EFTA01105263.pdf

JAMS ARBITRATION IN THE MATTER OF FORTRESS VRF I LLC and FORTRESS VALUE RECOVERY FUND I LLC, Claimants v. JEEPERS, INC., Respondent Case No. 1425006537 and FINANCIAL TRUST COMPANY, INC. and JEEPERS, INC., Counterclaimants and Third-Party Claimants v. Arbitrator: Hon. Anthony J. Carpinello D.B. ZWIRN SPECIAL OPPORTUNITIES FUND, L.P. k/n/a FORTRESS VALUE RECOVERY FUND I LLC, Counter-Respondent and D.B. ZWIRN PARTNERS, LLC, D.B. ZWIRN & CO., L.P., DBZ GP, LLC, ZWIRN HOLDINGS, LLC, DANIEL ZWIRN, and Third-Party Respondents FINANCIAL TRUST COMPANY, INC.'S AND JEEPER INC.'S PRE-HEARING BRIEF Counter- and Third-Party Claimants Jeepers, Inc. and Financial Trust Company, Inc. (collectively "FTC") submit the following Pre-Hearing Brief in Support of its claims against D.B. Zwim Special Opportunities Fund, L.P. k/n/a Fortress Value Recovery Fund I LLC ("Fund"), D.B. Zwim Partners, LLC, D.B. Zwim & Co., L.P., DBZ GP, LLC, Zwim Holdings, LLC, and Daniel Zwim. 1604650vI EFTA01105263  INTRODUCTION FTC invested $80 million the D.B. Zwirn Special Opportunities Fund, L.P. ("Fund"). From 2002 until 2006, the Fund performed well, and FTC's investment grew in value to $133 million. However, at the first sign of trouble in late 2006, FTC decided to get out. FTC suspected something ominous before other investors. Although FTC initially demanded payment of its entire $133 million, the Fund and its agents convinced FTC to settle for a return of somewhat more than half of its capital account - $80 million. A few months later, once FTC realized the Fund was back-tracking on its word, FTC again demanded the entire $133 million. FTC's intuition proved correct, as the Fund began a spiral downward from which it has never recovered. Despite FTC's prescient decision to get out, its money has been held prisoner in breach of the Fund's contractual obligations. To support its position, the Fund has concocted a fabricated interpretation of the relevant contract that has zero support in the actual language. Worse, the Fund and its agents have engaged in various acts of deception in order to frustrate FTC's effort to exercise its contractual rights. The Fund and its agents delayed disclosing material information, withheld material information, and made false promises. These acts constitute breaches of fiduciary duty and fraud. As a result, FTC respectfully requests an award of $133 million plus applicable interest. FACTUAL BACKGROUND 1. Zwirn Launches a Fund with the Help of Financial Trust Company, Inc. In April 2002, Highbridge Capital Management ("Highbridge"), one of the leaders in the hedge fund management business, launched a new fund run by Daniel Zwim. The fund was called Highbridge/Zwim Special Opportunities Fund, L.P. (the "Fund"). Dan Zwim was in his early 30's and had been working for Highbridge. Glenn Dubin, who ran and owned Highbridge was impressed with Zwim and decided to help Zwim start a fund. 1604650v1 2 EFTA01105264  To get the Fund started, Dubin approached his longtime friend and client, Jeffrey Epstein, about making an initial investment in the Fund. In April 2002, Epstein invested $10 million in the Fund through an entity owned and controlled by Epstein called Financial Trust Company, Inc. ("FTC"). FTC followed-up its initial investment with another $10 million investment in August 2002 and a $30 million investment in November 2002. As of the end of 2002, FTC owned over 73% of the Fund. As the Fund grew and succeeded, FTC continued investing. In June 2003, FTC made another $10 million investment. And, in January 2005, FTC made its last investment of $20 million. In total, FTC invested $80 million in the Fund. Epstein made the decision to invest—both the initial decision and all subsequent decisions—exclusively based on the advice and direction of Dubin. Epstein did not study the Fund's investment strategy nor did he talk to or meet with Zwirn other than to have one brief in person meeting after FTC invested. Dubin was his only point of contact at the Fund and only source of information about the Fund. Originally, the Fund's General Partner was an entity called Highbridge/Zwim Partners, LLC. The General Partner was owned by D.B. Zwirn & Co., LLC., which in turn was owned by Highbridge and Zwirn personally. The Fund also had a Trading Manager called Highbridge/Zwim Capital Management, LLC, which also was owned by Highbridge and Zwirn. In addition to its ownership interest in the Fund's management entities, Highbridge opened a managed account ("Highbridge Managed Account") that was managed by Zwirn in parallel with the Fund. In late 2004, JP Morgan Chase bought Highbridge, initially purchasing a less than total interest with plans to acquire the entire business. JP Morgan did not acquire Highbridge's ownership of the Fund's management company. So, Highbridge's ownership in the General 1604650v1 3 EFTA01105265 Partner was moved to an entity called Dubin & Swieca Asset Management ("DSAM"), which was owned by Dubin and his partner. On October 1, 2004, the "Highbridge" name was dropped from the Fund's name and the name of the General Partner. The Fund's name was changed to D.B. Zwim Special Opportunities Fund, L.P.; the General Partner's name was changed to D.B. Zwim Partners, LLC; and the Manager's name was changed to D.B. Zwim & Co., L.P. (Technically, the General Partner was a distinct legal entity from the Manager, which was called D.B. Zwim & Co., L.P. In practice, there was no relevant difference between two, so this brief will refer to both by the term "General Partner" or "Management Company.") 