmon (249 NY 458 [1928]) that a partner owes his co-partner a duty of "the finest loyalty ... not honesty alone, but the punctilio of an honor ....", argue that Defendants, who were in complete control of the Partnership, "breached their fiduciary duties to the plaintiffs by engaging in self interested judgments, acted in bad faith, failed to act honestly, with integrity and unconditional loyalty to the plaintiffs in interpreting and construing the contract documents" to stymie Plaintiffs' access to the Partnership List and the Partnership's books and records (Plaintiffs' Mem. of Law at 2).
The Court agrees with Defendants that Delaware Law applies to Plaintiffs' claims of breach of fiduciary duty because it is "the laws of the jurisdiction under which a foreign limited partnership is organized ... [that] govern its organization and internal affairs and the liability of its limited partners" (New York Partnership Law § 121-901; Diamond v Oreamuno, 24 NY2d 494, 503-504 [1969]; Sokol v Ventures Educ. Sys. Corp., 10 Misc 3d 1055(a), 2005 NY Slip Op 51963 (U) [Sup Ct NY County 2005]).[FN18]
Under Delaware law, "[a] general partner [or managing partner] owes a fiduciary duty to its partners" (KE Prop. Mgt. Inc. v 275 Mgt. Corp., 1993 WL 285900 at * 8 [Del Ch Ct 1993]; Riviera Congress Assoc. v Yassky, 18 NY2d 540, 547 [1966]; Lightyger v Franchard Corp., 18 NY2d 528, 536-537 [1966]; Friedman v Dalmazio, 228 AD2d 549, 550 [2d Dept 1996], lv denied 88 NY2d 815 [1996]). And "it is well established that one who knowingly participates with a fiduciary in a breach of trust renders himself liable to the injured beneficiary" (Solash v Telex Corp., 1988 WL 3587 at * 12 [Del Ch Ct 1988]; see also Talansky v Schulman, 2 AD3d 355, 359 [1st Dept [*24]2003]; Fallon v Wall Street Clearing Co., 182 AD2d 245, 251 [1st Dept 1992]). This includes an officer of a corporation who knowingly participates in a breach of the corporation's fiduciary duties (Talansky, 2 AD3d at 360; In re USA Cafes, L.P. Litigation, 600 A2d 43, 49 [Del Ch Ct 1991], lv denied 602 A2d 1082 [Del Sup Ct 1991] [Delaware Chancery Court holds that a director of a General Partner could be held personally liable for breach of fiduciary duty to the limited partners where director was alleged to have used his control over the partnership's property to advantage director at the expense of the partnership]).
"In order to establish a breach of fiduciary duty, a plaintiff must prove the existence of a fiduciary relationship, misconduct by the defendant, and damages that were directly caused by the defendant's misconduct" (Kurtzman v Bergstol, 40 AD3d 588 [2d Dept 2007]; accord, York Lingings v Roach, 1999 WL 608850 [Del Ch Ct 1999]). To state a claim for aiding and abetting a breach of fiduciary duty, a plaintiff must allege facts demonstrating: (1) the existence of a fiduciary relationship; (2) breach of that relationship; (3) knowing participation in the breach by a defendant who is not a fiduciary; and (4) damages proximately caused by the breach (In re General Motors (Hughes) Shareholder Litig., 2005 WL 1089021 at *23 [Del Ch Ct 2005], affd 897 A2d 162 [Del Sup Ct 2005]).[FN19]
Defendants contend that this claim should be dismissed as duplicative of the breach of contract cause of action. There are several Delaware Chancery Court decisions which hold that where a contract claim addresses the alleged wrongdoing by the Board, any fiduciary duty claim arising out of the same conduct is superfluous (Gale v Bershad, 1998 WL 118022 *5 [Del Ch Ct 1998]). To allow a fiduciary duty claim to exist in parallel with an implied contract claim would undermine the primacy of contract law over fiduciary law in matters involving essentially contractual rights and obligations (id. at *5; Blue Chip Cap. Fund II Ltd. Partnership v Turbergen, 906 A2d 827, 832 [Del Ch Ct 2006]; see also Solow v Aspect Resources, LLC, 2004 WL 2694916 [Del Ch Ct 2004];[FN20] Madison Realty Partners 7, LLC v Ag ISA, LLC, 2001 WL 40268 at *6 [Del Ch [*25]Ct 2001]).
However, the law in Delaware makes clear that it is sometimes possible for a complaint to sufficiently allege a breach of fiduciary duty claim based on a partner's bad faith actions that also constitute breach of the underlying Partnership Agreement. There is authority to support Plaintiffs' breach of fiduciary duty claim against Defendants based on their alleged bad faith interpretation of the contract documents in such a way as to maintain their control in the Partnership by (1) thwarting Plaintiffs' ability to contact the other investor partners so that they could collectively enforce their rights under the contract documents to oust the Millbrae Company as Managing Partner and also vote down the sale of what they claim were substantially all of the assets of the Partnership to Constellation in March 2007, and (2) attempting to terminate Plaintiffs as limited partners in February 2008 given the threat they posed to their control through the institution of the present lawsuit.
In RJ Assoc., Inc. v Health Payors' Organization Ltd. Partnership, HPA, Inc., 1999 WL 550350 [Del Ch Ct 1999]), plaintiff RJA, a limited partner, sued the general partner and the other limited partner of the partnership, claiming that defendants breached their contractual and fiduciary duties to plaintiff by making improper deductions for certain expenses from the plaintiff's partnership distributions. Denying defendants' motion to dismiss, the Delaware Chancery Court held plaintiff had stated claims for relief for breach of contract and for breach of the implied duty to act in good faith and fair dealing against both the general partner and the other limited partner.[FN21] With regard to the breach of fiduciary duty claim, the Court noted that the Partnership Agreement incorporated the traditional fiduciary duties recognized under Delaware through its provision requiring the managing partner to "conduct and manage the affairs for the Partnership in a prudent, businesslike and lawful manner," which plaintiff contended defendants had breached by failing to adhere to the contract's requirements. The Court disagreed with defendants' argument that the fiduciary duty [*26]claim was duplicative of the breach of contract claim, holding that "[c]onduct by an entity that occupies a fiduciary position ... may form the basis of both a contract and a breach of fiduciary duty claim" (RJ Assoc., Inc., 1999 WL 550350 at * 10; see also Cantor Fitzgerald, L.P. v Cantor, 724 A2d 571 [Del Ch Ct 1998]; Universal Studios, Inc. v Viacom Inc., 705 A2d 579 [Del Ch Ct 1997]). With regard to the liability of the limited partner for breach of fiduciary duty, the Court found that because the partnership agreement did not modify or preempt the fiduciary duties owed by the limited partners to a partnership,[FN22] section 1521 of the Delaware Uniform Partnership Law [FN23] controlled the extent of the limited partner's fiduciary duties. The Court found that plaintiff had sufficiently alleged breach of fiduciary duty against the limited partner based on claims that the limited partner, among other things, (1) improperly amended the Partnership Agreement formula so as to no longer distribute gross cash receipts as the Partnership Agreement prescribed, (2) paid excessive and unwarranted access fees to its affiliate, (3) established a competitive business that improperly solicited the Partnership's medical providers.
