MEMORANDUM & OPINION
Appellants ICP Strategic Credit Income Fund, Ltd. (the “Feeder Fund”), ICP Strategic Credit Income Master Fund, Ltd. (the “Master Fund,” and, together with Feeder Fund, the “Funds” or the “SCIF Funds”), and Hugh Dickson and
I. Background
A. Overview
This case is about certain financial transactions orchestrated by an investment manager, ICP Asset Management (“ICP”), and its President and CEO, Thomas Priore. ICP essentially used money belonging to the SCIF Funds, a hedge fund client, to cover financial obligations owed by Triaxx Funding High Grade I, Ltd. (“Triaxx”), another investment vehicle managed by ICP. The law firm DLA Piper represented Triaxx and ICP, and helped create the documents that facilitated the transfers, which totaléd over $36 million dollars over the course of eleven months.
The SCIF Funds were incorporated in 2005 as exempted limited liability companies under Cayman Islands Companies Law. (Compl. ¶¶ 17-18.)
Pursuant to an October 25, 2006 Investment Management Agreement, ICP served as SCIF Master’s investment manager. (Id. ¶26.) Under that agreement, “ICP owed SCIF Master the fiduciary duty to invest SCIF Master’s assets in good faith and give SCIF Master ‘the benefit of its best judgment and efforts in rendering its services,’ among other things.” (Id.) Priore served as director of the Funds. (Id. ¶ 27.)
ICP was also the collateral manager of Triaxx, the issuer of certain collateralized debt obligations in which the Funds had invested approximately 50% of its net asset value. (Id. ¶¶ 2-3.)
B. The Triaxx Funding CDO
In 2007, Triaxx entered into a Master Repurchase Agreement (“MRA”) with Barclays Bank PLC. (Id. ¶ 31.) Under the MRA, Barclays essentially provided Triaxx with a loan by providing financing to be paid back at a later date, and secured by certain collateral. (Id.) Pursuant to the MRA, if the value of the collateral dropped below a certain level, Barclays would issue a “margin call” requiring additional collateral, (Id.) Should Triaxx fail to meet the margin call, Barclays could declare default and liquidate the collateral. (Id.) If, on the other hand, the value of the collateral in
C. The October 2008 Misappropriation of Funds
As the mortgage markets began to decline in late 2007, the value of residential mortgage-backed securities (“RMBS”) held by Triaxx also decreased, resulting in margin deficits. (Id. ¶ 40.) Barclays issued margin calls that Triaxx was unable to meet. (Id.) Between March and October 2008, Triaxx engaged in a number of transfers of bonds, unrelated to the transaction here, to satisfy its obligations to Barclays. (Id. ¶ 41.) However, by late 2008, Priore and ICP were no longer able to sell additional bonds to cover the margin payments, and were forced to find another source of capital. (Id. ¶ 42.)
In October 2008, ICP asked DLA Piper attorney Lucien White whether an entity other than Triaxx could satisfy the margin payment. (Id. ¶¶ 43-44.) On October 28, 2008, an ICP employee asked White if it was “possible to just post [the margin] to [Barclays] in- escrow for [Barclays’] benefit if the deal unwinds but otherwise not part of the deal structure?” (Id. ¶ 44.) The next day, White emailed Barclays’ counsel at Cadwalader the following:
Triaxx Funding needs to post $7.5mm to Barclays today.
We’d like to have an icp affiliate post the cash directly in lieu of Triaxx Funding doing it (to avoid the painful mechanics of issuing new Credit Enhancement Notes, setting up a designed CE with the trustee and all the cash transfer headaches).
Think we can do it by having (I) a short letter agt between Barclays and the fun-der of the cash and (II) a written waiver of the mra margin requirement by Bar-clays in favour of Triaxx (which should include acknowledgement that future margin requirement would take into account the fact that Barclays has the $7.5mm in cash).
