ROBERT E. GERBER, UNITED STATES BANKRUPTCY JUDGE:
In the chapter 11 cases of debtors Soundview Elite Ltd. (
One such investment (in this case, by debtor Elite, one of the six companies that are debtors in this chapter 11 case) was in another investment company, defendant Soundview Composite Ltd. (
In this adversary proceeding under the umbrella of the Soundview Debtors' chapter 11 cases, the Trustee, on behalf of debtor Elite, sues to recover the
More specifically, the Trustee seeks (i) turnover, under sections 541 and 542 of the Bankruptcy Code, of the net asset value of Elite's holdings; (ii) an accounting; (iii) attorneys' fees, costs, and litigation expenses, and (iv) other relief that the Court considers proper.
The Trustee now moves, pursuant to Fed.R.Bankr.P. 7056 and Fed.R.Civ.P. 56, for summary judgment — though this might better be regarded as partial summary judgment, because (as the Trustee readily acknowledges) the Debtor's redemption entitlement — while to the entirety of Composite's remaining assets — is to those assets after the payment of any senior third-party creditor claims, which are not yet known with precision.
Composite's position — i.e., Mr. Fletcher's position — is inexplicable, and offensive to the Court. It is obvious that once any existing senior Composite liabilities have been satisfied, the entire remaining balance of Composite's assets rightfully belongs to Elite. That Elite made a redemption
On behalf of Composite, Mr. Fletcher contends that almost all of the evidence supporting the redemption request is inadmissible, and that what is admissible is "ambiguous"; that he can find no record of the redemption request and (though he and his staff were on both sides of the transaction at the time, and repeatedly acknowledged it before) cannot remember it; and that he isn't sure whether, assuming any redemption request was made, the request complied with necessary formalities. Mr. Fletcher also contends that Composite has the right, under "gating"
Sooner or later, the Trustee will win. But Mr. Fletcher's resistance to meeting his obligations to his investors, and constraints on the statutory and constitutional authority of a bankruptcy judge to enter a final order bringing the resistance to an end, have tied this case up in knots.
To minimize the delay Fletcher's resistance has occasioned, and given how obvious her entitlement (at least in overall terms) is, the Trustee has sought to recover her entitlement by the Bankruptcy Code's "Turnover" provision, section 542 of the Code. But for reasons discussed below, the Trustee's entitlement is not one that section 542 can enforce, and her main entitlements are to declaratory relief, an accounting, and a related judgment — as to which a bankruptcy judge cannot enter a final order. And the Court also needs to quantify Composite's creditor claims before it can fix the amount of the inevitable judgment. The most the Court can grant at this point is partial summary judgment (though this, because it is not a final order, is fully within the Court's statutory and constitutional authority) and an injunction freezing Composite's assets until the issues are fully determined and (as is certain) the Trustee ultimately wins.
The Court grants each, for the reasons described below.
Under familiar principles, the Court relies solely on undisputed facts.
Composite was formed in May 2007 under the "Articles of Association of Soundview Composite, Ltd." (the
The Placement Memorandum established that redemptions may only be made on the last business day of each calendar quarter (each, a
The Placement Memorandum also provided that redemption of shares is "contingent upon the Fund having sufficient assets to discharge its liabilities on the Redemption Date," and that the "maximum Net Asset Value of Shares that may be redeemed on any Redemption Date is 10% of the Net Asset Value of the Fund, unless such limitation is waived by the Directors in their sole discretion."
The Placement Memorandum also stated that Composite's directors could suspend redemptions and the determination of Net Asset Value under certain circumstances.
Absent such restrictions on redemptions, the Placement Memorandum required payment
In August 2009, Elite subscribed to Composite shares issued under the Placement Memorandum, purchasing 15,311 Class H Shares for approximately $12.87 million (the
As described in the Placement Memorandum, the investment manager of Composite was (and so far as the record reflects, still is) Soundview Capital Management (the
The Management Company is owned by Richcourt Holding, Inc. (
The Management Company — "Soundview Capital Management" — is a company distinct from "Fletcher Asset Management," whose activities were a focus of the FILB chapter 11 case. But both are under the control of Mr. Fletcher, and on the first day of the umbrella chapter 11 cases here, Mr. Fletcher made reference to the
In June 2008, two of Mr. Fletcher's associates, Messrs. Denis Kiely ("
Composite has confirmed that it redeemed all shares owned by Composite's original shareholder on March 31, 2009 after that investor delivered a redemption request on February 12, 2009.
The Trustee asserts (and the Court ultimately finds, though with less precision as to the exact date) that a redemption request (the
The Trustee — who had not yet been appointed by 2011, and, once appointed, needed to obtain the Soundview Debtors' documents from Fletcher-controlled entities — could not, and did not, present a copy of the Redemption Request to the Court. Mr. Fletcher has stated in an affidavit on this motion that he searched the files of Composite and the Management Company (though not those of HSBC) and his search did not yield a copy of the Redemption Request.
To date, Composite has declined to honor, and has not honored, the Redemption Request.
In support of her motion for summary judgment, the Trustee relies on eight separate communications (by letter, e-mail, affidavit, or statements in court on the record) from 2012 to 2014 (all but one preceding the appointment of the Trustee) acknowledging the Redemption Request, discussing the gating of redemptions of Composite shares, or both. The Court's review of exhibits submitted on this motion, but addressed less extensively by either side, revealed three more. Composite argues that all but two of them must be ignored by the Court, as inadmissible in evidence. The Court addresses the evidentiary issues, and thus the extent to which they may be considered on the motions here, in the Discussion to follow. For now, it sets forth the content of each of them.
