Opinion
No. X05 CV09-5013096S
October 26, 2011
MEMORANDUM OF DECISION ON THIRD-PARTY DEFENDANTS' MOTION TO STRIKE THE THIRD-PARTY COMPLAINT (#122)
Introduction
This litigation arises out of a series of investments in two different groups of hedge funds, and is yet another part of a contentious fallout between two men who are both securities industry professionals, and their related entities. Before the court is the third-party defendants' motion to strike both counts of a third-party complaint. The third-party plaintiffs include an individual named Scott A. Stagg (Stagg), who serves as the managing member of the third-party plaintiff Stagg Capital Group LLC (Stagg Capital). Stagg Capital is a Delaware limited liability company based in Greenwich, Connecticut that serves as the investment adviser for a family of hedge funds bearing the initials "SV." Stagg Capital and Stagg have full discretionary authority and responsibility to manage and invest the assets of the SV funds, and to direct their day-to-day activities. These funds, which are also third-party plaintiffs, are the SV Special Situations Fund Ltd., a British Virgin Islands company (Offshore Fund), and the SV Special Situations Fund LP, a domestic investment partnership (Onshore Fund) which acts as the "sister fund" to the Offshore Fund. Investments in both of the SV Funds are made through an entity known as the SV Special Situations Master Fund Ltd. (SV Master Fund.) The SV Funds are the sole shareholders of the SV Master Fund.
The third-party defendants include an individual named Gary Katcher (Katcher), Stagg's former colleague in the securities industry. The other third-party defendants are an entity known as Knight Libertas LLC, a limited liability company; Knight Libertas Holdings LLC, a limited liability company which was formerly known as Libertas Holdings LLC (Libertas Holdings); Libertas Partners LLC, a limited liability company now known as defendant Knight Libertas LLC. Both Libertas Partners LLC and Knight Libertas LLC are collectively referred to in the third-party complaint as "Libertas Partners," and all of the third-party defendants maintain(ed) offices in Greenwich. However, before discussing the merits of this third-party complaint or the motion to strike directed against it, it is necessary to discuss the original complaint against Stagg and the other SV defendants (and now third-party plaintiffs) which brought the parties to this juncture.
The Original Complaint
The plaintiff in the original complaint is an entity called Toledo Funds LLC (Toledo Funds), a Delaware limited liability company with a principal place of business in Palm Beach, Florida. Toledo Funds essentially maintains that it suffered financial losses as a result of certain investments in securities with Stagg and the SV defendants. Toledo Funds maintains that it purchased shares of an entity called 3V Capital Fund Ltd. between August 2005 and May 2007. Thereafter, in September and October 2007, Toledo Funds redeemed the 3V Capital Fund Ltd. Shares, and purchased almost 6.4 million shares of Stagg's Onshore Fund, which was then a newly created investment partnership. However, since making this investment, Toledo has been unable to redeem those shares, as redemptions of shares in the SV Funds have been suspended at the direction of Stagg. Toledo Funds alleges that together with Stagg Capital, Stagg prepared and/or approved and distributed certain false and misleading investment documents for the SV Funds, disclosures which the plaintiff relied upon to its detriment.
Toledo Funds seeks to maintain its action on behalf of itself and as the representative of a class consisting of all persons that purchased shares in the Onshore and Offshore Funds from the inception of the SV Funds to the present. However, there has been no determination as to a possible class action.
The complaint recites that the Toledo Fund's purchases of investments in both the 3V and SV Funds were actually done at Toledo Fund's direction and with its funds by an entity known as HSBC Alternative Investments (Guernsey) Ltd.
Toledo Funds filed suit against Stagg and Stagg Capital, and also named the Onshore and Offshore Funds. The Toledo Funds' complaint sounds in four counts. The first three counts are asserted against all defendants: common-law fraud and fraudulent inducement (Count I); negligent misrepresentation (Count II); and violations of CUSA, the Connecticut Uniform Securities Act (Count III). Stagg himself is also accused in Count IV of aiding and abetting common-law fraud committed by the SV Funds and Stagg Capital. In addition to these four counts, the specifies of which are discussed, infra, the Toledo Funds' complaint also includes by way of introduction a somewhat lengthy recitation of what it alleges transpired before Toledo Funds made its illiquid investment in the SV Funds.
The court notes that while Count III of the complaint employs language from the General Statutes, the complaint itself makes a single reference only to the acronym "CUSA" in the caption to Count III, without stating the statute by name or making any specific citation to the General Statutes, a regrettable informality in a complaint, but one that is not relevant to this motion to strike.