In Maillet v Frontpoint Partners, L.L.C. (2003 WL 21355218 [SD NY 2003]), a federal district court, applying Delaware law, denied defendants' motion to dismiss plaintiffs' complaint alleging tortious interference with contractual relations, breach of fiduciary duty and tortious interference with a fiduciary duty. Like the defendants in RJ Assoc., the defendants in Maillet argued that the breach of fiduciary duty claim should be dismissed under Delaware law because it was redundant of the breach of contract claim and was "based on the same set of facts as those that support the contract claim" (id. at * 3). The Court disagreed, stating: the partners of FFP owe each other a fiduciary duty. Defendants' conduct, therefore, may form the basis of both a breach of fiduciary duty and a contract claim. In any event, the contract claim is directed solely at the FFP, while the fiduciary duty claims are directed at the individual defendants. As the claims are directed at different defendants, on this basis as well there is no redundancy between the claims ... [and] the breach of fiduciary duty claim is not duplicative or redundant of the contract claim (id. at *4).[*27]
New York law is similar.[FN24]
Here, not all of the Defendants are parties to the contract documents so the claims are not completely duplicative of the breach of contract claim found in the First Cause of Action. Furthermore, there are some allegations found in Plaintiffs' Sixth through Tenth Causes of Action that Plaintiff may re-institute as direct claims and which allege breaches of fiduciary duty outside these alleged bad faith breaches of contract.
Plaintiffs have alleged more than simply a breach of the underlying contract documents to support their claim of breach of fiduciary duty. Plaintiffs have sufficiently alleged Defendants' breach of their fiduciary duty of loyalty, which requires, among other things, that "those in control of corporate processes do not unfairly manipulate those processes to retain such control" (U.S. West, Inc. v Time Warner Inc., 1996 WL 307445 at * 21 [Del Ch Ct 1996], citing Schnell v Chris-Craft Indus., Inc., 285 A2d 437 [Del Sup Ct 1971]; Blasius Indus., Inc. v Atlas Corp., 564 A2d 651 [Del Ch Ct 1988]; see also Richbell Information Serv., Inc. v Jupiter Partners, L.P., 309 AD2d 288 [1st Dept 2003] [claims based on breach of fiduciary duty and breach of implied covenant of good faith and fair dealing adequately stated where complaint alleged defendant exercised a contract "right malevolently, for its own gain as part of a purposeful scheme designed to deprive plaintiffs of the benefits of the joint venture and of the value of their ... holdings ...."][FN25];Lacher v Engel, 33 AD3d 10, 15 [1st Dept 2006] ["[a] fiduciary may breach his duties by exercising his contractual rights in an unfair or inequitable manner"]; Wilf v Halpern, 194 AD2d 508, 508 [1st Dept 1993], lv dismissed 82 NY2d 846 [1993] ["[t]he provision in the partnership agreement requiring unanimity does not, as defendant asserts, give him an absolute right, at his sole whim and discretion, to impede significant functions of the partnership solely for personal gain, but must be construed in light of defendant's fiduciary obligations of undivided loyalty to his fellow partners ...."]).
To the extent the Individual Defendants may only be held liable based on [*28]their knowing and active participation in the breaches of fiduciary duties, Plaintiffs have adequately pled these claims by specifying how each individual defendant was actively involved with or directed the bad acts alleged throughout the First Cause of Action of the Amended Complaint (see Amended Complaint at ¶¶ 2, 18, 22, 26, 43, 44, 46, 50, 51, 54, 56, 58, 59, 61, 64, and 65).
Accordingly, Defendants' motion to dismiss the Third Cause of Action should be denied.
Further, while this Court is dismissing the Eighth and Ninth Causes of Action to the extent there
are being pursued derivatively, these claims may be re-asserted (and state viable claims) in the
event Plaintiffs amend their complaint to assert them directly.
PLAINTIFFS' FOURTH CAUSE OF ACTION FOR RESTITUTION
In this Cause of Action, Plaintiffs allege that they invested funds in the Partnership "with the expectancy that those funds would be used by the ... [Partnership] and Millbrae Company in the manner contemplated and required by both the contract documents and the principle of fiduciary duty applicable to the obligations and duties of general partners to limited partners" and "[b]y virtue of the defendants' wrongful conduct ... defendants have been unjustly enriched at plaintiffs' expense" such that Plaintiffs are entitled to restitution of the money they paid into the Partnership (Amended Complaint at ¶¶ 95, 96).
This Court must dismiss this claim based on the decision of Bakerman v Sidney Frank Importing Co. (2006 WL 3927242 [Del Ch Ct 2006]), where the Delaware Chancery Court held: Unjust enrichment is the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity or good conscience. The elements of unjust enrichment are (I) an enrichment, (ii) an impoverishment, (iii) a relation between the enrichment and impoverishment, (iv) the absence of justification, and (v) the absence of a remedy provided by law. Courts developed unjust enrichment as a theory of recovery to remedy the absence of a formal contract. Therefore, claims of unjust enrichment may survive a motion to dismiss when the validity of the contract is in doubt or uncertain. When the complaint alleges an express, enforceable contract that controls the parties' relationship, however, a claim for unjust enrichment will be dismissed. This is the case even when the enforceable contract gives rise to a fiduciary relationship (id. at * 18; see [*29]also ID Biomedial Corp. v TM Tech., Inc., 1995 WL 130743 [Del Ch Ct 1995]).
Here, as in Bakerman, the relationship between Plaintiffs and Defendants was governed by the contract documents "and the fiduciary obligations that arose from" those agreements.
