PRCM ADVISERS LLC, PINE RIVER CAPITAL MANAGEMENT L.P., and PINE RIVER DOMESTIC MANAGEMENT L.P. v. TWO HARBORS INVESTMENT CORP.
Case 1:20-cv-05649-LAK-BCM
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
April 18, 2025
USDC SDNY DOCUMENT ELECTRONICALLY FILED DOC #: DATE FILED: 4/17/2025
BARBARA MOSES, United States Magistrate Judge.
REPORT AND RECOMMENDATION TO THE HON. LEWIS A. KAPLAN
BARBARA MOSES, United States Magistrate Judge.
Plaintiff PRCM Advisers LLC (PRCM) managed defendant Two Harbors Investment Corp. (Two Harbors), a publicly-traded real estate investment trust (REIT), from October 28, 2009, until August 14, 2020, when Two Harbors terminated the parties’ Management Agreement (MA) and commenced managing itself. In this action, PRCM – together with its parent Pine River Capital Management L.P. (PR Capital) and its affiliate Pine River Domestic Management L.P. (PR Domestic) (collectively Pine River) – alleges principally that Two Harbors terminated the Management Agreement without “cause,” as defined in § 15(a) thereof, and without paying any termination fee, after which it continued to use PRCM‘s valuable intellectual property (IP) in violation of MA § 27(a), which provides that “[a]ll Intellectual Property created or developed by [PRCM] in connection with [its] performance of this Agreement or otherwise and the Intellectual Property Rights associated therewith shall be the sole and exclusive property of [PRCM].” PRCM also asserts claims for misappropriation of the IP under the federal Defend Trade Secrets Act (DTSA),
Two Harbors, for its part, contends that it was entitled to terminate the Management Agreement on eleven separate grounds, each of which also entitles it to damages or other relief on a variety of contract and tort theories, including the faithless servant doctrine. As to the IP that it
Now before me for report and recommendation (see Dkt. 336) are the parties’ cross-motions for summary judgment as to most of their claims and counterclaims. (Dkts. 338, 347.) For the reasons that follow, I conclude that none of the Pine River conduct alleged by Two Harbors gave it cause to terminate the Management Agreement or constituted an independent breach or tort, and therefore that PRCM is entitled to summary judgment on its claim for breach of § 15(a) of the Management Agreement (as to liability), and on defendant‘s termination-related counterclaims. However, disputed issues of fact preclude a finding that PRCM created and developed the IP at issue, such that neither side is entitled to summary judgment on their IP-related claims and counterclaims. Consequently, Pine River‘s motion for summary judgment should be granted in part and denied in part, and Two Harbors’ motion should be denied.
I. BACKGROUND
A. Procedural History
PRCM filed its initial Complaint in this action on July 21, 2020, followed by an Amended Complaint on September 4, 2020, portions of which were dismissed by the district judge pursuant to
| First Claim | Misappropriation of Trade Secrets (in violation of the DTSA) |
| Third Claim | Breach of Contract (improper termination in violation of MA § 15(a)) |
| Fourth Claim | Breach of Contract (retention of IP in violation of MA § 27(a)) |
| Sixth Claim | Declaratory Judgment (that there was no basis to terminate the Management Agreement for cause, that the Second Amendment was “valid and binding,” and that Two Harbors was not entitled to use Pine River‘s intellectual property after terminating the Management Agreement) |
| Seventh Claim | Unfair Competition & Business Practices |
| Eighth Claim | Unjust Enrichment (pled in the alternative to the Fourth Claim, for breach of MA § 27(a)) |
| Ninth Claim | Conversion (of Pine River‘s IP) |
| Tenth Claim | Tortious Interference with Contract (arising out of Two Harbors’ post-termination employment of Pine River personnel, allegedly in violation of their confidentiality agreements) |
SAC ¶¶ 115-217.3
On November 18, 2021, Two Harbors filed its Answer, Affirmative Defenses, and Counterclaims (Dkts. 89, 93),4 in which it asserted 42 affirmative defenses and pled twelve
| Counterclaim I | Breach of Fiduciary Duty (against PRCM) |
| Counterclaim II | Faithless Servant (against PRCM) |
| Counterclaim III | Gross Negligence (against PRCM and PR Capital) |
| Counterclaim IV | Fraud (against PRCM and PR Capital) |
| Counterclaim V | Negligent Misrepresentation (against PRCM and PR Capital) |
| Counterclaim IX | Unjust Enrichment (against PRCM and PR Capital) |
| Counterclaim X | Aiding and Abetting Breach of Fiduciary Duty (against PR Capital) |
| Counterclaim XI | Breach of Contract (against PRCM) |
| Counterclaim XII | Breach of the Implied Covenant of Good Faith and Fair Dealing (against PRCM) |
Countercl. ¶¶ 156-244.
On November 8, 2023, after discovery, the parties filed competing motions for summary judgment. Pine River‘s motion (Dkt. 347) is supported by a memorandum of law (Pl. Moving Mem.) (Dkts 348, 364); a 443-paragraph Local Civil Rule 56.1 Statement (Pl. 56.1 St.) (Dkts. 349, 365); and the declaration of Jan M. Conlin (Conlin Decl.) (Dkts. 359, 366), attaching the 127 exhibits referenced in Pine River‘s Local Civil Rule 56.1 Statement.6
On December 20, 2023, Two Harbors submitted an opposition memorandum (Def. Opp.) (Dkts. 401, 402); another declaration signed by Christine V. Sama (Sama Opp. Decl.) (Dkts. 392, 394), attaching 62 additional exhibits7; the declaration of Alecia Hanson (Hanson Decl.) (Dkt. 396); and a 706-page Local Civil Rule 56.1 Counter-Statement (Def. 56.1 Counter-St.) (Dkts. 398, 400), in which it complains about the length of Pine River‘s 89-page statement and disputes all but 19 of the 443 paragraphs therein.8
Pine River‘s opposition papers, filed on the same date, include a memorandum of law (Pl. Opp.) (Dkts. 379, 383); the declaration of Kyle W. Wislocky (Wislocky Decl.) (Dkts. 380, 384), attaching 57 additional exhibits; and a 60-page Local Civil Rule 56.1 Counter-Statement (Pl. 56.1
On January 25, 2024, Pine River filed its reply memorandum (Pl. Reply) (Dkts. 414, 417), supported by another declaration of Jan M. Conlin (Conlin Reply Decl.) (Dkt. 415), attaching four exhibits, and defendant filed its own reply memorandum (Def. Reply) (Dkts. 427, 428).
B. Facts
The following facts, which are undisputed unless otherwise noted, are taken from (i) the admissions made in the parties’ pleadings9; (ii) their Rule 56.1 statements, to the extent the facts stated therein are either admitted or not genuinely controverted; (iii) the underlying evidentiary materials referenced in the parties’ Rule 56.1 statements; and (iv) other materials in the record or subject to judicial notice, as permitted by
1. The Management Agreement
Two Harbors is a publicly-traded REIT (NYSE: TWO). Pl. 56.1 St. ¶¶ 1, 13; Def. 56.1 St. ¶ 1. From October 28, 2009 through August 14, 2020, it was externally managed by PRCM, which was formed for that purpose by its parent PR Capital. Pl. 56.1 St. ¶¶ 1, 13, 15; Def. 56.1 St. ¶ 6.10 On October 28, 2009, Two Harbors, its affiliate Two Harbors Operating Company LLC,
Section 2(b) of the Management Agreement spelled out thirty “services and activities” of Two Harbors for which PRCM was responsible, including (as relevant here):
- Corp.‘s (‘Two Harbors‘) operations as a mortgage real estate investment trust (‘REIT‘).” Pl. 56.1 St. ¶ 1. Defendant “disputes” ¶ 1 on the ground that the first sentence “does not cite to specific evidentiary material” and that there is “conflicting evidence” showing that Pine River is a “global multi-strategy asset manager“). Def. 56.1 Counter-St. ¶ 1 (emphasis added).
- Pine River asserts that “[s]ince 2009, Two Harbors has been a publicly traded REIT, investing its capital in residential mortgage-backed securities and other mortgage-related financial assets.” Pl. 56.1 St. ¶ 13. Defendant “disputes” ¶ 13 solely on the ground that it is “immaterial,” Def. 56.1 Counter-St. ¶ 13, notwithstanding that defendant itself asserts, as a material undisputed fact, that Two Harbors “is a real estate investment trust (‘REIT‘) ‘focused on investing in, financing and managing Agency residential mortgage-backed securities, or Agency RMBS, mortgage servicing rights, or MSR, and other financial assets.‘” Def. 56.1 St. ¶ 1.
- Pine River asserts that “[f]rom Two Harbors’ inception in 2009 until August 14, 2020, Pine River provided investment advisory and other management services to Two Harbors pursuant to the MA, which the parties entered into on October 28, 2009.” Pl. 56.1 St. ¶ 15. Defendant “disputes” ¶ 15 on six different grounds, including that these facts are “immaterial,” that ¶ 15 cites ¶ 26 of Two Harbors’ Counterclaim instead of “admissible evidence,” and that ¶ 15 is “incomplete” because it fails to state that “Pine River failed to fulfill its obligations under the MA“). Def. 56.1 Counter-St. ¶ 15.
(vii) providing executive and administrative personnel, office space and office services required in rendering services to the Company . . . ;
(x) counseling the Company in connection with policy decisions to be made by the Board of Directors;
(xv) furnishing reports and statistical and economic research to the Company . . . regarding their activities and services performed for the Company . . . by the Manager;
(xx) assisting the Company . . . in complying with all regulatory requirements applicable to them in respect of their business activities . . . ; and
(xxix) performing such other services as may be required from time to time for management and other activities relating to the assets and business of the Company . . . as the Board of Directors shall reasonably request or the Manager shall deem appropriate under the particular circumstances.
MA § 2(b).
Under § 11 of the Management Agreement (which PRCM refers to as a “hedge clause,” see Pl. Opp. at 30 n.13), “[t]he Manager assumes no responsibility under this Agreement other than to render the services called for under this Agreement,” and “will not be liable to the Company” for any acts or omissions “except by reason of acts constituting reckless disregard of the Manager‘s duties under this Agreement which has a material adverse effect on the Company,” “willful misconduct,” or “gross negligence, as determined by a final non-appealable order of a court of competent jurisdiction.” MA § 11(a).
The Management Agreement automatically renewed each year unless terminated. MA § 13(a). As relevant here, Two Harbors could terminate its relationship with PRCM in two ways. Under § 13(a), it could terminate the contract without cause if two-thirds of the Independent Directors “agree[d] that (i) there has been unsatisfactory performance by the Manager that is materially detrimental to the Company . . . or (ii) the compensation payable to the Manager hereunder is unfair[.]” Id. In order to terminate under § 13(a), however, Two Harbors was required to provide notice at least 180 days prior to the termination date, and pay a termination fee equal to
Alternatively, under § 15(a), Two Harbors could terminate the Management Agreement “effective upon 30 days’ prior written notice of termination from the Company to the Manager, without payment of any Termination Fee,” but only if:
(i) the Manager, its agents or its assignees materially breaches any provision of this Agreement and such breach shall continue for a period of 30 days after written notice thereof specifying such breach and requesting that the same be remedied in such 30-day period (or 90 days after written notice of such breach if the Manager takes steps to cure such breach within 30 days of the written notice),
(ii) the Manager engages in any act of fraud, misappropriation of funds, or embezzlement against the Company or any Subsidiary, [or]
(iii) there is an event of any gross negligence on the part of the Manager in the performance of its duties under this Agreement[.]
MA § 15(a).
The Management Agreement is governed by New York law. MA § 21.
2. The Shared Services Agreement
Two Harbors had no employees. Pl. 56.1 St. ¶ 36. It repeatedly disclosed that fact in its SEC filings. See Wislocky Decl. Ex. 1 (compilation of relevant pages from TWO Annual Reports on Form 10-K for FYs 2010-2019). Instead, as Two Harbors explained to its shareholders, PRCM was responsible for providing “our management team, including our officers, along with appropriate support personnel,” and each Two Harbors officer was also an “employee or partner of Pine River.” Wislocky Decl. Ex. 1. These arrangements were set forth in more detail in the Management Agreement, which required PRCM “and its affiliates” to provide Two Harbors with a Chief Executive Officer (CEO), President, Chief Financial Officer (CFO), Chief Investment Officer (CIO), and “other support personnel.” MA § 3(a).
The initial Two Harbors management team consisted of:
| Name | Two Harbors Title |
|---|---|
| Brian C. Taylor | Chairman (and Director) |
| Thomas Siering | Chief Executive Officer, President (and Director) |
| Jeffrey Stolt | Chief Financial Officer and Treasurer |
| Steven Kuhn | Co-Chief Investment Officer |
| William Roth | Co-Chief Investment Officer |
| Timothy O‘Brien | General Counsel and Corporate Secretary |
| Andrew Garcia | Vice President – Business Development |
SSA § 2.12
Most of these executives were limited partners of PR Capital. Def. 56.1 St. ¶ 39; see also 2007 PR Capital L.P. Ag. (Sama Decl. Ex. 42) at 24; 2011 PR Capital L.P. Ag. (Sama Decl. Ex. 43) at ECF pp. 33, 36. Additionally, Mr. Taylor was PR Capital‘s CEO and (as of 2011) the sole member of Pine River Capital Management LLC, the general partner of PR Capital. See 2011 PR Capital L.P. Ag. (Sama Decl. Ex. 43) at 28. Thus, Taylor had the “final say” regarding PR Capital‘s business, 10/14/22 Siering Dep. Tr. (Sama Decl. Ex. 6) at 19:22-24, including the compensation of the other limited partners. Id. at 213:9-10.13
Many of the personnel provided by PR Capital to PRCM – and then by PRCM to Two Harbors – were employees of yet another Pine River affiliate, PR Domestic. Two Harbors officers who were also Pine River partners were treated as employees of PR Domestic for purposes of their “monthly base draw,” which was paid “in the form of salary.” 2/8/19 O‘Brien Memo (Sama Decl. Ex. 20 at ECF pp. 5-7) at 2.14 Similarly, according to Two Harbors Human Resources director
It was understood from the outset that Pine River had other lines of business (principally a hedge fund business), that it could have other REIT clients, and that many of the individuals who performed services for Two Harbors would also have responsibilities for those businesses and clients. Accordingly, the Management Agreement specified that the Pine River personnel provided to Two Harbors would “devote such portion of their time to the management of [Two Harbors] as is necessary to enable [Two Harbors] to operate their business,” MA § 3(a), but that “[n]othing in this Agreement shall . . . prevent the Manager, Pine River or any of their affiliates, officers, directors, employees or personnel, from engaging in other businesses or from rendering services of any kind to any other Person.” Id. § 3(b).
