Silverman v. Weil

• Decision Date: 19 May 1987
• Docket Number: Civ. A. No. 85-2782.
• Parties: Sylvan SILVERMAN, et al., Plaintiffs, v. Donald WEIL, et al., Defendants.
• Court: U.S. District Court — District of Columbia

662 F. Supp. 1195

Sylvan SILVERMAN, et al., Plaintiffs, v. Donald WEIL, et al., Defendants.

Civ. A. No. 85-2782.

United States District Court, District of Columbia.

May 19, 1987.

Steven Kramer, Philadelphia, Pa., for plaintiffs.

Joseph Semo, Seifman, Semo Slevin and Marcus, Terrence O'Donnell, Dianne Smith, Washington, D.C., for defendants.

MEMORANDUM ORDER

BARRINGTON D. PARKER, District Judge.

Defendants Donald Weil, Frank Stefanou and Frank & Company have filed Motions to Dismiss Plaintiffs' Third Amended Complaint. The defendants' motions track the same arguments which formed the basis for this Court's dismissals of the plaintiffs' three earlier complaints.¹ In each of the prior efforts, the Court indulged the plaintiffs and granted leave to correct the defects plaguing the prior attempts and to file a legally sufficient complaint. However, the plaintiffs have failed for the fourth time to remedy their deficient pleading. Their inability to craft an adequate complaint compels this Court to dismiss the Third Amended Complaint this time, with prejudice.

1. BACKGROUND

The genesis of this complaint arises out of the financial collapse of the limited partnership, TMG II and the resulting financial loss to plaintiffs who were investors in that partnership.² TMG II was the victim of a fraudulent tax scheme conceived of and perpetrated by one of its general partners, Edward Markowitz. In 1985, Markowitz pled guilty to defrauding numerous partnerships, including TMG II.³ In his plea, he implicated unnamed accountants and lawyers who allegedly helped in developing his fraudulent schemes. Armed with this "information," plaintiffs sought to recover their losses and sued all parties who were involved in the operation of TMG II and might have been involved in the "plot." Hence they instituted this action against Donald Weil, the only other general partner of TMG II and Frank Stefanou and his firm, Frank & Company, who performed accounting services for TMG II.⁴

This Court shares in the plaintiffs' sense of frustration at their financial loss. But, lawsuits are not instituted and won out of a mere sense of frustration or outrage. Plaintiffs must advance a claim against the party defendants upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). After four attempts, they have failed to do just that.

2. DISMISSAL COUNTS 1-4 AGAINST DONALD WEIL

Plaintiffs allege that Donald Weil exercised his fiduciary duties as general partner of TMG II in a negligent and/or grossly negligent manner. They also allege that Weil is liable for Markowitz's wrongdoings under a theory of agency/respondeat superior. Defendant Weil responds to these charges with a single defense: that his liability is established under the terms of the partnership agreement and that the agreement explicitly precludes any liability "except for fraud or willful misconduct."⁵

Under New York law,⁶ the rights of the limited partnership are governed by the partnership agreement. See Riveria Congress Associates v. Yassky, 25 A.D.2d 291, 268 N.Y.S.2d 854, 855 (1966). In that case, the New York Court of Appeals concluded that the limited partners waived their rights to proceed against the general partners for self dealing when they agreed to a provision in the partnership agreement permitting the partners to engage in self dealing. Here, the plaintiffs willingly signed the TMG II agreement which explicitly releases the partners from any liability "except for fraud and willful misconduct," thus barring any actions based upon negligence or vicarious liability theories.

Plaintiffs have not attempted to distinguish Riveria nor have they advanced any reasons to convince this Court to take the extraordinary step, in light of Riveria, to dissolve the contract. As the Court in Riveria noted, limited partnerships, such as TMG II, are created to offer investment possibilities and tax shelters to individuals possessing substantial capital. Individuals who invest in these limited partnerships are sophisticated investors capable of safe-guarding their own interests. Since plaintiffs have failed to offer any compelling reasons for this Court to protect their interests, it refuses to intervene and strike down the contract. Accordingly, all four counts against Weil are dismissed as barred by the Partnership Agreement.