Accordingly, Plaintiffs' claim of unjust enrichment must be dismissed.[FN26]
PLAINTIFFS' CLAIMS ALLEGING BREACH OF THE DUTY OF
GOOD FAITH
AND FAIR DEALING (FIFTH AND TWELFTH CAUSES OF ACTION)
Plaintiffs' Fifth Cause of Action asserts that the Partnership and
the Millbrae Company "were under a duty and obligation to its limited partners to whom they
owed a fiduciary duty to exercise their rights and perform their obligations in good faith and in a
manner consistent with fair dealing" (Amended Complaint at ¶ 101). Further, Plaintiffs
claim that although the contract documents are silent on this point, if they had thought to address
the issue, the parties would have agreed that the contract documents "should be interpreted and
construed by defendants in a fair and reasonable manner to give effect to the reasonable
expectations and spirit of the parties' agreement," which would have included that Millbrae
Company would not erect unreasonable and unfair hurdles to the Plaintiffs' reasonable requests
for the Participant List and the Partnership's books and records (id. at ¶¶
102-104).
Plaintiffs contend that the provisions in the contract documents that support the
implied covenant of good faith and fair dealing are the provisions giving limited partners the
right to receive copies of the Participant List and the books and records. Plaintiffs assert that
Defendants'[FN27]
breaches of the implied covenant of good faith and fair dealing [*30]in the construction and interpretation of the contract documents
had the effect of interfering with Plaintiffs' reasonable expectations and destroying their rights to
receive the fruits of the bargain (i.e., to contact other limited partners to remove the
Managing Partner and vote down the Constellation sale).
In their Twelfth Cause of Action, Plaintiffs allege that the Partnership and the Millbrae Company "were under a duty and obligation to its limited partners to whom they owed a fiduciary duty to exercise their rights and perform their obligations in good faith and in a manner consistent with fair dealing" (Amended Complaint at ¶ 203). Plaintiffs claim that although the contract documents are silent on this point, if they had thought to address the issue, the parties would have agreed that the contract documents "should be interpreted and construed by defendants in a fair and reasonable manner to give effect to the reasonable expectations and spirit of the parties' agreement," which would have included that the Millbrae Company "could not exercise its right to terminate the plaintiffs' limited partners' rights and interests in the Partnership Fund as a means of coercing the limited partners to desist from challenging the general partner's interpretation and construction of its contractual and fiduciary duties under the contract documents," or "to punish the plaintiffs for seeking to enforce ... through this action, their legitimate rights under the contract documents" (id. at ¶¶ 205-209). Plaintiffs contend that provisions of Articles V, X, XII, and XIII of the Partnership Agreement support the implied obligations.
"[T]he essential elements of a claim for breach of the implied covenant of good faith and fair dealing ... [are] arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the contract'" (Ace & Co., Inc. v Balfour Beatty PLC, 148 F Supp 2d 418, 426 [D Del 2001], quoting Cantor Fitzgerald L.P. v Cantor, 2000 WL 307370 at * 15, n. 51 [Del Ch Ct 2000], lv dismissed 755 A2d 387 [Del Sup Ct 2000]). And in the partnership context, "there is an implied covenant of good faith and fair dealing governing the partners' fiduciary obligations to one another ..." (Wilf, supra, 194 AD2d at 508).
While Delaware, like New York, implies a covenant of good faith and fair dealing in every contract, the implied covenant is best understood as a way of implying terms in the agreement, whether to analyze unanticipated developments or fill gaps in contractual provisions. It cannot be used to circumvent the parties' express agreement or to create a free-floating duty unattached to the underlying legal document (Dunlap v State Farm and Cas. Co., 878 A2d 434, 441 [Del Sup Ct 2005]; see also Capital Z Financial Serv. Fund II, L.P. v. Health Net, Inc., 43 AD3d 100, 110 [1st Dept 2007]). "Thus, one generally cannot base a claim for breach of the implied covenant on conduct authorized by the terms of the agreement" (Dunlap, 878 A2d at 441). The covenant is [*31]breached when a party frustrates the overarching purpose of the contract by taking advantage of its position to control implementation of the contract's terms, but only where it is clear from the writing that the parties would have prohibited the acts complained of had they thought to negotiate with respect to the matter (Dunlap, 878 A2d at 442).
In order to successfully plead a breach of the implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach by defendant, and damages. "Since a court can only imply a contractual obligation when the express terms of the contract indicate that the parties would have agreed to the obligation had they negotiated the issue, the plaintiff must advance provisions of the agreement that support this finding in order to allege sufficiently a specific implied contractual obligation" (Fitzgerald v Cantor, 1998 WL 842316 at *1 [Del Ch Ct 1998]; accord Bakerman, supra, 2006 WL 3927242 at *20).
Here, Plaintiffs have sufficiently alleged that the Partnership and Millbrae Company failed to adhere in good faith to the contractual obligations and to deal fairly with Plaintiffs in the transactions at issue in this case (RJ Assoc., supra, 1999 WL 550350 at * 9; Ace & Co. v Balfour Beatty PLC, 148 F Supp 2d 418, 426 [D Del 2001]). Furthermore, Plaintiffs' claim that Millbrae Company breached the implied covenant of good faith and fair dealing by improperly attempting to terminate their partnership interests to prevent Plaintiffs from asserting their rights in this action, likewise states a legally cognizable claim (see Wilmington Leasing, Inc. v Parrish Leasing Co., L.P., 1996 WL 560190 [Del Ch Ct 1996] [court denies motion for summary judgment because question of fact raised as to whether discretionary right to remove general partner was subject to the requirement that the exercise of the right be made reasonably and in good faith]; see also General Motors Corp. v New A.C. Chevrolet, Inc., 263 F3d 296 [3d Cir 2001] [where a party to a contract makes manner of performance a matter of its own discretion, the law implies a proviso that the discretion be exercised honestly and in good faith]). Whether Plaintiffs can prove this claim is not presently before the Court.
Accordingly, this branch of Defendants' motion should be denied.