3. Compensation of Two Harbors Management Team and Support Personnel
Two Harbors did not pay any cash compensation to its executive officers or to “any other employees of Pine River who support our business.” TWO 2016 Sched. 14A (Conlin Decl. Ex. 39)
Internally, Pine River had a “three-tiered compensation waterfall for partners.” 2/8/19 O‘Brien Memo (Sama Decl. Ex. 20 at ECF pp. 5-7) at 1. In the first tier, each partner received a monthly base draw, characterized as salary. Id. at 2. In the second tier, each partner received an allocation of “the firm‘s income” at year end, “in the form of discretionary bonuses,” determined
By 2013, the only Pine River partners serving as named executive officers of Two Harbors were Mr. Siering (as CEO) and Mr. Roth (as CIO). According to Mr. Taylor, they would typically be allocated 50% of the Two Harbors management fee – after the deduction of various expenses, including compensation paid to the other (non-partner) investment professionals assigned to Two Harbors – which they would split, but “not necessarily 50/50.” 11/2/22 Taylor Dep. Tr. (Sama Decl. Ex. 8) at 152:14-153:17; see also 10/14/22 Siering Dep. Tr. (Sama Decl. Ex. 6) at 200:18-23 (50% of the management fee was “the target under the framework of the handshake agreement that we had“); 11/11/22 Roth Dep. Tr. (Sama Decl. Ex. 10) at 173:3-14 (agreeing that, “generally,” he and Siering “split half of the [Two Harbors] management fee after certain deductions were taken out from that 50 percent of the management fee“).16
Beginning in 2013, Two Harbors “add[ed] an equity incentive component to [its] compensation program in the form of grants of restricted common stock awards to [its] named executive officers[.]” TWO 2016 Sched. 14A (Conlin Decl. Ex. 39) at 32. Under this program, known as the long-term incentive program (LTIP), the restricted stock awards were approved by the Two Harbors Compensation Committee, “which consists solely of independent directors.” Id. From 2013 forward, therefore, Two Harbors took a “hybrid approach” to the compensation of its named executive officers: Pine River was responsible for their cash compensation, which it paid
From 2013 through 2019, Mr. Siering and Mr. Roth received LTIP awards with an aggregate grant date fair value of approximately $30.8 million. Def. 56.1 St. ¶ 17; see also Conlin Decl. Exs. 11-18 (Siering/Roth LTIP grants). Over the same time period, Pine River reduced the partnership income allocated to Siering and Roth by one-third of the value of those LTIP grants. See 11/2/22 Taylor Dep. Tr. (Sama Decl. Ex. 8) at 138:22-139:7 (explaining that he would “take Two Harbors’ LTIP grants into consideration in determination of their partnership income allocation,” by “reduc[ing] their partnership income allocation at Pine River by a third of that“). The total reduction, over the relevant period, was approximately $10.3 million. Def. 56.1 St. ¶ 22. While this arrangement “potentially altered the distribution of profits amongst individual Pine River LPs,” 11/2/22 Taylor Dep. Tr. (Sama Decl. Ex. 8) at 141:20-21, it did not affect either the management fee paid by Two Harbors to PRCM, see Pl. 56.1 St. ¶ 228; 10/14/22 Siering Dep. Tr. (Sama Decl. Ex. 6) at 222:24-25 (“The amount that Two Harbors paid was not increased by a penny.“), or the total income available for distribution to the Pine River partners, as a group, through the Pine River compensation waterfall. See 11/2/22 Taylor Dep. Tr. (Sama Decl. Ex. 8) at 141:13-16 (noting that any partnership income not distributed as discretionary bonuses “was also available to Tom and Bill at the bottom of the waterfall in the residual allocation“).17
Two Harbors recognized, and repeatedly disclosed to its shareholders, that “[t]here are conflicts of interest in our relationship with Pine River and its affiliates, including PRCM Advisers LLC, which could result in decisions that are not in the best interests of our stockholders.” TWO Form 10-K for FY 2018 (Conlin Decl. Ex. 38) at 28. For example, the Company explained, because the 1.5% management fee was based upon stockholders’ equity rather than the REIT‘s financial performance, “significant management fees will be payable to PRCM Advisers LLC even if we have a net loss during a quarter.” Id. at 29. Two Harbors also noted that if it terminated the Management Agreement without cause (which was “limited to certain specifically described circumstances“), it would be required to make a substantial termination payment, “equal to three times the sum of the average annual base management fee received by PRCM Advisers LLC during the 24-month period before such termination[.]” Id.
As an additional risk factor, the Company disclosed that Pine River was free to engage in “additional management or investment opportunities,” and that (as of 2018) both Mr. Siering and Mr. Roth served as directors of another Pine River-managed REIT. TWO Form 10-K for FY 2018 at 28. Consequently, Pine River faced “conflicts in the allocation of resources” between Two Harbors and “any other funds they manage and for their own accounts.” Id. Finally (as relevant here), Two Harbors repeatedly disclosed to its shareholders that it was “completely reliant on the employees provided to us by PRCM Advisers.” Id. at 27. Consequently, it explained: “If the management agreement is terminated and no suitable replacement is found to manage Two Harbors or we are unable to hire our own qualified employees, we may not be able to continue to execute our business plan.” Id. at 28.
The Management Agreement was amended from time to time, including on November 3, 2014, when the Two Harbors Board unanimously approved the Second Amendment, which added § 27 (“Intellectual Property“) to the agreement. Pl. 56.1 St. ¶ 32; Def. 56.1 St. ¶ 72; 2d Amend. (Conlin Ex. 2) § 2. That section states that “[a]ll Intellectual Property created or developed by the Manager in connection with the Manager‘s performance of this Agreement or otherwise and the Intellectual Property Rights associated therewith shall be the sole and exclusive property of the Manager.” MA § 27(a).18 It also grants Two Harbors “a non-exclusive, worldwide, fully paid up, royalty-free, non-sub-licensable, non-transferable license and right to use the Intellectual Property created or developed by Manager in connection with the Manager‘s performance of this Agreement for their business purposes.” Id.
The Second Amendment was adopted in connection with Two Harbors’ expansion into commercial real estate investment. At the prior Board meeting, on October 22, 2014, management made a presentation concerning a CRE opportunity that would require, among other things, hiring a team of CRE investment professionals and building out a “CRE platform.” Sama Opp. Decl. Ex. 72 at ECF p. 6-7 (PowerPoint presentation). Management advised the Board that at the next meeting, it would ask for: (i) an amendment to the Two Harbors Investment Guidelines, to permit investment in CRE, and (ii) “an amendment to the Two Harbors Management Agreement to clarify
Before any IP-related amendment was presented to the Board, the Two Harbors General Counsel, Ms. Sandberg, consulted the Company‘s outside counsel at Stinson Leonard Street LLP (Stinson).19 Ms. Sandberg asked, among other things, whether it would be “problematic” to have a “joint development/joint ownership agreement.” Conlin Decl. Ex. 94 (email chain between Sandberg and Stinson) at ECF p. 3. Outside counsel responded, “Certainly we can draft any arrangement you like, but joint ownership of IP is usually very problematic in the long run.” Id. at ECF p. 2. After listing some of the thorny questions arising from joint ownership, counsel concluded, “A cleaner solution is to have one party own the IP (including the code) but provide for a very permissive license to the other party. Nearly all of the above questions are answered as the owner has all the rights and responsibilities as a default with the licensee just having whatever rights and obligations are spelled out in the agreement.” Id. at ECF p. 3. Later that same day, after reviewing the language ultimately presented to the Board, Ms. Sandberg wrote to Mr. Siering, Mr. Roth, and others to endorse that language, explaining that it was “the simplest approach” and “largely mirrors the way it works in practice now.” Conlin Decl. Ex. 80 (email chain between Sandberg and PRCM executives) at ECF p. 2.
The Two Harbors directors were given an opportunity to review the language of the proposed Second Amendment before they were asked to vote on it. 11/8/22 TWO 30(b)(6) Dep. Tr. (Conlin Decl. Ex. 113) at 183:2-8. Additionally, at the November 3, 2014 meeting, Ms.
The implementing resolution states, in its introductory recitals, that “in order to induce the Manager to develop the resources necessary for the Company to pursue the Commercial Real Estate Initiative, the Board has determined that it is advisable and in the best interests of the Company to amend the Management Agreement in order to clarify certain intellectual property matters as among the Company and the Manager.” 11/3/14 TWO Board Resolution (Sama Opp. Decl. Ex. 80) at ECF p. 3. However, neither the resolution nor the amendment itself suggests that MA § 27 applies only to IP developed for purposes of the CRE initiative. To the contrary: as this Court previously noted,20 the contractual language adopted on November 3, 2014 is both broad and uncomplicated, applying to “[a]ll” IP “created or developed by the Manager” (except for Two Harbors trademarks and logos), and rendering all of it “the sole and exclusive property of the Manager.” MA § 27(a).
6. Confidentiality Agreements
Both before and after the adoption of the Second Amendment, all of the employees provided to Two Harbors by Pine River were required to sign Confidentiality, Nonsolicitation, and Inventions Agreements (CNIAs) with PR Capital or PR Domestic. Def. 56.1 St. ¶ 79; Pl. 56.1 St. ¶ 53; see, e.g., Zoellner CNIA (Wislocky Decl. Ex. 53) (executed in 2015, with PR Capital); Quan CNIA (Sama Decl. Ex. 53) (executed in 2017, with PR Domestic). The purpose of the CNIAs was
Employee will not, during Employee‘s employment with Employer or at any time thereafter, divulge, furnish or make accessible to anyone or use in any way, on behalf of himself/herself or others, any Confidential Information, other than for the benefit of Pine River in the ordinary course of the business of Pine River or as required under compulsion of law.
CNIA ¶ 1(b).
Further, the Employee assigned “to Employer all of Employee‘s right, title, and interest in and to all Inventions” made by the employee relating to Pine River‘s business, CNIA ¶ 2(b), and acknowledged that “any computer software, program, or other work of authorship that Employee prepares within the scope of Employee‘s employment is a ‘work made for hire’ under U.S. copyright laws and that, accordingly, Employer exclusively owns all copyright rights in such
computer software, program, and other works of authorship[.]” Id. ¶ 3. Additionally, the Employee “specifically acknowledge[d]” that:
all of the records of any and all business conducted by or related to Pine River, including records and files pertaining to products, services, suppliers, investors, clients, vendors, practices, techniques, licensors, and licensees are the property of Pine River and not that of Employee. Upon the termination of Employee‘s employment, or upon Employer‘s earlier request, Employee agrees to deliver promptly to Employer all of Pine River‘s property, including all Work Product, Inventions, any item containing Confidential Information, and all copies of any of the foregoing, and all other materials and copies thereof relating in any way to the business of Pine River or its investors, clients or vendors.
Id. ¶ 6.
The CNIAs also contained a non-solicitation provision stating, in relevant part:
Employee agrees that during Employee‘s employment with Employer and for a period of twelve (12) months immediately following Employee‘s termination . . . Employee will not (except on Pine River‘s behalf during Employee‘s Employment with Employer) . . . [s]olicit . . . or accept business . . . from . . . any investor or client of Pine River with whom Employee (or Employee‘s subordinates) worked, called upon, rendered services to or otherwise developed a relationship, during Employee‘s employment with Employer.
CNIA ¶ 4(a)(i). Relatedly, the Employee was prohibited from inducing, persuading, or attempting to persuade any “client of Pine River, or any other person or entity doing business with Pine River, to alter or terminate its relationship with Pine River.” Id. ¶ 4(A)(ii).
Two Harbors does not claim that its Independent Directors were unaware of the CNIAs, which were signed by every member of its workforce for more than ten years.
7. Mr. Taylor‘s [REDACTED]
In October 2015, while Chair of the Two Harbors Board, Mr. Taylor [REDACTED] [REDACTED] [REDACTED] Def. 56.1 St. ¶ 49. [REDACTED] Id.; see also 11/2/22 Taylor Dep. Tr. (Sama Decl. Ex. 8) at 233:21-235:10 [REDACTED]
8. The Independent Directors Investigate
For the first ten years of Two Harbors’ corporate life, its Compensation Committee was uninterested in the amount that Pine River paid any of the individual partners who managed the REIT, or the manner in which their compensation was determined. For example, in 2012, when the Committee undertook a formal review of “officer compensation” (assisted by an outside compensation consultant and outside counsel), it reviewed the compensation of its then-CFO (who was not a partner at Pine River), but determined that it was “not necessary or appropriate” to review
In 2019, however, the Compensation Committee, chaired by attorney (and former U.S. Senator) Spencer Abraham, requested a “summary of the economic arrangements between Pine River and each of the company‘s CEO and CIO” (Siering and Roth), as well as the “total compensation” paid to them by Pine River. Sama Decl. Ex. 20 (email chain) at ECF p. 3. In response, on February 19, 2019, the Two Harbors HR Director, Ms. Hanson, forwarded a package of information, including the 2/8/19 O‘Brien Memo, explaining Pine River‘s “compensation waterfall for partners,” and a spreadsheet showing the total annual compensation paid by Pine River for the past three years to the four named executive officers of Two Harbors (the CEO, CIO, CFO, and General Counsel) and the nine non-partner investment professionals who provided services to Two Harbors. Id. at ECF pp. 9-10. In her email, Ms. Hanson explained that while Pine River bonuses were discretionary, the Two Harbors “investment professionals,” as a group, historically shared 50% of the Two Harbors management fee, and that “going forward,” the percentage was expected to remain 50%. Id. at ECF p. 2.
