Paige Capital Mgmt. Llc v. Lerner Master Fund Llc

• Decision Date: 05 May 2011
• Docket Number: Civil Action No. 5502–VCS.
• Citation: 22 A.3d 710
• Parties: PAIGE CAPITAL MANAGEMENT, LLC, Paige Opportunity Partners, L.P., Paige Opportunity Master Fund, LTD, Paige GP, LLC, Michele Paige and Christopher Paige, Plaintiffs,v.LERNER MASTER FUND, LLC, and Brooklyn N.Y. Holdings LLC, Defendants.Lerner Master Fund, LLC, Counterclaim/Third–Party Plaintiff,v.Paige Capital Management, LLC, Paige Opportunity Partners, L.P., Paige Opportunity Master Fund, LTD, Paige GP, LLC, Michele Paige and Christopher Paige, Counterclaim/Third–Party Defendants.
• Court: Court of Chancery of Delaware

22 A.3d 710

PAIGE CAPITAL MANAGEMENT, LLC, Paige Opportunity Partners, L.P., Paige Opportunity Master Fund, LTD, Paige GP, LLC, Michele Paige and Christopher Paige, Plaintiffs,

v.LERNER MASTER FUND, LLC, and Brooklyn N.Y. Holdings LLC, Defendants.Lerner Master Fund, LLC, Counterclaim/Third–Party Plaintiff,

v.Paige Capital Management, LLC, Paige Opportunity Partners, L.P., Paige Opportunity Master Fund, LTD, Paige GP, LLC, Michele Paige and Christopher Paige, Counterclaim/Third–Party Defendants.

Civil Action No. 5502–VCS.

Court of Chancery of Delaware.

Submitted: March 11, 2011.Decided: May 5, 2011.

Steven K. Kortanek, Esquire, Michael G. Busenkell, Esquire, Womble Carlyle Sandridge & Rice, PLLC, Wilmington, Delaware; William M. Dolan III, Esquire, Katherine S. Bromberg, Esquire, Jessica Calagione, Esquire, Brown Rudnick LLP, New York, New York, Attorneys for Plaintiffs, Counterclaim Defendants and Third Party Defendants.Joel Friedlander, Esquire, Jeffrey M. Gorris, Esquire, Bouchard Margules & Friedlander, P.A., Wilmington, Delaware; David Boies, Esquire, Boies, Schiller & Flexner LLP, Armonk, New York; Steven I. Froot, Esquire, Christopher E. Duffy, Esquire, Boies, Schiller & Flexner LLP, New York, New York, Attorneys for Defendant, Counterclaim/Third–Party Plaintiff.STRINE, Vice Chancellor.

I. Introduction

A traditional privilege has attached to testimony in judicial proceedings that immunizes a lawyer or witness from a collateral claim alleging that the testimony amounted to defamation or a related tort based on the alleged reputational harm suffered by a third party because of what the lawyer or witness said. That privilege has been deemed absolute and is thought to serve several important purposes, including encouraging the peaceable resolution of disputes in the courts, fostering the willingness of witnesses to testify freely and counsel to argue zealously, and limiting the proliferation of follow-on lawsuits.¹ The presence of safeguards and sanctions against offering knowingly false testimony in the litigation setting has also been thought to diminish the costs of this privilege.²

Here, in the months that preceded the filing of this lawsuit, a manager of a hedge fund sent a heated letter to its sole outside investor in which the manager made statements about what the manager would do if the investor did not surrender to the manager's settlement demands. Those statements can fairly be read as threats by the manager to breach its fiduciary duties owed to the investor. The hedge fund manager now seeks to bar the letter's admission into evidence on the grounds that the letter is subject to an absolute privilege and otherwise barred from admission by Delaware Rule of Evidence 408.

I reject that argument and admit the letter into evidence. The public interest served by shielding participants in judicial proceedings from being collaterally sued for defamation or related torts based on the adverse reputational or emotional effect of their testimony on others does not extend to allowing a party to use the privilege to block the introduction of a litigation-related communication in which that party threatens to engage in potentially tortious behavior if the recipient does not surrender to its demands. Facing responsibility for wrongful threats they make in settlement letters does not chill the ability of participants in the litigation process to tell their full story in support of their claims. Instead, another venerable testimonial rule applies to address situations like this. Delaware Rule of Evidence 408, which has a similar counterpart in the Federal Rules of Evidence, addresses the extent to which settlement communications are admissible into evidence. When, as is the case here, evidence that a party made a settlement offer is not being used to prove liability, or the amount of that liability, for a pre-existing claim of wrongdoing, that evidence may be admitted if it is otherwise relevant.

Here, the investor seeks to introduce the threats made in the settlement letter not to prove claims pre-existing the letter, but as evidence of new wrongdoing and of a wrongful state of mind. The evidence may or may not turn out to be useful for that purpose, but that is a proper purpose for its use, and I therefore admit it.

