District Court Requires Fund of Funds Manager PAAMCO to Pay 40 Percent of Annual Net Profits to Seed Investor

On August 27, 2010, the U.S. District Court for the Southern District of New York granted summary judgment on behalf of Franklin Realty Co., and Franklin Realty Holdings, LLC (Plaintiff), the venture investment entity of S. Donald Sussman, in their contract dispute with PAAMCO Founders Co., LLC (Defendant), f/k/a Pacific Alternative Asset Management Co.  It found no dispute that, under the terms of their Revolving Credit Agreement (RCA), Franklin was entitled to the greater of 10 percent of the outstanding loan or 40 percent of PAAMCO’s net profits.  It rejected PAAMCO’s defense of criminal usury because the principal on the loan was not absolutely repayable, and Franklin would not necessarily receive more than the 25 percent legal rate of interest in New York.  It also rejected PAAMCO’s defense that Franklin fraudulently induced a separate agreement that allowed Franklin to convert the RCA into a 40 percent membership interest in PAAMCO on the grounds that PAAMCO had failed to offer admissible evidence of a material misrepresentation.  We detail the background of the instant action and the Court’s legal analysis.

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