Eight months later, on October 17, 2019, the Compensation Committee requested additional information, including, as to Two Harbors’ CEO, CIO, and investment professionals, “whether and how the annual LTIP award granted to such individuals impacts their overall
- With respect to the CEO and CIO, their compensation, including the annual LTIP award granted to them, has been subject to a residual sharing agreement with Pine River. Heretofore, the cash compensation paid out of the management fee to the CEO and CIO has been reduced by 1/3 of the value of the LTIP award granted to the CEO and CIO for that performance year in the spirit of the sharing agreement.
- With regard to other investment professionals, the answer is no. Their compensation is driven by market and competitive compensation package considerations, which has been comprised of a mix of base salary, cash bonus and stock award. Any historical variations in the mix have been immaterial in the context of the total compensation package.
Id. at ECF p. 16.
The Independent Directors were previously unaware of the details of the Pine River cash compensation awarded to Siering and Roth, or the effect of the Two Harbors LTIP awards on that cash compensation. Def. 56.1 St. ¶ 23.
On November 26, 2019, the Compensation Committee again requested additional information, including “when Tom‘s LTIP sharing agreement was initiated” and the “language from the partnership agreement regarding Tom‘s non-compete covenant.” Conlin Decl. Ex. 84 (email chain) at ECF p. 5. In response, Pine River CFO Nick Nussbaum wrote that “Tom‘s LTIP sharing began at the inception of the Two Harbors LTIP program.” Id. at ECF p. 4. Nussbaum also forwarded the non-compete language applicable to Pine River partners, which prohibited them from competing with Pine River, directly or indirectly, until “the first anniversary of a Partner‘s Disaffiliation.” Id. at ECF pp. 4-5; see also Conlin Decl. Ex. 7 (December 6, 2019 email from Nussbaum to Compensation Committee members, attaching PR Holdings L.P. Ag. ¶ 10.4).
In this action, Two Harbors contends that the Independent Directors were unaware that the Pine River partners were subject to non-competes until November 2019. See Def. 56.1 St. ¶¶ 42-43.
Two Harbors was also aware that non-compete provisions were “standard in the financial industry.” 11/8/22 TWO
9. Two Harbors Terminates the Management Agreement — Twice
On a “periodic basis,” beginning at least as early as 2015, the Two Harbors Board considered the pros and cons of “internalization,” that is, terminating the Management Agreement, hiring its own employees, and managing itself. 11/8/22 TWO
On December 17, 2019, the Independent Directors held a meeting. See Conlin Decl. Ex. 65 (agenda). Four days later, Mr. Kasnet — by then the Board Chair — told the other Independent Directors that “Management of TWO would be commencing an analysis of internalizing the management of the Company” and that “our board fully supported this effort.” See Conlin Decl. Ex. 85 (Kasnet email) at ECF p. 4. Kasnet explained that the Board would establish a committee “to oversee the effort,” and that “Tom [Siering] will recuse himself from further participation in any board consideration or actions around this matter.” Id.
The Special Committee was formed in January 2020, Pl. 56.1 St. ¶ 125, and promptly retained external legal counsel and independent financial advisors. Pl. 56.1 St. ¶¶ 127-28. On January 29, 2020, Two Harbors’ senior management team (not including Siering) made a presentation to the Special Committee, recommending that Two Harbors internalize, either through negotiation with Pine River or by formally terminating the Management Agreement. Id. ¶¶ 132-34. The presentation noted, however, that there would be a “cost for intellectual property,” given that the “Pine River employment agreements as well as the management agreement specify that all intellectual property developed by employees during their employment belongs to Pine River.” 1/29/20 PowerPoint (Conlin Decl. Ex. 98) at 14.
On March 20, 2020, in a letter signed by Mr. Kasnet, Two Harbors advised PRCM “that at least two-thirds of the Independent Directors agree that the compensation payable to the Manager under the Management Agreement is unfair and that the Company intends not to renew the
On June 17, 2020, Pine River challenged the termination in New York state court, alleging, inter alia, that the claim of unfair compensation was “fabricated.” See SAC ¶¶ 16-17. The next day, Brian Taylor wrote a letter addressed to “Pine River Partners and Employees,” stating:
As partners or employees of Pine River, you have fiduciary and contractual duties to Pine River. Those duties include to act in Pine River‘s best interests and not to take any action that could harm the interests of Pine River. Of utmost importance is your obligation to protect Pine River‘s valuable intellectual property. This means that under no circumstances are you to provide copies of any Pine River intellectual property to Two Harbors or assist Two Harbors in any way in obtaining Pine River‘s intellectual property. Nor should you communicate with any attorneys for Two Harbors. If you are contacted by Two Harbors concerning this lawsuit or concerning potential employment with Two Harbors, please let me know immediately.
Taylor 6/18/20 Ltr. (Sama Decl. Ex. 47) at 1. On June 23, 2020, Kasnet pushed back, accusing Taylor of attempting to “disrupt the operations of Two Harbors” and demanding that Pine River remedy its “material breaches” of the Management Agreement by sending another letter to the same personnel, within 24 hours, that “retracts and disavows” the June 18 letter. Kasnet 6/23/20 Ltr. (Conlin Decl. Ex. 60) at ECF p. 3. Additionally, Kasnet confirmed that the Two Harbors Board had asked Siering to resign as CEO, but refused to provide Pine River with a “basis” for its decision, pointing out that under
On June 24, 2020, as demanded by Two Harbors, Taylor wrote a follow-up letter to “Pine River Partners and Employees,” this time stating, “Of course, it goes without saying — but I want to reemphasize that so long as Pine River is managing Two Harbors, Pine River and its employees and partners must continue to provide Two Harbors with the same high level of service that Pine River has provided to Two Harbors for the last ten years. This of course means that you must always act in the best interests of Two Harbors and its shareholders, and not take any action to the detriment of Two Harbors.” Taylor 6/24/20 Ltr. (Sama Decl. Ex. 13) at 1. Taylor continued:
You also can and should continue to rely on all intellectual property that Pine River developed in order to continue managing the day-to-day operations of Two Harbors up until the termination of the Management Agreement on September 19, 2020. To the extent that you must communicate with lawyers for Two Harbors concerning the day-to-day management of Two Harbors, you should certainly continue to do so. Finally, if you are contacted by Two Harbors concerning potential employment with Two Harbors, you have no obligation to inform Pine River that Two Harbors has contacted you.
Also on June 24, 2020, the Two Harbors Board removed Siering as its CEO and appointed Mr. Greenberg (formerly the co-CIO) in his stead. 6/24/20 TWO Form 8-K, Item 5.02.
On July 15, 2020, in another letter signed by Mr. Kasnet, Two Harbors notified PRCM that it was terminating the Management Agreement pursuant to
On August 7, 2020, Mr. Taylor wrote again to the personnel providing services to Two Harbors, noting that as of August 15, “Two Harbors will no longer be licensed to use” Pine River‘s IP, and asking them to provide — prior to that date — “all necessary passwords and access . . . to networks and servers in which Pine River‘s intellectual property resides.” Taylor 8/7/20 Ltr. (Conlin Decl. Ex. 58 at ECF pp. 6-7) at 1.
Again, Kasnet pushed back, writing on August 14, 2020, that Taylor‘s August 7 letter constituted yet another incurable material breach, because if Two Harbors provided the requested “passwords and access,” it would violate “federal and state laws concerning the security and confidentiality of non-public personally identifiable information (‘PII‘) of consumers — in particular, the individual borrowers of the residential mortgage loans for which the Company owns mortgage servicing rights[.]” Kasnet 8/14/20 Ltr. (Conlin Decl. Ex. 53) at 1-2.
On August 17, 2020 — three days after the August 14, 2020 termination date — Two Harbors announced that it had “completed its transition to self-management,” and had likewise “completed the transition of the functions necessary to continue to operate its business without interruption.” 8/17/20 TWO Press Release (Conlin Decl. Ex. 101). On a November 5, 2020 earnings call, the Company‘s new CEO, Mr. Greenberg, stated that the transition “occurred without interruption and was virtually seamless.” Pl. 56.1 St. ¶ 373. He added that Two Harbors succeeded in hiring “100% of the employees who had previously supported” it. 11/5/20 TWO Earnings Call Tr. (Conlin Decl. Ex. 40) at 2-3. Two Harbors did not return any IP to Pine River, either before or after the effective date of the termination. Pl. 56.1 St. ¶ 174.
1. Termination-Related Claims
Both sides seek summary judgment on Pine River‘s Third Claim, for breach of contract, which alleges that Two Harbors improperly terminated the Management Agreement without the required cause. See Pl. Moving Mem. at 8-9; Def. Moving Mem. at 24-30. As to that claim, Pine River must show that none of the eleven grounds upon which Two Harbors now relies for the termination, see Countercl. ¶¶ 7-17, was (i) a material breach of the Management Agreement; (ii) fraud; or (iii) gross negligence. See
- LTIP Sharing Arrangement. Two Harbors claims that Pine River “co-opted” the LTIP awards it made to Siering and Roth by reducing their cash compensation by one-third of the value of the LTIP awards, thereby saving approximately $10.3 million over the same time period, “while concealing their improper and disloyal practice from the Independent Directors” until November 2019. Countercl. ¶¶ 7, 51-71.
- Siering/Roth Compensation Structure. Two Harbors alleges that by paying Mr. Siering and Mr. Roth 50% of the management fee received from Two Harbors, less the compensation paid to the other Two Harbors investment personnel, Pine River created a conflict between the executives’ personal interests and the best interests of Two Harbors. Countercl. ¶¶ 11, 101-03. Further, Two Harbor alleges, Pine River concealed this arrangement from the Two Harbors Independent Directors until 2019. Id. ¶¶ 104-07.
- Pine River Restrictive Covenants. Two Harbors contends that the non-compete provisions in the Pine River partnership agreements rendered the executives “conflicted in their management of Two Harbors,” and that Pine River “concealed their improper and disloyal practice from the Independent Directors” until December 2019. Countercl. ¶¶ 8, 72-84.
Reputational Risks. Two Harbors alleges that Mr. Taylor‘s conduct, [REDACTED] [REDACTED], “created reputational issues and risks for Two Harbors,” “including with respect to personnel recruitment and retention, marketplace standing, counterparty confidence, and press coverage.” Countercl. ¶¶ 122, 125. There is no allegation that any of the risks posed by Mr. Taylor‘s personal conduct materialized. - Business Disruptions. Two Harbors asserts that Mr. Taylor‘s June 18, 2020 letter, in which he “told dedicated Two Harbors personnel that (among other things) they were obligated ‘to act in Pine River‘s best interests’ . . . and directed those personnel not to ‘communicate with any attorneys for Two Harbors,‘” was “bad faith conduct,” Countercl. ¶ 16, that was “intended to disrupt Two Harbors’ business,” id. ¶ 140, in violation of Pine River‘s duty of “loyalty good faith, and care in managing Two Harbors.” Id. ¶ 145.
- Second Amendment. As noted above,
§ 27(a) of the Management Agreement, added by amendment in 2014, governs the ownership of IP “created or developed by the Manager in connection with the Manager‘s performance of this Agreement or otherwise.”MA § 27(a) . Two Harbors now claims that its Independent Directors were misled as to the reasons for the amendment, which was in reality an “underhanded attempt to co-opt ownership of certain ‘intellectual property’ developed and paid for by Two Harbors,” and would never have voted in favor of it had they understood it. Countercl. ¶¶ 13, 115-17, 120. - Granite Point Restrictive Covenants. On June 22, 2017, Two Harbors contributed its commercial real estate business to Granite Point, a separate REIT that was also externally managed by Pine River, in exchange for equity in Granite Point. Countercl. ¶¶ 9, 86-87. In this action, Two Harbors alleges that the Pine River employment agreements with various Granite Point executives included non-compete clauses that “precluded the executives from continuing to provide services to Granite Point in the event that Granite Point did not renew or terminated its management agreement with Pine River,” id. ¶ 88, and that these covenants were concealed from the Two Harbors Independent Directors, thereby misleading them as to the value of the transaction. Id. ¶ 89.
- Proposed Co-CIO Restrictive Covenants. In 2019, in connection with Mr. Roth‘s retirement and the appointment of Mr. Greenberg and Mr. Koeppen as co-CIOs for Two Harbors, Pine River “sought to impose restrictive covenants” on them, which would “ensure that Two Harbors would lose the benefit of the Co-CIO Appointees if Two Harbors internalized.” Countercl. ¶¶ 10, 93-94. (Because the incoming co-CIOs were not limited partners of PR Capital, they were not already subject to such restrictions. Id. ¶ 93.) However, after the Two Harbors Independent Directors objected, Pine River dropped the proposal. Id. ¶ 95.
