In the Supreme Court of the State of Delaware
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EFiled: Oct 26 2015 01:05PM EDT Filing ID 58066809 Case Number 349,2015 IN THE SUPREME COURT OF THE STATE OF DELAWARE HUGH F. CULVERHOUSE, individually and on behalf of all others similarly situated, No. 349, 2015 Plaintiff-Appellant, Certification of Question of Law v. from the United States Court of Appeals for the Eleventh Circuit PAULSON & CO. INC. and C.A. No 14-1426 PAULSON ADVISERS, LLC, Defendants-Appellees. REPLY BRIEF OF APPELLANT HUGH F. CULVERHOUSE Richard L. Renck (No. 3893) DUANE MORRIS LLP 222 Delaware Avenue, 16th Floor Wilmington, DE 19801 OF COUNSEL: (302) 657-4900 Robert L. Byer Counsel for Appellant Robert M. Palumbos Hugh F. Culverhouse DUANE MORRIS LLP 30 South 17th Street Philadelphia, PA 19103 (215) 979-1000 Harvey W. Gurland, Jr., P.A. Lawrence A. Kellogg, P.A. Felice K. Schonfeld Jason Kellogg DUANE MORRIS LLP LEVINE KELLOGG LEHMAN 200 S. Biscayne Blvd., Suite 3400 SCHNEIDER + GROSSMAN LLP Miami, FL 33131 201 South Biscayne Blvd., 22nd Floor (305) 960-2214 Miami, FL 33131 (305) 403-8788 October 26, 2015 TABLE OF CONTENTS Page INTRODUCTION ..................................................................................................... 1 ARGUMENT ............................................................................................................. 3 1. Paulson owed Culverhouse a duty, and Paulson’s arguments to the contrary are not properly before this Court. .................................................... 3 A. The certified question asks whether claims are direct or derivative, not whether Paulson had a fiduciary or contractual relationship with Culverhouse. .............................................................. 3 B. Culverhouse adequately alleged that Paulson owed him a duty. .......... 5 2. Both Tooley and Anglo American dictate that the Court answer the certified question in the affirmative. ............................................................... 8 A. Paulson ignores the impact of the fund structure on the standing analysis under Tooley. ........................................................................... 8 B. The reasoning of Anglo American is sound and controls the outcome of this appeal. ........................................................................10 C. The decisions on which Paulson relies are all distinguishable. ..........12 3. This Court lacks jurisdiction to decide whether Culverhouse’s claims are barred by contract because the Eleventh Circuit did not certify that question and the district court did not reach the issue. .................................. 15 CONCLUSION ........................................................................................................ 19 i TABLE OF CITATIONS Page(s) CASES Anglo Am. Sec. Fund, L.P. v. S.R. Global Int’l Fund, L.P. 829 A.2d 143 (Del. Ch. 2003) .......................................................... 1, 3, 8-15, 17 BCR Safeguard Holdings, L.L.C. v. Morgan Stanley Real Estate Advisor, Inc. 2014 WL 4354457 (E.D. La. Sept. 2, 2014) ....................................................... 14 Espinoza on behalf of JPMorgan Chase & Co. v. Dimon 2015 WL 5439176 (Del. Sept. 15, 2015).................................................. 5, 16-17 Gerber v. Enter. Prods. Holdings, LLC 67 A.3d 400 (Del. 2013) ....................................................................................... 5 In re Gen. Motors (Hughes) S’holder Litig. 897 A.2d 162 (Del. 2006) ................................................................................... 14 Legatski v. Bethany Forest Assoc., Inc. v. Harris 2006 WL 1229689 (Del. Super. Ct. Apr. 28, 2006) ......................................... 6-7 Mitchell v. Reynolds 2009 WL 132881 (Del. Ch. Jan. 7, 2009) ............................................................. 7 Newman v. Family Management Corporation 748 F. Supp. 2d 299 (S.D.N.Y. 2010) .......................................................... 12-14 Prestancia Mgmt. Grp. v. Va. Heritage Found., II LLC 2005 WL 1364616 (Del. Ch. May 27, 2005) .................................................... 6-7 Rales v. Blasband 634 A.2d 927 (Del. 1993) ................................................................................... 16 Saltz v. First Frontier, LP 782 F. Supp. 2d 61 (S.D.N.Y. 2010) ............................................................ 12-14 Stephenson v. Citco Group Limited 700 F. Supp. 2d 599 (S.D.N.Y. 2010) .......................................................... 12, 14 ii Tooley v. Donaldson, Lufkin & Jenrette, Inc. 845 A.2d 1031 (Del. 2004) .......................................................... 1-3, 8-10, 12, 17 W. Palm Beach Police Pension Fund v. Collins Capital Low Volatility Performance Fund II, Ltd. 2010 WL 2949856 (S.D. Fla. July 26, 2010) ..................................................... 