Opinion
X08FSTCV155014970S
10-14-2016
Alpha Beta Capital Partners, LP v. Pursuit Investment Management, LLC et al
UNPUBLISHED OPINION
MEMORANDUM OF DECISION
Robert L. Genuario, J.
I. Background
This case arises out of the plaintiff's investments in two hedge funds which were structured as limited partnerships, the defendant Pursuit Opportunity Fund, I, L.P. (POF) and the defendant Pursuit Capital Management Fund I, L.P. (PCM). POF and PCM are among a group of companies established and operated by the defendants Anthony Schepis (Schepis) and Frank Canelas, Jr. (Canelas) which companies will be described in more detail later but are generally referred to as the Pursuit Investment Group. At one point in time the Pursuit Investment Group managed assets in excess of $600,000,000. The years 2007 and 2008 were years of great volatility in the investment markets in which liquidity was at a premium and as a result most of the investors in the Pursuit Investment Group withdrew or redeemed their investments and the total assets under management by the Pursuit Investment Group dwindled.
The plaintiff however, and another group of investors, generally referred to as the Schneider Group, chose to remain invested in POF and PCM. In 2010 the plaintiff brought suit and an arbitration proceeding against certain of the defendants herein claiming damages arising out of alleged breaches of duty by the defendants or respondents therein. (Collectively the 2010 case.)
The 2010 case was settled on April 8, 2011 pursuant to a written settlement agreement entitled Confidential Settlement Agreement (CSA). Since the execution of the CSA the plaintiff and the defendants have engaged in multiple lawsuits in multiple jurisdictions each alleging various breaches of contractual, statutory or common-law duties one against the other. Certain of the defendants have also engaged in multiple legal proceedings in multiple jurisdictions with the Schneider group who are not parties to this litigation but whose involvement is material to some of the claims being asserted herein.
The plaintiff and the defendants, who have asserted counterclaims, had both sought prejudgment remedies. The court held an evidentiary proceeding which included eight days of evidence. The parties stipulated that all evidence introduced in the prejudgment remedy proceeding would constitute evidence in the trial of the case in chief, subject to whatever appellate rights the parties maintained or preserved during the prejudgment remedy proceedings. In the case in chief the court heard approximately seven days of additional evidence which was followed by a robust briefing schedule.
See Memorandum of Decision dated June 16, 2016 (docket #271).
II. The Pleadings
The plaintiff's substituted complaint (docket no. 205) alleges claims sounding in breach of contract (breach of the CSA), breach of the covenant of good faith and fair dealing, unjust enrichment, conversion and civil conspiracy. The plaintiff had also included counts sounding in Connecticut Statutory Theft and the Connecticut Unfair Trade Practices Act but those two counts were stricken by the court. The defendants claim that the plaintiff is liable for breach of the CSA, and in particular certain of its confidentiality provisions, and for breaches of certain specific provisions of the Limited Partnership Agreement. The defendants also set forth a claim for indemnification pursuant to provisions in the Limited Partnership Agreement. Each party has also set forth various special defenses that will be discussed by the court as needed.
See Transcript of June 20, 2016 proceeding (docket #289.1).
III. The Findings of Fact
A. The Parties and the Players
The plaintiff is a limited partnership, organized under the laws of the state of Delaware, that invested in the defendant POF and the defendant PCM as previously indicated. The defendant Pursuit Partners, LLC (Pursuit Partners) is a limited liability company organized under the laws of the State of Delaware with its principal place of business in Greenwich, Connecticut; the defendant Pursuit Investment Management, LLC (PIM) is also a Delaware limited liability company with a principal place of business in Greenwich, Connecticut. PIM is an investment advisor registered with the United States Security and Exchange Commission and provided investment management and advisory services to POF and PCM as well as the defendants Pursuit Opportunity Fund I Master, LTD (POF Master) and Pursuit Capital Management Fund I Master, LTD. (PCM Master). The defendant PCM is a Delaware limited partnership that was formed in August 2004. The defendant PCM Master is a Cayman Island limited liability company; PCM Master and PCM are closely related in that the vast majority of investments in PCM Master were made by PCM, though PCM also made certain investments independent of investments those it made with PCM Master. The defendant POF similarly is a Delaware limited partnership that was formed in 2007 and the defendant POF Master is a Cayman Island limited liability company which is closely related to POF in that the vast majority of investments in POF Master were made by POF. The defendant Northeast Capital Management, LLC is a limited liability company who is the successor general partner to PCM. Schepis and Canelas are managing members of Northeast and from that position exercise complete control over PCM. Northeast became the general partner of PCM subsequent to a bankruptcy filing by the prior general partner of PCM Pursuit Capital Management, LLC (Pursuit Management). Schepis and Canelas had been managing members of Pursuit Management prior to its bankruptcy filing and exercised complete control over PCM from that earlier perch as well. The defendants Schepis and Canelas are individuals residing in Greenwich, Connecticut who together formed, operate and control the various Pursuit entities. The Schneider Group are various persons and entities who have also invested in PCM and POF. The group includes Leslie Schneider, Lillian Schneider, Claridge Associates, LLC and Jamus Scott, LLC. The plaintiff and the defendants PIM, POF, PCM, Schepis and Canelas (collectively referred to as the signatory defendants) are signatories to the CSA; the other defendants are not. During the operative periods of time the plaintiff was represented in part by a law firm named Reed Smith. Reed Smith is also a signatory to the CSA. The defendants during the operative periods of time were represented by a law firm known as DLA Piper. DLA Piper is also a signatory to the CSA. Pursuit Management was a signatory to the CSA but is not a defendant in this action.
B. Activity Which Preceded the Execution of the CSA
Sometime prior to 2007 the plaintiff invested in PCM. The plaintiff also invested in POF at or about the time of its formation in 2007. The investments took the form of the acquisition of a limited partnership interest in both PCM and POF and consistent with that form the plaintiff became a signatory to PCM and POF limited partnership agreements.
In 2007 and 2008 the global security markets were experiencing significant difficulties and liquidity was at a premium. In addition to the general difficulties that the Pursuit entities faced as a result of the volatility of the global security markets, certain of the defendants were experiencing a more specific difficulty. PCM Master and POF Master had purchased certain securities known generally as collateralized debt obligations (CDOs) from UBS AG (or its affiliate) in 2007 for substantial sums of money. Shortly after the acquisition of the CDOs by PCM Master and POF Master the value of those CDOs dropped precipitously and in 2008 Pursuit Partners and PIM brought suit against UBS AG and Moody's Corporation (Moody's) (the UBS suit). Pursuit Partners and PIM were represented by a Colorado law firm known as Berg Simpson along with local counsel. Both firms initially billed Pursuit Partners monthly on an hourly basis for legal services plus costs incurred. However, in December of 2010 both firms agreed to continue the litigation on a contingency basis and be paid for their services based upon a percentage of any recovery. Both firms continued to bill on a monthly basis for costs incurred. Monthly bills for services or costs were paid in timely fashion.
See generally Pursuit Partners, LLC v. UBS AG et al., 2009 WL 3286011 (The UBS suit).
In 2009 the defendants provided their investors with an opportunity to redeem their investments and withdraw from the limited partnerships POF and PCM. Most of their investors chose to redeem. In September 2009 the plaintiff chose to redeem its interest in POF, thus extinguishing its interest in POF with the exception of certain funds held back to cover possible future expenses of POF. But the plaintiff and the Schneider Group chose to remain invested in PCM and between them the plaintiff and the Schneider Group they held approximately two-thirds of the equitable interest in PCM as limited partners. On or about April 1, 2009 the plaintiff was provided with a document entitled " Amended and Restated Limited Partnership Agreement" for PCM (the LPA). The document was drafted by one or more of the defendants and under the supervision of Schepis and Canelas. The plaintiff executed the document but the document did not require or contemplate any new investment. The plaintiff simply retained its interest in PCM consistent with the terms of the new document based upon its past investment in the same limited partnership. On or about May 6, 2009 Schepis and Canelas, through an offshore entity which the parties and the court refer to as PCM offshore, made a deposit in the PCM Master account collectively totaling $1,100,000.