Proposed Siering Retirement Agreement. In the second half of 2019, Pine River “sought to enter into” a retirement agreement with Mr. Siering, under which he would “receive substantial payments . . . if he remained Two Harbors’ Chief Executive Officer through 2021 and PRCM remained Two Harbors’ manager until at least 2022.” Countercl. ¶¶ 12, 109 (emphasis added). Two Harbors alleges that this agreement would have improperly “incentivize[d] the Former CEO to delay or prevent the nonrenewal or termination of the Management Agreement by Two Harbors,” id. ¶ 110, and that Pine River failed to disclose these terms to the Independent Directors of Two Harbors. Id. ¶ 111. The proposed retirement agreement was never executed. - Internalization Interference. Two Harbors alleges that Pine River “sought to silence efforts by dedicated Two Harbors personnel to ensure that the Independent Directors were advised of the need for, and benefits of, internalization.” Countercl. ¶ 15. As an example, according to Two Harbors, when internalization was included on the agenda for a 2015 meeting of Two Harbors executives, “those executives who were Pine River partners reacted with anger and shut down any discussion of internalization.” Id. ¶ 128. Then, in 2018, although Two Harbors’ management team made a board presentation regarding internalization, it “understated the potential financial benefits to Two Harbors from internalizing,” because it was in its financial interest to keep the Management Agreement in place. Id. ¶¶ 130-36.
- PII Demand. Lastly, Two Harbors contends that Mr. Taylor‘s August 7, 2020 request for “all necessary passwords and access . . . to networks and servers in which [PRCM‘s] intellectual property resides,” Countercl. ¶ 152 (alterations in original), amounted to an unlawful demand for the PII “of borrowers of residential mortgage loans for which Two Harbors owned MSR,” which “would have required Two Harbors to violate federal and state law.” Id. ¶¶ 17, 153. There is no allegation that Pine River obtained any protected PII.
The same eleven instances of alleged misconduct by Pine River underlie Two Harbors’ counterclaims for breach of fiduciary duty (Counterclaim I); recovery of compensation and profits pursuant to the faithless servant doctrine (Counterclaim II); gross negligence (Counterclaim III); unjust enrichment (Counterclaim IX)23; breach of contract (Counterclaim XI); and breach of the
Pine River seeks summary judgment on all of Two Harbors’ termination-related counterclaims. See Pl. Moving Mem. at 29-50. Two Harbors, for its part, affirmatively seeks summary judgment in its favor only on its faithless servant counterclaim (Counterclaim II). See Def. Moving Mem. at 8-23.
2. IP-Related Claims
Pine River‘s remaining claims arise, in whole or in part, out of Two Harbors’ allegedly unlawful use of IP belonging to PRCM: misappropriation of trade secrets in violation of the
In its moving brief, Pine River argues that “resolution of the IP ownership issue” entitles it to summary judgment on its claims for breach of
II. LEGAL STANDARDS
A. Summary Judgment
A court may grant a motion for summary judgment “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
1. Burdens
The moving party bears the initial burden of informing the court of the basis for the motion and identifying those portions of the record that demonstrate the absence of a genuine dispute as to any material fact.
“The showing necessary to satisfy [the movant‘s] initial burden varies depending on whether the movant would bear the burden of proof as to the particular issue at trial.” Read Prop. Grp. LLC v. Hamilton Ins. Co., 2018 WL 1582291, at *5 (E.D.N.Y. Mar. 30, 2018). If the burden at trial would fall on the non-moving party (such as where a defendant seeks summary judgment on a plaintiff‘s claim), the moving party may satisfy its initial burden either by pointing to the absence of evidence on an essential element of the non-moving party‘s claim, Simsbury-Avon Pres. Club, Inc. v. Metacon Gun Club, Inc., 575 F.3d 199, 204 (2d Cir. 2009) (citing Celotex, 477 U.S. at 322-23), or by submitting evidence that “negates an essential element of the non-moving party‘s claim.” Nick‘s Garage, Inc. v. Progressive Cas. Ins. Co., 875 F.3d 107, 114 (2d Cir. 2017) (quoting Farid v. Smith, 850 F.2d 917, 924 (2d Cir. 1988)). To avoid summary judgment in such a case, the non-moving party must “come forward with admissible evidence sufficient to raise a genuine issue of fact for trial” as to the challenged element(s). Simsbury-Avon Pres. Soc‘y, 575 F.3d at 204 (citing Celotex, 477 U.S. at 322-23).
If, by contrast, the burden at trial would fall on the moving party (such as where a plaintiff seeks summary judgment on its own claim), its “own submissions in support of the motion must entitle it to judgment as a matter of law.” Albee Tomato, Inc. v. A.B. Shalom Produce Corp., 155 F.3d 612, 618 (2d Cir. 1998). In this scenario, the moving party “must lay out the elements of its claim, citing the facts it believes satisfies those elements, and demonstrating why the record is so one-sided as to rule out the prospect of the nonmovant prevailing.” 10A Charles A. Wright, Arthur R. Miller & Mary K. Kane, Federal Prac. & Proc. § 2727.1, at 492 (4th ed. 2021). If the moving party fails to make the required initial showing, “the court must deny the motion, even if the
2. Inferences
In evaluating the evidence, the court must construe it in the light most favorable to the non-moving party, and draw all reasonable inferences in the non-moving party‘s favor. Anderson, 477 U.S. at 255; In re Agent Orange Prod. Liab. Litig., 517 F.3d 76, 87 (2d Cir. 2008). However, the “mere existence of a scintilla of evidence in support of the [non-moving party‘s] position will be insufficient; there must be evidence on which the jury could reasonably find for [that party].” Anderson, 477 U.S. at 252. Thus, when a defendant moves for summary judgment, “the judge must ask himself not whether he thinks the evidence unmistakably favors one side or the other but whether a fair-minded jury could return a verdict for the plaintiff on the evidence presented.” Id.;
3. Local Civil Rule 56.1
Local Civil Rule 56.1(a) requires the moving party to submit a “short, and concise statement, in numbered paragraphs,” of the material facts that the moving party contends to be undisputed, with citations to the underlying evidence. The non-moving party must then respond in kind, with numbered paragraphs that correspond “to each numbered paragraph in the statement of the moving party[.]” Local Civ. R. 56.1(b). To the extent not “specifically denied and controverted” by the non-moving party, the statement of material facts submitted by the moving party will be “deemed to be admitted for purposes of the motion.” Local Civ. R. 56.1(c).
“The purpose of Local Rule 56.1 is to streamline the consideration of summary judgment motions by freeing district courts from the need to hunt through voluminous records without guidance from the parties.” Holtz, 258 F.3d at 74. In this case, as noted above, Pine River strained the limits of the rule — submitting a moving statement that, at 89 pages and 443 paragraphs, was neither “short” nor “concise” — while Two Harbors ignored its purpose altogether, repeatedly disputing facts as to which there can be no “genuine” dispute, and, as a result, requiring the Court to “hunt through voluminous records” merely to pin down facts that should have been readily conceded.
B. New York Law
4. Breach of Contract
“To state a claim for breach of contract under New York law, a plaintiff must allege ‘(1) the existence of an agreement, (2) adequate performance of the contract by the plaintiff, (3) breach of contract by the defendant, and (4) damages.‘” PRCM I, 2021 WL 2582132, at *6 (quoting
5. Fraud
“Under New York law, the elements of a fraud claim are: (1) a material misrepresentation or omission of fact (2) made by defendant with knowledge of its falsity (3) intent to defraud; (4) reasonable reliance on the part of the plaintiff; and (5) resulting damage to the plaintiff.” Skyline Risk Mgmt., Inc. v. Legakis, 733 F. Supp. 3d 316, 329-30 (S.D.N.Y. 2024). If the fraud claim is based on an omission, the plaintiff must also show that the defendant had a “duty to disclose the material information.” Banque Arabe et Internationale D‘Investissement v. Maryland Nat. Bank, 57 F.3d 146, 153 (2d Cir. 1995). Each element of a New York fraud claim must be shown “by clear and convincing evidence.” Id..
6. Gross Negligence
A claim of gross negligence under New York law requires proof of: (1) a duty; (2) a breach of that duty; (3) an injury; and (4) “conduct [that] evinces a reckless disregard for the rights of others or smacks of intentional wrongdoing.” PRCM I, 2021 WL 2582132, at *8 (alteration in original) (quoting Bayerische Landesbank, New York Branch v. Aladdin Cap. Mgmt. LLC, 692 F.3d 42, 61 (2d Cir. 2012)). “Recklessness in the context of gross negligence refers to ‘conduct
“New York law generally disallows claims in tort for the negligent performance of a duty arising under a contract.” BDG Gotham Residential, LLC v. W. Waterproofing Co., Inc., 2024 WL 4349163, at *8 (S.D.N.Y. Sept. 30, 2024), reconsideration denied, 2024 WL 5201596 (S.D.N.Y. Dec. 23, 2024), and motion to certify appeal denied, 2024 WL 5245007 (S.D.N.Y. Dec. 30, 2024). Thus, the duty underlying the negligence claim must be “a legal duty independent of the contract itself.” Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382, 389, 516 N.E.2d 190, 193 (1987) (affirming dismissal of claim for gross negligence (based on allegations that defendant failed to exercise due care in the performance of its contractual obligations); see also Tchrs. Ins. & Annuity Ass‘n of Am. v. CRIIMI Mae Servs. Ltd. P‘ship, 2007 WL 7569162, at *1 (S.D.N.Y. Sept. 7, 2007) (Kaplan, J.) (“Tort claims that merely seek to enforce contractual obligations must be dismissed unless they are premised on a breach of a duty arising independently of the contract.“), aff‘d, 481 F. App‘x 686 (2d Cir. 2012). Put simply, “New York law does not recognize a cause of action for a ‘negligent’ breach of contract. It follows then that no claim can be stated for a ‘grossly’ negligent breach of contract.” Avazpour Networking Servs., Inc. v. Falconstor Software, Inc., 937 F. Supp. 2d 355, 365 (E.D.N.Y. 2013) (citations omitted); see also City of New York v. 611 West 152nd Street, Inc., 273 A.D.2d 125, 126, 710 N.Y.S.2d 36, 38 (1st Dep‘t 2000) (“claims based on negligent or grossly negligent performance of a contract are not cognizable“).
7. Breach of Fiduciary Duty
Under
The elements of a claim for breach of fiduciary duty are: (1) the existence of a fiduciary duty between the parties; (2) a breach of that duty; and (3) damages proximately caused by the breach. Metro. West Asset Mgmt. v. Magnus Funding, Ltd., 2004 WL 1444868, at *8 (S.D.N.Y. June 25, 2004) (applying New York law). Absent the third element — damages proximately caused by the breach — there can be no liability. See, e.g., BNY Cap. Markets, Inc. v. Moltech Corp., 2001 WL 262675, at *10 (S.D.N.Y. Mar. 14, 2001) (Lynch, J.) (no liability where the claimant “cannot possibly demonstrate that such a putative breach caused any harm“). To establish a claim for aiding and abetting a breach of fiduciary duty, a plaintiff must show (1) “a primary breach” by another, Tchrs. Ins. & Annuity Ass‘n of Am., 2007 WL 7569162, at *1; (2) that the defendant knowingly induced or participated in the breach; and (3) resulting damages. S & K Sales Co. v. Nike, Inc., 816 F.2d 843, 847-48 (2d Cir. 1987).
It is uncontroversial that “[i]nvestment advisors who manage funds belonging to others” are “fiduciaries who owe the highest duty of loyalty to those on whose behalf they act.” Beacon Hill CBO II, Ltd. v. Beacon Hill Asset Mgmt. LLC, 249 F. Supp. 2d 268, 273 (S.D.N.Y. 2003) (Lynch, J.), aff‘d on other grounds, 89 F. App‘x 749 (2d Cir. 2004); see also PRCM III, 2023 WL 5152288, at *11 (ruling, on the pleadings, that “the alleged investment advisory relationship between plaintiffs and Two Harbors ‘imposed on [plaintiffs] also a duty to act with care and loyalty independent of the terms of the contract‘“) (citation omitted). However, Pine River‘s broader
management responsibilities did not give rise to a similar duty. See Seven Hanover Assocs., LLC v. Jones Lang Lasalle Americas, Inc., 2008 WL 464337, at *1-4 (S.D.N.Y. Feb. 19, 2008) (property management agreements under which defendant undertook to do “all things necessary, required or desirable for the proper and efficient management, operation, and maintenance” of plaintiff‘s office buildings did not “create a fiduciary relationship between the parties“), aff‘d, 363 F. App‘x 49 (2d Cir. 2009). Here, none of the conduct alleged to constitute a breach of PRCM‘s fiduciary duties arises out of the investment advice it provided or its management of the REIT‘s portfolio. Rather, the alleged breaches relate to matters far removed from those fiduciary functions (for example, PRCM‘s failure to police the personal conduct of Mr. Taylor so as to guard against reputational risk) or in some instances – matters expressly committed to PRCM‘s discretion (for example, determining what to pay the Pine River partners and employees serving as Two Harbors officers and investment professionals, see MA § 9).Fiduciary duty is not an all-or-nothing proposition. New York law is clear that even where a party has stepped into a fiduciary relationship, the courts may not “automatically imply the application of every duty that has ever been attached to some other sort of fiduciary relation.” Beacon Hill, 249 F. Supp. 2d at 276; see also Ramiro Aviles v. S & P Glob., Inc., 380 F. Supp. 3d 221, 300 (S.D.N.Y. 2019) (escrow agent‘s fiduciary obligations did not “extend past the specific transactions covered by the escrow agreement” or impose a “duty of full transparency in every unrelated future matter that might arise“); EBC I, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 21-22, 832 N.E.2d 26, 32 (2005) (underwriter‘s fiduciary duty to IPO issuer “is limited to the underwriter‘s role as advisor. We do not suggest that underwriters are fiduciaries when they are engaged in activities other than rendering expert advice.“).
The courts are particularly reluctant to impose broad fiduciary obligations where as here “the parties to a relationship specified the precise content of their agreements” in language “drafted by sophisticated lawyers acting on behalf of sophisticated entities.” 249 F. Supp. 2d at 275.25 Thus, in Beacon Hill, the court held that the issuers of a collateralized bond obligation could not fire the CBO‘s investment adviser after losing “confidence” in it (notwithstanding “the equitable principle allowing for termination at will of a fiduciary relationship“), because “such a loss of confidence is not specified in the Agreements as a basis for removal[.]” Id. at 270-72, 274.