In a final effort to avoid dismissal, plaintiffs attempt to fit their complaint within the four corners of the partnership contract by alleging that Weil's gross negligence was so egregious as to constitute willful misconduct. However, for gross negligence to rise to the level of willful misconduct plaintiffs must show that Weil consciously intended to ignore his fiduciary duties with the knowledge that his breach would result in damage to the partners. See Walker v. Security Trust Co., 85 Misc.2d 614, 379 N.Y.S.2d 308, 316 (N.Y. 1976); Cohen v. Varig Airlines, 62 A.D.2d 324, 405 N.Y.S.2d 44, 47 (N.Y.Ct.Ap.1978). Plaintiffs have not alleged that Weil had knowledge of Markowitz's fraudulent schemes.⁷ If he were not aware of Markowitz's illegal activities, he could not have foreseen that his failure to monitor closely the partnership business would have resulted in the collapse of the partnership. His failure to keep a keen eye on the partnership was nothing more than a textbook case of negligence and as such is not grounds for suit.⁸

3. DISMISSAL OF THE THIRD AMENDED COMPLAINT AGAINST FRANK STEFANOU AND FRANK & COMPANY

Defendants contend that as limited partners in TMG II, plaintiffs have no standing to commence legal proceedings on behalf of the partnership. Plaintiffs agree that the rights of limited partners are circumscribed, but urge this Court to recognize that limited partners may sue in a derivative action on behalf of the general partnership for malfeasance of the general partners.

The capacity of individuals acting in a representative capacity to sue and be sued is determined by state law. See Fed.R. Civ.P. 17(b). Plaintiffs have conceded that the law of the forum governs. However, the rights of limited partners to institute suits on behalf of general partnerships have not been clearly established in the District of Columbia. The only authority on point is a recent D.C. Superior Court decision where the court adopted the model of the shareholder derivative action and permitted limited partners to proceed with an action after they made a showing that the general partnership was disabled from instituting the action itself. TMG II v. Reese, Broome & Diaz, (C.A. 4570-86, Feb. 23, 1987). But there, the only general partner had been dismissed for defrauding the partnership and no one other than the limited partners could proceed with the action.

Even if the limited partnership were permitted to institute a derivative action on behalf of the general partnership, before they could proceed they must set forth their efforts to secure relief by the general partner or demonstrate that those partners are disabled from bringing the action themselves. See Revised Uniform Limited Partnership Act § 1003; Klebanow v. New York Produce Exchange, 344 F.2d 294 (2d Cir.1965). This threshold showing requires "strong allegations and proof of disqualification or wrongful refusal by the general partners ... a mere difference of opinion would be nowhere near enough." Id. at 299. Plaintiffs have failed to make this threshold showing. They never contacted Weil and asked him to proceed against the accountants, nor have they demonstrated that such efforts would have been futile. They merely rely on conclusory statements that Weil is disabled from instituting an action against the accountants because of unspecified conflict of interest.⁹ However the "conflicts of interests" did not deter Weil from proceeding against Markowitz himself or the lawyers who provided services for TMG II. Plaintiffs have not advanced any reasons why Weil would be uniquely disqualified from proceeding against the accountants.¹⁰ Without demonstrating that Weil is disabled from instituting an action, plaintiffs have no standing to proceed on behalf of TMG II. Their entire complaint against Frank Stefanou and Frank & Company must be and is dismissed.

4. DISMISSAL COUNTS 5 & 7

Counts 5 and 7 of Plaintiffs' Third Amended Complaint, charge defendants Stefanou and Frank & Company with malpractice for the allegedly negligent accounting services they rendered to TMG II and its general partners. Defendants raise the same defense to this count as that asserted by Weil. They argue that any such claims of negligence are barred by the provisions of the Partnership Agreement between TMG II and Lehigh Associates. For the same reasons that the negligence counts against Weil were dismissed, the Court dismisses counts 5 and 7 against the accountants.

Section 11.02(c) of the TMG II Partnership Agreement clearly states that the general partners of TMG II, and their agents, are not liable for mere negligence: "no General Partner nor any affiliate or employee or agent of such General Partner shall have any liability for negligence." Paragraph 28 of plaintiffs' Amended Complaint states that Stefanou and Frank & Company "provided accounting services for TMG II, Markowitz and Weil." Thus, these two defendants were agents of TMG II and its general partners. See Johnson v. Bechtel Associates Professional Corp., 717 F.2d 574, 579 (D.C.Cir.1983), rev'd on other grounds, 467 U.S. 925, 104 S.Ct. 2827, 81 L.Ed.2d 768 (1984) (an "agent is one who is authorized by another (principal) to act on his behalf"); Restatement (Second) of Agency § 1 (1958). Since defendants were agents of TMG II and its general partners, plaintiffs are barred from suing Stefanou and Frank & Company for negligence under the terms of the Partnership Agreement they entered into when Lehigh Associates became a limited partner in the TMG II partnership.

Plaintiffs argue that if the Court holds that the Partnership Agreement bars defendants' liability for...