PLAINTIFFS' BREACH OF CONTRACT CLAIM (ELEVENTH CAUSE OF ACTION)
Plaintiffs' Eleventh Cause of Action alleges that it was shortly after this Court's January 23, 2008 Decision that held certain causes of action in Plaintiffs' complaint to be derivative in nature that Defendant Reid wrote to Plaintiffs on February 14, 2008 purporting "to terminate them as limited partners" and requiring their withdrawal as of February 28, 2008" based on Plaintiffs' institution of this action. Plaintiffs claim that Defendants' attempt to wrongfully terminate their partnerships shortly before they amended their complaint to allege derivative claims "was motivated [*32]by a bad faith attempt to short circuit the plaintiffs' inquiry into the alleged misappropriation of Partnership Fund assets entrusted to the defendants' management" (Amended Complaint at ¶ 192). Plaintiffs assert that as a result of Defendants' material breaches of contract and breaches of fiduciary duty set forth in detail in the Amended Complaint, Defendants' attempt to terminate Plaintiffs' partnership interests is invalid and unenforceable. Plaintiffs contend that this action has had the immediate effect of cutting off Plaintiffs' right to monthly cash distributions. Further, Plaintiffs assert that the Partnership's and Millbrae Company's "assertion of a right that they do not have is a repudiation of the contract documents that constitutes a separate, distinct breach of the contract by the Partnership Fund and Millbrae Company and a breach of fiduciary duty by all defendants" (id. at ¶196). Plaintiffs also contend that Defendants should be estopped from terminating Plaintiffs' partnership interests as of February 28, 2008 based on their breaches of contract and fiduciary duty, bad faith and unclean hands. Plaintiffs seek restitution of the money invested in the Partnership and any profit due.
In support of their motion to dismiss, Defendants contend that Plaintiffs' retention of distributions subsequent to the filing of this action means that Plaintiffs have elected not to terminate the contract documents and, instead, are suing for damages relating to Defendants' partial breach. Therefore, according to Defendants, Plaintiffs' ongoing rights under the contract remained intact and Plaintiffs "cannot now claim that a total breach deprived the Managing Partner of its rights under the Agreement" (Defendants' Mem. of Law at 20). Alternatively, Defendants argue that the breaches were not sufficiently material (i.e., the provisions relating to access to the Participant List, books and records and notice of capitalization are collateral to the primary goal of the partnership's purpose to obtain a profit in the purchase and sale of gas and oil properties) for Plaintiffs to declare a total breach and thereby nullify the remainder of the Agreement" (id.). Defendants claim that Millbrae Company had ample good cause to remove Plaintiffs and it was endowed with the discretion to remove an investor "for any reason ... it determines ... in its sole discretion" and such provisions are enforceable as a means of permitting an expulsion of a partner to avoid the dissolution if the partners find themselves in discord (id. at 21, citing 59A Am. Jur. Partnership § 325).
Delaware has a system of notice pleading under which a complaint for breach of contract is sufficient if it contains a short and plain statement of the claim showing that the pleader is entitled to relief. To survive a motion to dismiss, the plaintiff must show: (a) the existence of the contract, express or implied; (b) the breach of an obligation imposed by that contract; and ( c) the resultant damage to plaintiff (VLIW Technology, LLC v Hewlett-Packard Co., 840 A2d 606, 611-612 [Del Sup Ct 2003]). Under Delaware law, the proper interpretation of contract language is a question of law, which is properly resolvable on a motion to dismiss (Majkowski v American Imaging Mgt. Services, LLC, 913 A2d 572, 581 [Del Ch Ct 2006]; Allied Cap. Corp. v GC-Sun Holdings, L.P., 910 A.2d 1020, 1030 [Del Ch Ct 2006]). In interpreting the contract, clear and unambiguous terms are interpreted according to their ordinary meaning and [*33]the courts will not distort or twist the language or create an ambiguity where none would otherwise exist (Allied Cap. Corp., 910 A2dat 1030).
The Court views it inappropriate, in the context of a motion to dismiss, to determine
whether, as a matter of law, the alleged breaches by Defendants are sufficiently material such that
Millbrae Company lost its right to terminate Plaintiffs' partnership interests or whether Plaintiffs
have waived the right to terminate the contract based on their acceptance of distributions after the
institution of this action. These issues are plainly fact-intensive and go beyond the face of the
pleadings and the undisputed documents. Further, the Court will not determine whether this
provision meant that Millbrae Company could terminate under the circumstances present in this
case (see, e.g., Berman v Sugo, 2008 WL 2414052 at * 8 [SD NY 2008])). Suffice it to
say, Plaintiffs have adequately alleged the Millbrae Company's breach of contract through its
alleged wrongful attempt to terminate Plaintiffs' partnership interests as punishment for the
institution of this action.
PLAINTIFFS' CLAIM FOR PUNITIVE DAMAGES (TENTH CAUSE OF ACTION)
In their Tenth Cause of Action, Plaintiffs allege that Reid, King and Boyce had actual knowledge of and actively participated in the breaches of fiduciary duty and other tortious conduct alleged throughout the Amended Complaint and that their actions "were "intentional, deliberate, morally culpable, evidencing a high degree of moral turpitude, activated by malicious, evil and reprehensible motives or in such conscious disregard of the plaintiffs' rights that their behavior would be deemed willful and wanton dishonesty" (Amended Complaint at ¶ 185).
To begin with, Plaintiffs have satisfied the requirement found by this Court to be deficient in their original complaint (i.e., that the demand for punitive damages be attached to a substantive cause of action). Because the punitive damages claim is now tied to Plaintiffs' tort claim of breach of fiduciary duty, there is no longer any need to allege that the public in general was harmed by Defendants' actions (see, e.g., IDT Corp. v Morgan Stanley Dean Witter & Co., 45 AD3d 419 [1st Dept 2007]).
Under Delaware Law, punitive damages may be recovered in tort actions involving wanton
conduct on behalf of defendants, which is usually a question for the trier of fact (see E.I.
DuPont de Nemours & Co. v Pressman, 679 A2d 436 [Del Sup Ct 19966]; Jardel Co. v
Hugh, 523 A2d 528, 530 [Del Sup Ct 1987]; Hodges v Smith, 517 A2d 299 [Del
Super Ct 1986]). However, because Plaintiffs have asserted their Tenth Cause of Action for
punitive damages in their derivative capacity, the Tenth Cause of Action must be dismissed,
without prejudice, to Plaintiffs' re-institution of it as a claim for recovery in connection with their
direct claims involving Defendants' alleged breaches of fiduciary duty.
[*34]PLAINTIFFS'
MOTION TO COMPEL PRODUCTION OF THE PARTICIPANT
LIST
Plaintiffs move, pursuant to CPLR 3216(1),
for an order compelling Defendants to produce the names and addresses of, and the units owned
by, the investor partners of the Partnership, "by a date certain, not to exceed ten (10) days; or
alternatively ... precluding the defendants from adducing any evidence that plaintiffs would not
have been able to contact and persuade a majority in interest of the Investor Partners to: 1)
remove the Managing Partner of the Millbrae Partnership for cause; and/or 2) disapprove the dale
of substantially all of the Millbrae Partnership assets to Constellation Energy in or about March
2007." Plaintiffs' First Request for Production of Documents, which was served on Defendants
on March 13, 2008, requests that Defendants produce, among other things, "all documents that
relate to the requests by plaintiffs for access to the names of the other limited partners/unit
holders and/or their respective holdings in Partnership Fund" (Plaintiffs' First Request for
Production of Documents, Exhibit E to Leghorn Compel Aff., Request No. 20) and "all
documents setting forth a list of participants in Partnership Fund, listing name, address and
telephone number during the operation of the Partnership Fund" (id., Request No. 42).
