Hunnicutt & Co. v Thinkstrategy Capital Mgt., LLC
Annotate this CaseDecided on April 27, 2010
Supreme Court, New York County
Hunnicutt & Co.,as Trustee of the Hunnicutt & Co. Defined Benefit Pension Plan I, Plaintiff,
against
Thinkstrategy Capital Management, LLC, Defendant.
601236/2009
For Plaintiff:
Law Office of Ronald Weisenberg, P.C
By: Ronald B. Weisenberg
167 East 67th St., Suite 9A
New York, NY 10065
For Defendants:
Drohan Lee LLP
By: Vivian R. Drohan
489 Fifth Avenue
New York, NY 10017
Bernard J. Fried, J.
Defendant ThinkStrategy Capital Management, LLC (TSCM) moves to dismiss the complaint for failure to state a cause of action (CPLR 3211 [a] [7]), and on the basis of a defense founded upon documentary evidence (CPLR 3211 [a] [1]).
These two subdivisions, respectively, challenge the sufficiency of the complaint, as amplified by affidavit (see Rovello v Orofino Realty Co., Inc., 40 NY2d 633, 635 [1976]), and require a determination whether defendant has established a defense based on documentary evidence. Dismissal is warranted only where the documentary evidence "utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law [citation omitted]" (McCully v Jersey Partners, Inc., 60 AD3d 562, 562 [1st Dept 2009]).
This action arises as a result of plaintiff's investment in a leveraged "fund of funds" that [*2]suffered a loss of approximately 19% of its assets through an investment in a Ponzi scheme perpetrated by Arthur Nadel. The due diligence questionnaire (ex. B to Hunnicutt aff.), provided to Hunnicutt in connection with its investment, states that portfolio risk is controlled by allocating "across a minimum of 15 fund managers." That almost 19% of the fund's assets was lost in the Arthur Nadel Ponzi scheme, indicates either an over-allocation beyond that suggested by the questionnaire or very high use of leverage.
Plaintiff Hunnicutt & Co. (Hunnicutt) is in the business of marketing hedge funds. According to the complaint, on July 1, 2007, in its capacity as trustee of the Hunnicutt & Co. Defined Benefit Pension Plan, I, Hunnicutt placed $613,120 of its defined benefit plan's funds into Class A membership shares in TSCM's TS Multi-Strategy Fund, LP (the fund), a fund of funds. The Class A shares are leveraged. TSCM is both a general partner of the fund, and its investment advisor. Hunnicutt had made a previous, similar, investment, which has been fully redeemed.
The investment was in the form of units in a limited partnership, pursuant to an April 24, 2004 Agreement of Limited Partnership (the LPA). The investment was also governed by the terms of a Confidential Private Offering Memorandum (the offering memorandum), dated January 1, 2003. Both the offering memorandum and the LPA were amended prior to Hunnicutt's second investment to increase the lock-up period to 12 months from six months. The September 2, 2005 supplement to the offering memorandum provides, in section 3, captioned, "LOCK-UP PERIOD; REDEMPTIONS," as pertinent:
each investor agrees that no Unit ... may be redeemed prior to the expiration of twelve full
calendar months following the purchase thereof ... Following the expiration ... such Units may be
redeemed on the last business day of each calendar quarter upon 90 days prior written notice to
the General Partner
(ex. C to mov. aff.).
Counsel for Hunnicutt conceded at oral argument that the 12-month lock-up amendment applies to the second investment, but it challenges TSCM's determination that the earliest date for redemption was September 30, 2008, pursuant to the terms of the LPA as amended. According to the complaint, on October 31, 2007, Hunnicutt requested that TSCM redeem its investment in the fund and return the money to Hunnicutt.[FN1] TSCM then informed Hunnicutt of the 12-month lock-up on its investment, and that, because the lock-up period ends on June 30, 2008, the funds would not be redeemable until September 30, 2008, the last business day of the next quarter. Hunnicutt contends that a correct application of the provisions would allow it to redeem as of June 30, 2008.
Hunnicutt challenges TSCM's determination of Hunnicutt's withdrawal rights as "inconsistent with the spirit and letter of the Offering Memo, Agreement, and Due Diligence Questionnaire" [*3](Complaint, ¶ 20). The complaint asserts that a June 30, 2008 redemption would comply with the minimum lock-up requirements. As of June 30, 2008, the value of Hunnicutt's shares in TSCM was $643,467. As of February 28, 2009, the value of that investment was $261,295.