Schepis contributed 60 percent of the funds deposited and Canelas contributed 40 percent of the funds deposited consistent with their ownership interest in PCM offshore.
In 2010 the plaintiff brought suit against PIM, Schepis and Canelas in the Supreme Court of the State of New York claiming substantial damages against the defendants therein for various alleged tortious conduct involving the management of its investments in the hedge funds. At the same time they filed a separate arbitration proceeding against POF and PCM claiming similar losses for similar tortious conduct. Among the claims made in those proceedings was that one or more of the defendants, whose compensation was based upon a percentage of the value of the assets under management, continued to pay themselves based upon a highly inflated value of the CDOs which they had purchased even though they knew that those CDOs held little or no value. Around this time the United States Securities Exchange Commission (the SEC) began an investigation of the Pursuit entities and on February 23, 2011 Schepis and Canelas received a brief email from DLA Piper indicating that between: (1) legal expenses associated with the SEC investigation and (2) the possible disgorgement of assets if the defense of the SEC investigation was unsuccessful, the SEC proceeding could cost as much as $10,000,000. The defendants notified the investors including the plaintiff of the SEC investigation (but not the estimate of costs) and at the plaintiff's request Reed Smith contacted the SEC to learn more about the investigation. There was little evidence presented in this case concerning the substance of the SEC investigation but ultimately it was resolved without penalty or sanction.
On April 8, 2011 the parties executed the CSA settling the 2010 case.
C. The Terms of the CSA
The CSA referenced both the 2010 New York lawsuit and the 2010 arbitration proceeding, acknowledged that the plaintiff had invested in both PCM and POF and stated that " the parties hereby agree as follows:" the agreements were listed in numerical form and included discontinuance of the 2010 lawsuit and arbitration proceeding with prejudice. In paragraph 3 entitled " Consideration, " it required PIM to pay $2,200,000 to the plaintiff within five days. It acknowledged that the net asset value (NAV) of the plaintiff's investment in PCM was $1,868,033. It required a payment within thirty days of $1,418,033 identified as the " Redemption Payment " (Emphasis in original.) which amount represented the plaintiff's NAV less a hold back of $250,000, " for the purpose of funding necessary costs (other than plaintiff counsel's attorneys fees through trial) associated with the ongoing [UBS litigation] and an additional holdback in the amount of $200,000 to pay legal fees and expenses with respect to which PCM has an obligation to indemnify." The CSA also acknowledged that PCM and POF had previously held back funds amounting to approximately $525,000 which was less than 10 percent of the aggregate prior hold backs of all redeemed investors in the funds or their affiliates. In the CSA, PIM warranted that the $525,000 would not be used to pay expenses of the UBS litigation. The CSA was specific that if the $250,000 held back for the UBS litigation was insufficient to pay the plaintiff's pro rata share of the cost of the UBS litigation, the plaintiff would be provided with the opportunity to pay additional expenses on a proportionate basis necessary for the UBS litigation. If the plaintiff declined to provide such additional expenses its interest in the UBS litigation would be extinguished. That same provision would bind other investors. The CSA defined the plaintiff's proportionate interest in PCM as 32.083612 percent (the court for simplicity will refer to this as 32.08 percent but will use the actual number for any calculations). In paragraph 4 the CSA referenced certain " contingent assets" which were specifically identified as (a) PCM's proportionate interest in the UBS litigation and (b) PCM's interest in a claim against Lehman Brothers International (Europe) in the approximate amount of $14,000,000 (the LBIE claim). The contingent asset paragraph acknowledged that the plaintiff would continue to hold its pro rata share (32.08 percent) of PCM's interest in these two contingent assets. The CSA provided that the plaintiff's " continued interest in the contingent assets shall be governed by [the PCM LPA]."
The CSA contained broad general mutual releases between the parties for all claims which were made or could have been made by the parties against each other as of the date of its execution.
The CSA also contained a significant confidentiality provision in which the parties agreed to " maintain in the strictest confidence and not to disclose . . . the contents and terms of [the CSA] including but not limited to the consideration for this [CSA]." The confidentiality provision further provided:
To further ensure the confidentiality of this agreement, the parties and their respective counsel agree not to use or provide any information relating to any claim arising out of an investment to any person in connection with the initiation of any lawsuit, claim, arbitration or action related to or concerning any investment of PCM, POF or any other investment vehicle managed by PIM.
Finally, the CSA contained a provision that it shall be construed and interpreted in accordance with the laws of New York and that any disputes or litigation arising out of this agreement shall be governed by New York law.
The parties' view of the significance of these provisions and how they relate to their claims and defenses will be discussed subsequently.
D. Post-CSA Activity
On or about April 28, 2011 PIM sent a letter to the remaining investors in PCM notifying them that the claims made by the plaintiff had been settled (though not of the terms of the settlement) and that it pursuant to the LPA it was effecting a " mandatory withdrawal of their limited partnership interest" but that they would maintain their proportionate interest in the two contingent assets. On or about April 30, 2011 Schepis executed a document, in his capacity as member of the general partner and in his capacity as member of the general partner acting as attorney in fact for the limited partners, entitled Amendment to the PCM Limited Partnership Agreement which set forth certain terms relating to the withdrawn investors' continued interest in the contingent assets, the rights of the General Partner to be paid an incentive fee, and the right of the General Partner to withhold from any distribution of the proceeds of the contingent assets " reserves, costs or expenses owed either to the Partnership or the General Partner."
Shortly after the CSA was signed, the LBIE claim was sold for $9,334,141.55. Those funds were received in PCM Master's account on June 1, 2011. However, no part of the LBIE claim proceeds were remitted to the plaintiff until some time in October 2011, approximately four and one-half months later. At that time the plaintiff received $1,022,022.36. The first explanation as to the amount of the remittance and the value of the plaintiff's interest in the LBIE claim proceeds was received on November 9, 2011 in an email from DLA Piper to Reed Smith (the CSA required communications between the parties to be conducted through counsel). DLA Piper explained that PCM did not hold the LBIE claim directly but held a 90 percent interest in PCM Master who held the LBIE claim. Therefore, Alpha Beta's 32.08 percent interest in 90 percent of the LBIE claim was worth $2,691,641. DLA Piper further stated that a performance fee would also be subtracted from the plaintiff's interest based upon the performance of the fund " after [the plaintiff] reinvested in April 2009." A further explanation was received by Reed Smith from DLA Piper on November 26, 2012 indicating that after adjusting for the performance fee the plaintiff's interest in the LBIE claim was reduced to 2, 132, 559 and that Alpha Beta's reserve balance in May 2011 was adjusted upward in that amount. Neither of the November communications provided any reference to new facts which would give rise to a basis for concluding the holdbacks of $975,000 of the plaintiff's funds recognized or created by the CSA were insufficient to accomplish the tasks for which they were intended. Indeed none of the DLA Piper communications even asserted a right to hold back additional funds or to establish reserves in excess of those specifically negotiated and expressly set forth in the CSA. Thus, even if the defendants established the correctness of the 90 percent/10 percent ratio between PCM Master and PCM and even if the defendants established that they were entitled to a performance fee, at least by the end of November 2011 there was no explanation for why the defendants had remitted less than 48 percent of what they had calculated was the plaintiff's interest in the LBIE claim.
Nor were any additional funds or any additional meaningful or credible explanations provided to the plaintiff until May 2013 approximately one and a half years later and approximately two years after PCM Master received the LBIE claim proceeds.
