Zohar CDO 2003-1, Ltd. v. Patriarch Partners, LLCZohar CDO 2003-1, Ltd. v. Patriarch Partners, LLC
- Reporters:
- ,
- Before:
- William H. Pauley III
OPINION & ORDER
WILLIAM H. PAULEY III, Senior United States District Judge:
Plaintiffs and Counterclaim Defendants Zohar CDO 2003-1, Ltd. (“Zohar I“), Zohar II 2005-1, Ltd. (“Zohar II“), and Zohar III, Ltd. (“Zohar III” and, together with Zohar I and Zohar II, the “Zohar Funds“) move under
Defendants, Counterclaimants, and Third-Party Plaintiffs Patriarch Partners, LLC, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, Patriarch Partners XV, LLC, (“Patriarch“) Octaluna LLC, Octaluna II LLC, Octaluna III LLC (together, “Octaluna“), Ark II CLO 2001-1, LLC, Ark Investment Partners II, L.P. (together, “Ark“), and Lynn Tilton (“Tilton” and, together with Patriarch, Octaluna, and Ark, the “Patriarch Parties“) oppose the Zohar Funds’ motion. (ECF No. 158.) For the reasons that follow, the Zohar Funds’ motion is denied.
BACKGROUND
This Court assumes familiarity with its prior Opinion & Order and summarizes only the facts necessary to decide this motion. See Zohar CDO 2003-1, Ltd. v. Patriarch Partners, LLC, 286 F. Supp. 3d 634, 638 (S.D.N.Y. 2017).
Functionally, the Zohar Funds are three special purpose vehicles created by Tilton from the sale of collateralized loan obligations (“CLOs“). (Compl., ECF No. 1 (“Zohar Compl.“), ¶ 29.) The Zohar Funds in turn use these funds to invest in distressed companies. (Zohar Compl. ¶¶ 40–45.) Due in part to the financial crisis in 2008, the Zohar Funds lost significant value. Since then, the parties have engaged in internecine litigation around the country. In the action at hand, the Zohar Funds and the Patriarch Parties accuse each other of wrongdoing. At bottom, the Zohar Funds allege that the Patriarch Parties engaged in a wideranging conspiracy to enrich themselves by pillaging the Zohar Funds’ funds and impairing their assets, ultimately rendering them unable to repay investors. In response, Patriarch accuses the Zohar Funds and MBIA of concocting a scheme to wrest control of the portfolio companies from Patriarch and Tilton in an effort to replace lost revenues.
On January 16, 2017, the Zohar Funds filed the original complaint commencing this action against Patriarch, seeking declaratory judgment over ownership of the portfolio companies, damages from Patriarch Parties, and a RICO claim against the Patriarch Parties. (See generally Zohar Compl.) On November 27, 2017, the Patriarch Parties filed an answer, as well as counterclaims and a third-party complaint. (Answer, Counterclaims, and Third-Party Compl., ECF No. 88 (“Patriarch Compl.“).) On December 29, 2017, this Court dismissed the Zohar Funds’ RICO claim under
On March 11, 2018, Tilton caused Zohar III to commence chapter 11 in the United States District of Delaware Bankruptcy Court (the “Bankruptcy“). See In re Zohar III, Corp., No. 18-10512 (Bankr. D. Del.). To quell the sparring in bankruptcy court, the parties entered into a settlement agreement to monetize the Zohar Funds’ interests in the portfolio companies. (Settlement Agreement, ECF No. 130-1, ¶¶ 8, 10–12.) The Settlement Agreement expired on September 30, 2019. (ECF No. 141, at 2.) The next day, Tilton filed an equitable subordination complaint in the Delaware Bankruptcy Court. (Decl. of Joseph M. Barry in Supp. of the Zohar Funds’ Mot. to Transfer Case, ECF No. 157 (“Barry Decl.“), Ex. 1 (“Subordination Compl.“).) Thereafter, the Zohar Funds filed their motion to transfer the case, to which the Third-Party Defendants joined.