General Statutes Section 52-102a allows for impleader "against persons who are or may be liable to the defendant for part or all of the plaintiff's claim." Thus, a third-party complaint is premised on the plaintiff prevailing against the defendant/third-party plaintiff. Macarone v. Hawley, 7 Conn.App. 19, 22 (1986). Where a motion to strike a third-party complaint is filed on the basis that the third-party defendant cannot, as a matter of law, be liable to the defendant for the claims by the plaintiff, the court assumes that the plaintiff prevailed in his cause of action against the defendant in the original action. Weintraub v. Richard Dahn, Inc., 188 Conn. 570, 573 (1982). Therefore, in ruling on the motion to strike the third-party complaint, this court must assume that the Toledo Funds prevailed in its original complaint concerning the inadequate disclosures surrounding its investment in Stagg's "SV" hedge fund operation.
The original complaint recites by way of background that in 2004, Katcher and Stagg together opened a hedge fund called 3V Capital Master Fund Ltd. (3V Master Fund). The 3V Master Fund consisted of both a domestic fund and an offshore fund which invested solely through the 3V Master Fund. The 3V Master Fund was part of a structure that included a general partner and investment advisor, and this group of related entities are collectively referred to in the original complaint as the "3V Entities." Katcher and Stagg were officers, directors, managing members and/or shareholders of one or more of the 3V Entities, and they received millions of dollars in fees and incentive compensation from the 3V Entities over the years. 3V's principal broker was a company owned and controlled by Katcher called Knight Libertas LLC, formerly known as Libertas Partners LLC (collectively, Libertas). Prior to January 1, 2007, Libertas and the 3V Entities shared the same office space in Greenwich, Connecticut.
An individual named Mark A. Focht (Focht) was the Chief Operations Officer of the 3V investment advisor. Stagg was in charge of overseeing Focht's activities, because Stagg was the person principally responsible for the day-to-day operations of the 3V Entities. Prior to January 2007, Focht was also an employee of Libertas. Thereafter, under Stagg's oversight and supervision, Focht became Chief Operations Officer of Stagg Capital, the investment advisor for the SV Funds. The plaintiff Toledo Funds alleges that it was never disclosed that millions of dollars were funneled out of the accounts of the 3V Funds into Libertas and not returned (collectively, the Libertas Transfers). Specifically, Libertas purportedly caused one or more of the 3V Funds to purchase "Stelco" bonds for approximately $5.8 million. On May 2, 2006, this sum was wired to Libertas from accounts maintained or controlled by the 3V Funds, ostensibly for the purchase of the Stelco bonds. However, Libertas did not transfer the funds for the purchase of the bonds, nor were the bonds ever delivered. Stagg charged in an affidavit dated September 8, 2009 (Stagg Affidavit) that Katcher had "abscond[ed] with $5.8 million of 3V's money." Moreover, on February 14, 2007, approximately $3.4 million was wired to Libertas from a trading account of the 3V Funds, ostensibly to pay the salaries of Libertas' officers and employees. According to Stagg, this payroll transfer constituted a "theft" of 3V's funds. The complaint quotes the Stagg Affidavit: "Even if there was an agreement to pay for Libertas' expenses, which there was not, that agreement would have been between 3V Management and Libertas, not 3V. Obviously, any payment would have had to have come from 3V Management, not the hedge fund's investment assets." The plaintiff alleges that these transactions were not disclosed.
Furthermore, on April 18, 2007, Libertas purportedly caused approximately $3.1 million to be transferred from a 3V Funds account to Credit Suisse First Boston for certain bonds purchased in 2006. Stagg avers that, "3V had no beneficial interest in the purchase, did not authorize the taking of the funds, and received no consideration for transferring the funds to Credit Suisse." According to Stagg, "Libertas once again used 3V's trading account as a slush fund" and had "stolen" 3V's funds. The complaint alleges that Focht played a role in one or all of these thefts and fraudulent transfers. In August 2009, Focht pleaded guilty to grand larceny in the Supreme Court of the State of New York. He acknowledged engaging in illegal transactions and fraudulent transfers involving 3V Capital and the 3V Master Fund, among others. On September 23, 2009, Focht was sentenced to prison for a term of up to seven years. Once again, the plaintiff Toledo Funds alleges that these events and circumstances were not disclosed.