(Id. ¶ 45.) After sending the email, White told ICP to fund the margin payment “from an entity other than ICP” because DLA wanted “to reduce the argument that [ICP] has implicitly accepted additional obligations under the transaction.” (Id. ¶ 46.) The ICP employee then told White that “[i]t will be from our Hedge Fund [SCIF Master] not from ICPAM—does that help?” (Id.) White responded: “Yep.” (Id.)
Barclays agreed to the funding deal, and ICP caused SCIF Master to transfer $7,175,455 to Barclays on October 29,2008. (Id. ¶ 47.) DLA then began drafting what would become the Waiver Letter
In the Waiver Letter, Barclays “(i) acknowledged that it ‘received, on October 29, 2008, $7,175,455.22 in immediately available funds from [SCIF Master], which amount has been applied by Barclays to meet the margin payment obligations’ of Triaxx Funding; and (ii) waived Triaxx Funding’s obligations under the MRA.” (Id. ¶ 51.) The Waiver Letter ultimately included Barclays’ reservation of rights in the event that SCIF Master brought a fraudulent transfer claim against Barclays. (Id. ¶ 52.)
At the time of this transaction, ICP and DLA Piper knew that the Funds were not represented by counsel in connection with this transaction, and White knew that the Funds had previously been represented by the law firm Schulte Roth. (Id. ¶¶ 54, 101.) Despite this, White drafted a letter agreement on behalf of the Funds between the Funds and Barclays on October 31, 2008. (Id. ¶ 56.) The purpose of the letter was to get Barclays’ agreement to pay excess margin to the Funds in the event that the RMBS market improved. (Id.) However, Barclays refused to sign the letter, and White later told ICP that “[i]f we were to insist on it, they’d want the Issuer [Triaxx Funding] to countersign it, which creates all kinds of problems under the Indenture.” (Id. ¶ 57.) Priore, ICP, and DLA Piper decided not to insist on Barclays signing the letter agreement. (Id.)
D. Subsequent Transfers of Funds
Throughout 2009, DLA documented nine additional payments from the Funds to Barclays. (Id. ¶ 58.) During one such transaction, the trustee, Bank of America, requested that White “add a certification in the direction letter that the Noteholders are not materially and adversely affected by the transaction,” which White added. (Id. ¶ 61.) The transfers totaled approximately $36.5 million over a period of eleven months. (Id. ¶¶ 8,123a.)
At several points, DLA billed Triaxx for legal services, including “negotiating and drafting documents in connection with [SCIF Master] funding of margin payments under the Barclays MRA.” (Id. ¶¶ 71; 93-99.)
E. Representations Made to ICP Employees and Fund Administrators
On April 23, 2009, Peter Woroniecki, ICP’s Director of Fund Operations, who joined ICP in February 2009, emailed White to ask why “SCIF has no note to represent the funding, really has no way to tie in collateral, nor has any documentation in terms of the advances?’ (Id. ¶74.) In response, White said that the “only documentation” evidencing the transfers were the Waiver Letters and Direction Letters. (Id. ¶75.) White said he “asked Barclays to sign a letter agreement with SCIF describing how SCIF would get paid back, but at the last minute they refused to sign it and we had to fund to avoid an [event of default].” (Id.) Woroniecki emailed his concern about the transaction to Priore and others at ICP. (Id. ¶ 76.)
On April 29, 2009, White drafted a document describing the transfers as a loan, which was forwarded to Woroniecki. (Id. ¶ 79.) Woroniecki responded to White, telling him that the document he drafted was not a loan agreement. (Id. ¶ 80.) On May 21, 2009, White emailed reasons why DLA “believe[d] it would not be unreasonable to take the position that” to the “extent that [SCIF Master’s] advances are subsequently transferred by Barclays to the Trustee [B of A],” ICP could direct B of A “to transfer those advances back to [SCIF Master] outside of the Priority of Payments under the [Triaxx Funding] Inden-
F. SEC Investigation
Barclays ultimately issued a margin call that neither Triaxx nor the Funds could pay, and Barclays declared an event of default. (Id. ¶ 13.) The Funds lost their entire investment in Triaxx—over $100 million in losses. (Id. ¶¶ 13, 114) The Complaint alleges that, had Barclays foreclosed on Triaxx Funding back in October 2008, the SCIF Funds would have recovered a portion of their Triaxx investment. (Id. ¶ 114)
White was deposed by the SEC regarding these transactions and testified that he knew that the Funds had at one point been represented by Schulte Roth, but because he was not representing the Funds in that transaction and he “wasn’t analyzing whether these reps were something that SCIF could or should make.” (Id. ¶ 101.) He did not “review any documents relating to SCIF’s authority or ability to either make the loan or sign this agreement.” (Id.) It was his understanding that “this was the agreement that had been made by SCIF and Barclays, and [he] was representing the issuer in the transaction and wasn’t focusing on SCIF’s representation.” (Id.)
