The opinion of the court was delivered by: PARKER
Barrington D. Parker, United States District Judge
Defendants Donald Weil, Frank Stefanou and Frank & Company have filed Motions to Dismiss Plaintiffs' Third Amended Complaint. The defendants' motions track the same arguments which formed the basis for this Court's dismissals of the plaintiffs' three earlier complaints.
In each of the prior efforts, the court indulged the plaintiffs and granted leave to correct the defects plaguing the prior attempts and to file a legally sufficient complaint. However, the plaintiffs have failed for the fourth time to remedy their deficient pleading. Their inability to craft an adequate complaint compels this Court to dismiss the Third Amended Complaint this time, with prejudice.
The genesis of this complaint arises out of the financial collapse of the limited partnership, TMG II and the resulting financial loss to plaintiffs who were investors in that partnership.
TMG II was the victim of a fraudulent tax scheme conceived of and perpetrated by one of its general partners, Edward Markowitz. In 1985, Markowitz pled guilty to defrauding numerous partnerships, including TMG II.
In his plea, he implicated unnamed accountants and lawyers who allegedly helped in developing his fraudulent schemes. Armed with this "information," plaintiffs sought to recover their losses and sued all parties who were involved in the operation of TMG II and might have been involved in the "plot." Hence they instituted this action against Donald Weil, the only other general partner of TMG II and Frank Stefanou and his firm, Frank & Company, who performed accounting services for TMG II.
This Court shares in the plaintiffs' sense of frustration at their financial loss. But, lawsuits are not instituted and won out of a mere sense of frustration or outrage. Plaintiffs must advance a claim against the party defendants upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). After four attempts, they have failed to do just that.
2. DISMISSAL COUNTS 1-4 AGAINST DONALD WEIL
Plaintiffs allege that Donald Weil exercised his fiduciary duties as general partner of TMG II in a negligent and/or grossly negligent manner. They also allege that Weil is liable for Markowitz's wrongdoings under a theory of agency/respondeat superior. Defendant Weil responds to these charges with a single defense: that his liability is established under the terms of the partnership agreement and that the agreement explicitly precludes any liability "except for fraud or willful misconduct."
Under New York law,
the rights of the limited partnership are governed by the partnership agreement. See Riveria Congress Associates v. Yassky, 25 A.D.2d 291, 268 N.Y.S. 2d 854, 855 (1966). In that case, the New York Court of Appeals concluded that the limited partners waived their rights to proceed against the general partners for self dealing when they agreed to a provision in the partnership agreement permitting the partners to engage in self dealing. Here, the plaintiffs willingly signed the TMG II agreement which explicitly releases the partners from any liability "except for fraud and willful misconduct," thus barring any actions based upon negligence or vicarious liability theories.
In a final effort to avoid dismissal, plaintiffs attempt to fit their complaint within the four corners of the partnership contract by alleging that Weil's gross negligence was so egregious as to constitute willful misconduct. However, for gross negligence to rise to the level of willful misconduct plaintiffs must show that Weil consciously intended to ignore his fiduciary duties with the knowledge that his breach would result in damage to the partners. See Walker v. Security Trust Co., 85 Misc. 2d 614, 379 N.Y.S. 2d 308, 316 (N.Y. 1976); Cohen v. Varig Airlines, 62 A.D.2d 324, 405 N.Y.S. 2d 44, 47 (N.Y. Ct. Ap. 1978). Plaintiffs have not alleged that Weil had knowledge of Markowitz's fraudulent schemes.
If he were not aware of Markowitz's illegal activities, he could not have foreseen that his failure to monitor closely the partnership business would have resulted in the collapse of the partnership. His failure to keep a keen eye on the partnership was nothing more than a textbook case of negligence and as such is not grounds for suit.
3. DISMISSAL OF THE THIRD AMENDED COMPLAINT AGAINST FRANK STEFANOU AND FRANK & COMPANY
Defendants contend that as limited partners in TMG II, plaintiffs have no standing to commence legal proceedings on behalf of the partnership. Plaintiffs agree that the rights of limited partners are circumscribed, but urge this Court to recognize that limited partners may sue in a derivative action on behalf of the general partnership for malfeasance of the general partners.
The capacity of individuals acting in a representative capacity to sue and be sued is determined by state law. See Fed. R. Civ. P. 17(b). Plaintiffs have conceded that the law of the forum governs. However, the rights of limited partners to institute suits on behalf of general partnerships have not been clearly established in the District of Columbia. The only authority on point is a recent D.C. Superior Court decision where the court adopted the model of the shareholder derivative action and permitted limited partners to proceed with an action after they made a showing that the general partnership was disabled from instituting the action itself. TMG II v. Reese, Broome & Diaz, (C.A. 4570-86, ...