Newman v. Ernst & Young, LLP
| Decision Date | 11 October 2017 |
| Docket Number | No. 4D16–2162,4D16–2162 |
| Citation | 231 So.3d 464 |
| Parties | Daniel S. NEWMAN, as Receiver FOR FOUNDING PARTNERS STABLE VALUE FUND, LP, Founding Partners Stable Value Fund, II., LP, Founding Partners Global Fund, Ltd and Founding Partners Hybrid–Value Fund, L.P., Appellant, v. ERNST & YOUNG, LLP, a Delaware Limited Liability Partnership, and Mayer Brown, LLP, an Illinois Limited Liability Partnership, Appellees. |
| Court | Florida District Court of Appeals |
Stuart Z. Grossman and Rachel W. Furst of Grossman Roth Yaffa Cohen, P.A., Coral Gables, and Leo R. Beus, Scot C. Stirling and Robert O. Stirling of Beus Gilbert PLLC, Phoenix, AZ, for appellants.
Edward A. Marod, Aaron J. Horowitz and Joshua A. Levine of Gunster, Yoakley & Stewart, P.A., West Palm Beach, for appellee Ernst & Young, LLP.
ON MOTION FOR REHEARING
We grant appellant's motion for clarification and rehearing, vacate our prior opinion, and substitute the following in its place.
Appellant Daniel Newman, the court-appointed receiver for several investment funds collectively known as Founding Partners, appeals a non-final order granting Ernst & Young, LLP's, ("E & Y") revised motion to compel arbitration. Newman raises several issues on appeal. We address three of them. First, we agree with the trial court that a delegation clause contained in the engagement agreement with E & Y controls the determination of whether arbitration covers the issues raised in the complaint. Second, the trial court determined that the claims of the individual investors are subject to arbitration. Because several of the claims are direct, rather than derivative, we disagree in part. Third, we agree with the trial court that the claims of Global Fund, Inc., a Founding Partner, are derivative and thus subject to arbitration, even though Global did not sign an arbitration agreement. Therefore, we affirm in part and reverse in part the order compelling arbitration.
In 2009, the Securities and Exchange Commission brought a securities fraud complaint against Founding Partners Capital Management, the general partner and investment manager of Founding Partners, and their president. Newman ("the Receiver") was appointed successor receiver for the funds. In 2015, the Receiver filed a complaint against E & Y in his capacity as court-appointed Receiver for the funds as well as the assignee of claims assigned by the individual investors in the funds. The complaint alleged claims of professional malpractice, negligent misrepresentation, fraud, breach of fiduciary duty, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and aiding and abetting breaches of statutory duty by E & Y.
These claims arose out of E & Y's role as auditor of financial statements of the Founding Partners for the fiscal years of 2000–07. The Receiver alleged that Founding Partners loaned hundreds of millions of dollars to two factoring companies who were supposed to use the loan proceeds to purchase short-term, high-quality receivables payable by the government or by insurance companies. The third amended complaint alleges that, unbeknownst to the investors, the factoring companies began to misuse the loan proceeds by, among other things, purchasing receivables that were longer-term, less liquid, and much riskier in nature than what was represented to the investors in the financial statements. The Receiver's basic theory was that E & Y knew, or should have known, that the factoring companies began to misuse Founding Partners' loan proceeds, but nevertheless issued "clean" audits.
E & Y moved to compel arbitration based on the engagement agreement entered into with Founding Partners, which contained an arbitration clause. E & Y argued that the arbitration agreements contain delegation clauses which command that the arbitrators, not the court, determine the arbitrability of all claims. E & Y asserted that the Receiver was bound by the engagement agreements because he stands in the shoes of the funds. Further, E & Y argued that the assigned claims of the individual investors are derivative of the claims of the funds and are thus subject to arbitration. The trial court agreed and ordered arbitration as to all claims. Newman appeals that order.
We find that the delegation clause contained in the arbitration provision of the engagement agreement controls the determination of what issues are subject to arbitration. Generally speaking, when a delegation provision is included in an arbitration agreement, the court Angels Senior Living at Connerton Ct., LLC v. Gundry , 210 So.3d 257, 258 (Fla. 2d DCA 2017) (quoting Parnell v. CashCall, Inc. , 804 F.3d 1142, 1148 (11th Cir. 2015) ). The Receiver did not challenge the delegation clause itself. Thus, whether an arbitrable issue exists is a determination that should be delegated to an arbitrator.
As to the claims of the individual investors, we conclude that the court erred in ordering arbitration of some of the assigned claims of the individual investors which were direct, not derivative, claims of the investors. This Court, some years ago, explained the distinction between derivative and direct claims: "A direct or individual action is a suit by a stockholder to enforce a right of action existing in the stockholder." Salit v. Ruden, McClosky, Smith, Schuster & Russell, P.A. , 742 So.2d 381, 388 (Fla. 4th DCA 1999) (citing Fort Pierce Corp. v. Ivey , 671 So.2d 206, 207 (Fla. 4th DCA 1996) ).
A derivative suit is an action in which a stockholder seeks to enforce a corporate right or to prevent or remedy a wrong to the corporation, where the corporation, because it is controlled by the wrongdoers or for other reasons, fails and refuses to take appropriate action for its own...
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