Case Title: Eurycleia Partners, LP v. Seward & Kissel, LLP

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2009-06-04T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 88  
Eurycleia Partners, LP, et al.,
            Appellants,
        v. 
Seward & Kissel, LLP,
            Respondent, 
et al.,
            Defendants.
Lance Gotthoffer, for appellants.
Gerard E. Harper, for respondent.
GRAFFEO, J.:
Following the collapse of a hedge fund, certain limited
partners brought this action sounding in fraud and breach of
fiduciary duty against the fund's attorneys based on the law
firm's failure to disclose improper fund activities and its
misrepresentations in the offering memoranda.  For the reasons
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No. 88
1  Whittier was also the principal executive of Wood River
Capital Management, LLC, the hedge fund's investment manager.
2  The record contains two 29-page offering memoranda dated
June 2004 and April 2005.  The parties agree that each of the
offering memoranda prepared by S&K from 2003 to 2005 were
identical in all aspects relevant to this appeal.  
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that follow, we affirm the Appellate Division order dismissing
the complaint.
In February 2003, John Whittier launched Wood River
Partners, LP, a hedge fund in the form of a limited partnership. 
Whittier was the sole principal and managing member of Wood River
Associates, LLC, the hedge fund's general partner.1  According to
Wood River's offering memorandum, the fund sought "to achieve
capital appreciation through the combination of long and short
equity investments in a diversified number of industries, with a
particular emphasis in media and communications, technology and
technology-related companies."  The offering memorandum also
represented that American Express Tax and Business Services, Inc.
(TBS) was Wood River's auditor and that, to ensure adequate
investment diversification, individual holdings in the fund's
portfolio would be capped at 10% of the total assets at any given
time, based on the original cost of the stock.  As Wood River's
legal counsel, defendant Seward & Kissel, LLP (S&K) drafted the
original offering memorandum as well as periodic updates.2
Plaintiffs are 16 of Wood River's limited partners who
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No. 88
3  As of June 2004, new limited partners were obligated to
invest at least $500,000.
4  Plaintiffs never sought permission to sue Wood River.  
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invested in the fund between 2003 and 2005.3  Unbeknownst to
plaintiffs, in 2004 or early 2005, Wood River -- at Whittier's
direction -- began to invest heavily in the stock of Endwave
Corporation.  By the summer of 2005, Wood River's investment in
Endwave shares represented approximately 65% of the fund's total
assets and over 35% of Endwave's outstanding shares.  After
peaking at $54 per share in mid-July, Endwave's share price
gradually declined until it plummeted to $14 in late September. 
As a result, Whittier was unable to meet plaintiffs' redemption
requests.  S&K resigned as Wood River's counsel on September 30,
2005.
In October 2005, the Securities and Exchange Commission
(SEC) brought an action in federal court against Whittier and the
Wood River entities seeking to enjoin them from violating various
securities laws and to impose civil penalties.  At the SEC's
request, the United States District Court for the Southern
District of New York appointed a receiver for the Wood River
entities and issued an injunction preventing any lawsuits against
Wood River absent the court's permission.4  A federal grand jury
subsequently indicted Whittier for securities fraud and he
pleaded guilty to three counts in May 2007.  During his
allocution, Whittier admitted that he intentionally concealed the
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No. 88
5  The Securities Exchange Act of 1934 requires persons to
report the acquisition of more than five percent of a
corporation's common stock (see 15 USC § 78m [d]).  The Act
contains similar reporting requirements upon the acquisition of
more than 10% of a single equity security (see 15 USC § 78p [a]).
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extent of Wood River's position in Endwave.
Plaintiffs commenced this action against S&K, TBS and a
third entity in March 2006, alleging causes of action against S&K
for, among other things, fraud, aiding and abetting fraud, gross
negligence and breach of fiduciary duty.  They seek $200 million
in damages.
The July 2007 amended complaint presents three main
allegations against S&K.  First, plaintiffs assert S&K learned at
some point in 2005 that Wood River invested more than 10% of its
assets in Endwave stock in violation of the 10% restriction
contained in the offering memoranda.  According to plaintiffs,
S&K nonetheless persisted in drafting offering memoranda falsely
representing that Wood River was adhering to the 10% cap as part
of its investment policy.  Second, plaintiffs claim that S&K
falsely stated in the offering memoranda that TBS was Wood
River's auditor even though S&K knew from the inception that TBS
had not been retained to perform any auditing work.  Third,
plaintiffs allege S&K learned in January 2005 that Wood River had
violated securities laws by failing to file required notices when
Wood River obtained 5% and, later, 10% of Endwave's stock.5 
Plaintiffs maintain that S&K breached fiduciary duties owed to
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No. 88
6  Plaintiffs do not challenge the dismissal of the
complaint as against TBS and apparently have not pursued their
claims against a third defendant -- Trident Financial Services,
LLC.  Therefore, this appeal solely concerns plaintiffs' causes
of action against S&K.  
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them, as limited partners, by failing to disclose the SEC
violations to them.