DISCUSSION
I. Legal Standard
The Zohar Funds move to transfer this action to the District of Delaware under
II. The Applicable Transfer of Venue Statute
As an initial matter, this Court must determine which transfer of venue statute is appropriate. While some courts in this District have stated that the statues are functionally identical, see, e.g., Credit Suisse AG v. Appaloosa Inv. Ltd. P‘ship I, 2015 WL 5257003, at *7 (S.D.N.Y. Sept. 9, 2015), there are material differences between
A. Whether Section 1412 Applies
The text of
Nevertheless, this has spawned some confusion among lower courts. Compare, e.g., Smartmatic USA Corp. v. Dominion Voting Sys. Corp., 2013 WL 5798986, at *6 (S.D.N.Y. Oct. 22, 2013) (transferring a case after only finding “related to” jurisdiction existed); with, ICICI Bank, 565 B.R. at 248 (requiring an action to be core
I am not free to ignore the limiting language, or to treat section 1412 as though it includes extra language that Congress used in other sections of title 28 but that Congress did not include in section 1412 itself. Nor am I free to rewrite section 1412 based on arguments that it would make more sense if section 1412 had a broader application. The terms of section 1412 simply do not grant me the power to transfer a New York State litigation that is not a case or proceeding “under” the Bankruptcy Code.
Multibank, Inc. v. Access Glob. Capital LLC, 594 B.R. 618, 624 (Bankr. S.D.N.Y. 2018); see also Onewoo Corp. v. Hampshire Brands, Inc., 566 B.R. 136, 139–40 (Bankr. S.D.N.Y. 2017) (same).2 Accordingly, this Court must determine whether this action “arises under” Title 11.
B. Whether this Action “Arises Under” Title 11
Actions arising under Title 11 are “any matter under which a claim is made under a provision of [T]itle 11.” Delaware Tr. Co. v. Wilmington Tr., N.A., 534 B.R. 500, 511 (S.D.N.Y. 2015) (alteration in original) (quotation marks omitted).3 A common practice in this District when determining whether a case may be transferred pursuant to
On their face, the Patriarch Parties’ claims are not core proceedings under the contemplation of
The Second Circuit established a framework to determine whether a contract action is a core proceeding:
(1) whether the contract is antecedent to the reorganization petition; and (2) the degree to which the proceeding is independent of the reorganization. The latter inquiry hinges on the nature of the proceeding. Proceedings can be core by virtue of their nature if either (1) the type of proceeding is unique to or uniquely affected by the bankruptcy proceedings (claim allowance), or (2) the proceedings directly affect a core bankruptcy function (contractual subordination agreements affecting priority of claims). Core bankruptcy functions of particular import to the instant proceedings include [f]ixing the order of priority of creditor claims against a debtor, plac[ing] the property of the bankrupt, wherever found, under the control of the court, for equal distribution among the creditors,
and administer[ing] all property in the bankrupt‘s possession.
In re U.S. Lines, Inc., 197 F.3d 631, 637 (2d Cir. 1999) (alterations in original) (quotation marks and citations omitted).
The contracts at issue here predate the Bankruptcy. Moreover, the disputes arising from those contracts also precede the Bankruptcy. Much of the alleged conduct occurred between 2003 and 2015, while the Bankruptcy was commenced in 2018. See In re Petrie Retail, Inc., 304 F.3d 223, 229 (2d Cir. 2002) (“The fact that the lease was executed pre-petition and that the dispute between [the parties] could arise outside of bankruptcy proceedings weighs against its core status.“); Delaware Tr. Co., 534 B.R. at 516 (finding a case to be core because “although the contract in the present case preceded the bankruptcy, the dispute did not“). Accordingly, well-established Second Circuit precedent dictates that these facts alone weigh heavily against core status.
