-
Majority Opinion >
Pagination* BL
SUPREME COURT OF NEW YORK, NEW YORKCOUNTY
STILLWATER LIQUDATING LLC, Plaintiff, -against-PARTNER
REINSURANCE COMPANY, LTD.,BREVET ASSET SOLUTIONS, LLC, BREVET
CAPITAL MANAGEMENT LLC, and LFRCOLLECTIONS, LLC, Defendants.
Index No.:
652451/2015
652451/2015
January 23, 2017, DecidedTHIS OPINION IS UNCORRECTED AND WILL
NOTBE PUBLISHED IN THE PRINTED OFFICIALREPORTS.
SHIRLEY WERNER KORNREICH, J.S.C.
SHIRLEY WERNER KORNREICH
DECISION & ORDERSHIRLEY WERNER KORNREICH, J.:
Defendants Partner Reinsurance Company, Ltd.(PartnerRe), Brevet
Asset Solutions, LLC (BAS),Brevet Capital Management LLC
(collectively withBAS, Brevet), and LFR Collections, LLC (LFR)
move,pursuant to CPLR 3211 , to dismiss the amendedcomplaint (the
AC). Plaintiff Stillwater Liquidating LLC(Stillwater Liquidating or
plaintiff) opposes the motion.Defendants' motion is granted in part
and denied inpart for the reasons that follow.
1. Factual Background & Procedural HistoryAs this is a
motion to dismiss, the facts recited aretaken from the AC (see Dkt.
20)1 and the documentaryevidence submitted by the parties. The
plaintiff in thisaction, Stillwater Liquidating, is a Delaware LLC
formedpursuant to a Global Settlement Agreement entered
into by creditors of two failed hedge funds, StillwaterAsset
Backed Fund LP (Stillwater Onshore) andStillwater Asset Backed
Offshore Fund, Ltd. (StillwaterOffshore) (collectively, the Funds),
and approved byfederal district and bankruptcy courts in the
SouthernDistrict of New York. See AC ¶¶ 1-3. Between 2004and 2009,
Stillwater Onshore, among other things,originated hundreds of
millions of dollars in loans tolaw firms, secured by nearly $1
billion of those firms'accounts receivable. AC ¶ 16. Stillwater
Offshoreowned participation interests in the loans andreceivables
(the Law Firm Loans).2 AC ¶ 19.According to plaintiff, non-parties
Stillwater CapitalPartners, LLC and Stillwater Capital Partners,
Inc.controlled the Funds and operated them as alter egoswithout
adhering to corporate formalities. AC ¶¶14-15.3
Plaintiff, essentially, is an SPV created to collect onmore than
$575 million allegedly owed by the Funds totheir creditors. AC ¶¶
5, 22. In this action, plaintiffseeks to unwind two related
transactions involving theFunds and PartnerRe on the ground that
they areconstructive fraudulent transfers under New YorkDebtor and
Creditor Law (DCL) §§ 274, 275, and 278.In the first transaction,
the Funds' interest in the LawFirm Loans was transferred to
non-party StillwaterFunding LLC (Stillwater Funding), and
StillwaterFunding subsequently pledged the Law Firm Loans
toPartnerRe as collateral for a $31.5 million loan (thePartnerRe
Loan). The second transaction involved thesettlement of Stillwater
Funding's default on thePartnerRe Loan, pursuant to which PartnerRe
tookcontrol of the Law Firm Loans, which were allegedlyworth tens
(if not hundreds) of millions of dollars morethan the amount of
Stillwater Funding's debt toPartnerRe. Plaintiff's operative
pleading, the AC, alsoasserts claims for violations of PartnerRe's
obligationsunder Article [*2] 9 of the New York UniformCommercial
Code (UCC), declaratory judgment againstall defendants, unjust
enrichment against alldefendants, conversion against PartnerRe and
LFR,breach of fiduciary duty against all defendants, andbreach of
contract against PartnerRe.
To begin, plaintiff alleges in the AC, on information andbelief,
that the Funds "became illiquid at the end of2008, and, as a
result, were unable to pay theircreditors." AC ¶ 21. By 2009, the
Funds allegedly owedmore than $575 million to their creditors. AC ¶
22. InJuly 2009, despite their alleged insolvency, the Funds
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 1
http://www.bna.com/terms-of-service-subscription-products
-
arranged for a credit line of up to $31.5 million fromPartnerRe.
The PartnerRe Loan is governed by twocontracts dated as of July 27,
2009: (1) a NotePurchase Agreement (the NPA) (Dkt. 26)
betweenStillwater Funding (as issuer), Stillwater Onshore
(asservicer), and PartnerRe (as purchaser); and (2) anIndenture
(Dkt. 27) between Stillwater Funding andnon-party Wilmington Trust
Company (the Trustee).Both agreements are governed by New York law
andcontain New York forum selection clauses. See Dkt. 26at 27-28;
Dkt. 27 at 84-85.
Pursuant to the NPA and Indenture, PartnerRe issuednotes to
Stillwater Funding (the Notes). StillwaterFunding's obligation to
pay off the Notes was securedby collateral — the Law Firm Loans
owned by theFunds. Between July 24 and December 4, 2009,Stillwater
Funding received the maximum availableamount under the credit
facility from PartnerRe —$31.5 million.4 According to plaintiff, at
the time theNDA was executed in 2009, the Law Firm Loans wereworth
$221 million. See AC ¶ 28.5 Under section 2.4(b)of the NPA,
Stillwater Funding was required to makemonthly principal and
interest payments on this debt.See Dkt. 26 at 11. The interest rate
was 21.25% perannum, and increased to 28% upon default. See id.at
6-7.6 Upon default, moreover, PartnerRe had theright, under section
5.2(a) of the Indenture, toaccelerate payment on the Notes and
direct theTrustee to foreclose on the Law Firm Loans inaccordance
with section 5.4(a). See Dkt. 27 at 53.
