Seibold v. Camulos Partners LP, C.A. No. 5176-CS (Del. Ch. Sept. 17, 2012).

Issue Addressed:  Did hedge fund breach the limited partnership agreement by not distributing to the departing partner his capital investment?

Short Answer:  Yes.  In addition, the Court addressed many related claims and issues in connection with the departure of an ex-Soros hedge fund manager.

Brief Background

This case involves a former partner and analyst at the investment management arm of a hedge fund in which he was also a limited partner.  After he resigned and withdrew as a partner of the investment manager, he also requested to withdraw as a limited partner of the fund and sought payment of his capital investment in the fund pursuant to the terms of the limited partnership agreement.  The investment manager refused to return the investment which they stipulated was approximately $4.6 million, most of which had been payable and past due since early 2008. The principals involved in this case formerly worked for a Soros hedge fund.

In what the Court indicated was aggressively contested litigation on both sides, additional claims and counterclaims included breach of fiduciary duty, tortious interference with contract, spoliation of evidence, cross-claims for shifting attorneys’ fees, and unjust enrichment, among others.

This 77-page opinion provides copious factual details about the dysfunctional relationships involved and the minutiae of the evidentiary issues that the Court addressed.  The most helpful approach to a decision of this length in a case of this type is to highlight the salient legal pronouncements that can be useful to practitioners to the extent they may be applicable to other cases, as opposed to recounting the voluminous facts.


The Court ruled in favor of Seibold, the departing hedge fund partner, on all of his claims, except for his demand for an “excessively high rate of prejudgment interest.”  Although the Court found that Seibold did breach a confidentiality agreement as an employee of the investment manager, because the hedge fund was not able to establish any harm, and because the investment manager could not prove that Seibold profited from any breach of fiduciary duty, the requested disgorgement was denied.  Although the Court found that some of the litigation tactics of the hedge fund entitled Seibold to fee shifting, due to the Court also holding that the plaintiff’s own early litigation conduct was not blameless, the Court found that “equity counsels letting the fees lie where they now rest.”

Practitioner’s Aside

As an aside, preliminarily, several notable excerpts of the opinion are a reflection of what some observers of the Court of Chancery view as less fervor towards cases that do not involve “relatively large sums.”  The stipulated amount owed in this case, not including consequential damages and fees, was approximately $4.6 million (apart from the alleged set-offs and counterclaims).  If this is considered a “relatively small sum” for an appropriate dispute in the Court of Chancery, the Court still gave it an abundance of attention along with comprehensive treatment and careful thought as evidenced by the 77-page opinion.  Nonetheless, the following opening paragraph might lead one to infer some type of potential proclivity of the Court to handle “larger cases” or disinclination towards smaller cases:

“This is a post-trial decision in a fight between money managers, which seems to be belie any notion that financial logic drives behavior, to the exclusion of other sentiments, like hurt, anger, and resentment.  The emotions of the parties have led to a suit, the expense of which seems to be disproportionate to what is financially at stake.”  (emphasis added).

In a better world, financial logic should drive virtually all litigation. There was at least $4.6 million in dispute in this case. Is that too small a case for the Court of Chancery?  Perhaps an example of one of the procedural requirements that could make certain aspects of Chancery litigation more expensive as compared to some other courts, is the practice of requiring routinely that motions be fully briefed along with the need for both pre-trial briefs and post-trial briefs, as well as post-trial argument on the post-trial briefs.  That level of briefing adds an expense that may not be incurred by some other courts that do have those layers of cost. (Of course, because all trials in the Court of Chancery are non-jury, there may be some cost savings because no jury instructions need to be prepared.)

Another quote that might indicate the disquietude implied by the Court in this opinion, in connection with the bellicose insistence of the parties to litigate this matter, is found on page 2 of the opinion:

“The ardor that these parties have to fight has manifested itself in the way they litigate.  Despite the fact that the investment manager (i) recognizes that it must return Seibold the proceeds from its capital account that it withheld from him, (ii) offers no evidence that Seibold used or disclosed any confidential information that would harm it in a material way, (iii) no longer makes any claims for monetary relief, and (iv) has a remaining claim for injunctive relief seeking to require Seibold to return whatever confidential information he still has on the system that rings hollow (since its own begrudging litigation concessions, such as dropping its damage claims, suggest any such information is now immaterial), the parties have been unable to reach an amicable resolution of their issues; and so, here we are.”

The Court added elsewhere that it was not pleased at how either party litigated the case.