2. FTC's Withdrawal Rights. When FTC made its final investment in the Fund on January 1, 2005, as FTC was one of the largest and the initial investor, FTC and the General Partner entered into a side letter that governed FTC's withdrawal rights. The letter agreement was signed on January 11, 2005 ("2005 Letter Agreement") and provided: In accordance with Section 9.1 of the Amended and Restated Limited Partnership Agreement, dated as of May 1, 2003 (as amended to the date hereof, the "Agreement") of the Fund, the General Partner hereby agrees that Financial Trust Company, Inc. (the "Company") shall be permitted to withdraw its Capital Account as of the last Business Day of the calendar quarter ending at least two years after the Company initially purchases this Interest . . . upon not less than 120 days' prior written Notice to the General Partner. Capitalized terms used herein but not defined shall have the meanings ascribed to them in the Agreement. The Limited Partnership Agreement provided that each limited partner had a single "Capital Account." Specifically, the Agreement defined a "Capital Account" by providing that "[a] `Capital Account' shall be maintained for each Partner," and that such account shall constitute the Partner's "Initial Capital Contribution" plus adjustments for performance of the Fund and increased by any "Additional Capital Contribution." Thus, the 2005 Letter Agreement clearly I 604650v I 4 EFTA01105266 applied to all of FTC's investments in the Fund, which were held in FTC's single "Capital Account." Under the 2005 Letter Agreement, FTC could withdraw its Capital Account on March 31, 2007 (the quarter ending after the two-year anniversary of the January 1, 2005 investment). FTC would have to give 120-days notice—i.e., notice by December 1, 2006. Significantly, the Fund drafted the 2005 Letter Agreement and Limited Partnership Agreement. FTC did not negotiate over the language or have any input in the words selected by the Fund. 3. The Zwirn Fund's Hidden Problems. Between its inception and 2005, the Fund reported strong returns. Unbeknownst to investors, however, Zwim's management was experiencing serious problems. To begin with, Zwirn constantly pushed the Fund's liquidity to the edge, creating a constant need to find cash to fund approved investments. Until 2005, Zwirn had found it necessary to rely in part on Highbridge to loan it money or add capital when the Fund became short of liquidity. Once JP Morgan purchased Highbridge, however, the outside cash flow stopped. As a result, the General Partner began improperly using money entrusted to management by investors in vehicles other than the Fund, including the Fund's offshore sister fund, called D.B. Zwirn Special Opportunities, Ltd. ("Offshore Fund"), and the Highbridge Managed Account to meet its demands. These so-called "Interfund Transfers" eventually amounted to hundreds of millions of dollars in undocumented, no interest loans. Just as he ran the Fund on the edge, Zwirn ran the Management Company with very little liquidity. As a result, the Management Company was short cash to pay expenses. The Management Company was designed to generate significant income from a 27% management fee and 20% incentive fee. The management fee was predictable and earned every month but payable only at each quarter end. The incentive fee was earned only at year end if there were 1604650v1 5 EFTA01105267 profits. Zwim, however, wanted to avoid paying current income taxes on the incentive portion, which in some years was very large, so he deferred the incentive fees payable by the Offshore Fund (keeping the money out of the United States). This scheme left the Management Company perpetually short of cash. To make up for the cash crunch, the Management Company began paying itself the management fees from the Onshore Fund, Offshore Fund, and two other funds before the fees were actually payable. This practice was designed to provide desperately-needed cash, and continued until March 2006. Moreover, in September 2005, when a subsidiary of the Management Company bought an expensive private jet for Zwim's private use, investor money was improperly borrowed to fund the purchase. 4. The Fund's Knowledge of the Improprieties. While Zwim personally claims to have had no knowledge of the improprieties, the law firm hired to investigate concluded that Perry Gruss personally oversaw and approved of these transactions. Mr. Gruss was both an officer (Chief Financial Officer) and part owner of the Management Company. Additionally, the law firm concluded that another officer of the Management Company, Harold Kahn, was at a minimum "willfully blind" to this misconduct. In the Spring of 2006, two other high ranking officers of the Management Company learned of the prepayment of management fees and the airplane funding issues. The Management Company's General Counsel, David Proshan, and Chief Compliance Officer, Lawrence Cutler, apparently learned from an accounting staff member of the issues. They immediately informed Dan Zwirn, yet Zwirn maintains that they did not tell him any details. Zwim claims that he did not learn any of the details until June 2006, at which point the Management Company's outside counsel, Schulte, Roth & Zabel "SRZ", was called in to conduct an investigation. 