S&K and TBS each moved to dismiss the complaint
pursuant to CPLR 3211.  Supreme Court denied the motions.  The
Appellate Division reversed, granted the motions and dismissed
the complaint as against them (46 AD3d 400 [1st Dept 2007]).6  We
granted plaintiffs leave to appeal (11 NY3d 705 [2008]).
Plaintiffs principally argue that the Appellate
Division erred in dismissing their fraud and aiding and abetting
fraud claims against S&K.  They contend that the complaint
adequately pleads these claims because it alleges that S&K
drafted offering memoranda falsely representing that a 10%
investment cap was in place and that TBS was Wood River's
auditor, despite knowing that these representations were false. 
S&K counters that, even under CPLR 3211's liberal pleading
requirements, the fraud and aiding and abetting fraud claims fail
because plaintiffs' allegations relating to S&K's knowledge of
falsity are too conclusory and without a factual basis.
The elements of a cause of action for fraud require a
material misrepresentation of a fact, knowledge of its falsity,
an intent to induce reliance, justifiable reliance by the
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No. 88
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plaintiff and damages (see Ross v Louise Wise Servs., Inc., 8
NY3d 478, 488 [2007]; Lama Holding Co. v Smith Barney, 88 NY2d
413, 421 [1996]).  A claim rooted in fraud must be pleaded with
the requisite particularity under CPLR 3016 (b).
We recently explored the pleading requirements of CPLR
3016 (b) in Pludeman v Northern Leasing Sys., Inc. (10 NY3d 486
[2008]).  In that case, we noted that the purpose underlying the
statute is to inform a defendant of the complained-of incidents. 
We cautioned that the statute "should not be so strictly
interpreted as to prevent an otherwise valid cause of action in
situations where it may be impossible to state in detail the
circumstances constituting a fraud" (id. at 491 [internal
quotation marks and citations omitted]).  Although there is
certainly no requirement of "unassailable proof" at the pleading
stage, the complaint must "allege the basic facts to establish
the elements of the cause of action" (id. at 492).  We therefore
held that CPLR 3016 (b) is satisfied when the facts suffice to
permit a "reasonable inference" of the alleged misconduct.  And,
"in certain cases, less than plainly observable facts may be
supplemented by the circumstances surrounding the alleged fraud"
(id. at 493).
Here, whether the claim is labeled fraud or aiding and
abetting fraud, we conclude that neither the allegations in the
complaint nor the surrounding circumstances give rise to a
reasonable inference that S&K participated in a scheme to defraud
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No. 88
7  As S&K points out, most of the plaintiffs had already
invested in Wood River before S&K allegedly learned of the 10%
cap violation and, therefore, could not have relied on this
representation -- a necessary element of a fraud claim.  
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or knew about the falsity of the two contested statements in the
offering memoranda.  The amended complaint conclusorily alleges
that at some unspecified point in 2005 S&K became aware that more
than 10% of Wood River's holdings were invested with Endwave but,
nonetheless, S&K continued to issue offering memoranda falsely
representing that Wood River would not invest more than 10% of
its assets in any given security.7  In support of this
allegation, plaintiffs assert that S&K was informed in January
2005 that Wood River had purchased 10% of Endwave's stock.  But
the fact that S&K may have been aware that Wood River owned 10%
of Endwave's stock is not material to whether Wood River invested
more than 10% of its total assets in Endwave, particularly where
there is no indication that S&K was ever informed of Wood River's
overall asset levels or the cost basis of the Endwave shares. 
Plaintiffs' reliance on a 2002 letter -- predating the existence
of Wood River by nearly a year -- from a S&K attorney to Whittier
discussing the performance of a separate fund is similarly
unavailing.
Nor do the surrounding circumstances breathe life into
plaintiffs' fraud claim premised on the 10% cap representation. 
Unlike the individual corporate officer defendants in Pludeman,
each of whom managed a company implicated in a nationwide
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No. 88
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fraudulent scheme covering a span of years, S&K was outside
counsel to Wood River, whose manager -- Whittier -- was convicted
of securities fraud.  Notably, plaintiffs do not dispute S&K's
assertion that they secured Whittier's assistance in drafting the
amended complaint.  The absence of any firm factual pleadings
relevant to S&K's knowledge that Wood River breached the 10%
restriction or any fraudulent scheme between Whittier and S&K is
even more conspicuous in light of Whittier's cooperation with
plaintiffs.
We likewise find the amended complaint's alternative
allegation of fraud or aiding and abetting fraud -- that S&K knew
TBS was not Wood River's auditor yet continued to list TBS in the
offering memoranda -- to be similarly conclusory.  As the
Appellate Division recognized, the complaint elsewhere alleges
that in the summer of 2005 TBS falsely represented that it was
the fund's auditor and would conduct an audit.  In short,
although we are mindful that a plaintiff need not produce
absolute proof of fraud and that there may be cases in which
particular facts are within a defendant's possession, it is also
true that the strength of the requisite inference of fraud will
vary based on the facts and context of each case.  Under the
facts of this case, we believe that the allegations in the
complaint, coupled with the surrounding circumstances, do not
give rise to a reasonable inference that S&K committed fraud or
aided and abetted Wood River's or Whittier's fraudulent
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No. 88
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activities.