Stagg closed the 3V Funds to new investors around March 2007, and began raising money for a new hedge fund called the SV Funds, a fund family to be operated without Katcher. Together with Focht, Stagg moved the offices of 3V Management to a new location in Greenwich. Stagg also created Stagg Capital and the Onshore and Offshore Funds. According to SEC public filings in February 2008 by Stagg Capital, the SV Master Fund is the "successor" to the 3V Master Fund. Stagg liquidated the 3V Funds on September 30, 2007, and transferred Katcher's capital account in the 3V Funds to one or both of the SV Funds. According to Katcher, the transfer of his capital account by Stagg and Focht was "illegal." Several weeks earlier, on August 20, 2007, Stagg, individually and purportedly on behalf of the 3V Entities, commenced an arbitration proceeding before the American Arbitration Association asserting various claims against Katcher (Katcher Arbitration).
On or about September 26, 2007, Katcher and Stagg reached two agreements (Katcher Agreements) regarding Katcher's interests in the 3V Entities. Katcher, Stagg and certain related entities agreed that "Katcher shall first be allocated, and shall be entitled to receive, prior and in preference to any allocation, distribution or other payment to the other Members" from combined cash flow of: (i) up to $12 million in the aggregate between January 1, 2007 and July 15, 2008; and (ii) 2% of "Average Access Assets" exceeding $300 million, payable on or before July 15, 2009. Stagg Capital also agreed to guarantee these payments to Katcher. A total of $6 million was thereafter paid to Katcher pursuant to the Katcher Agreements, but the balance remains outstanding. The plaintiff Toledo Funds alleges that this arrangement was not disclosed to it.
On or about October 1, 2007, several days after the Katcher Agreements were executed, the SV Funds commenced operations. While simultaneously suing Katcher and executing agreements with him, Stagg was also busy soliciting investors for his new fund. Specifically, the defendants disseminated to investors an "Explanatory Memorandum" dated July 1, 2007 relating to the sale of shares in the new Offshore Fund (Memorandum). The Memorandum was prepared, reviewed and/or approved by Stagg and Stagg Capital, among others, and is substantially similar to a memorandum disseminated to prospective investors in the new Onshore Fund. The plaintiff Toledo Funds received the Memorandum prior to investing in the Offshore Fund. According to the Memorandum, the "investment objective of the Fund will be to achieve superior risk-adjusted total returns by investing and trading in event driven situations, primarily in investments which are rated below investment grade or which are unrated, including, but not limited to, senior and subordinated debt bank loans, trade claims and all other types of fixed-income obligations as well as investments in the securities of distressed companies."
The Memorandum purported to describe Stagg's investment background and experience, as well as potential conflicts between Stagg, Stagg Capital and the SV Funds. The Memorandum also represented that Stagg had "co-founded 3V Capital Management, LLC, an investment advisor currently with over $500 million in assets under management." In addition to the Memorandum, the defendants disseminated to prospective investors in the SV Funds, including the plaintiff Toledo Funds, an undated promotional brochure (Brochure). The Brochure was prepared, reviewed and/or approved by Stagg and Stagg Capital. The defendants represented in the Brochure that Stagg Capital "is comprised entirely of the team that has successfully run 3V Capital Management since 2004, a distressed fund with $500mm+ in assets." According to the Brochure, investors had a rare opportunity to invest in a `startup' fund with an established track-record and fully built out infrastructure. The Brochure further touted the team's experience and exceptional track record of generating positive consecutive monthly returns.
The complaint alleges that prior to disseminating the Memorandum and the Brochure to prospective investors, the defendants knew, or recklessly failed to know, about the Libertas Transfers, the Katcher Agreements and the Katcher Arbitration, but did not disclose them to the plaintiff. The non-disclosure of these facts and circumstances was material to persons considering investing in the SV Funds as they: (i) exposed Stagg, Stagg Capital and the SV Master Fund — the "successor" to the 3V Master Fund — to significant financial and litigation expense; (ii) revealed that one or more officers of Stagg Capital had engaged in improper and unauthorized transactions regarding fund assets; and (iii) revealed that the 3V Funds, the SV Funds and their affiliated parties and entities had non-existent internal controls and oversight functions.
In addition to disseminating the materially false and misleading Memorandum and Brochure, the defendants engaged in written communications with the plaintiff Toledo Funds regarding prospective investments in the SV Funds, again without disclosing the Libertas Transfers, the Katcher Agreements or the Katcher Arbitration. The plaintiff maintains that the defendants had a clear and undeniable fiduciary duty to disclose the foregoing information to their investors. Among other things, the defendants: (i) had unique and superior access to information about the Libertas Transfers, the Katcher Agreements and the Katcher Arbitration, access the plaintiff did not have; (ii) had complete and unfettered authority with regard to the investment of the plaintiff's funds; and (iii) were paid management and performance fees for their work on behalf of the SV Funds, some of which were derived from monies the plaintiff Toledo Funds paid for its shares. Toledo Funds further charges that the defendants had an independent duty to disclose this information to investors, given their dissemination of documents and communications that contained partial disclosures and half-truths about the background and experience of the SV Funds' executives and predecessor entities, without a corresponding and fulsome disclosure of the contentious litigation, fraudulent activities and controversies regarding such persons and entities.