1604650v1 6 EFTA01105268  In early September 2006, SRZ presented the results of its investigation into the prepayment of management fees and the airplane financing. Zwim claims that at this point in time, no one other than Gruss and his immediate subordinates knew about the Interfund Transfers. In September 2006, Zwim and the other members of management decided to fire Gruss. Realizing what was about to occur, Gruss quit. 5. The Fund Begins Disclosing to Investors. Even though the Management Company was aware of the above issues for almost six months, no one told the investors in the Fund. Finally in mid-October 2006, the Management Company began contacting investors to disclose that Gruss was no longer employed. According to the prepared script, Zwim intended to make no disclosure of any details other than that Gruss had been replaced. According to Zwim, at about the time he was making the first round of investor calls, a low-level accountant came forward to reveal the Interfiind Transfers, which had been going on for over a year and a half. At this point, it was clear that Zwim could not keep the lid on the problems brewing at the Fund. In late October 2006, Zwim made yet another series of calls to investors. According the prepared script, Zwim was supposed to inform investors of exactly why Gruss had been fired (i.e., the prepayment of management fees and airplane financing) and to reveal that yet another, more serious problem had been uncovered, the Interfund Transfers. The script fails to explain that Zwim and his co-officers learned about the prepayment of management fees and the airplane financing during the Spring of 2006. Worse, the script makes no mention of the role played by Harold Kahn, who was never formally disciplined or fired. With one exception, investors largely accepted Zwim's explanation and assurances. 1604650v1 7 EFTA01105269 6. Epstein Demands His Money Back. Jeffrey Epstein smelled something foul. While the witnesses' memories of events disagree about many details, everyone appears to agree that Epstein was agitated from the first moment he was contacted about the Fund's problems. Indeed, Epstein demanded to speak (and did speak) to a partner at SRZ to get an explanation as to why the initial disclosure about Gruss's departure was misleading. The parties disagree about whether Epstein actually began demanding his money back at this point. In contrast, Epstein and Dubin both will testify that Epstein repeatedly demanded to withdraw from the Fund. At that point in time, FTC's investment in the Fund was valued at about $133 million. In response, Dubin and Zwim discussed how to change Epstein's mind. Zwim feared that news of Epstein's withdrawal could spark a panic among investors, especially given that Epstein was the oldest and still one of the largest investors. The discussions between Dubin and Zwim culminated in a plan to convince Epstein to reduce his demand. Dubin initially asked Epstein to refrain from pushing his demand for a total withdrawal. Dubin relayed Zwim's concerns about Epstein causing a run-on-the-bank and explained that if Epstein was adamant about withdrawing, Zwim would prefer that Epstein withdraw half of his capital account. Epstein responded that he would agree to withdraw $80 million, which was the amount of Epstein's original invested capital. This conversation was followed up a three-way call involving Dubin, Epstein, and Zwim. During this call, Zwim confirmed what Dubin had told Epstein. The call ended with Zwim and Epstein agreeing that FTC would make a reduced demand of $80 million withdrawal and that the Fund would honor such a demand. On the night of November 13, 2006, FTC sent the following memorandum to Dan Zwim: 1604650v1 8 EFTA01105270  As per our conversation, I hereby instruct you to immediately liquidated in the amount of EIGHTY MILLION DOLLARS of Financial Trust Company's interest in D.B. Zwirn Special Opportunities Fund, L.P., and wire the proceeds of EIGHTY MILLION DOLLARS ($80,000,000) to: Bank Name: York City ABA #: For Credit Co. Account #: F/B/O/: Financial Trust Company Account #: Please call Harry Beller aawith the Fed. reference number or if you have any questions. Exhibit 5 (JE 2000-01) (emphasis added).' According to Zwirn, the first time he heard that Epstein wanted any money back was when he received a written demand for $80 million on November 13, 2006. Zwirn will testify the request came out-of-the-blue. 7. Zwirn's Response to FTC's Demand. The day after receiving FTC's demand, Zwirn contacted Epstein to set up a meeting where Zwirn would attempt to demonstrate that the problems at the Fund had not impacted the underlying investments. Epstein cancelled the meeting. Zwirn claims that Epstein subsequently agreed to retract his withdrawal demand. This is simply false. There is zero evidence to support Zwim's claim. As noted above, Epstein made the investment through an entity called Financial Trust Company, Inc., which is located in the United States Virgin Islands. The Fund was reporting New York State source income to FTC. For tax reasons, FTC preferred not to have New York source income. To solve this problem, FTC proposed transferring its investment in the Fund to a wholly-owned subsidiary of FTC, called Jeepers, whose sole purpose was to hold the investment. Under the Fund's Limited I Exhibits 5, 45, and 117 arc attached to this Brief. 