On December 15, 2009, approximately five monthsafter the NDA was
entered into, Stillwater Fundingdefaulted on the NDA by failing to
make its monthlypayment on the Notes. In response, plaintiff
allegesthat ParnerRe attempted to "obtain for itself the fullvalue
of the Law [Firm] Loans." See AC ¶ 38.7 Morethan a year-and-a-half
after plaintiff's default, on June17, 2011, Stillwater Funding and
PartnerRe, amongothers,8 entered into a Consent Foreclosure and
SaleAgreement (the CFSA). See Dkt. 28. The CFSA isgoverned by New
York law and contains a New Yorkforum selection clause. See id. at
33-34.
The CFSA's "Whereas" clauses memorialize itscontext:
WHEREAS, as a result of, among other things,[Stillwater
Funding's] failure to make thepayments required under the terms of
the [Notes]
and as demanded pursuant to the terms of theAcceleration Notice,
the [Trustee], for the benefitof [PartnerRe], currently has the
right to enforceits security interest in and lien upon the [Law
FirmLoans] pursuant to the terms of the Indenture andapplicable
law, including the right to foreclose onand [*3] sell the [Law Firm
Loans] in accordancewith the applicable provisions of [the
UCC];WHEREAS, [the Trustee] has given notice to[Stillwater Funding]
that it may dispose of the[Law Firm Loans] under the applicable
provisionsof the [UCC] by entering into a private saletransaction
on or after June 13, 2011;WHEREAS, in contemplation of a Private
UCCSale, [Stillwater Funding], Stillwater Capital andthe
[PartnerRe] engaged in settlementnegotiations in an attempt to
consensually andfinally resolve various matters as to the
KnownDefaults and the aforementioned failures to payamounts due;
[and] WHEREAS, as a result ofsuch negotiations, the Parties hereto
haveagreed to provide for the foreclosure of the lienand security
interest of the [Trustee] and theabsolute surrender, transfer and
conveyance ofthe [Law Firm Loans] from [Stillwater Funding]
to[PartnerRe] (with the simultaneous contributionof [the Law Firm
Loans] by [PartnerRe] to[LF12]), in full satisfaction of the
outstandingobligations of the [Stillwater Funding] under
theIndenture and other Basic Documents, upon theterms and
conditions set forth herein.
See id. at 7 (emphasis added; paragraph breaks andlettering
omitted). Simply put, the CFSA purports to bea contract whereby
PartnerRe foreclosed on the LawFirm Loans in full satisfaction of
the $39 million,inclusive of interest and fees accrued since the
default,allegedly owed on the Notes by virtue of
StillwaterFunding's default. Despite the CFSA purporting to be
aforeclosure agreement, section 11.1 provides StillwaterFunding the
right, for five years, and under certaincircumstances, to receive
80% of the proceeds on theLaw Firm Loans in excess of the amount
owed toPartnerRe. See id. at 29-30.
Section 3 of the CFSA contains broad releasesbetween the parties
to the CFSA that only excludebreaches of the CFSA post-dating its
execution, as wellas fraud, gross recklessness, and
intentionalmisconduct. See id. at 16-17. Plaintiff and the
Funds'creditors are not parties to the CFSA and, therefore, as
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 2
http://www.bna.com/terms-of-service-subscription-products
-
explained below, are not bound by CFSA's releases.
Section 8.4 addresses the value of the collateral, i.e.,the Law
Firm Loans:
Each of the Issuer Parties [defined to includeStillwater
Funding] [see id. at 12]acknowledges and agrees that: (a)
theSecured Parties [defined to mean theTrustee, PartnerRe, and BAS]
assertthat [Stillwater Funding] has no equity in [the LawFirm
Loans] and the current fair market value ofthe [the Law Firm
Loans], commonly known asthe "as-is value," is significantly less
than theamount of the obligations owing to the SecuredParties that
are secured by [the Law Firm Loans];(b) any diminution in the value
of the [Law FirmLoans], if any, from and after January 27, 2010has
not resulted from any action or inaction byany of the Foreclosing
Parties; and (c) [StillwaterFunding] is receiving, at a minimum,
reasonablyequivalent value and fair consideration in returnfor the
Sale and the other transactionscontemplated by the Sale Documents
and thatthe Sale and such other transactions are in thebest
interests of [Stillwater Funding], its [*4]estate, its creditors,
and other parties in interest.
See id. at 26 (emphasis added).
Allegedly, prior to entering into the CFSA, PartnerRethreatened
to conduct, respectively, a public andprivate sale of the Law Firm
Loans in March and June2011. See AC ¶¶ 54, 56. These threats,
according toplaintiff, were made in bad faith and caused
StillwaterFunding to enter into the CFSA under conditions ofduress.