He also testified that, after he heard that Barclays would not sign the drafted agreement between the SCIF Funds and Barclays, it was his understanding that “the terms that were written in this document were the terms that had been agreed by those two parties.” (Id. ¶ 102.) When asked why he had that understanding in light of Barclays’ decision not to sign the letter, White declined to answer on the basis that it would reveal communications between him and his client, ICP. (Id.) At a later deposition, after waiving the privilege, White was asked about his prior testimony. concerning his understanding of the agreement between the SCIF Funds and Barclays. He testified that, “it changed, in subsequent conversations with Aamer and or Dave, we discussed the suggestion by Aaron that a transfer of these funds from Barclays to the issuer could be then subsequently transferred pursuant to an instruction from the collateral manager to SCIF.” (Id. ¶ 103.) He further testified that “[t]he fact of an agreement to repay a loan was always there. The mechanics of the repayment are what became different.” (Id. ¶ 104.) He also stated that “it’s a method of repayment that anticipates that Barclays is going to transfer funds to the issuer which are not funds that the issuer owns.... And that therefore the collateral manager [ICP] can instruct pursuant to the management agreement the trustees to transfer those funds to SCIF.” (Id.)
The SEC ultimately brought an action against ICP and Priore for securities fraud. (Id. ¶ 106.) After the SEC sued ICP and Priore, the Funds were placed into official liquidation by the Grand Court of Cayman Islands. (Id. ¶ 119.)
II. Procedural History
On June 28, 2013, the Liquidators filed a verified petition in Bankruptcy Court pursuant to Chapter 15 of the Bankruptcy Code, seeking recognition of the Funds’ liquidation proceedings pending in the
A few months later, on December 6, 2013, the Liquidators brought claims against DLA Piper in New York State Supreme Court, alleging (1) aiding and abetting breach of fiduciary duty, (2) aiding and abetting fraud, and (3) fraudulent trading. (App’x 20-60.) On January 17, 2014, DLA Piper removed the claims to the United States District Court for the Southern District of New York as related to the Chapter 15 bankruptcy proceedings, pursuant to 28 U.S.C. §§ 1334(b) and 1452. (App’x 10-19.) Shortly thereafter, the case was referred from the District Court to the United States Bankruptcy Court for the Southern District of New York under 28 U.S.C. § 157 and the January 31, 2012 Standing Order regarding Title 11 cases. (App’x 9.)
Once before the Bankruptcy Court, DLA Piper filed a motion to dismiss the Liquidators’ complaint pursuant to Federal Rules of Civil Procedure 12(b)(6), applicable through Bankruptcy Rule 7012, for failure to state a claim. (App’x 4.) On September 15, 2015, the Bankruptcy Court issued an order granting DLA’s motion to dismiss, holding, among other things, that the Liquidators had failed to state a claim and that the doctrine of in pari delicto barred the New York common law claims. (App’x 731-70.) The Liquidators filed their notice of appeal on September 25, 2015. (App’x 771-72.) Appellants filed their brief and an appendix on December 4, 2014. (Doc. 11.) Appellee DLA filed its opposition and an appendix on January 19, 2016, (Doc. 14), and Appellants filed their reply on February 17, 2016, (Doc. 15).
