Hugh F. Culverhouse v. Paulson & Co. Inc.

Case: 14-14526 Date Filed: 02/17/2016 Page: 1 of 5
[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 14-14526
________________________
D.C. Docket No. 1:12-cv-20695-MGC
HUGH F. CULVERHOUSE,
individually and on behalf of all others similarly situated,
Plaintiff-Appellant,
versus
PAULSON & CO. INC.,
PAULSON ADVISERS LLC,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Southern District of Florida
________________________
(February 17, 2016)
Before WILLIAM PRYOR, JULIE CARNES, and SILER, ∗ Circuit Judges.
WILLIAM PRYOR, Circuit Judge:
∗
Honorable Eugene E. Siler, Jr., United States Circuit Judge for the Sixth Circuit, sitting by
designation.
Case: 14-14526 Date Filed: 02/17/2016 Page: 2 of 5
We certified the following question of state law to the Delaware Supreme
Court:
Does the diminution in the value of a limited liability company, which
serves as a feeder fund in a limited partnership, provide the basis for
an investor’s direct suit against the general partners when the
company and the partnership allocate losses to investors’ individual
capital accounts and do not issue transferable shares and losses are
shared by investors in proportion to their investments?
Culverhouse v. Paulson & Co., 791 F.3d 1278, 1281 (11th Cir. 2015). The
Delaware Supreme Court answered our question in the negative. See Culverhouse
v. Paulson & Co., No. 349, 2015, slip op. 1, 2 (Del. Jan. 26, 2016). Based on its
answer, we now affirm the dismissal of the complaint.
I. BACKGROUND
Hugh Culverhouse invested in HedgeForum Paulson Advantage Plus, LLC,
a “feeder” fund that invested in Paulson Advantage Plus, L.P. When the latter lost
$460 million on a bad investment, Culverhouse sued its general partners for breach
of fiduciary duty, gross negligence, and unjust enrichment. Culverhouse alleged
that his claims are “direct” under Delaware law. The district court disagreed and
concluded that his claims are “derivative.” The district court ruled that
Culverhouse lacked “standing” under Article III of the Constitution and dismissed
his complaint for lack of “subject matter jurisdiction.” The district court also
denied Culverhouse’s request for jurisdictional discovery and dismissed his
complaint without leave to amend.
2
Case: 14-14526 Date Filed: 02/17/2016 Page: 3 of 5
On appeal, we concluded that the question whether Culverhouse’s claims are
direct or derivative is “unsettled” in Delaware. Culverhouse, 791 F.3d at 1281. We
certified the question to the Delaware Supreme Court, which held that
Culverhouse’s claims are derivative. Culverhouse, slip op. at 7–8. We must now
resolve Culverhouse’s appeal.
II. STANDARDS OF REVIEW
We review the dismissal of a complaint de novo. See Lord Abbett Mun.
Income Fund, Inc. v. Tyson, 671 F.3d 1203, 1206 (11th Cir. 2012). We review the
denial of jurisdictional discovery and the denial of leave to amend for abuse of
discretion. See Reese v. Herbert, 527 F.3d 1253, 1262 n.13 (11th Cir. 2008).
III. DISCUSSION
The district court correctly dismissed Culverhouse’s complaint. Now that the
Delaware Supreme Court has answered our certified question, we know that
Culverhouse’s claims are derivative, not direct. His derivative claims fail because
Culverhouse was never a partner of Paulson Advantage Plus, L.P. See Del. Code
Ann. tit. 6, § 17-1002.
Although the district court correctly concluded that Culverhouse’s claims are
derivative, it incorrectly described this defect as jurisdictional. In his complaint,
Culverhouse alleged that his claims are direct under Delaware law. Because his
theory was “not ‘immaterial and made solely for the purpose of obtaining
3
Case: 14-14526 Date Filed: 02/17/2016 Page: 4 of 5
jurisdiction’ or ‘wholly insubstantial and frivolous,’” Black v. Wigington, No. 15-
10848, slip op. 1, 20 (11th Cir. Jan. 22, 2016) (quoting Bell v. Hood, 327 U.S. 678,
682–83 (1946)), the district court should have accepted it as correct for purposes of
jurisdiction, see Mr. Furniture Warehouse, Inc. v. Barclays Am./Commercial Inc.,
919 F.2d 1517, 1520 n.2 (11th Cir. 1990). “[I]n reviewing the standing question,
the court must be careful not to decide the questions on the merits for or against the
plaintiff, and must therefore assume that on the merits the plaintiffs would be
successful in their claims.” City of Waukesha v. EPA, 320 F.3d 228, 235 (D.C. Cir.
2003) (citing Warth v. Seldin, 422 U.S. 490, 502 (1975)). When the district court
later concluded that Culverhouse was wrong and that his claims were derivative, its
ruling should have been on the merits. See Lexmark Int’l, Inc. v. Static Control
Components, Inc., 134 S. Ct. 1377, 1387 n.4 (2014); Bond v. United States, 131
S. Ct. 2355, 2362 (2011). That is, the district court should have dismissed
Culverhouse’s complaint for failure to state a claim, Fed. R. Civ. P. 12(b)(6), not
for lack of subject-matter jurisdiction, Fed. R. Civ. P. 12(b)(1). See Williamson v.
Tucker, 645 F.2d 404, 415–16 (5th Cir. 1981).
Nevertheless, this labeling error is harmless because Culverhouse’s
complaint should have been dismissed. See McCallum v. City of Athens, 976 F.2d
649, 650 & n.1 (11th Cir. 1992). Because the complaint fails to state a claim,
Culverhouse was also not entitled to jurisdictional discovery. See Chatham Condo.
4
Case: 14-14526 Date Filed: 02/17/2016 Page: 5 of 5
Ass’ns v. Century Vill., Inc., 597 F.2d 1002, 1011–12 (5th Cir. 1979). And
amending his complaint would have been futile. See Sibley v. Lando, 437 F.3d
1067, 1073 (11th Cir. 2005).
IV. CONCLUSION
We AFFIRM the dismissal of Culverhouse’s complaint.
5