Molly DiBianca’s Delaware Employment Law Blog provides helpful insights on this case from the perspective of a labor lawyer.

Practice Tip:

The Court noted early on, in footnote 2, a practice tip for litigators regarding what the Court referred to as a “post-post-trial dispute about the admissibility of certain exhibits.”  Specifically, the Court indicated that if one seeks to object to an exhibit it is not sufficient to make a notation on a pre-trial exhibit log but rather a formal motion to object, or an objection at trial or even in post-trial briefing must be explicit.  In this case, no timely objections were made to the exhibits in dispute and therefore the exhibits were admitted.

Highlights of Court’s Legal Analysis

We provide the following excerpts of legal principles that are most likely to be applicable in other cases generally.

Partnership Law Principles under L.P. Act

In discarding as nearly frivolous one of the arguments of  the hedge fund, the Court referred to Section 17-1101(d) of the Delaware Limited Partnership Act in connection with the principle of partnership law that:  “The general partner is liable to other partners if it breaches the partnership agreement, unless the partnership agreement provides otherwise.”  See footnote 97. See also  6 Del. C. section 17-403 (general partner is bound by a limited partnership agreement).

Contract Interpretation Principle

The Court rejected an argument that a phrase in a Subscription Agreement also referred to an unrelated Confidentiality Agreement. In part the Court relied on a contract interpretation principle that is not likely well-known among lawyers, but the Court described as follows:

“… the well-established rule of construction that where general language follows an enumeration of things, by words of a particular and specific meaning, such general words are not to be construed in their widest extent, but are to be held as applying only to things of the same general kind or class as those specifically mentioned.”  (internal quotes and ellipsis omitted). See footnote 270.

Tortious Interference with Contract

The parties did not appear to argue, and the Court did not address, whether the fact that there were many inter-related affiliated parties impacted the claim for tortious interference with contractual relations.  The Court found that Camulos Capital was liable for tortious interference because it intentionally seized control over the capital investment that was due to Seibold and that interference was unjustified, and a significant factor in the breach of the Limited Partnership Agreement.  The elements of tortious interference with contractual relations were recited in footnote 105.

Unjust Enrichment

The Court rejected claims of unjust enrichment because those claims are not available when contractual relief is also available as it was in this case.  Nonetheless, the Court recited the elements for unjust enrichment at footnote 106.

Breach of Confidentiality Agreement

The confidentiality agreement was governed under New York law and so will only receive cursory treatment here.  The important part of the many pages that addressed each document taken by Seibold which was claimed to be a breach of the confidentiality agreement, was found at page 31 which can be summarized as: “no harm, no foul.”  Specifically, the Court explained that Camulos did not offer any evidence in support of its theory that confidential information was used to its detriment.  See also Slip op. at 50 (even if Seibold breached the confidentiality agreement and his fiduciary duties by improperly gathering and using information belonging to Camulos for his own purposes, Camulos has failed to prove any resulting damages).

Breach of Fiduciary Duty

Seibold did not dispute that he owed fiduciary duties to Camulos Capital in his capacity as a partner as well as a “senior investment professional.”  See footnote 193.

Misuse of Confidential Information Constituting a Breach of Fiduciary Duty

The Court explained the settled law that an agent may not misuse the confidential information of its principal.  See footnote 195 citing 1949 Chancery decision for the statement of Delaware law that:  “If an employee in the course of his employment acquires secret information relating to his employer’s business, he occupies a position of trust and confidence toward it, analogous in most respects to that of a fiduciary, and must govern his actions accordingly.”

Solicitation as a Breach of Fiduciary Duty

The Court also explained that:  “An employee commits a breach of fiduciary duty when he solicits an employer’s customers before cessation of employment.”  See footnote 197.

Using the Resources of an Employer to Compete with the Employer is a Breach of Fiduciary Duty – But Damages Must be Proven

The Court reiterated Delaware law principles that are very important to business owners regarding the obligations of employees, even those employees who do not have restrictive covenants (or covenants not to compete).  Specifically, the Court explained that:  “It is a breach of fiduciary duty for an agent to use his principal’s resources to compete, or prepare to compete, with the principal.  An agent may, however, take steps to prepare to compete with his principal, so long as these steps are not otherwise wrongful.”  See footnotes 202 and 203.