On May 10, 2012, Ann Loeb, an employee of Richcourt USA — which provided administrative services for the Richcourt Funds, including Elite and Composite — sent an e-mail (the
On the next day, May 11, 2012, Mr. de Saram sent a letter (the
In response to CIMA's fourth inquiry,
In response to CIMA's fifth inquiry,
Solon Group, Inc. (
On May 28, 2013 (now about a year after the communications just quoted, at a time when she was still a director of Composite and had not yet either "resigned" or "been removed"), Ms. Midanek sent an eight-page single-spaced letter (the
For the most part, Ms. Midanek's statements as to Mr. Fletcher and his management of the six funds that were the subject of Ms. Midanek's letter are not relevant to this controversy, and the Court makes no findings with respect to them. They are relevant here only with respect to Ms. Midanek's statements as to pending redemptions and gating. In that connection, Ms. Midanek stated, in a section captioned "Funds' Condition," that:
In the next section, "Current Situation," Ms. Midanek stated that she had "attempted to compile, on a Fund by Fund basis, all available information on assets, shareholders, directors, governing documents, valuation dates, most recent NAV and minute books and registers,"
The May 2013 Midanek Letter triggered a response from CIMA, dated June 6, 2013, seeking more information. CIMA desired a response within a week.
By e-mail dated June 10, 2013 (the
The May 2013 Midanek Letter also triggered a desire on the part of Mr. Fletcher and Composite's remaining leadership to address it. On June 26, 2013, Mr. Fletcher sent an e-mail (the
The work by Mr. Fletcher and his colleagues to submit a response to CIMA continued after the June 2013 Fletcher E-Mail. On July 1, 2013, Mr. Turner sent an e-mail (the
# of Outstanding Redemption Estimated Value of
Requests Outstanding Redemption
Requests
Soundview Composite Ltd. 1 $5,000,000
The July 2013 Turner E-Mail then stated that each of Elite, Premium and Star had gated redemptions, but once again did not include Composite in that list. Mr. Turner continued that "[n]one of the Funds have suspended redemptions but due to the delays caused by the outgoing administrator, HSBC, to forward materials to Pinnacle, redemptions are not currently being processed at this time."
Meanwhile, Ms. Midanek responded by the deadline CIMA had set. On June 13, 2013 (which, as noted above,
In the June 2013 Midanek Letter, Ms. Midanek still referred to Solon ("via its President, Deborah Hicks Midanek") as a director, though the June 13, 2013 date appearing on the letter is the day after Mr. Fletcher says that Solon was removed. (It is not clear whether Ms. Midanek was unaware of the other directors' actions in attempting to remove Solon as a director, or simply disputed their power to do so; later in the letter, she stated that Mr. Fletcher "indicated his desire to terminate the directorship of the Solon Group," but she expressed the view that any such effort would be invalid.)
In any event, the June 2013 Midanek Letter provided a table of redemption requests received by each fund since the last redemption was paid,
Mr. Fletcher admits that this amount is also shown within the shareholder register, but contends that it is merely an estimate.
By letter dated June 10, 2013 (but which all agree should read July 10, 2013, when it was actually sent), six Richcourt Funds, including Elite and Composite,
At least in respects relevant here, the July 2013 Richcourt Funds Letter was not materially different than Turner's July 1 draft. It stated that, as of the date of that letter, Composite had one "pending" or "outstanding" redemption request with an estimated value of $5 million,
The July 2013 Richcourt Funds Letter also stated that "[e]ach of Soundview Elite Ltd., Soundview Premium Ltd., and Soundview Star Ltd. [but once more, not Composite] has gated redemptions. None of the Richcourt Funds has suspended redemptions."
Under an order entered in November 2013, CohnReznick Advisory Group (
On January 21, 2014, Warren Martin, Jr. (a partner of Porzio Bromberg & Newman P.C. (
After another paragraph, in which Mr. Martin advised this Court that the Soundview Debtors supported a more durable "freeze" of the funds than was suggested in the Cayman Liquidators' motion,
Mr. Martin continued:
At a March 19, 2014 hearing before this Court in Elite's underlying chapter 11 case (shortly after the Trustee had been appointed), the Court considered a motion filed on February 21, 2014, about a month earlier (the
The motion continued that although the former Debtors in Possession (who now called themselves "Debtors Out-of-Possession"
The motion listed the people "behind the entities, so to speak,"
Further on, the Administrative Expense Motion — which it will be recalled was filed on behalf of Messrs Fletcher, Ladner, Saunders and the Management Company — stated that:
The "estate's investments" included, of course, Elite's investment in Composite.
When speaking to the assets that would be available to pay the requested fees, Mr. Martin made statements relevant to this controversy on the record and in open court.
Although the hearing was attended by Messrs. Fletcher, Ladner, and Turner (each of whom was seeking to be paid under the Administrative Expense Motion), none of them corrected or supplemented anything Mr. Martin said. The "related entity" described in the last-quoted paragraph of Mr. Martin's remarks was of course Composite. But Composite contends that Mr. Martin's statement is inadmissible — a contention addressed in the discussion to follow.
The Soundview Debtors' chapter 11 case was filed on September 24, 2013,
Early in the chapter 11 cases, the Soundview Debtors sought to use the Bankruptcy Code's automatic stay to prevent the Cayman winding up proceedings from moving forward.
The Trustee commenced this adversary proceeding on April 1, 2014, with the filing of a complaint here in the bankruptcy court. On May 2, 2014, Composite filed an answer to the complaint, and a motion to withdraw the reference.
On July 3, 2014, Judge Scheindlin of the district court denied Composite's motion to withdraw the reference, without prejudice.
Without dispute, this Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. § 1334.
That same 28 U.S.C. § 157, addressing bankruptcy judges' statutory authority, grants authority to bankruptcy judges to hear and determine matters in "cases under title 11" (e.g., the Elite chapter 11 case) and in proceedings arising under title 11 or arising in a case under title 11 — e.g., this adversary proceeding — if they are "core." "Core proceedings "include, but are not limited to" 16 enumerated categories of proceedings,
The limits on bankruptcy judges' powers to decide disputes when estates seek to augment their assets and bring claims arising under state or other nonbankruptcy law can delay litigation. In an effort to shortcut such litigation delays, the Trustee relies on the Bankruptcy Code's "Turnover" provision, Bankruptcy Code section 542. That section, captioned "Turnover of property to the estate," provides, in relevant part (with exceptions not relevant here):
And 28 U.S.C. § 157, in recognition of bankruptcy courts' historic in rem jurisdiction, and bankruptcy courts need to bring in and administer property of the estate, lists "orders to turn over property of the estate" as included within core proceedings.
