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Claude Worthington Benedum Foundation v. Harley

United States District Court, Third Circuit

June 5, 2013

CLAUDE WORTHINGTON BENEDUM FOUNDATION, a Pennsylvania non-profit corporation, Plaintiff,
WILLIAM FRANCIS HARLEY, III, an adult individual, FURSA ALTERNATIVE STRATEGIES, LLC, a Delaware Limited Liability Company, HBS HOLDING COMPANY, LLC, a Delaware Limited Liability Company, and ARSENAL GROUP, LLC, a Delaware Limited Liability Company, Defendants.



This is a civil action for conversion, breach of fiduciary duty, fraudulent misrepresentation, and negligent misrepresentation in connection with the management of Plaintiff Claude Worthington Benedum Foundation's (the "Foundation") investment funds. (Docket No. 30). The Foundation claims that Defendant William Francis Harley, III ("Harley") utilized its money for self-interested purposes, failed to report certain large transactions, and refused to honor the Foundation's redemption requests. Id. The Foundation implicates Defendants FURSA Alternatives Strategies, LLC ("FURSA"), HBS Holding Company, LLC ("HBS"), and Arsenal Group, LLC ("Arsenal") in Harley's misconduct. Id. Pending before the Court is Defendants' "Motion to Dismiss and Motion to Strike Immaterial, Impertinent, and Scandalous Allegations." (Docket No. 33). The Foundation has filed a response opposing both dismissal as well as the motion to strike, (Docket No. 37), to which Defendants have countered with a reply brief. (Docket No. 38). For the following reasons, Defendants' "Motion to Dismiss and Motion to Strike Immaterial, Impertinent, and Scandalous Allegations" is denied.


The Foundation is a non-profit corporation organized under the laws of the Commonwealth of Pennsylvania. (Docket No. 30, at ¶ 1). It maintains sizable investments for the purpose of funding various philanthropic initiatives. In 2004, it placed $2 million in the Mellon HBV Offshore Multi-Strategy Fund Ltd. ("Mellon Fund"), which was then controlled and managed by Mellon HBV Alternative Strategies, LLC, Mellon Holdings LLC (collectively the "Mellon Entities"), and Defendant Harley. Id. at ¶ 8. Upon investing, the Foundation was provided with a Side Letter agreement signed by Edward A. Schinik, Chief Operating Officer for the Mellon Fund. Id. at ¶ 9. This Side Letter stipulated that "[t]here will be no restriction on the ability of the Foundation to completely withdraw from the Fund" and that if the Foundation elected to partially withdraw, it only needed to maintain a minimum holding of $100, 000. Id.; (Docket No. 30-1). No amendments were ever made to this Side Letter. (Docket No. 30, at ¶ 10). During this time, Harley was the fund manager responsible for the day-to-day custody and control of the Mellon Fund's assets through his position with the Mellon Entities. Id. at ¶ 12.

In late 2006, the Mellon Entities divested themselves of management over the Mellon Fund without explanation. Id. at ¶¶ 18-19. While the hedge fund was being spun off, various members of Defendant HBS who possessed claims against Harley and the Mellon Entities were threatening litigation. Id. at ¶ 20. At that time, Harley also held a 34.88% interest in HBS. Id. at ¶ 22. In order to secure releases from litigation for him and the Mellon Entities, Harley transferred $13.6 to $17.6 million in assets as well as $1.8 million in cash from the hedge fund to HBS. Id. at ¶¶ 21-23.

The Foundation claims that on January 19, 2007, it was advised that Harley, through FURSA, had purchased Mellon Holdings LLC and renamed the Mellon Fund to FURSA Offshore Global Event Driven Fund Ltd.[1] Id. at ¶ 25. No prior representations concerning a change in control of the Mellon Fund had been provided to the Foundation. Id. at ¶ 26. Following this transaction, Harley and FURSA retained exclusive control and custody over the Foundation's assets that were previously invested in the Mellon Fund. Id. at ¶ 28. As such, Harley and FURSA had the exclusive responsibility for making all investment and management decisions regarding the Foundation's assets. Id. At no time during or after the sale did the Foundation agree to alter or amend the Side Letter. Id. at ¶ 27.

