YS GM Marfin II LLC v. Four Wood Capital Advisors, LLC

Background

YS GM Marfin II LLC, YS GM MF VI LLC, YS GM MF VII LLC, YS GM MF VIII LLC, YS GM MF IX LLC, YS GM MF X LLC, YieldStreet Marine Finance, LLC, and YieldStreet Management, LLC sued Four Wood Capital Advisors, LLC, Four Wood Capital Partners, LLC, Steven Baffico, and Andrew Simmons. The amended complaint asserted fraud, aiding and abetting fraud, breach of fiduciary duty, negligent misrepresentation, negligence, conversion, and breach of contract.

The dispute arose from an April 2018 Investment Management Agreement between YieldStreet Marine Finance and Four Wood Capital Advisors. The agreement provided for investment-management services involving ship-finance transactions, including sourcing prospective transactions, performing due diligence, negotiating with borrowers, monitoring loan repayments and collateral, reporting on portfolio performance, and taking authorized action after borrower defaults. The special-purpose entities later joined the agreement.

Between June 2018 and September 2019, the plaintiff lenders made six loans totaling approximately $89.2 million to companies associated with the North Star Borrowers. The loans were intended to finance purchases of vessels for later sale to third parties for recycling. The plaintiffs alleged that the North Star Borrowers and related individuals engaged in fraud involving the vessels and loan proceeds, and that the defendants failed to monitor the loans and collateral, provided or forwarded fraudulent sales documents and inaccurate information, failed to disclose relevant problems, and charged fees that were not authorized by contract. The plaintiffs sought, among other relief, approximately $87 million in damages.

Jurisdictional Issue

The amended complaint alleged federal subject-matter jurisdiction under the maritime-jurisdiction statute, 28 U.S.C. § 1333(1), based on the Investment Management Agreement. It also alleged supplemental jurisdiction over related state-law claims. It did not assert diversity-of-citizenship jurisdiction.

The defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(1), 12(b)(2), 12(b)(6), and 9(b), and under the doctrine allowing dismissal when another forum is more appropriate. The court addressed the Rule 12(b)(1) challenge first. A Rule 12(b)(1) motion tests whether the court has legal authority to hear the case, and the plaintiffs had the burden of showing that subject-matter jurisdiction existed.

Analysis

The court explained that maritime-contract jurisdiction depends on the nature and character of the agreement and whether its principal objective is maritime commerce. The court rejected the plaintiffs’ position that references to ships, maritime lending, vessel monitoring, and marine-related entities made the Investment Management Agreement maritime.

The court relied on the agreement’s title, its parties, and its provisions. Four Wood Capital Advisors was a registered investment adviser, and the agreement required it to source and manage loans, conduct due diligence, negotiate with borrowers, monitor loan repayments and collateral, calculate portfolio performance, and provide reports. In the court’s view, these duties were investment-management services. The agreement did not involve operating vessels or providing maritime services, and the fact that the loans would help third parties purchase vessels for recycling did not change the agreement’s principal objective.

The court also concluded that the agreement was not merely a preliminary contract leading to a maritime contract because it included ongoing services after the loans were made. But that conclusion did not establish maritime jurisdiction. The court distinguished cases involving ship operations, maritime ventures, marine insurance, or other transactions directly connected to maritime commerce. It determined that the Investment Management Agreement was even more remote from maritime commerce than a contract for the sale of a vessel.

Ruling and Disposition

Judge Paul G. Gardephe held that the Investment Management Agreement was not a maritime contract and that the plaintiffs had not established subject-matter jurisdiction. The court therefore granted the defendants’ motion to dismiss for lack of subject-matter jurisdiction under Rule 12(b)(1). The court did not reach the defendants’ other dismissal grounds or the forum-related argument. It denied the request for oral argument as moot, directed the Clerk of Court to terminate the motion, and ordered the case closed.