212 INVESTMENT CORPORATIONv.KAPLAN, 0603029/2004

Supreme Court of the State of New York, New York CountyMay 27, 2008
0603029/2004 (N.Y. Misc. 2008)
0603029/20042008 N.Y. Slip Op. 31587

0603029/2004.

May 27, 2008.


Motion sequences 22 and 23 are consolidated for disposition.

Kaplan, Nathan Co. (the Partnership) moves for approval of the settlement agreement entered into between the Plaintiffs in this action, defendants Myron Kaplan, Barbara Kaplan, and the Partnership. The Partnership also seeks approval of its proposed plan for allocation of the monies it will receive pursuant to the settlement agreement.

Background

Previous decisions of the Court have been issued in this action, familiarity with which are presumed. Thus, the pertinent underlying facts are recited herein only briefly and in limited part.

In 1969, Myron Kaplan founded the Partnership, a hedge fund, with James Nathan. Myron Kaplan traded securities for the Partnership as well as for his own accounts. In trading for the Partnership and himself, separate securities accounts were maintained. He retained his sister, defendant Barbara Kaplan, a registered representative, to execute the trades.

On numerous occasions, Barbara Kaplan placed orders to buy or sell securities for Myron Kaplan's accounts at the same, or almost the same, time when she placed similar orders for the Partnership account.

Barbara Kaplan would fail to specify the account for which the trades were executed, at the time they were placed. The securities were later allocated to a particular account, depending on the profitability of the trade, with the more profitable trades allocated to Myron Kaplan's accounts, while the less profitable were allocated to the Partnership account. The timing of certain transactions, and the commissions charged, were also varied to benefit Myron Kaplan's accounts over that of the Partnership.

On June 12, 2003, the New York Stock Exchange (NYSE) found that Barbara Kaplan had effected improper post-execution allocations on approximately 375 occasions between November 1998 and April 1999 for trades which she knew, or should have known, would result in more favorable prices being allocated to her brother's account, to the detriment of an account with public investors, the Partnership's account. The NYSE censured Barbara Kaplan, suspended her from the securities industry for one year, and fined her $100,000.00. Barbara Kaplan entered into a stipulation admitting her actions.

Plaintiffs, limited partners of Kaplan, Nathan Co., commenced this derivative action on behalf of the Partnership, alleging causes of action for, inter alia, breach of fiduciary duty and fraud. The action was principally directed against defendants Myron Kaplan and Barbara Kaplan, alleging that they failed to disclose and deliberately concealed the NYSE investigation of the Partnership and its partners, and in nearly 85% of the same-day, same-security trades entered for both, Myron Kaplan received the better price than the Partnership account.

Thereafter, Myron Kaplan moved to stay this action, pending arbitration. The Court granted the motion (2/9/05 Decision and Order), and the dispute proceeded to arbitration at the American Arbitration Association. 212 Investment Corp. et al v Kaplan, Nathan Co., et al (AAA Case No. 13 180 Y 00862 05) (the Arbitration).

The Arbitration
:

The arbitrators issued an award, dated January 26, 2007, "based upon [their] evaluations of the credibility of the witnesses and . . . documentary evidence." Award of Arbitrators, Objecting Br, Exh A (the Award) at 2. In it, the Kaplans were held liable for nearly $77,000,000 in damages, together with interest. Specifically, the Award provided for payment of:

(a) $16,336,288.00 to the Partnership, as a result of the wrongful allocation of trades;

(b) $35,041,131.00 to the Partnership, representing the return of the performance fees. which had been paid to Myron Kaplan, including interest at the rate of 9% per annum;

(c) $4,199,503.00 to the Partnership, representing commissions paid to Barbara Kaplan plus interest at the rate of 9% per annum;

(d) $16,336,288.00 to Plaintiffs as punitive damages;

(e) $3,055,000.00 to Plaintiffs for attorneys' fees and disbursements;

(f) $1,572,700.00 to Nathan, a respondent in the Arbitration, for attorneys' fees and costs; and

(g) $220,169.00 to the Partnership for attorneys' fees and costs, less any amount already paid by Myron Kaplan.

Id. at 9-10.

The Award also provides for the Steering Committee of Plaintiffs (the Steering Committee), working with specified others, to distribute the proceeds of the Award to the limited partners and for apportionment to the limited partners "according to their respective interests during the time period 1991-2006." Id. at 12.

The Court confirmed the Award in a decision dated July 18, 2007. 7/18/07 Decision and Order.

