Opinion ID: 3014885
Heading Depth: 2
Heading Rank: 4

Heading: Fraud in the Inducement Claims Against Acorn

Text: The Barracks’ finally seek to assert claims against Acorn and Acorn Partners for fraudulently inducing them to invest based 13 on the penalty waiver given by Torkelsen.5 The District Court concluded that these claims too were derivative in nature and therefore failed as a matter of law. District Court Order at , 1415. Here, we disagree with the District Court. The District Court correctly acknowledged that fraud in the inducement claims are generally individual claims. District Court Order at  (citing Golden Tee, Inc. v. Venture Golf Sch., Inc., 969 S.W. 2d 625 (Ark. 1998)). However, the District Court characterized the Barracks’ only damages as “diminution in value of their investment.” Id. On the contrary, the Barracks may have suffered a wrong independent of the general wrong to the partnership from mismanagement, and separate from any other investor, by an invalid waiver extended to them by Torkelsen. The Barracks may be able to make out a colorable individual claim for fraud in the inducement; therefore it was error for the District Court to prematurely conclude that the claim failed as a matter of law for want of being brought derivatively. It is not the end of our inquiry, though, to conclude that the fraud in the inducement claims can be properly brought individually instead of only derivatively. The claims could of course still lack merit. Fraud in New Jersey requires “(1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages.” Banco Popular N. Am. v. Gandi, 876 A.2d 253, 260 (N.J. 2005) (quoting Gennari v. Weichert Co. Realtors, 691 A.2d 350, 367 (N.J. 1997)); see also Travelodge Hotels, Inc. v. Honeysuckle Enters., 357 F. Supp. 2d 5 The Barracks also assert claims based on an alleged breach of the waiver agreement, but these claims depend on whether a valid waiver existed, and are only an argument-in-the-alternative to the fraud in the inducement claim. Since as noted the SBA conceded at argument that either of these claims might have merit, we will address the claims jointly. 14 788, 796 (D.N.J. 2005) (citing these factors as constituting fraud in the inducement in New Jersey). The District Court concluded that the waiver was inherently invalid and the Barracks’ reliance on it, unreasonable as a matter of law. Id. at . These conclusions were premature. Torkelsen’s letters extending the penalty waiver, as head of Acorn’s general partner, purported to “waive penalties in advance” for failing to fulfill a subscription agreement, and thereby allow the Barracks in the future to make additional capital contributions if they so wished. A59. Section 3.4.2. of the Limited Partnership Agreement, though, states that the “General Partner may, in its sole discretion (and with the consent of SBA given as provided in Section 5.2. of this Agreement), elect to declare, by notice” that the limited partner’s commitment is reduced to the capital contribution already made, discharging further obligation to Acorn. Id. (emphasis added). The District Court stated, without factual inquiry, that “it is clear that SBA consent was never obtained by or for the benefit of the Barracks.” District Court Order at . The issue is not so clean-cut. The Limited Partnership Agreement makes provision for the SBA to consent by silence: “If the Partnership has given the SBA thirty (30) days prior written notice of any proposed legal proceeding, arbitration or other action under the provisions of the Agreement with respect to any default by a Private Limited Partner in making any capital contribution to the Partnership required under the Agreement and for which SBA consent is required as provided in Section 5.2.3., and the Partnership shall not have received written notice from the SBA that it objects to such proposed action within such thirty (30) day period, then SBA shall be deemed to have consented to such proposed Partnership action.” 15 Limited Partnership Agreement § 5.2.4. (emphases added). The District Court did not address the issue of consent by silence. If such consent did issue, then the Barracks’ reliance on the waiver may have been reasonable, and they might be able to make out a colorable fraudulent inducement claim. The SBA conceded at argument that the Barracks’ fraud in the inducement and breach of contract claims might have merit, and therefore may satisfy the third prong of Wencke depending on discovery. We must therefore address the other Wencke factors. We first ask “whether refusing to lift the stay genuinely preserves the status quo or whether the moving party will suffer substantial injury if not permitted to proceed.” Wencke II, 742 F.2d at 1231. The Barracks claim that the SBA has already disturbed the status quo by filing suit to recover the money allegedly due on the Subscription Agreements. See, e.g., Appellant Br. at  (“[T]he Receiver’s actions belie any purported interest in maintaining the status quo.”). This argument misunderstands the purpose and practice of a receivership. One of the SBA’s key functions as receiver is to marshal the receivership estate’s assets. The SBA’s suit against the Barracks is simply one step in that direction. The Wencke II court, the only court to ever find that the receiver was the party seeking to disturb the status quo, was faced with the far different situation where the receiver was preparing to distribute the assets. 