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Alonso v. Weiss

United States Court of Appeals, Seventh Circuit

August 6, 2019

Michael Alonso, individually and derivatively on behalf of Nutmeg/Mercury Fund, LLP (hereinafter within this caption Mercury Fund, LLP), et al., Plaintiffs-Appellants,
Leslie J. Weiss and Barnes & Thornburg, Defendants-Appellees. and Randall S. Goulding, Plaintiff-Appellant,

          Argued April 11, 2019

          Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. l:12-cv-7373 - Joan Humphrey Lefkow, Judge.

          Before Sykes, Scudder, and St. Eve, Circuit Judges.


         This appeal centers on the performance of the court-appointed receiver of financial advisory firm Nutmeg Group, LLC. The district court appointed the receiver after the Securities and Exchange Commission initiated an enforcement action against Nutmeg and its managing member, Randall Goulding. Against the Commission's allegations of ongoing fraud and misappropriation of client assets, the district court presiding over the SEC matter entered a temporary restraining order prohibiting Goulding from operating Nutmeg and appointed a receiver to oversee all aspects of the firm's business.

         This civil suit followed. Goulding and a group of limited partners in one or more of the Nutmeg funds alleged that the receiver breached her fiduciary duties and, in doing so, reduced the value of the funds' assets. After dismissing certain counts, the district court entered summary judgment in the receiver's favor on all remaining claims. Because we agree that no reasonable jury could find that the receiver engaged in a willful, deliberate, or even grossly negligent breach of a fiduciary duty, we affirm.



         Nutmeg Group, LLC, formerly managed by Randall Goulding, served as an investment advisor and sole general partner of more than a dozen investment funds, which we will refer to collectively as the Funds. Each of the constituent funds is a limited partnership under Illinois or Minnesota law. With Goulding at the helm, Nutmeg executed transactions on behalf of the Funds and oversaw their investment strategies. Goulding's management of the Funds ended in 2009, when the SEC brought an enforcement action against him, Nutmeg, and others in the Northern District of Illinois, alleging violations of the Investment Advisors Act of 1940. The thrust of the Commission's complaint was that Nutmeg misappropriated client assets and failed to maintain proper records. See SEC v. Nutmeg Grip., LLC, No. 09 C 1775, 2011 WL 5042094 (N.D. 111. Oct. 19, 2011).

         The district court handling the SEC action found that the Commission made the showing necessary to warrant the issuance of a restraining order prohibiting Goulding from managing the Funds. The court also granted the SEC's unopposed motion to appoint attorney Leslie Weiss as receiver for Nutmeg. The appointment order granted Weiss the authority to "oversee all aspects of Nutmeg's operations and business," including "serving as general partner and investment advisor" to the Funds. It also provided that, as receiver, Weiss was "solely the agent of [the] [c]ourt," and should continue Nutmeg's business "in such manner, to such extent, and for such duration as [she] may in the exercise of her business judgment and in good faith deem to be necessary or appropriate." The order directed Weiss to file regular status reports with the district court detailing her acts as receiver.

         The appointment order separately addressed Weiss's liability, broadly providing that Weiss and any professionals she retained would not be held liable to anyone "for their own good faith compliance with any order, rule, law, judgment, or decree." The order added that neither Weiss nor any retained personnel would be held liable "with respect to the performance of their duties and responsibilities as Receiver and Retained Personnel . . . except upon a finding by [the district] [c]ourt that they acted or failed to act as a result of malfeasance, bad faith, gross negligence or in reckless disregard of their duties."


         Following her appointment, Weiss submitted the required status reports to the district court. In her first report, she broadly shared the results of her initial due diligence. She informed the court of her review of the Funds' assets, which included convertible notes (many of which were in default); lawsuits or judgments against borrowers who had defaulted on their notes or refused to convert notes to stocks; and "shells" of failed borrower companies that Nutmeg or the Funds had recovered when the companies defaulted on their debt. Weiss also reported on her efforts to assess the collectability of any outstanding judgments, while also conveying her concern that some of the notes' issuers were not financially stable. In time Weiss submitted additional reports informing the district court of particular developments and challenges she was encountering as well as decisions she was making as receiver.

         To further fulfill her duties, Weiss sought assistance from investment advisors and attorneys. For example, in addition to retaining Barnes & Thornburg, the law firm where she is a partner, Weiss hired McClendon, Morrison & Partners, LLC as an investment advisor. She also consulted with a collection firm regarding the collectability of certain judgments against borrowers who had defaulted on their notes.

         Unsatisfied with Weiss's performance as receiver, Gould-ing and a group of limited partners from certain funds managed by Nutmeg filed an individual and derivative action on behalf of the Funds. The complaint named as defendants Weiss, Barnes & Thornburg, Nutmeg, and the Funds, and alleged state-law claims for breach of fiduciary duty and legal malpractice. Specifically, the plaintiffs alleged that Weiss breached her fiduciary duties as receiver, including under Illinois's and Minnesota's partnership statutes, by failing to pursue certain opportunities to the detriment of one or more of the Funds and, separately, by not converting certain debt owed to Nutmeg or a particular fund into stock to be sold on the open market. The plaintiffs also brought a federal claim pursuant to the Investment Advisors Act of 1940 and SEC Rule 206(4)-2.

         For their part, Weiss and Barnes & Thornburg filed a motion to dismiss, which the district court granted in part. The court dismissed the plaintiffs' federal securities law claim as well as several other counts in an amended complaint, including all claims against Nutmeg, all legal malpractice claims against Weiss and Barnes & Thornburg, and two breach of fiduciary duty claims against Weiss. These dismissals are not at issue on appeal.

         Weiss and Barnes & Thornburg then successfully moved for summary judgment on the remaining seventeen counts. In a detailed and thorough opinion, the district court assessed each of the plaintiffs' allegations, concluding that even when viewed in the light most favorable to the plaintiffs, no reasonable jury could find that either Weiss or Barnes & Thornburg willfully and deliberately violated any fiduciary ...

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