On November 6, 2012, the case against UBS and Moody's was dismissed based upon the court's ruling that the plaintiffs in that case did not have standing to proceed against UBS or Moody's. On December 4, 2012 lead counsel for Pursuit Partners in the UBS case sent a letter to the investors, including the plaintiff, explaining that the case had been dismissed, that he disagreed with the decision and that he had filed a motion to reargue the motion to dismiss. The letter also urged investors not to take any action which would interfere with the process. Lead counsel also expressed confidence that they would ultimately prevail in the case against the UBS and Moody's. However, in March 2013 the plaintiff having received no further communication regarding the LBIE claim and concerned about the status of its holdbacks, including the UBS holdback provided in the CSA, brought suit in New York against PIM, PCM, POF and Pursuit Capital Management (the 2013 case). The essence of the 2013 case was the plaintiff's claim that the defendants breached the CSA by (1) failing to pay the plaintiff the pro rata portion of its LBIE claim proceeds and (2) failing to provide the plaintiff with periodic updates on the status of its hold back and its contingent assets. That case did not seek the UBS proceeds as the UBS case had not yet been resolved. The plaintiff therein sought an accounting and further sought a temporary and permanent injunction enjoining the defendants from using or otherwise accessing the plaintiff's holdbacks without further order of the court. Shortly after the suit was instituted the defendants or some of them sent the plaintiff approximately $700,000 in additional proceeds from the LBIE claim. The transmittal of the $700,000 was not accompanied with any explanation or accounting of how the amount of the additional proceeds transmitted was determined. Nor did it provide any indication or explanation regarding the balance of the LBIE proceeds or information relating to the status of the holdbacks.
On April 22, 2014 the Pursuit Capital Management sent the plaintiff a letter purportedly executing its rights to " mandatorily withdraw" the plaintiff from the limited partnership. Schepis believed that he was entitled to " mandatorily withdraw" the plaintiff based upon the language in the LPA and that his decision to mandatorily withdraw the plaintiff terminated any interest they had in the contingent assets. On July 3, 2014, the court in the UBS case reconsidered its ruling dismissing the case, vacated the dismissal and held that Pursuit Partners and PIM had standing to continue the litigation based on the unique and unitary relationship between the various companies that make up and control the Pursuit hedge fund structure.
In 2014 the court in the UBS case ordered the plaintiffs therein to make a sanction payment to the defendants therein in the amount $53,815.34. The sanction payment was the result of the UBS court's determination that the plaintiffs had not complied with certain discovery orders. Counsel for Pursuit Partners in the UBS case testified that this combined with orders that had been entered in the 2013 case limiting access to the held back funds put counsel and Pursuit Partners in a difficult position because they arguably were unable to access the held back funds necessary to comply with the court's order and risked further sanctions or dismissal of the UBS case. In any event the orders in the 2013 case were modified and funds were accessed. No adverse impact on the UBS case resulted. In 2015 the Pursuit Partners settled the UBS case for a total amount of $36,000,000. The defendants have not provided the plaintiff with any portion of the UBS settlement proceeds.
The court has previously granted a motion to seal information covering the UBS settlement filed by UBS and Moody's but in granting that motion informed both UBS and Moody's that in writing its decision the court reserved the right to reference the necessary settlement terms to explain its decision. The public has a right to know the court's reasoning and the court cannot adequately explain the damages component of the decision without referencing the gross settlement amount. It is unnecessary however, to identify which UBS defendant paid what portion of the gross settlement amount.
The parties disagree as to whether or not plaintiff still maintains any interest in the UBS proceeds and if so they have substantial disagreements with regard to how the plaintiff's interest in the UBS settlement is to be determined and calculated. Additionally, the defendants seek damages from the plaintiff for its alleged breaches of contract. Additional factual findings will be discussed as needed.
IV. The Claims of the Parties
The plaintiff claims that it is entitled to 32.08 percent of PCM's interest in the UBS proceeds less certain specific attorneys fees incurred in the collection of the UBS claim. The defendants claim that the plaintiffs are entitled to no part of the UBS proceeds because of their material breaches of the CSA by virtue of their violation of the CSA confidentiality provisions because they communicated with the Schneider Group and the SEC and in that they brought the 2013 lawsuit seeking remedies which were inconsistent with their current position since they sought return of the $250,000 holdback or portions thereof which holdback was necessary for the prosecution of the UBS case, and in that the court orders entered as a part of that 2013 case impeded the prosecution of the UBS case. Moreover, the plaintiff and the defendants disagree as to what the plaintiff's 32.08 percent of PCM's interest in the UBS proceeds equates to. The defendant position is that the $36,000,000 first has to be divided between the interest of PCM Master (52.8 percent) and POF Master (47.2 percent). The defendants then assert that once the interest of PCM Master is determined, PCM's interest is approximately 90 percent of PCM Master as other investors (Schepis and Canelas though PCM offshore) held approximately 10 percent interest in PCM Master. The defendants further assert that once PCM's interest is calculated the limited partnership agreement provides for a payment of an performance fee (sometimes referred to as an incentive fee) equal to 20 percent of the profits of the investment. The defendants claim that 100 percent of PCM's interest in the UBS proceeds is profit as defined by the April 2009 Limited Partnership Agreement and that therefore the plaintiff, if entitled to anything, after deduction of the performance fee, would be entitled to only 80 percent of PCM's interest. Finally, the defendants assert that they are entitled to further deduct, pursuant to the indemnification clauses of the LPA expenses which include the expenses of defending against the SEC investigation, the expenses of defending and prosecuting the various lawsuits between these parties as well as the various lawsuits brought for and against the plaintiff and the litigation between the defendants and others.
This specific litigation between the parties mentioned in this memorandum is only a small fraction of the litigation that has raged between the parties and between the defendants and the Schneider Group and at least one other group of investors since 2010.
Of course, the court must first determine if the CSA or the LPA have been breached by either party; and if so, what the ramifications of any breach is before determining whether or not the plaintiff is entitled to any of the proceeds of the UBS claim. If the court determines that the plaintiff is entitled to any of the proceeds of the UBS claim, the court must go through each of the assertions of the defendants with regard to calculating the actual interest of the plaintiff in the UBS claim before rendering a decision.
V. Discussion
A. The Pre-UBS Settlement Events
In the case at bar the plaintiff seeks damages for the defendant's breach of the CSA with regard to the defendant's failure to remit to the plaintiff, its proportionate share of the UBS proceeds. In the 2013 case, which is still pending in New York, the plaintiff seeks, inter alia, damages relating to the defendant's alleged breach of the CSA in failing to remit the balance of the LBIE proceeds as well as an accounting of their holdbacks as set forth in the CSA. However, the conduct of the parties about the time the LBIE proceeds became available is pertinent to this litigation because both parties argue that breaches by the other at or about that time justified their subsequent conduct.
In order to determine whether the defendants breached the CSA the court must determine what obligations the CSA in conjunction with the LPA obliged the defendants to perform. The defendants place great emphasis on the phrase contained in the CSA that the plaintiff's " continued interest in the contingent assets shall be governed [by the LPA]." Indeed that phrase cannot be ignored but it also clearly defines what it is that continues to be governed by the LPA. The LPA continues to govern the plaintiff's interest in the two contingent assets defined in the CSA. Those two contingent assets are the LBIE claim and the UBS claim.
At issue is whether or not upon receipt of the LBIE proceeds the defendant's withholding of substantial portions of those proceeds from the plaintiff was consistent with the language in the CSA and the LPA or breaches of the obligations set forth in those documents. The defendants now maintain, as stated in Schepis' testimony, that pursuant to LPA the defendant had the ability to withhold the balance of the plaintiff's percentage interest in the LBIE claim. Section 5.01(c) of the LPA states in pertinent part: " In the case of any limited partner who withdraws all or any portion of its limited partnership interest, such withdrawing limited partner shall be paid the amount of its withdrawal in cash as soon as practicable following the effective date of the withdrawal, subject to certain restrictions and reserves for contingent or undetermined liabilities of the partnership."
