Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd.

392 F.Supp.3d 382

KORTRIGHT CAPITAL PARTNERS LP, Matthew Taylor, and TY Popplewell, Plaintiffs,

v.INVESTCORP INVESTMENT ADVISERS LIMITED, Defendant.

16cv7619

United States District Court, S.D. New York.

Signed August 7, 2019

Jason Michael Halper, Hyungjoo Han, Jared Jon Stanisci, Matthew Moler Karlan, Todd Blanche, Cadwalader, Wickersham & Taft LLP, New York, NY, for Plaintiffs.

Christopher Michael Joralemon, Mark Adam Kirsch, Peter Michael Wade, Alison Leigh Wollin, Laura Faye Corbin, Gibson, Dunn & Crutcher, LLP, New York, NY, for Defendant.

OPINION & ORDER

WILLIAM H. PAULEY III, Senior United States District Judge:

Plaintiffs Kortright Capital Partners LP ("Kortright") and its co-founders Matthew Taylor and Ty Popplewell bring this diversity action against Investcorp Investment Advisers Limited (together with various affiliates, "Investcorp"). Broadly speaking, Plaintiffs allege that Investcorp—a longtime seed investor in funds operated by Kortright—induced them to proceed with a multi-million-dollar transaction with a competitor of Investcorp's, which depended on Investcorp's consent and participation. Although Investcorp purportedly promised to support the transaction, Plaintiffs claim that Investcorp reneged at the last moment—mere days before the closing date of the transaction.

In the wake of the transaction's implosion, Plaintiffs brought an assortment of New York common law claims for negligent misrepresentation, negligence, breach of contract, breach of the implied covenant of good faith and fair dealing, and promissory estoppel. (See Complaint, ECF No. 1 ("Compl.").) Only Plaintiffs' negligent misrepresentation claim survived Investcorp's motion to dismiss and subsequent motion for summary judgment. See Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd., 2018 WL 6329396 (S.D.N.Y. Dec. 4, 2018) (summary judgment); Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd., 257 F. Supp. 3d 348 (S.D.N.Y. 2017) (motion to dismiss).

Following a bench trial on the negligent misrepresentation claim, this Court makes the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure. This Opinion & Order also addresses the parties' motions to preclude the expert testimony of their respective damages and industry experts. (See Trial Tr. at 640.) Finally, this Court calculates the fees to be awarded Plaintiffs for Investcorp's discovery misconduct. See Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd., 330 F.R.D. 134, 140 (S.D.N.Y. 2019).

BACKGROUND

I. The Investcorp Seeding Relationship

Roughly a decade ago, Taylor and Popplewell—two investment professionals who had worked together for years at Och-Ziff Capital Management and Barclays—formed Kortright. (Trial Tr. at 40-42 (Taylor).) Kortright was an investment adviser for a series of hedge funds that began managing money for clients in May 2010. (Trial Tr. at 43 (Taylor).) In general, Kortright employed a hybrid strategy between event-driven investing and long-term value investing. (Trial Tr. at 43-45 (Taylor); Trial Tr. at 1223-24 (Popplewell).) After forming Kortright, Plaintiffs planned to develop its track record for a few years under a joint venture structure with its original seed funder before seeking a new seeding arrangement that would eventually enable Kortright to stand on its own as an asset manager. (Trial Tr. at 45-46 (Taylor).)

In 2013, Plaintiffs embarked on their search for a new seeding partner. One of Kortright's potential suitors was Investcorp, an alternative asset manager that offered its clients the opportunity to invest in hedge funds and other products. (Trial Tr. at 803-04 (Vamvakas).) As relevant here, one of Investcorp's businesses—its single manager platform—involved identifying hedge fund managers and providing them with seed capital to grow their assets in return for a revenue share. (Trial Tr. at 645, 803-07 (Vamvakas); Trial Tr. at 995 (Erdely).) Investcorp would also monitor the performance of the managers in real time. (Trial Tr. at 997-99 (Erdely).) Once the contractual commitment period lapsed, Investcorp typically redeemed that capital in order to seed additional fund managers. (Trial Tr. at 665, 807-08 (Vamvakas); Trial Tr. at 996 (Erdely).)