On September 30, 2008, TSCM refused to redeem Hunnicutt's shares, informing Hunnicutt that the reason was that TSCM "did not want to jeopardize other clients' positions by giving Hunnicutt preference" (id., ¶ 24). Hunnicutt challenges the propriety of TSCM's refusal to redeem its class A shares on September 30, 2008. The complaint states that TSCM repeatedly confirmed to Hunnicutt that its holdings would be redeemed on September 30, 2008. By letter dated November 7, 2008, TSCM advised its investors, including Hunnicutt, that all redemptions in the fund were suspended. By letter dated January 21, 2009, TSCM informed its investors that it had invested in a sub-fund that was a Ponzi scheme run by Arthur Nadel.
Hunnicutt argues that on October 31, 2007, when TSCM first received Hunnicutt's request to redeem the units, TSCM should have notified its sub-fund managers and begun the process of unwinding Hunnicutt's investment. Hunnicutt has not cited any provision in the record that requires TSCM to take these actions, but only states that this was the procedure followed by TSCM in the redemption of Hunnicutt's earlier investment.
The complaint contains three causes of action.
The first cause of action, sounding in breach of contract, alleges that TSCM breached its contracts with Hunnicutt, first by refusing to redeem the shares on June 30, 2008, and again by failing to redeem them on September 30, 2008.
The second cause of action, sounding in breach of fiduciary duty, alleges that TSCM, as agent of Hunnicutt, breached its fiduciary duty by refusing to redeem the funds, charging a management fee "even though it lost money due to lack of diversification and lack of due diligence" (Complaint, ¶ 42), and by failing to protect the funds after Hunnicutt requested a redemption.
The third cause of action, which sounds in unjust enrichment, seeks disgorgement of fees charged by TSCM at the rate of two percent of assets under management, and 20% of profits, to the extent that those fees were charged on growth in value or illusory profits reported by TSCM on the basis of the false and fraudulent statements generated by Arthur Nadel and incorporated in TSCM's results.
In support of the motion, TSCM submits the affidavit of Chetan Kapur, its managing director, who asserts that the documentary evidence alone establishes its entitlement to dismissal of the complaint.
TSCM argues that it has the discretionary right to suspend redemptions under the terms of both the offering memorandum and the LPA. The offering memorandum provides:
[t]he General Partner may suspend redemptions ... if it determines that the value of the
Partnership's assets cannot reasonably be determined or if the Partnership cannot reasonably
liquidate any of its investments. If redemptions are suspended, the General Partner will notify
Limited Partners and will withhold payment to any Limited Partner that has requested the
redemption of his Units. Outstanding redemption requests will be honored as of the next quarter
end following the end of the suspension at the Net Asset Value per Unit as of such quarter end
(ex. A to mov. aff.).
[*4]
The LPA gives TSCM the same rights in paragraph 11 (b).
Hunnicutt asserts that redemptions were not suspended on September 30, 2008, for all investors in the fund, but has not submitted any supporting evidence for this allegation.
The motion to dismiss the first cause of action, sounding in breach of contract, is granted only to the extent that it seeks to dismiss the claim that TSCM should have redeemed Hunnicutt's units on June 30, 2008, and is otherwise denied. The argument with respect to Hunnicutt's contention that it was entitled to redemption on June 30, 2008, is a simple computation matter that can be resolved based on the documentary evidence. The plain meaning of the applicable provisions is that, because June 30, 2008, the date on which the 12-month lock-up period ends, is in the second calendar quarter, the earliest that the funds can be withdrawn is September 30, 2008, which is the end of the next calendar quarter.
The motion to dismiss the first cause of action is denied to the extent that it alleges that TSCM improperly suspended redemptions. The documentary evidence does not conclusively establish a defense as a matter of law. The issues raised in the affidavit submitted by TSCM in opposition to the motion, primarily whether TSCM properly exercised its discretion to suspend redemptions, are better suited to a summary judgment motion, especially in light of the rule that an affidavit may not be considered as "documentary evidence" on a CPLR 3211 (a) (1) motion (see Berger v Temple Beth-El of Great Neck, 303 AD2d 346, 347 [2d Dept 2003]).