But "mere characterization of an action as a complaint for turnover does not mean that it is a turnover action pursuant to 28 U.S.C. § 157(b)(2)(E))."
This Court addressed the conceptual underpinnings of turnover actions in its opinion in Pali Holdings,
Where the turnover power is properly invoked, it is simply an effort to recover property — or on property — that is already property of the estate. That invokes the court's in rem jurisdiction over the bankruptcy res.
But as this Court explained in Pali Holdings, "the turnover power can be improperly invoked, especially when it is used as a Trojan Horse for bringing garden variety contract claims; when the property in question is not already property of the estate; or when the turnover statute is used to recover assets with disputed title when the estate's claim of ownership is legitimately debatable. It is well established that the turnover power may not be used for such purposes."
Though the matter is close — as the Court finds Composite's defenses here to be largely frivolous, and the Court cannot even find that they are bona fide — the Court nevertheless is not in a position to determine that the cash or property to be delivered to Elite is already estate property. And though (as discussed above and below), Elite's redemption request has repeatedly been acknowledged to be pending and unpaid, and has been quantified in concept, the uncertainties as to the amount to be turned over make use of the turnover power inappropriate.
As tempting as it is to push the statutory and constitutional envelope here given the conduct of Fletcher, the Management Company and others acting for Composite, the Court does not believe that it should stretch the turnover power that far. Prudence suggests that bankruptcy judges be wary of pushing the limits of their statutory and constitutional authority to avoid more problems of the type occasioned by Stern.
The Trustee may pursue her claims by a host of alternative means, but she cannot do so by means of the Turnover Power. Construing its turnover authority to avoid the Constitutional issue, the Court determines that her claims are non-core matters. And for that reason, the Court cannot enter the final judgment that 28 U.S.C. § 157(b)(2)(E)) would permit a bankruptcy judge to enter if the Turnover Power were appropriately invoked.
Though the Trustee is unable to invoke the Turnover Power, that does not mean that Composite can stymie, especially for more than a short time, her efforts to enforce Composite's obligations. The Court can still issue a Report and Recommendation.
Additionally, the limits on bankruptcy judges' ability to enter final orders and judgments do not apply in situations where (as here, for reasons discussed below) a bankruptcy judge is issuing an order granting only partial summary judgment.
A partial summary judgment that is not dispositive of claims is an interlocutory order, and doesn't implicate the constitutional limitations on the Court's authority to enter final judgments.
For reasons discussed below, the Court is not now in a position to award a money judgment in a fixed amount in favor of the Trustee. The more limited relief the Court now grants does "not end the action as to any of the claims or parties...."
Composite's defense to summary judgment here effectively rests on two things. First, Composite argues that of the eight (and, the Court finds, now eleven) separate communications acknowledging Elite's redemption request; the absence of gating; the approximate amount owed to Elite; or some combination of those things, only two are admissible in evidence — and that those two are too ambiguous to support Elite's entitlement.
Second, Composite submits an affidavit by Mr. Fletcher (who individually and through the Management Company, controls Composite, as he previously controlled Elite), saying that he does not recall making the Redemption Request, and that he has looked for it and now cannot find it — though significantly (especially since Fletcher and companies and personnel he controlled were on both sides of the Redemption Request, and the request was made to the prior administrator HSBC, whose files Mr. Fletcher failed to check and repeatedly stated had not been fully turned over), he never says that the Redemption Request was not in fact made. Then, based on Fletcher's artful affidavit and its efforts to exclude the Trustee's evidence, Composite argues that the Trustee has not proven her case, or that there remain material disputed issues of fact. The Court disagrees.
The Court determines first that of the 11 items, 8 are admissible. The Court further determines that Mr. Fletcher's crafty responses do not raise issues of fact as to Elite's entitlement, except as to the exact amount that Elite is owed. Partial summary judgment in the Trustee's favor is appropriate now.
Preliminarily, the Court must address Composite's contentions that the Trustee has moved for summary judgment "[r]elying on inadmissible documents and hearsay
It is clear, of course, that on a motion for summary judgment, parties may rely only on evidence that would be admissible at trial.
As one of the predicates for its assertions that most of the evidence offered against it is inadmissible, Composite argues that in order to be considered on this motion, each of the documents upon which the Trustee relies had to be authenticated through an affidavit or declaration made upon personal knowledge.
To address this, a court must focus on what Civil Rule 56(c)(2), quoted above,
Composite understandably does not argue that the matter on which the Trustee relies could never be authenticated. While bona fide evidentiary objections can and should be considered at the summary judgment stage (which is why the Court considers each of the hearsay objections below), as to authenticity there is no basis for concluding that any of the documents is anything other than what it purports to be. And the fact that documents were attached to an attorney declaration without a supplemental affidavit by a document custodian or another with knowledge does not make them inadmissible for that reason.
And even at trial, under Federal Rule of Evidence 901(b), a document may be authenticated based on its "appearance, contents, substance, internal patterns, or other distinctive characteristics of the item, taken together with all the circumstances," the issue being whether a reasonable juror could find the evidence in question authentic.
By declaration,
The Court then considers the 11 individual documents and other forms of evidentiary matter to determine the extent to which any is inadmissible under the Hearsay Rule.
Ms. Loeb was an employee of Richcourt USA at the time she sent the e-mail, and the employees of Richcourt USA
The May 2012 Loeb E-Mail plainly reflects the role of Ms. Loeb and Mr. Siedlecki as team members (and agents) in that collective effort. As a Richcourt employee with at least partial responsibility for advising the directors of the Management Company about redemption requests,
The Court flatly disagrees with Composite's contention that the e-mails comprising Exhibit F to the Dailey Declaration, including the May 2012 Loeb E-Mail, "are not party admissions, because they contain statements made on behalf of Elite, not Composite."