Plaintiffs contend that "[t]he gravamen of the Complaint is that the defendants materially breached their Partnership Agreement with the plaintiffs by, among other things: 1) wrongfully refusing to provide the plaintiffs with the Partnership List; and 2) wrongfully refusing to provide the plaintiffs with access to the books and records of the Partnership Fund" (Plaintiffs' Mem. of Law at 4). Plaintiffs outline their prior seven requests to Defendants for a copy of the Participant List, as well as provisions of the Partnership Agreement (Article V, § 5.5 [ c] and Article X, §10.6 [b] [c]), which Plaintiffs contend support their entitlement to it. Plaintiffs assert that the Participant List is important to an investor partner because it would serve as a predicate to a partner's ability to exercise other rights granted to him under the Partnership Agreement. For example, the Investor Partners have the right among other things, to "(1) remove the managing partner ... (4) approve, or disapprove any sale, exchange or other disposition of all or substantially all of the partnership assets outside the ordinary course of the business of the partnership." Such rights were exercisable by a majority in interest of the Investor Partners. Without knowledge of the names of the other Investor Partners and knowledge of their respective holdings, information in the exclusive possession of the defendants, the Knotts could not exercise their rights, particularly their voting rights, under the Partnership Agreement (id. at 7).
Plaintiffs state that Defendants agreed to provide Plaintiffs with the [*35]Participant List and forwarded a confidentiality agreement which Plaintiff Knott was required to sign (and did sign), but Defendants reneged on their promise and failed to provide the Participant List.[FN28] After several subsequent demands, Defendants agreed to provide a copy of it to Plaintiffs if they agreed to sign a confidentiality agreement that was significantly broader in scope than the prior confidentiality agreement insofar as it (1) required the investor partners to submit to the jurisdiction of Delaware Courts (state and federal) and agree to submit to the venue of the State of Delaware, (2) provided that the agreement would be governed by and construed in accordance with the laws of the State of Delaware (rather than the prior agreement which was to be construed pursuant to the laws of the State of New York), and (3) precluded the investor partners from contacting other investor partners without giving the Partnership 10 days' advance written notice setting forth the purpose of the contact which must be reasonably related to the investor partner's interest as a limited partner and not detrimental to the Partnership.
With regard to the relevance and materiality of the Participant List vis a vis Plaintiffs' claims, Plaintiffs point out that their First Cause of Action asserts that the Defendants' material breach of the contract documents, including their failure to provide Plaintiffs with the Participant List, effectively froze them out and rendered "meaningless their power to effect changes in the management ... including the right to take steps to change the managing partner and disapprove the sale of the core assets of the Partnership Fund" (i.e., the Southern Dome and Paradigm Fields to Constellation Energy) (Plaintiffs' Mem. of Law at 24).
In opposition, Defendants argue that Plaintiffs' motion should be denied because (1) by basing their motion on their claim that they have a right to the Participant List under the Partnership Agreement, Plaintiffs are seeking for the Court to rule on an ultimate issue in this case in the context of a discovery motion;[FN29] (2) it would [*36]be improper at this juncture of the case, to convert it to a motion for summary judgment "in light of the incomplete state of discovery" (Defendants' Mem. of Law at 2), and (3) Plaintiffs' "theory of injury is too speculative a basis on which to require production of the List" (id.).
Defendants contend that given the "private nature" of the information Plaintiffs seek (i.e., the investors' private contact and financial information, including their names, addresses, phone numbers and the amounts of their investments), it was necessary for the Managing Partner to "balance a particular investor's potential need for the List in appropriate circumstances against the other investors' privacy interests" (id. at 3). Defendants go so far as to argue that maintaining the privacy of this information was vital to the Partnership because "[i]f the Managing Partner could not protect investors' privacy, then the Partnership's ability to raise capital would be impaired. New and existing investors would be deterred from investing if they believed that the Managing Partner would not protect their privacy to the extent permitted by the Agreement, and competitors could use the List to lure investors' money into other ventures, and thus away from investing more money in the Partnership" (id.). Thus, Defendants maintain that the second confidentiality agreement was necessary because the first confidentiality agreement (1) was only signed by Knott Senior whereas the request for information had been signed by four other members of the Knotts' family and the family partnership, and (2) the agreement was too narrow in scope because it only covered "information conveyed to [Mr. Knott] by or on behalf of Ophir" (Reid Aff. at ¶ 33). Mr. Reid also avers that had Plaintiffs proposed changes to the second confidentiality agreement, Defendants would have considered their proposal and that they "prepared a review room for them in [their] Tulsa, Oklahoma office, and had set up a day and time for them to come and visit the room and review the documents, but they never showed up" (id. at ¶ 35).
With regard to the speculative nature of Plaintiffs' claims, Defendants argue that to prove their case, Plaintiffs would have to show that (1) requests for the Participant List were improperly denied, (2) they intended to use the list to convene an investor meeting to block the Constellation sale or remove the Managing Partner, (3) they could have satisfied the conditions of the Partnership Agreement to block the Constellation sale [FN30] or remove the Managing Partner,[FN31] (4) a majority of investors in fact [*37]would have supported their effort to block the Constellation sale or remove the Managing Partner, and (5) the Constellation sale or other actions taken by the Managing Partner after the time when it would have been removed caused Plaintiffs financial harm. Defendants argue that even if Plaintiffs can show that the Participant List is marginally relevant, it would be unduly prejudicial to Defendants to require its production prior to Plaintiffs having even made a threshold showing of their right to the Participant List under the Partnership Agreement.
Defendants' final argument is that Plaintiffs' request for an order of preclusion in the event Defendants fail to produce the Participant List pursuant to CPLR 3126 is unjustified because Plaintiffs have not shown that Defendants refusal to produce it was "willful, deliberate or contumacious" as there is no order compelling its disclosure and, indeed, this Court held in its January 23, 2008 Decision that "there are issues as to whether the requests [for the Partnership List] were reasonable" (id. at 17).
