Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 533 (2009)

An attorney for a limited partnership does not automatically owe a fiduciary duty to the limited partners and, absent a duty to disclose, cannot be liable for fraud based on silence.

Summary

Limited partners of a hedge fund sued the fund’s attorneys (S&K) for fraud and breach of fiduciary duty, alleging S&K failed to disclose the fund’s improper activities and made misrepresentations in offering memoranda. The New York Court of Appeals held that S&K did not owe a fiduciary duty to the limited partners simply by virtue of representing the limited partnership. The court also found that the plaintiffs failed to plead fraud with sufficient particularity, as they did not establish that S&K knew of the falsity of the statements in the offering memoranda. Therefore, the Court affirmed the dismissal of the complaint against S&K.

Facts

John Whittier launched Wood River Partners, a hedge fund structured as a limited partnership. S&K, as Wood River’s legal counsel, drafted offering memoranda representing that the fund would diversify its investments and cap individual holdings at 10% of total assets. Plaintiffs, limited partners in Wood River, invested in the fund between 2003 and 2005. However, Whittier began investing heavily in Endwave Corporation stock, exceeding the 10% cap and eventually comprising 65% of the fund’s assets. Endwave’s stock price plummeted, causing losses for the fund and preventing Whittier from fulfilling redemption requests. S&K resigned as Wood River’s counsel. Whittier was later indicted and pleaded guilty to securities fraud for concealing the extent of Wood River’s Endwave holdings.

Procedural History

Plaintiffs sued S&K, alleging fraud, aiding and abetting fraud, gross negligence, and breach of fiduciary duty. The Supreme Court denied S&K’s motion to dismiss. The Appellate Division reversed, granting the motion and dismissing the complaint. The Court of Appeals granted leave to appeal.

Issue(s)

1. Whether S&K’s actions constituted fraud or aiding and abetting fraud.

2. Whether S&K owed a fiduciary duty to the limited partners of Wood River.

Holding

1. No, because the plaintiffs failed to plead fraud with the requisite particularity, and the allegations did not give rise to a reasonable inference that S&K participated in a scheme to defraud or knew about the falsity of the statements in the offering memoranda.

2. No, because an attorney’s representation of a limited partnership, without more, does not create a fiduciary duty to the limited partners.

Court’s Reasoning

The Court of Appeals addressed the fraud claim, citing the requirement that fraud claims be pleaded with particularity under CPLR 3016(b). The Court referenced Pludeman v. Northern Leasing Sys., Inc., noting that while “unassailable proof” is not required at the pleading stage, the complaint must “allege the basic facts to establish the elements of the cause of action.” The Court found that neither the allegations nor the surrounding circumstances gave rise to a reasonable inference that S&K participated in a scheme to defraud or knew about the falsity of the representations in the offering memoranda.

Regarding the breach of fiduciary duty claim, the Court stated that a fiduciary relationship exists when one party is under a duty to act for the benefit of another. The Court noted that the plaintiffs had no direct contact or relationship with S&K. The Court concurred with precedent holding that an attorney for a limited partnership does not automatically owe a fiduciary duty to the limited partners. The court drew an analogy to the corporate context, noting that a corporation’s attorney represents the entity, not its shareholders. As such, S&K’s representation of the limited partnership, without more, did not give rise to a fiduciary duty to the limited partners.

The court stated, “We therefore hold that S&K’s representation of this limited partnership, without more, did not give rise to a fiduciary duty to the limited partners. Hence, plaintiffs’ breach of fiduciary duty claim against S&K was properly dismissed.”

The Court also rejected claims for fraud based on S&K’s silence, noting the absence of a duty to disclose. “In the absence of a fiduciary relationship, we perceive no legal duty obligating S&K to make affirmative disclosures to plaintiffs under the circumstances of this case.”