In Metropolitan Life Ins. Co v. Tremont Group Holdings, et al. C.A. No. 7092-VCP (Del. Ch. Dec. 20, 2012).
Plaintiff insurance carriers, who were limited partners in a Delaware limited partnership that invested in another fund which invested substantially all of its investment capital in Bernie Madoff’s investment firm, brought an action alleging a number of claims including, among others, fraud, breach of contract, breach of fiduciary duty, negligent misrepresentation, unjust enrichment, civil conspiracy and aiding and abetting.
Issue: The defendants moved to dismiss the complaint arguing that: (i) the Court lacked personal jurisdiction over the individual defendants; (ii) the exculpation clause of the Limited Partnership Agreement (“LPA”) barred many of the claims asserted by the plaintiffs; (iii) the derivative claims are barred by res judicata and release because of the claims that were settled in the consolidated action in New York and the failure to make demand; and (iv) for the remaining claims the plaintiffs’ failure to state a claim.
Answer: The Court: (i) found that it lacked personal jurisdiction over the individual defendants; (ii) found certain of the counts were solely derivative in nature, and therefore were dismissed based on res judicata and release; (iii) dismissed the plaintiffs‘ claim for breach of the implied covenant of good faith and fair dealing because the complaint failed to plead a specific, implied contractual obligation; (iv) dismissed plaintiffs‘ negligent misrepresentation claim because it is either barred by the exculpation provision of the limited partnership agreement or duplicative of the fraud and intentional misrepresentation claims; and (v) granted in part the motion to dismiss plaintiffs‘ claims for aiding and abetting and civil conspiracy.
New York Madoff-Related Litigation Against Tremont Settled
After Madoff’s arrest, numerous individual, class, and derivative actions were filed against Madoff’s companies and in particular, Tremont Group Holdings (“TGH”) and others to recover losses as a result of Madoff’s Ponzi scheme. Those actions were consolidated in the United States District Court for the Southern District of New York as In re Tremont Group Holdings, Inc., Securities Litigation. That case settled, among other things, all Madoff-related derivative and direct claims. The settlement also gave the limited partners in the settling entities an opt-out right, which the plaintiffs in the Court of Chancery action exercised. After opting out of the settlement, the plaintiffs filed suit in the Court of Chancery on December 7, 2011.
Consent to Jurisdiction
The first issue the Court addressed was whether it had personal jurisdiction over the individual defendants because the LPA contained a forum selection clause whereby the parties expressly consented to Delaware as the exclusive jurisdiction and venue of the Court of Chancery. In analyzing this issue, the Court noted that a party may expressly consent to jurisdiction by contract, and if the party properly consents to personal jurisdiction by contract, a minimum contacts’ analysis is not required. However, in this action, the only parties to the LPA were the Fund’s general partner and its limited partners, including the plaintiff carriers but not the individual defendants.
The Court described in detail the statutory basis for specific and general jurisdiction and the provisions of the Delaware long-arm statute, 10 Del. C. § 3104(c). The Court ultimately concluded that because the plaintiffs had not alleged contacts that would “meet the minimum contacts standard, such as residing, conducting business, or owning real property or other assets in Delaware,” and that they had failed to allege facts that the individual defendants “purposefully directed their activities at the forum and the litigation resulted from injuries that arose out of or related to those activities,” the Court had no jurisdiction over the individual defendants.
Defendants next argued that the Exculpation Provision of the LPA barred the plaintiffs’ claims for breach of contract, breach of fiduciary duty, negligent misrepresentation and unjust enrichment. The plaintiffs argued that they had satisfied their burden in the complaint by six allegations of gross negligence and willful and reckless conduct. The Court concluded that the complaint adequately pled facts in support of a claim against Tremont that conceivably could satisfy one or more of the grossly negligent, willful, or reckless requirements set forth in the Exculpation Provision. Thus, the Court denied Tremont’s motion to dismiss those counts.
Tremont next argued that claims should be dismissed because: (i) the doctrines of res judicata and release by operation of the final judgment in the New York action barred the plaintiffs’ derivative claims; (ii) although the plaintiffs label the breach of fiduciary duty and unjust enrichment claims as direct claims, they are also derivative claims and should be barred; and (iii) the plaintiffs have failed to satisfy the demand requirements applicable to those claims.
Tremont also argued that the claims for breach of fiduciary duty and unjust enrichment arise out of the diminution in the value of the funds resulting from Madoff’s theft of the funds’ assets and from the funds’ payment of allegedly unwarranted fees to Tremont. Because these injuries were suffered by the funds and only indirectly by the plaintiffs, Tremont argued that the claims were derivative, and not direct. The plaintiffs argued that the settlement rendered their claims direct rather than derivative. Specifically, they argue that the first prong of the Tooley test—i.e., who suffered the alleged harm—was satisfied because the plaintiffs received no benefit from the settlement because they opted out. The plaintiffs also argued that they satisfied the second prong of the Tooley test—i.e., who would receive the benefit of any recovery or other remedy—because the claimed damages would benefit the plaintiffs alone.
The Court found that the claims were derivative in nature because Tremont’s misconduct damaged the plaintiffs “only to the extent of their proportionate interest in TOF III independent of the funds.” However, the Court went on to note that those derivative claims were released by the settlement of the New York litigation therefore, the Court dismissed those claims as barred by principles of res judicata and release by operation of the final judgment in New York.
Failure to State a Claim
Tremont also moved to dismiss the remaining claims—breach of contract, breach of covenant of good faith and fair dealing, fraud, intentional misrepresentation, negligent misrepresentation, and civil conspiracy/aiding and abetting. For the contract claim, the Court found that the complaint alleged facts that could conceivably support a reasonable inference that Tremont breached its obligations under the LPA, so the Court denied the motion to dismiss the breach of contract claim. With respect to the breach of an implied covenant, the Court found that the complaint failed to plead a specific implied contractual obligation so the Court granted the motion to dismiss this count. With respect to fraud or intentional misrepresentation, the Court found that the plaintiffs had adequately pled facts to support both of those claims therefore the motion to dismiss was denied. However, with respect to the claim for negligent misrepresentation, the Court found that claim to be either barred by the Exculpation Provision or duplicative of the fraud and intentional misrepresentation claim, so it was dismissed.
Finally, the Court found that the plaintiffs had alleged facts sufficient to support their claim for aiding and abetting, thus denying the motion to dismiss, however, the Court dismissed the claim for civil conspiracy. The complaint alleged that one of the defendants, Tremont Partners, Inc. (“TPI”) was a wholly-owned subsidiary of TGH which, the Court noted, could provide a basis for precluding the plaintiffs’ claim for civil conspiracy under In re Transamerica Airlines, Inc., 2006 WL 587846 (Del. Ch. Feb. 28, 2006) (holding that a corporation generally cannot be deemed to have conspired with its wholly owned subsidiary) but “only if TPI was acting for reasons outside the normal course of its business.” However, the Court found that the complaint failed to contain any such allegations, so this claim was dismissed.