By Joseph Ax

NEW YORK, Jan 29 (Reuters) - A former hedge fund executive should be awarded damages after his former partner withheld profits from him, an appeals court ruled Tuesday, the latest twist in a dispute that also includes allegations that one party deliberately set a forged document on fire to avoid getting caught.

The Appellate Division, First Department, unanimously found in favor of James Melcher, who ran hedge fund Apollo Medical Partners with Brandon Fradd and claimed Fradd had denied him his proper share of profits.

The court ruled that the jury erred in finding Melcher could not collect damages from Apollo, even after concluding that Fradd had breached a profit-sharing agreement, because Melcher never complained about his pay while he was still employed.

"We find that no rational interpretation of the evidence supports" the jury's conclusion that Melcher is precluded from claiming breach of contract, Justice Rosalyn Richter wrote for the five-judge panel.

The court rejected Melcher's bid to hold Fradd individually liable for allegedly taking money that belonged to Melcher. That could make it harder for Melcher to collect the approximately $6 million he is owed, since Apollo is now defunct, according to his lawyers, Stephen Younger and Jeffrey Jannuzzo.

The court also called for an evidentiary hearing to determine whether Fradd forged an amendment to the profit agreement in an effort to undermine Melcher's claim and then burned the amendment to prevent Melcher's ink expert from testing it for forgery.

Fradd said the amendment, which changed the arrangement to cut Melcher's pay, was legitimate and that he accidentally burned it while making tea, according to court filings.

That assertion led Jannuzzo to file a lawsuit against Apollo's former lawyer, Leslie Corwin of Greenberg Traurig, claiming Corwin knew the document was fake but told Jannuzzo it was authentic.

The lawsuit was thrown out two weeks ago by a divided First Department panel that found it was filed after the statute of limitations had expired. Jannuzzo has said he will appeal.

Greenberg has denied the allegations.

In Tuesday's ruling, the First Department said it was "troubled" by the purported forgery and burning of the document.

"If Melcher's allegations are proven, the court should impose a monetary sanction," Richter wrote.

Lawyers for Apollo did not immediately comment on the ruling.

"We're quite pleased that the court entered judgment against Apollo Partners," Stephen Younger said. "We're also pleased that the court recognized that the actions by the defendant, Mr. Fradd, are such that can rise to a sanctionable event. This is something that casts a pall upon the whole justice system."

The panel also included Presiding Justice Luis Gonzalez and Justices Karla Moskowitz, Dianne Renwick and John Sweeny.

The case is Melcher v. Apollo Medical Fund Management, Appellate Division, First Department, No. 4764.

For Melcher: Stephen Younger, Sarah Zgliniec and Anthony DeCinque of Patterson Belknap Webb & Tyler; Jeffrey Jannuzzo.

For Apollo: Scott Matthews and James Tracy of Windels Marx Lane & Mittendorf.

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