16046500 9 EFTA01105271 Partnership Agreement, any assignment required prior consent of the General Partner. According to Zwim, Epstein agreed that if Zwim would agree to the assignment to Jeepers, Epstein would drop the withdrawal demand. During December 2006, Zwim did consent in writing to an assignment of FTC's interest to Jeepers. The assignment was made effective retroactive to January 1, 2006. The Assignment Agreement, which Zwim signed, says nothing about FTC agreeing to retract its pending withdrawal demand. To the contrary, Zwim attempted to insert language into the document that would grant the Fund a broad release of any claims, including pending claims. Epstein specifically objected to this language, which was removed from the executed version. Moreover, the Fund asked Jeepers to execute a new Subscription Agreement. The form Subscription Agreement contained language requiring the investor to acknowledge and agree to the standard lock-up provisions of the Limited Partnership Agreement. Because FTC had a pending withdrawal demand, Epstein inserted in hand-writing language to the effect that the standard withdrawal rules did not apply to FTC and thus would not apply to Jeepers. 8. Epstein Learns that the Fund Disputes the $80 Million Demand. In February 2007, Epstein's in-house bookkeeper, Harry Beller, was instructed by the Fund to direct all future communications to the then-President of the Management Company, David Lee. Sensing something was amiss, Epstein instructed Beller to get an update on the status of the $80 million redemption. On February 14, 2007, Beller called Lee about the withdrawal demand and was told that the Fund had no intention of honoring it. Lee explained that FTC/Jeepers's withdrawal rights were governed by a rolling schedule of redemption dates (based on the two-year or three-year anniversary of each, separate capital contribution) and that FTC/Jeepers had no right to withdraw $80 million in November 2006. 1604650v1 10 EFTA01105272  Epstein responded immediately by demanding in writing a complete withdrawal of his interest in the Fund. FTC's complete withdrawal demand was given to the Fund on February 14, 2007. Exhibit 45. 9. The Fund Formally Responds to FTC's Demand. Although FTC made its partial withdrawal demand on November 13, 2006 and complete withdrawal demand on February 14, 2007, the Fund waited until March 27, 2007 to respond in writing. The Fund sent FTC a letter written by SRZ, who drafted the Limited Partnership Agreement. Conspicuously, SRZ's letter does not dispute that FTC had a right under the 2005 Letter Agreement to withdraw its entire Capital Account nor did SRZ claim that the 2005 Letter Agreement only applied to the $20 million investment made on January 1, 2005—both of which are arguments now advocated by the Fund. Instead, SIC begins by stating that the February 14, 2007 demand for a complete withdrawal failed to comply with the 120-day notice requirement. With respect to November 13, 2006 demand, SRZ claimed that the 2005 Letter Agreement only authorized complete withdrawals, not partial withdrawals. According to SRZ, the 2005 Letter Agreement only authorized complete withdrawals because it contained an introductory clause saying the agreement was made "[i]n accordance with Section 9.1" of the Limited Partnership Agreement, and Section 9.1 addressed "complete" withdrawals—as opposed to Section 9.2 which addressed "partial" withdrawals. Since FTC asked for $80 million on November 13, 2006 (not $133 million which was the value of FTC's entire Capital Account at the time), SRZ claimed the demand was invalid: Mr. Epstein previously sought withdrawal of a portion of his interest in the Fund by letter dated November 13, 2006. That letter did not constitute valid notice, because Mr. Epstein had no right at that time to partial withdrawal from the Fund. The 2005 letter Agreement did not provide Mr. Epstein with any such right as of March 31, 2007, because partial withdrawals are governed by Section 9.2 of the 1604650v1 11 EFTA01105273  Limited Partnership Agreement, which was not covered by the 2005 Letter Agreement. Exhibit 117. LEGAL ARGUMENT FTC's primary claim is a straightforward breach of contract claim based on FTC's demand to withdrawal $80 million. The Fund's failure to honor this demand breached the 2005 Letter Agreement. The Fund has two defenses to FTC's contract claim. First, the Fund claims the 2005 Letter Agreement only applied to a single investment or "tranche" (the January 1, 2005 investment), and that FTC's remaining investments were subject to distinct lock-ups. This is the "Tranche-by-Tranche" defense. As outlined below, the "Tranche-by-Tranche" defense is demonstrably wrong as a matter of contract interpretation. The Fund's second defense is that the 2005 Letter Agreement only authorized "complete" withdrawals, and the $80 million demand was a "partial" withdrawal demand. This is the "Complete, Not Partial" defense. The "Complete, Not Partial" defense is also flawed as a matter of contract interpretation, but even it if were valid, it would make no difference. Because FTC made the decision to seek a partial withdrawal instead of a complete withdrawal (which FTC originally wanted) based on the conduct of the Fund and its agents, the Fund is estopped from using the "Complete, Not Partial" defense. Alternatively, the Fund entered into an oral agreement with FTC, which it must honor. Second, FTC claims that the Fund is liable for $133 million, which was the full value of FTC's Capital Account as of March 31, 2007. This claim presumes that the 2005 Letter Agreement permitted FTC to withdraw its entire Capital Account as of March 31, 2007. On February 14, 2007, FTC made a formal demand to withdrawal its account. The Fund rejected this demand because it failed to comply with the 120-day notice