Plaintiff claims that, at the time, the Law FirmLoans were worth
approximately $286 million and theaccounts receivable securing such
loans were worthmore than $1 billion. Hence, plaintiff claims that
theexchange of approximately $286 million worth ofcollateral to
satisfy a debt worth less than $40 million isnot fair
consideration. In light of the alleged insolvencyof the Funds and
Stillwater Funding, plaintiff claims thatthe CFSA was a
constructive fraudulent conveyancethat had the effect of hindering
their creditors' collectionefforts (i.e., but for the CFSA, the
Funds' creditorswould have had the right to go after the
Funds'membership interest in Stillwater Funding, which wouldhave
had value but for the foreclosure on its principalasset, the Law
Firm Loans). Likewise, plaintiff contends
that the terms of the CFSA are procedurally andsubstantive
unconscionable (i.e., made in bad faithunder the UCC) because:
For example, evidently cognizant of theunconscionability of
seizing $286 million in valuein exchange for illusory forgiveness
of $39 millionin debt, the [CFSA] purports to grant theStillwater
Parties a right to receive a contingentpayment out of any
collections, recoveries orfurther sales with respect to the [Law
FirmLoans]. That right, however, also was purelyillusory.
PartnerRe, LFR (the entity to whichPartnerRe caused the [Law Firm
Loans] to betransferred) and Brevet (whom LFR hired toservice the
[Law Firm Loans]) explicitlydisclaimed in the [CFSA] any
obligations at all tomake any collection, recovery or sales
efforts; theStillwater Parties' right to receive the
contingentpayment would expire after 5 years, creating aconflict of
interest incentivizing the Defendantssimply to wait until then
before making any realeffort to monetize the [Law Firm Loans];9
thecontingent payment right would only obtain afterthe Defendants
fully recouped out of collections,recoveries and sales the entire
$39 million in debtPartnerRe purportedly forgave, after
theDefendants recouped all costs associated withsuch collections,
recoveries and sales, and afterDefendants recouped out of
collections,recoveries and sales an "Acquirer Return" of 19%per
annum,10 compounding quarterly, on the$39 million debt PartnerRe
supposedly forgave,and all costs associated with
Defendants'collection, recovery and sales efforts. Moreover,the
Stillwater Parties' rights to the contingentpayment could be
cancelled at any time ifDefendants merely assign their rights under
the[CFSA] to a third party. By way of example, ifDefendants made no
collection, recovery or salesefforts with respect to the [Law Firm
Loans] untilthe end of [*5] the five year period, Defendants atthat
point would need to collect nearly$100,000,000 before the
Stillwater Parties wouldsee a dime; and if the Defendants simply
waitedto the day after the Stillwater Parties' entitlementto the
contingent payment expires, or at any timesimply assigned their
rights under the SaleAgreement to a third party, the Stillwater
Partieswould receive nothing at all even if thesubsequent
collections and recoveries total
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 3
http://www.bna.com/terms-of-service-subscription-products
-
multiples of $100,000,000.
AC ¶ 74 (emphasis added).11 According to the AC, asof March 31,
2014 (i.e., nearly three years after theCFSA was executed), Brevet
and the law firm of MayerBrown, acting as servicer and enforcement
counselunder the CFSA, collected approximately $11 millionon the
Law Firm Loans and were paid about $8.7million in fees and expenses
for doing so. See AC ¶¶90-91.
Plaintiff commenced this action on July 10, 2015 andfiled its AC
on December 23, 2015. Defendants filedthe instant motion to dismiss
on February 29, 2016,arguing, among other things, that plaintiff
failed toproperly plead a DCL claim for constructive
fraudulentconveyance. Consequently, according to defendants,the
remainder of plaintiff's causes of action failbecause, for
instance, if the court does not hold thatthe CFSA is unenforceable,
the remaining causes ofaction dependent on the parties'
relationship beinggoverned by their pre-CFSA rights would
necessarilybe infirm. The court reserved on the motion after
oralargument. See Dkt. 43 (10/27/16 Tr.).
II. DiscussionOn a motion to dismiss, the court must accept as
truethe facts alleged in the complaint as well as allreasonable
inferences that may be gleaned from thosefacts. Amaro v Gani Realty
Corp., 60 AD3d 491 (1stDept 2009); Skillgames, LLC v Brody, 1 AD3d
247 ,250 (1st Dept 2003), citing McGill v Parker, 179 AD2d98 , 105
(1st Dept 1992); see also Cron v HargroFabrics, Inc., 91 NY2d 362 ,
366 (1998). The court isnot permitted to assess the merits of the
complaint orany of its factual allegations, but may only determine
if,assuming the truth of the facts alleged and theinferences that
can be drawn from them, the complaintstates the elements of a
legally cognizable cause ofaction. Skillgames, id., citing
Guggenheimer vGinzburg, 43 NY2d 268 , 275 (1977). Deficiencies
inthe complaint may be remedied by affidavits submittedby the
plaintiff. Amaro, 60 NY3d at 491 . "However,factual allegations
that do not state a viable cause ofaction, that consist of bare
legal conclusions, or thatare inherently incredible or clearly
contradicted bydocumentary evidence are not entitled to
suchconsideration." Skillgames, 1 AD3d at 250 , citingCaniglia v
Chicago Tribune-New York News Syndicate,204 AD2d 233 (1st Dept
1994). Further, where the
defendant seeks to dismiss the complaint based upondocumentary
evidence, the motion will succeed if "thedocumentary evidence
utterly refutes plaintiffs factualallegations, conclusively
establishing a defense as amatter of law." Goshen v Mutual Life
Ins. Co. of NY.,98 NY2d 314 , 326 (2002) (citation omitted); Leon
vMartinez, 84 NY2d 83 , 88 (1994).