The Toledo Funds' complaint also asserts that the Libertas Transfers and the Katcher Agreements spawned several lawsuits among the parties to those transactions, and ensnared the SV Funds and the SV Master Fund in the controversy as well. These proceedings were also not disclosed in a timely manner, and include:
a. A 2008 demand for arbitration dated commenced by Katcher against Stagg, 3V Advisors, 3V Management, Stagg Group and Stagg Partners for alleged breach of the Katcher Agreements.
b. A 2008 action filed by Katcher in the Superior Court, Judicial District of Stamford/Norwalk, against Stagg, Focht, 3V Capital Partners and 3V Capital Advisors, asserting claims for, among other things, breach of contract, breach of fiduciary duty and violations of CUTPA. Katcher's complaint was later amended to assert claims against the SV Funds and the SV Master Fund.
c. A 2008 action by 3V against Katcher, Libertas and related entities in the United States District Court, District of Connecticut, asserting claims including breach of contract, breach of fiduciary duty and statutory theft.
d. A third-party complaint filed by Katcher, Libertas and related entities against Focht, Stagg and 3V Capital asserting claims including fraud, breach of fiduciary duty and violations of CUTPA.
The plaintiff alleges that the defendants' failures to disclose the Libertas Transfers, the Katcher Agreements and the Katcher Arbitration had a direct and material impact on the investment decisions of the Toledo Funds. The plaintiff would not have invested in the SV Funds had the defendants disclosed that: (i) the assets of the predecessor entities of the SV Funds and their affiliated entities had been materially depleted through improper and unauthorized transfers totaling millions of dollars; (ii) the co-founders and principal advisors to the 3V Funds were involved in contentious litigation concerning the assets of those entities; (iii) one or more senior executives of the investment advisor for the SV Funds and their predecessor entities had misappropriated monies and engaged in illegal and unauthorized transactions; and (iv) these circumstances would lead to prolonged and costly litigation in which the SV Funds, the SV Master Fund, Stagg Capital and Stagg would be parties.
Toledo Funds maintains that its capital account in the SV Funds has been severely depleted as a result of the defendants' non-disclosure and concealment, and that proximate cause is demonstrated by several facts: First, the Libertas Transfers, the Katcher Agreements and the Katcher Arbitration have caused the SV Funds to indefinitely suspend share redemptions, thereby denying the plaintiff the ability to access whatever monies are left in its capital account. Second, the lawsuits with Katcher and Libertas have forced Stagg Capital to search for a new administrator, as the prior administrator terminated its relationship with the SV Funds because of the controversies created by the Katcher litigation. Third, the defendants have expended substantial funds litigating the various proceedings, and thereby depleted the capital accounts of investors in the SV Funds. Fourth, as has been acknowledged by Stagg, the lawsuits involving Katcher and Libertas will likely require a material restatement of the 3V Funds' financial statements, which will cause a direct loss to the plaintiff Toledo Funds, which transferred its 3V Fund shares into shares of the SV Funds. Fifth, as Stagg has also acknowledged, the Libertas Transfers have forced the SV Funds to indefinitely delay completion of required audit procedures and the issuance of audit opinions for the 2007 and 2008 fiscal years, thereby depriving the plaintiff of audited financial statements for the SV funds. Sixth, the wrongful conduct has seriously endangered the financial health of the SV Funds, and thereby decreased the value of the capital accounts of the plaintiff. Toledo Funds also alleges that these undisclosed matters could reasonably have been foreseen by the defendants to engender significant financial risk to the plaintiff as an investor in the SV Funds, and that when those risks materialized in the form of multiple civil lawsuits involving Stagg and others and the criminal proceedings involving Focht, the plaintiff was directly and proximately harmed.
In the first count of its complaint, the plaintiff Toledo Funds accuses all the defendants of common-law fraud and fraudulent inducement. The plaintiff maintains that the Memorandum, the Brochure and the defendants' other communications with investors omitted the disclosure of material facts concerning the Libertas Transfers, the Katcher Agreements and the Katcher Arbitration. As a result, the disclosure documents and other communications, which were designed to fraudulently induce the plaintiff to invest in and retain its shares in the SV Funds, were materially false and misleading. At the time of these wrongful omissions, the defendants knew the facts and circumstances that were being concealed from investors, or were reckless in not knowing them, and that had the plaintiff known of these adverse material facts that the defendants failed to disclose, it would not have purchased or retained its shares in the SV Funds.