Starting in January 2007, FURSA provided monthly updates as to the performance of the Foundation's $2 million investment. Id. at ¶ 30. By December 31, 2007, FURSA represented that the investment had grown to over $2.7 million. Id. at ¶ 31. In 2008, however, Defendants' fortunes turned and the hedge fund began sustaining heavy losses. It was reported that the Foundation's investment was $2.1 million in January 2008 and $1.78 million in February 2008. Id. at ¶¶ 33-34. By the end of March 2008, the value fell to $1.69 million, and FURSA reported that the fund needed to be "rescued." Id. at ¶ 38. While the fund was collapsing in February 2008, Harley "caused a payment of $2, 626, 451 to be made to [HBS]" with regard to the Chinese NPLs[2] that remained titled to the fund and to FURSA, without disclosing said transaction to the Foundation. Id. at ¶ 35. Because Harley maintained his 34.99% interest in HBS, the Foundation believes he received approximately $918, 995 from this transaction. Id. at ¶ 36.

No successful rescue effort ever materialized. Id. at ¶ 39. By April 30, 2008, the value of the Foundation's investment had plummeted to $306, 376.75. Id. at ¶ 40. In a meeting allegedly held on June 25, 2008, Harley admitted to the Foundation's financial representative, Dwight Keating, that the hedge fund had been experiencing difficulties since late 2007 and that a number of large investors had made redemption requests to pull out of the fund. Id. at ¶¶ 43-44. During this same conversation, the Foundation maintains that Harley represented: (1) he shared material, non-public information with certain large investors in the fund but not the Foundation; (2) he had failed to inform the Foundation about any redemption requests; (3) the fund was to be liquidated, with the Foundation receiving a pro rata share of the liquidation assets; (4) because he had failed to previously advise the Foundation about the redemption requests, that it would be treated as if it had made its redemption request in December 2007 rather than later in time; and (5) if the matter had to be taken to court, the Foundation would stand first in line to recover before the other large investors. Id. at ¶¶ 45-46, 48.

Following this conversation, Harley and FURSA provided the Foundation with monthly account updates, which advised that the hedge fund was in the process of winding down and liquidating. Id. at ¶¶ 51, 56-59, 61-62. On July 9, 2008, Keating formally requested the withdrawal of the Foundation's investment effective December 31, 2007, and Harley acknowledged acceptance of said request. Id. at ¶¶ 53-54. The monthly updates continued into June 29, 2009, when Harley and FURSA maintained that the hedge fund's value was approximately $108 million. Id. at ¶¶ 61-63.

Sometime after sending the June 29, 2009 account statement, Harley and FURSA abruptly and without prior notice closed FURSA's offices, disconnected the phones, and ceased communications with the Foundation. Id. at ¶¶ 66-68, 70. No forwarding address or other contact information was provided. Id. at ¶ 69. It was later discovered that Harley had relocated FURSA to the basement of a Hooter's restaurant that he owned while allegedly continuing to wind down the hedge fund. Id. at ¶¶ 72-73.

The hedge fund was never wound down or liquidated. Id. at ¶ 80. Rather, the Foundation alleges that Harley and FURSA continued to operate with its money. Id. at ¶ 74. More specifically, Harley used the hedge fund's assets to secure appointments to numerous boards, collected income from stock for his own use, and continued to collect a 1.5% annual management fee from the hedge fund. Id. at ¶¶ 76, 80. For example, in 2010, Harley established a company in Texas that purchased a pecan farm and acquired over eight million shares of Frederick's of Hollywood ("FOH") stock. Id. at ¶ 77-78. No distributions to the Foundation were made. Id. at ¶ 80.

In 2011, it is believed that Harley and FURSA transferred assets from FURSA to Arsenal, including the FOH stock. Id. at ¶¶ 79, 81. The Foundation contends that Harley completely controls Arsenal and that this transaction was conducted without its consent. Id. at ¶¶ 85, 86. At some unknown time, Harley used Arsenal to provide at least $2.8 million to HRK Holdings, LLC ("HRK"), which he had co-founded in February 2006, causing both Harley and Arsenal to take an ownership interest in the company. Id. at ¶¶ 14, 92-94. The Foundation charges that the purpose of this transaction was to help pay for efforts to remedy HRK's pollution problem involving the leakage of 170 million gallons of toxic water into Tampa Bay's Bishop Harbor. Id. at ¶¶ 89, 94-95.