III. Standard of Review
This court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1) to hear appeals from final judgments, orders, and decrees of a bankruptcy court. On such an appeal, a district court reviews the bankruptcy .court’s findings of fact for clear error, and any conclusions of law de novo. See In re Momentum Mfg. Corp.,
DLA Piper argues that I should treat the Bankruptcy Court’s decision as proposed findings of fact and conclusions of law—to which the Liquidators allegedly failed to timely object—rather than a final order or judgment, because the Bankruptcy Court did not have jurisdiction to decide the “non-core” claims at issue in the case. (Appellee’s Br. 1-2.) See 28 U.S.C. § 157(c)(1) (for non-core proceedings, “the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected”); see also Fed. R. Bankr. P. 9033(d); In re Standing Order of Reference: Title 11,
IV. Discussion
On appeal, the Liquidators argue that the Bankruptcy Court erred in (1) concluding that the Complaint failed to allege sufficient facts to state a claim for aiding and abetting breach of fiduciary duty, (2) applying New York law, rather than Cayman Islands law, to the question of whether ICP and Priore’s conduct is imputed to the Funds under the doctrine of in pari delicto, (3) holding that the ICP and Pri-ore’s conduct is imputed to the Funds under New York law, and (4) holding that the Liquidators had failed to state a claim for fraudulent trading under Section 147 of the Cayman Companies Law.
Because I agree with the Bankruptcy Court’s determination that New York law applies and requires dismissal on in pari delicto grounds, I need not and do not reach the question of whether the Complaint adequately pleads a claim of aiding and abetting breach of fiduciary duty.
To survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
B. In Pari Delicto
1. Choice of Law
The Bankruptcy Court concluded' that New York law applies to the in pari delic-to question because, (1) in New York,
In pari delicto is an affirmative defense in New York. See Kirschner v. KPMG LLP,
Indeed, courts typically apply New York law of in pari delicto after determining that New York law applies to the underlying claim to which the defense is asserted. See FIA Leveraged Fund Ltd.,
Appellant argues that New York courts, in principle, would apply one jurisdiction’s law to the underlying claim and another’s to an affirmative defense, by virtue of the fact that New York conflict of laws analysis applies differently to “loss-allocating” rules than it does to “conduct-regulating” rules.
Here, there is no dispute that New York law applies to the claims of aiding and abetting breach of fiduciary duty. Therefore, New York law applies to the affirmative defense of in pari delicto as well. Nevertheless, if I were to conduct a separate interest analysis, I would conclude that New York law applies, as the Bankruptcy Court did. The case was brought in New York state court, based on facts alleged to have occurred solely in New York, against a New York law firm. New York has a significant interest in the types of claims themselves, as they relate directly to the financial industry in New York. See Granite Partners,
Therefore, the Bankruptcy Court was correct in concluding that New York law applies to DLA Piper’s in pari delicto defense.
2. Applicable Law
Under New York law, the in pari delicto doctrine “mandates that the-courts will not intercede to resolve a dispute between two wrongdoers.” Kirschner,
As the New York Court of Appeals recently made clear, “traditional agency principles play in important role in an in pari delicto analysis,” most importantly that “the acts of agents ... are presumptively imputed to their principals.” Id. at 465,
There is a “narrow exception” to the presumption of imputation “where the corporation is actually the victim of a scheme undertaken by the agent to benefit himself or a third party personally, which is therefore entirely opposed (i.e., ‘adverse’) to the corporation’s own interests.” Id. at 467,
Although factual development may be required in some cases, a case may be dismissed where it is “plain on the face of the pleadings” that the in pari delicto defense applies. In re MF Global Holdings Ltd. Inv. Litig.,
3. Application
The Bankruptcy Court concluded that the adverse interest exception was inapplicable because the Funds received a benefit from ICP/Priore’s actions: the temporary preservation of the Funds’ investment in Triaxx. (App’x 767-68.) The Liquidators argue that, unlike the insiders in Kirschner, ICP and Priore stole from the Funds, rather than for them, and that whether a benefit was actually conferred to the Funds is a question of fact. (Appellant’s Br. 54-57.) The operative question is whether ICP and Priore “totally abam doned” the Funds’ interests at the time of the misconduct.