In this case, while the Management Agreement identifies PRCM as Two Harbors’ “agent” in carrying out its core investment management functions,26 it does not contain any language imposing on PRCM a broad fiduciary duty to “place Two Harbors’ interests above its own” in every sphere, as defendant posits. See Def. Opp. at 12. To the contrary: by its terms, the contract required only that PRCM use “commercially reasonable efforts” to perform its various duties, “subject to the supervision of the Company‘s Board of Directors.” MA §§ 2(a), 2(b). This directive is “far removed . . . from the much higher duties created by a fiduciary relationship.” Calvin Klein Trademark Tr., 129 F. Supp. 2d at 250 (contractual duty to “proceed in ‘good faith‘” did not render trust servicer a fiduciary to trust).
8. Faithless Servant
“New York‘s faithless servant doctrine holds that one who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary.” PRCM III, 2023 WL 5152288, at *10 (cleaned up). The doctrine is typically (although not exclusively) applied to employer-employee relationships. In order to “claw back” an employee‘s compensation under the faithless servant doctrine, the employer must show (i) that the employee acted disloyally in the performance of her duties, and (ii) that the disloyalty “permeated the employee‘s service in its most material and substantial part.” PRCM III, 2023 WL 5152288, at *10 (quoting Sanders v. Madison Square Garden, L.P., 2007 WL 1933933, at *3 (S.D.N.Y. July 2, 2007) (Lynch, J.)); accord Ebel v. G/O Media, Inc., 2021 WL 2037867, at *5 (S.D.N.Y. May 21, 2021). Acts of disloyalty cannot qualify
Unlike a claim for breach of fiduciary duty, a faithless servant claim – at common law – does not require “provable damage as a result of the breach of fidelity by the agent.” Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928, 929, 363 N.E.2d 350, 351 (1977). However, “the faithless servant doctrine, like the traditional fiduciary duty standard, is ‘limited to matters relevant to affairs entrusted’ to the employee.” Sanders, 2007 WL 1933933, at *4 (quoting Ross v. FSG PrivatAir, Inc., 2004 WL 1837366, at *7 (S.D.N.Y. Aug. 17, 2004)). Misconduct in areas outside the scope of the agency relationship, even if significant, does not trigger the “drastic” remedies available under the faithless servant doctrine. Id. at *6.27
Even within the agency relationship, a faithless servant claim “is available only where the employee has acted directly against the employer‘s interests – as in embezzlement, improperly competing with the current employer, or usurping business opportunities.” Ebel, 2021 WL 2037867, at *5 (quoting Veritas Cap. Mgmt., LLC v. Campbell, 82 A.D.3d 529, 530, 918 N.Y.S.2d 448, 449 (1st Dep‘t 2011)).28 “[M]isuse of the employer‘s resources to compete with the employer is generally required.” Id. (quoting Cerciello v. Admiral Ins. Brokerage Corp., 90 A.D.3d 967, 968, 936 N.Y.S.2d 224, 226 (2d Dep‘t 2011));
A claim under the faithless servant doctrine “is a claim in equity,” Webb v. RLR Assocs., Ltd., 2004 WL 555699, at *2 (S.D.N.Y. Mar. 19, 2004), and the attendant disgorgement remedy is likewise “equitable in nature.” Id.; see also Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 2011 WL 13263368, at *5 (S.D.N.Y. Dec. 7, 2011) (disgorgement of defendants’ salaries, “for the period of their disloyalty,” was “an equitable remedy“).
III. TERMINATION-RELATED CLAIMS
Although Two Harbors has articulated eleven separate grounds for its termination of the Management Agreement (and cites the same grounds, in various combinations, to support its counterclaims), in seeking summary judgment on its own faithless servant counterclaim, and on Pine River‘s claim for breach of § 15(a) of the Management Agreement, Two Harbors relies upon only five of the eleven grounds: the LTIP Sharing Arrangement, the Siering/Roth Compensation Structure, the Pine River Restrictive Covenants, the Reputational Risks, and the alleged Business Disruptions. See Def. Moving Mem. at 8-23 (faithless servant), 24-30 (breach of contract). Consequently, I discuss these five issues first, and then turn to the remaining instances of alleged misconduct by Pine River.
As noted above, the Management Agreement reserves for PRCM all decisions regarding the allocation of the management fee among the Pine River partners (including those serving as the Company‘s CEO and CIO) and the Pine River employees serving as Two Harbors’ “investment professionals.” MA § 9. Under the express language of the parties’ contract, these compensation decisions are ”specifically the responsibility of the Manager.” Id. (emphasis added). Two Harbors reinforced this point in its communications with its shareholders, repeatedly explaining that the CEO, CIO, and investment professionals were paid out of the management fee; that Pine River was “solely responsible” for determining their cash compensation, “based on such factors as Pine River determines appropriate“; and that the Management Agreement “does not require that a specified amount or percentage of the fees paid to PRCM . . . be allocated” to them. TWO 2014 Sched. 14A (Sama Decl. Ex. 25) at 24; TWO 2016 Sched. 14A (Conlin Decl. Ex. 39) at 32; TWO 2018 Sched. 14A (Conlin Decl. Ex. 37) at 35. Two Harbors also told its shareholders that these “compensation policies and practices are aligned with the interests of our stockholders.” TWO 2014 Sched. 14A at 27; TWO 2018 Sched. 14A at 39.
Yet Two Harbors now contends that it was “faithless” for PRCM to allocate 50% of the management fee collectively to Mr. Siering (the CEO), Mr. Roth (the CIO), and the investment professionals, because this structure (the “Siering/Roth Compensation Structure“) “incentivized” Siering and Roth “to minimize the compensation of the rest of Two Harbors’ investment team even if it was not in Two Harbors’ best interests.” Def. Moving Mem. at 15. Similarly, according to Two Harbors, it was “faithless” for Pine River to reduce the partnership income that it would otherwise have allocated to Siering and Roth by a portion (1/3) of the value of their Two Harbors LTIP awards, because this arrangement (the “LTIP Sharing Arrangement“) resulted in a “cash benefit”
In response, Pine River argues, among other things, that both of the challenged compensation arrangements were “outside the scope of the agency relationship” and “insubstantial and immaterial as a matter of law.” Pl. Opp. at 7, 15.30 Therefore, Pine River urges, Two Harbors cannot rely on them either to furnish “cause” for its termination of the Management Agreement or as a basis for liability on the counterclaims, whether under the faithless servant doctrine or otherwise. See id. at 7-15; Pl. Reply at 6-10.
On the first point, Pine River is clearly correct. Just as a law firm‘s duty to its clients does not extend to its internal compensation decisions (that is, allocation of the fees paid by the clients), PRCM‘s duty to Two Harbors – whether as agent or fiduciary – did not extend to its internal decisions as to allocation of the management fee. I would reach this conclusion even if the Management Agreement were silent on the point. But is it not silent. In § 9, which was “drafted by sophisticated lawyers acting on behalf of sophisticated entities,” Beacon Hill, 249 F. Supp. 2d at 275, Two Harbors gave Pine River the right to divide the management fee among its own
Pine River is also correct that the alleged misconduct, which was many leagues removed from its investment advisory duties, did not “permeate [its] service in the most material and substantial part,” PRCM III, 2023 WL 5152288, at *10, as required for a faithless servant claim. Pl. Opp. at 10. Even more fundamentally, the record does not show that any misconduct was committed. As to the Siering/Roth Compensation Structure, defendant‘s theory proves too much. If allocating 50% of the management fee to the Two Harbors investment team (Siering, Roth, and the non-partner investment professionals) improperly “incentivized Mr. Siering and Mr. Roth to pay the investment team less so that they could keep more,” Def. Opp. at 15, then allocating any other percentage of the management fee to the same group (or no fixed percentage at all) would present precisely the same “conflict of interest.” This is so because “the CIO, CEO, [and] investment professionals get paid out of [the] management fee,” 11/8/22 TWO 30(b)(6) Dep. Tr. (Conlin Decl. Ex. 113) at 210:1-4, and the management fee is a finite pool. Every dollar allocated
Tellingly, Two Harbors does not explain what allocation methodology would not “incentivize” the partners to “increase their own compensation” by “reduc[ing] the compensation of the rest of Two Harbors’ investment team.” Def. Moving Mem. at 16. That is because there is none. As Pine River correctly observes, “[t]he ‘incentive’ for owners who share in profits to minimize expenses is inherent in any business and exists under any compensation framework.” Pl. Reply at 10.31 Moreover, Two Harbors has never claimed that the non-partner investment professionals were actually underpaid (or that there were too few of them), much less that it suffered any “loss of business” or other damage related to the Siering/Roth Compensation Structure. See 11/8/22 TWO 30(b)(6) Dep. Tr. (Conlin Decl. Ex. 113) at 218:13-18, 219:12-16.32
As to the LTIP Sharing Arrangement, Two Harbors complains that “Pine River realized a substantial cash benefit from Two Harbors’ equity incentive awards to Mr. Siering and Mr. Roth,” Def. Moving Mem. at 11, consisting of the roughly $10.3 million in partnership income that Pine River did not allocate to Siering and Roth over the six-year period (2013-2019) during which Siering and Roth received, in the aggregate, $30.8 million worth of LTIP awards. Id. at 12. In its
The primary flaw in Two Harbors’ reasoning – as Pine River points out, see Pl. Opp. at 11 – is that there was no “cash benefit” to the Manager as a result of the LTIP sharing, and certainly no “misappropriation” from the Company. Notwithstanding defendant‘s rhetoric, the evidence on this point is entirely undisputed. By contract, PRCM earned a management fee equal to 1.5% of stockholders’ equity. MA §§ 1(c), 8(a). Neither the LTIP grants (which went to Siering and Roth individually, see 11/8/22 TWO 30(b)(6) Dep. Tr. (Conlin Decl. Ex. 113) at 43:10-21), nor the sharing arrangement increased the management fee by as much as a “a penny,” 10/14/22 Siering Dep. Tr. (Sama Decl. Ex. 6) at 222:24-25. By the same token, Two Harbors would not have paid PRCM a penny less in the absence of the challenged sharing arrangement. If and to the extent there were victims of the sharing arrangement, those victims were the “faithless” executives themselves – Mr. Siering and Mr. Roth – and the “cash beneficiaries” were the individual Pine River partners who were paid more, by Pine River, at the expense of Siering and Roth.
This case is thus fundamentally unlike the “misappropriation” cases relied on by Two Harbors, in which the faithless agent either stole directly from his principal,33 took money or other
Unable to explain how either the Siering/Roth Compensation Structure or the LTIP Sharing Arrangement benefited Pine River at Two Harbors’ expense, defendant contends that PRCM nonetheless had a duty to disclose the precise methodology by which it made the internal compensation decisions expressly committed to its discretion by the Management Agreement. See Def. Moving Mem. at 14, 17 (arguing, as to both compensation issues, that Pine River “compounded its faithless performance” by “failing to disclose [its] conflict of interest“); see also Def. Opp. at 12, 15 (arguing, as to both, that Pine River was required to disclose because its “duty to disclose conflicts of interests that it created does not depend on the materiality of those conflicts“). This argument, however, assumes its own premise: that those compensation decisions created a conflict of interest that PRCM was required, as a fiduciary, to disclose. Since I have rejected the premise, I cannot accept the conclusion. See Bd. of Trustees of Aftra Ret. Fund v. JPMorgan Chase Bank, N.A., 806 F. Supp. 2d 662, 694 (S.D.N.Y. 2011) (“JPMC had no duty to
For these reasons, I conclude that Pine River did not act faithlessly, breach its fiduciary duty to Two Harbors, or commit any other breach or tort in connection with the LTIP Sharing Arrangement or the Siering/Roth Compensation Structure. Nor did plaintiffs’ conduct in making challenged compensation decisions (or in failing to volunteer the details of those decisions to the Independent Directors) give Two Harbors “cause” for the termination of the Management Agreement, because nothing about the challenged compensation arrangements constituted a material breach of the Management Agreement, fraud, or gross negligence in the performance of any of the Manager‘s contractual duties. See MA § 15(a).
B. Pine River Restrictive Covenants
Both before and after the formation of Two Harbors, the Pine River partners (including Mr. Siering and Mr. Roth) were subject to non-compete provisions, contained in their Pine River partnership agreements, which precluded them from working for any competitive business while they remained at Pine River, or for one year after they “disaffiliated,” “except in connection with
Two Harbors now argues that the Pine River non-compete covenants entitle it to summary judgment on its faithless servant counterclaim because they “disincentiviz[ed] Mr. Siering and Mr. Roth . . . from considering, or advising Two Harbors and its Independent Directors on, issues related to internalization fairly and objectively,” and constituted “obstacles if Two Harbors sought to change managers or internalize.” Def. Moving Mem. at 19. In its opposition to Pine River‘s motion, Two Harbors further argues that “disputed facts” concerning the non-compete covenants “preclude summary judgment for Pine River” on any of Two Harbors’ counterclaims. See Def. Opp. at 16-20, 31.
