Court Opinion

ID: 3178036
Source: CourtListenerOpinion
Date Created: 2016-02-17 22:05:19.439367+00
Date Added: 2024-06-11T07:38:53.061995
License: Public Domain

Case: 14-14526       Date Filed: 02/17/2016        Page: 1 of 5

                                                                                     [PUBLISH]

                  IN THE UNITED STATES COURT OF APPEALS

                             FOR THE ELEVENTH CIRCUIT
                               ________________________

                                     No. 14-14526
                               ________________________

                          D.C. Docket No. 1:12-cv-20695-MGC

HUGH F. CULVERHOUSE,
individually and on behalf of all others similarly situated,

                                                                            Plaintiff-Appellant,

versus

PAULSON & CO. INC.,
PAULSON ADVISERS LLC,

                                                                        Defendants-Appellees.

                               ________________________

                       Appeal from the United States District Court
                           for the Southern District of Florida
                             ________________________

                                     (February 17, 2016)

Before WILLIAM PRYOR, JULIE CARNES, and SILER, ∗ Circuit Judges.

WILLIAM PRYOR, Circuit Judge:

∗
 Honorable Eugene E. Siler, Jr., United States Circuit Judge for the Sixth Circuit, sitting by
designation.
                Case: 14-14526     Date Filed: 02/17/2016   Page: 2 of 5

         We certified the following question of state law to the Delaware Supreme

Court:

         Does the diminution in the value of a limited liability company, which
         serves as a feeder fund in a limited partnership, provide the basis for
         an investor’s direct suit against the general partners when the
         company and the partnership allocate losses to investors’ individual
         capital accounts and do not issue transferable shares and losses are
         shared by investors in proportion to their investments?

Culverhouse v. Paulson & Co., 791 F.3d 1278, 1281 (11th Cir. 2015). The

Delaware Supreme Court answered our question in the negative. See Culverhouse

v. Paulson & Co., No. 349, 2015, slip op. 1, 2 (Del. Jan. 26, 2016). Based on its

answer, we now affirm the dismissal of the complaint.

                                  I. BACKGROUND

         Hugh Culverhouse invested in HedgeForum Paulson Advantage Plus, LLC,

a “feeder” fund that invested in Paulson Advantage Plus, L.P. When the latter lost

$460 million on a bad investment, Culverhouse sued its general partners for breach

of fiduciary duty, gross negligence, and unjust enrichment. Culverhouse alleged

that his claims are “direct” under Delaware law. The district court disagreed and

concluded that his claims are “derivative.” The district court ruled that

Culverhouse lacked “standing” under Article III of the Constitution and dismissed

his complaint for lack of “subject matter jurisdiction.” The district court also

denied Culverhouse’s request for jurisdictional discovery and dismissed his

complaint without leave to amend.

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      On appeal, we concluded that the question whether Culverhouse’s claims are

direct or derivative is “unsettled” in Delaware. Culverhouse, 791 F.3d at 1281. We

certified the question to the Delaware Supreme Court, which held that

Culverhouse’s claims are derivative. Culverhouse, slip op. at 7–8. We must now

resolve Culverhouse’s appeal.

                          II. STANDARDS OF REVIEW

      We review the dismissal of a complaint de novo. See Lord Abbett Mun.

Income Fund, Inc. v. Tyson, 671 F.3d 1203, 1206 (11th Cir. 2012). We review the

denial of jurisdictional discovery and the denial of leave to amend for abuse of

discretion. See Reese v. Herbert, 527 F.3d 1253, 1262 n.13 (11th Cir. 2008).

                                  III. DISCUSSION

      The district court correctly dismissed Culverhouse’s complaint. Now that the

Delaware Supreme Court has answered our certified question, we know that

Culverhouse’s claims are derivative, not direct. His derivative claims fail because

Culverhouse was never a partner of Paulson Advantage Plus, L.P. See Del. Code

Ann. tit. 6, § 17-1002.

      Although the district court correctly concluded that Culverhouse’s claims are

derivative, it incorrectly described this defect as jurisdictional. In his complaint,

Culverhouse alleged that his claims are direct under Delaware law. Because his

theory was “not ‘immaterial and made solely for the purpose of obtaining

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jurisdiction’ or ‘wholly insubstantial and frivolous,’” Black v. Wigington, No. 15-

10848, slip op. 1, 20 (11th Cir. Jan. 22, 2016) (quoting Bell v. Hood, 327 U.S. 678,

682–83 (1946)), the district court should have accepted it as correct for purposes of

jurisdiction, see Mr. Furniture Warehouse, Inc. v. Barclays Am./Commercial Inc.,

919 F.2d 1517, 1520 n.2 (11th Cir. 1990). “[I]n reviewing the standing question,

the court must be careful not to decide the questions on the merits for or against the

plaintiff, and must therefore assume that on the merits the plaintiffs would be

successful in their claims.” City of Waukesha v. EPA, 320 F.3d 228, 235 (D.C. Cir.

2003) (citing Warth v. Seldin, 422 U.S. 490, 502 (1975)). When the district court

later concluded that Culverhouse was wrong and that his claims were derivative, its

ruling should have been on the merits. See Lexmark Int’l, Inc. v. Static Control

Components, Inc., 134 S. Ct. 1377, 1387 n.4 (2014); Bond v. United States, 131

S. Ct. 2355, 2362 (2011). That is, the district court should have dismissed

Culverhouse’s complaint for failure to state a claim, Fed. R. Civ. P. 12(b)(6), not

for lack of subject-matter jurisdiction, Fed. R. Civ. P. 12(b)(1). See Williamson v.

Tucker, 645 F.2d 404, 415–16 (5th Cir. 1981).

      Nevertheless, this labeling error is harmless because Culverhouse’s

complaint should have been dismissed. See McCallum v. City of Athens, 976 F.2d

649, 650 & n.1 (11th Cir. 1992). Because the complaint fails to state a claim,

Culverhouse was also not entitled to jurisdictional discovery. See Chatham Condo.

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Ass’ns v. Century Vill., Inc., 597 F.2d 1002, 1011–12 (5th Cir. 1979). And

amending his complaint would have been futile. See Sibley v. Lando, 437 F.3d

1067, 1073 (11th Cir. 2005).

                               IV. CONCLUSION

      We AFFIRM the dismissal of Culverhouse’s complaint.

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