Hugh F. Culverhouse v. Paulson & Co. Inc.
2016 U.S. App. LEXIS 2691
| 11th Cir. | 2016Background
- Hugh Culverhouse invested in HedgeForum Paulson Advantage Plus, LLC (a feeder LLC) which invested in Paulson Advantage Plus, L.P. (the partnership).
- The partnership lost $460 million on a bad investment; Culverhouse sued the partnership’s general partners for breach of fiduciary duty, gross negligence, and unjust enrichment.
- Culverhouse alleged his claims were direct under Delaware law; the district court treated them as derivative and dismissed for lack of Article III standing (subject-matter jurisdiction), denying jurisdictional discovery and leave to amend.
- The Eleventh Circuit certified the question to the Delaware Supreme Court whether loss in a feeder LLC that allocates losses to individual capital accounts supports a direct suit against the partnership’s general partners.
- The Delaware Supreme Court answered that such claims are derivative, not direct; the Eleventh Circuit reviews dismissal de novo and appellate denials of discovery/amendment for abuse of discretion.
- The Eleventh Circuit affirms dismissal, holding Culverhouse’s claims were derivative and fail because he was never a partner of the partnership; the court also explains the district court should have dismissed for failure to state a claim rather than for lack of jurisdiction, but the error was harmless.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether diminution in value of a feeder LLC gives an investor a direct cause of action against general partners of the underlying LP | Culverhouse: loss to the feeder LLC that allocates losses to individual capital accounts supports a direct claim | Defendants: claims are derivative because injuries flow to the LLC/partnership, not individual investors | Held: Claims are derivative under Delaware law; not direct |
| Whether district court properly dismissed for lack of subject-matter jurisdiction | Culverhouse: his pleaded direct theory establishes standing | Defendants: dismissal appropriate because claims are derivative and plaintiff lacks standing | Held: District court should have treated the problem as substantive (12(b)(6)) not jurisdictional (12(b)(1)); dismiss for failure to state a claim is proper and harmless error |
| Whether Culverhouse was entitled to jurisdictional discovery | Culverhouse: discovery could show direct claim or facts supporting jurisdiction | Defendants: discovery unnecessary because claims are derivative and there is no viable jurisdictional basis | Held: Not entitled to jurisdictional discovery because complaint fails to state a claim |
| Whether plaintiff should have been allowed to amend | Culverhouse: amendment could cure defects | Defendants: amendment would be futile | Held: Denial of leave to amend was not an abuse of discretion because amendment would be futile |
Key Cases Cited
- Culverhouse v. Paulson & Co., 791 F.3d 1278 (11th Cir. 2015) (prior Eleventh Circuit opinion certifying question to Delaware Supreme Court)
- Bell v. Hood, 327 U.S. 678 (1946) (frivolous or immaterial federal-question pleadings exception to federal jurisdictional inquiry)
- Warth v. Seldin, 422 U.S. 490 (1975) (standing requires assuming plaintiffs would succeed on merits when assessing jurisdiction)
- Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014) (distinguishing merits rulings from jurisdictional rulings)
- Mr. Furniture Warehouse, Inc. v. Barclays Am./Commercial Inc., 919 F.2d 1517 (11th Cir. 1990) (accept plaintiff’s jurisdictional allegations as true when not frivolous)
- Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) (procedural guidance on dismissal and jurisdictional challenges)