The second count of the Toledo Funds' complaint charges all defendants with negligent misrepresentation. It alleges that the defendants had a duty to disclose the Libertas Transfers, the Katcher Agreements and the Katcher Arbitration to the plaintiff. Toledo Funds justifiably relied upon the defendants' documents and communications, and in ignorance of the material omissions and non-disclosures, purchased, continued to purchase, and retained shares in the SV Funds. The plaintiff further alleges that the defendants did not exercise due care in failing to disclose these facts and circumstances, and knew or should have known that their representations to SV fund investors were materially false and misleading.
The third count alleges a violation of CUSA, the Connecticut Uniform Securities Act, General Statutes Section 36b-2, et seq. The plaintiff claims that in connection with their offer and sale of shares in the SV Funds, the defendants: (i) omitted material facts necessary in order to make their statements made, in light of the circumstances under which they were made, not misleading; (ii) engaged in acts, practices and courses of business that operated as a fraud and deceit upon the plaintiff; and (iii) directly or indirectly engaged in dishonest and unethical practices.
The fourth and final count of Toledo Fund's complaint accuses Stagg of knowingly aiding and abetting common-law fraud by the other defendants. It alleges that Stagg had actual and intimate knowledge of the undisclosed events and transactions, but fraudulently concealed them from investors in the SV Funds, or was willfully blind to substantial evidence of such fraud.
The Third-party Complaint
In the third-party complaint, the defendants/third-party plaintiffs allege that if the plaintiff Toledo Funds was damaged by the thefts from the 3V Master Fund or the failure to disclose them, then those damages were caused in whole or in part by the third-party defendants. Therefore, the third-party defendants should be parties to this action, because they are or may be liable for all or part of the plaintiff Toledo Funds' claims against the defendants/third-party plaintiffs. The third-party complaint restates some of the same background information set forth in the Toledo Funds complaint, but also recites the following allegations, which, as is discussed infra, must be taken as true for purposes of the motion to strike.
The third-party complaint purportedly arises out of Katcher and Libertas Holdings and Libertas Partners' theft of nearly $17 million from 3V Master Fund, the cover up of those thefts, and Katcher's failure to comply with his management responsibilities as a managing member of the 3V Entities. Katcher and Stagg opened the 3V hedge fund in 2004, which consisted of a domestic fund and an off-shore fund. The domestic fund and offshore fund invested solely through 3V Master Fund, in what is commonly termed a "master feeder" structure. The general partner of the domestic fund designated 3V Management as its investment advisor, and an entity through which 3V Master Fund would effect trades. 3V Management selected Libertas to serve as one of 3V Master Fund's brokers. From 2004 through 2006, 3V Master Fund used Libertas as its primary broker, and Libertas handled virtually all of 3V's trades.
In addition to his responsibilities as a managing member of 3V Management, and a managing member of the general partner of the 3V domestic fund, Katcher was the Chief Executive Officer, majority owner, founder and a member of both Libertas Partners and Libertas Holdings. Katcher signed all Libertas Holdings checks and had unfettered authority over all Libertas Holdings and Libertas Partners bank accounts. As such, Katcher controlled the operation of these entities, and he used his dominion and control to hold 3V Master Fund's monies for his use and the use of Libertas Holdings and/or Libertas Partners in connection with the 2006 theft of approximately $5.8 million worth of "Stelco" bonds referenced in the Toledo Funds complaint. The third-party complaint makes a similar theft allegation against Libertas Partners with respect to approximately $3.1 million in certain bonds purchased from Credit Suisse in 2007 with funds from 3V Master Fund, as referenced in the original complaint. The third-party complaint makes the additional allegation that from October 2005 through February 2006, Katcher and Libertas Partners caused an additional approximately $4.6 million to be transferred to Libertas Partners from 3V Master Fund without authorization, and that they have failed to return these funds despite a demand.
