Albert Goodman v. Bert Dohmen

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ALBERT GOODMAN, No. 17-56330
Plaintiff-Appellee,
D.C. No.
v. 2:15-cv-00020-FFM
BERT DOHMEN, ORDER CERTIFYING A
Defendant-Appellant. QUESTION OF LAW
PURSUANT TO
DELAWARE SUPREME
COURT RULE 41
Filed September 20, 2019
Before: Johnnie B. Rawlinson and Mary H. Murguia,
Circuit Judges, and James Rodney Gilstrap, * District Judge.
Order
*
The Honorable James Rodney Gilstrap, United States District
Judge for the Eastern District of Texas, sitting by designation.
2 GOODMAN V. DOHMEN
SUMMARY **
Certified Question to the Delaware Supreme Court
The panel certified the following question of state law to
the Supreme Court of the State of Delaware:
In a Delaware limited partnership, does a
general partner’s request to a limited partner
for a one-time capital contribution constitute
a request for “limited-partner action” such
that the general partner has a duty of
disclosure, and, if the general partner fails to
disclose material information in connection
with the request, may the limited partner
prevail on a breach-of-fiduciary-duty claim
without proving reliance and causation?
COUNSEL
Andrew B. Holmes and Matthew D. Taylor, Holmes Taylor
Scott & Jones LLP, Los Angeles, California, for Defendant-
Appellant.
Jeffrey Engerman, Law Offices of Jeffrey C. Engerman PC,
Los Alamitos, California, for Plaintiff-Appellee.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
GOODMAN V. DOHMEN 3
ORDER
For the reasons explained in the certificate below, we
find that this case involves an important issue of Delaware
law, which Delaware courts have yet to resolve. Therefore,
we respectfully certify a question of law to the Supreme
Court of the State of Delaware. See Del. Sup. Ct. R. 41.
The Clerk of this Court is directed to file in the Supreme
Court of Delaware six certified copies of this certificate and
provide copies of the record if requested. This case is
withdrawn from submission and stayed pending final action
by the Supreme Court of Delaware. The Clerk is directed to
administratively close this docket pending further order. The
parties shall notify this Court within 14 days of the Supreme
Court of Delaware’s acceptance or rejection of certification,
and, if certification is accepted, within 14 days of the
issuance of a decision. 1
CERTIFICATE OF QUESTION OF LAW
(1) The nature and stage of the proceedings are:
This is a Delaware limited partnership breach-of-
fiduciary-duty case. Albert Goodman, plaintiff-appellee,
sued Bert Dohmen, defendant-appellant, alleging a breach of
the duty of disclosure in connection with a request for
limited-partner action. The district court held a bench trial,
found Dohmen liable, and awarded Goodman monetary
damages. Dohmen appealed, arguing, inter alia, that his duty
of disclosure was not triggered because there was no request
1
In a memorandum disposition filed concurrently herewith, we
reject each of Dohmen’s arguments that are not related to the certified
issue.
4 GOODMAN V. DOHMEN
for limited-partner action within the meaning of Delaware
law. The appeal was argued and submitted on April 11,
2019, in Pasadena, California.
(2) The following facts are undisputed: 2
Bert Dohmen is well known in the financial-services
industry for his newsletters, which analyze financial markets
and world economies. Dohmen had never created or
managed a hedge fund until the events that gave rise to this
case. Albert Goodman is a wealthy investor who knew of
Dohmen because of his newsletters. The two met and
became friends in 1999. Goodman had never invested in a
hedge fund until the events that gave rise to this case.
In 2010, Dohmen decided to start a hedge fund. He
formed the Croesus Fund, L.P. (the “Fund”) as a Delaware
limited partnership. Dohmen also formed Macro Wave
Management, LLC to serve as the Fund’s general partner.
Macro Wave had exclusive control and management of the
Fund, and Dohmen, in turn, was the sole member and
manager of Macro Wave. Under the Fund’s limited
partnership agreement, investors in the Fund became limited
partners.