The competent documentary evidence does not establish what sub-funds of TSCM had suspended redemptions, and it does not identify any sub-fund, the value of which could not reasonably be determined as of September 30, 2008. Plainly, for purposes of redemptions, the value of the Nadel sub-fund was zero for the foreseeable future. The documentary evidence does not establish conclusively that TSCM properly exercised its contractual right to suspend redemptions.
The motion to dismiss the second cause of action, sounding in breach of fiduciary duty, is granted to the extent that it alleges that TSCM improperly executed Hunnicutt's redemption order, and improperly charged a management fee, and otherwise denied. Hunnicutt has failed to plead with sufficient particularity that TSCM breached its fiduciary duty by failing to execute Hunnicutt's redemption order promptly with its sub-funds, and then "failing to protect the assets of [plaintiff] once Hunnicutt requested a redemption" (Complaint, ¶ 43; see CPLR 3016 (b); Le Bar Bat, Inc. v Shallo, 198 AD2d 49, 49 [1st Dept 1993]).Hunnicutt's allegation that TSCM breached either a contractual or fiduciary duty by not promptly executing its order to redeem, despite the fact that TSCM was not required to redeem the proceeds for at least a year after receipt of the order, is a bare legal conclusion that is not deemed true for purposes of this motion (see Perl v Smith Barney Inc., 230 AD2d 664, 665 [1st Dept 1996]). Hunnicutt has not cited any duty owed by TSCM to execute the trades promptly in response to the redemption request. The allegation that TSCM acted in that manner with respect to Hunnicutt's earlier investment is immaterial.
The allegation in the second cause of action that TSCM breached its fiduciary duty by improperly charging a management fee "even though it has lost money due to lack of diversification and lack of due diligence" (Complaint, ¶ 42), is insufficient as a matter of law. Nothing in the documentary evidence requires TSCM to forego its management fee for losing money.
The allegations of the second cause of action, when considered in connection with the Hunnicutt affidavit and the incorporation of the prior paragraphs of the complaint, sufficiently state a cause of action for breach of fiduciary duty by TSCM in connection with its investment in the [*5]Nadel Ponzi scheme. The standard on a CPLR 3211 (a) (7) motion is whether the plaintiff has a cause of action, not whether it is properly stated (Leon v Martinez, 84 NY2d 83, 88 [1994]).
These allegations sufficiently state that TSCM breached its fiduciary duty to Hunnicutt by failing to exercise due diligence in connection with its investment in the Nadel Ponzi scheme, and that Hunnicutt suffered damages of $382,172 as a result. The Hunnicutt affidavit demonstrates that a simple internet search would have revealed sufficient facts about Nadel's checkered past, including disbarment in New York in 1982 for conducting involving dishonesty, to put TSCM on notice, at the very least, that further due diligence was required.
The motion to dismiss the third cause of action, sounding in unjust enrichment, is granted. Unjust enrichment, which sounds in quasi-contract, is an "obligation which the law creates, in the absence of any agreement" (State of New York v Barclays Bank of NY, N.A., 76 NY2d 533, 540 [1990]). A cause of action for unjust enrichment is not permitted where, as here, the terms of a valid and enforceable contract control the matter in question (see Goldman v Metropolitan Life Ins. Co., 5 NY3d 561, 572 [2005]). To the extent that only the third cause of action raises the issue of TSCM improperly charging fees on illusory returns or assets, those allegations may be considered as part of either the first or second cause of action.
Accordingly, it is
ORDERED that TSCM's motion to dismiss is granted, with respect to the first cause of action, to the extent of dismissing that part of the first cause of action that alleges that TSCM breached its contractual duties to Hunnicutt by not redeeming its units on June 30, 2008, and is otherwise denied; and it is further
ORDERED that TSCM's motion to dismiss is granted, with respect to the second cause of action, to the extent that it alleges that TSCM breached its fiduciary duty by failing to process Hunnicutt's redemption request promptly and segregate the resultant proceeds, and that TSCM improperly charged a management fee, and is otherwise denied; and it is further
ORDERED that TSCM's motion to dismiss the third cause of action is granted.
DATED:
ENTER:
_________________________
J. S. C.
Footnotes
Footnote 1:
TSCM argues that what Hunnicutt actually requested was that the funds be transferred from one
fund to another, rather than returned to Hunnicutt. It is immaterial to liability whether Hunnicutt
requested a transfer or return of the funds. Either way, the Class A shares would have been
redeemed in accordance with the applicable terms.
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