The execution of the CSA constituted a withdrawal of the plaintiff from the limited partnership. The defendants maintain that upon receipt of the LBIE proceeds the partnership could establish reserves out of the LBIE fund before remitting the balance to the plaintiff. But the CSA established and acknowledged certain defined and specific " holdbacks" to cover the same type of expenses. At one point in his testimony Schepis tried to distinguish between reserves and hold backs but it is a distinction without a difference.
If it didn't certainly the mandatory withdrawal determined by the defendants on or about August 28, 2011 constituted the same.
The LPA does not use the word " holdback" at all and the CSA does not use the word " reserves." But both are the maintaining of dollars by the partnership, otherwise due to the limited partner upon withdrawal, in order to provide the partnership with funds necessary to pay legitimately anticipated expenses of the partnership prior to the time those expenses are due or can be definitively calculated. " Reserves for contingent or undetermined liability of the partnership" as that phrase is used in 5.01(c) are for all practical purposes the same as the holdbacks set forth in paragraph 3 of the CSA. The CSA contains significant detail concerning those holdbacks. First, it defines the amount to be held back and the purposes for which certain specific holdbacks can be utilized. Accordingly, after establishing the NAV of the plaintiff's interest in PCM at $1,868,033 it establishes out of that NAV a holdback of $250,000 for the purpose of funding necessary costs (other than plaintiff counsel's attorneys fees through trial) associated with " the UBS litigation." The counsel fees were obviously excluded because at the time the CSA had been executed, the agreement between Pursuit Partners and its UBS counsel had been converted to a contingency fee agreement. The CSA also established an " additional hold back in the amount of $200,000 to pay legal fees and expenses with respect to which PCM has an obligation to indemnify." The CSA also acknowledged that these two newly created holdbacks were in addition to a prior holdback in the approximate amount of $525,000 which PIM represented and warranted was less than 10 percent of the aggregate prior holdback from all redeemed investors and the funds. Thus, the CSA impliedly acknowledged total holdbacks in excess of $5,250,000.
The CSA also expressly contemplated the possibility that the $250,000 earmarked for the UBS litigation costs might be insufficient to fund for the necessary cost through the end of the UBS litigation. In such event the plaintiff and all current PCM investors " will be provided with the opportunity to pay additional expenses necessary for the UBS litigation." If the plaintiff or any additional investor declined to provide additional costs the declining party's interest in the UBS litigation would be extinguished. Thus under the CSA the defendants had the right to request additional funds to pay for UBS costs if needed (which they never did) and the plaintiff had the right to contribute or decline to contribute those costs which declination would extinguish its interest in the UBS litigation.
Notably, nothing in the CSA expressly contemplates that the other holdbacks will be insufficient nor does the CSA suggest that the defendants had the right or the plaintiff had the obligation to provide more funds for the purposes for which these holdbacks were otherwise provided. Indeed the CSA acknowledges that the plaintiff's continued interest in the holdbacks since under the CSA the plaintiff through its counsel is " entitled to periodic updates on the status of the hold backs . . ."
In essence the CSA modified the right of the defendant to establish reserves in favor of the carefully negotiated and established reserves set forth as holdbacks in the CSA. To suggest that the plaintiffs agreed these specific amounts for a specific purposes with specific processes for obtaining additional contributions for expenses and the specific rights to status reports on these holdbacks only to allow the defendant to unilaterally withhold additional amounts is simply inconsistent with the express terms of the CSA. The CSA is specific and detailed with regard to this issue and of course it is a classic rule of contract interpretation that terms expressed specifically in a contract supercede terms expressed in more generally. See e.g. Aramony v. United Way of America, 254 F.3d 403 (2nd Cir. 2001).
Moreover, when DL Piper provided its explanations of the amounts provided to the plaintiff in November of 2011 DL Piper mentioned the 10 percent of interest of PCM Master in the LBIE proceeds which needed to be deducted from the gross proceeds amount and DL Piper mentioned the performance fee that the defendant claimed it had a right to, but DL Piper did not mention the plaintiff's right to withhold additional amounts as reserves.
Thus, while providing the plaintiff with $1,022,000 of the LBIE proceeds some four and one-half months after those proceeds were received is not providing the proceeds " as soon as practicable" as required by the LPA and in and of itself could be considered a breach of both the CSA and LPA merely by the extensive delay in that payment, the fact that the payment represents less than 48 percent of what the plaintiffs were entitled to from the LBIE proceeds, even assuming the correctness of the DL Piper explanations concerning PCM Master's interest and the performance fee, constitutes a material breach. Payment of less than 48 percent of the amount due the plaintiff four and one-half months after the funds are received by the defendants is a material breach of the CSA.
Alternatively, even if the court were to conclude that the defendants were entitled, under some circumstances to additional reserves for reasonably anticipated expenses their conduct still evidences a material breach. At the time the CSA was executed there were only two contemplated contingent or undetermined liabilities of any significance: the UBS case and the SEC investigation. The UBS case and the possibility of additional expenses is expressly covered in the CSA. There is no evidence that between the execution of the CSA on April 8, 2011 and the receipt of the LBIE funds less than two months later or even (at the time of the partial disbursement) another four and one-half months later, that anything had occurred or that the defendants had received any new information that would justify new or additional reserves. Prior to the execution of the CSA both the plaintiff and the defendants were aware of the SEC investigation. The SEC investigation had begun. Subpoenas had been issued and defense counsel had been engaged. While Schepis testified that he had received an email estimating that the SEC proceedings could cost as much as $10,000,000. This email had been received before the execution of the CSA and therefore cannot justify additional hold backs beyond that which had been was agreed to in the CSA.
This assumes that " disgorgement" ordered by the SEC would have been an indemnifiable expense, a doubtful proposition.
Certainly six months after the CSA had been executed if the defendants believed that the negotiated and agreed-upon hold backs were insufficient they would have been obligated to provide a " periodic update" as to the status of the holdbacks required by the CSA before unilaterally holding back an additional amount in excess of $1,000,000.
Holdbacks and reserves when allowed are required to be proportional to those of the other investors so the $1,000,000 coupled with a proportionate amount from the other PCM, POF, PCM Master and POF Master investors translates into significantly more.
There is no evidence that the defendants ever provided the plaintiffs with such a periodic update. All this is important to the case at bar because the defendants argue that they are relieved of their obligations under the CSA, including the obligation to remit the plaintiff's share of the UBS proceeds, because of the plaintiff's alleged breach of the CSA starting with their communication with the Schneider Group as evidenced by Reed Smith's November 16, 2011 letter on behalf of the plaintiff to DL Piper. That letter stated that the defendants had provided insufficient information concerning the LBIE claim and no supporting documentation to justify or support the split of the LBIE effectuated by the defendants. That letter also indicated that Reed Smith had been in contact with the Schneider Group and their related entities and that the Schneider Group was supporting the demands made by the plaintiff. The defendants argue that this is an admission that the plaintiffs or their representatives had breached the confidentiality agreement contained in the CSA. The defendants' additional claim that the plaintiff materially breached the provisions of the CSA when it filed a 2013 action. The 2013 action sought and still seeks the plaintiff's pro rata share of funds from the LBIE claim as well as information on the status of the plaintiff's holdbacks. The 2013 New York action also sought an accounting, and an order temporarily and permanently restraining and enjoining the defendants from using or otherwise accessing any portion of the plaintiff's holdbacks without further order of the court. Shortly after the initiation of the 2013 action the defendants (or some of them) remitted approximately $700,000 of the LBIE proceeds to the plaintiff. This of course was almost two years after the LBIE claim had been liquidated and certainly cannot be construed as complying with the obligation in the LPA to provide the withdrawal proceeds as soon as practicable. The defendants claim that the 2013 New York action was in violation of the CSA primarily because it sought an injunction preventing the defendants from using the UBS hold back to fund the UBS litigation. The defendants assert that such action is inherently inconsistent with the plaintiff's current position that is entitled to its pro rata share of what has been a successful (or at least cash generating) conclusion for the UBS litigation. The defendants argue that under New York law they are relieved of their obligation to pay the plaintiff the pro rata share of the UBS proceeds. On April 22, 2013 shortly after the 2013 New York case was initiated by the plaintiff PCM sent a letter to the plaintiff stating that under the CSA the plaintiff's " continued interest in the contingent assets shall be governed by the PCM [limited partnership agreement]" and that pursuant to the partnership agreement the general partner had the right to " mandatorily withdraw" the plaintiff's remaining limited partnership interest in the fund. Schepis testified that he believed that such withdrawal eliminated the plaintiff's interest in the UBS litigation.