The Instant Motion
:

A Settlement Agreement, dated December 6, 2007, was reached. Stipulation of Settlement, Frey Aff, Exh A (the Settlement Agreement). It provides, inter alia, for:

(a) Myron Kaplan to pay $74,000,000, a discount of slightly less than $3,000,000 from the Award ( id. at 8);

(b) Myron Kaplan to simultaneously make payments to accounts for the monies awarded to the Partnership and the Plaintiffs ( id. at 8-17);

(c) Attorneys' fees to be paid, proportionateley, from the monies paid to the Partnership and the Plaintiffs, with Plaintiffs counsel receiving a contingency fee on the amounts collected ( id. at 10-17);

(d) In the event of Myron Kaplan defaulting, he and Barbara Kaplan to be jointly and severally responsible for the full amount of the Award, plus interest ( id. at 18)

(e) In the event of a default, any attorneys' fees and costs incurred in enforcing the Award to be the responsibility of the Kaplans ( id. at 19);

(f) Acknowledgment that the Kaplans' obligations are non-dischargeable, in the event that either Kaplan becomes a chapter 11 bankruptcy debtor ( id. at 21); and

(g) No distribution to be made until (i) the Court approves the Settlement Agreement and (ii) a formal plan of allocation is agreed to by Plaintiffs and the Partnership or is otherwise approved by a final and non-appealable order of the Court. Id. at 17.

The Settlement Agreement also provides the details for the handling and allocation of attorneys' fees ( id. at 10-17), but does not address the allocation to the limited partners, other than providing that no distribution will occur until such a plan is agreed to or ordered by the Court.

The Partnership, now moving for approval of the Settlement Agreement, argues that it enhances the Partnership's likelihood of collecting the Award, and avoids the expense and delay that would result from attempts to seize or encumber assets to satisfy the Award. Mot Br at 2. It contends that "in the event the Settlement Agreement is not approved, it is highly likely that the Kaplans will appeal the Court's confirmation of the Award." Mot Br at 13.

The Partnership also seeks Court approval of its proposed allocation and distribution plan. Notice of Derivative Settlement with Myron Kaplan and Barbara Kaplan and Proposed Allocation of Settlement Proceeds, Fey Aff, Exh C (the Proposed Allocation); Distribution Schedules, Fey Aff, Exhs B1-B3. It proposes to limit the portion of the settlement for the Partnership to those who were limited partners in 1991-1999. Proposed Allocation at 7.

Notice was sent to the limited partners of the Partnership and a fairness hearing was held on April 2, 2008.

Objections
:

The Steering Committee joins the Partnership in urging the Court to accept the Stipulation of Settlement, but objects to the Proposed Allocation plan. It contends that the proposed allocation rewrites the Award, which provides for apportionment to the limited partners in accordance with their respective interests during the time period 1991-2006. It also asserts that counsel for the Partnership have forgone the opportunity to raise significant allocation issues by not raising them either with the arbitrators in a post-Award motion for modification, or before the Court on the motion to confirm.

The Settlement Agreement incorporates by reference the settlement reached between the Plaintiffs and James Nathan. Settlement Agreement, Exh D; Proposed Allocation at 7. It provides for Nathan to receive the greater of (i) $3,000,000 or (ii) 50% of what he would have been entitled to if his capital account was treated as a limited partnership interest under the Award. Id. at 3. The agreement with Nathan is unopposed.

Additionally, separate objections were filed on behalf of Guilford Glazer, the Emerson U. Glazer 1976 Trust A and the Erica J. Glazer 1976 Trust A (together, the Glazers). The Glazers were limited partners of the Partnership. They object to the: (1) allocation of damages on any basis other than the relative harm suffered by each partner, except Myron Kaplan; (2) exclusive allocation of the punitive damages to the Plaintiffs, rather than to the entire Partnership; and (3) the contingency fee to Plaintiffs' counsel, if it is imposed on the Partnership.

Discussion:
The Settlement:

The Settlement Agreement substantially tracks the arbitration Award except as to the allocation of attorneys' fees. As to this, the parties have agreed to the change which effectively have the attorneys' fees paid from both the general and punitive award, unlike the Arbitrator's Award which has them paid from the general damages only. Section 115-a(4) of the Partnership Law provides that a limited partners' derivative action "shall not be discontinued, compromised or settled, without the approval of the court having jurisdiction of the action." Although this section "sets forth no standard for passing on proposed settlements of derivative actions," certain principles have evolved. Rodgers, et al. v Sound of Music Co., et al., 74 Misc 2d 699, 703 (NY County 1972). These include:

(1) The benefits in the agreement of settlement, as against the likelihood of recovery after trial. (2) The general rule that courts favor settlements. (3) Whether sharply contested and dubious issues are present, the determination of which would be obviated by the settlement. (4) The expense of going to trial. (5) The likelihood of success at the trial. (6) Whether the settlement is the result of good faith negotiation at arms length, or of collusion, chicanery or fraud. (7) The position of the parties to the litigation concerning the settlement; the opposition, if any, to the settlement. (8) Whether, in the court's judgment, the settlement is fair and reasonable under all the circumstances.