requirement. However, the Fund is equitably estopped from asserting the notice requirement as a defense. The Fund's agent engaged in misconduct which caused FTC to fail to comply with the notice requirement. Even if 1604650v1 12 EFTA01105274 equitable estoppel did not apply, the Fund would be liable in tort because this misconduct (non- disclosure and misleading disclosure) constitutes fraud and breach of fiduciary duty. As a result of this misconduct, FTC was misled into making a demand for $80 million instead of $133 million. The misconduct underlying this claim is two-fold: (1) the Fund failed to inform FTC that it would not honor the $80 million demand or the basis for such refusal; and (2) the Fund failed to adequately describe the scope of the underlying accounting problems, including for example that the misconduct was not confined to Perry Gruss. Had FTC known any of these facts, FTC would have demanded to withdraw $133 million in the Fall of 2006. FTC's third claim is based on the dubious assumption that the Fund's "Tranche-by- Tranche" defense is valid. In other words, even if the Fund were right about FTC's contract rights, the Fund would be still liable to FTC. To begin with, even under the Fund's view, FTC had the right to withdraw a total of $45 million on March 31, 2007 and June 30, 2007. FTC's November 13, 2006 withdrawal demand provided sufficient notice, so the Fund has zero defense for the failure to pay this amount. Moreover, under the Fund's view, FTC had a right to withdraw all its investments had it started the process earlier in 2006. Specifically, the Fund claims FTC could have withdrawn on the following dates: June 30, 2006, September 31, 2006, December 31, 2006, March 31, 2007, and June 30, 2007. As a result, had Epstein learned of the Gruss-related issues earlier in 2006, FTC could have (and would have) withdrawn its money in accordance with the Fund's tortured view of FTC's redemption rights. The evidence will show that Zwim and the Fund knew about these accounting problems well before October 2006. The failure to reveal the information sooner was a clear breach of fiduciary duty that harmed FTC by preventing it from exercising its withdrawal rights. 1604650v' 13 EFTA01105275 I. The Fund Breached the 2005 Letter Agreement By Not Paying FTC $80 Million. The Fund's failure to pay FTC $80 million on March 31, 2007 was a clear breach of the 2005 Letter Agreement. Under that Agreement, FTC had the right to withdraw its Capital Account on March 31, 2007 provided FTC gave 120-days notice. FTC's November 13, 2006 demand met the notice requirement. The Fund's argument is that the 2005 Letter Agreement only authorized a withdrawal of the $20 million investment made January 1, 2005. This argument is unsupported by the plain language of the Agreement. The Fund's claim that the 2005 Letter Agreement applies only to complete withdrawals is also not supported by the language of the Agreement. However, this point is irrelevant. Even if the 2005 Letter Agreement were construed to cover only complete withdrawals, the Fund would be estopped from asserting this limitation because (1) the Fund induced FTC to reduce the demand from a complete to a partial and (2) the General Partner breached its fiduciary duty to FTC by not correcting FTC's alleged error before it was too late for FTC to correct it. At a result, the Fund is liable to honor the demand. A. The 2005 Letter Agreement Unambiguously Applies to FTC's Entire Capital Account. Under the plain language of the 2005 Letter Agreement, FTC had the right to withdraw its "Capital Account" (not a particular tranche or investment) so long as FTC gave notice before December 1, 2006. FTC complied with the notice requirement—no particular form of notice is specified anywhere in the 2005 Letter Agreement or in the Fund's Limited Partnership Agreement. In any event, Delaware law, which governs, merely requires that a party "substantially comply" with a notice requirement. E.g., Gildor v. Optical Solutions, Inc., 2006 WL 4782348, at *10 (Del. Ch.) ("When confronted with less than literal compliance with a notice provision, courts have required that a party substantially comply with the notice provision. 1604650v1 14 EFTA01105276 The requirement of substantial compliance is an attempt to avoid `harsh results' . . . where the purposes of these [notice] requirements has been met.").2 If a contract is unambiguous, Delaware law gives effect to the plain meaning of the words used without further inquiry. As this Court is well aware, a contract is not ambiguous merely because the parties disagree about the meaning; a contract is only ambiguous "when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings." Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (De1.1992). The 2005 Letter Agreement provides that FTC "shall be permitted to withdraw its Capital Account" as of the quarter ending two years after January 1, 2005. "Capital Account" is a defined term so there is no plausible claim of ambiguity. The 2005 Letter Agreement expressly incorporates the defined terms from the Fund's Amended and Restated Limited Partnership Agreement dated May 1, 2003, which it turn defined a "Capital Account" in Section 6.1: A "Capital Account" shall be maintained for each Partner. For the Fiscal Period during which a Partner is admitted to the Partnership, the Partner's Capital Account will initially equal the Partner's Initial Capital Contribution. For each Fiscal Period after the Fiscal Period in which a Partner is admitted to the Partnership, the Partner's Capital Account will equal the sum of the amount of the Partner's Capital Account as finally adjusted for the immediately preceding Fiscal Period in according with the provisions of this Article VI increased by the amount of any Additional Capital Contribution made by the Partner as of the first day of the Fiscal Period. This definition makes clear that there is a single "Capital Account" for each investor: "A `Capital Account' shall be maintained for each Partner." The "Capital Account" includes an aggregation of all investments made by that investor. As a result, when the 2005 Letter Agreement provided 2 The Agreement was entered into pursuant to the terms of the Fund's Limited Partnership Agreement, which contained a Delaware choice-of-law clause, and the arbitration clause governing this dispute requires application of Delaware law. 1604650v1 15 EFTA01105277 that FTC could withdraw its "Capital Account," there is only one reasonable interpretation of that language. FTC could withdraw any and all of its money. The Fund may attempt to argue that each of FTC's investments was placed in a separate "Capital Account" because FTC completed a separate Subscription Agreement for each investment. Accordingly, the Fund may argue that each subsequent investment after the first was not an "Additional Capital Contribution" but rather a new "Initial Capital Contribution." This argument ignores the language of the LPA. Section 5.2 of the LPA defines a partner's "Initial Capital Contribution" as a contribution of not less than $5 million (subject to waiver by the General Partner) that results in admission to the partnership. Section 5.3 simply says the General Partner may accept an "Additional Capital Contribution" from a "Limited Partner"—i.e., an entity that has already been admitted to the partnership. The definition has nothing to do with the type of paperwork completed when making the contribution. As a result, the Fund's own internal documents repeatedly characterized FTC's first investment as its "subscription" and each subsequent investment as an "additional contribution." Moreover, the Fund always gave FTC a single number that when it regularly provided in writing the value of FTC's "Capital Account"; the single number represented the total of all of FTC's investments plus all appreciation. B. There Is No Basis for Adopting a So-Called Tranche-By-Tranche Approach. The Fund contends the 2005 Letter Agreement only permitted FTC to withdraw its $20 million investment made on January I, 2005. The Fund does not and cannot offer a reasonable interpretation of the actual language in the 2005 Letter Agreement to support this result. That ends the matter under Delaware law. FTC anticipates that the Fund's argument to support its interpretation of the contractual language will hinge entirely on extrinsic evidence, e.g. the practice of other funds. To date, the 1604650v1 16 EFTA01105278 Fund has not provided an explanation for its position that is based on an interpretation of the contractual language itself. Under Delaware, this is not permissible. As a result, FTC is filing current with this Pre-Hearing Brief a Motion in Limine to Exclude All Extrinsic Evidence, and any discussion of extrinsic evidence in this Brief is without prejudice and included herein to avoid forcing Your Honor to have to read both an extensive Pre-Hearing Brief and Motion in Limine. Extrinsic evidence is irrelevant and should be excluded in this case for three reasons. First, the terms at issue are unambiguous, and Delaware courts do not allow the introduction of extrinsic evidence to interpret unambiguous terms. Second, if Your Honor finds the terms to be ambiguous, extrinsic evidence is still irrelevant because the Fund drafted the terms, and Delaware courts strictly apply the principle of contra proferentem and construe ambiguous terms against the drafter without permitting any consideration of extrinsic evidence. Third, the specific types of extrinsic evidence FTC anticipates the Fund will rely on do not meet Delaware's standards for relevant, probative extrinsic evidence. 1. Delaware Does Not Permit Extrinsic Evidence Where Terms Are Unambiguous. The first reason that extrinsic evidence is irrelevant relates to the parol evidence rule. Delaware law strictly applies the parol evidence rule so that extrinsic evidence may not be used to create an ambiguity in a contract. Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (De1.1997) ("If a contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity.").3 In Delaware the threshold question of whether a contract provision is ambiguous or 3 The Delaware Supreme Court in Eagle Industries disapproved and limited its previous holding in Klair v. Reese, 531 A.2d 219 (Dcl. 1987), in which it suggested that extrinsic evidence should be considered even when the contract was unambiguous. See Eagle Indus., Inc., 702 A.2d at 1232 n.7. 1604650vI 17 EFTA01105279 unambiguous is answered without resort to extrinsic evidence,4 and if a contract provision is found to be unambiguous, extrinsic evidence—course of performance,5 usage of trade,6 and so on—is simply excluded. See, e.g., Halliburton Co. v. Highlands Ins. Group, Inc., 811 A.2d 277, 279—80 (Del. 2002) ("We agree with [the trial court] that the documents are not ambiguous. Accordingly extrinsic evidence was properly excluded."); Pellaton v. Bank of New York, 592 A.2d 473, 478-79 (Del. 1991) (reversing trial court's contract interpretation because it impermissibly used extrinsic evidence to interpret unambiguous contract, "if the instrument is clear and unambiguous on its face, neither this Court nor the trial court may consider parol evidence to interpret it or search for the parties' intentions.") (internal quotation marks and citations omitted). 