The Court especially disagrees with Composite's contention insofar as it covers the May 2012 Loeb E-Mail itself — whose last two paragraphs expressly make reference to Composite; state facts with respect to Composite; and seek more information with respect to Composite — all for the purpose of the response to CIMA that was the subject of the team's joint effort, on behalf of Composite and other Fletcher Funds.
The Court therefore rejects Composite's arguments that the May 2012 Loeb E-Mail is inadmissible. The May 2012 Loeb E-Mail is not hearsay because it satisfies the requirements under Fed.R.Evid. 801(d)(2)(D) that a party must establish "(1) the existence of the agency relationship, (2) that the statement was made during the course of the relationship, and (3) that [the statement] relates to a matter within the scope of the agency."
The May 2012 Loeb E-Mail is admissible, and will be considered on this motion.
Mr. de Saram was an attorney for Composite; his response concerned his client Composite; he was asked by Composite's Board to respond to the Cayman Authorities earlier letter; and he was doing so on Composite's behalf.
Understandably, Composite does not object to the admissibility of the May 2012 de Saram Letter.
Ms. Midanek was a director of, among other funds, Composite. In that role, Ms. Midanek had a legal obligation to serve the company and its shareholders, with which she was attempting to comply. The May 2013 Midanek Letter provided information to the Cayman Authority in furtherance of what Ms. Midanek perceived as her and Composite's obligations to its stakeholders.
The May 2013 Midanek Letter clearly related to matters of legitimate concern to any corporate director; Mr. Fletcher's disapproval of her whistle-blowing does not change that fact. She was a director with the right, if not also the duty, to act in good faith to protect stakeholder interests.
And it does not matter that Ms. Midanek did not personally issue redemption requests, or handle other administrative matters. She had a legitimate concern as to whether Composite and the other funds were meeting their obligations to their investors — if for no reason other than CIMA could be anticipated to expect as much.
The May 2013 Midanek Letter is an admission. It is admissible, and will be considered on this motion.
The hearsay analysis with respect to the June 2013 Siedlecki E-Mail is very much the same as with respect to the May 2012 Loeb E-Mail. At the time he sent the June 2013 Siedlecki E-Mail, Mr. Siedlecki (like Ms. Loeb) was a Richcourt employee, dealing with the administrative end of Composite's business. And here too, more fundamentally, Mr. Siedlecki was communicating incident to the team effort to formulate a submission to CIMA — including with respect to redemption requests, which were among Richcourt's areas of responsibility. The June 2013 Siedlecki E-Mail plainly reflects his role as team member in that collective effort. His discussion of facts to be incorporated into the letter then being drafted was well within the scope of his responsibilities.
The June 2013 Siedlecki E-Mail is an admission. It is admissible, and will be considered on this motion.
Mr. Fletcher made the statements in the June 2013 Fletcher E-Mail in the scope of his own employment, for each of the funds (including Composite) for whom he was acting. Mr. Fletcher's statements also confirm that Mr. Siedlecki, when he made the statements in the June 2013 Siedlecki E-Mail, was acting within the scope of Mr. Siedlecki's employment as well.
The June 2013 Fletcher E-Mail is an admission. It is admissible, and will be considered on this motion.
The hearsay analysis with respect to the July 2013 Turner E-Mail is closely similar to that with respect to the June 2013 Fletcher E-Mail, and especially the June
The June 2013 Turner E-Mail is an admission. It is admissible, and will be considered on this motion.
The Court is mindful of Solon's — and hence Ms. Midanek's — status as a Composite director at the time of many of the key events in question here, and is likewise mindful of its ruling that her earlier May 2013 Midanek Letter, written in her capacity as such and to advance the welfare of Composite stakeholders, was well within her authority and admissible as an admission.
But the hearsay issue here is more difficult, because while Ms. Midanek once more wrote CIMA as the Solon director of Composite (among other funds), the Composite Board, at least purportedly, had terminated Solon's status as such the preceding day. And while Ms. Midanek knew of Mr. Fletcher's intent to remove Solon from its directorship, and while she said any such effort would be improper, the Court is reluctant to allow the admission of a document premised on Solon's status as a director at the time that she wrote it when the Court would first have to find either that Mr. Fletcher's statement that Solon had been removed the preceding day was false, or that its removal was legally invalid — a determination that presumably would have to be made under Cayman law, with no help from either side on what Cayman law provides with respect to that issue.
Some hearsay exceptions rely on considerations of reliability, but this one does not; it rests on status — as an agent of a corporate party. It appears that rightly or wrongly, Mr. Fletcher and his fellow director Mr. Saunders determined to take away Ms. Midanek's status as a director-agent who could speak for Composite. Whether that firing of a troublesome whistleblower was a breach of fiduciary duty (or an additional breach of fiduciary duty) does not appear to be relevant to the evidentiary issue. In light of Solon's change in status, the June 2013 Midanek Letter cannot qualify as an admission, and it will be excluded and not relied upon by the Court on this motion.
Understandably, Composite does not challenge the admissibility of the July 2013 Richcourt Funds Letter.
Mr. Katz was an accounting professional retained by the Elite estate back when it was a debtor-in-possession. The Katz Affidavit was submitted by Elite in opposition to the ultimately successful motion to appoint a chapter 11 trustee. In
Under these circumstances, the Court cannot find that Mr. Katz was an agent for Composite, or that what he said was an admission of Composite. And as a professional brought in after the events at issue here, Mr. Katz lacked firsthand knowledge of the facts relating to Elite's redemption request.
There being no other potential hearsay exception shown to be applicable (as a predicate was not laid for admitting the underlying financial information as a business record, for example), the Katz Affidavit must be excluded, and it will not be considered on this motion.
The Court need not, and does not, determine whether Mr. Martin's remarks should be admitted as admissions bearing on summary judgment. It will not be relying on them in its summary judgment determination anyway, as they are insufficiently relevant to that inquiry. The Court can, and will, consider the January 2014 Martin Letter as containing admissions relevant to the asset freezing injunction request, considered separately below.
Mr. Martin's remarks — and especially the motion that he had filed occasioning those remarks — support, and ultimately justify, the admissibility of the March 2014 Martin Statements.
