Claridge Associates, LLC v. Schepis

Background

Plaintiffs invested approximately $7 million in the Pursuit Capital Management Fund I, L.P. The fund’s general partner was Pursuit Capital Management, LLC (PCM), which the opinion states was owned, managed, and controlled by Anthony Schepis and Frank Canelas. Plaintiffs later sued Schepis, Canelas, and Northeast Capital Management, LLC, alleging breach of fiduciary duty arising from excessive markups charged to the fund and the handling of money that was supposed to be returned to the Schneiders.

Plaintiffs previously arbitrated claims against PCM in two phases. In the first phase, Arbitrator Charles J. Moxley found that the Schneiders were not on inquiry notice of the markup claims until late 2012 and that PCM was maintaining an unreasonable holdback reserve, requiring the return of $1,186,346.38. In the second phase, the arbitrator found that PCM breached fiduciary duties by allowing Pursuit Partners to charge improper markups and described them as grossly excessive and beyond industry norms. Plaintiffs received $2.2 million in compensatory damages related to the markups. A New York State court later adopted both arbitration awards and entered judgments against PCM.

In this case, plaintiffs sought partial summary judgment based on collateral estoppel, also called issue preclusion. That doctrine can prevent a party from relitigating a factual or legal issue that was actually and necessarily decided in an earlier proceeding, when the party had a full and fair opportunity to litigate it. The court had denied plaintiffs’ earlier request for summary judgment on their entire breach-of-fiduciary-duty claims because a factual dispute remained about whether Schepis and Canelas personally benefited from the alleged misconduct.

Issues Presented

Plaintiffs’ second motion addressed four subsidiary issues:

The court first determined that Schepis and Canelas were in privity with PCM. Although they were not named parties in the 2012 arbitration, they had previously admitted that they were in privity with PCM, including in a later arbitration. The court therefore considered whether the remaining requirements for issue preclusion were satisfied.

Court’s Analysis

Issue I: Excessive markups. The court held that collateral estoppel applied. The arbitrator had considered expert testimony and found that the markups were “grossly excessive and far beyond industry norms, rising to the level of deliberate looting.” The court rejected defendants’ argument that the finding was not actually litigated because PCM did not participate in the second phase. The court found that PCM had chosen not to participate despite having an opportunity to do so and had later pursued a counseled effort to attack the arbitration award. The court also refused to reconsider the merits of the arbitrator’s finding based on the Securities and Exchange Commission’s decision not to bring an enforcement action.

Issue II: Personal benefits. The court held that collateral estoppel did not apply. Plaintiffs argued that the arbitrator necessarily found that Schepis and Canelas personally benefited because the arbitrator found a self-interested relationship involving PCM and Pursuit Partners. The court had considered and rejected substantially the same argument in its earlier ruling. It concluded that the arbitration decision did not actually and necessarily decide whether Schepis and Canelas personally received benefits from the markups. The motion was therefore denied as to this issue.

Issue IV: Excessive holdback reserve. The court held that collateral estoppel applied to the finding that PCM was required to return money held as an excessive holdback reserve. The court stated that the arbitration had actually and necessarily decided this issue and that PCM had actively participated in the first phase. The court rejected defendants’ argument that plaintiffs also had to establish that Schepis and Canelas personally benefited from the failure to return the money. Plaintiffs were seeking preclusion only on whether PCM had been required to return the money, not a finding about defendants’ personal benefit. The court also distinguished contempt from liability, explaining that a decision not to hold someone in contempt did not resolve whether that person was liable for the transfer.

Disposition

Judge Katherine Polk Failla concluded that the equities favored applying collateral estoppel to Issues I, III, and IV, given the time and expense already devoted to resolving those issues in arbitration. The court granted in part and denied in part plaintiffs’ motion for partial summary judgment. Specifically, defendants were precluded from relitigating the excessive-markup finding, the September 2012 inquiry-notice finding, and the excessive-holdback-reserve finding. The court denied preclusion on whether Schepis and Canelas personally benefited from the markups. The clerk was directed to terminate the motion, and the parties were directed to submit a joint status letter about next steps.