Chapter Forty Limited Liability Companies and Limited Partnerships 40-5 another is not an excuse for the failure to fulfill it by the trustee. inferred that Andover Management failed to exercise even slight Nor does the trustee's good faith and honesty, of purpose relieve care in failing to detect it. Similarly, it may be inferred that in him from a breach of his fiduciary obligation. In essence, Hecht's entrusting Andover Associates' funds to Madoff, Andover Man- theory is that Andover Management breached the duty of dili- " agement showed complete disregard for Andover Associates' gence and prudence by delegating management of Andover Asso- rights and the safety of its investment. That public regulators ciates' investment to Madoff without conducting an adequate also failed to uncover the fraud does not establish that Andover investigation into his operation. Management was diligent. Andover Management's-motion to dis Gross negligence is the failure to exercise even slight care or miss Hecht's gross negligence claim for failure to state a cause of light diligence. It is conduct that is so careless as to show com- action is denied. plete disregard for the rights and safety of others. While Andover Management denies that it knew of Madoff's scheme, it may be Andover Management's motion to dismiss denied in favor of Hecht.Hecht v. Andover Assoc. Mgmt. Co. 910 N.Y.S.2d 405 (Sup. Ct. 2010) Charles Hecht invested his money in Andover Associates LLC I, an investment company that sought funds from wealthy investors and invested the funds in a variety of investment products. Hecht was a passive investor in Andover Associates. The LLC's managing member was Andover Associates Management Company. Andover Management retained Ivy Asset Management Corporation as its investment con- sultant Ivy recommended that Andover Management utilize Bernard L. Madoff Investment Securities as its investment manager. Madoff's overall fees were much lower than what investment managers typically charged, and Andover Management initially invested 100 percent of Andover Associates's funds with Madoff. For a number if years, Madoff's firm paid generous returns to Andover Associates. However, In December 2008, it became known that Madoff had been running a Ponzi scheme, whereby no profits were actually being earned, but Instead earlier Investors were paid returns from the capital invested by newer investors. At the time Madoff's fraud was discovered, 25 percent of Andover Associates's assets were invested with Madoff. On behalf of Andover Associates LLC I. Hecht brought a legal action against Andover Management and Ivy on several grounds in a New York supreme court, a trial court in that state. Hecht claimed that Ivy breached the LLC's administrative services agreement by fall- ing to reconcile Madoff's monthly statements. Hecht alleged that had Ivy attempted to reconcile Madoff's monthly statements against the trade tickets, Ivy would have discovered that there were no trade tickets because no trades were ever executed. Thus, Hecht alleged that, but for Ivy's failure to reconcile the statements, Madoff's fraud would have been discovered earlier and Andover Associates would have been able to withdraw its Investment. Hecht claimed that, as a result of Ivy's breach of the administrative services agreement, Andover Associates sustained damages in the amount of $ 14 million, the value of its Madoff investment. Hecht also alleged that Ivy was negligent in recommending Madoff's firm without conducting a sufficient "due diligence " investigation of his operation." Hecht asserted Andover Associates's claim against Andover Management for gross negligence in investing with Madoff without conducting its own due diligence investigation. In particular, Hecht alleged that Madoff's confirmation slips and statements reported purchases and sales of securities at prices outside the range at which the securities traded on the days in question. Hecht alleged that had Andover Management conducted a proper investigation, it would have learned that Madoff's confirmation slips and statements were false because no trades were actually being conducted. Hecht alleged that but for Andover Management's negligence in failing to react to the suspicious confirmation slips and other red flags, Andover Associates would have learned of Madoff's fraud and been able to liquidate its investment. Andover Management asked the trial court to dismiss Hecht's complaint by citing the business judgment rule, a rule that protects from liability managers who make good faith, business decisions. Bucarta, Judge administrative services included maintaining original books of The business judgment rule bars judicial inquiry into actions of entry for all Madoff activity, presumably including his fictitious corporate directors taken in good faith and in the exercise of hon- trades. Hecht alleges that there were no trade tickets, or any other est judgment in the lawful and legitimate furtherance of corporate documentation, to substantiate the trades. Giving Hecht the bene purposes. Andover Management argues that the business judge fit of every possible favorable inference, Ivy's preparing original ment rule insulates their decisions to utilize Ivy as their invest- books of entry, without the benefit of back up documentation. ment consultant and Madoff as their investment manager. may have furthered Madoff's scheme or helped to avoid its detec- The retaining of Jvy as the investment consultant, and the tion. Accordingly. Andover Management's motion to dismiss amount of compensation which Ivy was paid for investment based upon the business judgment rule is denied. consulting and administrative services, would ordinarily be A trustee is under a duty to employ diligence and prudence within Andover Management's business judgment. However, in the management of the trust estate. Delegation of this duty to