Did Assertion of Privilege Against Self-Incrimination Warrant Dismissal Of Complaint?
Daniel Small was a portfolio manager for numerous investments of Platinum Partners, L.P., a collapsed New York-based hedge fund. As part of the compensation for his services, Small was made a member of DMRJ Group LLC and became entitled to distributions under certain circumstances. DMRJ had been formed to hold Platinum’s investment in Implant Sciences Corp., which Small managed. Small also co-managed one of Platinum’s largest investments, Black Elk Energy Offshore Operations, LLC. Small sued DMRJ for those distributions.
Small was convicted of securities fraud and conspiracy to commit securities fraud for his part in a scheme to defraud Black Elk bondholders and deprive them of the proceeds of Black Elk’s most valuable assets through misrepresentations and omissions regarding, among other things, Platinum’s control over Black Elk bonds.
In a breach of contract action, Small sought distributions from DMRJ pursuant to his membership interest. At his examination before trial, Small consistently invoked the Fifth Amendment in response to questions relating to Black Elk. After the note of issue was filed, DMRJ moved for summary judgment dismissing the complaint, arguing that Small’s repeated invocation of the Fifth Amendment at his deposition prevented DMRJ from obtaining facts relevant to its defense. Supreme Court granted DMRJ’s motion. Small appealed.
Courts have the inherent authority to strike the complaint and dismiss the action where the plaintiff refuses to answer questions posed at an examination before triall on grounds of the privilege against self-incrimination. The only inquiry in reviewing a dismissal made pursuant to that inherent power is whether the questions that the plaintiff refused to answer were material and necessary to the defendant’s defense.
DMRJ was entitled to argue that Smalls’s fraudulent actions relating to Black Elk should deprive him of any compensation, including distributions from DMRJ for his services as portfolio manager. In preparing that defense, DMRJ needed to discover information establishing whether Small’s illegal conduct regarding Black Elk, one of Platinum’s largest investments, was central to or a dominant part of the services he rendered in his role as portfolio manager. Accordingly, Small’s actions relating to Black Elk were material and necessary to DMRH’s defense. And dismissal of Small’s complaint was warranted due to his invocation of the privilege.