As an initial matter, the court rejects defendants'argument that
section 3 of the CFSA releaseddefendants from any liability they
may have for theclaims [*6] asserted in this action by plaintiff.
At aminimum, the first cause of action under the DCL isnot covered
by the release since plaintiff is not aparty to the CFSA and the
CFSA does not purport to(nor could it) release non-signatory
creditors' claimsagainst defendants.12 Moreover, the DCL claim,
ifmeritorious, would result in the CFSA being deemedunenforceable.
Additionally, the release carves out thevery sort of behavior
alleged in the AC, namely fraudand intentional misconduct.
Turning now to the merits, DCL § 278(1) provides:
Where a conveyance or obligation is fraudulentas to a creditor,
such creditor, when his claim hasmatured, may, as against any
person except apurchaser for fair consideration withoutknowledge of
the fraud at the time of thepurchase, or one who has derived
titleimmediately or mediately from such a purchaser,
a. Have the conveyance set aside or obligationannulled to the
extent necessary to satisfy hisclaim, or
b. Disregard the conveyance and attach or levyexecution upon the
property conveyed.
(emphasis added). In this case, by virtue of the CFSAallegedly
amounting to a fraudulent conveyance,plaintiff seeks to set aside
the transfers of the Law FirmLoans to defendants and/or recover the
Law FirmLoans or their value from defendants. See Dkt. 20 at26 (AC,
Prayer for Relief).
Generally, to establish a fraudulent conveyance, theplaintiff
must prove either intentional or constructivefraud. See Wall St.
Assocs. v Brodsky, 257 AD2d 526 ,529 (1st Dept 1999). In this case,
plaintiff only assertsa claim for constructive fraudulent
conveyance under
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 4
http://www.bna.com/terms-of-service-subscription-products
-
DCL §§ 274 and 275. Section 274 provides:
Every conveyance made without fairconsideration when the person
making it isengaged or is about to engage in a business
ortransaction for which the property remaining inhis hands after
the conveyance is anunreasonably small capital, is fraudulent as
tocreditors and as to other persons who becomecreditors during the
continuance of such businessor transaction without regard to his
actual intent.
(emphasis added). In other words, a creditor states aclaim under
§ 274 when it alleges a debtor entered intoa transaction made
without fair consideration whichresults in the debtor being left
with insufficient funds topay off its creditors; intent is not an
element of theclaim. See CIT Group/Commercial Servs., Inc. v 160-09
Jamaica Ave. Ltd. P 'ship, 25 AD3d 301 , 302 (1stDept 2006) ("A
conveyance that renders the conveyorinsolvent is fraudulent as to
creditors without regard toactual intent, if the conveyance was
made without fairconsideration"). Likewise, DCL § 275 provides:
Every conveyance made and every obligationincurred without fair
consideration when theperson making the conveyance or entering
intothe obligation intends or believes that he willincur debts
beyond his ability to pay as theymature, is fraudulent as to both
present andfuture creditors.
(emphasis added); see CIT Group, 25,AD3d at 302("Also fraudulent
are conveyances made without fairconsideration when the conveyor
'intends or believesthat he will incur debts beyond his ability
[*7] to pay asthey mature.").
Integral to DCL §§ 274 and 275 and constructive fraudis the
absence of "fair consideration", defined in DCL §272:
Fair consideration is given for property, or obligation,
a. When in exchange for such property, orobligation, as a fair
equivalent therefor, and ingood faith, property is conveyed or an
antecedentdebt is satisfied, or
b. When such property, or obligation is receivedin good faith to
secure a present advance or
antecedent debt in amount not disproportionatelysmall as
compared with the value of the property,or obligation obtained.
(emphasis added),13 Also, even if fair consideration isshown,
the transfer is still constructively fraudulent if itwas not made
in good faith. See CIT Group, 25 AD3dat 303 ("Good faith is
required of both the transferorand the transferee, and it is
lacking when there is afailure to deal honestly, fairly, and
openly"), quotingBerner Trucking, Inc. v Brown, 281 AD2d 924 ,
925(1st Dept 2001); see also Sardis v Frankel, 113 AD3d135 , 142
(1st Dept 2014).
Defendants argue that the PartnerRe Loan, asgoverned by the NDA
and Indenture, is not, on its own,a fraudulent conveyance.
Plaintiff does not contendotherwise. Rather, plaintiff argues that
the NDA andCFSA should be viewed as part of a single
transaction.This is neither a necessary nor tenable basis
forplaintiff to recover the Law Firm Loans under DCL §278. As noted
earlier, there is no question that thePartnerRe Loan is not a
fraudulent conveyancebecause borrowing money secured by more
valuablecollateral is not considered a transaction with
unfairconsideration. See In re Jesup & Lamont, Inc., 507 BR452
, 472 (Bankr SDNY 2014) ("Ordinarily[,]collateralization of a
legitimate debt is not a fraudulentconveyance."), citing In re
Pfeifer, [2013 BL 194845],2013 WL 3828509 , at *3 (Bankr SDNY
2013)(explaining why "[m]any decisions in this District and inother
Districts applying New York law have consistentlyused a per se rule
that the grant of collateral for alegitimate antecedent debt is not
a constructivefraudulent conveyance."). Securing a debt with
morevaluable collateral is not nefarious since, upon default,the
debtor has the right to the value of the collateralthat exceeds the
amount of the debt. See Chemtex,LLC v St. Anthony Enterprises,
Inc., 490 FSupp2d 536, 545 (SDNY 2007) ("the value of the
collateral is notrelevant in determining whether the debtor
receivedreasonably equivalent value in exchange for itsgranting the
security interest, because the rights of asecured creditor in
collateral are always restricted bythe amount of the debt"), citing
In re Applied TheoryCorp., 323 BR 838 , 841 (Bankr SDNY 2005)
("Thesecurity interest did not provide the Lenders with a rightto
receive anything more than the amount of the moneythey had
provided, and the debtor's liabilities did notincrease due to the
security interest. The securityinterest was granted in respect of
an antecedent
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 5
http://www.bna.com/terms-of-service-subscription-products
-
debt—debt that arose by reason of the Lenders havingprovided the
debtor with actual cash in the amount ofthe debt."), gird 330 BR
362 (SDNY 2005).Accordingly, merely securing the $31.5 million
loanwith more than $200 million in collateral was not afraudulent
conveyance.
