Fundamental Portfolio v. Tocqueville Asset

CourtNew York Court of Appeals
Writing for the CourtGraffeo
Citation7 N.Y.3d 96,850 N.E.2d 653
PartiesFUNDAMENTAL PORTFOLIO ADVISORS, INC., et al., Appellants, v. TOCQUEVILLE ASSET MANAGEMENT, L.P., et al., Respondents.
Decision Date06 June 2006
850 N.E.2d 653
7 N.Y.3d 96
FUNDAMENTAL PORTFOLIO ADVISORS, INC., et al., Appellants,
v.
TOCQUEVILLE ASSET MANAGEMENT, L.P., et al., Respondents.
Court of Appeals of New York.
June 6, 2006.

Page 654

Folkenflik & McGerity, New York City (Max Folkenflik of counsel), for appellants.

Seward & Kissel LLP, New York City (Mark J. Hyland and Charles M. Miller of counsel), for respondents.

OPINION OF THE COURT

GRAFFEO, J.


In furtherance of a proposed transfer of advisory responsibility over a group of mutual funds from plaintiffs to defendants in return for monetary compensation, the parties executed an agreement that precluded defendants from soliciting or engaging in business with the funds if the deal was not consummated. The primary issues before us in this breach of contract action are whether the record establishes—as a matter of law—that plaintiffs, by nurturing a business relationship between defendants and the funds, waived the right to enforce the noncompete agreement or should otherwise be estopped from relying on that provision. Because there are questions of fact that must be resolved before application of waiver and estoppel may be determined, we conclude

Page 655

that defendants are not entitled to summary judgment.

I

Beginning in the early 1980s, plaintiff Lance Brofman founded a group of five mutual funds collectively referred to as the Fundamental Funds.1 Brofman acted as president and chief portfolio strategist of the Funds, and was also the president and principal shareholder of the Funds' investment management advisor, plaintiff Fundamental Portfolio Advisors, Inc. (FPA). Brofman's partner in this venture was Vincent Malanga, who also served as an officer of FPA and was a member of the Funds' boards of directors.2 Brofman and Malanga also controlled plaintiff Fundamental Service Corp., Inc. (FSC), which operated as the distributor for the Funds.

When the Funds were first created, Brofman invested the assets in securities that had relatively low risk. In 1993, when the Funds' performance lagged compared to similar mutual funds, Brofman altered his investment strategies. Utilizing a more aggressive approach, he leveraged the assets of the Funds, making substantial investments in collateralized mortgage obligations (CMOs) and inverse floating-rate securities (inverse floaters), which were highly susceptible to changes in interest rates.

This new strategy initially proved to be successful. But in early 1994, the Federal Reserve raised interest rates, which caused the market for CMOs to quickly collapse and the value of inverse floaters to plummet. This took a dramatic toll on the performance of the Funds. For example, the net assets of the Fundamental U.S. Government Strategic Income Fund, which approximated $60 million in June 1993, decreased to just over $30 million over the course of the following year. In addition, a leading market tracking service ranked that fund last in total returns out of 270 long-term government bond mutual funds.

As a result of Brofman's change in investment tactics and the financial losses borne by the Funds, the management of the Funds came under scrutiny and, in 1995, the Securities and Exchange Commission (SEC) began to investigate Brofman, FPA and FSC.3 Concerned that the Funds' boards of directors could remove FPA as advisor if regulatory problems persisted, Brofman and Malanga began exploring the possibility of transferring the management duties of the Funds to another investment advisory firm. In an attempt to locate a purchaser, in September 1996 Brofman and Malanga met with defendant Robert Kleinschmidt, president of defendant Tocqueville Asset Management, L.P. (Tocqueville), and Christopher Culp, one of its officers and portfolio managers, to discuss the potential acquisition of FPA's investment advisory assets.