As noted above, Mr. Martin's remarks in court on March 19, 2014 were made while prosecuting a motion filed, as relevant here, on behalf of Mr. Fletcher, Mr. Ladner, Mr. Saunders, Mr. Turner, and the Management Company. The motion filed on their behalf (which thus was an admission of each of them) stated that none of the Soundview Debtors had any "direct employees," and that services were provided to them by "associated management companies and unassociated service providers." The motion stated that "Soundview Management [i.e., the Management Company] directed the efforts of the Debtors' counsel and financial advisors on all matters pertaining to the estate's investments, which stated differently, means estate assets."
Wholly apart from that, the Court is mindful of what Mr. Martin was trying to accomplish by the motion and the remarks he made in court supporting it. He was appearing on behalf of Mr. Fletcher, Mr. Ladner, Mr. Turner, and Fletcher Asset Management, among others, to get them paid. He was acting for their benefit — not, at this time, for Elite, Premium or Star. They cannot now be heard to say that Mr. Martin was not really speaking for them.
For the reasons stated, the hearsay objections to the June 2013 Midanek Letter and the Katz Affidavit on summary judgment are sustained. The Court will not consider the January 2014 Martin Letter for summary judgment purposes, as the Court regards that letter to be insufficiently relevant to summary judgment. All other evidentiary objections are overruled.
Having considered the admissible evidence put forward by the Trustee on her summary judgment motion, and Mr. Fletcher's affidavit in opposition, the Court determines that it does not yet have enough information to fix the exact amount due from Composite to Elite. But the Trustee has satisfactorily shown everything else. Mr. Fletcher's responsive affidavit, discussed below, is notable for its evasiveness and indirection, and its efforts to disavow what Composite told CIMA when CIMA was investigating, among other things, issues of the very type present here — the extent to which Composite and other funds under Mr. Fletcher's control were failing to honor redemption obligations to their customers. More fundamentally, Mr. Fletcher's affidavit is notable for its failure to put forth any evidence to contradict, by actual evidence, the many earlier admissions on which the Trustee relies, addressed above and below.
Mr. Fletcher's responses fail to create issues of fact. Partial summary judgment will be granted on all but the amount due, and, incident to that, the Court will issue the particular determinations set forth below.
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
In deciding a summary judgment motion, it is well settled that the Court should not weigh the evidence or determine the truth of any matter, and must resolve all
For reasons discussed above, the great bulk of Composite's evidentiary objections to the Trustee's showing have been overruled. By Composite's own admissions — including some that Mr. Fletcher himself endorsed
Apart from its contentions that most of the Trustee's showing was inadmissible (which, except with respect to the June 2013 Midanek E-Mail and Katz Affidavit, the Court now has rejected), that the Trustee's evidence is "ambiguous," and that the above facts are still not enough, Composite relies solely on an affidavit by Mr. Fletcher in opposition to the Trustee' summary judgment motion. That affidavit is insufficient to rebut the Trustee's showing, or even to create issues of material fact.
Mr. Fletcher's affidavit consists of 39 paragraphs. In none of them does Mr. Fletcher ever say that the redemption request was not made. Nor does he say that the redemption request — directly acknowledged four times,
Rather, Mr. Fletcher says a variety of other things — presumably to imply, though without saying, that the admitted redemption request was not made — which fall well short of refuting Composite's earlier admissions. Thus, Mr. Fletcher says that the Trustee (who got what documents she could from Mr. Fletcher, companies Mr. Fletcher controlled, and their counsel) "does not present the actual redemption request."
In fact, Mr. Fletcher acknowledges this very problem. Recognizing that he and his colleagues expressly acknowledged the Redemption Request in the July 2013 Richcourt Funds Letter, he seeks relief from the admission by saying that it "was prepared at a time of great turmoil."
Nor do Mr. Fletcher's other responses give the Court anything substantive. He says, once again (this time with respect to Elite's other two directors, Messrs. Turner and Kiely), that he has "seen no evidence" that either of the other directors "knew of or ratified the alleged request in 2011," but ignores the fact that Mr. Turner, the original drafter of the July 2013 Richcourt Funds Letter, knew of the Elite Redemption Request when the letter Mr. Turner drafted in June and July 2013 expressly made mention of it (and Mr. Fletcher obviously knew of it then as well), and Mr. Fletcher is notably silent about ever having talked to anyone else at Elite about it.
In fact, Mr. Fletcher says cryptically, that "I have, however, found a proposal for a similar request that was never approved."
Then, further to his "I have found no evidence" defenses, Mr. Fletcher says that
Then Mr. Fletcher explains that the July 2013 Richcourt Funds Letter (which he acknowledges he "helped write"
But these qualifications grossly overstate the requirements of the approval process — which, as just noted, required nothing more for a redemption than a writing, a statement of the amount to be redeemed, and a signature. If there were an unstated requirement for more, what was told to CIMA was a half-truth at best. But there was no requirement for more. Mr. Fletcher has failed to raise a valid defense to the existence of the repeatedly acknowledged redemption demand, or even to create an issue of fact with respect to it.
Finally, with respect to a redemption request having been made, Mr. Fletcher says "Well, if I wanted the redemption done and controlled all the participants, then the redemption should have been done when I gave the order, but there never was a redemption."
Thus, nothing Mr. Fletcher said is sufficient to contradict the admissions, which squarely acknowledged the redemption requests, and stated that the redemption requests were still pending.
Composite likewise relies on Mr. Fletcher's affidavit with respect to its Gating
The Court agrees with Mr. Fletcher that Composite's documents gave it the right to gate redemptions, and that (putting aside what would have been fully honest responses to CIMA), there would be a distinction between Composite's having the right to gate redemptions and its actually exercising that right — a distinction that Composite, if it really wanted to make that distinction, blurred in its several communications internally, and more importantly to CIMA. But the Court disagrees with Composite in every other respect. And it finds Mr. Fletcher's gating contentions to be insufficient to provide a defense to the Trustee's claims now.
The Court rejects Composite's gating defense for three separate reasons.
