We have all made bad business or investment decisions at one time in our lives. In some cases a bad decision may be induced by the fraudulent or illegal conduct of another. But it is not enough to simply accuse another party of such fraud. Depending on the type of business arrangement you entered into, New York law may not afford you a remedy for your losses.
Limited Partners Do Not Have Standalone Claim Against Partnership
A common business arrangement in New York is a limited partnership (LP). When you invest in an LP, you normally do so as a “limited partner,” which means that you are shielded from any personal financial liability for the partnership's business decisions. Of course, you still run the risk of losing your investment in the LP itself.
But can a limited partner sue the partnership for fraud when the investment proves worthless? A recent decision by a federal judge in Manhattan addressed this question. The plaintiffs were limited partners who invested in an LP intended to finance oil and gas exploration in Ohio. The LP was purely an investment vehicle used to raise capital for other entities that held the options to exploit the oil and gas rights.
The limited partners were, to put it mildly, not pleased with the return on their investment. As the judge later described it, the “attempt to exploit the oil and gas resources was an unmitigated disaster.” The plaintiffs sued numerous parties, including one of the principals involved with forming the LP, alleging he made statements that “misrepresented the oil field's capacity to produce; falsely claimed that his company had conducted due diligence on the oil field; and altered a report produced by an independent company to remove any negative findings.” The plaintiffs alleged their combined financial losses—an amount in excess of $20 million—was due to the defendants' “fraudulent” misrepresentations.
Unfortunately, the limited partners' case did not even make it to trial. The judge dismissed the case in its entirety. As he explained, the limited partners suffered no individual injury; their losses were merely “derivative” of the LP's business failure. The plaintiffs argued they suffered an injury “at the time of their investment” by relying on the defendants' false statements. To the contrary, the judge said the limited partners “got what they paid for.” When they initially invested, the LP in fact “had no assets and conducted no business.” The plaintiffs paid to acquire a fractional share of a partnership that later engaged in what turned out to be an unprofitable business. Any losses were therefore sustained by the partnership as a whole, not by the individual limited partners.