Court Opinion

ID: 4210741
Source: CourtListenerOpinion
Date Created: 2017-10-11 15:08:10.646233+00
Date Added: 2024-06-11T14:40:50.195419
License: Public Domain

DISTRICT COURT OF APPEAL OF THE STATE OF FLORIDA
                              FOURTH DISTRICT

  DANIEL S. NEWMAN, as Receiver for FOUNDING PARTNERS STABLE
  VALUE FUND, LP, FOUNDING PARTNERS STABLE VALUE FUND, II.,
    LP, FOUNDING PARTNERS GLOBAL FUND, LTD and FOUNDING
              PARTNERS HYBRID-VALUE FUND, L.P.,
                              Appellant,

                                          v.

   ERNST & YOUNG, LLP, a Delaware Limited Liability Partnership, and
     MAYER BROWN, LLP, an Illinois Limited Liability Partnership,
                            Appellees.

                               No. 4D16-2162

                             [October 11, 2017]

   Appeal of a non-final order from the Circuit Court for the Seventeenth
 Judicial Circuit, Broward County; John Joseph Murphy, III, Judge; L.T.
 Case No. 10-49061 (19).

    Stuart Z. Grossman and Rachel W. Furst of Grossman Roth Yaffa
 Cohen, P.A., Coral Gables, and Leo R. Beus, Scot C. Stirling and Robert O.
 Stirling of Beus Gilbert PLLC, Phoenix, AZ, for appellants.

    Edward A. Marod, Aaron J. Horowitz and Joshua A. Levine of Gunster,
 Yoakley & Stewart, P.A., West Palm Beach, for appellee Ernst & Young,
 LLP.

                        ON MOTION FOR REHEARING

 PER CURIAM.

   We grant appellant’s motion for clarification and rehearing, vacate our
prior opinion, and substitute the following in its place.

   Appellant Daniel Newman, the court-appointed receiver for several
investment funds collectively known as Founding Partners, appeals a non-
final order granting Ernst & Young, LLP’s, (“E&Y”) revised motion to
compel arbitration. Newman raises several issues on appeal. We address
three of them. First, we agree with the trial court that a delegation clause
contained in the engagement agreement with E&Y controls the
determination of whether arbitration covers the issues raised in the
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complaint. Second, the trial court determined that the claims of the
individual investors are subject to arbitration. Because several of the claims
are direct, rather than derivative, we disagree in part. Third, we agree with
the trial court that the claims of Global Fund, Inc., a Founding Partner, are
derivative and thus subject to arbitration, even though Global did not sign an
arbitration agreement. Therefore, we affirm in part and reverse in part the
order compelling arbitration.

     I.     Background

    In 2009, the Securities and Exchange Commission brought a securities
fraud complaint against Founding Partners Capital Management, the
general partner and investment manager of Founding Partners, and their
president. Newman (“the Receiver”) was appointed successor receiver for
the funds. In 2015, the Receiver filed a complaint against E&Y in his
capacity as court-appointed Receiver for the funds as well as the assignee
of claims assigned by the individual investors in the funds. The complaint
alleged claims of professional malpractice, negligent misrepresentation,
fraud, breach of fiduciary duty, aiding and abetting fraud, aiding and
abetting breach of fiduciary duty, and aiding and abetting breaches of
statutory duty by E&Y.

    These claims arose out of E&Y’s role as auditor of financial statements
of the Founding Partners for the fiscal years of 2000-07. The Receiver
alleged that Founding Partners loaned hundreds of millions of dollars to
two factoring companies who were supposed to use the loan proceeds to
purchase short-term, high-quality receivables payable by the government
or by insurance companies. The third amended complaint alleges that,
unbeknownst to the investors, the factoring companies began to misuse
the loan proceeds by, among other things, purchasing receivables that
were longer-term, less liquid, and much riskier in nature than what was
represented to the investors in the financial statements. The Receiver’s
basic theory was that E&Y knew, or should have known, that the factoring
companies began to misuse Founding Partners’ loan proceeds, but
nevertheless issued “clean” audits.

   E&Y moved to compel arbitration based on the engagement agreement
entered into with Founding Partners, which contained an arbitration
clause. E&Y argued that the arbitration agreements contain delegation
clauses which command that the arbitrators, not the court, determine the
arbitrability of all claims. E&Y asserted that the Receiver was bound by
the engagement agreements because he stands in the shoes of the funds.
Further, E&Y argued that the assigned claims of the individual investors
are derivative of the claims of the funds and are thus subject to arbitration.
The trial court agreed and ordered arbitration as to all claims. Newman
appeals that order.
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     II.    Analysis

    We find that the delegation clause contained in the arbitration provision
of the engagement agreement controls the determination of what issues
are subject to arbitration. Generally speaking, when a delegation provision
is included in an arbitration agreement, the court “only retain[s]
jurisdiction to review a challenge to that particular provision. Absent a
direct challenge, we must treat the delegation provision as valid and allow
the arbitrator to determine the issue of arbitrability.” Angels Senior Living
at Connerton Ct., LLC v. Gundry, 210 So. 3d 257, 258 (Fla. 2d DCA 2017)
(quoting Parnell v. CashCall, Inc., 804 F.3d 1142, 1148 (11th Cir. 2015)).
The Receiver did not challenge the delegation clause itself. Thus, whether
an arbitrable issue exists is a determination that should be delegated to
an arbitrator.