First, assuming that Composite had the right under its documents to gate redemptions, the record is devoid of any indication that Composite did so. Mr. Fletcher proffers no board minutes or other contemporaneous indications of any action on his part, or his associates', to make or communicate a gating determination, even after this controversy blew up.
Second, Ms. Loeb was right that gating would serve no purpose when Composite had only a single investor. It now is sophistry for Mr. Fletcher to contend that he could withhold the full redemption requested
Third, there is an additional problem with Composite's gating excuse here. Assuming that Composite had the right to gate (and putting aside Fletcher's lack of candor to CIMA if he intended to invoke a gating right without saying so), that right only gave Composite the authority to defer, not refuse, redemptions. Composite still had to pay out 10% of the NAV per quarter — i.e., 40% per year. With the redemption request having been made no later than May 2012, at least 12 quarters now have passed, obligating Composite to have returned to Elite, by June 2015, the entirety of Elite's redemption request. Even assuming the right to gate when the Redemption Request came in, the time to pay Elite in full has now come and gone.
The gating right is a red herring. The Court rejects it as a defense.
Composite further disputes the Trustee's showing of the amount of Elite's claim. Composite contends that the May 2013 Midanek Latter, the June 2013 Midanek Letter, and the Katz Affidavit are all inadmissible in evidence
As an evidentiary matter, the Court has excluded the June 2013 Midanek Letter and the Katz Affidavit, but the May 2013 Midanek letter has been admitted, and is part of the record. Moreover, Composite fails to address the July 2013 Turner E-Mail (noting not just the redemption request, but that it was in the estimated amount of $5 million); the July 2013 Richcourt Funds Letter (stating, once again, that the one pending redemption had an estimated value of $5 million); and the March 2014 Martin Statements (making reference to the redemption request, but quantifying it as only $3.8 million). They all are effectively saying the same thing, merely pegging a then-existing redemption request to the communicator's belief as to the value of Composite's net assets at that time.
The Court can and does quantify the Trustee's claim as "at least" $3.8 million, but is not otherwise in a position to now fix it in amount. But the Court rejects Composite's implication that the amount due to Elite can never be fixed. Further proceedings can clarify whether Elite's redemption entitlement is to $5 million, $3.8 million, or something in between. And an audit (which was never identified as a reason for failing to honor Elite's redemption
The parties have not sufficiently briefed the issues surrounding the amount of other creditors' claims; whether Elite's claim would be junior to, or pari passu with, those other creditors' claims; and whether claims against Composite by insiders (such as the Management Company, Fletcher, Saunders and Ladner) would be senior to (or even pari passu with) Elite's entitlement.
Apart from the merits of the Trustee's request for summary judgment, the Trustee makes a further argument as well — that summary judgment is warranted under the doctrines of equitable and judicial estoppel, based on prior positions taken in the underlying chapter 11 case — first, in the January 2014 Martin Letter; second, in statements by Mr. Martin in open court later on that same day, January 21; and third, when trying to recover fees for Mr. Fletcher and other Soundview Debtors' directors and the Management Company in March. The Court cannot, and does not, rely on the first two communications; they are inadmissible hearsay. But the third communication, while it does not support equitable estoppel, is admissible, providing a potential second basis for the Court's award of partial summary judgment here.
Ultimately, however, the Court determines that judicial estoppel is applicable only to the Trustee's request for the continued asset freeze, and not to her request for summary judgment.
Preliminarily, as a factual matter, the record on which the estoppel claims rest cannot include statements in the first two communications. In the January 2014 Martin Letter, Mr. Martin acknowledged that Elite and other Soundview Debtors had "presented evidence at trial that Soundview Composite owned Soundview Elite that amount,"
Later in court the same day, Mr. Martin's remarks were made in the same context as his letter. And though this time Mr. Martin expressly recognized the existence of Composite's debt, the interests of the Soundview Debtors and others (e.g., the Management Company and Mr. Fletcher), while aligned in opposing the asset freezing TRO, were still adverse with
Matters stated in the third of the communications on which the Trustee relies — the March 2014 Martin Statements — are, however, admissible for purposes of judicial estoppel, just as they were on summary judgment itself. At this time, as previously noted,
The Trustee then argues that equitable estoppel "principles" bar Composite from "walking away from its obligations."
The Court understands the Trustee's frustration. But it is compelled to agree with points Composite makes in opposition to the Trustee's equitable estoppel argument. With the inability to make credibility determinations on a summary judgment motion, the Court cannot rely on this yet. And the Court cannot see the requisite reliance by Elite, and resulting injury, resulting from statements made by Mr. Fletcher and those acting on Mr. Fletcher's behalf.
What the Trustee is really saying, in substance, is that Mr. Fletcher's excuses now, after controlling both sides of the redemption transaction, are highly offensive. That is true, but the Trustee's showing falls short of an equitable estoppel.
Judicial estoppel presents different issues. As explained by the Supreme Court in New Hampshire v. Maine,
Here, the position taken by Mr. Fletcher is plainly inconsistent with the statements made by Mr. Martin — and by Mr. Fletcher himself, in adoptive admissions when he remained silent if, as Mr. Fletcher now contends, Mr. Martin was wrong. And the reversal in position would give rise to both an unfair advantage and impose an unfair detriment on the opposing party — i.e., the Trustee. But insofar as judicial estoppel is argued to support summary judgment itself, the second element is lacking. In March 2014, the Court assumed that the $3.8 million could be recovered by Elite from Composite (and thus that the Soundview Debtors' estates would have the funds to pay the requested fees), but made no findings on the existence of the redemption debt at that time.
As judicial reliance on the March 2014 Martin Statements is lacking, judicial estoppel based on them on this summary judgment motion is not warranted.
Though the Court can grant the Trustee's summary judgment motion only in part at this time, it can, and does, issue the requested preliminary injunction freezing the disposition of Composite's assets pending the completion of this case — which effectively means no more than determining the amount of Elite's monetary entitlement, and the entry of a final judgment by the district court embodying Composite's duty to pay it. The Court does so under each of Fed.R.Civ.P. 65(a) and Bankruptcy Code section 105(a), each of which provides separate authority for such measures.