To rebut this presumption, the Zohar Funds argue that the congruence between this action and the Bankruptcy render the Patriarch Parties’ claims core. While the Zohar Funds do not divide their arguments into such, this Court curates the Zohar Funds’ arguments into four general categories. First, the Zohar Funds assert that the factual and legal circumstances are so intertwined that this matter is core. The Zohar Funds points to similarities in the Patriarch Complaint and the Subordination Complaint. Indeed, paragraphs in the Subordination Complaint are grafted verbatim from the Patriarch Complaint. (Compare, e.g., Patriarch Compl. ¶ 154, with Subordination Compl. ¶ 174.) Moreover, the “steal the equity” themes that pervade the Patriarch Complaint are infused in the Subordination Complaint. Additionally, the Zohar Funds point to numerous claims that the Patriarch Parties also assert in the Bankruptcy. For example, the Zohar Funds note that the Patriarch Parties’ fraudulent inducement allegations concerning MBIA are also pleaded in the Bankruptcy. (Compare Patriarch Compl. Counts 1–3, with Subordination Compl. ¶¶ 222–25.)
The similarities are apparent. But those similarities alone does not alter the fact that the claims do not spring from Title 11. Moreover, several parties in this action—Credit Value Partners, LP, Halcyon Capital Management LP, Coöperatieve Rabobank U.A., and Varde Partners, Inc.—are not parties to the Bankruptcy.
The Zohar Funds’ reliance on In re CBI Holdings Co. Inc., 529 F.3d 432 (2d Cir 2008), is misplaced. While the Second Circuit found that the “claims of negligence, breach of contract, and fraud [that were] based upon the same operative facts as the above core proceedings” were core, that was because those claims “were filed in response to [a party‘s] Proof of Claim.” In re CBI Holding, 529 F.3d at 461 (quotation marks omitted). The Court of Appeals characterized those claims as core under
Second, the Zohar Funds aver that determinations in this matter will both affect the estate and the determination of priorities among creditors. According to the Zohar
But that alone does not make this action core. At bottom, the causes of action are common law contract claims and tort and do not emanate from Title 11. Moreover, this Court has the power to stay these particular claims while the Bankruptcy proceeds to avoid the possibility of conflicting rulings. Further, to the extent that damages are awarded, the Bankruptcy Court could account for them when determining priorities among creditors. See ResCap Liquidating Tr., 518 B.R. at 264 (“If [Plaintiff] recovers damages, the award can be distributed by the bankruptcy court according to the Plan‘s provisions.“).
In that regard, this case is similar to In re Orion Pictures Corp., where the Second Circuit rejected the argument that deciding contractual matters which may affect the estate automatically renders a matter core under
Third, the Zohar Funds argue that several of the claims that the Patriarch Parties assert are in fact derivative and therefore belong to the estate. Specifically, Counts 4–9, 14, and 16–17 appear facially to assert claims premised on the diminution of value of the Zohar funds. Because these derivative claims would belong to the Zohar Funds and the Zohar Funds are in Chapter 11, those claims must be adjudicated in the Bankruptcy. See In re WorldCom, Inc., 323 B.R. 844, 857 (Bankr. S.D.N.Y. 2005) (holding a derivative action is property of the estate and could only be brought by the debtor). However, even if those claims are derivative, the Zohar Funds overlook the fact that the Patriarch Parties have not properly asserted them. That alone could warrant dismissal of those claims. See Schiff v. ZM Equity Partners, LLC, 2020 WL 5077712, at *11 (S.D.N.Y. Aug. 27, 2020).
Finally, the Zohar Funds argue that this litigation adversely impacts the Bankruptcy because it can interfere with the monetization process. Continuing that line of
III. Transferability
Under
A. Whether this Case Could Have Been Brought in Delaware
For the Zohar Funds to have been able to file this action in Delaware, “the court must first determine whether venue is proper in the proposed transferee district.” Power Play 1 LLC v. Norfolk Tide Baseball Club, LLC, 2018 WL 357304, at *4 (S.D.N.Y. Jan. 9, 2018); accord Solar v. Annetts, 707 F. Supp. 2d 437, 442 (S.D.N.Y. 2010). Additionally, the District of Delaware would need to have personal jurisdiction over all defendants.
The Patriarch Parties claim that this suit could not have been brought originally in the District of Delaware because Tilton would not have been subject to Delaware‘s personal jurisdiction. This argument is not persuasive. Tilton is the sole director or managing member of numerous Delaware entities involved in this action. (Opp‘n, at 10; Patriarch Compl. ¶ 20.) Tilton used her positions within these entities to cause them to make investments. (Compl. ¶¶ 114–15.) However, the Patriarch Parties aver that the mere transacting by Tilton in business in Delaware is insufficient to establish personal jurisdiction.