Id.

The Settlement Agreement at issue meets the goals of the above areas of review. Most significantly, it advances the parties' interests in ending the litigation and appeals, minimizing collection efforts and, thereby, bringing the conclusion of this much litigated — — and arbitrated — — dispute to a more speedy conclusion.

The Allocation
:

The Arbitrators specified that the apportionment should be in accordance with the Partnership's "respective interests during the time period 1991-2006." Award at 12. The Partnership contends that 1991-1999 is the appropriate time period for which to allocate the money to be paid to the Partnership, in accordance with the partners respective interests, rather than the period the arbitrators found. They argue that this is so since the damages awarded by the Panel is the amount that the Plaintiffs' own expert testified the Partnership suffered in those years. Mot Br at 2. They assert that "the Arbitration Panel credited only the economic harm to the Partnership and the compensation paid to the Kaplans during those nine years and rejected the 212 Claimants' effort to obtain monetary damages for the period prior to 1991 and the period subsequent to 1999" and, therefore, the only investors that should share in the Settlement proceeds are those investors that owned a partnership interest during that period. Mot Br at 2, 16.

Movant argues that using the 1991-2006 time period would shift a benefit of over $5 million to the Plaintiffs, and would reduce the recovery of former partners by more than $5.8 million. Mot Br at 3. It also contends that the Steering Committee "should be disqualified from any participation in the determination of allocation," because it espouses a methodology that would significantly benefit them, to the detriment of other investors. Motion Br at 23. It asserts that

the Steering Committee attempts to avoid an equitable and appropriate result here by frivolous technical and procedural arguments belied by their own conduct, by making irrelevant and baseless ad hominem attacks . . . that are completely unsupported by the record, and by improperly attempting to augment the record and re-write the basis of the Arbitrator's decision in order to support a claim for Partnership damages in 2000-2006 even though the Steering Committee's own counsel previously represented to this Court that the Panel had rejected their effort to award damages for this period.

Reply Br at 2 (emphasis in original).

However, what movant, the Partnership, considers to be a "frivolous technical" argument, the Court considers the clear language of the arbitrators in the Award. Arbitrators are not required to set forth their underlying findings or rationale and the courts give great deference to arbitrators. Wien Malkin LLP v Hemsley-Spear, Inc., 6 NY3d 471, 481 (2006); Colletti v Mesh, 23 AD2d 245, 247 (1st Dep't 1965), aff'd 17 NY2d 460 (1965). The Court will not rewrite the Award, or superimpose an interpretation or intention on language that is clear on its face, especially since the Court has already confirmed the award by its decision dated July 18, 2007. Accordingly, the Court does not approve the Proposed Allocation plan proposed by the Partnership, but would approve an allocation as set forth in the Award.

The Court notes, however, that the Glazers' objections, seeking equal allocation of damages, including punitive damages, in accordance with the relative harm to each partner in the Partnership and to exclude any allocation of the fees of Plaintiffs' counsel upon the Partnership, are unpersuasive. In the first instance, they contend that they "had absolutely no knowledge of the underlying protracted arbitration proceedings and litigation," despite being "among the limited partners with the largest holdings in the partnership." Glazer Br at 2. The Glazers offer no explanation on how the dispute underlying the litigation and arbitration proceeded for years without their being aware of it in anyway. Moreover, although the objections they raise can be considered objections to the Proposed Allocation, or indeed objections to the Settlement Agreement, the objections are, most of all, objections to the Award of the arbitrators, who specifically limited the receipt of punitive damages to Plaintiffs and clearly provided that payments to the Partnership was to be after payment to Plaintiffs' counsel. Award at 12. The Glazers, therefore, appear not to be objecting to the Settlement Agreement and Proposed Allocation currently before the Court, but seeking to have the Court set aside or modify the Award itself. The awards of arbitrators are afforded substantial deference and broad latitude, which the courts will not override even if they disagree ( Yusuf Ahmed Alghanim Song v Toys "R" Us, Inc., 126 F3d 15, 25 (2d Cir 1997), cert denied 522 US 1111 (1998); see also 7/18/07 Decision and Order) and, here, the Award has already been confirmed.

The Court has considered the remaining arguments, and finds them to be without merit.

Accordingly, it is

ORDERED that the motion is denied, to the extent it seeks approval of the Proposed Allocation; and it is further

ORDERED that the clerk is directed to enter judgment accordingly.