Of course, there are several problems with this letter. First the plaintiff had already withdrawn or been withdrawn from the limited partnership by virtue of the CSA and/or mandatory withdraw of April 2011. The second problem is that, pursuant to the LPA, withdrawal, mandatory or otherwise, does not result in a forfeiture of the limited partner's interest but requires the withdrawing limited partner to be paid the amount of its NAV in cash as soon as practicable.
There are also several problems with the defendants' contention that they are relieved of their obligations under the CSA by virtue of the suggested breaches of the CSA by the plaintiff. First, is that New York law is not as simple as the defendants contend. While the defendants contend that a material breach of contract excuses the performance of the non breaching party, an analysis of the cases demonstrates that New York law is more nuanced than that. " When a party has breached a contract that breach may excuse the non breaching party from further performance if the breach is 'material.'" New Windsor Volunteer Ambulance Corps., Inc. v. Meyers, 442 F.3d 101, 117 (2nd Cir. 2006) (emphasis added). " If a breach is only partial it may entitle the non-breaching party to damages for the breach but it does not entitle it to treat the contract as at an end . . . The distinction between partial and total breach is particularly important in executory contracts where the parties are only part way through a contracted for a period of time. A partial breach by one party . . . does not justify the other party's subsequent failure to perform; both parties may be guilty of breaches, each having a right to damages." Id. at 117-18. (Internal quotations and citations omitted; emphasis added.) Moreover, in the absence of evidence of damages there can be no finding of breach of contract under New York law. In the case of Gordon v. Dino Dilaurentis Corporation, the Appellate Division of the New York Supreme Court reversed a trial's court denial of a motion to dismiss a complaint asserting causes of action for breach of contract by way of a breach of a confidentiality agreement. The Appellate Division ruled that there was insufficient allegations of damages and allegations of breach without allegations of damages were not sufficient to sustain the complaint. See Gordon at 141 A.D.2d 435, 529 N.Y.S.2d 777 (Supreme Court, Appellate Division First Department, New York 1988). Of course, the defendants assert that there is ample evidence of damages that they have suffered as a result of the plaintiff's breach of confidentiality provisions, including costs associated with multiple legal proceedings that they have been engaged in with the Schneider Group. However, there is no evidence, and indeed the court finds it hard to believe that the defendants could have avoided the litigation and arbitration proceedings with the Schneider Group under any circumstances within the control of the plaintiff herein. The court concludes that if there was a breach of the confidentiality provision it was a partial breach and one that caused the defendants no damages. The conduct of the plaintiff in communicating with the Schneider Group through their counsel did not relieve the defendants of their obligations under the CSA and the court cannot conclude that the defendants have in anyway been damaged by any communications between the Schneider Group and the plaintiff or their representatives.
The second problem with the defendants' contention is that it presumes that defendants were not in material breach of the CSA at the time of the communications between representatives of the plaintiff and the Schneider Group. The evidence would indicate the contrary. Before there is any evidence of any communications between the plaintiff and/or representatives in the Schneider Group, the defendants delayed more than four months in remitting the proceeds of the LBIE claim and at then they remitted, without sufficient explanation, less than half of the proceeds that the plaintiff was due. Even at such time as explanations were provided those explanations, even to the extent they were accurate, did not support the withholding of over 52 percent of the proceeds to which the plaintiff was entitled. Significantly, the plaintiff did not receive a second distribution of the LBIE proceeds until 2013 in the approximate amount of $700,000 which was almost two years after the LBIE claim had been liquidated. There is no justification for this delay. As of October and November 2011 the court finds that the defendants were in material breach of their obligations under the CSA by not remitting within a reasonable time or " as soon as practicable" the proceeds of the LBIE claim to which the plaintiff was entitled.
Moreover, based upon the evidence at trial, the court concludes the defendants' withholding of the additional dollars from the LBIE claim to which the plaintiff was entitled was not because they had any basis in fact to believe that additional reserves were necessary or that they believed that they were entitled to withhold additional amounts as reserves but simply because they wanted more money for their own purposes. This withholding of the plaintiff's money without cause constitutes a willful or grossly negligent breach of the obligations under the CSA and the LPA.
Between the receipt of the $1,022,000 in October 2011 and March 2013 the plaintiff received no additional funds and no periodic updates on the status of their holdbacks. This of course prompted the plaintiff to begin the 2013 action which sought the balance of the plaintiff's interest in the LBIE proceeds and information including an accounting of the holdbacks. Shortly after that suit was brought the defendants transmitted to the plaintiffs an additional $700,000 in LBIE proceeds without material explanation. This would appear to be a concession or admission that the plaintiffs were entitled to $700,000. To the extent one might argue that a delay of four and one-half months to transmit less than half of the proceeds to which the plaintiff is entitled is not a breach. There certainly is no justification for the delay of two years in forwarding the $700,000.
Essentially the defendants claim is that they were entitled to withhold the plaintiff's money (or, more properly, money the plaintiff was contractually entitled to) without meaningful explanation for two years and when the plaintiff sued to get the money and an accounting or explanation of the holdbacks as expressly required in the CSA that this lawsuit constituted a material breach forfeiting their rights to the UBS proceeds. The defendants' position is simply untenable.
But as previously stated this case is not about damages for failure to provide the plaintiffs with the LBIE claim proceeds. The discussion concerning the LBIE claim merely establishes that any of the conduct of the plaintiffs in either communicating with the Schneiders, the SEC or others or in instituting the 2013 action does not deprive the plaintiffs of their rights or the defendants of their obligations with regard to the plaintiff's interest in the UBS litigation proceeds.
B. The UBS Proceeds and the Breach of Contract
In August and September 2015 the defendants settled the UBS litigation with Moody's and UBS respectively. The total gross settlement amount was $36,000,000. For reasons discussed the court has determined that the plaintiff has not breached either the CSA or the LPA. The court finds that the defendants who are parties to the CSA (PIM, POF, PCM, Schepis and Canelas, collectively referred to as the signatory defendants) have breached the CSA with regard to their failure to remit the LBIE proceeds but the court also finds that the defendants have breached the CSA for failure to remit to the plaintiff the amount that it is due as a result of the UBS settlement.
Initially the defendants took the position that only PIM was obligated to make payments under the CSA and that therefore only PIM could be held liable for breach of contract under the CSA. However, this is a significant misreading of the CSA.
The evidence is clear that all of the Pursuit entities were controlled by Schepis and Canelas in a variety of capacities. Indeed, in the UBS litigation UBS took the position that the Pursuit entities were, and the UBS court found that, the various Pursuit entities constituted a " unitary set of tightly related entities all working for a common purpose." Pursuit Partners, LLC v. UBS et al., judicial district of Stamford/Norwalk at Stamford, Docket No. CV08-4013452-S, Memorandum of Decision, Motion to Reconsider, (July 3, 2014, Brazzel-Massaro, J.). The evidence before this court is consistent with that finding. More importantly, with regard to the contractual claim that only PIM is obligated to make payments under the CSA, no specific signatory to the CSA is identified as the entity which has an obligation to pay to the plaintiff its interest in the contingent assets. The defendants' argument that only PIM promised to make payments is inconsistent with the express language of the CSA.