The Patriarch Parties are mistaken. Delaware‘s long-arm statute provides for personal jurisdiction over any nonresident who “[t]ransacts any business or performs any character of work or service in the State [of Delaware].”
Next, the Patriarch Parties challenge venue. Since Tilton is not a resident of Delaware, the Zohar Funds cannot rely on
B. Factors
Courts in the Second Circuit consider several factors on a motion to transfer venue, including:
(1) the plaintiff‘s choice of forum, (2) the convenience to witnesses, (3) the location of relevant documents and ease of access to sources of proof, (4) the convenience of parties to the suit, (5) the locus of operative facts, (6) the availability of process to compel the attendance of unwilling witnesses, (7) the relative means of the parties, (8) the forum‘s familiarity with the governing law, (9) trial efficiency, and (10) the interest of justice, based on the totality of the circumstances.
Ritchie Cap. Mgmt., L.L.C. v. BMO Harris Bank, N.A., 2015 WL 1433320, at *7 (S.D.N.Y. Mar. 30, 2015) (quotation marks omitted). There is “no rigid formula for balancing these factors and no single one of them is determinative.” Citigroup Inc. v. City Holding Co., 97 F. Supp. 2d 549, 561 (S.D.N.Y. 2000). Instead, in light of a district court‘s “broad discretion” in deciding whether to transfer venue, it “must make [its] determination[] upon notions of convenience and fairness on a case-by-case basis.” Citicorp Leasing, Inc. v. United Am. Funding, Inc., 2004 WL 102761, at *2 (S.D.N.Y. Jan. 21, 2004). In considering these factors, the court may consider factual material outside the pleadings. Mohsen v. Morgan Stanley & Co., 2013 WL 5312525, at *3 (S.D.N.Y. Sept. 23, 2013); Power Play 1 LLC v. Norfolk Tide Baseball Club, LLC, 2018 WL 357304, at *4 (S.D.N.Y. Jan. 9, 2018).
i. Plaintiff‘s Choice of Forum
A plaintiff‘s choice of forum is “presumptively entitled to substantial deference,” Gross v. British Broad. Corp., 386 F.3d 224, 230 (2d Cir. 2004), although less so “where the connection between the case and the chosen forum is minimal,” Ritchie Capital Mgmt., 2015 WL 1611391, at *3. But this is not a mine-run case. While the Zohar Funds initially filed this suit, all of their claims have been dismissed and the Patriarch Parties assert counterclaims and impleaded the Third-Party Defendants. Thus, even though initially the Zohar Funds were plaintiffs, they are now effectively defendants. Ironically, while the Zohar Funds chose this forum, they now seek transfer to Delaware. Thus, no parties’ initial choice would be disturbed. But there is a genuine connection to a New York forum, as the agreements at issue contain a non-exclusive forum selection clause in which the parties consented
Additionally, the parties’ forum-selection clause militates against transfer. Because “[t]he enforcement of valid forum-selection clauses, bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice system,” and “the overarching consideration under § 1404(a) is whether a transfer would promote the interest of justice, a valid forum-selection clause [should be] given controlling weight in all but the most exceptional cases.” Atl. Marine Const. Co. v. U.S. Dist. Court for W. Dist. of Texas, 571 U.S. 49, 63 (2013) (alteration in original) (quotation marks omitted). In several of the agreements at issue, the parties agreed to venue in the Southern District of New York. (See Barry Decl., Exs. 4, 5.) The forum-selection clauses coupled with the fact that the Zohar Funds chose the Southern District of New York, caution against transfer.
ii. Convenience to the Witnesses
In considering the convenience of the witnesses, a court “must consider the materiality, nature, and quality of each witness, not merely the number of witnesses in each district.” Liberty Mut. Ins. Co. v. Fairbanks Co., 17 F. Supp. 3d 385, 396 (S.D.N.Y. 2014); see also Power Play 1 LLC, 2018 WL 357304, at *5 (same). Here, the Zohar Funds do not claim that any witnesses would be inconvenienced. And the pleadings indicate that most of the pertinent witnesses are located in New York. However, this Court is also aware that many of the parties in this action are actively engaged in the Bankruptcy. As such, this factor is neutral.