In reply, Plaintiffs argue that the Partnership Agreement does not provide for the withholding of the Participant List because of privacy and confidentiality concerns and neither section 5.5 ( c) nor section 10.6 (b), ( c), or (d) "requires the execution of a separate confidentiality agreement as a condition precedent to the production of the Participant List" (Reply Mem. at 3). Plaintiffs also submit Affidavits from Knott Senior and Ralph Lightner, the Chief Financial Officer of James F. Knott Realty Group, which dispute the veracity of the statements made by Defendant Reid that (1) Plaintiffs were advised that Defendants had prepared a room in Tulsa, Oklahoma for Plaintiffs to come and review the documents but Plaintiffs never showed up, and (2) Mr. Reid stated in a conference call that the sale of the Paradigm and Southern Dome partnership assets was not a sale of substantially all of the partnership's assets (see Affidavit of James F. Knott, Sr., sworn to June 13, 2008 and Affidavit of Ralph Lightner, sworn to June 13, 2008).
The Court declines to delve into this thicket, particularly since Plaintiffs may be interposing another pleading and potentially seeking to maintain some claims as a class action, which could inject additional notice issues into the equation. Until [*38]such time as all of claims are before the Court, it would be premature to address the question of access to the Participant List.
Further, the request here, though stated to be a discovery request, also directly implicates the
merits. Plaintiffs' need for access to the Participant List, as a discovery item, is pegged to their
theory that they had a contract right to the List and, because they did not get it, their ability to
gather support from other investors to block proposed Partnership actions and remove the
Managing Partner. Likewise, Defendants' opposition is premised on their claim that the
Participant List is a confidential business record which, according to Defendants, is the reason
why it was not a breach of contract to deny Plaintiffs' access to the list in the first place. Thus, for
the Court now to either grant Plaintiffs access to the List or to deny access implicates the merits
of the First Cause of Action. Moreover, as noted, should Plaintiffs proceed with their direct
claims as a class action, notification of this action, in some appropriate fashion, need be given to
the other investor partners. Further, bifurcation of the issues of liability and damages is a
consideration, as is bifurcation of the First and Second Causes of Action from the balance of any
other claims as the First and Second Causes of Action appear to present issues unique to these
Plaintiffs. There is no indication that any other investor partners have sought access to the List
and no indication that any other investor partners have claimed improper dilution of their
interests. Since it seems inevitable that there will be a further pleading, and further motion
practice, the Court will deny Plaintiffs' motion at this time, without prejudice to
renewal.[FN32]
CONCLUSION
For the reasons set forth above, it is hereby
ORDERED that the partial motion by Defendants Millbrae Natural Gas Development Fund 2005, L.P., Millbrae Natural Gas 2005 LLC, Stewart Reid, Robert E. King, Charles Boyce (Seq. No. 008), made pursuant to CPLR 3211, to dismiss the First Amended Complaint is granted in part and denied in part; and it is further
ORDERED that the motion by Defendants Millbrae Natural Gas Development Fund 2005, L.P., Millbrae Natural Gas 2005 LLC, Stewart Reid, Robert E. King, Charles Boyce is denied with respect to the Third, Fifth, Eleventh and Twelfth Causes of Action in the Amended Complaint; and it is further
ORDERED that the motion by Defendants Millbrae Natural Gas Development Fund 2005, L.P., Millbrae Natural Gas 2005 LLC, Stewart Reid, Robert E. [*39]King, Charles Boyce is granted with respect to the Sixth, Seventh, Eighth, Ninth and Tenth Causes of Action in the Amended Complaint and such Causes of Action are hereby dismissed, without prejudice, to Plaintiffs' re-pleading some or all of the said Causes of Action as direct claims (either on behalf of Plaintiffs only and/or as a class action on behalf of all investor partners); and it is further
ORDERED that the motion by Defendants Millbrae Natural Gas Development Fund 2005, L.P., Millbrae Natural Gas 2005 LLC, Stewart Reid, Robert E. King, Charles Boyce is granted with respect to the Fourth Cause of Action and such Cause of Action is hereby dismissed, with prejudice; and it is further
ORDERED the motion by Plaintiffs JFK Family Ltd. Partnership, James Knott, Sr., James Knott, Jr., Carroll Knott, Allison Knot, Carroll Knott McGill (Seq. No. 007) for an order, pursuant to CPLR 3216(1), compelling Defendants to produce the names and addresses of and the units owned by the investor partners of Millbrae Natural Gas Development Fund 2005, L.P. by a date certain, not to exceed ten days is denied, without prejudice to renewal; and it is further
ORDERED that Plaintiffs shall serve any amended pleading so as to be received by Defendants' counsel by not later than 5 p.m. on October 7, 2008; and it is further
ORDERED that the status conference now scheduled for September 26, 2008 is adjourned to October 17, 2008 at 9:30 a.m and may not be adjourned except upon prior written order of the Court.
The foregoing constitutes the Decision and Order of this Court.
Dated:White Plains, New York
September, 2008
E N T E R :
__________________________
Alan D. Scheinkman
Justice of the Supreme Court
APPEARANCES:
[*40]
WILSON, ELSER, MOSKOWITZ, EDLEMAN
& DICKER LLP
By: Thomas Leghorn, Esq.
Attorneys for Plaintiff
3 Gannett Drive
White Plains, New York 10604
FRANCH, JARASHOW & SMITH, P.A.
By: Frank T. Laznovsky, Esq.
107 Ridgely Avenue, Suite 9
Annapolis, Maryland 21401
WILMER CUTLER PICKERING HALE & DORR, LLP
By: Thomas Trenchard, Esq.
Attorneys for Defendants Millbrae Natural Gas Development Fund 2005, L.P.
Millbrae Natural Gas 2005 LLC, Stewart Reid,
Robert King, and Charles Boyce
399 Park Avenue
New York, New York 10022
Footnotes
Footnote 1:Due to issues relating to
Defendants' request for the sealing of certain documents submitted in connection with the
motions that led to the January 23, 2008 Decision, the January 23, 2008 Decision was not entered
until March 4, 2008.
Footnote 2:Defendants' opening brief
mistakenly referred to Plaintiffs' claim as being set forth in the Third Cause of Action. In their
reply, Defendants apologize for confusing the issue. The claim originally appeared in the Third
Cause of Action of original complaint. The claim is now set forth derivatively in the Sixth Cause
of Action of the Amended Complaint.