The same is not true [*8] of the CFSA. First, the courtrejects
defendants' contention that the CFSA was aforeclosure and that,
under New York law, aforeclosure is not a voluntary act that
amounts to a"conveyance" for the purposes of the DCL. As
plaintiffcorrectly avers, the terms of the CFSA govern, not
thetitle given to it. See N.E. Gen. Corp. v WellingtonAdvertising,
Inc., 82 NY2d 158 , 162 (1993) (substanceof a contract governs, not
its "nomenclature"). That thecontact's name incudes the word
"foreclosure" is notdispositive. To assess whether the CFSA
resulted in aconveyance for the purposes of the DCL, its
economicsubstance must be evaluated. See Chemical Bank vMeltzer, 93
NY2d 296 , 304 (1999) ("this transactionmust be analyzed as an
integrated whole. To adopt theapproach employed by the lower courts
would elevateform over substance, obfuscate the nature
of[defendant's] legal obligations and gloss over theessential
character of this transaction.").
The AC contains well-pleaded allegations that theCFSA did not
result in a bona fine foreclosure, andcertainly not one that
comports with Article 9 of theUCC and its good faith obligations.
As noted inComment 11 (Role of Good Faith) to UCC § 9-620 :
Section 1-203 imposes an obligation of good faithon a secured
party's enforcement under thisArticle. This obligation may not be
disclaimed byagreement. See Section 1-102. Thus, a proposaland
acceptance made under this section in badfaith would not be
effective. For example, asecured party's proposal to accept
marketablesecurities worth $1,000 in full satisfaction
ofindebtedness in the amount of $100, made in thehopes that the
debtor might inadvertently fail toobject, would be made in bad
faith. On the otherhand, in the normal case proposals
andacceptances should be not second-guessed onthe basis of the
"value" of the collateral involved.Disputes about valuation or even
a clear excessof collateral value over the amount of
obligationssatisfied do not necessarily demonstrate theabsence of
good faith.
(emphasis added); see Tudisco v Duerr, 89 AD3d 1372, 1376 (4th
Dept 2011) ("Defendants had an obligationto enforce the security
agreement in good faith [seegenerally UCC 1-203 ]. Defendants,
however, retainedthe backhoes and bulldozer without complying with
theprovisions of the UCC, either by disposing of thosepieces of
equipment in a commercially reasonablemanner and paying any surplus
to plaintiffs [see UCC9-610 [a] , [b]; 9-615 [d] [1]], or by
obtaining plaintiffs'consent after the default to retain the
equipment insatisfaction of debt [see UCC 9-620 [a] [1]; [c]].
Wetherefore conclude that, because plaintiffs establishedthat the
value of the backhoes and the bulldozerexceeded the amount that
they owed on thepromissory note, plaintiffs had a possessory
interest inthat equipment and defendants' dominion over it was
inderogation of the rights of plaintiffs.") (emphasisadded).
A proper foreclosure under the UCC would haveresulted in the
value of the debt in excess of theproceeds being remitted to the
debtor. Plaintiffplausibly alleges that the economic reality of the
CFSAis that defendants obtained rights in the Law FirmLoans with a
value far in excess [*9] of the amountowed to it by Stillwater
Funding. In other words, plaintiffalleges, the consideration was
not fair and, thus, wasnot made in good faith.
Defendants, perhaps recognizing that fair value is aquestion
requiring discovery, seek to take the CFSAentirely out of the
purview of the DCL by contendingthat the CFSA could not amount to a
fraudulentconveyance because "PartnerRe was a valid andacknowledged
creditor of [Stillwater Funding]." SeeDkt. 34 at 26. This argument
misses the mark. While acreditor has every right to seek full
payment of a debtdespite the existence of other creditors, "[t]he
rule thata debtor may generally favor one creditor over another[see
Ultramar Energy v Chase Manhattan Bank, 191AD2d 86 , 90-91 (1st
Dept 1993)] is not a license toengage in sham transactions in
furtherance of thatpreference." CIT Group, 25 AD3d at 302
.14PartnerRe, as a creditor of Stillwater Funding, wasnot entitled,
through the CFSA or otherwise, to settleStillwater Funding's
default by obtaining fromStillwater Funding consideration
disproportionately inexcess of the value of Stillwater Funding's
debt.Here, plaintiff alleges that the value obtained byPartnerRe
was in excess of Stillwater Funding's debt
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 6
http://www.bna.com/terms-of-service-subscription-products
-
by more than $200 million. To be sure, the actualvalue of the
Law Firm Loans is a question of factrequiring discovery because
defendants have notsubmitted any evidence that clearly shows that
thevalue of the Law Firm Loans was only worthapproximately $40
million.15 On the other hand,plaintiff has pleaded facts raising
issues about whethersuch alleged foreclosure was conducted in good
faithas required by Article 9 of the UCC. According todefendants,
since Stillwater Funding may still have theright to some of the
proceeds from the Law FirmLoans, that value somehow renders the
considerationreceived by PartnerRe fair. At best, this is a
question offact for discovery.