12 Winshall v. Viacom Int’l, Inc. 76 A.3d 808 (Del. 2013) ....................................................................................... 5 OTHER AUTHORITIES DEL. CONST. art. IV, § 11(8) ................................................................................ 5, 16 Supr. Ct. R. 41(c)(iv) ............................................................................................... 16 iii INTRODUCTION Paulson & Co. Inc. and Paulson Advisers, LLC (collectively, “Paulson”) would rather that the Eleventh Circuit had certified a different question framed by different facts. Paulson introduces several pages of additional facts that the Eleventh Circuit chose not to include in its Certification Order. Based on those new facts, Paulson argues that it owed no fiduciary or contractual duty to Culverhouse and that Culverhouse contracted away his right to recourse against Paulson. Those arguments are beyond the scope of the certified question and not properly before this Court. The question that is before the Court is whether Culverhouse stated derivative or direct claims under Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and Anglo American Security Fund, L.P. v. S.R. Global International Fund, L.P., 829 A.2d 143 (Del. Ch. 2003). In the Certification Order, the Eleventh Circuit focused solely on this issue and framed the certified question against the relevant factual backdrop. What distinguishes this case from every case cited other than Anglo American is that a derivative action here will compensate the wrong parties. A derivative action under the facts in this case will provide new investors in Paulson Advantage Plus and HedgeForum with a windfall, while denying a recovery to investors like Culverhouse who were actually harmed. That problem is at the core of the certified question. Tooley provides an analytical framework that aligns the party actually harmed with the party who will receive a recovery. That result is achieved under the facts of this case only through a direct action. Accordingly, the Court should answer the certified question in the affirmative. 2 ARGUMENT 1. Paulson owed Culverhouse a duty, and Paulson’s arguments to the contrary are not properly before this Court. A. The certified question asks whether claims are direct or derivative, not whether Paulson had a fiduciary or contractual relationship with Culverhouse. The Eleventh Circuit’s certification order focuses on a single legal issue. It notes that Culverhouse argued that his claims “are direct under Anglo American.” (Certification Order 5.) The Eleventh Circuit found that “[t]he fund in Anglo American is similar to Paulson Advantage Plus and HedgeForum,” but that “later developments in Delaware law make [it] hesitant to hold that Anglo American controls this appeal.” (Id. at 6.) “Although the analysis in Anglo American appears consistent with the analytical framework set forth in Tooley,” courts have “questioned whether Anglo American remains good law.” (Id. at 7.) The Eleventh Circuit certified the question to this Court to resolve the issue. Paulson attempts to redirect the Court to a different legal issue. It argues that “there is no contractual or fiduciary relationship or privity between” an investor in a feeder fund and the general partners of a hedge fund “to provide any basis for a direct suit.” (Paulson Br. 17.) According to Paulson, by analyzing the certified question under Anglo American and Tooley, just as the Eleventh Circuit did in its Certification Order, Culverhouse “blithely skipp[ed] over the distinction between a Feeder Fund investor and an Investment Fund investor.” (Id. at 16.) 3 Paulson unsuccessfully made this same argument in its petition for rehearing to the Eleventh Circuit. It claimed that “[t]he primary issue in the underlying action is whether [Culverhouse], as a Feeder Fund investor, has standing to bring a direct suit against the fiduciaries of the Investment Fund in which the Feeder Fund (not [Culverhouse]) invested.” (Pet. Reh’g at 5.) Paulson argued that the certified question failed to “distinguish between investors in the Feeder Fund and investors in the Investment Fund.” Id. Paulson proposed a new certified question that focused on the distinction between the hedge fund and the feeder fund, and more elaborately explained that Culverhouse invested only in the feeder fund. Id. at 7. The Eleventh Circuit denied the petition for rehearing and declined to rephrase the certified question or amend the Certification Order with additional facts. That decision dispels any notion that the Eleventh Circuit “inadvertently” identified the facts in its Certification Order or sought “an answer that would not assist [it] in deciding the underlying appeal.”