Civil Rule 65(a), made applicable to adversary proceedings by virtue of Bankruptcy Rule 7065, provides that a court may issue a preliminary injunction after notice to the party against whom the injunction will be enforced. The issuance of a preliminary injunction is an equitable remedy and within the discretion of the court.
The standards for entry of a preliminary injunction in the Second Circuit, as set out in its well-known decision in Jackson Dairy
If this Court allows Composite to dispose of its remaining assets now — especially after the Court's summary judgment ruling, making Composite's ultimate loss a certainty — Elite will be irreparably injured. Composite will be judgment-proof. And while a disposition of assets after this ruling would be a slam-dunk intentional fraudulent conveyance, recovering Composite assets from diverse transferees may well be impossible — and plainly extraordinarily burdensome and expensive.
Moreover, the risk of the dissipation of Composite's assets in the absence of an injunction barring such is very real. As more fully explained in an opinion of Judge Woods of the district court
Because Mr. Fletcher's prior actions were discovered quickly, it was possible, incident to the contempt proceedings that followed, to secure the return of the unauthorized withdrawals from Wilmington Trust, and the Trustee's injury turned out not to be irreparable. But she may not be as lucky the next time. Mr. Fletcher's past actions
Here the Trustee has shown much more than a likelihood of success. Except for ascertaining her monetary entitlement, and securing a district court judgment implementing her recovery, the Trustee has already fully won. The question now is not whether Elite will be entitled to the return of its investment (or what is left of it), but when.
An alternative basis for relief — serious issues going to the merits, coupled with a tipping of the equities in favor of the injunction — need not be considered to grant an asset-freezing preliminary injunction here, because of the Trustee's overwhelming showing on the merits. But if it were, it would easily be satisfied. The Trustee has shown much more than serious issues in her favor. And her showing is equally strong on the tipping of the equities. Elite will suffer grievously if Composite's funds are dissipated, especially since the residual ownership of the funds effectively already belongs to Elite. And Composite would not be prejudiced in the least; Composite has no claim to the funds whatever. Anything in the Wilmington Trust account belongs to either Elite or Composite's creditors.
Additionally, where, as here, the plaintiff is a bankruptcy estate trying to recover its assets for funding a reorganization — even under a liquidating plan — there is an additional basis for injunctive relief preserving the property to be recovered. Section 105 of the Bankruptcy Code provides bankruptcy courts with a broad range of equitable powers in proceedings within its jurisdiction, including the power to issue any order "necessary or appropriate to carry out the provisions of this title." Among the actions that may be taken pursuant to this authority is an injunction freezing the assets of a defendant when the plaintiff is seeking equitable relief, such as the recovery of property or an accounting, both of which are requested here.
The applicable law relating to the exercise of the section 105(a) injunction power was restated in the Calpine decisions.
Here too the circumstances strongly favor imposing a freezing injunction on Composite's assets. The four factors favor the Trustee in every respect.
Although any reorganization plan the Trustee might propose would almost certainly be a liquidating plan, that does not foreclose this Court from finding the requisite likelihood of success.
The Court has already addressed irreparable harm in the discussion above. Additionally,
The Court has likewise already addressed the balance of harms in the discussion above. For reasons there stated, Composite would not be harmed in the slightest by the preservation of the status quo, and Elite would be grievously injured if the investment it is about to recover is dissipated first.
Here too, the Public Interest factor favors the Trustee. It is in the public interest that entities meet obligations to creditors and other stakeholders, and it is in the public interest that commercial obligors not dissipate their assets — or, when they have already done so, that they not do it again.
For these reasons too, the Court finds issuance of an asset-freezing injunction appropriate.
Additionally, Composite contends that the Court cannot preserve the status quo by reason of limits imposed under the Supreme Court's decision in Grupo Mexicano.
Composite's Grupo Mexicano defense is unsupported for two reasons. First, it has been repeatedly held, in this District and elsewhere, and even at the Circuit Court of Appeals level,
Here, where the Trustee is attempting to marshal the Elite estate's assets for the benefit of its creditors, and to protect those creditors from efforts to dissipate property that may technically not yet be estate property but will be imminently, the Third Circuit's analysis in Owens Corning makes for a perfect fit.
Second, the Court here would have the authority to issue an asset freezing injunction against Composite even if Grupo Mexicano applied to bankruptcy courts. Courts have routinely held that when equitable claims have been asserted, the Grupo Mexicano rule barring issuance of a preliminary injunction freezing assets does not apply.
Here, the Trustee has asked for an accounting, which is a classic basis for an asset-freezing order,
Composite disputes that, however, arguing that under New York law, a plaintiff seeking an accounting must show "relations of a mutual and confidential nature."
Composite's contention that a fiduciary relationship is essential to an accounting was expressly rejected by the Appellate Division in Kaminsky. There the First Department reversed a trial court ruling that had dismissed a claim for an accounting when he trial court believed that the plaintiff's allegations "did not establish such a relationship between the parties, fiduciary or otherwise, as would entitle the plaintiff to an accounting."
Then, obviously, Composite cannot rely on a general rule that "no [confidential or fiduciary] relationship exists between the sellers and buyers of corporate stock when dealing at arms length." Here the relationship between Elite and Composite — with Mr. Fletcher, his colleagues, and the Management Company on both sides of the relationship — was most decidedly not at arms' length. And it is at least arguable, if not obvious, that Mr. Fletcher's failure to complete the redemption when he was still at the helm of Elite was a breach of the fiduciary duties he owed to Elite. Under these circumstances, the Court is unwilling to regard cases dealing with ordinary buyer and seller relationships in the securities market to be controlling.
Additionally, Composite disregards another basis for an accounting under New York law: "The fact that a case involves the consideration and adjudication of issues relating to an account of a complicated character, even in the absence of any element of mutuality or of trust relationship, is ordinarily a sufficient reason for a court of equity to assume jurisdiction thereof, upon the ground of its superior equipment to handle and dispose of such issues."