Based on the terms of the CFSA and the AC's wellpleaded
allegations, plaintiff claims the CFSA wassimply a scam. If
plaintiff's valuations are correct(and, again, they must be assumed
to be correct forthe purposes of this motion), the value
PartnerRewill realize under of the CFSA will be well in excessof
the $40 million allegedly owed at the time theCFSA was executed.16
PartnerRe had no right toobtain for itself value disproportionally
higher than thedebt owed by Stillwater Funding. Doing so would be
afraud on Stillwater Funding's creditors.
Indeed, the very point of the DCL is to ensure thatan
insolvent17 debtor does not dissipate assets toanyone in excess of
what may be considered fairconsideration. Here, despite the
exceedinglycomplex underlying facts and contracts, this
caseinvolves a simple question: did PartnerRe obtainfrom Stillwater
Funding consideration to settleStillwater Funding's default
disproportionally inexcess of the debt owed to PartnerRe? In the
AC,plaintiff alleges this is the case because the value ofthe
rights to the Law Firm Loans that inured toPartnerRe was worth far
more than the debt.18 As aresult, the Funds' creditors lost the
ability to [*10]enforce their own claims against the Funds.
TheFunds, after all, gave up their assets (the Law FirmLoans) for
ownership of Stillwater Funding, which, inturn, gave up the Law
Firm Loans to PartnerRe. TheFunds were the real beneficial owners
of the LawFirm Loans, so it is the Funds' creditors that
directlysuffer from Stillwater Funding relinquishing the LawFirm
Loans. PartnerRe, along with those thatoperated the Funds and
Stillwater Funding, had noright to cause the Law Firm Loans to be
exchangedfor disproportionally less than they were worth. If
they did so, the Funds' creditors, such as plaintiff,were
defrauded for the purposes of DCL § 278because their ability to
collect a judgment from theFunds was impaired.19
That being said, the remainder of the AC's causes ofaction are
dismissed. The claim that the CFSA isunconscionable is dismissed as
duplicative of the otherDCL and UCC claims because a finding that
the CFSAis unconscionable turns on the consideration beinggrossly
unfair, the same claim as that alleged under theDCL. See B.D.
Estate, 114 AD3d at 478 , quoting Kingv Fox, 7 NY3d 181 , 191
(2006) ("[Alt common law anunconscionable agreement was one that no
promisor(absent delusion) would make on the one hand and nohonest
and fair promisee would accept on the other."),accord Gillman v
Chase Manhattan Bank, N.A., 73NY2d 1 , 10 (1988). Likewise, the
declaratory judgmentcause of action is dismissed as duplicative
since adeclaration regarding the validity of the subjectcontracts
is duplicative of the relief sought on plaintiff'ssurviving DCL and
UCC claims. See Cherry Hill MarketCorp. v Cozen O'Connor P.C., 118
AD3d 514 , 515(1st Dept 2014), citing Apple Records, Inc. v
CapitolRecords, Inc., 137 AD2d 50 , 54 (1st Dept 1988) ("Acause of
action for a declaratory judgment isunnecessary and inappropriate
when the plaintiff hasan adequate, alternative remedy in another
form ofaction, such as breach of contract."). The quasi-contract
claims of unjust enrichment and conversion,moreover, must be
dismissed since a writtenagreement governs the parties' rights. See
Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382 ,
388(1987). In any event, the possible recovery on thegrounds of
unjust enrichment or conversion entirelyturn on the merits of the
DCL and UCC claims, whichare the only proffered bases for finding
that it would be"against equity and good conscience" to
permitdefendants' recovery of the Law Firm Loans. See Georgia
Malone & Co. v Rieder, 19 NY3d 511 , 516(2012). Finally, the
causes of action for breach offiduciary duty and breach of contract
based on thealleged UCC violation, even if not otherwise subject
todismissal for the reasons set forth in defendants' briefs,also
seek duplicative relief. Accordingly, it is
ORDERED that defendants' motion to dismiss theamended complaint
is granted with respect to the thirdthrough seventh causes of
action, which are herebydismissed, and the motion is otherwise
denied; and it isfurther
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 7
http://www.bna.com/terms-of-service-subscription-products
-
ORDERED that the parties are to appear in Part 54,Supreme Court,
New York County, 60 Centre Street,Room 228, New York, NY, for a
preliminary conferenceon February 28, 2017, at 11:30 in the
forenoon, andthe parties' pre- [*11] conference joint letter shall
be e-filed and faxed to Chambers at least one weekbeforehand.
Dated: January 23, 2017
ENTER:
/s/ Shirley Werner Kornreich
J.S.C.
fn1
References to "Dkt." followed by a number refer todocuments
filed in this action on the New York StateCourts Electronic Filing
system (NYSCEF).
fn2
For simplicity's sake, the court (in accordance withthe parties'
briefing) refers to these assets as LawFirm Loans, but it should be
noted that they alsoapparently include life insurance policies.