Paragraph 3, entitled " Consideration, " sets forth specific payments that would be made by PIM including a settlement payment of $2,200,000 and a redemption payment of $1,868,033 less the holdbacks previously identified. But the plaintiff's interest and the defendants' obligations concerning the contingent assets are set forth in an entirely different paragraph. Paragraph 4, entitled " Contingent Assets" does not identify which of the parties to the agreement is obligated to make the payments required thereunder or in way suggested the rights and obligations set forth in paragraph 4 are rights and obligations that are in any way limited to less than all of the parties to the CSA. The express language of the CSA in the introductory paragraph just as the document begins to identify the obligations of the parties states:
NOW, THEREFORE, without admission of fault or liability and for the sole purpose of ending the New York action and the arbitration in resolving the claims that have been, or could have been asserted between and among the parties, and any other claims between them, in consideration of the mutual promises made herein, the sufficiency which is hereby acknowledged. The parties hereby agree as follows: (Emphasis added.)
All of the parties understood the close working relationship between the entities and that Schepis and Canelas controlled all the entities. The CSA was executed as a way to settle claims brought in a lawsuit and arbitration proceedings against the individual parties to the CSA which claims included claims brought against Schepis and Canelas personally. The court must conclude that all of the signatories were undertaking the obligation to protect and ultimately pay the plaintiff their interest in the contingent assets. Given the lack of a specific obligor in paragraph 4, the interrelationship between the funds and the prior litigation/arbitration, the court concludes that the parties intended that all of the defendants be obliged to perform the various obligations contained therein. More importantly that is what the express language of the CSA says.
In their post-trial briefing the defendants add the position that Schepis and Canelas did not sign the CSA in their individual capacity but as indemnified agents. The defendants' suggested construction has no basis in the language of the CSA. All the parties made the mutual promises to each other and the plaintiff was releasing all of the defendants for prior acts. It is simply an incorrect reading of the language " the parties hereby agree" as suggesting that only some of the parties agree to the benefits and obligations contained therein, particularly when there is no specific language (other than in paragraph 3 which is not pertinent to the contingent assets) that identifies a particular party who is to perform a particular obligation.
While paragraph 4 of the CSA identifies PCM, as it must, as the owner of the certain contingent assets, it does not limit the obligation to comply with the terms of the agreement to PCM. The parties were aware that PCM and the other Pursuit entities could only act with the consent of its general partner and therefore with the consent of Schepis and Canelas who controlled and managed the general partner. In the absence of such an express limitation, there is no reason to conclude that the parties intended to limit the particular persons or entities that were obliged to perform in a manner that is contradictory to the broad and inclusive language contained in the introductory paragraph. To suggest otherwise is an unwarranted and tortured reading of the CSA.
The parties agree that in order to arrive at the amount of the UBS gross settlement to which the plaintiffs are entitled the contingent fee earned for legal services by Berg Simpson and local counsel of $6,900,000 is properly deducted from the $36,000,000 gross settlement leaving a balance of $29,100,000. This is where the parties' agreements end.
The defendants claim that (1) they are entitled to deduct other fees and expenses incurred in furtherance of the UBS litigation in arriving at a net settlement amount; (2) that the net settlement proceeds must then be divided between PCM Master and POF Master in accordance with their proportionate interest and (3) that the UBS proceeds allocable to PCM Master must then be divided between the interest of PCM and the interest of PCM Master's other investors (which happen to be Schepis and Canelas) and (4) that once PCM's share is determined the defendants are entitled to deduct a performance fee pursuant to the LPA, all before arriving at the plaintiff's interest. Of course, the defendants also claim that the sum of such calculations would be subject to the defendants' various claims for setoff and damages for breach of contract or alternatively that they are entitled to utilize this sum to pay expenses of PCM including the defense of multiple lawsuits and indemnification obligations prior to distribution of the proceeds to the plaintiff. Each of these claims must be analyzed separately.
(1) The Deduction for Other Fees and Expenses Incurred in Furtherance of the UBS Litigation
The attorneys fees agreement between Pursuit Partners and their UBS attorneys was initially a fee agreement based on hourly rates plus expenses. That agreement however, was converted to a contingency fee agreement plus expenses in December of 2010, well before the execution of the CSA. Under the hourly rate agreements the two firms billed on a monthly basis and were paid on a monthly basis. Accordingly, all such hourly rate fees and expenses were paid prior to the execution of the CSA. Thus, those expenses were paid and subtracted from the assets of PCM prior to arriving at the NAV of PCM or the NAV of the plaintiff's investment in PCM. To subtract those earlier fees and expenses from the settlement amount would be in effect double billing the plaintiff for the same service. Nor can the defendants subtract the post-CSA expenses (as opposed to attorneys fees) from the settlement amount. The plaintiff's obligation to pay post-CSA expenses for the UBS litigation was limited to $250,000 as their proportionate share of those expenses. The plaintiff was not obligated to contribute anymore for expenses unless they along with other investors were given the voluntary opportunity under the express language of the CSA. The plaintiff was never asked to contribute more to those additional expenses. Moreover there is insufficient evidence for the court to conclude that the $250,000 holdback specifically earmarked for UBS expenses was insufficient to satisfy the plaintiff's obligation for those expenses. The post-CSA expenses incurred as a result of the UBS litigation would have to have exceeded approximately $1,500,000 in order for the plaintiff's $250,000 holdback to be insufficient to cover its proportionate share of expenses. The evidence does not indicate that the post-CSA expenses exceeded that amount.
Since the plaintiff's proportionate interest in PCM was only 32.08 percent, the total PCM holdback for UBS expenses would be approximately $780,000 which would be 52.8 percent of the combined PCM/POF UBS holdback. Therefore the total holdback would be approximately $1,476,000.
(2) The Proportionate Interests of PCM Master and POF Master in the UBS Settlement
The defendants next claim that the net proceeds need to be divided 52.8% to PCM Master and 47.2% to POF Master. The court agrees with the defendants in this regard. The CSA clearly indicated that the plaintiff was only entitled to PCM's interest. (PCM, of course had no interest in POF Master). The plaintiff had earlier withdrawn and redeemed its interest in POF and the CSA contains a broad release concerning any claims arising out of the redemption of the plaintiff's interest in POF. At the time the plaintiff executed the CSA the UBS litigation had already begun and the amended complaints in that case expressly claimed that both PCM Master and POF Master had purchased the troubled CDOs from UBS. The evidence presented to this court established that the ratio of those purchases between PCM Master and POF Master are consistent with the defendants' claims. That evidence consisted with testimony from Berg Simpson concerning the nature of the claims made in the UBS litigation, the actual trade tickets evidencing the transactions, the amended complaints in the UBS action which set forth the transactions by which both PCM Master and POF Master acquired the CDOs. The evidence also demonstrated that the expenses that were incurred in pursuing the UBS litigation were borne in relatively equal amounts by both PCM Master and POF Master. While the plaintiffs assert that the defendants lack credibility in this regard because Schepis and Canelas have an interest in moving as large a percentage to POF Master as possible because they have a significantly greater interest in POF Master than PCM Master the court finds the evidence presented sufficient to sustain its finding. Accordingly, the court finds that PCM Master's interest in the net settlement proceeds was 52.8 percent or $15,364,800.
