Hugh F. Culverhouse v. Paulson & Co. Inc.
2015 U.S. App. LEXIS 11156
| 11th Cir. | 2015Background
- Paulson Advantage Plus LP (Delaware) lost about $460 million investing in Sino-Forest; its general partners are Paulson & Co. Inc. and Paulson Advisers LLC.
- Culverhouse invested not directly in the partnership but in HedgeForum Paulson Advantage Plus, a feeder/"pass-through" LLC that invests substantially all its capital in Paulson Advantage Plus and allocates profits/losses to investors’ individual capital accounts.
- After the loss, Culverhouse filed a putative class action against the general partners for breach of fiduciary duty, gross negligence, and unjust enrichment.
- Defendants moved to dismiss for failure to state a claim and for lack of subject-matter jurisdiction, arguing (among other things) that Culverhouse lacked standing because his claims were derivative under Delaware law.
- The district court concluded Culverhouse’s claims were derivative and dismissed for lack of subject-matter jurisdiction without resolving the merits.
- The Eleventh Circuit found Delaware law unsettled on whether Anglo American or Tooley controls and certified a question to the Delaware Supreme Court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether loss in value to a feeder LLC/limited partnership gives rise to a direct claim by an investor in the feeder | Anglo American controls: fund structures that allocate losses to capital accounts and lack transferable shares yield direct claims by investors | Claims are derivative under Delaware law; Tooley’s two-question test controls and requires treating the injury as corporate unless it directly harms the investor | Court declined to decide; certified the controlling legal question to the Delaware Supreme Court as unsettled Delaware law |
| Whether Tooley or Anglo American governs direct vs. derivative analysis for these fund structures | Tooley-consistent analysis can allow Anglo American’s outcome; Anglo American explicitly held similar fund facts produce direct claims | Tooley narrowed the test to who suffered the harm and who would benefit from recovery, casting doubt on Anglo American’s continued force | Court found reasonable dispute after Tooley and lower-court divergence; certification warranted |
| Effect of fund attributes (losses allocated to individual capital accounts; no transferable shares; losses borne proportionally) on remedy allocation | These attributes make recoveries that go to the fund incapable of compensating wronged investors, supporting direct suits | Defendants warn that such traits do not automatically convert derivative harms into direct ones under Delaware precedent | Court did not resolve; posed a precise certified question about these fund attributes to the Delaware Supreme Court |
Key Cases Cited
- Anglo American Sec. Fund, L.P. v. S.R. Global Int’l Fund, L.P., 829 A.2d 143 (Del. Ch. 2003) (held certain hedge-fund limited partners’ claims were direct given fund’s bank-like capital-account structure)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (established the two-question test: who suffered the harm and who would benefit from recovery)
- Lobo v. Celebrity Cruises, Inc., 704 F.3d 882 (11th Cir. 2013) (standard of review for dismissal for lack of subject-matter jurisdiction)
- Newman v. Family Mgmt. Corp., 748 F. Supp. 2d 299 (S.D.N.Y. 2010) (discussed post-Tooley viability of Anglo American)
- Saltz v. First Frontier, LP, 782 F. Supp. 2d 61 (S.D.N.Y. 2010) (questioned Anglo American’s continued force after Tooley)
Question certified to the Delaware Supreme Court: whether a diminution in value of a feeder LLC/limited partnership with the specified attributes gives rise to a direct investor suit against general partners.