[EDITOR'S NOTE: This case is unpublished as indicated by the issuing court.] KARLA MOSKOWITZ, Judge.
The court consolidates the following motions for disposition: motion sequence number 001 in Continental Casualty Co. v PricewaterhouseCoopers LLP (Index No. 120016/2003) ( "Continental Action"); motion sequence number 001 in Eagle Partners L.P. v PricewaterhouseCoopers LLP (Index No. 121132/2003) ( "Eagle Action"); and motion sequence number 004 in Jones v PricewaterhouseCoopers LLP (Index No. 602962/2003) ( "Jones Action"). In all three actions (together, "Actions"), defendant PricewaterhouseCoopers LLP ("PWC") moves for summary judgment dismissing the complaints based upon plaintiffs' lack of standing to assert direct claims.
These actions arise out of the demise of Lipper Convertibles, L.P. and Lipper Fixed Income Fund L.P. (collectively "Funds" or "Partnerships"). Each of the complaints in these actions assert claims for fraud and aiding and abetting fraud, negligent misrepresentation, aiding and abetting breach of fiduciary duty and negligence.
The court discussed the facts underlying these actions in detail in the prior decisions Jones v PricewaterhouseCoopers LLP (6 Misc 3d 1014[A], 2004 WL 3140909 [Sup Ct, NY County 2004]) and Morgado Family Partners, LP v Lipper ( 6 Misc 3d 1014 [A], 2004 WL 3142198 [Sup Ct, NY County 2004], affd 19 AD3d 262 [1st Dept 2005]). Therefore, the court presumes familiarity with the facts and refers the parties to these decisions.
Discussion
PWC argues that the court should dismiss the Continental, Eagle and Jones Actions, because plaintiffs cannot substantiate any non-derivative injury in support of their individual claims. Plaintiffs counter that their injury arose when PWC fraudulently induced them, through its improper audit reports, to purchase their limited partnership interests and that PWC's audit reports induced them to maintain their investments. Plaintiffs argue that their claims all rely upon fraudulent inducement, making them direct.
"In determining whether a cause of action is derivative in nature regarding limited partnership law, the case law relevant to corporation law may be looked to for guidance." ( Strain v Seven Hills Assoc., 75 AD2d 360, 370 [1st Dept 1980]). In determining whether claims are direct or derivative, the Appellate Division, First Department has looked to the test the Supreme Court of Delaware enunciated in Tooley v Donaldson, Lufken Jenrette, Inc., 845 A2d 1031, 1033 (Del 2004). ( See Buechner v Avery, 38 AD3d 443 [1st Dept 2007] and Nemazee v Premier Purchasing Partners, L.P., 24 AD3d 196 [1st Dept 2005]).
Under the " Tooley test," a court considers: "(1) who suffered the alleged harm (the corporation or the suing stockholders, individually) and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually.)" ( Id.). More specifically,
a court should look to the nature of the wrong and to whom the relief should go. The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.
( Id. at 1039).
Here, PWC submits as documentary evidence the December 15, 2003 plan of BDO Seidman, that pertains to the limited partners' distribution rights and that this court approved in an order dated February 13, 2004 ("BDO Report"). PWC also submits the affidavit of Chudozie Okongwu ("Okongwu"), providing expert testimony on "the sources of the losses allegedly suffered by the Plaintiffs in the Actions" under the distribution model in the BDO Report. (Okongwu Aff., at 2, 4). According to PWC's expert, differences in the limited partners' net capital investments and their June 30, 2002 ending capital balances are attributable to three possible sources: (1) the limited partners' share in the net losses of the Funds; (2) the Fund's overpayment of general partner fees and (3) unrecovered overpayments of capital to withdrawn limited partners.
The documentary evidence establishes that the limited partner plaintiffs had no divisible right in the portfolio of the Funds (Fournier Aff., Ex. II, Amended and Restated Limited Partnership Agreement, art. 8.1 [b] ["[n]o Partner shall have the right to receive property other than cash in return for the amount of its Capital Account"]) and withdrawing limited partners received cash distributions or securities out of the Funds' assets. ( Id., art. 8.2). Thus, claims based upon mismanagement of partnership assets that resulted in net losses to the Partnerships, overpayments to withdrawing limited partners and overpayment of fees to the general partner all state derivative claims that all limited partners share equally proportionate with their investments in the Funds. ( See Abrams v Donati, 66 NY2d 951, 953; see also Blank v Schafrann, 70 NY2d 887, 888).
As this court already stated in Jones ( 2004 WL 3140909, at *4), claims for excess fees paid to the general partner are derivative claims. ( See Broome v ML Media Opportunity Partners L.P., 273 AD2d 63, 64 [1st Dept 2000] [wrongful deferral and payment of management fees claims were derivative in nature because they alleged no more than mismanagement and diversion of assets]). Significantly, none of the limited partners' claimed direct injuries are independent of any alleged injury to the Partnerships.
Further, the general partner engaged PWC to perform the audits of the Partnerships' financial statements. While the general partner concedes that it was obligated to deliver audited financial statements to the limited partners, plaintiffs do not claim that PWC performed any audit on their behalf either before or after their investments. Nor do plaintiffs show a breach of a duty PWC owed to them independent of any duty owed to the Partnerships. Thus, the injuries that plaintiffs suffered derived from their status as limited partners. Any duty that PWC owed to the limited partners was derivative of PWC's obligations to the limited partnership. Plaintiffs' resulting injury is attributable to a loss the limited partnerships suffered and then to plaintiffs through the allocation of those losses on a pro rata basis. For the foregoing reasons, PWC has demonstrated that plaintiffs' claims are derivative, not direct.
The essence of plaintiffs' rebuttal argument is that they can pursue their fraudulent inducement claims, because they "became injured at the moment they were fraudulently induced by PWC to purchase their limited partnership interests in the Fund, limited partnership interests that were indisputably overvalued long before they purchased their investments." (Plaintiffs' Opp. Mem. of Law, at 14). Indeed as the United States District Court for the Southern District of New York has observed, "courts have consistently held that a shareholder . . . has standing to sue on its own behalf where it claims `that it was fraudulently induced to become a shareholder in the first place.'" ( Solutia Inc. v FMC Corp., 385 F Supp 2d 324, 333 [SD NY 2005] [citations omitted]; but see Capital Z Fin. Servs. Fund II, v. Healthnet, Inc., 43 AD3d 100, 111 [1st Dept 2007] [applying Delaware law and citing Tooley, court held plaintiffs lacked standing to assert direct claims that defendants induced them to enter into purchase agreement]).
However, discovery is now closed and plaintiffs fail to produce any evidence to support their claim that they suffered a direct injury at the time of their investments that is distinct from the injury to the Partnerships. Rather, for the reasons discussed above, plaintiffs cannot prevail without showing an injury to the Partnerships and PWC did not owe a duty to plaintiffs. In short, the only loss plaintiffs can demonstrate is the diminution in value of their investment in the Partnerships, stemming from the Partnerships' overpayments and trading losses. Thus, the nature of the injury is derivative. As plaintiffs fail to rebut PWC's prima facie showing, the court is constrained to grant PWC's motions for summary judgment dismissing the complaints. On the other hand, the Trustee's action against PWC on behalf of the Partnerships will continue. Any recovery the Trustee receives on behalf of the Partnerships is for the sole benefit of the limited partners who lost money. ( See decision of today in Williamson v PricewaterhouseCoopers, Index No. 602106/2004).
Accordingly, it is hereby
ORDERED that the court grants defendant's motions for summary judgment and dismisses the complaints; and it is further
ORDERED that the Clerk is directed to enter judgments accordingly.