   As to the claims of the individual investors, we conclude that the court
erred in ordering arbitration of some of the assigned claims of the
individual investors which were direct, not derivative, claims of the
investors. This Court, some years ago, explained the distinction between
derivative and direct claims: “A direct or individual action is a suit by a
stockholder to enforce a right of action existing in the stockholder.” Salit
v. Ruden, McClosky, Smith, Schuster & Russell, P.A., 742 So. 2d 381, 388
(Fla. 4th DCA 1999) (citing Fort Pierce Corp. v. Ivey, 671 So. 2d 206, 207
(Fla. 4th DCA 1996)).

      A derivative suit is an action in which a stockholder seeks to
      enforce a corporate right or to prevent or remedy a wrong to
      the corporation, where the corporation, because it is
      controlled by the wrongdoers or for other reasons, fails and
      refuses to take appropriate action for its own protection.

Id.; see also Strazzulla v. Riverside Banking Co., 175 So. 3d 879, 882-83
(Fla. 4th DCA 2015). In KPMG, LLP v. Cocchi, 88 So. 3d 327 (Fla. 4th DCA
2012), a case factually similar to the present case, we held that negligent
misrepresentation and Florida Deceptive and Unfair Trade Practices Act
(“FDUTPA”) claims were direct claims by the investors against the firm that
audited the partnerships. Id. at 330. But the claims of professional
malpractice and aiding or abetting breach of fiduciary duty were derivative
claims. Id. at 331. This Court explained that each claim must be examined
to determine whether the claim of an individual investor is direct or
derivative:

      In Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031,
      1033 (Del. 2004), the Delaware Supreme Court established a
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      test when analyzing whether an action by stockholders (or
      limited partners) was direct or derivative of the
      corporation/general partnership’s cause of action.         The
      questions which must be asked are: 1) who suffered the harm,
      the corporation or the stockholders individually, and 2) who
      received the benefit of the recovery or remedy? Because the
      claims of negligent misrepresentation and violation of
      FDUTPA allege individual harm to the plaintiffs and involve
      torts directed at the individual limited partners, we conclude
      that the limited partners suffered individual harm.

Id. at 329-30 (quoting KPMG LLP v. Cocchi, 51 So. 3d 1165, 1167-68 (Fla.
4th DCA 2010), vacated, 565 U.S. 18 (2011)). Similarly, in this case, the
individual investors alleged direct harm in their investment decisions
because of E&Y’s negligent misrepresentations. In a factually similar case,
the court in Askenazy v. Tremont Group Holdings, Inc., 29 Mass.L.Rptr.
340, 2012 WL 440675, at *10 (Mass. Sup. Ct. Jan. 26, 2012), also held
that such claims were direct and not derivative, stating:

      specifically, the plaintiffs allege that, as a result of KPMG's
      misstatements and professional incompetence, they were
      induced to invest in the Rye Funds, to stay invested, and in
      some cases to make additional investments in the Funds. As
      such, these claims describe individualized harm independent
      of harm to the partnership, and rest on a duty to each plaintiff
      that is not merely derivative of KPMG’s fiduciary duties as the
      Rye Funds’ auditor.

Id. (emphasis added). In this case, the complaint makes similar allegations
that the investors were injured through investing or making additional
investments in the funds because of the misrepresentations of E&Y. In
addition, in the count for aiding and abetting the breach of statutory duty,
the Receiver alleges the breach of statutory duties which are owed to the
individual     investors.   Therefore,    those    claims     of   negligent
misrepresentation, fraud, and aiding violation of statutory duties are not
derivative, and, thus, are not subject to arbitration, where none of the
individual investors agreed to arbitrate their claims. On the other hand,
we conclude that the breach of fiduciary claims and professional
malpractice claims are derivative.       The count alleging professional
malpractice against E&Y alleges only that the Founding Partners, and not
the investors, were damaged. As to the breach of fiduciary claim, the
damages from the improper audits were a failure to reveal that the
collateral to secure the Founding Partners’ loans was grossly inadequate.
These were damages to the Founding Partners when the loans defaulted,
not direct damages of the investors. Therefore, in this case, the breach of
fiduciary claims of the investors are derivative and can be arbitrated.
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    The receiver also contends that Global Fund, one of the Founding
Partners, should not be required to arbitrate its claims, because it did not
join in the arbitration agreement. Although it is clear that Global was not
named in the arbitration agreement, the complaint alleges that it is a
Founding Partner, and its damages are therefore the same damages as the
Founding Partners. No separate claim of direct damages for Global is
alleged. Therefore, we conclude that all of its claims are derivative of those
of the other Founding Partners, and the court did not err in granting
arbitration of Global’s claims.

   Consequently, we affirm the trial court’s order compelling arbitration of
the claims of the Founding Partners, including Global, and the claims of
the investors for breach of fiduciary duty and aiding and abetting breach
of fiduciary duty. We reverse the order compelling arbitration of the
negligent misrepresentation, fraud, and aiding and abetting the breach of
statutory duty counts.

WARNER, CIKLIN and TAYLOR, JJ., concur.

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