Approximately $245 million was invested in the Funds, (Compl. ¶ 18), and approximately fifty percent of the Funds’ assets were invested in Triaxx, {id. ¶ 3). This included at least “tens of millions of dollars in various tranches of Triaxx Funding ‘mezzanine’ notes.” {Id. ¶ 33.) Had ICP and Priore not transferred the money and executed the unauthorized loans, Barclays would have foreclosed on the investment. {Id. ¶ 31; see also App’x 82 (email from DLA attached to Complaint stating that “absent these advances, there was a substantial likelihood that Barclays would have declared an Event of Default ..., possibly leaving the Noteholders ... with a principal shortfall”).) While the Liquidators may have preferred this result, they cannot escape the fact that the decision to sustain Triaxx temporarily preserved the Funds’ investment. The fact that ICP and Priore’s bad business decisions ultimately harmed the Funds is irrelevant to the adverse interest analysis. See Kirschner,
In Kirschner, the Court of Appeals determined that simply keeping a business alive was enough of a benefit to defeat the adverse interest exception. Id. at 468,
The same logic applies to the Liquidators’ argument that they did not benefit from the subsequent transfers or from the legal fees paid to execute the transactions—ICP and Priore did not “totally abandon” the Funds’ interest because transferring the capital had the effect of keeping Triaxx temporarily afloat and staved off adverse consequences for the Funds. Therefore, the adverse interest exception does not apply here, and the Liquidators’ claims are barred by the doctrine of in pari delicto.
C. Cayman Companies Law Section 147
Section 147 of the Cayman Companies Law provides:
(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose the liquidator may apply to the Court for a declaration under this section.
(2) The Court may declare that any persons who were knowingly parties to the carrying on of the business in the manner mentioned in subsection (1) are liable to make such contributions, if any, to the company’s assets as the Court thinks proper.
(App’x 196-97.) The Bankruptcy Court concluded that the Liquidators did not plausibly plead that DLA knew of or was a party to an “intent to defraud” or “fraudulent purpose.” The Liquidators do not appeal the Bankruptcy Court’s determination that they had failed to plead fraud under New York law. Yet they argue that knowledge of “intent to defraud” or “fraudulent purpose” under Cayman Companies Law is distinct from knowledge of actual fraud. They point to English courts’ interpretation of the Cayman law, which have said that an intent to defraud can be inferred from carrying on business and incurring debts with the knowledge that there is no reasonable prospect of repayment, and that the phrase “for any fraudulent pur
I agree with the Bankruptcy Court that there are insufficient allegations of an intent to defraud or fraudulent purpose. According to Appellants’ own foreign law expert, fraud includes “ ‘fraudulently prolonging the life’ of a company so that its overall deficiency of assets increases, if at the time the directors knew ‘that there was no prospect ... that [the company] would ever be in a position or be placed in a position to pay its creditors in full.” (App’x 198) (quoting Carman v. Cro-nos Group SA [2005] EWHC 2403) (emphasis added). Here, although not guaranteed, there was at least a prospect that the Funds would be repaid or that the market would improve enough to justify the decision to keep Triaxx alive. While setting up a “loan” with no right to repayment may have been a breaeh of fiduciary duty, see supra note 8, it was not necessarily fraudulent. Therefore, DLA could not be expected to be knowing party.
V. Conclusion
For the reasons set forth above, the Bankruptcy Court’s decision is AFFIRMED and the case is DISMISSED. The Clerk of Court is respectfully directed to close the case.
SO ORDERED.
Notes
. On a motion to dismiss, I take the facts as alleged in a complaint as true and draw all reasonable inferences in favor of the non-moving party. See, e.g., Burch v. Pioneer Credit Recovery, Inc.,
. "Compl." refers to the complaint filed in the Supreme Court of the State of New York on or about December 6, 2013, and is contained along with the Summons in the'Appellants' Appendix ("App’x”) at A20 through A60.
