Commercial Division Blog

Posted: April 11, 2014 / Categories Commercial, Res Judicata/Collateral Estoppel/Entire Controversy Doctrine, Derivative Actions

Settlement of Federal Derivative Action Bars State Court Plaintiff’s Derivative Action

On April 1, 2014, Justice Lowe (formerly of the New York County Commercial Division and now Presiding Justice of the Appellate Term, 1st Judicial District), issued a decision in Wexler v. KPMG LLP, 2014 NY Slip Op. 30825(U), granting a series of motions to dismiss in an action brought by an investor who allegedly lost money as a result of Bernard Madoff’s Ponzi scheme, when the "feeder fund" in which the plaintiff had invested collapsed.

Justice Lowe's opinion addressed different motions made by several different institutional and individual defendants. Many of the claims asserted by the plaintiff were derivative of the claims of the Rye Select Fund, of which he was a limited partner and investor, and he alleged that Rye's losses had been caused by the misconduct of the defendants. While the motions were pending, a federal action involving the Rye fund and its losses in the Madoff fraud was settled and dismissed. The federal action involved claims against many of the defendants appearing in the Wexler action, and several moving parties amended their motions to include the res judicata effect of the federal action.

The court granted their motion to dismiss the derivative claims on res judicata grounds. Although the plaintiff himself was not a party to the federal case, the Rye fund's claims were adjudicated in the federal action, meaning that no other derivative plaintiff could assert those claims. The court recognized two exceptions to that rule: "that the judgment being raised as a bar not be the product or collusion or other fraud on the nonparty shareholders, and also . . . that the shareholder sought to be bound by the outcome in the prior action not have been frustrated in an attempt to join or intervene in the action that went to judgment." Wexler's allegations that he had vigorously prosecuted his action, and that he had been excluded from settlement negotiations in the federal action were insufficient to meet either exception.