In response, Pine River argues that the terms of its own partnership agreements, including the non-compete provisions, were outside the scope of its agency relationship with Two Harbors, Pl. Opp. at 16, and that in any event it had “no fiduciary duty to inform Two Harbors of risks already well known” to it – including that it “may be unable to hire Pine River employees in the
Pine River is correct that it had no contractual obligation to make its partners available to Two Harbors after the termination of the Management Agreement. Under that agreement, PRCM was required to provide the Company with a management team (including a CEO and a CIO) for however long PRCM itself served as its Manager – not perpetually. See MA § 13(d) (termination “shall be without any further liability or obligation of either party to the other“); 11/8/22 TWO 30(b)(6) Dep. Tr. (Conlin Decl. Ex. 113) at 84:6-10 (agreeing that nothing in the Management Agreement “prohibits Pine River from having its partners have noncompetes“). Nor was Pine River obligated as a fiduciary to make it easy for Two Harbors to hire away its partners for the purpose of competing with it at the conclusion of the parties’ relationship. See Rest. (3d) of Agency § 8.01 cmt. c (fiduciary duty is “generally coterminous with the duration of the agency relationship“). Put
Two Harbors cites Samba Enterprises, LLC v. iMesh, Inc., 2009 WL 705537 (S.D.N.Y. Mar. 19, 2009) (Chin, J.), aff‘d sub nom. Samba Enterprises, Ltd. v. iMesh, Inc., 390 F. App‘x 55 (2d Cir. 2010), for the proposition that “[a] fiduciary acts faithlessly when it enters into contractual provisions that could be detrimental to the principal to whom it owes fiduciary duties.” Def. Moving Mem. at 19. Nothing in Samba, however, states the proposition that broadly. Samba was hired by iMesh to help iMesh find a partner with which it could enter into a software bundling agreement. Id. at *2. Samba succeeded in making a match between iMesh and Zango, thus entitling it to a commission from iMesh, but – unbeknownst to iMesh – also arranged to take a “referral fee” from Zango, calculated as a percentage of Zango‘s profits from the deal. Id. at *2-3. Samba thus violated the well-understood duty of a fiduciary not to secretly work both sides of the street. Id. at *9 (explaining that “the less money Zango had to pay iMesh, the greater Zango‘s profits,” and hence, the greater Samba‘s referral fee); see also, e.g., Wendt v. Fischer, 243 N.Y. 439, 443, 154 N.E. 303, 304 (1926) (Cardozo, J.) (real estate brokerage firm breached its fiduciary duty when, acting as agent for the seller, it took a commission on a sale to a dummy corporation secretly controlled by a member of the firm, who quickly flipped the property for a profit).
The unspoken premise of this argument is that PRCM‘s fiduciary duty to Two Harbors extended to counseling it (“fairly and objectively“) as to whether, when, and under what terms to fire PRCM. I reject that premise. I also reject Two Harbors’ claim (made only in its brief, unsupported by any evidence) that because the Independent Directors were not told about the non-compete covenants, they were “unaware” that the Pine River partners serving as Two Harbors executives “were subject to conflicts of interest with respect to issues related to internalization.” Def. Moving Mem. at 18. In fact, there were multiple, obvious, and well-disclosed conflicts inherent in any advice given by Pine River‘s partners to Two Harbors about terminating the Management Agreement.39 It is no doubt for this reason that the Management Agreement expressly
Pine River is also correct that Two Harbors suffered no actual harm as a result of the Pine River Restrictive Covenants. Defendant does not point to any evidence suggesting that the existence of the non-compete covenants (or their late disclosure) had the slightest effect on Two Harbors’ internalization. To the contrary: according to Mr. Greenberg (who became Two Harbors’ CEO when the Board removed Mr. Siering), the process “occurred without interruption and was virtually seamless.” Pl. 56.1 St. ¶ 373. Greenberg specifically noted that Two Harbors succeeded in hiring “100% of the employees who had previously supported” it (including Greenberg himself). 11/5/20 TWO Earnings Call Tr. (Conlin Decl. Ex. 40) at 2-3; see also 11/8/22 TWO 30(b)(6) Dep. Tr. (Conlin Decl. Ex. 113) at 85:3-6 (agreeing that Two Harbors “did not intend to have any Pine River partner continue working at the company” after termination of the Management Agreement). Likewise, when defendant‘s
I therefore conclude that Pine River did not act faithlessly, breach its fiduciary duty to Two Harbors, or commit any other breach or tort in connection with the Pine River Restrictive Covenants. Nor did those covenants violate the Management Agreement or otherwise furnish Two Harbors with “cause” to terminate it on a no-fee basis.
C. Reputational Risks
The facts regarding the reputational risks created by Brian Taylor‘s [REDACTED] are uncomplicated and undisputed. Mr. Taylor, who was then the Chair of the Two Harbors Board as well as a Pine River partner, [REDACTED] Id.; see also 11/8/22 TWO
The incident quickly came to the attention of Two Harbors’ CEO, Mr. Siering, its Lead Independent Director, Mr. Kasnet, and its dedicated General Counsel, Ms. Sandberg, who looped in the Company‘s outside counsel regarding “the risk to the company.” 11/8/22 TWO
Notwithstanding Two Harbors’ determination in 2015 that Mr. Taylor‘s conduct warranted only a verbal apology to the Board (on which he continued to sit for three more years), the Company now asserts that it is entitled to summary judgment on its faithless servant claim (and therefore that it can claw back all of the compensation paid to the Manager at least since 2015) because it was “faithless,” as a matter of law, for PRCM to fail to prevent Mr. Taylor from [REDACTED] Def. Moving Mem at 20. In its opposition to Pine River‘s motion, Two Harbors further argues that insofar as its remaining counterclaims are premised on Mr. Taylor‘s conduct, “the record precludes” a grant of summary judgment to Pine River on those counterclaims. See Def. Opp. at 20-21, 31-32.
Pine River disagrees. In Pine River‘s view, the events of October 2015 cannot lead to liability – under the faithless servant doctrine or otherwise – because Mr. Taylor‘s personal conduct was not within the scope of PRCM‘s agency relationship with Two Harbors, and because no reasonable jury could conclude “that Mr. Taylor [REDACTED] permeated Pine River‘s decade-long service to Two Harbors in its most material and substantial part.” Pl. Opp. at 22. Pine River also points out that Two Harbors tolerated the allegedly
Pine River is correct. I note at the outset that the question before this Court is not whether Mr. Taylor breached a legal duty that he owed to Two Harbors as a director; it is whether Pine River breached a legal duty that it owed to Two Harbors in connection with Mr. Taylor‘s conduct. There is no evidence in the summary judgment record that could support such a conclusion. PRCM‘s duties to Two Harbors, whether as agent or fiduciary, did not extend to policing Mr. Taylor‘s [REDACTED] or otherwise preventing him from making poor decisions in his personal life.41 Likewise, the conduct that created the reputational risk was “far removed” from Pine River‘s duties as Two Harbors’ investment adviser and manager. See Sanders, 2007 WL 1933933, at *5-7 (unethical and potentially illegal conduct committed by senior executive in violation of employer‘s “broad ethical policies,” but on her own time, could not be the basis of a faithless servant claim).42
Even if Pine River‘s fiduciary duties could be deemed to include preventing its personnel from engaging in personal conduct that might “reflect poorly” on Two Harbors, no faithless servant claim could be premised on Mr. Taylor‘s conduct in October 2015, because such a claim requires “disloyal” activity, PRCM III, 2023 WL 5152288, at *10, as opposed to poor judgment. See also Phansalkar, 344 F.3d at 200 (a faithless servant claim requires “disloyal or faithless performance of employment duties“); Nuveen Servs., 2024 WL 4264864, at *16 (there must be “self-dealing by the employee that directly operated to the financial detriment of the employer“). The claimant must also show that the misconduct was “substantial,” PRCM III, 2023 WL 5152288, at *10, which Two Harbors cannot possibly do after determining - at the time - that Mr. Taylor‘s lapse of judgment required nothing more than an apology, which the Board “accepted,” 11/8/22 TWO Rule 30(b)(6) Dep. Tr. (Conlin Decl. Ex. 113) at 130:10-12, and then retained him as Chairman for the next three years. See Phansalkar, 344 F.3d at 202 (disloyalty will not be deemed “substantial” where it “consisted of a single act, or where the employer knew of and tolerated the behavior“).
Finally, Pine River is correct that the 2015 [REDACTED] incident did not damage Two Harbors. No scandal ensued, no business was lost, and there is no evidence that the Company‘s performance suffered in any way. See 11/8/22 TWO 30(b)(6) Dep. Tr. (Conlin Decl. Ex. 113) at 661 (Del. Ch. 2023). Among other things, the CPO “grabbed an employee and forced her onto his lap” while attending a company event for the human resources staff. Id. at 666.
For these reasons, I conclude that the Reputational Risks created by Mr. Taylor‘s conduct in 2015 did not give Two Harbors cause for the termination of the Management Agreement in 2020. Nor does that conduct support any of the counterclaims that defendant filed in 2021.
D. Business Disruptions
The fifth and final instance of allegedly faithless conduct that Two Harbors relies on in support of its own summary judgment motion is the June 18, 2020 letter from Mr. Taylor to the Pine River personnel staffing Two Harbors. Once again, the material facts are undisputed. In that letter - sent three months after Two Harbors moved to terminate the Management Agreement and one day after Pine River filed its state court lawsuit - Taylor made the following statements:
As partners or employees of Pine River, you have fiduciary and contractual duties to Pine River. Those duties include to act in Pine River‘s best interests and not to take any action that could harm the interests of Pine River.
Nor should you communicate with any attorneys for Two Harbors. If you are contacted by Two Harbors concerning this lawsuit or concerning potential employment with Two Harbors, please let me know immediately.
Taylor 6/18/20 Ltr. (Sama Decl. Ex. 47) at 1.
In Two Harbors’ view, the first statement was “contrary to the fiduciary duties owed [by Pine River] to Two Harbors,” Def. Moving Mem. at 22, while the second “presented a significant obstacle to Two Harbors in responding to a pending SEC investigation into both Pine River and Two Harbors.” Id. at 23.43 Thus, by sending the June 18 letter, “PRCM was faithless in the
In response, Pine River argues that the June 18 letter was unobjectionable, because the employees providing services to Two Harbors did in fact have “fiduciary and contractual duties to their employer, Pine River.” Pl. Opp. at 24; see also id. at 25 (“[I]t is not a breach of fiduciary duty for a fiduciary to insist that its contractual rights be respected.“). In any event, Pine River points out, Mr. Taylor sent a follow-up letter on June 24, 2020 (within 24 hours of Mr. Kasnet‘s retraction demand), “clarifying” his message by stating, among other things:
Of course, it goes without saying - but I want to reemphasize - that so long as Pine River is managing Two Harbors, Pine River and its employees and partners must continue to provide Two Harbors with the same high level of service that Pine River has provided to Two Harbors for the last ten years. This of course means that you must always act in the best interests of Two Harbors and its shareholders, and not take any action to the detriment of Two Harbors.
To the extent you must communicate with lawyers for Two Harbors concerning the day-to-day management of Two Harbors, you should certainly continue to do so. Finally, if you are contacted by Two Harbors concerning potential employment with Two Harbors, you have no obligation to inform Pine River that Two Harbors has contacted you.
Taylor 6/24/20 Ltr. (Sama Decl. Ex. 13) at 1.44
Once again, Pine River has the better end of the argument. The lack of any actual disruption to defendant‘s business is, in fact, dispositive of its fiduciary duty counterclaims, see Moltech, 2001 WL 262675, at *10; Pacelli v. Peter L. Cedeno & Assocs., PC, 220 A.D.3d 596, 597, 198 N.Y.S.3d 332, 333 (1st Dep‘t 2023) (directing the entry of summary judgment to defendants on breach of fiduciary duty claim because plaintiffs “failed to raise a triable issue of fact as to whether recoverable damages were incurred“). Similarly, the lack of any actual disruption is fatal to defendant‘s counterclaims for breach of contract, fraud, and negligence, all of which require proof of damages proximately caused by the breach or the tort. See Yukos Cap. S.A.R.L. v. Feldman, 977 F.3d 216, 246 (2d Cir. 2020) (under New York law, “nominal damages cannot satisfy the ‘damage’ element of a tort that requires actual harm“).
At common law, no proof of damages is required to prevail under the faithless servant doctrine. However, the faithless conduct must have “permeated the employee‘s service in its most material and substantial part.” PRCM III, 2023 WL 5152288, at *10 A “single act,” even if wrongful, will not require disgorgement of compensation unless it was part of a “persistent pattern of disloyalty.” Schwartz v. Leonard, 138 A.D.2d 692, 693, 526 N.Y.S.2d 506, 508 (2d Dep‘t 1988)
Under the circumstances, I cannot conclude that Mr. Taylor‘s June 18, 2020 letter amounted to an act of disloyalty so severe that it “permeated the [agent‘s] service in its most material and substantial part,” PRCM III, 2023 WL 5152288, at *10. Consequently, Two Harbors’ claim of Business Disruptions does not entitle it to equitable relief under the faithless servant doctrine.
E. Second Amendment
Two Harbors does not rely on the Second Amendment to support its own motion for summary judgment. See generally Def. Moving Mem. In opposition to Pine River‘s motion, however, it argues that there are “disputed facts” as to whether the Second Amendment was (i) fraudulently induced (in that Pine River materially misrepresented its “purpose and effect,” Def. Opp. at 47, or (ii) substantively unfair (in that it gave PRCM IP rights that it did not previously own), id. at 48, either of which, in defendant‘s view, would entitle it to summary judgment on all of Pine River‘s IP-related claims. I discuss these contentions here because they are also relevant to
As to fraudulent inducement, Two Harbors claims that Pine River wrongfully omitted a material fact when it presented the proposed Second Amendment by “failing to inform the Board of Pine River‘s position” that the new language would give Pine River ownership of all of the IP “created or developed” by the Manager, “not only the (different) intellectual property associated with the CRE initiative.” Def. Opp. at 47, 49 n.30.
The claim is meritless. Pine River could not possibly have “fail[ed] to inform the Board” that the Second Amendment would give PRCM ownership of “all” IP that it created or developed (not just the “different” IP that it created or developed for the new CRE venture), because that is exactly what the Second Amendment said:
Section 2. Addition of Intellectual Property Provisions. The Management Agreement is hereby amended to include the following as a new Section 27:
“Section 27. Intellectual Property.