With respect to the 2007 payroll theft referenced in the Toledo Funds complaint, supra, the third-party complaint alleges that Katcher, Libertas Holdings and/or Libertas Partners arranged for the transfer of $3,362,565.89 from 3V Master Fund to Libertas Holdings and/or Libertas Partners. 3V Master Fund received no consideration for the transfer nor did it authorize the transfer. The proceeds were used to fund the payroll of Libertas Holdings and/or Libertas Partners without authorization from 3V Master Fund, and Katcher personally received approximately $100,000 from the proceeds. By letter dated April 15, 2008, Katcher represented and acknowledged that this transfer funded the February 15, 2007 payroll of Libertas Holdings. Katcher effected the transfer and was aware that it occurred, and was aware that the transfer was unauthorized and should not have occurred, since 3V Master Fund had no obligation to pay Libertas Holdings and/or Libertas Partners' payroll. The third-party complaint charges Katcher with bad faith tactics to deplete 3V Master Fund's capital, even though he was still a managing member of the 3V Entities. It also accuses Katcher of using his dominion and control of Libertas Holdings and/or Libertas Partners to prevent the return of the funds used for payroll, and directed a cover up of the theft, including knowingly providing false and misleading information to auditors and the Internal Revenue Service.
With respect to the Katcher Agreements and the settlement referenced in the Toledo Funds complaint, the third-party complaint alleges that by September 2007, Katcher was reaping the benefit of his interest in the 3V Entities by receiving payment for management services he was not performing. Despite a demand by Stagg, Katcher refused to resign, and instead demanded that Stagg pay him vast sums for Katcher's interests in 3V. Katcher promised that he had acted in good faith and would not interfere with Stagg's operation of the 3V Entities, but failed to disclose the thefts by Libertas Partners and Libertas Holdings, his role therein and his cover up of those thefts. Based on Katcher's promises, and his nondisclosure, Stagg agreed to pay Katcher for his interests in the 3V Entities. Had Katcher disclosed the thefts, Stagg would not have signed the Katcher Agreements without the misappropriated funds being restored to the proper owner.
The third-party complaint makes the additional allegation that Katcher caused Libertas Partners to maintain a secret account at Pershing, LLC (Escrow Account). Libertas funded the Escrow Account with the $4.6 million taken in the additional thefts and the $5.8 million from the Stelco theft. Libertas Partners transferred approximately $7.3 million in funds from the Escrow Account to its checking account in 2005 and 2006. These monies were used to pay the expenses of Libertas Partners and/or Libertas Holdings. In all, the third-party complaint alleges that Katcher used nearly $17 million stolen from 3V Master Fund to keep his undercapitalized Libertas companies afloat. In July 2008, Katcher sold those companies to Knight Capital for a $150 million payment to him personally.
Following the recitation of these allegations, the third-party complaint discusses the 2007 launch of the SV Fund, managed by Stagg Capital. A significant number of the existing investors in the 3V Funds consented to transfer their investments in the 3V Funds to the SV Funds. The participating shareholders redeemed their interests in these entities and received, instead of a return of capital, a pro rata portion of the assets of the 3V Funds. The investors then immediately transferred to the SV onshore and offshore feeder funds the in-kind assets they received. Once the transfer was complete, the SV hedge fund had substantially the same assets as the 3V hedge fund had before the transfer.
The third-party complaint sounds in two counts. In the first count it is alleged that if the plaintiff Toledo Funds suffered any loss, damage or injury as it alleges, it occurred without any fault on the part of the defendants, and was caused by the conduct of the third-party defendants. If any judgment is recovered by the plaintiff against the defendants, the defendants will be damaged thereby, and the third-party defendants are, or will be, responsible therefore in whole or in part, and the defendants will be entitled to judgment over and against the third-party defendants. In the second count it is alleged that the third-party defendants will be liable to the defendants/third-party plaintiffs for the full amount of any recovery herein by the plaintiff Toledo Funds, or for that portion caused by the relative responsibility of the third-party defendants, and the third-party defendants are bound to pay the defendants/third-party plaintiffs' attorneys fees and costs. If the plaintiff Toledo Funds was damaged through the thefts of fund assets as it alleges, then those damages were caused in whole or in part by the third-party defendants, who are bound to indemnify the defendants/third-party plaintiffs in full for damages that the Toledo Funds may recover in this case.
The third-party defendants seek to strike the first count on both factual and legal grounds in that they are not alleged to have made any of the representations that caused financial loss and injury to Toledo as it alleged in its original complaint. As a further basis for their motion, the third-party defendants seek to strike the claim for indemnification on the grounds that it is either not available on certain counts as a matter of law and/or has been insufficiently alleged by the defendants/third-party plaintiffs.
Motion to Strike — Legal Standard
"The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). "It is fundamental that in determining the sufficiency of a [pleading] challenged by a [party's] motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted." (Internal quotation marks omitted.) Gazo v. Stamford, 255 Conn. 245, 260, 765 A.2d 505 (2001).