Footnote 3:In their reply papers, Defendants
further specify that the Sixth Cause of Action concerning improper expense reimbursements is
directly contradicted by the Partnership Agreement's terms which permit reimbursement for
organization and management costs.
Footnote 4:Again, in their reply papers,
Defendants further specify that the alleged conflicts of interest based on the affiliates' ownership
of oil and gas interests alongside the Partnership's interests fail because there is no allegation that
the Partnership was deprived a corporate opportunity (which could not be alleged anyway since
the Partnership acquired its interests in the Paradigm and Southern Dome oil fields after the
Managing Partners' affiliates had obtained their interests), the lack of any allegations that the
affiliates received a disproportionate benefit from the sale of these interests to Constellation, and
the failure to allege a transaction between the Managing Partner affiliate and the Partnership at an
unfair price.
Footnote 5:Defendants go a step further and
argue that Section 12.5's purpose "would be thwarted if the Managing Partner's motivations could
be put in issue; in every case, a removed partner could challenge some aspect of the Managing
Partner's motivation ... [which] would eliminate the exact benefit the parties intended in
providing for removal" (id. at 23).
Footnote 6:The issues on which Plaintiffs
seek discovery include the Defendants' alleged termination of other limited partners in the
Partnership, their motive/timing for terminating the Knotts, and Defendants' alleged breaches of
other provisions in the Partnership Agreement which provide "[t]he Managing Partner shall not
employ or permit another to employ the Partnership Assets in any manner except for the
exclusive benefit of the partnership" and "the Managing Partner may not commingle funds of the
Partnership with funds of any other entity" (Plaintiffs' Mem. of Law at 15, citing
paragraphs 4.5 ( c) and 4.5 (d) of the Partnership Agreement).
Footnote 7:Plaintiffs claim that "it is the
managing partner and its officers and directors that are at economic risk, not the other limited
partners" (Plaintiffs' Mem. of Law at 18).
Footnote 8:Plaintiffs request that they be
afforded the opportunity to proceed with discovery based on CPLR 3211(d) "that facts essential
to justify opposition may exist but cannot ... be stated" because "defendants have the exclusive
control of the books and records of the [Partnership] that contain the information that would
allow the plaintiffs to be in a position to provide further amplification of facts relating to the
manner and means of defendants' multiple breaches of contract and fiduciary duty" (Leghorn Aff.
at ¶ 5).
Footnote 9:Plaintiffs contend that the
Individual Defendants work out of Millbrae's offices in New York State and the Amended
Complaint alleges breaches of fiduciary duty occurring in New York State, and therefore, New
York's law should be applied to these causes of action (Plaintiffs' Mem. of Law at 24, citing
Padula v Lilarn Prop. Corp., 84 NY2d 519 [1995]; Coony v Osgood Mach., Inc., 81
NY2d 66 [1993]).
Footnote 10:Defendants contend that
Plaintiffs have abandoned their expense reimbursement claim and the derivative breach of
fiduciary duties claim "other than the one based on the alleged diversion of the Constellation sale
proceeds" (Reply Mem. of Law at 1).
Footnote 11:Because this aspect of the
motion presents factual questions, and cannot be resolved solely by reference to undisputed
documentary materials (the only basis for a motion to dismiss under CPLR 3211 [a][1]), the
Court cannot address which side has the better, or more persuasive, argument.
Footnote 12:In support of this
proposition, Defendants cite R.M. Williams Co. v Frabizzio, 1993 WL 54423 (Del Super
Ct 1983) and Honeywell Intl. Inc. v Air Prods. & Chems., Inc., 858 A2d 392, 420 (Del
Ch Ct 2004), affd in part and revd in part on other grounds, 872 A2d 944 (Del Sup Ct
2005).
Footnote 13:Defendants contend the
claim is limited to unanticipated developments or to fill in gaps in contract provisions only to the
extent that the parties would have agreed to the obligation.
Footnote 14: The two Delaware cases
relied upon by Plaintiffs do not hold to the contrary. Those cases do not even address the
adequacy of representation of a plaintiff who institutes individual and derivative causes of action
and instead, hold that dismissal of those particular cases, on the ground that the actions were
"exclusively derivative", were in error. In Gentile v Rossette (906 A2d 91 [Del Sup Ct
2006]), the Delaware Supreme Court reversed the Chancery Court's dismissal of an "exclusively
derivative" action (i.e., plaintiffs lacked standing to sue derivatively after the
corporation's merger) finding that the minority shareholders also had a separate direct claim
arising out of the same transaction where the significant stockholder's voting power and
economic value of shares had been increased at the expense of the minority shareholders. In
Gatz v Pondsoldt (925 A2d 1265 [Del Sup Ct 2007]), the Delaware Supreme Court
reversed the Chancery Court's dismissal of an "exclusively derivative" action (i.e.,
plaintiffs had failed to meet the demand requirements of Chancery Rule 23.1) finding that the
Recapitalization claims had the similar effect of the transaction in Gentile, and, therefore,
the shareholders had a direct cause of action and the action was improperly dismissed.
Footnote 15:Of course, Plaintiffs may
choose to drop their direct claims and only pursue the derivative claims in the next iteration of
the complaint.
Footnote 16:This Cause of Action repeats
and re-alleges the prior paragraphs of the Amended Complaint, so the contract rights to which
Plaintiffs are referring are "their power to effect changes in the management of the Partnership
Fund and the Millbrae Company, including the right to take steps to change the managing partner
and disapprove the sale of the core assets of the Partnership Fund ("substantially all of the
partnership assets") under the Partnership Agreement (Amended Complaint at ¶ 48).
Footnote 17:Notwithstanding that the
Eighth and Ninth Causes of Action are being dismissed, without prejudice, due to their derivative
nature, the Court believes that it is worthwhile exercise to discuss the viability of these claims
since they will likely be re-asserted as direct claims in Plaintiffs' Third Amended Complaint.
Footnote 18:In any event, the law in New
York and Delaware is the same with regard to the breach of fiduciary duty claim and the aiding
and abetting a breach of fiduciary duty claim.
Footnote 19:In New York "[o]ne who aids
and abets a breach of a fiduciary duty is liable for that breach as well, even if he or she had no
independent fiduciary obligation to the allegedly injured party, if the alleged aider/abettor
rendered substantial assistance' to the fiduciary in the course of effecting the alleged breaches of
duty" (Caprer v Nussbaum, 36
AD3d 176, 193 [2d Dept 2006]).