(3) The Claimed Division of PCM Master's Proceeds
The defendants additionally claim that PCM Master's interest must be divided 90% to PCM and 10% to the other investors of PCM Master who coincidentally happen to be Schepis and Canelas (through PCM offshore). By April 2010 all of the investors of PCM Master other than PCM had redeemed. On May 6, 2009 Schepis and Canelas deposited $1,100,000 into the PCM Master account. This arguably became the only other investment in PCM Master other than PCM. It is this deposit which forms the basis for the defendants claim that PCM is only entitled to 90% interest in the proceeds to which PCM Master is entitled. There are several problems with the claim of the defendants. First, the deposit was made after all other investors in PCM Master other than PCM had redeemed; Second, the deposit was made after the CDOs had been purchased and after suit had been instituted; Third, the deposit amounted to little more than parking cash which Schepis and Canelas retained complete control over in order to assert a claim for a percentage of the UBS proceeds. This is verified by the fact that in excess of $1,100,000 was withdrawn from the PCM Master account by August 2010 (eight months before the CSA had been signed). Essentially the defendants claim that Schepis and Canelas could gain an interest in a valuable claim (which other investors were pledging substantial assets to prosecute) by parking cash in an account after the fact, which cash could be withdrawn or moved without any risk or at least without risk comparable to that involved in the CDO transactions which gave rise to the UBS claim. The claim strains credibility. It was an investment after the initial risk had been taken and withdrawn before the CSA had been executed. It was managed independent of any risk participated in by the PCM investors. To the extent that PCM Master chose to make investments utilizing the cash any such returns were not shared by the PCM investors. The second problem with the defendants' position is that the defendants had not been forthcoming in their compliance with the court's discovery orders both in terms of the timeliness of that compliance and in terms of the completeness of that compliance all of which hamper their credibility as to this issue. The records and the testimony are simply not supportive of the defendants' position.
Finally, Schepis' testimony as to this issue is not particularly credible either. His explanations were not complete. They were inconsistent and varied from his earlier testimony during the PJR proceedings. Without credible and complete evidence supporting the defendants' position the court concludes that the plaintiffs have sustained their burden that they are entitled to 32.08 percent of PCM Master's interest (since PCM held 100% of PCM Master) in the UBS proceeds or $15,364,800.
(4) The Performance Fee
The CSA provides that the plaintiff's interest in the contingent assets shall be governed by the LPA. The LPA provides that " 20 percent of the limited partner share of cumulative fiscal period net economic profit (including net profits in the new issue account) provisionally allocated to each limited partner for the calendar year . . . shall be reallocated to the general partner." In other words the general partner is entitled to a performance fee equal to 20 percent of the net profits experienced by the limited partner. The disagreement between the parties regarding the performance fee arises out of a dispute as to how net profit is calculated. The defendants argue that, because in April 2009 the parties executed an amended and restated limited partnership agreement after investors were given an opportunity to withdraw or remain invested, the value of the plaintiff's interest was reestablished at that time, and after consideration for the disbursements made relative to the LBIE claim, 100 percent of the UBS proceeds represents profit as contemplated in the LPA. The plaintiff argues that the profit must be based upon the initial investment made by the plaintiff in 2007, the value of which was substantially reduced when the value of the purchased UBS CDOs quickly were reduced to minimal amounts. The court agrees with the plaintiff. The court first looks to the specific language contained in the LPA. Under definitions Article I(ab) states:
" Share of cumulative fiscal period net economic profit" shall mean with respect to each limited partner, an amount determined as of the end of any accounting period subject to the following modifications. If a limited partner's share of cumulative fiscal period net economic profit for any accounting period shall be a loss--(i.e., negative amount) then such loss shall carry forward into the next accounting period (and, if necessary, into succeeding accounting periods) and will reduce such limited partners' share of cumulative fiscal period net economic profit if any in such next (or succeeding) accounting period . (Emphasis added).
The amended and restated LPA executed on or about April 1, 2009 did not create a new limited partnership. The same entity organized under the laws of the State of Delaware existed since 2007. The LPA did not create a new investment. The plaintiff's investment was exactly that which it had made prior to April 1, 2009. In fact Article II Section 2.01 states: " Agreement to continue the partnership . The partners hereby agree to form and continue the partnership as a limited partnership under the laws of the State of Delaware in accordance with the Act." (Emphasis in original.) Section 3.09 entitled Capital Accounts states: " Each partner's capital account shall consist initially of the amount of cash and agreed net fair market value of any other property which it has contributed to the partnership as a capital contribution upon its admission to the partnership . . ." (Emphasis added.) Thus the limited partner's share of cumulative fiscal period net economic profits pursuant to the express terms of the LPA must include prior losses that are carried forward into the next accounting period. Nothing in the LPA states or implies that there was intended to be a re-basing of the plaintiff's investment. Nor does the purported amendment to the LPA executed by Schepis, in different capacities alter the analysis. First an amendment signed only by the Schepis cannot alter its rights under the CSA executed previously. To the extent the CSA stated that the rights of the plaintiff in the contingent assets " shall be governed by the [LPA]" it specifically referenced the LPA " amended and restated as [of] April 1, 2009." The plaintiff was certainly not giving the defendants carte blanche to change the terms of their compensation after the fact. Moreover the purported April 30, 2011 amendment while addressing the timing of the payment of the performance fee does not purport to materially alter the amount of the performance fee which is still controlled by the LPA.
In effect the plaintiffs experienced a substantial loss in their PCM investment as a result of the defendants' decision to purchase the UBS CDOs (through PCM Master). The settlement of the UBS litigation did not result in a net economic profit; rather it represented a recoupment of part of the loss that PCM had earlier experienced. The defendant is not entitled to a performance fee based upon profit because it managed to recoup some of the value that it had previously lost. The language of the LPA does not so provide and actually states the opposite.
The court does not minimize the work, dedication and persistence required by Schepis and Canelas in pursuing the UBS litigation. That, however, is not the contractual basis for the performance fee.
While the court does not believe that the terms of the LPA in this regard are ambiguous the court additionally finds that the LPA was drafted by the defendants and if there were an ambiguity it would have to be interpreted against the defendants and in favor of the plaintiffs. Thus, the defendants are not entitled to a performance fee and pursuant to the CSA the plaintiffs are entitled to 32.083612 percent of $15,364,800 or $4,929,582. Since the signatory defendants have not honored their obligation to cause this amount to be paid the court finds that all of the signatory defendants have breached their obligation under the CSA and under the LPA to the extent the plaintiff's " interest in the contingent assets shall be governed by the LPA" and further that the plaintiff has been damaged by that breach in the amount $4,929,582.
The court further finds that the breach of the CSA by the defendants was both wilful and grossly negligent in that they knew of the provisions and what their obligations were and disregarded those obligations primarily so they could retain the benefit of holding the additional funds at a time when they were obligated to remit those funds to the plaintiff.
C. Count Two Breach of the Covenant of Good Faith and Fair Dealing
As indicated in the defendants' brief, to establish a breach of the covenant of good faith and fair dealing under New York law the plaintiff must establish that the defendants acted in a manner to " deprive the other party of the right to receive the benefits under their agreement." Aventine Investment Management, Inc. v. Canadian Imperial Bank of Commerce, 265 A.D.2d 513, 513-14, 697 N.Y.S.2d 128 (2nd Dep't. 1999). The court finds that is exactly what the signatory defendants did in this case. The signatory defendants had a clear obligation under the CSA to provide the plaintiffs with 32.08 percent of PCM's interest in the UBS proceeds as soon as practicable after receipt. The defendants have done everything but that. The defendants have conducted themselves in a manner in which they have wilfully attempted to thwart the plaintiff's ability to receive the benefits of the CSA. Rather than provide the plaintiff with 32.08 percent of PCM's interest in the UBS proceeds they have raised claims and counterclaims that arise out of alleged conduct of the plaintiff which conduct was justified based upon the prior breaches of the CSA with regard with to the LBIE proceeds. At every step of the process the defendants have conducted themselves not in a way to provide the plaintiff with their contractual benefit, but rather to maintain control, use and possession of as much of the monies that the plaintiff had a contractual right to for as long as possible in order to maintain the benefit of those monies for themselves. Accordingly, the court finds that the signatory defendants are all liable for the breach of the covenant of good faith and fair dealing contained in the CSA. Indeed it is remarkable that though the plaintiff executed the CSA with the intent of resolving its issues and ending litigation and disputes with the defendants, the defendants' wilful conduct in failing to comply with the CSA has been the primary reason for the continued litigation and excessive expenses incurred by the parties since 2011. The defendants' failure to provide information to the plaintiff until ordered by the court which might have resolved some of the issues in advance of the litigation is indicative of their breach of this covenant. The non signatory defendants not having a contractual obligation to the plaintiff can have no liability under the covenant implied by that contractual relationship.