SeeAC ¶¶ 17, 28. Two of those law firms (Khorrami,Pollard &
Abir, LLP and the Tate Law Group,LLC [TLG]) (see Dkt. 26 at 51)
have been involvedin litigation in this court over their firms'
fundingarrangements. See, e.g., Hamilton Capital VII, LLCv
Khorrami, LLP, 48 Misc3d 1223 (A) (Sup Ct, NYCounty 2015 ); Tate
Law Group, LLC v StillwaterFunding, LLC, 2012 WL 10008053 (Sup Ct,
NYCounty 2012 ) (rejecting TLG's claim to piercePartnerRe's
corporate veil based on allegationsregarding its subsidiary,
LFR).
fn3
This allegation, which is not challenged bydefendants at this
juncture, is assumed to be true onthis motion, despite the AC not
containing therequite factual detail that would ordinarily
benecessary to state a claim to pierce the corporateveil (a claim
not asserted in the AC) under Delawarelaw (the Funds are
incorporated in Delaware), such
as the so-called fraud prong. See generally Crossev BCBSD, Inc.,
836 A2d 492 , 497 (Del 2003). Thisalter ego allegation has no
bearing on the issuesdecided herein.
fn4
The credit line was initially $30 million, but wasincreased to
$31.5 million (i.e. the MaximumPrincipal Amount, as defined in the
NPA [seeDkt. 26 at 7], was increased). According to theaffidavit of
Kathleen A. Servidea (Dkt. 29) andthe wire transfers attached
thereto (Dkt. 30-33),the $31.5 million was collectively dispersed
onJuly 24, August 21, September 18, andDecember 4, 2009. This
information wassubmitted by defendants to refute the contentionin
paragraph 34 of the AC that recordspossessed by plaintiff indicate
that only $13million was funded and that only $6-8 million
wasissued to provide credit support for the Law FirmLoans (the
latter issue, it should be noted, is notrefuted by documentary
evidence sinceServidea's affidavit does not address the use ofthe
proceeds, nor could such information in anaffidavit be considered
on a motion to dismiss [see Basis Yield Alpha Fund (Master) v
Goldman SachsGroup, Inc., 115 AD3d 128 , 134 n.4 (1st
Dept2014)]).
fn5
Simply put, the Funds transferred their interest in theLaw Firm
Loans to Stillwater Funding in exchangefor all of the membership
interests in StillwaterFunding (a Delaware LLC). Thus, instead of
theFunds borrowing the money directly from PartnerReand pledging
the Law Firm Loans as collateral, theparties structured an
economically equivalenttransaction by which the borrower,
StillwaterFunding, a newly formed LLC wholly owned by theFunds, did
this. The NPA, on its face, is not afraudulent transaction under
the DCL, nor was thetransfer of the Law Firm Loans by the Funds
inexchange for the equity in Stillwater Funding. While,for
instance, paragraph 31 of the AC complains thatthe Funds encumbered
over $200 million inexchange for a $31.5 million credit facility,
even ifthe Funds were insolvent, under the authority citedherein,
this is not constructively fraudulent since theFunds gained access
to $31.5 million in value by
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 8
http://www.bna.com/terms-of-service-subscription-products
-
virtue of their ownership of Stillwater Funding. Whilethey put
up collateral (allegedly) well in excess of$31.5 million, even upon
default, a foreclosure couldonly result in retention of the amount
of the debt; theexcess value of the collateral would be returned
toStillwater Funding, and that value would be realizedby the Funds
by virtue of their ownership ofStillwater Funding. Consequently, at
this stage of thetransaction, it cannot be said that the Funds gave
upvalue disproportionate to what it received, the sinequa non of a
DCL claim. That being said, asexplained herein, other DCL issues
arise fromStillwater Funding's default under the NPA.
fn6
While a corporate entity cannot avail itself of a civilusury
defense, contrary to the argument made bydefendants, under General
Obligations Law §5-521(3) , a corporate entity is still subject to
thecriminal usury rate, which was apparently exceededhere. See B.D.
Estate Planning Corp. vTrachtenberg, [2013 BL 359596], 2013 WL
839779(Sup Ct, NY County 2013 ), aff'd 114 AD3d 477 (1stDept 2014).
While a usury defense has not beenpleaded, usury has been raised as
a factor the courtshould consider when assessing the fair value of
theconsideration for the purposes of the DCL claims.
fn7
Allegedly, the sub-servicer of the Law Firm Loans,non-party
Oxbridge Financial Group (Oxbridge),proposed a number of options to
make PartnerRewhole while retaining Stillwater Funding's interest
inthe Law Firms Loans, such as a liquidation thatwould supposedly
provide $60-80 million inproceeds, which would have been more
thanenough to fully pay off PartnerRe. See AC ¶¶ 39-46.PartnerRe
rejected Oxbridge's proposals, allegedly,because of PartnerRe's
desire to realize a greaterreturn on the Law Firm Loans. These
allegations areassumed to be true on this motion and raisequestions
of fact about PartnerRe's good faithobligations under the UCC.
fn8
Other parties to the contract include the Funds, theTrustee, and
Brevet. See Dkt. 28 at 2, 6.
fn9
It should be noted that loans to law firmsworking on
contingency, such as in mass tortcases, ordinarily are not expected
to be paidoff for many years since such complexlitigation (the
proceeds from which the loansare repaid) often takes many years to
resolve.
fn10
This 19% return is one of the reasons whyplaintiff claims no
true foreclosure took place.In a foreclosure, the parties to the
underlyingdebt do not incur or receive further
interestpayments.
