545 B.R. 802
Bankr. S.D.N.Y.2016Background
- MAG sued MNF and Maiman on a $20 million loan note and guaranty, leading to a judgment against the Defendants for over $28 million including pre-judgment interest.
- The Third Party Complaint (TPC) asserted tortious interference and related claims against three Indenture Trustees, two bondholders, and Shapira & Co., seeking to dismiss or reduce bond-related claims and to challenge the Trustees’ bankruptcy claims.
- AMPAL assigned the Loan, Guaranty, and related option rights to MAG in 2010, with subsequent extensions through 2012; MNF pursued Project Financing and equity conversion attempts to fund an ethanol project.
- Defendants allegedly engaged in a smear campaign and interference that caused potential Project investors to withdraw, preventing Project Financing and the conversion of the loan into equity.
- Ampal proposed that Third Party Defendants’ actions blocked the Project Financing, causing MAG/MAN to lose the chance to own a substantial equity stake in the Project.
- The Court granted the Third Party Defendants’ motion to dismiss Counts I and II for lack of related-to jurisdiction and declined supplemental jurisdiction, and dismissed Count III (Disallowance/Setoff) in its entirety.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to object to the Claims | MNF and Maiman are creditors with standing under §502(a). | Chapter 7 norms require trustee leave to object; creditors generally lack standing absent that leave. | Creditors have standing to object; Spizz’s lack of objection does not defeat standing. |
| Whether unclean hands bars the Disallowance Claim | Unclean hands should bar the claims given immoral conduct by Third Party Defendants. | Unclean hands applies to equitable, not legal claims; the Disallowance Claim is legal. | Unclean hands is not a defense to the Claims; the Disallowance Claim is rejected on other grounds. |
| Setoff against the Claims | Equity value of the AMPAL/MAG Project should offset the Indenture Trustees’ Claims. | Debts lack mutuality; setoff cannot apply because they are not between the same parties. | Setoff denied for lack of mutuality; Count III dismissed. |
| Jurisdiction over Counts I and II | Counts I and II are related to the AMPAL bankruptcy and fall under supplemental jurisdiction. | Even if related, supplemental jurisdiction is inappropriate where core claims are resolved; Israeli law may govern. | Declines to exercise supplemental jurisdiction; Counts I and II dismissed. |
Key Cases Cited
- Pascazi v. Fiber Consultants, Inc., 445 B.R. 124 (S.D.N.Y. 2011) (creditors are parties in interest under §502(a))
- In re Manshul Constr. Corp., 223 B.R. 428 (Bankr.S.D.N.Y. 1998) (standing to object rules; trustee preference)
- Aetna Cas. & Sur. Co. v. Aniero Concrete Co., Inc., 404 F.3d 566 (2d Cir. 2005) (unclean hands barred when seeking equitable relief, not for legal claims)
- Mallis v. Bankers Trust Co., 615 F.2d 68 (2d Cir. 1980) (unclean hands only bars where directly related to subject matter)
- Readco, Inc. v. Marine Midland Bank, 81 F.3d 295 (2d Cir. 1996) (unclean hands defense context; see discussion in Milberg vein)
- Jaksich v. Thomson McKinnon Sec., Inc., 582 F. Supp. 485 (S.D.N.Y. 1984) (unclean hands in securities context; not controlling here)
- Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343 (1988) (judicial discretion to decline supplemental jurisdiction)
- Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984) (related-to bankruptcy test for jurisdiction)