In September 2011, Dohmen emailed Goodman, asking
Goodman to invest in the Fund. Goodman agreed and signed
a Fund subscription agreement shortly thereafter. On
November 14, 2011, Goodman made his first $500,000
investment in the Fund (the “First Investment”). By the date
of the First Investment, Dohmen had not made any concrete
2
We accept the district court’s factual findings following a bench
trial absent clear error. See United States v. Temkin, 797 F.3d 682, 688
(9th Cir. 2015). The district court made these relevant factual findings,
which we accept and treat as undisputed.
GOODMAN V. DOHMEN 5
representations regarding whether other investors had joined
the Fund. In fact, Dohmen had disclosed that he had only
spoken with two people about the Fund at that point. In
November 2011, Dohmen invested $200,000 of his own
money in the Fund.
After Goodman made the First Investment, Goodman
specifically inquired about other investors. On November
20, 2011, Dohmen made the following statements in an
email: “We have not yet officially announced the start of the
fund. You are one of the few who knows it exists. There are
several other close friends I told about the fund that are now
liquidating some assets in order to participate.” Goodman
understood the italicized statement to mean that more
investors were coming in, which was important to Goodman.
But, in fact, no friends of Dohmen’s were liquidating assets
to invest in the Fund, and Dohmen was well aware of this.
On November 26, 2011, Goodman again inquired as to
“how big [the Fund] will be.” Dohmen replied:
Re the question of ‘how big it will be,’ I can
only say that it will probably not be very big,
depending on how it is defined. . . . Until we
get a good track record, I only want investors
I know, or who have been referred by friends,
and that I have spoken to. They will all be
‘accredited investors.’ My first goal is to get
to 20–30 million. If the fund does well,
perhaps we can get to 100 mio by end of
2012. Those are my parameters right now,
which of course can always change
depending on conditions. We haven’t even
announced the fund yet, officially. Only a
few of my good friends know about it.
6 GOODMAN V. DOHMEN
Goodman wired another $500,000 on December 9, 2011
(the “Second Investment”), but Goodman continued to ask
about other investors. On December 13, Dohmen stated that
“[p]ersonal friends that have expressed interest are now
reviewing the documents.” This was knowingly false. The
Second Investment was invested in the Fund on December
14, 2011. Dohmen contacted five people other than
Goodman regarding the Fund, but none committed to
investing.
On May 14, 2012, Dohmen informed Goodman for the
first time that there were only two investors in the Fund.
Goodman was shocked, and Dohmen offered to allow
Goodman to withdraw his investments. Goodman did not
withdraw.
As of June 30, 2012—when Goodman could have
withdrawn—the net asset value (“NAV”) of the Fund was
$804,021.26. By November 5, 2012, the NAV was down to
about $500,000, and at the end of December 2012, the NAV
was about $357,000. In July 2014, the NAV was down to
$100,000. Any remaining NAV has been used by Dohmen
to pay for this litigation. Goodman has not received any
portion of his investment back. 3
In January 2015, Goodman brought suit alleging, inter
alia, that Dohmen breached his fiduciary duty of disclosure
by failing to disclose that there were only two investors in
the Fund and affirmatively misleading Goodman on this
point. The district court held a bench trial and found for
Goodman on the fiduciary-duty claim, reasoning that
Dohmen’s November 20, 2011, email contained a material
3
Goodman also paid about $30,000 in Fund administrative fees and
costs, startup costs, and various other expenses.
GOODMAN V. DOHMEN 7
misrepresentation made in connection with Dohmen’s
request for Goodman to take discretionary limited-partner
action. Because the misrepresentation related to a request for
limited-partner action, the district court found that the
relaxed standard from Malone v. Brincat, 722 A.2d 5, 12
(Del. 1998), applied, and Goodman did not have to prove
reliance or causation.
In calculating Goodman’s damages, the district court
awarded the lost value of the Second Investment only—
because Goodman made the First Investment before
Dohmen’s misrepresentation. The damages award did not
include losses incurred after June 30, 2012, the date on
which Goodman could have mitigated his damages by
withdrawing his investments. Dohmen appealed, arguing
that his duty of disclosure was not triggered, and Goodman
was required to prove causation, because there was no
request for limited-partner action.
