Staffenberg v. Fairfield Pagma Assoc.: The Periphery of the Bernie Madoff Collapse
In Staffenberg v. Fairfield Pagma Assoc., 95 A.D.3d 873 (N.Y. App. Div. 2012), the Appellate Division of the New York Supreme Court held there were no triable issues of fact and affirmed the trial court’s grant of summary judgment to all defendants.
This case is ancillary to the pending Bernie Madoff Ponzi scheme debacle. According to the allegations in the case, Eugene Staffenberg, on the advice of his accountant, invested $500,000 in Fairfield Pagma Associates (“Fairfield Pagma”), which was a limited partnership that pooled funds for the purpose of investing in Bernard L. Madoff Investment Securities (“BLMIS”). When federal authorities revealed Madoff’s scheme in a highly publicized event in late 2008, Staffenberg lost nearly all of his investment. Staffenberg commenced an action against his accountant and accounting firm (collectively, the “Sejour Defendants”) and Fairfield Pagma and its partners and managers for “professional malpractice, breach of fiduciary duties, breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud.” After the trial court granted summary judgment on all claims, Staffenberg appealed the claims of breach of fiduciary duty against both Sejour and Fairfield Pagma and breach of contract and the implied covenant of good faith and fair dealing against Fairfield Pagma.
In addressing the fiduciary duty claims, the court held there was no fiduciary relationship between Staffenberg and the Sejour Defendants. The court noted that Staffenberg only “sought investment advice from [the Sejour Defendants], at most, only once per decade.” The court explained this “intermittent communication” cannot transform a simple business relationship to a fiduciary relationship. As for Fairfield Pagma, the court acknowledged that Fairfield Pagma had a fiduciary relationship with Staffenberg; however, the court held there was no plausible misconduct by Fairfield Pagma leading to Staffenberg’s damages which would justify reversing the trial court.
Next, the court struck down both of Staffenberg’s contract claims against Fairfield Pagma. For the breach of contract claim, the court found there were no triable issues of fact. Despite Staffenberg’s assertion that Fairfield Pagma breached the Limited Partnership Agreement by not investing a 100% of his initial $500,000 contribution, the court noted to the contrary, that the agreement expressly permitted the retention of funds deemed “required for partnership purposes.” Further, the court explained that any failure to transfer the entirety of Staffenberg’s investment to BLMIS did not cause Staffenberg sustainable damages.
Lastly, the court recognized that a covenant of good faith and fair dealing was implicit in every contract. Nevertheless, the court explained the partnership agreement required funds invested into Fairfield Pagma be directed to BLMIS. Therefore, as the court noted, any implied obligation to invest contrary to the explicit language of the contract was unenforceable.
The primary materials for this case may be found on the DU Corporate Governance website.