Footnote 20:For example, in
Solow, supra, the limited partner sued the general partner and the general
partner's affiliates (the Aspen entities) and the individual controlling shareholder of the Aspen
entities. The complaint alleged that defendants breached the partnership agreement by (1)
improperly reinvesting partnership revenue, (2) engaging in unapproved sales of partnership
property, (3) failing to offer plaintiff an opportunity to participate in another venture, and (4)
improperly substituting the general partner. The complaint further alleged that these same bad
acts constituted breaches of defendants' fiduciary duties. The Court dismissed the fiduciary
claims "[b]ecause of the primacy of contract law over fiduciary law, if the duty sought to be
enforced arises from the parties' contractual relationship, a contractual claim will preclude a
fiduciary claim" (2004 WL 2694916 at *4). The Court, however, stated that it would have
considered other claims that were inherently breach of fiduciary claims, such as an unauthorized
sale of all or substantially all of the partnership assets, "which might have fiduciary implications
independent of the partnership agreement" or a claim alleging a usurpation of partnership
opportunity. Here, Plaintiffs have alleged that Defendants have engaged in an unauthorized sale
of substantially all of the Partnership's assets.
Footnote 21:The Court found that plaintiff
sufficiently stated breach of contract and breach of the implied covenant of good faith and fair
dealing against the other limited partner based on its allegations that the limited partner
controlled the board of the managing partner and caused the managing partner to engage in the
bad faith conduct.
Footnote 22:Under Delaware Law, a
limited partnership can limit, but not eliminate, the general partner's fiduciary duties (Gotham
Partners, L.P. v Hallwood Realty Partners, L.P., 817 A2d 160, 167-168 [Del Sup Ct 2002]).
Footnote 23:At the time of the decision,
that section provided "[e]very partner must account to the partnership for any benefit, and hold as
trustee for it any profits derived by him without the consent of the other partners from any
transaction connected with the ... conduct of the partnership or from any use by him of its
property."
Footnote 24:New York law provides that
the same conduct that may constitute a breach of contract may also constitute breach of a duty
which arises out of the relationship created by contract, but which is independent of the contract
itself (William Kaufman Org. Ltd. v Graham & James LLP, 269 AD2d 171, 173 [1st
Dept 2000]; Apple Records, Inc. v Capitol Records, Inc., 137 AD2d 50, 57 [1st Dept
1988]; Anderson v Weinroth, 48 AD3d 121, 136 [1st Dept 2007]; Rodin Prop.-Shore
Mall N.V. v Ullman, 264 AD2d 367 [1st Dept 1999]).
Footnote 25:Limitations on an "unfettered
contract right may be grounded either on the construction of the parties' fiduciary obligations ...
or on the purely contractual rule that even an explicitly discretionary contract right may not be
exercised in bad faith so as to frustrate the other party's right to the benefit under the agreement
.... " (Richbell, 309 AD2d at 302).
Footnote 26: This is not to say, however,
that Plaintiffs may not ultimately prevail in the recovery that they seek (i.e., restitution)
based on a right to rescind the contract documents based on Defendants' alleged bad faith actions.
Footnote 27:It is unclear whether
Plaintiffs are asserting a breach of the implied covenant of good faith and fair dealing by all
Defendants or merely the Millbrae Company since the Causes of Action state that the parties
would have inserted a duty on the Millbrae Company and the Partnership not
to unreasonably deny Plaintiffs' access to the Participant List and the Partnership's books and
records, as well and a duty on the Millbrae Company not to terminate Plaintiffs'
partnership interests for impermissible purposes. It would appear that to the extent these
allegations buttress Plaintiffs' claims of breach of fiduciary duties against the Individual
Defendants, they allege valid claims (see Wilf, supra, 194 AD2d at 508). But these
claims are somewhat more problematic if they are being asserted against non-signatories to the
contract documents (compare Castetter v Delaware Dept. of Labor, 2002 WL 819244
[Del Super Ct 2002] with RJ Assoc., supra). For the present purposes, the Court reads
these Causes of Action as being asserted against the Partnership and the Millbrae Company and
not the Individual Defendants.
Footnote 28:Defendants dispute that the
first confidentiality agreement was executed for the purpose of providing Plaintiffs with the
Participant List. Mr. Charles Boyce, the Chief Operating Officer of Ophir Energy Corporation
and Millbrae Company, avers that he recalls "telling Mr. Lightner before Mr. Knott signed the
October 2006 confidentiality agreement that we would not give them th Partnership List even
with the confidentiality agreement in place ... [and that the] October 2006 confidentiality
agreement was put in place to give detailed information about cash flow and wells far beyond
what we normally provide to investors" (Affidavit of Charles R. Boyce, sworn to June 11, 2008
at ¶¶ 7-8).
Footnote 29:Defendants provide affidavits
from Stewart Reid, sworn to June 11, 2008 ("Reid Aff.") and Charles Boyce to show that
Defendants were justified in failing to provide the Participant List based on their belief that the
disclosure would raise privacy concerns with their investors who did not want other people to
obtain their personal financial information and, therefore, if they "were to disclose these
investors' information without good reason, it would strain our investor relations and thus make it
more difficult to raise capital in the future" (Reid Aff. at ¶ 9). Also, Mr. Reid avers that the
list has competitive significance since if a company "were seeking to raise capital for their own
venture, access to this list of wealthy individuals would benefit them at the expense of our own
ability to raise capital" (id. at ¶ 10).
Footnote 30:Defendants contend that
Plaintiffs cannot prove that they could have stopped the sale because (1) under the Partnership
Agreement, they are only entitled to approve or disapprove a sale involving all or substantially all
of the Partnership's assets (which was not implicated in the Constellation sale) and (2) the
Managing Partner would have consented to the disapproval of the sale.
Footnote 31:Defendants contend that
Plaintiffs will not be able to show (nor they even stated a claim) that the Managing Partner could
have been removed for cause, defined as "fraud, gross negligence, willful misconduct or a
material default by the Managing Partner in the performance of its obligations to the Investor
Partners" (Defendants' Mem. of Law at 14), that the Managing Partner would have refused to
cure any defaults within 60 days, and that a "qualified successor Managing Partner (agreed to by
a majority vote of investors) would be available to immediately step into the Managing Partner's
shoes" (id. at 14).
Footnote 32:While Plaintiffs appear to
seek the current Participant List, it would appear that the List in question would be the List as of
July September 2006 since the names of any persons or entities who became investor partners
thereafter would not seem to be material. Defendants have indicated whether the List has
changed over the past two years and, if any investor partners have disposed of their interest, such
disposition may impact on the assertions of confidentiality made by Defendants.
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