Palm Avocet Holdings LLC v. RT Signal Corporation

Background

The plaintiffs are former investors in Next Alpha, an artificial-intelligence-driven hedge fund managed by the defendants. The plaintiffs alleged that they invested $21 million based on the fund’s purportedly proprietary machine-learning algorithm and later became concerned about the fund’s abilities. They sought to redeem their interests, and the parties signed a settlement agreement in April 2020.

The agreement required the defendants to liquidate the plaintiffs’ capital accounts, return 95% of their investment, hold the remaining 5% in cash in a specific bank account for the plaintiffs’ sole benefit, and pay those amounts to the plaintiffs. The plaintiffs alleged that they had not been paid and sought specific performance, meaning a court order requiring performance of the agreement’s terms.

Defendants’ arguments

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), which concerns subject-matter jurisdiction, and Rule 12(b)(6), which concerns whether a complaint states a legally sufficient claim. They argued that the dispute had to be arbitrated, that the parties were not diverse for purposes of federal jurisdiction, and that specific performance was inappropriate because the plaintiffs had an adequate remedy through money damages. Kanen Flowers and Aryst Willams separately sought dismissal of the claims against them.

Court’s analysis and ruling

The court rejected the jurisdictional argument. It explained that an LLP’s citizenship is determined by the citizenship of all its members, rather than by its place of incorporation. The complaint alleged that the plaintiffs were Florida citizens and that the defendants were citizens of Delaware, New York, and the British Virgin Islands.

The court also rejected the arbitration argument. The settlement agreement stated that a party could seek injunctive relief to require another party to perform actions affirmatively required by the agreement. The court concluded that this language supported court adjudication of the plaintiffs’ enforcement claims rather than requiring arbitration.

The court rejected the argument against specific performance because the parties had contracted for that remedy for issues arising under the settlement agreement, and the plaintiffs argued that their harm could not be quantified. The court noted that the defendants identified no precedent foreclosing the claim at the motion-to-dismiss stage.

As to Flowers and Willams, the court noted that they were listed as parties to the agreement. Whether they could be held liable to the same extent as the corporate defendants was an unresolved factual issue, so the court did not dismiss the claims against them.

The court denied the motion to dismiss. It directed the parties to appear for a remote initial pretrial conference on April 12, 2024, and stated that the entity defendants were to appear through substituted counsel. It further stated that, in the absence of counsel, the individual defendants were to appear without lawyers. The Clerk was directed to terminate the open motions at ECF Nos. 29, 47, and 50.