(3) The question of law set forth below should be
certified to the Supreme Court of the State of Delaware
for the following reasons:
“A claim for breach of fiduciary duty requires proof of
two elements: (1) that a fiduciary duty existed and (2) that
the defendant breached that duty.” Beard Research, Inc. v.
Kates, 8 A.3d 573, 601 (Del. Ch.), aff’d sub nom. ASDI, Inc.
v. Beard Research, Inc., 11 A.3d 749 (Del. 2010). The
district court found that Dohmen, as the sole member of
Macro Wave and the exclusive controller of the Fund, owed
fiduciary duties to Goodman, as the Fund’s limited partner.
Dohmen does not challenge this finding on appeal.
A general partner’s duty of loyalty generally “parallels
that of a corporation’s director.” Davenport Grp. MG, L.P.
v. Strategic Inv. Partners, Inc., 685 A.2d 715, 722 (Del. Ch.
8 GOODMAN V. DOHMEN
1996). In the corporate context, a director has a “duty of
disclosure,” which arises from the duties of care and loyalty.
Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (“The
duty of disclosure is not an independent duty, but derives
from the duties of care and loyalty.”); see also Lonergan v.
EPE Holdings, LLC, 5 A.3d 1008, 1023 (Del. Ch. 2010)
(finding that general partners owe the same “duty of full
disclosure” in the limited-partnership context). The duty of
disclosure requires a general partner to “disclose fully and
fairly all material information within the [general partner’s]
control when [he] seeks [limited-partner] action.” Arnold v.
Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1277 (Del.
1994) (citation omitted). General partners breach their duty
of disclosure by making materially false statements,
omitting material facts, or making partial disclosures that are
materially misleading. Pfeffer, 965 A.2d at 684. 4
Delaware law distinguishes between disclosures made
“in connection with a request for [limited-partner] action”
and disclosures made outside of this context. Malone,
722 A.2d at 12. When a general partner makes a misleading
statement or omission in connection with a request for
limited-partner action, the plaintiff need not prove reliance,
causation, or actual damages. Id. Instead, the plaintiff simply
must prove that the alleged omission or misrepresentation
was “material” to the action being sought. Id.Here, the district court found that Dohmen’s misleading
November 20, 2011, statement was made in connection with
a request for limited-partner action. Specifically, Dohmen
4
Although many of the cases cited herein reference “shareholder
action” or “stockholder action,” we use those terms interchangeably with
“limited-partner action” because corporate directors and general partners
owe the same duty of disclosure.
GOODMAN V. DOHMEN 9
was requesting that Goodman invest additional capital.
Therefore, the district court found that Malone’s relaxed
“materiality” standard applied, and Goodman did not have
to prove causation. This conclusion was essential to
Goodman’s success. The district court found that Goodman
could not prove causation, if required, because Goodman
could not show “that the lost investment value was
proximately caused by there being only two investors in the
Fund”—i.e., loss causation. See Vichi v. Koninklijke Philips
Elecs., N.V., 85 A.3d 725, 816 (Del. Ch. 2014). Rather,
Goodman lost his investment because of market forces and
Dohmen’s trading decisions. Therefore, the dispositive issue
in this appeal is whether the district court correctly held that
Dohmen’s misrepresentation was made in connection with a
request for limited-partner action such that Malone applies.
We review the district court’s legal conclusions de novo.
Temkin, 797 F.3d at 688. Looking to Delaware law, as we
must, there is no clear indication as to whether the request in
this case—a general partner’s request to a limited partner for
additional capital—constitutes a request for limited-partner
action that triggers the duty of disclosure. Most cases suggest
that limited-partner action is narrowly defined as actions that
Delaware law or the partnership organizational documents
identify as requiring a discretionary limited-partner vote. See
Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs.