Here the Trustee has sought both equitable and legal remedies in this adversary proceeding, including an equitable remedy — for an accounting, to which the Court believes, if the Trustee's entitlement cannot more easily be determined,
Finally, the Trustee relies not just on traditional asset-freezing doctrine, discussed above, but also judicial estoppel. She is right in this respect as well. Though judicial estoppel did not apply to her request for summary judgment, it applies to her request for the continued asset freeze.
As the Trustee properly observes, her preliminary injunction motion is one "the Trustee should not have to bring."
As discussed above,
Back in January 2014, the JOLs filed an emergency motion seeking a TRO and preliminary injunction seeking essentially the same relief the Trustee seeks now. The Soundview Debtors, and, importantly here, Composite — which as this Court was told, "are managed by the same entity, Soundview Capital Management," wanted to avoid that. The Court was told that they "wish[ed] to avoid entry of any TRO under
Composite has now taken exactly the opposite position. The earlier position induced the Court not to then enter the TRO, as the Court believed what it was told: that Composite's agreement to the consensual freeze — one that "Composite has agreed it will sign onto" — would be sufficient. Now Composite has reneged on the promise on which the other parties, and the Court, relied.
Composite's decision to "sign onto" a consensual asset freeze did not happen by accident. Counsel for the JOLs was nervous about the lack of a TRO and subsequent preliminary injunction, and looked for assurances that a consensual freeze would be sufficient. At the hearing on the TRO, James Beha, Esq., counsel for the JOLs, began the colloquy that led to the representation upon which the JOLs and the Court later relied:
Mr. Martin stated, in response:
Documents in the record confirm that many members of the Fletcher team, including
The Court finds the requisite change in position; reliance by the Court; and unfairness all to be present here. It holds that Composite is judicially estopped from now contending that the continued asset freeze is inappropriate.
For the reasons set forth below, the Court grants summary judgment to the Trustee on all issues other than the amount of Elite's entitlement, and the extent to which other creditors' claims are senior to, or pari passu with, Elite's claims. The Court grants partial summary judgment to the Trustee determining that:
The Court will hold a conference to ascertain whether discovery is necessary incident to the trial on the computation of Elite's entitlement pursuant to its redemption demand, or if there are any other impediments to a prompt trial to fix the amount of Elite's entitlement. Counsel
A trial in the bankruptcy court will thereafter be held as soon as practical to resolve the open issues.
The Trustee is to settle two orders (one with respect to summary judgment,
Earlier, in a distinct, but related, chapter 11 case involving another investment fund controlled and managed by Mr. Fletcher, In re Fletcher Int'l Ltd. of Bermuda., No. 12-12796 (Bankr.S.D.N.Y. case filed June 29, 2012), referred to by the parties, and eventually this Court, as
Id.
Id.
At the least, this Court has "related to" jurisdiction, because a result favorable to Elite would benefit the Elite estate and Elite's creditors, easily satisfying the broad test for such jurisdiction articulated by the Third Circuit in In re Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir.1984) and applied in this circuit in Publicker Industries Inc. v. U.S.A. (In re Cuyahoga Equip. Corp.), 980 F.2d 110, 114 (2d Cir. 1992).
Finally, in the July 9, 2013 (3:31 p.m.) e-mail, Mr. Fletcher wrote "Thank you very much. Floyd, I think the letter is ready."
In providing an alternative to an immediate TRO, Mr. Martin was speaking to advance the interests not just of the Soundview Debtors, but also their affiliates — including, as Mr. Martin expressly stated, Composite. Statements in the January 2014 Martin Letter and at the January 21, 2014 hearing are admissible, as admissions, with respect to the preliminary injunction prong of the Trustee's motions, even though not admissible with respect to the summary judgment prong, because of what Mr. Martin said and their obvious purpose. Those statements were expressly made for the benefit of the Management Company and Mr. Fletcher personally, who were then hoping to preserve their reputations. Mr. Fletcher and the Management Company then had a joint interest in avoiding the entry of a TRO and subsequent preliminary injunction that could destroy the remainder of their business. As Mr. Martin stated:
January 2014 Martin Ltr. at 2 (emphasis added).
Composite further tries to minimize the danger to Elite in the absence of a preliminary injunction by saying that the Trustee does not allege that the purpose of taking money out of the Wilmington Trust account was to defraud creditors in collecting on their debts or to frustrate the enforcement of any future judgment that could be obtained by the Trustee. See Composite PI Br. at 22. Even if an intentional fraudulent conveyance was not the purpose of that transfer, that was its effect. And it gives the Court little solace in knowing that the prior actions were taken solely to achieve personal gain.
23 A.D.2d at 236-37, 259 N.Y.S.2d at 721-22 (emphasis added).
Some courts have criticized Kaminsky, see Nero v. RCA, 1982 U.S. Dist. LEXIS 11848 (S.D.N.Y. Mar. 22, 1982) (Conner, J.), or regarded its very direct statement that a fiduciary relationship is not required to be dictum or overtaken by time. See Chambers v. Weinstein, 44 Misc.3d 1224(A), 997 N.Y.S.2d 668 (Table) (Supr.Ct.N.Y.Co.2014) (Unreported Disposition). By the same token, Kaminsky has been relied on in this District, for the broader principle that plainly emerges from it: "The remedy of an accounting as provided under New York law is available where special circumstances are present warranting equitable relief in the interest of justice." Shimer v. Fugazy (In re Fugazy Express), 114 B.R. 865, 876 (Bankr.S.D.N.Y.1990) (Lifland, C.J.), aff'd 124 B.R. 426 (S.D.N.Y.1991) (Duffy, J.), appeal dismissed, 982 F.2d 769 (2d Cir.1992). Respectfully, this Court has difficulty seeing how Kaminsky, especially in all the respects it is relevant here, can be regarded merely as dictum. It conveys a very strong message that when necessary to provide adequate relief, courts have great flexibility as to the appropriate remedy, including by means of an accounting. At the very least, it is obvious that the Trustee has sought the accounting in good faith.