Early in the course of their discussions, on September 24, 1996, Kleinschmidt and

Page 656

Culp executed a written nondisclosure and noncompete agreement that provided:

"WHEREAS, [Kleinschmidt and Culp] and Brofman and Malanga intend discussing various business proposals involving the investment advisory and mutual funds business....

"[Kleinschmidt and Culp] agree not [to] solicit or engage in any business activity involving any of the mutual funds which have had, or ever in the future have business relationships with FPA or any company affiliated or associated with FPA, without prior written consent of both Brofman and Malanga."

The agreement further stated that "[n]o delay or omission by FPA, Brofman or Malanga in exercising any right under this Agreement will operate as a waiver of that or any other right" and that a "waver [sic] or consent given by FPA, Brofman and Malanga on any one occasion is effective only in that instance and will not be construed as a bar or waiver of any right on any other occasion."

Several months later, the Funds' boards of directors renewed FPA's contract but removed Brofman as chief portfolio strategist and prohibited him from participating in management of the Funds. FPA and Tocqueville reached a tentative agreement in early 1997 to transfer investment advisory duties from FPA to Tocqueville, allegedly in return for approximately $6 million to be paid by Tocqueville over five years. In pursuit of this plan, Culp began working out of FPA's offices in order to conduct due diligence and learn how the Funds were managed. FPA provided Culp with access to its shareholder information, he was allowed to make presentations to the Funds' boards of directors and he served on a three-person investment committee that managed the Funds' assets after Brofman was removed as chief portfolio strategist.

Culp began advising the Funds and eventually the boards of directors voted to replace FPA as investment adviser once an acceptable alternative was found. Seeking to promote the anticipated $6 million acquisition, Malanga presented Tocqueville's management proposal to the boards. He also wrote to the boards "strongly endors[ing]" the change in adviser as being in the best interest of the Funds' investment performance since Tocqueville, through Culp's efforts, was "intimately acquainted" with the operation of the Funds and the composition of their portfolios.

The boards of directors subsequently solicited formal proposals from four investment advisory firms, including Tocqueville, for the future management of the Funds' assets. Only Tocqueville and another firm submitted proposals. At a July 1997 meeting of the boards, Malanga moved to accept Tocqueville's proposal and the boards unanimously agreed. A plan was thereby adopted to make the Funds part of a new family of mutual funds—the Tocqueville Funds—which would be managed by Tocqueville.

In September 1997, the SEC charged Brofman, Malanga, FPA and FSC with fraud for failing to disclose to investors that the Funds had invested heavily in inverse floaters, which led to the substantial losses in 1994. Three months later, when the Funds' management agreement with FPA was set to expire, the boards of directors approved a 90-day continuance of the contract (rather than the usual one-year extension) in expectation of Tocqueville's pending takeover. Because the transfer was not consummated at the end of that period, the boards gave FPA a further 60-day continuance.

By the beginning of 1998, Brofman apparently came to believe that Tocqueville intended to secure the Funds' business without compensating FPA. Based on this

Page 657

belief, at the end of January 1998 FPA's attorney sent a letter to Tocqueville reminding it of the terms of the noncompete agreement. The correspondence indicated that FPA "fully intend[ed] to enforce this covenant, and to...

