Seip v. Rogers Raw Materials Fund, L.P.

Citations: 948 N.E.2d 628; 408 Ill. App. 3d 434Docket: 1-10-1440

Court: Appellate Court of Illinois; March 10, 2011; Illinois; State Appellate Court

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An appeal was filed by investors Tom D. Seip, Alexa C. Seip, Clarence Ridley, and Eleanor Ridley after their class action complaint against the Rogers Raw Materials Fund, Beeland Management Company, and James B. Rogers was dismissed by the trial court. The court affirmed the dismissal. The plaintiffs, former limited partners in the Private Fund managed by Beeland, based their rights on the "Second Amended and Restated Agreement of Limited Partnership." The investment funds, which included the Private Fund and the Rogers International Raw Materials Fund, focused on commodities futures and forward contracts linked to the Rogers International Commodity Index, with remaining assets held in cash or government securities. A "Confidential Private Placement Memorandum" stipulated that investments would be kept in segregated accounts, ensuring no commingling. Beeland, owned 69% by Rogers, is led by CEO Tom Price and CFO Allen Goodman. The excerpt also details Rogers' prior relationship with the defunct financial services company Refco, including an arrangement where Refco's subsidiary became the selling agent for the Funds and a deal for Refco to acquire Rogers' interest in Beeland.

Refco, LLC assumed the role of administrator for the Funds, involving the transfer of assets from brokers Man Financial, Inc. and Harris, N.A. to Refco, LLC and Refco Capital Markets (Refco CM), an offshore, unregulated broker. This transfer was part of a broader strategic plan. In September 2005, Price and Goodman initiated the asset transfer, executing account transfer forms that instructed the transfer of account balances and positions to Refco, LLC. An affidavit from Price stated that no collateral was to be moved to Refco CM without prior notice to investors, allowing them to redeem their interests if they did not wish to accept the credit risk. Approximately $297.5 million was transferred in early October 2005, but it was discovered that the assets were sent directly to Refco CM without explicit direction from Price or Goodman. Upon this realization, Beeland sought to redirect the assets back to Refco, LLC or the original brokers.

Shortly thereafter, Refco disclosed nearly $500 million in concealed debt, leading to bankruptcy filings by Refco, Inc. and its affiliates, including Refco CM, on October 17, 2005. Refco, LLC followed suit in November. Beeland filed a complaint in bankruptcy court for the return of the diverted assets. On November 15, 2005, a special redemption letter was issued to limited partners, offering them the chance to receive their pro rata share of available cash as of November 30, 2005, minus anticipated expenses. The letter warned that redeeming partners would face potential losses from Refco CM's bankruptcy and estimated disbursement based on about 30% of the Fund's assets, with remaining proceeds to be distributed post-Resco CM proceedings or when liquidity allowed. All redemption requests were treated as full requests. By December 1, 2005, the capital accounts for the Seips and Ridleys were calculated and disbursed in December 2005, totaling $172,210.46 and $52,147.46, respectively.

Beeland successfully recovered assets transferred to Refco through various efforts, culminating in a $30 million settlement on October 11, 2006. By April 15, 2008, Beeland had recovered 97.12% of the Private Fund's transferred assets, and by December 31, 2009, this figure increased to 101.3%. As assets were recovered, further disbursements were made to plaintiffs as per a special redemption letter, ultimately resulting in plaintiffs receiving over 100% of their capital account values from November 2005.

Multiple complaints were filed in 2006 and 2007 in New York and Illinois related to these events, including plaintiffs' complaint filed on May 14, 2007, and amended on April 1, 2008, which alleged breach of contract, unjust enrichment, and other claims. On May 15, 2008, defendants filed motions to dismiss the plaintiffs' complaint and others, leading to a circuit court dismissal of all claims on June 16, 2009. The plaintiffs' motion for reconsideration was denied on April 27, 2010. Plaintiffs appealed, arguing that their claims for breach of contract and other matters were improperly dismissed.