Between the spring and summer of 2013, Kortright and Investcorp negotiated a seeding relationship and each conducted due diligence on the other. (Trial Tr. at 47-48 (Taylor); Trial Tr. at 645 (Vamvakas).) Investcorp's risk committee approved an investment in Kortright, touting the Kortright team's talent, track record, and reputation. (Trial Tr. at 647-50 (Vamvakas); see P-9.) The parties' efforts culminated in a Project Agreement executed on June 26, 2013. (See P-11.) In broad strokes, the Project Agreement provided for up to a $50 million investment of Investcorp's clients' capital subject to the funds' liquidity provisions—namely, that Investcorp could redeem its investment if it provided notice of redemption at least 45 days before the end of each quarter. (Trial Tr. at 53, 72-73 (Taylor).) Under the Project Agreement, the investment of client capital was subject to a "fiduciary reasonable best efforts" clause, which meant that the capital would be subject to Investcorp acting in what it reasonably believed to be its clients' best interests. (Trial Tr. at 249-52 (Taylor); Trial Tr. at 814-15 (Vamvakas).) Investcorp also agreed to invest $50 million of proprietary capital from its balance sheet subject both to the general liquidity provisions as well as a two-year lockup period. (Trial Tr. at 51-53 (Taylor); Trial Tr. at 1225-26 (Popplewell); Trial Tr. at 664-65 (Vamvakas).)

In exchange for Investcorp's seed funding, the Project Agreement afforded Investcorp a bevy of consent, informational, and economic rights. (Accord Trial Tr. at 1177, 1179-80 (Klein) (explaining the nature of seeding relationships generally).) For example, Investcorp had the right to consent to any mergers, sales, joint ventures, changes in Kortright's structure, or changes in control. (Trial Tr. at 54 (Taylor); see P-11, § 2.1.) The Project Agreement also entitled Investcorp to receive notice of various events and to inspect Kortright's financial statements and valuations. (Trial Tr. at 55-56 (Taylor); see P-11, §§ 2.2, 2.3, 2.5.) And in particular, Investcorp had the right to receive a revenue share at different levels of Kortright's growth, based on its assets under management. (Trial Tr. at 56-57 (Taylor); see P-11, § 3.2.) Throughout the life of Kortright's relationship with Investcorp, Plaintiffs primarily interfaced with Nick Vamvakas, the head of Investcorp's single manager platform business. (Trial Tr. at 47-48 (Taylor); Trial Tr. at 644-45, 800 (Vamvakas).) In addition, Plaintiffs periodically communicated with Investcorp's research analysts about the specifics of the portfolios. (Trial Tr. at 818 (Vamvakas).)

II. The Man Opportunity

Between 2011 and 2015, Kortright's annual profits grew from roughly $1 million to approximately $5 million. (Trial Tr. at 242 (Taylor).) Although the relationship with Investcorp enabled Kortright to raise assets and attract clients, Taylor and Popplewell were dissatisfied with the rate of Kortright's growth. As part of the seed investor arrangement, Investcorp had agreed to serve as a placement agent for the Kortright funds pursuant to a marketing agreement between the parties. (See P-12.) Plaintiffs believed that Investcorp could leverage its "robust" marketing team and connections in the hedge fund industry to promote Kortright and raise funds. (Trial Tr. at 69 (Taylor).) However, shortly after Kortright and Investcorp began their relationship, Investcorp's marketing department downsized from five or six people to a single person. (Trial Tr. at 70 (Taylor).) And because this coincided precisely with the period in which Kortright needed to grow, Taylor and Popplewell fell short of their growth goals. (Trial Tr. at 73-74 (Taylor).)

In the summer of 2015, Taylor began discussing a potential business opportunity with Man Group plc ("Man"), an asset management company based in the United Kingdom. (Trial Tr. at 89-92 (Taylor); Trial Tr. at 424 (Jones).) Although Man sent over proposed terms at that time in contemplation of a potential transaction, these exploratory discussions did not result in any agreement with Man at that time.

Despite Plaintiffs' growing frustrations with Investcorp's marketing of the Kortright funds, Taylor still perceived Investcorp to be committed to the partnership, and Kortright had a few prospective clients that it hoped to bring on board. (Trial Tr. at 92-93 (Taylor).)

By the end of 2015, two developments caused Taylor to revisit Kortright's earlier discussions with Man. First, Investcorp made a redemption request for a portion of its proprietary capital for year-end 2015, possibly signaling a shriveling commitment to Kortright. (Trial Tr. at 95-97 (Taylor); Trial Tr. at 822-23 (Vamvakas); Trial Tr. at 1236 (Popplewell); see also P-53.) Second, the prospective clients that Kortright wooed during the summer failed to materialize by the end of the year. (Trial Tr. at 95-96 (Taylor).) These circumstances gave rise to Taylor's concerns that the withdrawal of capital by Investcorp—Kortright's strategic investor—could spook potential clients from investing in Kortright.

Based on lingering doubts over Investcorp's continuing commitment to Kortright, Taylor rekindled discussions with Man in December 2015. Man sent Taylor an indicative proposal that month. This proposal carried the same general structure as the proposal Plaintiffs considered in the summer of 2015 and eventually became the template for the Man transaction. (Trial Tr. at 278-79 (Taylor); see D-5.) Things came to a head in February 2016. The catalyst was Investcorp's submission of redemption notices for a substantial portion of its proprietary capital for March 31, 2016. (Trial Tr. at 102-04 (Taylor); see also P-71;...