fn11
The most difficult thing to understand is why, evenunder
conditions of duress, the Funds (by virtue oftheir control over
Stillwater Funding) would agree tothese terms if they were so
one-sided. It should benoted that plaintiff does not allege that
PartnerRewas in cahoots with the Funds (e.g., no kickbacksare
alleged); after all, the claim asserted is forconstructive fraud
(which does not require thepleading of scienter), not intentional
fraud (whichdoes). That being said, since Stillwater Funding wasan
SPV that was effectively judgment proof asidefrom its ownership of
the Law Firm Loans, it doesnot make sense for Stillwater Funding to
give up allof its interest in the Law Firm Loans in return
forcanceling an uncollectable $40 million debt. In otherwords, the
incentive to provide PartnerRe withgrossly excessive consideration
does not existabsent bad motive. Since the court must assume
thetruth of plaintiffs allegation as to the value of thecollateral
(an issue only discovery can resolve), theAC permits a reasonable
inference that the CFSAwas at least the product of constructive
(andpossibly) actual fraud.
fn12
This is not a situation where plaintiff must step intothe shoes
of the Funds and Stillwater Funding and,then, is subject to their
rights and obligations underthe CFSA. The very purpose of the DCL
is to protectcreditors from fraudulent actions taken by debtors
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 9
http://www.bna.com/terms-of-service-subscription-products
-
and those that wrongfully acquire the debtors'assets. Debtors
and their fraudulent transfereescannot extinguish their creditors'
rights by agreeingto waive their creditors' DCL claims.
fn13
DCL § 270 defines the terms assets, conveyance,creditor, and
debt:
In this article "assets" of a debtor meansproperty not exempt
from liability for his debts.To the extent that any property is
liable for anydebts of the debtor, such property shall beincluded
in his assets.
"Conveyance" includes every payment ofmoney, assignment,
release, transfer, lease,mortgage or pledge of tangible or
intangibleproperty, and also the creation of any lien
orincumbrance.
"Creditor" is a person having any claim,whether matured or
unmatured, liquidated orunliquidated, absolute, fixed or
contingent.
"Debt" includes any legal liability, whethermatured or
unmatured, liquidated orunliquidated, absolute, fixed or
contingent.
Insolvency, moreover, is defined in DCL § 271:
1. A person is insolvent when the present fairsalable value of
his assets is less than theamount that will be required to pay
hisprobable liability on his existing debts as theybecome absolute
and matured.
2. In determining whether a partnership isinsolvent there shall
be added to thepartnership property the present fair salablevalue
of the separate assets of each generalpartner in excess of the
amount probablysufficient to meet the claims of his
separatecreditors, and also the amount of any unpaidsubscription to
the partnership of each limitedpartner, provided the present fair
salable valueof the assets of such limited partner isprobably
sufficient to pay his debts, includingsuch unpaid subscription.
fn14
Defendants do not cite any authority supporting theproposition
that a fraudulent conveyance made to acreditor is not subject to
the DCL. That is an absurdproposition. Aside from the holding in
UltramarEnergy, DCL § 272(a) addresses how fairconsideration must
be made for payment of anantecedent debt and belies the notion that
a transferis not fraudulent if, as alleged here, the amount paidto
the creditor is far more than the value of the debt.
fn15
That only $11 million may have been recovered onthe Law Firm
Loans (as of 2014) is of no moment.The loans may take years to be
paid off. Theirpresent value may be difficult to determine and
willrequire expert discovery, but that militates againstdismissal
at this juncture.
fn16
As plaintiff further avers, the 19% interest rate alongwith the
significant collection fees may also ensurethat defendants end up
with far more than they wereowed on the Notes. While the value of
these "perks"is a question of fact, there is no doubt they may
beconsidered when assessing the value of theconsideration since,
but for the CFSA, defendantswould not have obtained this value.
Again, it is theoverall substance of the agreement that must
beaccounted for in determining the value of theconsideration.
fn17
On this motion, the allegations of the Funds' andStillwater
Funding's insolvency have not beendisproven by defendants.
fn18
It is of no moment that section 8.4 of the CFSA, inconclusory
fashion, states otherwise. A party cannotimmunize itself from
liability under the DCL bymerely reciting in a contract with its
co-conspiratorthat the consideration was fair.
fn19
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 10
http://www.bna.com/terms-of-service-subscription-products
-
If plaintiff prevails in this action, the court may(among other
possible remedies) set aside the fairvalue of the Law Firm Loans
given up by StillwaterFunding to PartnerRe in excess of
StillwaterFunding's debt so that the value of the Funds'membership
interest in Stillwater Funding may beused to satisfy the Funds'
creditors.
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 11
http://www.bna.com/terms-of-service-subscription-products
-
General Information
Judge(s) Shirley Werner Kornreich
Topic(s) Debtor Creditor; Civil Procedure
Industries Financial Services
Date Filed 2017-01-23 00:00:00
Parties STILLWATER LIQUDATING LLC, Plaintiff, -against-
PARTNERREINSURANCE COMPANY, LTD., BREVET ASSETSOLUTIONS, LLC,
BREVET CAPITAL MANAGEMENTLLC, and LFR COLLECTIONS, LLC, Defendants.
Index No.:652451/2015
Court New York Supreme Court
Stillwater Liqudating LLC v. Partner Reinsurance Co., No.
652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court
Opinion
© 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
Terms of Service // PAGE 12
http://www.bna.com/terms-of-service-subscription-products