The document outlines the legal standards for motions to dismiss under sections 2-615 and 2-619 of the Illinois Code of Civil Procedure. A section 2-615 motion challenges the legal sufficiency of the complaint based on well-pleaded facts, while a section 2-619 motion admits the complaint's legal sufficiency but raises affirmative defenses. The court must interpret pleadings favorably to the nonmoving party when reviewing such motions.

In appeals following a dismissal under a section 2-619 motion, the focus is on whether a genuine issue of material fact exists and if the defendant is entitled to judgment as a matter of law. The review of such dismissals under sections 2-615 or 2-619 is conducted de novo. Plaintiffs argued that their breach of contract claims were wrongly dismissed under section 2-619, asserting that Beeland failed to meet their redemption requests. Key documents for analysis include the Partnership Agreement, a special redemption letter, and the valuation of plaintiffs' capital accounts. 

The Partnership Agreement states that a limited partner can withdraw capital by requesting redemption at least twenty days in advance, with payment based on the interest's value at the redemption date. A special redemption letter issued on November 15, 2005, allowed limited partners to redeem their interests amid the bankruptcy of Refco CM, detailing their rights and indicating that redeeming partners would receive a pro rata share of available cash as of November 30, 2005, minus expenses. It also cautioned that a significant portion of assets was under bankruptcy protection and that redeeming partners faced potential losses.

The plaintiffs submitted a redemption request and received initial disbursements in December 2005, totaling $172,210.46 for the Seips and $52,147.46 for the Ridleys, with subsequent payments eventually totaling 100% of their interests plus trading gains by November 30, 2005. However, they contended that the amounts received were not timely, claiming initial disbursements excluded funds lost to Refco CM. The special redemption letter outlines the disbursement method, affirming that participants in the November 2005 redemption would receive a share of available cash in December 2005, less anticipated expenses.

A significant portion of the Fund's assets was under bankruptcy protection, rendering them unavailable; thus, only 30% of total assets was estimated to be available in cash. Plaintiffs claimed immediate entitlement to the full amount of their capital accounts but instead requested a pro rata share of the Fund's available cash as of November 30, 2005, which they received. The December 2005 redemption values were based on affidavits from Goodman, which were uncontested, leading to their acceptance as true in the motion to dismiss context. Plaintiffs argued that subsequent account statements from Beeland contradicted Goodman’s affidavit, indicating higher amounts they believed they were owed. However, plaintiffs failed to consider that most assets were inaccessible due to bankruptcy protection. Accompanying letters to the account statements warned that balances were subject to adjustments related to recovery efforts and potential asset impairments. The initial disbursement was strictly based on available cash, and Beeland’s decision not to lower plaintiffs' account values was not an official statement of available cash nor a contradiction to Goodman’s affidavit. Plaintiffs contended the circuit court improperly weighed evidence in dismissing their breach of contract claim. They claimed their redemption request was for the full value of their partnership interests, but the circuit court clarified they sought a pro rata share based on the redemption letter. The court found no dispute regarding the request's nature or that plaintiffs received their appropriate share as outlined in the special redemption letter, which indicated that such redemptions would be based on the limited partner's entire interest.

Plaintiffs contended that the amounts they received in December 2005 were disputed and that the circuit court improperly relied on a "self-serving" affidavit for its resolution. This assertion marked a departure from their original breach of contract claim, which focused on the alleged failure to timely redeem their interests, not on miscalculations by Beeland. The court noted that plaintiffs did not challenge Goodman's affidavit or provide evidence disputing the December 2005 disbursement's alignment with their pro rata share of available cash. Additionally, plaintiffs’ reliance on account statements received after December 2005 was deemed misplaced as they did not contradict Goodman's affidavit. Consequently, the court upheld the dismissal of the breach of contract claim.

Regarding claims for post-redemption interest and account charges, plaintiffs argued that the Partnership Agreement allowed for interest on delayed payments. However, the court found no evidence of delayed payments, as the December 2005 disbursement aligned with the special redemption process. Therefore, there was no basis for interest under the Partnership Agreement or the Interest Act, since plaintiffs failed to demonstrate any untimely payment. The court concluded that since there was no breach of contract, the claim for post-redemption interest was properly dismissed.