(a) All Intellectual Property created or developed by the Manager in connection with the Manager‘s performance of this Agreement or otherwise and the Intellectual Property Rights associated therewith shall be the sole and exclusive property of the Manager.[“]
Second Amend. at 1 (emphasis added).45
In New York, the courts routinely hold “as a matter of law that a party‘s reliance [is] unreasonable where the alleged misrepresentation is explicitly contradicted by the written agreement.” Great Lakes Reinsurance (UK) SE v. Herzig, 2023 WL 4266012, at *5 (S.D.N.Y.
Here, no affirmative misrepresentation is alleged. That is, Two Harbors does not claim that anyone told the Board - orally or in writing - that § 27(a) of the Management Agreement would only apply to CRE-related IP. Rather, the claim is that the Independent Directors developed that “understanding” because the Second Amendment was discussed in the “context” of the CRE initiative. 11/8/22 TWO 30(b)(6) Dep. Tr. (Conlin Decl. Ex. 113) at 177:11-15, 183:20-25. Moreover, as noted above, the six Independent Directors of Two Harbors - all of whom voted in favor of the Second Amendment - were seasoned and sophisticated business professionals (including two lawyers and a former U.S. Senator), with “access” not only to the plain text of the amendment but also to the unconflicted advice of Two Harbors’ General Counsel, Ms. Sandberg.46 Under these circumstances, Two Harbors cannot hope to sustain a claim of fraudulent inducement
As to the “substantive unfairness” of the Second Amendment, defendant argues that “where, as here, ‘a fiduciary relationship exists between parties to a contract, there must be clear proof of the integrity and fairness of a transaction between them, or any instrument thus obtained will be set aside or held as invalid[.]‘“). Def. Opp. at 48 (quoting Aviles, 380 F. Supp. 3d at 301). Further, according to Two Harbors, the Second Amendment was not “objectively fair” because (if plaintiffs are interpreting it correctly) it gave PRCM IP rights that it did not previously own. See id. at 48-49 (arguing that the Second Amendment was unfair because, prior to its enactment, the CNIAs “assigned rights only to PR Domestic - not PRCM or PR Capital“).
Once again, Two Harbors is incorrect. First, it assumes, mistakenly, that PRCM was acting within the scope of its fiduciary duty as Two Harbors’ investment adviser when negotiating the Second Amendment to the Management Agreement. It was not. See Moltech, 2001 WL 262675, at *9 (explaining that BNY could not have been acting within the scope of its fiduciary duties as Moltech‘s acquisition adviser when it was “negotiating over fees” with Moltech, and therefore had no duty to “reduce its fees or accept a carve-out“).
Third, as the Gordon court explained, even where the burden is shifted due to the obvious inequality of the parties’ positions, the defendant is not required to show that the transaction was substantively fair (this would be impossible in the case of a donation, which by definition lacks consideration); rather, it must show “that no deception was practiced, no undue influence was used, and that all was fair, open, voluntary and well understood.” 45 N.Y.2d at 699, 385 N.E.2d at 289. Two Harbors’ “unfairness” claim thus collapses into its fraudulent inducement claim, which likewise turns on whether PRCM wrongfully withheld material information from Two Harbors when negotiating the Second Amendment, and fails for the same reasons outlined above.
The remaining grounds relied on by Two Harbors to terminate the Management Agreement - and to support its termination-related counterclaims - can be swiftly dealt with.
1. Granite Point Restrictive Covenants
It is now undisputed that the Granite Point Restrictive Covenants (that is, non-compete provisions in the employment contracts between Pine River and three Pine River employees serving as Granite Point‘s senior executives) did not go into effect until after Granite Point was spun off from Two Harbors in 2017. Pl. 56.1 St. ¶ 278; 11/8/22 TWO 30(b)(6) Dep. Tr. at 103:17-22. Consequently, “those employment terms did not impact PRCM‘s performance under the Management Agreement,” PRCM II, 2021 WL 4847224, at *5.
Two Harbors does not argue otherwise. Instead, it speculates that the challenged covenants might have negatively affected the value of Granite Point itself, and therefore should have been disclosed to Two Harbors before its Board voted to approve the terms of the Granite Point spinoff. See Def. Opp. at 23 (“Pine River was required to disclose the Granite Point Restrictive Covenants to Two Harbors because of their impact on the [value of the] Granite Point shares that Two Harbors received“). At deposition, however, Two Harbors’ Rule 30(b)(6) witness equivocated: “If you want to say that the absence of those disclosures could have impacted somehow the pricing of the Granite Point IPO when it went out, perhaps that was a way they said it was harmed. That is very hypothetical and hard to guess.” 11/8/22 TWO 30(b)(3) Dep. Tr. at 101:13-17. One of the factors making it “hard to guess” was the (publicly available) Granite Point Management Agreement, which contained its own non-compete provision, barring Granite Point from retaining the services of any Pine River personnel for two years after a termination without cause. Pl. 56.1 St. ¶ 274; Conlin Decl. Ex. 6 (Granite Point Mgmt. Ag.) § 3(e). Two Harbors presents nothing but “speculation,” Kulak, 88 F.3d at 71, to suggest that the overlapping non-compete clauses in three
2. Proposed Co-CIO Restrictive Covenants
The same is true with respect to the Proposed Co-CIO Restrictive Covenants. Two Harbors is correct that including non-compete covenants in the 2019 employment contracts for Mr. Greenberg and Mr. Koeppen would have made it more difficult for Two Harbors to retain its co-CIOs after terminating the Management Agreement, thus presenting an “obstacle” to internalization. Even assuming, however, that Pine River had an obligation to remove all such obstacles,47 Two Harbors cannot establish any breach (much less injury), because Pine River removed the non-compete clauses from the draft employment agreements for the incoming co-CIOs before presenting the revised agreements - minus the restrictive covenants - to the Two Harbors Board, which approved them. Pl. 56.1 St. ¶¶ 289-91; 11/8/22 TWO 30(b)(3) Dep. Tr. (Conlin Decl. Ex. 113) at 108:2-18; 11/3/22 Koeppen Dep. Tr. (Conlin Decl. Ex. 120) at 103:1-7 (confirming that Mr. Taylor accepted Mr. Koeppen‘s changes, “and a clean version was sent on to Two Harbors’ compensation committee for them to review“).
3. Proposed Siering Retirement Agreement
Similarly, the Proposed Siering Retirement Agreement was never anything other than a “proposed” agreement. See 11/8/22 TWO 30(b)(3) Dep. Tr. (Conlin Decl. Ex. 113) at 121:10-13.
4. Internalization Interference
According to Two Harbors, “[t]he record reflects disputed facts as to whether Pine River breached its fiduciary duties by attempting to thwart Two Harbors’ internalization[.]” Def. Opp. at 25. Once again, however, Two Harbors argues from a flawed premise, namely, that PRCM had an obligation to advise Two Harbors as to the pros and cons of firing PRCM. See id. (“There is no carve-out to Pine River‘s fiduciary duties for internalization.“). Moreover, Two Harbors makes no claim that it should have internalized earlier than it did - much less that it was somehow prevented from doing so by anything that Pine River did or failed to do. See, e.g., 11/8/22 TWO 30(b)(6) Dep. Tr. (Conlin Ex. 113) at 245:24-246:25 (“I don‘t think it is Two Harbors’ position” that internalization was “in the best interest in 2016“); id. at 253:8-25 (“I can‘t sit here today and say the company thought ... in 2018 that it was in its best interest [to internalize], because it hadn‘t done the homework yet.“). Consequently, even if Pine River had - and breached - contractual or fiduciary duties to counsel the Independent Directors regarding internalization, Two Harbors could not sustain a damages claim on that basis.
Lastly, Two Harbors alleges that Mr. Taylor‘s August 7, 2020 letter - asking it to provide “all necessary passwords and access ... to networks and servers in which [Pine River‘s] intellectual property resides,” prior to the August 14, 2020 termination date of the Management Agreement, constituted an unlawful demand for the personally identifiable information “of borrowers of residential mortgage loans for which Two Harbors owned MSR,” which “would have required Two Harbors to violate federal and state law.” Countercl. ¶¶ 17, 152. Pine River strenuously denies the charge, pointing out that Mr. Taylor‘s letter said nothing about PII, see Pl. Moving Mem. at 25, and that Pine River‘s counsel specifically addressed the issue in a longer, more nuanced letter sent to Two Harbors’ counsel on August 6, 2020:
To the extent that any non-public personally identifiable information of consumers (“PII“) remains on Pine River‘s proprietary software and systems, or to the extent that PII is comingled within Pine River intellectual property, Pine River proposes that Liz Olney Arms (Pine River‘s Head of Legal and Chief Compliance Officer) and Randall Brett (Pine River‘s Managing Director, Chief Technology Officer) and an appropriate Pine River employee dedicated to Two Harbors review the relevant data to remove PII from Pine River intellectual property. Ms. Arms and Mr. Brett both have had compliance training and are familiar with the standard duty of care in handling PII. Further, as the Management Agreement remains in effect, Pine River is still responsible for the management of Two Harbors and accordingly, its management team is authorized to view this information in compliance with all federal and state laws.
Conlin Decl. Ex. 63 (8/6/20 letter from Sidley Austin to Goodwin Proctor) at 3-4. Moreover, it is also undisputed that Two Harbors did not provide any passwords or any network or server access, and thus that no PII was improperly accessed.
Two Harbors, for its part, offers no further evidence that Pine River improperly sought to access consumer PII. Nor, for that matter, does it offer any further analysis. Instead, the single footnote devoted to this issue in Two Harbors’ summary judgment briefs offers only a naked conclusion: “Pine River also breached its fiduciary duties by demanding that Two Harbors
IV. IP-RELATED CLAIMS
Assuming the validity of the Second Amendment (discussed in Part III(D), supra, and Part V, infra) the parties agree that a common “threshold issue,” PRCM I, 2021 WL 2582132, at *10, underlies all of Pine River‘s IP-related claims: whether the intellectual property that Two Harbors routinely used to conduct its business prior to terminating the Management Agreement - including computer programs, databases, financial models, investor and prospective investor information, and more - was “created or developed by the Manager,” MA § 27(a), that is, by PRCM. If so, the clear and unambiguous language adopted by the Board on November 3, 2014, compels the conclusion that the IP was “the sole and exclusive property of the Manager,” id. (except for trademarks using the name or logo of Two Harbors, id. § 27(b)(i)), and therefore that PRCM is entitled to summary judgment as to liability on its Fourth Claim (for breach of § 27(a)) and its Ninth Claim (for conversion of the IP), and PR Capital and PR Domestic are entitled to summary judgment as to liability on their Tenth Claim (for tortious interference with the CNIAs). See, e.g., Pl. Moving Mem at 3-5.48 Conversely, if the IP was not “created or developed by the Manager,”
A. Law of the Case
Addressing this issue at the motion to dismiss stage, the district judge held that Pine River‘s IP-related claims were “alleged sufficiently,” PRCM I, 2021 WL 2582132, at *10, because the human creators and developers of the IP at issue were the Pine River personnel provided to Two Harbors under the Management Agreement and the SSA. Id. at *10-11. In so holding, the district judge considered and rejected Two Harbors’ argument that the IP could not have been created or developed by “the Manager” - that is, by PRCM - because the individuals who performed the work were, in many cases, employees of PR Domestic, which was neither an assignee under the Management Agreement nor a party to the SSA. The district judge explained:
Two Harbors’ assumption that PRCM could act only through employees or assignees is incorrect. For example, PRCM could delegate its responsibilities by contract, in which case the delegee‘s acts may be attributed to PRCM, at least in some circumstances. In fact, the Management Agreement expressly contemplated that PRCM would fulfill its responsibilities as manager through the employees, officers, partners, and personnel of its affiliates pursuant to the Shared Services Agreement.
Accordingly, the bright line that Two Harbors has constructed between PRCM‘s employees and other personnel acting on PRCM‘s behalf is an oversimplification. While PRCM does not allege that it hired employees, it does allege that it contractually retained personnel to carry out its responsibilities under the Management Agreement. Whether the nature of their relationship with PRCM made their acts attributable to the “manager” under section 27 of the Management Agreement is a fact specific question that the Court cannot decide on a motion to dismiss. At this stage, PRCM has alleged sufficiently that these personnel were acting on its behalf when the intellectual property was developed. This is sufficient for PRCM to claim plausibly that it owns the intellectual property at issue here.
Notwithstanding the district judge‘s analysis, which is now the law of the case, Two Harbors continues to argue that PRCM could not own any of the IP at issue because “the personnel who provided services to Two Harbors were employed by a different entity, PR Domestic.” Def. Moving Mem. at 31. In Two Harbors’ view, this circumstance dictates the conclusion that “PRCM did not in fact delegate its responsibilities under the Management Agreement to the personnel who carried out those responsibilities, and the acts of those personnel are not attributable to PRCM.” Id.; see also Def. Reply at 21 (since “the personnel who provided services to Two Harbors were employed by a different entity, PR Domestic,” their acts “are not attributable to PRCM under the MA, and Pine River does not own the alleged intellectual property or trade secrets under the MA“).
