If there’s a more litigious partnership falling-out than that of the closely-held mortgage company, Private Capital Group (PCG), I don’t know about it. The case, entitled Ficus Investments, Inc. v. Private Capital Management, LLC, has racked up 87 motions since it was filed in Manhattan Supreme Court in March 2007, including several contempt applications. The court’s docket lists over 2,300 separate documents filed, and the case isn’t even close to being tried. There have been three interlocutory appeals decided thus far, with several others awaiting decision. Did I mention the parties have filed at least five other, related cases?
PCG was a New York-based Florida limited liability company formed to buy, manage and sell non-performing mortgages. Ficus Investments, Inc. (Ficus), the 80% member and sole manager of PCG, put up $300 million debt financing. Private Capital Management (PCM), the 20% member, operated PCG’s mortgage business by PCM’s two beneficial owners, Thomas Donovan and Lawrence Cline. The conflagration started a little over a year after operations began, in March 2007, when Ficus ousted Donovan and Cline and brought suit accusing them of misappropriating over $20 million.
The complex, high stakes litigation not surprisingly has generated millions in legal bills, which in turn has spawned a litigation within the litigation over the issue of the defendants’ entitlement to advancement and indemnification of legal expenses under the provisions of PCG’s operating agreement.
A year ago I wrote about a January 2009 appellate decision in Ficus in which the court held that the primary defendant, Thomas Donovan, as a former officer of PCG was entitled to seek advancement of his legal defense costs under the operating agreement. The primary issue there was whether the trial court’s issuance of preliminary injunctions against Donovan defeated his advancement rights. Manhattan Commercial Division Justice Bernard Fried ruled (read here), and the Appellate Division affirmed (read here), that the ultimate determination of Donovan’s indemnification rights had no impact on his interim advancement rights under the operating agreement’s terms. The rulings resulted in reimbursement to Donovan of approximately $1.5 million in legal fees incurred through the end of 2007, which was upheld by yet another appellate court ruling in June 2009 (read here).
As it turned out, 2007 was just a warm-up for the next year, in which Donovan incurred another $3.8 million in legal defense costs for which he also sought advancement. Ficus opposed the bulk of the request, arguing that Donovan was not entitled to advancement for fees incurred opposing Ficus’s applications for discovery and contempt sanctions concerning Donovan’s alleged misconduct after he was terminated as an officer, during the course of litigation. Donovan’s alleged misconduct included the "hacking" of former co-defendant Cline’s e-mail account — early in the case Cline and Ficus entered into settlement and cooperation agreements — and failing to turn over company books and records in violation of court order.
The arguments raised in this second go-round, and the court’s recent decision in favor of Ficus, raise novel legal issues with important ramifications for advancement and indemnification litigation in this and other cases.