Finally, plaintiffs sought reimbursement of fees and expenses charged to their accounts post-redemption, claiming these were incurred due to breaches or wrongful conduct by Beeland and the Private Fund. However, the complaint lacked detail and did not cite specific provisions of the Partnership Agreement that were breached, leading the court to reject this claim as well.

Plaintiffs’ breach of contract claim, asserting entitlement to the full amount in their capital accounts by December 2005 under the Partnership Agreement, has been dismissed, as previously determined. Expenses related to asset recovery were appropriately charged to the partnership per the Partnership Agreement's provisions regarding operating expenses. Plaintiffs argue on appeal that their breach of contract claim includes an implied claim for reimbursement based on the duty of good faith and fair dealing, which is inherent in every contract and requires reasonable exercise of contractual discretion. However, this duty is not an independent source of obligations and serves only to clarify the intent of the parties when interpretations conflict. The court finds it unclear how plaintiffs can assert their reimbursement claim on this basis, as the original complaint did not reference the duty of good faith and fair dealing. Moreover, cited cases by plaintiffs do not support their position. The amended complaint excluded prior claims of negligence or breach of fiduciary duty, despite current assertions related to Beeland’s actions concerning asset diversion. The circuit court noted a lack of evidence for misfeasance or breach of contract against Beeland regarding the October 2005 asset diversion. The court concurs with these findings and confirms the dismissal of the reimbursement claim. Regarding the tortious interference claim against Rogers, plaintiffs must establish: 1) a valid contract exists; 2) the defendant was aware of the contract; 3) the defendant intentionally induced a breach; 4) a breach occurred due to the defendant’s actions; and 5) damages resulted.

Plaintiffs allege a tortious interference claim based on the "Confidential Private Placement Memorandum," which mandated that Private Fund assets be held in segregated accounts. They argue that the assets were improperly transferred to Refco CM, an unregulated entity with nonsegregated accounts, constituting a breach of contract. Plaintiffs assert that Rogers induced this breach for personal gain, claiming that his involvement in Beeland implies participation in the asset diversion. However, the court finds no evidence linking Rogers to the transfer, noting that Price and Goodman were responsible for authorizing any asset transfer, specifically to Refco, LLC, not Refco CM. Testimonies and affidavits confirm Rogers' lack of involvement, undermining plaintiffs' claims, which are deemed speculative. The court maintains that its findings were based on established facts rather than conjecture. Additionally, declarations from minority members of Beeland supporting plaintiffs' claims were submitted too late, during a motion for reconsideration, not during the initial hearings. The court emphasizes that such motions should only introduce newly discovered evidence or legal changes, and the declarations do not qualify as newly discovered. The court discourages litigants from delaying and then attempting to introduce new evidence post-ruling.

The circuit court initially permitted plaintiffs to file declarations but later denied their motion for reconsideration, leading to inconsistencies in handling the declarations from Harrison and Chambers. Despite the potential to review these declarations, they were found to lack sufficient support for the claim against Rogers regarding asset diversion and breach of contract, as they primarily contained hearsay and inadmissible opinions. Consequently, the trial court's dismissal of the tortious interference claim against Rogers was deemed appropriate.

Regarding the plaintiffs' declaratory judgment claim, they asserted that the Private Fund and Beeland breached the Partnership Agreement through unauthorized transfers and failure to pay capital account balances, that defendants owed interest on unpaid amounts, improper fee charges, and obligations to distribute recovered assets. The elements for a declaratory judgment require a tangible interest from the plaintiff, an opposing interest from the defendant, and an actual controversy. The court noted that while the trial court dismissed the claim due to a lack of authorization for the transfer to Refco CM, the plaintiffs raised issues not fully addressed. However, this did not necessitate a reversal of the dismissal.

The first three issues in the plaintiffs' declaratory claim were found to reiterate prior claims already addressed by the court. The fourth claim regarding asset distribution was determined not to constitute a concrete controversy, as the Private Fund had already distributed more than 100% of the plaintiffs' capital account values. Therefore, the court affirmed the circuit court's dismissal of the plaintiffs' claims. The judgment was affirmed with concurrence from Presiding Justice Gallagher and Justice Pucinski.