Plaintiffs next contend that the Appellate Division
erroneously dismissed their breach of fiduciary duty claim.  They
claim that S&K owed them a fiduciary duty and breached that duty
by failing to reveal Wood River's fraudulent actions, in
particular, the fund's violation of SEC reporting requirements in
connection with its ownership of 5% and, later, 10% of Endwave's
stock.
A fiduciary relationship arises "between two persons
when one of them is under a duty to act for or to give advice for
the benefit of another upon matters within the scope of the
relation" (EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19
[2005] [internal quotation marks and citation omitted]).  Put
differently, "[a] fiduciary relation exists when confidence is
reposed on one side and there is resulting superiority and
influence on the other" (AG Capital Funding Partners, L.P. v
State St. Bank & Trust Co., 11 NY3d 146, 158 [2008] [internal
quotation marks and citation omitted]).  Ascertaining the
existence of such a relationship inevitably requires a fact-
specific inquiry.
Here, plaintiffs do not allege that they had direct
contact or any relationship -- contractual or otherwise -- with
S&K.  Indeed, plaintiffs acknowledge that the offering memoranda
advised prospective limited partners to consult their own legal
counsel prior to investing in Wood River.  Plaintiffs
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No. 88
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nevertheless contend that S&K's attorney-client relationship with
Wood River in and of itself created a fiduciary relationship
between S&K and the limited partners themselves.  We disagree.
The Appellate Divisions have held that the fiduciary
duties owed by a limited partnership's attorney to that entity do
not extend to the limited partners (see Briarpatch Ltd., L.P. v
Frankfurt Garbus Klein & Selz, P.C., 13 AD3d 296, 297 [1st Dept
2004], lv denied 4 NY3d 707 [2005]; Kushner v Herman, 215 AD2d
633 [2d Dept 1995]; but see Franco v English, 210 AD2d 630, 634
[3d Dept 1994]).  Federal courts applying New York law likewise
have consistently rejected such a duty (see e.g. In re Bayou
Hedge Funds Inv. Litig., 472 F Supp 2d 528, 531 [SDNY 2007];
Estate of Ginor v Landsberg, 960 F Supp 661, 667 [SDNY 1996],
affd 159 F3d 1346 [2d Cir 1998]; Quintel Corp. v Citibank, N.A.,
589 F Supp 1235, 1241-1242 [SDNY 1984]; see also 3 Mallen &
Smith, Legal Malpractice § 26:8 [2009] [citing New York cases
with approval]).
We concur with these precedents, particularly given
that we have found similarities between limited partners and the
shareholders of a corporation (see Lichtyger v Franchard Corp.,
18 NY2d 528, 536 [1966] [observing that a limited partner "is in
a position analogous to that of a corporate shareholder, an
investor who likewise has limited liability and no voice in the
operations of an enterprise"]; Ruzicka v Rager, 305 NY 191, 198
[1953], rearg denied 305 NY 798 [1953] [recognizing the "quasi-
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No. 88
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corporate aspects of a limited partnership and the quasi-
shareholder status of a limited partner"]; see also 3 Bromberg &
Ribstein, Partnership § 11.01 [c]).  It is well settled that a
corporation's attorney represents the corporate entity, not its
shareholders or employees (see Talvy v American Red Cross in
Greater N.Y., 205 AD2d 143, 149 [1st Dept 1994], affd for reasons
stated 87 NY2d 826 [1995]; Rechberger v Scolaro, Shulman, Cohen,
Fetter & Burstein, P.C., 45 AD3d 1453 [4th Dept 2007]; Griffin v
Anslow, 17 AD3d 889, 893 [3d Dept 2005]; see also 22 NYCRR
1200.13 [a]).  We therefore hold that S&K's representation of
this limited partnership, without more, did not give rise to a
fiduciary duty to the limited partners.  Hence, plaintiffs'
breach of fiduciary duty claim against S&K was properly
dismissed.
To the extent plaintiffs assert claims for fraud or
aiding and abetting predicated on S&K's silence, they similarly
fail for lack of a duty to disclose (see Gurnee v Hasbrouck, 267
NY 57, 62 [1935]; Mitschele v Schultz, 36 AD3d 249, 254-255 [1st
Dept 2006]; Kreindler, Rodriguez, Beekman & Cook, New York Law of
Torts § 1.70, at 73-76 [14 West's NY Prac Series 1997]).  In the
absence of a fiduciary relationship, we perceive no legal duty
obligating S&K to make affirmative disclosures to plaintiffs
under the circumstances of this case.  We have considered
plaintiffs' remaining arguments and find them to be without
merit.
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No. 88
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Accordingly, the order of the Appellate Division,
insofar as appealed from, should be affirmed, with costs.
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Order, insofar as appealed from, affirmed, with costs.  Opinion
by Judge Graffeo.  Judges Ciparick, Read, Smith, Pigott and Jones
concur.  Chief Judge Lippman took no part.
Decided June 4, 2009