Court Opinion

ID: 4184178
Source: CourtListenerOpinion
Date Created: 2017-07-06 23:09:01.36034+00
Date Added: 2024-06-11T14:40:35.737552
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

                              [July 5, 2017]

   Appeal of a non-final order from the Circuit Court for the Seventeenth
Judicial Circuit, Broward County; John Joseph Murphy, 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 appellant.

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

PER CURIAM.

   Appellant Daniel Newman, the court appointed receiver for several
investment funds collectively known as Founding Partners, appeals a
nonfinal order granting Ernst & Young, LLP’s (“E&Y”) revised motion to
compel arbitration. Newman’s third amended 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.
Newman raises several issues on appeal. We address two of them. First,
the trial court did not err in finding that a delegation clause contained in
the engagement agreement controls. Second, the trial court properly
determined that the claims of the individual investors are subject to
arbitration. Therefore, we affirm 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 “solely in
his capacity as court-appointed Receiver” for the funds. The third
amended complaint states that the receiver is “also the assignee of claims
assigned by” the individual investors of the funds.

    The receiver’s claims against E&Y arose out of E&Y’s role as auditor of
financial statements of the funds 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 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 agreements
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.

    II.    Discussion

   We find that the delegation clause contained in the arbitration provision
of the engagement agreement controls. 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

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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.

   We also find that the trial court did not err in ordering arbitration of
the assigned claims of the individual 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). Here, the assigned claims of the investors are
derivative. The damages suffered by the individual investors resulted from
the losses the Founding Partners suffered due to the bad loans.

   The receiver’s reliance on KPMG, LLP v. Cocchi, 88 So. 3d 327 (Fla. 4th
DCA 2012), is misplaced. In KPMG, this Court held that under Delaware
law, the negligent misrepresentation and 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. Davidson, Lufkin & Jenrette, Inc., 845 A.2d 1031,
      1033 (Del. 2004), the Delaware Supreme Court established a
      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

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      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)).

    Such an analysis is not required in this case because, unlike in KPMG,
the instant complaint is not brought by any individual plaintiff with an
independent tort claim against E&Y. The third amended complaint was
filed by Newman as receiver for the funds. As stated in the third amended
complaint, all damages that the receiver recovers will go to the funds,
which will benefit all of the investors evenly. 1 Throughout the third
amended complaint, the receiver alleged that the investors relied on E&Y’s
representations and refrained from taking actions to protect the Founding
Partners’ assets, not their own. Accordingly, the claims of the individual
investors are derivative.

    Consequently, we affirm the trial court’s order compelling arbitration of
all claims raised in the third amended complaint.

WARNER, CIKLIN and TAYLOR, JJ., concur.

                             *         *          *

    Not final until disposition of timely filed motion for rehearing.

1The third amended complaint states, “[e]ach assignor provided an unconditional
assignment of its claims against E&Y . . . to the Receiver, and any proceeds from
the prosecution of those claims are for the benefit of the receivership.”

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