"A motion to strike . . . does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 588, 693 A.2d 293 (1997). "[The court] construe[s] the complaint in the manner most favorable to sustaining its legal sufficiency . . . [I]f facts provable in the complaint would support a cause of action, the motion to strike must be denied." (Internal quotation marks omitted.) Sullivan v. Lake Compounce Theme Park, Inc., 277 Conn. 113, 117-18, 889 A.2d 810 (2006). "A motion to strike is properly granted if the complaint alleges mere conclusions of law that are unsupported by the facts alleged." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, supra, 262 Conn. 498.
"In ruling on a motion to strike, the court is limited to the facts alleged in the [challenged pleading]." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., supra, 240 Conn. 580. "Where the legal grounds for such a motion [to strike] are dependent upon underlying facts not alleged in the . . . pleadings, the [party that filed the motion] must await the evidence which may be adduced at trial, and the motion should be denied." (Citations omitted; internal quotation marks omitted.) Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 348, 576 A.2d 149 (1990). "It is of no moment that the defendants might prove facts which operate to bar the plaintiff's claim, the sole inquiry at this stage of the pleadings is whether the plaintiff's allegations, if proved, would state a basis for standing . . . [An] argument [that] would require the court to consider facts outside the face of the pleadings . . . would be improper on a motion to strike . . ." (Citations omitted.) Miller v. Insilco Corp., Superior Court, judicial district of New Haven, Docket No. 27 92 67 (May 22, 1990, Schimelman, J.) ( 1 Conn. L. Rptr. 651).
"As a fundamental and threshold requirement, a third-party plaintiff must allege that the third-party defendant is or may be liable to the third-party plaintiff for all or part of the plaintiff's claim against him." Commissioner of Environmental Protection v. Lake Phipps Land Owners Corp., 3 Conn.App. 100, 102, 485 A.2d 580 (1985) "The right to implead a third-party defendant exists even though his ultimate liability to the impleading plaintiff is not yet determined. But the impleading plaintiff must allege facts to support proof that the third-party defendant in question `is or may be liable' so as to state a cause of action within the requirements of the statute." First New Haven National Bank v. Rosenberg, 33 Conn.Sup. 1, 3, 335 A.2d 319 (1975). "A defendant is not permitted to bring in third parties for the purpose of litigating with them matters in no way connected with the suit." Allen v. Chase, 81 Conn. 474, 476, 71 A. 367 (1908).
Discussion
It is clear that the third-party complaint in this case alleges that the third-party defendants are or may be liable to the third-party plaintiffs for all or part of the plaintiff's claim against them. That fundamental threshold requirement is satisfied. What is in dispute is whether the defendants/third-party plaintiffs have also alleged facts in the third-party complaint to support proof that the third-party defendants are or may be liable, so as to state a cause of action within the requirements of the impleader statute. The third-party defendants argue that while the third-party complaint claims that the plaintiff Toledo Funds' alleged losses were "caused" by the third-party defendants, this is exactly the sort of "mere conclusion of law" that is "unsupported by facts" and should be stricken as an impermissible use of impleader.
The claims asserted by the Toledo Funds in its original complaint are fraud, negligent misrepresentation, and CUSA violations. The third-party defendants argue that each of these claims requires evidence of a misrepresentation or actionable omission, yet neither complaint alleges that the third-party defendants had any relationship with the SV Funds or their investors, much less that they made any alleged misrepresentation. In fact, the original complaint clearly asserts that Stagg and Stagg Capital created the SV Funds, prepared all materials disseminated to their investors, and falsely communicated to investors about the funds. As such, Stagg and Stagg Capital allegedly had fiduciary responsibilities to their investors, including the duty to provide full disclosure to the plaintiff. The third-party complaint, while claiming that the third-party defendants are liable for the defendants/third-party plaintiffs' misrepresentations, fails to allege any facts suggesting that the third-party defendants had any role whatsoever in the nondisclosures or alleged misrepresentations. Absent any alleged misrepresentation, which is necessary to plead causation, they argue that any claim that the third-party defendants "caused" plaintiff's losses fails as matter of law as an unfounded (and unsupportable) legal conclusion.
The third-party defendants argue that the entire bases asserted for their liability is the supposedly fraudulent Libertas transfers, but according to the original complaint, it was the defendants/third-party plaintiff's (not the third-party defendants) that failed to disclose this circumstance to SV Funds investors like the plaintiff. Indeed, although the Toledo Fund complaint stems from alleged misstatements and omissions, neither the original complaint nor the third-party complaint asserts that the third-party defendants themselves ever made any statements to the plaintiff, or that they had any involvement with misstatements or material omissions by the defendants/third-party plaintiffs. In fact, the defendants/third-party plaintiffs admit that it was Stagg Capital, which Stagg himself controlled, that managed the SV Funds.