2. Delaware Strictly Applies Contra Proferentem And Excludes Extrinsic Evidence Where Ambiguous Terms Were Drafted By Only One Party. Here, however, even if the terms in question are ambiguous, consideration of extrinsic evidence would be inappropriate. The Delaware Supreme Court has held that the principle of contra proferentem requires the exclusion of extrinsic evidence and construction of the ambiguous terms against the drafter in cases where ambiguous terms are drafted by only one party—as is the case with the 2005 Letter Agreement and the 2003 Limited Partnership Agreement. See SI Management L.P. v. Wininger, 707 A.2d 37 (Del. 1998). The ambiguous terms in situations where this rule applies are construed against the drafter. Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 399 (Del. 1996). 4 See, e.g., E.l. Du Pont De Nemours & Co. v. Admiral Ins. Co., 711 A.2d 45, 60 (Del. Sup. Ct. 1995) ("My obligation is to determine whether the term 'sudden' is ambiguous in the context of the specific pollution exclusions at issue without relying on extrinsic evidence.") (emphasis in original). See, e.g., Del. Civil Pattern Jury Instructions § 19.15 (2000) ("I-Do determine the parties' intent when there are ambiguous terms, the jury will look to the construction given to the parties as shown through their conduct during the period after the contract allegedly became effective and before the institution of this lawsuit.") (emphasis added). 6 See, e.g., Sassano v. CIBC World Markets Corp., 948 A.2d 453, 468 n.86 (Del. Ch. 2008) ("Nor can parol evidence such as industry usage be used to create ambiguity."). 1604650v1 18 EFTA01105280  SI Management L.P. itself had closely analogous facts to this case—a dispute between a Limited Partner and a General Partner over the interpretation of ambiguous provisions in a document drafted by the General Partner. The Delaware Supreme Court held: [T]he articulation of contract terms . . . appears to have been entirely within the control of one party—the General Partner—that party bears full responsibility for the effect of those terms. Accordingly, extrinsic evidence is irrelevant to the intent of all parties at the time they entered into the agreement. Id. at 44 (emphases in original). In accordance with these principles, Delaware courts have construed ambiguous terms in documents drafted by only one party against the drafter, without permitting the introduction of extrinsic evidence. See, e.g., SI Management L.P., 707 A.2d at 40-44 (requirements for meetings and amendments in limited partnership agreement); Kaiser Aluminum Corp., 681 A.2d at 395-99 (conversion rights in certificate of designation creating preferred shares); Stockman, 2009 WL 2096213, at **5—8 (advancement of legal fees under partnership agreement); In re Nantucket Island Assocs. Ltd. P 'Ship Unitholders Litig., 810 A.2d 351,361-68 (Del. Ch. 2002) (amendment of limited partnership agreement); Greco v. ColumbialHCA Healthcare Corp., No. Civ. A. 16801, 1999 WL 1261446, at **12-13 (Del. Ch. Feb. 12, 1999) (payment of legal fees under limited partnership agreement.). 3. The Specific Extrinsic Evidence FTC Anticipates that Fund Will Cite Is Legally Irrelevant and Inadmissible. There are additional reasons why the specific types of extrinsic evidence that the Fund will likely submit here are irrelevant and should be excluded. FTC anticipates that the Fund will rely on three types of extrinsic evidence: (1) the fact that people within the Management Company believed that each investment was subject to a distinct lock-up period; (2) the fact that other investors allegedly redeemed investments on an investment-by-investment basis; (3) the claim that many hedge funds adopt a "tranche-by-tranche" approach; and (4) the fact that 1604650vI 19 EFTA01105281 "tranche-by-tranche" language was added to a May 2005 Offering Memorandum. Even assuming there was a factual basis to support the existence of these types of extrinsic evidence (which there is not), this evidence would be legally irrelevant and inadmissible because it does not meet Delaware's standards for the types of extrinsic evidence that are entitled to weight. a. Unexpressed Subjective Understanding Is Irrelevant. The Fund apparently intends to present evidence that the General Partner and its employees believed that each investment made by a single investor was subject to a distinct lock- up. This evidence largely consists of internal redemption schedules that were prepared by Management Company personnel prior to the dispute with FTC. Even assuming there was crystal clear and overwhelming evidence of a sincere belief within the Management Company, this evidence would be irrelevant and inadmissible. "It is the law of Delaware that subjective understandings of a party to a contract which are not communicated to the other party are of no effect. They are irrelevant to the interpretation of the contract and should not and will not be given any weight." Supermex Trading Co., Ltd. v. Strategic Solutions Group, Inc., No. Civ. A. 16183, 1998 WL 229530, at *9 (Del. Ch. May 1, 1998). The rule against crediting one party's subjective understanding is consistent with the overarching principle that contract interpretation is a