The Foundation sent Harley correspondence inquiring about its investment in FURSA on May 19, 2011. Id. at ¶ 87. This correspondence was allegedly ignored.[3] Id. at ¶ 88. As of June 2012, the Foundation's investment has dwindled to a value of $125, 627.51. (Docket No. 30, at ¶ 118).


Defendants seek to dismiss a number of claims and strike certain pleadings in the Second Amended Complaint based on Rules 12(b)(6) and Rule 12(f) of the Federal Rules of Civil Procedure.[4] (Docket No. 33). As grounds for their Rule 12(b)(6) motion to dismiss, Defendants specifically contend that: (1) the statute of limitations bars the Foundation's claims for breach of fiduciary duty, fraudulent misrepresentation, and negligent misrepresentation; (2) there can be no breach of a fiduciary duty because hedge fund managers owe no fiduciary duty to their investors; and (3) the Foundation has not alleged sufficient facts to establish proximate causation for its fraudulent misrepresentation and negligent misrepresentation claims. Id. In addition, Defendants seek to strike multiple portions of the Second Amended Complaint pursuant to Rule 12(f). Id. The Foundation urges that the motions be denied. (Docket No. 37). As the matter has been fully briefed, they are now ripe for disposition.

A. Federal Rule of Civil Procedure 12(b)(6) Standard

A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure challenges the legal sufficiency of a complaint. To survive a motion to dismiss, a complaint must contain sufficient factual pleadings to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); accord Phillips v. Cnty. of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (citing Twombly ). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court's plausibility determination is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679; accord Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009) (quoting Iqbal ). This requirement is designed to facilitate the federal notice-pleading standard, which requires "a short and plain statement of [a] claim showing that the pleader is entitled to relief." FED. R. CIV. P. 8(a)(2) (emphasis added). With respect to allegations of fraud, "a party must state with particularity the circumstances constituting fraud or mistake." FED. R. CIV. P. 9(b).

When ruling on a Rule 12(b)(6) motion, a court must accept as true all well-pleaded facts and allegations and must draw all reasonable inferences therefrom in favor of the plaintiff. See Iqbal, 556 U.S. at 678; see also Mayer v. Belichick, 605 F.3d 223, 229 (3d Cir. 2010) (explaining that the ultimate determination in a Rule 12(b)(6) analysis is "whether plaintiff may be entitled to relief under any reasonable reading of the complaint"). The Court may consider "only the allegations in the complaint, exhibits attached to the complaint, matters of public record, and documents that form the basis of a claim." Lum v. Bank of Am., 361 F.3d 217, 222 n.3 (3d Cir. 2004). Nevertheless, a court need not credit bald assertions, unwarranted inference, or legal conclusions cast in the form of factual averments. Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 n.8 (3d Cir. 1997). The plaintiff's obligation to provide the grounds of his legal entitlement to relief "requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)) (alterations in original). By authorizing dismissal on the basis of some dispositive issue of law, Rule 12(b)(6) dispenses with "needless discovery and factfinding" for the ultimate purpose of streamlining litigation. Neitzke v. Williams, 490 U.S. 319, 326-27 (1989).

B. Analysis of Rule 12(b)(6) Motion

As noted, Defendants contend that the Foundation's claims for breach of fiduciary duty, fraud, and negligent misrepresentation should be dismissed for failure to state a claim on which relief can be granted. First, they argue that these legal claims are time-barred by Pennsylvania's two-year statute of limitations applicable to such causes of action. (Docket No. 34, at 4-6). Second, Defendants insist that they do not owe the Foundation a legally cognizable fiduciary duty. Id. at 7-8. Third, they dispute that any of the alleged injuries sustained by the Foundation were proximately caused by any misrepresentations they allegedly made. Id. at 8-12.

With the exception of Defendants' assertion that they owe no fiduciary duty to the Foundation, the parties' arguments rest entirely on Pennsylvania law. (Docket Nos. 34; 37; 38). In addition, the Foundation makes no reference to any federal causes of action in the Second Amended Complaint. (Docket No. 30). Neither party has asserted that the law of any other jurisdiction applies. Accordingly, the Court will apply Pennsylvania law. As ...

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