742 F.2d at 1231. That is simply not the case here. The Barracks next argue that they would “suffer substantial injury” if the stay is not lifted, “because of the real possibility that they would be precluded from asserting those claims in the future.” Appellant Br. at . We find this argument unpersuasive for two reasons. First, as noted by the SBA, the Barracks can obtain discovery in the original SBA-Barrack suit. Government Br. at , 47 n.8. This discovery should help illuminate the question of the waiver’s validity. We do not comment on the issue of whether the availability of a defense has any bearing on the ability of a party to bring a counterclaim. However, since successful assertion of the waiver in either posture would result in a discharge of the 16 Barracks’ obligation to make future payments, we do not see how refusing to order the stay lifted would result in substantial injury. Second, while it is true that if the waiver is invalid, the Barracks would prefer to seek rescission of both Subscription Agreements and the return of their $750,000, this argument in no way shows that substantial injury would result if the Barracks were forced to wait until the SBA was finished disentangling the receivership estate. Where other courts have found the first Wencke factor to tip in favor of lifting a receivership stay, the degree of injury has been far more severe. For instance, in ESIC Capital, an unemployed single mother was unable to support herself absent regaining control of contested real estate. 685 F. Supp. at 485. Likewise, in Wencke II, the receiver was preparing to distribute stock to other investors, against whom the petitioning shareholders might have had no legal recourse. 742 F.2d at 1232. What is not sufficient is a clear attempt by the Barracks to withdraw funds from the receivership estate before the receiver is ready to distribute funds to all creditors. Not being allowed the first bite at the apple is not the kind of substantial injury we will recognize under the first prong of Wencke. We will next address the second Wencke factor, the “time in the course of the receivership at which the motion for relief from the stay is made.” Wencke II, 742 F.2d at 1231. Contrary to the Barracks’ assertions, the SBA has not “conceded that the timing is proper” by filing suit to recover the Barracks’ subscription funds. Appellant Br. at . As we have already said, the very purpose of a receiver is to collect and disentangle a receivership estate’s assets, including debts owed to it. In carrying out that purpose, the receiver simply does not consent to the bringing of a counterclaim by every debtor. When the Barracks first asked the District Court to lift the stay, the receivership had been in place for only ten months. It has now been in effect for 30-36 months. We are reluctant to set a clear cut-off date after which a stay should be presumptively lifted. The second Wencke prong is inherently case-specific, and of course, merely one of three linked considerations. The Wencke II court lifted a stay after seven years, but focused primarily on the fact that no new facts had been discovered in six years, and that the 17 receiver was ready to distribute the assets. 742 F.2d at 1232. The Wencke I court had refused to lift the same stay after a mere two years. Wencke I, 622 F.2d at 1374; see also ESIC Capital, 685 F. Supp. at 485 (“[T]his motion comes at a fairly youthful age of the receivership – two years since its inception.”). The Ninth Circuit in Universal Financial denied a motion to lift a four-year-old stay where “material facts continue to come to light.” 760 F.2d at 1039. In this case, where the alleged fraud encompassed many individuals and companies, we cannot say that the timing factor tips in the Barracks’ favor. See 3R Bancorp, 2005 U.S. Dist. LEXIS 12503, at . Upon consideration of all three Wencke factors, even though the Barracks’ proposed claims may have merit, the other factors do not weigh in favor of allowing them to assert these claims at the present time. While it is true that “[t]he receivership cannot be protected from suit forever,” Wencke II, 742 F.2d at 1231, we find that the Barracks have not carried their burden of proving that the stay should be lifted.