search for a meaning shared between the parties rather than a meaning held by one party alone. See United Rentals, Inc. v. Ram Holdings, Inc., 937 A.2d 810, 835 (Del. Ch. 2007) ("[T]he private, subjective feelings of the negotiators are irrelevant and unhelpful to the Court's consideration of a contract's meaning because the meaning of a properly formed contract must be shared or common."). There is no shortage of Delaware cases applying this rule. Delaware courts give no weight at all to a party's subjective, unexpressed understandings of a contract term's meaning, even when the evidence is uncontradicted that the party did in fact hold that understanding. See, 1604650v1 20 EFTA01105282 e.g., United Rentals, Inc., 937 A.2d at 836-40 (Del. Ch. 2007) (party's understanding that contract preserved a right to specific performance); Supermex Trading Co., 1998 WL 229530, at **8-9 (party's understanding that contract gave the party the right to redeem a debenture for stock); SBC Interactive, Inc. v. Corporate Media Partners, No. Civ. A. 15987, 1997 WL 810008, at *4 n.13 ((Del. Ch. 1997) (party's understanding that a withdrawal under a contract provision would be nonarbitrable); Bell Atlantic Meridian Sys. v. Octel Commc 'ns Corp., No. Civ. A. 14348, 1995 WL 707916, at **6-11 (Del. Ch. Nov. 28, 1995) (party's understanding that "new systems" in a contract entitled it to certain successor products). b. The Understanding and Conduct of Other Investors Is Irrelevant. The Fund also will attempt to claim that other investors in the Fund believed that each of their investments was subject to a distinct lock-up and that some requested withdrawals consistent with that understanding. There are two huge problems with this evidence. First, not a single investor in the Fund other than FTC is on the witness list. Any evidence about what other investors thought would be inadmissible hearsay. Second, the conduct of other investors in requesting withdrawals is irrelevant. Before addressing the legal flaw in such evidence, FTC notes that prior to the Fall of 2006, there were very few requests for withdrawals from the Fund, presumably because the Fund had experienced positive performance and had not revealed any of its problems yet. In fact, FTC believes there may be a single example of an investor who asked to withdraw an amount equal to an entire "tranche"; in other words, there was a single example of an investor who conceivably might have considered whether it could ask for more than a tranche or was limited by some tranche-by- tranche restriction — every other withdrawal request was for relatively small amounts. Even if compelling evidence of other investors acting consistent with the Fund's proffered interpretation existed, such evidence would be inadmissible and irrelevant. Obviously, 1604650v1 21 EFTA01105283 the conduct of third parties is entirely irrelevant to interpreting a bilateral contract between FTC and the Fund. Presumably, the Fund might contend this sort of evidence constitutes "course of performance" evidence. Such a contention would be very wrong. Delaware courts have relied on the Restatement (Second) of Contracts when considering evidence submitted to establish a course of perforrnance.7 The Restatement's definition of course of performance requires: "repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other." Restatement (Second) of Contracts § 202(4) (1981) (emphasis added). A course of performance shows the meaning that both parties put on the contract by their repeated actions—"the parties' own practical interpretation of the contract—how they actually acted, thereby giving meaning to their contract during the course of performing it." 11 Richard Lord, Williston on Contracts § 32:14 (4th ed. 1999). As the Restatement makes clear, a course of performance must thus be both repeated (the agreement must have an opportunity for "repeated occasions for performance" by either party (Restatement (Second) of Contracts § 202(4) (1981)) and mutual (the other party must "accept[] . . . or acquiesce[] in" the performance "without objection") (Id.). These two elements—repetition and mutuality—are necessary for evidence to truly be a "course of performance" and therefore entitled to great weight: repetition, so that it's clear that a party has truly admitted by conduct that the contract should be interpreted in a certain way,8 and mutuality, so that it's clear that both parties share the understanding of the contract's interpretation. 7 See, e.g., Personnel Decisions, Inc. v. Business Planning Sys., Inc., No. 3213-VCS, 2008 WL 1932404 at 115 n. 21 (Del. Ch. May 5, 2008) (quoting Restatement (Second) of Contracts section on course of performance evidence); Sun-Times Media Group, Inc. v. Black, 954 A.2d 380, 398 n.71 (Del. Ch. 2008) (same). $ See 2 E. Allan Farnsworth, Farnsworth on Contracts § 7.13, at 332 (3rd ed. 2004) ("Perhaps the most satisfactory explanation [for why course of performance evidence is relevant to the parties' intent at the time of contracting] is that [course of performance evidence] operates as an admission. If that is so, presumably the reason for requiring more than one occasion of conduct is to justify a court in inferring an admission from the conduct."). 1604650vI 22 EFTA01105284  Delaware cases recognizing evidence establishing a course of performance similarly require both repetition and mutuality. See, e.g., Personnel Decisions, Inc. v. Business Planning Sys., Inc., No. 3213-VCS, 2008 WL 1932404 at *5 (Del. Ch. May 5, 2008) (cours