Alki Partners, LP v. DB Fund Servs., LLC

4 Cal.App.5th 574

209 Cal.Rptr.3d 151

ALKI PARTNERS, LP, et al., Plaintiffs and Appellants,

v.DB FUND SERVICES, LLC, et al., Defendants and Respondents.

D068063

Court of Appeal, Fourth District, Division 1, California.

Filed October 24, 2016

James A. Shalvoy, Manhattan Beach, for Plaintiffs and Appellants.

Pillsbury Winthrop Shaw Pittman, Richard M. Segal, Nathaniel R. Smith, San Diego, Kirke M. Hasson and G. Allen Brandt, San Francisco, for Defendants and Respondents.

NARES, J.

After allegedly losing millions of dollars in a hedge fund, investors sued the fund's administrator for breach of contract, alleging the administrator failed to (1) value the hedge fund's assets, (2) advise investors of the hedge fund's net asset value, and (3) respond to investor inquiries about the fund. The superior court granted summary judgment in favor of the fund administrator, determining the undisputed material facts established no breach of contract. Later, the court awarded the fund administrator $3,027,237.96 in attorney fees based upon a contractual provision entitled “Standard of Care,” which provides the administrator is to be indemnified for losses, including reasonable attorney fees “resulting in any way from the performance or non-performance of Administrator's duties hereunder....”

The investors appeal, asserting triable issues of material fact preclude summary judgment. They also contend the court erroneously awarded attorney fees. We affirm summary judgment, determining the undisputed material facts establish the administrator did not breach the applicable contract. However, we reverse the award of attorney fees because the contractual language relied upon is a third party indemnity provision that does not create a right to prevailing party attorney fees in litigation between the parties to the contract. (See Carr Business Enterprises, Inc. v. City of Chowchilla (2008) 166 Cal.App.4th 14, 22–23, 82 Cal.Rptr.3d 128 (Carr ).)

FACTUAL AND PROCEDURAL BACKGROUND

A. Introduction—The Parties

This appeal involves several distinct entities having similar names. The investment fund entities are Alki Partners, LP; Alki Capital Partners, L.P.; Alki Fund, Ltd.; and Alki Capital Management, LLC. The fund administrators are DB Hedgeworks, LLC, and Hedgeworks Fund Services Limited.

Adding to the potential for confusion, these entities are parties to distinct contracts, one called a “Fund Administration Agreement” and the other an “Administrative Services Agreement.” The record contains three such contracts, but they differ from each other in material respects. One of them is not even signed.

Thus, to say “Hedgeworks” or “Respondents” breached “contracts” with “Alki”—as plaintiffs often assert in their briefs, is confusing at best, and potentially misleading.

To clarify, the following persons or entities are involved in this appeal:

1. Alki Partners, LP

Alki Partners, LP (also known as Alki Capital Partners, L.P.) is a limited partnership in the business of operating a hedge fund.¹ Hereafter, we refer to Alki Partners, LP, and Alki Capital Partners, L.P., as Alki Partners.

2. Alki Capital Management, LLC

Alki Capital Management, LLC (Alki Capital) was the general partner of Alki Partners until approximately September 2008.

3. Scott Wilfong

Scott Wilfong is the president of Alki Capital. Wilfong was also the portfolio manager for Alki Partners. Wilfong had sole authority to make investment decisions for Alki Capital and Alki Partners.

4. DB Fund Services, LLC , formerly known as DB Hedgeworks, LLC

DB Fund Services, LLC, formerly known as DB Hedgeworks, LLC (Hedgeworks), is a company that provided administrative services to Alki Partners under a contract entitled “Fund Administration Agreement” dated January 1, 2002.

5. Bullfrog Research, LLC

Bullfrog Research, LLC (Bullfrog) became the general partner of Alki Partners in September 2008. Bullfrog is also the assignee of certain claims and causes of action of individuals who are limited partners of Alki Partners.

6. Alki Fund, Ltd.

Alki Fund, Ltd. (Alki Fund) is a Cayman Islands company, an “offshore hedge fund.”

7. Hedgeworks Fund Services Limited

Hedgeworks Fund Services Limited (HFSL) is a Cayman Islands limited liability company. HFSL provided administrative services to Alki Fund under a contract entitled “Administrative Services Agreement” dated August 1, 2005.

B. Summary Judgment and Summary Adjudication Rulings

In May 2014 the court issued the summary judgment ruling that is the basis for the instant appeal. However, in March 2014 the court made several rulings on a separate motion for summary judgment and summary adjudication. As a result of those March 2014 rulings, which are not challenged here, some of the entities and contracts noted ante are no longer involved in this case.