This argument - which is purely legal - fails at summary judgment for the same reasons it failed under Rule 12(b)(6). As the district judge explained, although PRCM never assigned the Management Agreement in its entirety, it could and did - “delegate” its responsibilities thereunder “by contract, in which case the delegee‘s acts may be attributed to PRCM, at least in some circumstances.” The Management Agreement required PRCM to “provide” personnel to Two Harbors, MA § 3(a), but did not require that the individuals so provided be on PRCM‘s payroll. See also MA § 14(b) (PRCM could “subcontract” any or all of its responsibilities under §§ 2(b), 2(c) and 2(d) “to any of its affiliates“) (emphasis added). Likewise, the SSA required PR Capital to “provide” personnel to PRCM (so that PRCM, in turn, could “provide” them to Two Harbors), but did not require that they be on PR Capital‘s payroll. See SSA § 2 (“All [PR Capital] personnel who provide services hereunder shall be employees of [PR Capital] or its affiliates“) (emphasis added). Consequently, there is no “bright line,” PRCM I, 2021 WL 2582132, at *12, preventing this Court from attributing the acts of personnel who happened to be on the PR Domestic payroll
Pine River, for its part, confuses the motion to dismiss standard with the summary judgment standard when it relies on PRCM I to argue a factual point: that although the relevant personnel were employees of PR Capital and PR Domestic, “they were ‘acting on [PRCM‘s] behalf when the intellectual property was developed.‘” Pl. Opp. at 34 (quoting PRCM I, 2021 WL 2582132, at *12). The full quotation from PRCM I makes the distinction clear: “At this stage, PRCM has alleged sufficiently that these personnel were acting on its behalf when the intellectual property was developed.” PRCM I, 2021 WL 2582132, at *12 (emphasis added). At summary judgment, of course, a party may no longer rely on its allegations; it must produce evidence. See Golden Pac. Bancorp, 375 F.3d at 200.
The question now before the Court, therefore, is not whether the developers, programmers, and other individuals who created and developed the IP at issue were on PRCM‘s payroll; it is the “fact specific question” whether the relationship between those individuals and PRCM “made their acts attributable to the ‘manager’ under section 27 of the Management Agreement.” PRCM I, 2021 WL 2582132, at *12. For the reasons that follow, I conclude that the evidence on this point is mixed, such that summary judgment cannot be granted to either side.
B. Whether the Personnel Who Developed the IP Were Acting on PRCM‘s Behalf
The question necessarily left unanswered at the pleading stage is fundamentally one of agency: whether the individuals who created and developed the IP at issue were acting as agents of PRCM or as agents of Two Harbors when they did so. See PRCM I, 2021 WL 2582132, at *12
“The existence of an agency relationship ‘is a mixed question of law and fact,‘‘’ In re Nigeria Charter Flights Cont. Litig., 520 F. Supp. 2d 447, 460 (E.D.N.Y. 2007) (quoting Com. Union Ins. Co. v. Alitalia Airlines, S.p.A., 347 F.3d 448, 462 (2d Cir. 2003)), which, if dependent upon “contradictory evidence,” or “evidence ... from which different inferences reasonably may be drawn,” must go to the jury. Id. at 461 (quoting Hedeman v. Fairbanks, Morse & Co., 286 N.Y. 240, 248-49, 36 N.E.2d 129, 133 (1941)); see also Samba, 2009 WL 705537, at *7 (“The existence of an agency relationship is a mixed question of law and fact that should generally be decided by a jury.“); Mouawad Nat. Co. v. Lazare Kaplan Int‘l Inc., 476 F. Supp. 2d 414, 421 (S.D.N.Y. 2007) (“Unless the material facts from which agency is to be inferred are undisputed, the question of agency should be submitted to the jury.“). Here, the relevant evidence is susceptible of more than one reasonable inference, making summary judgment inappropriate.
Under the SSA, upon which Pine River principally relies, “[o]ffice personnel” provided to PRCM (so that PRCM could provide them to Two Harbors) “shall be advised that while providing services to the Manager, they are to follow the directions of the Manager and are to act in the best interests of the Manager.” SSA § 2. Pine River characterizes this provision as an unambiguous manifestation of PRCM‘s “intent that [PR Capital] and its employees act for PRCM in fulfilling its responsibilities under the MA.” Pl. Moving Mem. at 4. However, it is not clear from the SSA whether the “office personnel” were to prioritize the directions and interests of the Manager over those of Two Harbors - or simply over those of the Pine River entity listed as their employer.
Moreover, although PRCM and PR Capital agreed among themselves that the relevant individuals would be “advised” to follow the directions of the Manager, the actual advice those
Making matters even murkier, the Two Harbors Compliance Manual instructed all of the individuals providing services to Two Harbors:
You are expected [to] discharge your duty to Two Harbors in the best interests of Two Harbors and its stockholders, especially in situations where the interests of Two Harbors may be in conflict with your own interests or those of Pine River or its affiliates.
Sama Decl. Ex. 12, at ECF p. 6. The forward to the Compliance Manual, urging faithful adherence to the guidelines set forth therein, was signed by Mr. Siering. Id. at ECF p. 3. The Compliance Manual could be construed, therefore, as a direct instruction from a Pine River partner - who was
Further, the record contains evidence that Two Harbors maintained its own human resources (HR) and information technology (IT) functions, largely separate from Pine River‘s. According to Ms. Hanson, the Two Harbors “HR team,” supervised by the Two Harbors Hiring Committee (consisting of Ms. Hanson, the Two Harbors CEO, and the Two Harbors CFO) recruited, hired, on-boarded, set the compensation of, and (if necessary) fired Two Harbors personnel “at all levels,” including “information technology and application development personnel,” without requiring “approval from Pine River.” Hanson Decl. ¶¶ 3-9, 12. These facts suggest that that Two Harbors, rather than PRCM, “actually controlled” the IT staff working in its offices. See Hoskins, 44 F.4th at 150 (holding that Hoskins was not the agent of an entity that did not hire him, could not fire him, and had no say in his compensation).
Once onboarded, the IT personnel reported to Two Harbors’ dedicated Chief Technology Officer (CTO), worked in Two Harbors’ dedicated office space, and used “Two Harbors’ equipment.” 11/2/22 Quan Dep. Tr. (Conlin Decl. Ex. 122) at 209: 5-12 (testifying that he “viewed [himself] as a Two Harbors employee, because [he] reported to the Two Harbors CTO” and “worked in Two Harbors’ office ... using Two Harbors’ equipment“). Indeed, by 2014 Two Harbors had its own source code repository, accessible only through its own secure network. See 11/18/22 Brett Dep. Tr. (Sama Opp. Decl. Ex. 64) at 48:4-19. As explained by Pine River‘s then-CTO, James Brett, “[t]he only way for hedge fund staff ... to have access [to the Two Harbors network] would be to request access from Rebecca [Sandberg],” the dedicated Two Harbors General Counsel. Id. at 116:7-10. Two Harbors also had its own Information Security Standards and Procedures manual, which “define[d] the security standards and procedures applicable to the
To be sure, the record also contains ample evidence that Two Harbors’ officers and directors believed and accepted - for years - that the IP used by the Company belonged to the Manager. When Two Harbors reported the Second Amendment to its shareholders in 2014, it explained that it now had “a non-exclusive license ... to use Manager‘s intellectual property ... for the term of the Management Agreement.” 11/7/14 TWO Form 8-K (Conlin Decl. Ex. 21), Item 1.01. When the Company‘s senior managers (not including Mr. Siering) recommended internalization on January 29, 2020, they warned the Special Committee that there would be a “cost for intellectual property,” because “all intellectual property developed by employees during their employment belongs to Pine River.” 1/29/20 PowerPoint (Conlin Decl. Ex. 98) at 14. The following month, Two Harbors told its shareholders that “[i]n the event of a termination of the management agreement,” it could be “difficult or costly to replace certain intellectual property” previously “provided by or contracted through Pine River.” TWO Form 10-K for FY 2019 (Conlin Decl. Ex. 28) at 28. Indeed, insofar as the record reflects, the first time Two Harbors articulated a different view was after Pine River filed its state court lawsuit, when Mr. Kasnet asserted, in his June 23, 2020 letter to Mr. Taylor, that “intellectual property created or developed by dedicated
The question underlying the parties’ IP-related claims and counterclaims, however, is not what the parties’ officers and directors thought about which entity owned the IP; it is which entity actually “created or developed” the IP. MA § 27(a). As discussed above, this question turns on whether the human beings who created and developed that IP were acting as agents of PRCM or Two Harbors when they did so. Since the evidence on this point is susceptible of more than one reasonable inference, see Nigeria Charter Flights Cont. Litig., 520 F. Supp. 2d at 460-61, neither Pine River nor Two Harbors is entitled to summary judgment on the parties’ IP-related claims and counterclaims.53
V. INVESTMENT ADVISERS ACT
The district judge dismissed all of Two Harbors‘s counterclaims under the IAA (Counterclaims VI, VII, VIII, and portions of IX), as well as its second affirmative defense, which asserted that the Management Agreement is unenforceable, void, and/or voidable because it violates the IAA. PRCM III, 2023 WL 5152288, at *12.54 Nonetheless, Two Harbors continues to argue that the Management Agreement is unenforceable because it violates the IAA. Def. Moving Mem. at 24-29; Def. Opp. at 36. Specifically, it argues that MA § 11 (the hedge clause) and MA § 13(b) (the termination fee provision) are “proscribed” by the IAA, rendering the entire contract void, and insulating defendant from liability for breach of contract. Def. Moving Mem. at
Two Harbors is mistaken. All of its IAA-related claims and defenses were dismissed. No portion of its second affirmative defense survived the Rule 12(c) motion. Any doubt on this score is erased by the district judge‘s careful treatment of Two Harbors’ unjust enrichment counterclaim, which was dismissed “to the extent” it “relies on Two Harbors’ argument that the management agreement is invalid.” PRCM III, 2023 WL 5152288, at *12. Pine River is therefore correct that defendant‘s effort to revive its IAA defense on summary judgment is, in substance, a “procedurally improper and untimely motion for reconsideration,” Pl. Opp at 27, that should be ignored.
Even if the issue were not foreclosed, Two Harbors cannot avoid liability under the Management Agreement by claiming that the contract under which it conducted its business for over a decade is unenforceable. In support of its contention that § 13(b) violates the IAA, Two Harbors describes “decades of consistent guidance” by the SEC, which takes the position that termination fees in advisory agreements ”may be inconsistent with the adviser‘s fiduciary duty.” Def. Moving Mem at 25 (quoting Constellation Fin. Mgmt. L.L.C., 2003 WL 76185, at *2 (S.E.C. No-Action Letter Jan. 9, 2003)) (emphasis added). Similarly, Two Harbors’ argument as to § 11(a) rests entirely on SEC no-action letters. Id. at 27. It does not cite a single litigated case, from any jurisdiction, invalidating a comparable termination provision or hedge clause, much less in the context of a complex contract, going well beyond investment management services, negotiated between sophisticated parties. Thus, if and to the extent Two Harbors’ renewed arguments under the IAA are considered on the merits, they should be rejected.
For the reasons set forth above, I recommend, respectfully, that Pine River‘s motion (Dkt. 347) be GRANTED IN PART. Plaintiff PRCM is entitled to summary judgment as to liability on its Third Claim, for termination of the Management Agreement without cause in violation of § 15(a) thereof. Additionally, Pine River is entitled to summary judgment on Two Harbors’ counterclaims for breach of fiduciary duty (Counterclaim I); recovery under the faithless servant doctrine (Counterclaim II); gross negligence (Counterclaim III); fraud (Counterclaim IV); negligent misrepresentation (Counterclaim V); unjust enrichment (Counterclaim IX), insofar as Two Harbors seeks recovery of “the nearly $10.3 million cash benefit realized by Pine River pursuant to the improper LTIP Sharing Agreements,” Countercl. ¶ 218; aiding and abetting breach of fiduciary duty (Counterclaim X); breach of contract (Counterclaim XI); and breach of the covenant of good faith and fair dealing (Counterclaim XII). Pine River‘s motion should otherwise be DENIED. Two Harbors’ motion for summary judgment (Dkt. 338) should be DENIED.
Because the parties filed portions of their motion papers under seal, and because I have necessarily discussed some of the sealed material, the Clerk of Court is respectfully directed to file this Report and Recommendation under seal, at the “selected parties” viewing level, such that only the attorneys appearing for the parties, and court personnel, may view it. By separate order (Dkt. 438), the parties have been given an opportunity to submit proposed redactions before this Report and Recommendation is filed in public view.
Dated: New York, New York
March 31, 2025
BARBARA MOSES
United States Magistrate Judge
The parties have 14 days from this date to file written objections to this Report and Recommendation pursuant to
Notes
- Pine River asserts that “Pine River Capital Management, L.P. (‘Pine River Capital‘) is a global asset manager. Pine River Capital‘s wholly owned subsidiary, PRCM Advisers LLC (‘PRCM‘) previously served as the external manager of Defendant Two Harbors Investment
The syllogism is invalid. The cases that Two Harbors relies on for this point all involve the duty of an individual corporate director to act in “good faith,” not the faithless servant doctrine. Notwithstanding the shared use of the word “faith,” these doctrines are not interchangeable. Moreover, “bad faith” conduct by a corporate director is not simply “more culpable than . . . gross negligence,” Rahbari, 732 F. Supp. 2d at 389 (quoting Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006)); it is “qualitatively different.” Id. at 382 (quoting Stone, 911 A.2d at 369). The same is true here, in the sense that faithlessness and gross negligence are “qualitatively different,” not simply two points on the same scale. The faithless servant doctrine requires Two Harbors to show (among other things) that Pine River breached its common-law duty of loyalty. Parker Waichman, 215 A.D.3d at 872, 188 N.Y.S.3d at 533. MA § 15(a)(iii), by contrast, requires Two Harbors to show
Pine River also argues, at various points, that the LTIP Sharing Arrangement and the Siering/Roth Compensation Structure were merely informal understandings that guided rather than governed Pine River‘s compensation decisions. See, e.g., Pl. Opp. at 7. Pine River is correct that the evidence points to a set of informal and somewhat variable practices, thus calling into question (for example) Two Harbors’ calculation that the LTIP Sharing Arrangement cost Siering and Roth $10.3 million in partnership compensation from 2013 to 2019. For purposes of the instant summary judgment motions, however, I accept defendant‘s interpretation of the relevant evidence as to the mechanics of the challenged practices.