D. Liability of the Non Signatory Defendants
(1) Liability of Northeast
Northeast is the successor, general partner to PCM. Pusuit Capital Management (the prior general partner) appointed Northeast to be its successor sole general partner as evidenced by its resolution dated February 17, 2014, notably before the settlement of the UBS litigation. Thus Northeast was the general partner during the period of time when the signatory defendants including PCM made the wilful decision to breach its agreement under the CSA. Under New York law the general partner of a limited partnership is liable to the limited partners for breaches of the obligations of the limited partnership to the limited partners. See McKinney's, Consolidated Laws of New York, Revised Limited Partnership Act § 121-403. Accordingly, Northeast is liable to the plaintiff for the breach of the CSA and the breach of covenant of good faith and fair dealing claim to the same extent as PCM.
(2) Liability of the Other Non Signatory Defendants (Pursuit Partners, PCM Master and POF Master)
The non signatory defendants, other than Northeast, cannot be held liable to the plaintiff for breach of a contract or an implied covenant in that contract to which they are not a party. Notably the plaintiff did not plead a count against any of these defendants sounding in a piercing of the corporate veil or alter ego. The plaintiff seems to rely upon the finding by the court in the UBS litigation concerning the interrelationship and unitary nature of the various Pursuit hedge fund entities but the determination of the court in its decision to reconsider its prior ruling dismissing the. action was a determination that related to the standing of the plaintiff. Nothing in that decision implies or suggests that the same concepts are applicable or control the decision of whether or not non signatory defendants are liable for the conduct of the signatory defendants. Indeed the standards discussed by the court in its Memorandum of Decision are quite foreign to the traditional standards applied in New York and Connecticut with regard to piercing a corporate veil. Pursuit Partners, LLC, et al v. UBS, AG et al., Docket No. CV 08-4013452S, Memorandum of Decision, dated July 3, 2014 (Brazzel-Massaro, J.) with Cahaly v. Benistar Property Exchange Trust Co., 73 Conn.App. 267, 283-84, 812 A.2d 1, cert. granted on other grounds, 262 Conn. 925, 814 A.2d 378 (2002).
E. Unjust Enrichment
Because the court has found that the plaintiff and the signatory defendants have entered into an enforceable contract and that the plaintiff will prevail on its breach of contract claim the plaintiff cannot prevail on its unjust enrichment claim. United Coastal Industries, Inc. v. Clearheart Construction Company, 71 Conn.App. 506, 512, 802 A.2d 901 (2002)
F. Conversion
The plaintiff had a contractual right to be paid certain sums of money pursuant to the CSA. It had neither ownership nor possession of the money itself. While Connecticut courts have held that money can be the subject of a conversion claim not all breaches of contract satisfy the elements of conversion. See e.g. Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 761 A.2d 1268 (2000). Under New York law, in order to prevail in a conversion claim the plaintiff must allege and approve that (1) the property subject to conversion is a specific identifiable thing; (2) plaintiff had ownership, possession or control over the property before its conversion; and (3) defendants exercised an unauthorized dominion over the thing in question to the alteration of its condition or the exclusion of the plaintiff's rights. Kirschner v. Bennett, 648 F.Supp.2d 525, 540 (S.D.N.Y. 2009). Here the property was neither specific nor did the plaintiff have possession or control of the settlement of proceeds prior to the defendants' conduct. The plaintiff has pled and proven a breach of contract claim; without more, that claim does not establish conversion. Duane Reade v. S.L. Green Operating Partnership, LT, 30 A.D.3d 189, 190, 817 N.Y.S.2d 230 (2006).
G. Civil Conspiracy
New York cases are consistent in setting forth the elements of a claim for civil conspiracy. In order for the plaintiff to establish a claim for civil conspiracy the plaintiff must first establish that an underlying tort had been committed and then establish an agreement between two or more parties, an overt act in furtherance of the agreement, the parties' intentional participation in furtherance of a common purpose or plan and resulting damage or injury. See e.g. Abacus Federal Savings Bank v. Lim, 75 A.D.3d 472, 905 N.Y.S.2d 585 (Appellate Division Dep't 2010); Eaves v. Designs For Finance, Inc., 785 F.Supp.2d 229 (S.D.N.Y. 2011); IMG Fragrance Brands, LLC v. Houbigant, Inc., 759 F.Supp.2d 363 (S.D.N.Y. 2000). The plaintiff has failed to establish an underlying or primary tort for the reasons stated in this memorandum on the issue of conversion and for the reasons stated in court's earlier memorandum of decision concerning the plaintiff's stricken claims for statutory theft and CUTPA. Without an underlying tort the plaintiff cannot establish a claim for civil conspiracy to commit an underlying tort.
See footnote 2.
H. The Defendants' Special Defenses and Counterclaims
With regard to the First, Second, Fifth, Sixth, and Eighth special defenses it is sufficient to say and the court finds that the defendants have failed to sustain their burden of proof with regard to these special defenses.
With regard to the fourth special defense it is sufficient to say that the court has not found liability for the non signatory defendants except for Northeast and has adequately explained the basis for the liability of Northeast in a prior section. The defendants have only pled the three-year statute of limitations which the defendants claim bars the various tort and non contract counts. But the court has not found liability of the defendants based upon the tort and non contract counts but only against the signatory defendants and Northeast based the contract accounts one and two. The defendants have not pled a statute of limitations defense as to those counts and accordingly the pleaded defense does not bar the plaintiff's claims under Count One and Count Two.
In any event the causes of action did not accrue until the signatory defendants failed to remit the UBS proceeds to the plaintiff as soon as practicable, and therefore the causes of action would not be barred.
With regard to the Seventh Special Defense, the defendants plead that various claims of the plaintiff are barred by the broad release contained in the CSA. The Special Defense is obviously misplaced. The CSA in paragraph 5 entitled Mutual Release specifically states: " Nothing in this release shall affect any claims that may arise after the execution of this Agreement and concerning events, facts or actions post dating the execution of this Agreement." The claim brought by the plaintiff is a claim for breach of the CSA for violation of the signatory defendants' obligation to remit to the plaintiff the plaintiff's pro rata interest in PCM's interest in the UBS settlement. The claim did not arise until after execution of this agreement nor did the conduct of the defendant withholding the plaintiff's rightful interest in the UBS proceeds until such time as those proceeds were in fact withheld. The defendants have failed to prove that the claim set forth in Counts One and Two of the Amended Complaint are claims that were intended to be released pursuant to the CSA.
With regard to the plaintiff's counterclaims for the reasons stated earlier in this memorandum the defendants have failed to sustain their burden of proof with regard to those counterclaims and with regard to any damages that might have been incurred as a result of the alleged breaches.
IV. Conclusion
For all the reasons stated herein judgment may enter in favor of the plaintiff against the defendants PCM, POF, PIM, Schepis, Canelas and Northeast on Counts One and Counts Two and the plaintiff is awarded damages against those defendants in the amount of $4,929,582 plus prejudgment interest at the rate of 10 percent per year from October 16, 2015 (the date that the plaintiff's interest in the UBS proceeds should have been remitted to the plaintiff) until October 16, 2016 in the amount of $492,958 for a total of $5,422,540. Postjudgment interest will continue to accrue at the rate of 10 percent per annum on all outstanding amounts until paid.
Judgment may enter for the defendants Pursuit Partners, PCM Master and POF Master on Counts One and Two. Judgment may enter in favor of all the defendants on Counts Three through Eight. Judgment may enter for the plaintiff on the counterclaims.