II. Factual Background

The hedge fund manager is an entity, Paige Capital Management, LLC, that is in turn managed by Michele and Christopher Paige, who are husband and wife. Paige Capital Management was founded by Michele Paige along with three other entities that would serve as vehicles for her hedge fund, Paige Opportunity Partners, L.P., Paige Opportunity Master Fund, LTD, and Paige GP, LLC. Together, those four entities, all controlled by the Paiges, operated as a hedge fund (the “Hedge Fund”) managed by Michele Paige with the help of her husband, Christopher. Although Michele Paige has experience making investments working for other hedge fund managers, Paige Capital Management was her first endeavor in running her own fund, and her husband Christopher Paige has been deeply involved in its operation from nearly its inception. The Paiges thought themselves fortunate to land as a seed investor, Lerner Master Fund (the “Lerner Fund”), a fund controlled by Randy Lerner and the Lerner family. As a seed investor, the Lerner Fund sought to make money not simply from its own invested capital, but also to share in some of the management fees as the Hedge Fund found other investors.

The Lerner Fund's investment in the Hedge Fund is subject to written agreements, the meaning of which is at issue in this litigation. It suffices to say for present purposes that the Paiges envisioned that the Lerner Fund would be a very long-term investor in their Hedge Fund and that they could depend on the Lerner Fund being stuck in. By contrast, the Lerner Fund viewed itself as being required to remain in the Hedge Fund without paying a high exit cost for only a three year period.

In January 2009, a little over one year after the Lerner Fund first invested, it informed the Paiges that it wished to withdraw its investment from the Hedge Fund at the end of its third year as an investor, or even earlier if mutually acceptable terms could be agreed upon. As of then and to the present, the Paiges have never been able to procure other investors in the Hedge Fund and thus the Lerner Fund's money still constitutes over 99% of the Hedge Fund's invested capital, with Michele Paige having the only other investment of around $40,000, a sum that is in stark contrast to the Lerner Fund's $40 million.

After a long period of haggling, Christopher Paige, who during the events giving rise to this dispute was an attorney ³ serving as the Paiges' counsel, wrote an emotional letter to the Lerner Fund in March 2010 (the “March 2010 Letter”). In that letter, he indicated that the Paiges believed that even if the Lerner Fund could withdraw after three years, the Paiges could impose the so-called “gates” referenced in the limited partnership agreement of Paige Opportunity Partners, L.P.⁴ Those gates, if applicable to the Lerner Fund, allow the Paiges to limit total withdrawals from the Hedge Fund to 20% of the total value of the Hedge Fund's net assets in any six month period. ⁵ Because the Paiges had raised no outside capital other than that from the Lerner Fund, the Lerner Fund's capital constituted essentially all of the Hedge Fund's assets. This meant that it would take many years before the Lerner Fund could get all its capital out.

In the March 2010 Letter, Christopher Paige made vivid his view of how things would go if the Lerner Fund did not settle and instead attempted to get relief in the courts against the Paiges to leave earlier. For instance, in the March 2010 Letter, Christopher Paige stated:

“[The Lerner Fund] should remember that our right to raise the gates ensures that we will continue to manage your money throughout the litigation. Similarly, you should remember that you will be responsible for your pro rata share of the [Hedge Fund's] legal expenses, so—in a very real sense—you will be paying our attorneys' fees as well as your own.

....

... [W]e are fully prepared to litigate this matter to the bitter end because we will continue to manage your money, and collect management and incentive fees, until this matter is resolved many years hence. The economic reality, therefore, is that you cannot win because you will spend more litigating than we're fighting over.

If this matter is not resolved quickly, we will mitigate our damages by investing the portfolio in the high risk, long-term, illiquid, activist securities in which we specialize, and we will turn the matter over to the [Hedge Fund's] attorneys with instructions to spend whatever it takes to defend the [Hedge Fund]. ( Please remember that you are responsible for your pro rata share of the [Hedge Fund's] expenses.).” ⁶

One colorable reading of the March 2010 Letter is that the Paiges would engage in improper litigation tactics designed not to litigate any case in an aggressive but fair way, but would instead purposely engage in improper, frivolous and delaying litigation tactics effectively using the Lerner Fund's own money, thus thwarting the ability of the Lerner Fund to get justice. Another plausible reading of the March 2010 Letter is that the Paiges were set upon investing the Lerner Fund's money, not to advance the best interests of the Hedge Fund or its investors, but solely to aid the self-interest of the Paiges in tying up the Lerner Fund's investment and ensuring that the Paiges could draw their management fees for the longest time possible, regardless of whether that was best for the Hedge Fund's investors, especially the Lerner Fund, whose investment comprised over 99% of the capital in the Hedge Fund. Put simply, it is plausible to read the March 2010 Letter as one in which the Paiges threatened to breach their fiduciary duties owed...