iii. Convenience of the Parties
The convenience of the parties weighs in favor of transfer when it would increase convenience for the movant without decreasing convenience for the non-movant. Liberty Mut. Ins. Co., 17 F. Supp. 3d at 399. However, it “does not favor transfer when it would merely shift any inconvenience from defendant to plaintiff.” Kiss My Face Corp. v. Bunting, 2003 WL 22244587, at *3 (S.D.N.Y. Sept. 30, 2003). In considering this factor, courts “often look to the parties’ principal places of business and the location of their offices.” Royal & Sun Alliance Ins., PLC v. Nippon Express, USA, Inc., 202 F. Supp. 3d 399, 407 (S.D.N.Y. 2016).
The Zohar Funds rely primarily on the Bankruptcy to argue that transfer would convenience the parties because it would be much easier to litigate all the issues in a single forum. Moreover, the Zohar Funds maintain that the Patriarch Parties cannot claim inconvenience because Tilton chose Delaware for the Bankruptcy.
While many of the parties are actively engaged in the Bankruptcy, not all are. Moreover the claims in this action are not core and are—at best—related to the bankruptcy. Additionally, most of the parties have principal places of business in New York. (Patriarch Compl. ¶¶ 2–21.) Accordingly, this factor militates against transfer.
iv. Locus of Operative Facts
“In determining the locus of operative facts for a breach of contract claim, a court typically considers the location where the contract was negotiated or executed, where the contract was to be performed,
The Zohar Funds are only able to identify two connections to Delaware: the Bankruptcy and the fact that some of the entities were incorporated in Delaware. Otherwise, events giving rise to this action occurred in New York. For example, a significant portion of the Patriarch Parties’ claims revolve around MBIA‘s fraudulent inducement of Tilton to purchase notes. (See Patriarch Compl. Counts 3, 7–13.) MBIA has its principal place of business in New York, (Patriarch Compl. ¶ 15), and the Patriarch Parties allege that the conduct at issue happened in New York, (see Patriarch Compl. ¶¶ 91–107). Moreover, in its initial pleading, the Zohar Funds alleged that the Southern District of New York was the “district in which a substantial part of the actions giving rise to the claims occurred.” (Zohar Compl. ¶ 26.) Therefore, this factor militates against transfer.
v. Remaining Factors
Neither party addresses the location of relevant documents. Indeed, it would hardly be dispositive considering “the conveniences afforded by the internet and electronic discovery mitigate whatever burden would ordinarily be imposed on the [parties] from litigating in another state.” Power Play 1 LLC, 2018 WL 357304, at *6. Because there is no indication that any witness “will be unwilling to testify voluntarily,” this Court finds that this factor is irrelevant. Rosen v. Ritz-Carlton Hotel Co. LLC, 2015 WL 64736, at *4 (S.D.N.Y. Jan. 5, 2015). Nor does this Court believe that a Delaware federal court is incapable of applying New York substantive law, especially in a straightforward tort and breach of contract action. See Flowserve Corp. v. BMCE, Inc., 2006 WL 2927176, at *4 (S.D.N.Y. Oct. 12, 2006). On the other hand, trial efficiency and the interests of justice do not weigh in favor of transfer. While the Bankruptcy court is no doubt familiar with its action, this Court has delved into the pleadings and decided various motions. See, e.g., Zohar, 286 F. Supp. 3d at 634.
When weighing all of the pertinent factors, the Zohar Funds fail to demonstrate by clear and convincing evidence that transfer is warranted for the convenience of the parties and witnesses and in the interests of justice.
CONCLUSION
For the foregoing reasons, the Zohar Funds’ motion to transfer this case is denied. The Clerk of Court is directed to terminate the motions pending at ECF Nos. 151 and 154.
Dated: September 18, 2020
New York, New York
SO ORDERED:
WILLIAM H. PAULEY III
U.S.D.J.