Although the defendants/third-party plaintiffs concede that this court must assume that they have been found liable for their non-disclosures and misstatements alleged by Toledo Funds, the Toledo Fund's claims against the defendants/third-party plaintiffs allege no facts suggesting that the third-party defendants are responsible for the Toledo Fund's alleged losses stemming from investments with the SV Funds. The third-party defendants did not create, promote, or sell the SV Funds. The elements of the claims alleged against the defendants/third-party plaintiffs (and assumed proven for purposes of this motion) relate solely to alleged misstatements and omissions by those parties alone. These are non-disclosures to SV investors which cannot be attributed to the third-party defendants. Any potential liability in the third-party defendants to the defendants/third-party plaintiffs for any alleged thefts from the 3V Entities is not dependent on the outcome of the main claim brought here by the Toledo Funds. It is not derived therefrom, and the theft claim would not be foreclosed by a verdict in favor of the defendants/third-party plaintiffs. Impleader is therefore inappropriate.
In their opposition to the motion to strike, the defendants/third-party plaintiffs argue that all of the claims in the complaint and the third-party complaint arise from Katcher and Libertas' thefts from 3V Master Fund and Katcher's failure to abide by his contractual obligation and his fiduciary duty to manage 3V Master Fund. The defendants/third-party plaintiffs allege that if the plaintiff Toledo Fund was harmed, then the third-party defendants' conduct caused that harm. Therefore, they contend that the motion to strike should be denied. While conceding that the third-party defendants would not be held liable on the same theories of liability as the defendants/third-party plaintiffs, they argue that a third-party plaintiff need not pursue third-party claims based on the same theory of liability asserted in the complaint. Instead, they contend that a third-party action need only arise out the same facts or circumstances as those underlying the original complaint, as is the situation here.
The court is aware of certain trial court decisions which have denied motions to strike third-party complaints even when they allege purportedly independent claims, because one of the purposes of § 52-102a is to obviate the need for multiple actions arising from the same transaction. See Cambridge Mutual Fire Ins. Co. v. Michaud, Superior Court, judicial district of Hartford, Docket No. CV 07 4032988 (August 9, 2008, Wagner, J.) ( 46 Conn. L. Rptr. 96) (`[s]ince the third-party complaint entails similar and related issues . . . the motion to strike is denied'). However, the court finds that line of reasoning is inapplicable to the circumstances of these parties. The original complaint of the Toledo Funds is against Stagg and his entities, and it is but one of several lawsuits in which the Stagg and Katcher entities are embroiled over their business dealings in the hedge fund industry, both with each other and with third parties such as Toledo Funds. Granting this motion to strike will not obviate the need for multiple actions arising from the same transactions, as the Stagg defendants/third-party plaintiffs are already pursuing virtually identical theft claims elsewhere. These theft claims are also being asserted as counterclaims against the third-party Katcher defendants in the related litigation pending before this court, as well in a separate action before Judge Underhill in the U.S. District Court here in Connecticut. 3V Capital Master Fund Ltd v. Knight Libertas LLC et al., No. 08-CV-01769 (SRU) (D.Conn.). In fact, in light of the prior pending federal action, an argument could be made that granting this motion to strike a duplicative third-party complaint would advance the cause of judicial economy, not hinder it. It will not thereby deprive the defendants/third-party plaintiffs of a potential remedy if their claims against the Katcher entities are found to have merit, as it does not preclude the Stagg entities from pursuing their theft claims in state or federal court.
Despite the fact that this court at oral argument indicated to counsel that it did not believe that the federal case would have any bearing on this motion to strike, further research and analysis indicates that the court was mistaken in that opinion.
Conclusion
In deciding a motion to strike, the court accepts all facts well-pled. However, even in light of the standards applicable to such motions, the court finds that the third-party complaint in this case falls short. It does not allege enough facts to support proof that the third-party defendants are or may be liable to the defendants/third-party plaintiffs for all or part of the plaintiff Toledo Funds' non-disclosure claims against the defendants/third-party plaintiffs. Alternatively, the court grants the motion to strike because it finds that the causes of action in the third-party complaint are sufficiently independent and not derivative of the causes of action against the defendants in the original complaint, and that the defendants/third-party plaintiffs may pursue — in fact, are pursuing — their available remedies for such claims elsewhere.
For the foregoing reasons, the motion to strike is GRANTED.
IT IS SO ORDERED,