The Court further explained that:  “An agent has a duty not to use the property of a principal for the agent’s own purposes, unless the principal consents to such use.  There is no confidentiality requirement to this proscription.”  See footnote 206.  Although the Court found that Seibold breached his fiduciary duty in this regard by taking work product for his own purposes, the breach of fiduciary duty was identical to the breaches of the confidentiality agreement which has been separately dealt with.  In addition, Camulos Capital did not suffer any harm as a result of the breach of fiduciary duty.

Footnote 207 is the best footnote of the opinion and deserves to be quoted verbatim as follows:

“I recognize that the principle set forth above  [regarding the duty of an agent not to use the principal’s property for the agent’s purposes] is not one that most of us can claim that we have adhered to with fidelity 100% of the time in our working lives.  Section 8.05 of the Restatement (Third) of Agency should not be read in a non-sensical, Stalinist way that allows employers an easy excuse to sue or penalize faithful employees for human behavior that does not diminish the effectiveness of the employer in any way.  Phones get used for personal phone calls, work copiers get used to make a few copies of necessary personal documents, computers get used to plan vacations, etc., because employees have lives and families.  But so too do employees’ own computers, paper, and resources get used for work benefiting their employers.”

Compare footnote 245 (referring to allowable inference of harm to employer due to breach of fiduciary duty by employee).

Spoliation Law in Delaware

The Court emphasizes that spoliation of evidence is a serious charge and can lead to harsh penalties.  The Court states the truism that:  “A party in litigation who has reason to anticipate litigation has an affirmative duty to preserve evidence that might be relevant to the issues in the lawsuit.”  See footnote 216.  However an adverse inference will only be drawn and is only appropriate where a party acts to “intentionally or recklessly destroy evidence and when it knows that the item in question is relevant to a legal dispute or it was otherwise under a legal duty to preserve the item.”  A party is not obligated to preserve every shred of paper or electronic document but must instead “preserve what it knows, or reasonably should know, is relevant to the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.”  See footnotes 217 and 218.

In order to prove spoliation, a party must “identify specific documents that existed and would support his position; and cannot make a vague and general complaint that evidence has been mislaid.”

The Court concluded that Seibold and his counsel made a good faith, “if imperfect,” effort to preserve evidence, and there is no evidence of intentional or reckless spoliation.

The Court also admonished that the “age of computers has led to far too light uses of the harsh term ‘despoiler,’ and Courts should be mindful not to tag anyone who alters, deletes, or loses a computer file within five years of a lawsuit.  Our Supreme Court’s careful decision in Sears is mindful of that danger.”  (citing Sears, Roebuck & Co. v. Midcap, 893 A.2d 542, 548-50 (Del. 2006)).

Prejudgment Interest

The Court explained that a court of equity has broad discretion in fixing the prejudgment interest rate to be applied.  The Court referred to the default legal rate of interest provided in Section 2301(a) of Title 6 of the Delaware Code which generally adds 5% to the Federal Reserve Discount Rate.  That rate fluctuates but Seibold sought to ask the Court to maintain a fixed rate based on a rate as of February 2008 when the money was due, even though the rate has dropped dramatically since then.  The Court provided an extensive survey of the Federal Reserve Discount Rate from 2008 to the present, as well as comparable rates for the various stock indexes during the same period of time.  However, the Court warned Seibold that he “should be careful what he wishes for before he seeks an equity component in the determination of prejudgment interest.”  See footnote 238.  In sum, because the Court blamed Seibold at least in part for the protracted nature of the litigation and because simple interest was fair, given both market realities and his conduct, the Court did not grant him compounded interest or a fixed rate of interest.


The Court explained that a set-off cannot be taken preemptively against claims, and instead must be formally asserted as a reduction against a “liquidated and demandable debt.”  See footnote 233.  The Court explained that set-offs are properly taken only as to judgments, not claims.

Attorneys’ Fees

The Court explained the general American Rule that everyone pays their own way in terms of legal fees but there are exceptions for bad faith litigation tactics.  While it might have shifted fees due to the litigation tactics of Camulos, because Seibold did not come to the Court with clean hands, the Court decided to leave the fees where they lied.  The Court also rejected what it referred to as a “billiard bank-shot argument” in which Camulos made an argument that it was entitled to attorneys’ fees under a subscription agreement.  The Court referred to statements by at least one Camulos witness that were false, and other arguments that the Court charitably referred to as “lacking color.”  However, the Court assigned blamed for the litigation tactics of both sides, and cited to cases for the position that even when the conduct of litigants could support fee shifting, when both sides have engaged in such conduct, each party will pay their own fees and costs.

UPDATE: Alison Frankel of Thomson Reuters writes about the case here.