. "Waiver Letter" refers to the letter prepared by White "for Barclays to sign in which it agreed to accept money from SCIF Master and waive Triaxx Funding's margin obligation but reserved the right to reassert the obligation against Triaxx Funding if SCIF Master brought a claw-back claim." (Compl. ¶ 7.)
. "Direction Letter” refers to another letter prepared by White "for ICP to send to La-Salle directing LaSalle to consider Triaxx Funding’s margin obligation paid as a result of SCIF Master’s transfer of funds to Bar-clays.” (Id.)
. The Southern District of New York standing order is available at http://nysd.uscourts.gov/ rules/StandingOrder_OrderReference_12mc 32.pdf. It states:
Pursuant to 28 U.S.C. Section 157(a) any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 are referred to the bankruptcy judges for this district.
If a bankruptcy judge or district judge determines that entry of a final order or judgment by a bankruptcy judge would not be consistent with Article III of the United States Constitution in a particular proceeding referred under this order and determined to be a core matter, the bankruptcy judge shall, unless otherwise ordered by the district court, hear the proceeding and submit proposed findings of fact and conclusions of law to the district court. The district court may treat any order of the bankruptcy court as proposed findings of fact and conclusions of law in the event the district court concludes that the bankruptcy judge could not have entered a final order or judgment consistent with Article III of the United States Constitution.
. Even if I were to treat the decision as non-final, the standard of review would be the same, as legal conclusions are reviewed de novo in either event. See In re Coudert Bros. LLP, App. Case No, 11-278 5 (CM),
DLA Piper also argues that, if the Bankruptcy Court’s order was not final, the Liquidators’ failure to file written objections within fourteen days constituted a waiver of review of the proposed findings and conclusions, Some judges have concluded that failure to object to proposed findings results in waiver of the right to appeal a bankruptcy court’s proposed findings and conclusions. See Messer v. Peykar Int’l Co., Inc,,
. The Liquidators do not appeal the Bankruptcy Court’s dismissal of their claim for aiding and abetting fraud. (Appellant’s Br. at 2 n.5.)
. However, I make the following observations. A claim for aiding and abetting breach of fiduciary duty requires a plaintiff to allege “(1) breach of fiduciary obligations to another of which the aider and abettor had actual knowledge; (2) the defendant knowingly induced or participated in the breach; and (3) plaintiff suffered actual damages as a result of the breach.” Anwar v. Fairfield Greenwich Ltd.,
With respect to the “actual knowledge” prong, Judge Gerber found significant the fact that the transfers’ obvious purpose was to "sav[e] half the Funds’ net asset value.” (App’x 759.) Even so, this does not explain ICP/Priore’s decision to transfer the money with no documentation and no right to repayment, or how such a decision could be seen by White as a legitimate business decision with the Funds' interest in mind. As alleged in the Complaint, White knew that the Funds had not secured a right of repayment, that Barclays had refused an obligation to repay the Funds directly, and that the Funds would be repaid only at the direction of ICP. However, there were no terms by which ICP would transfer the money back to the Funds. White drafted a letter to the Funds’ administrator in July 2009, stating that “Repayment of the Loans will occür upon direction of [ICP] to [B
The Bankruptcy Court also believed it “barely plausible” that Triaxx would have “contested a duty to repay indebtedness advanced to it by its affiliate,” and uses the example of "inter-company loans” made with "little or no documentation, but ... nevertheless g[iving] rise to intercompany obligations.” (App’x 757-58.) But the relationship between Triaxx and the Funds was not that of intercompany affiliates, and ICP’s decision to use millions of dollars of the Funds’ money to meet Triaxx’s margin obligations—with nothing more than ICP's word that the loan would be repaid—probably support a "strong inference of conscious avoidance” of the fact that ICP was acting against the Funds' interest, “which is sufficient to satisfy the knowledge requirement.” Anwar,
. The parties agree that New York law governs the conflict-of-law questions. (Appellant’s Br. 38; Appellee’s Br. 28-36.)
. In typical tort cases, New York courts apply an “interests'' analysis, which involves the examination of the purposes and policies of the conflicting laws in the context of the facts of a particular case. See Brink's Ltd. v. S. African Airways,