Inc., 854 A.2d 121, 156 (Del. Ch. 2004) (defining requests
for shareholder action narrowly as communications asking
shareholders “to make a discretionary decision—such as
whether to grant a proxy, to vote yes or no on a particular
matter, or to seek appraisal or accept merger consideration”);
Jackson Nat. Life Ins. Co. v. Kennedy, 741 A.2d 377, 388
(Del. Ch. 1999) (“Since neither the Delaware General
Corporation Law nor Section II.B of the Certificate
expressly provided [the stockholder] with the right to vote
10 GOODMAN V. DOHMEN
on [the corporation’s] sale of assets to Fort James, [the
director of the corporation] had no fiduciary obligation to
disclose that transaction to [the stockholder].”). However, at
least one case has interpreted limited-partner action more
broadly. See Alessi v. Beracha, 849 A.2d 939, 944 (Del. Ch.
2004) (holding that there was a request for shareholder
action where the corporation announced a program allowing
minority shareholders to buy or sell shares for a reduced
processing fee).
Moreover, we note that none of the above-cited cases
actually addresses the partnership context. And while
corporate directors and general partners have parallel duties
of disclosure, they are not perfectly analogous. The types of
discretionary actions regularly taken by shareholders may be
distinct from those taken by limited partners. And there may
be policy reasons for interpreting limited-partner action
more broadly or narrowly than shareholder action.
These are purely state-law issues, which have not been
addressed by Delaware courts. The issues are of statewide
importance because allowing Goodman’s claim to prevail
under Malone’s relaxed “materiality” standard might
“threaten to convert the duty to disclose all material facts in
connection with a discretionary vote or tender into a
pervasive, across-the-board rule governing all entity
disclosures, because entity owners can usually connect any
disclosure to a decision they might make[.]” Metro
Commc’n Corp., 854 A.2d at 158; see also In re Wayport,
Inc. Litig., 76 A.3d 296, 314–15 (Del. Ch. 2013) (suggesting
that plaintiffs may be required to prove proximate causation
even when there is a request for shareholder action); In re
Orchard Enterprises, Inc. Stockholder Litig., 88 A.3d 1, 53
(Del. Ch. 2014) (same).
GOODMAN V. DOHMEN 11
(4) The important and urgent reasons for an immediate
determination by the Supreme Court of the question
certified are:
As noted above, there are important and urgent reasons
for an immediate determination by the Supreme Court of
Delaware. The issue of what constitutes limited-partner
action for purposes of the duty of disclosure is a purely state-
law issue that implicates important Delaware policy
considerations. The issue has not been addressed by
Delaware courts, but it will be determinative in this case, and
it is likely to recur in federal courts. A ruling from the
Supreme Court of Delaware on the certified issue would
ensure accurate application of Delaware law in other
jurisdictions.
(5) If certification is accepted, it is recommended that
defendant-appellant Bert Dohmen be appellant for
purposes of the caption on any filings in the Supreme
Court of Delaware and that plaintiff-appellee Albert
Goodman be appellee for purposes of the caption on any
filings in the Supreme Court of Delaware with respect to
the question certified. Pursuant to Delaware Supreme
Court Rule 41(c)(v), we recommend that defendant-
appellant file his brief first, followed by plaintiff-appellee.
NOW, THEREFORE, IT IS ORDERED that the
following question of law is certified to the Supreme Court
of the State of Delaware for disposition in accordance with
Rule 41 of the Supreme Court:
In a Delaware limited partnership, does a
general partner’s request to a limited partner
for a one-time capital contribution constitute
a request for “limited-partner action” such
that the general partner has a duty of full
12 GOODMAN V. DOHMEN
disclosure, and, if the general partner fails to
disclose material information in connection
with the request, may the limited partner
prevail on a breach-of-fiduciary-duty claim
without proving reliance and causation?
We respectfully request that the Supreme Court of
Delaware resolve this state-law question of first impression,
which will resolve the determinative issue in this case. Our
phrasing of the question should not be construed to restrict
the Supreme Court of Delaware’s consideration of the issues
involved in this case.