For example, in the March 2014 ruling, the court granted summary judgment in favor of HFSL on the grounds it was dissolved before plaintiffs' action was commenced. Thus, HFSL is out of the case.

The court also granted summary adjudication in favor of Hedgeworks against Alki Fund on the grounds no contract existed between them. As a result, the court dismissed claims alleged by Alki Fund. Alki Fund is out of the case.

There are other important results of these March 2014 rulings. The administrative services agreement dated August 1, 2005, between Alki Fund and HFSL is not relevant in this appeal. That August 1, 2005 contract does not determine Hedgeworks's contractual obligations to Alki Partners because the court has already adjudicated that Hedgeworks is not a party to that contract, and that ruling is not challenged on appeal.

The only contract that is relevant here is the fund administration agreement dated January 1, 2002, between Alki Partners and Hedgeworks. In their response to Hedgeworks's separate statement of undisputed material facts, plaintiffs concede this point, agreeing it is “undisputed” that the agreement is the contract for administrative services between Hedgeworks and Alki Partners.²

With these preliminary matters clarified, the relevant facts are summarized below.

C. The Alki Partners Hedge Fund

Alki Partners was created to acquire, invest in, and sell or otherwise trade in securities, defined broadly to include “investment instruments and vehicles of every kind and nature, foreign or domestic, whether publicly or nonpublicly traded....”

Alki Capital, the general partner of Alki Partners, was given vast authority in running Alki Partners. For example, the limited partnership agreement gives Alki Capital exclusive authority to determine the value of the partnership's assets:

“10.6 Valuation. The value of the assets and liabilities of the Partnership shall be determined by the [g]eneral [p]artner in good faith and such determination shall be conclusive and binding on all of the [p]artners....”

The limited partnership agreement also gives Alki Capital “full, exclusive and complete authority in the management and control of the business of the [p]artnership ... and [it] shall make all decisions affecting the [p]artnership.”

From 2002 to September 2008, Wilfong, as owner of Alki Capital, had the sole authority to make investment decisions for Alki Partners.

Only wealthy and sophisticated investors were eligible to become limited partners in Alki Partners. The minimum investment was $250,000. The offering was available only to investors having a net worth in excess of $1.5 million. Before being accepted into the limited partnership, an investor had to demonstrate that he or she was an “accredited investor,” sophisticated in financial and business matters generally and in investing in securities.

The Alki Partners' offering circular warned potential investors in all upper case letters, “THESE SECURITIES ARE SUBJECT TO A HIGH DEGREE OF RISK.” Elsewhere, the circular explained that the general partner “has broad discretion to employ any [s]ecurities trading or investment techniques” many of which “are high-risk activities that could result in substantial losses under certain circumstances.” After providing biographical information about Wilfong, the offering circular states, “The [p]artnership's performance depends, to a great extent, on the ability and experience of Mr. Wilfong in making investment decisions.”

D. The Hedgeworks Fund Administration Agreement

Alki Partners entered into a contract with Hedgeworks entitled “Fund Administration Agreement,” dated January 1, 2002 (the Agreement). The Agreement refers to Alki Partners as “Client” and to Hedgeworks as “Administrator.” The Agreement provides that “No provision of this Agreement may be amended, modified, waived or discharged except as agreed to in writing by the parties.”

Under the Agreement, Hedgeworks agreed to perform certain accounting and administrative functions for Alki Partners. In the ordinary course of business, each month Alki Partners (or its prime broker) would provide Hedgeworks with values for the fund's assets.³ If the value of a particular asset was not available on the securities exchange or market, or if Alki Partners believed the reported value was not indicative of fair value, Alki Partners had the right under the Agreement to provide Hedgeworks its own valuation. Schedule A, paragraph 2(d) of the Agreement provides in part:

“The value of assets will be recorded at their fair value as determined in good faith by the Client in the absence of current quotations or if Client [ ] concludes that such quotations are not indicative of fair value by reason of illiquidity of a particular security or other factors.”

Consistent with this provision, Wilfong testified in deposition, “I'm the one that valued it. Hedgeworks had nothing to do with the valuation.”

In turn, Hedgeworks would take the asset values provided by Alki Partners, factor in monthly expenses and any other adjustments, and calculate the net asset value (NAV) of the fund. Under schedule A.2. of the Agreement, Hedgeworks was required to prepare limited partner statements on a monthly basis. Based on...