A New York state trial court has recently denied in part a defendant’s motion to dismiss, finding that a prior arbitration between plaintiff and a hedge fund allegedly controlled by defendant did not prevent plaintiff from asserting claims for fraud, breach of fiduciary duty and negligent misrepresentation. Pine St. Assoc., L.P. v. Hicks, 651440-2011, NYLJ 1202560693274, at *1 (Sup. Ct. N.Y. Co. 2012). The court did, however, grant defendants motion to dismiss plaintiff’s claims for unjust enrichment.

Background

Beginning in 2005, plaintiff Pine Street Associates (“Pine Street”) invested, as a limited partner, approximately $8.3 million in Southridge Partners, L.P. (“Southridge Fund”), an investment vehicle allegedly controlled by the defendant Stephen M. Hicks. Pursuant to the operative limited partnership agreement (the “Agreement”), investors were permitted to redeem their investments, allegedly a key factor in Pine Street’s decision to invest (and later remain invested in) the fund. That agreement also gave the Fund’s General Partner the right to suspend any redemption in certain circumstances: “The General Partner shall have the right, exercisable in the General Partner’s sole and absolutely discretion, to suspend or postpone the payment and effective date of any redemption [under various specified circumstances including] at such other times as the General Partner, in its sole discretion, may determine.”

On October 3, 2008, amidst the backdrop of the global financial crisis, Pine Street sought to redeem its remaining investment in Southridge Fund — estimated at $8,076,457.85 — as of December 31, 2008. The redemption was acknowledged and Southridge Fund informed Pine Street that the valuation date for the redemption would be December 31, 2008. However, Southridge Fund thereafter failed to satisfy Pine Street’s redemption request.

Notwithstanding Southridge Fund’s prior representations that 75 percent of the fund’s portfolio was in cash and free trading securities, in December 2008 Hicks requested that Pine Street delay its redemption due to the crisis in the financial markets. Thereafter Pine Street proposed and Southridge Fund rejected four redemption schedules, failing to satisfy Pine Street’s redemption request.

The Arbitration and Subsequent Litigation

In April 2009, Pine Street commenced arbitration against Southridge Fund and Hicks with the American Arbitration Association, pursuant to the Agreement, seeking an accounting and detailed portfolio of Pine Street’s investment, as well as an award ordering Southridge Fund to buy back Pine Street’s investment at the value set and determined by Southridge in October 2008. Pine Street also asserted claims for fraudulent misrepresentation, unsuitable investments, dealing with investors in bad faith and breach of fiduciary duties. Subsequently, however, Pine Street voluntarily dropped its tort claims and pursued only its claims related to accounting and redemption-related issues. As a result, Hicks was found not to be a proper party to the arbitration because the relief sought could only be granted against Southridge Fund, and Hicks was dismissed from the arbitration. Pine Street, however, expressly reserved the right to bring tort claims against Hicks in a later action. The arbitration, therefore, did not address such tort claims and dealt only with the accounting and redemption provisions under the Agreement.

Pine Street ultimately succeeded in the arbitration and was awarded cash and in kind payments of monies owed, plus an accounting of Pine Street’s interest and position in Southridge Fund. The award specified that it was “in full and complete settlement of any and all claims . . . properly submitted to the jurisdiction of these proceedings, and any claim or counterclaim not specifically granted herein [is] . . . deemed denied.” Litigation was commenced subsequently concerning the in kind payments that the Fund made to Pine Street, which Pine Street contended were worthless. As such, Pine Street thereafter filed a lawsuit against Hicks in New York State Supreme Court, seeking to obtain its 2005 investment amount back, regardless of any subsequent valuation, including the valuation at the time of redemption. It is this action that Hicks sought to dismiss based upon the legal principle of collateral estoppel.

The Applicable Legal Principle

Collateral estoppel is an equitable doctrine that applies to prevent an identical issue that was necessarily raised, decided and material in a prior action, from being litigated in a subsequent action. The issue in the subsequent action must be identical to the issue in the first action and the plaintiff must have had a full and fair opportunity to litigate it therein.

The Court’s Holding

The gravamen of Pine Street’s complaint against Hicks was that Hicks made material false statements and omissions concerning, among other things, the Fund’s liquidity, to induce Pine Street to invest and remain invested in Southridge Fund. In seeking to dismiss the fraud claims against him, therefore, Hicks argued that Pine Street “referenced” the fund’s liquidity during the arbitration against Southridge Fund. The court rejected this argument out of hand, noting that the “occasional references at the arbitration to ‘liquidity’” concerned redemptions and not the fraud claims asserted against Hicks. As such, the court found that the arbitration dealt with contract claims only, and the damages awarded to Pine Street therein were correspondingly limited.

The court found that Pine Street was not collaterally estopped from asserting fraud claims against Hicks. The court did find, however, that if Pine Street prevails on those fraud claims, its damages will be limited to the difference between the amount that Pine Street paid for its interest in the fund ($8.3 million) and the value of its interest (plus statutory interest) which it received since its initial investment.

The court dismissed Pine Street’s unjust enrichment claim against Hicks finding that the existence of Agreement with Southridge Fund precluded Pine Street from pursuing what is a quasi-contract theory of recovery designed to prevent injustice in the absence of an actual agreement between the parties.