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225 practice notes
  • 544 W. 157th St. Hous. Dev. Fund Corp. v. Alliance Prop. Mgmt. & Dev., Inc., Index No. 104203/2012
    • United States
    • United States State Supreme Court (New York)
    • 22 Noviembre 2013
    ...those rights, a defense of waiver may constitute a factual question. Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., Ltd., 7 N.Y.3d 96, 104 (2006); Gilbert Frank Corp. v. Federal Ins. Co., 70 N.Y.2d 966, 968 (1988); Jefpaul Garage Corp. v. Presbyterian Hosp., 61 N.Y.2d 442, ......
  • Seidenfeld v. Zaltz, 2016–01209
    • United States
    • New York Supreme Court Appellate Division
    • 20 Junio 2018
    ...Hosp., 7 N.Y.3d 548, 552–553, 825 N.Y.S.2d 435, 858 N.E.2d 1140 ; Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., L.P., 7 N.Y.3d 96, 106–107, 817 N.Y.S.2d 606, 850 N.E.2d 653 ; Zumpano v. Quinn, 6 N.Y.3d 666, 673, 816 N.Y.S.2d 703, 849 N.E.2d 926 ; Wallace v. BSD–M Realty, L......
  • 159 MP Corp. v. Redbridge Bedford, LLC, 2015–01523
    • United States
    • New York Supreme Court Appellate Division
    • 31 Enero 2018
    ...the freedom and opportunity to abandon rights and privileges (see Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., L.P., 7 N.Y.3d 96, 104, 817 N.Y.S.2d 606, 850 N.E.2d 653 ; Hannigan v. Hannigan, 104 A.D.3d 732, 734, 960 N.Y.S.2d 492 ; Town of Hempstead v. Incorporated Vil. o......
  • Carver Fed. Sav. Bank v. Redeemed Christian Church of God, Int'l Chapel, HHH Parish, Long Island, N.Y., Inc., No. 19753–11.
    • United States
    • United States State Supreme Court (New York)
    • 22 Mayo 2012
    ...and justifiable relied” on the alleged oral assurances ( see Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., L.P., 7 N.Y.3d 96, 106, 817 N.Y.S.2d 606 [2006, 850 N.E.2d 653) ] ). The remaining claims of the defendants rest upon notions of equity which purportedly allow the co......
  • Request a trial to view additional results
225 cases
  • 544 W. 157th St. Hous. Dev. Fund Corp. v. Alliance Prop. Mgmt. & Dev., Inc., Index No. 104203/2012
    • United States
    • United States State Supreme Court (New York)
    • 22 Noviembre 2013
    ...those rights, a defense of waiver may constitute a factual question. Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., Ltd., 7 N.Y.3d 96, 104 (2006); Gilbert Frank Corp. v. Federal Ins. Co., 70 N.Y.2d 966, 968 (1988); Jefpaul Garage Corp. v. Presbyterian Hosp., 61 N.Y.2d 442, ......
  • Seidenfeld v. Zaltz, 2016–01209
    • United States
    • New York Supreme Court Appellate Division
    • 20 Junio 2018
    ...Hosp., 7 N.Y.3d 548, 552–553, 825 N.Y.S.2d 435, 858 N.E.2d 1140 ; Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., L.P., 7 N.Y.3d 96, 106–107, 817 N.Y.S.2d 606, 850 N.E.2d 653 ; Zumpano v. Quinn, 6 N.Y.3d 666, 673, 816 N.Y.S.2d 703, 849 N.E.2d 926 ; Wallace v. BSD–M Realty, L......
  • 159 MP Corp. v. Redbridge Bedford, LLC, 2015–01523
    • United States
    • New York Supreme Court Appellate Division
    • 31 Enero 2018
    ...the freedom and opportunity to abandon rights and privileges (see Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., L.P., 7 N.Y.3d 96, 104, 817 N.Y.S.2d 606, 850 N.E.2d 653 ; Hannigan v. Hannigan, 104 A.D.3d 732, 734, 960 N.Y.S.2d 492 ; Town of Hempstead v. Incorporated Vil. o......
  • Carver Fed. Sav. Bank v. Redeemed Christian Church of God, Int'l Chapel, HHH Parish, Long Island, N.Y., Inc., No. 19753–11.
    • United States
    • United States State Supreme Court (New York)
    • 22 Mayo 2012
    ...and justifiable relied” on the alleged oral assurances ( see Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., L.P., 7 N.Y.3d 96, 106, 817 N.Y.S.2d 606 [2006, 850 N.E.2d 653) ] ). The remaining claims of the defendants rest upon notions of equity which purportedly allow the co......
  • Request a trial to view additional results

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