Claridge Assocs., LLC v. Schepis
Posted on Categories Court Decisions, Securities Arbitration

By Jill I. Gross

District court declines to provide issue preclusive effect to a prior arbitration award, because the issues in both proceedings are not identical and, in any event, the alleged identical issue was not necessary to support a valid and final award.

Claridge Assocs., LLC vs. Schepis, No. 15 Civ. 4514 (S.D. N.Y., 8/1/19).

In 2012, limited partners to an investment partnership filed an arbitration before the American Arbitration Association against the general partner, Pursuit Capital Management (PCM), for allegedly withholding information about the investment fund (Pursuit Capital Management Fund I, L.P.), for directing the broker-dealer it controlled to charge grossly excessive markups to the fund, and for other alleged breaches of fiduciary duty. The Arbitrator awarded the limited partners $2.2 million after finding that the general partner breached its fiduciary duties to the limited partners. Before the respondents paid the award, they substituted in a new general partner for the fund and transferred almost all of the monies owed to the arbitration claimants to a law firm. In 2015, the limited partners then sued the individuals controlling PCM and the new general partner in federal district court, seeking relief for essentially the same alleged misconduct.

Defendants moved to dismiss the lawsuit, contending that the present lawsuit was barred by the 2012 arbitration proceeding under the doctrine of res judicata (claim preclusion). The district court then compelled the parties to arbitrate the arbitrability of the res judicata defense and, if arbitrable, the merits of the defense. The Arbitrator found that the 2012 arbitration did not preclude plaintiffs’ claims against the individual defendants, even though they were involved in the 2012 arbitration as corporate representatives of PCM. Plaintiffs now seek partial summary judgment, arguing that the 2012 arbitration award has collateral estoppel effect (issue preclusion) on the current action. Specifically, plaintiffs argue that the 2012 Arbitrator must have found that the individual defendants breached their fiduciary duty to the limited partners when he found that the corporate entity that they controlled breached its fiduciary duty to those same limited partners.

The Court denies the motion. The Court first concludes that the issues that were before the Arbitrator are not identical to the issues in the current lawsuit, which is one element needed to apply collateral estoppel. In order for the general partner’s breach of fiduciary duty (by charging excessive markups) to extend equally to the managers of the general partner, the arbitrator would have been required to find that the managers personally benefited from the excessive markups. However, nowhere in the Award is there any specific finding that the individual defendants personally benefited from the markups. In addition, in order to invoke the doctrine of collateral estoppel, plaintiffs must show that the alleged identical issues were “necessary to support a valid and final judgment on the merits.” In this case, the Court concludes that there is a disputed issue of fact as to whether, even assuming the Arbitrator had found that defendants personally benefited from the breaches, that finding is a “necessary, essential and dependent part of the 2012 Arbitration” Award. Accordingly, the Court denies plaintiffs’ motion for partial summary judgment.

(J. Gross)

(SOLA Ref. No. 2019-44-02)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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