Summary
denying Liquidating Agent's second motion to amend complaint on application of Wagoner rule
Summary of this case from Liquidating Agent of Stanwich Fin. Servs. Corp. v. Pardee (In re Stanwich Fin. Servs. Corp.)Opinion
Case No. 01-50831, Adv. Pro. No. 02-5023.
April 7, 2011
James J. Tancredi, Esq., Erick M. Sandler, Esq., Day Pitney LLP, Hartford, CT, For the Liquidating Agent.
See Official Committee of Unsecured Creditors v. Pardee et al. (In re Stanwich Fin. Servs. Corp.), 377 B.R. 432, 432 n. 1 (Bankr. D. Conn. 2004) (treating the Liquidating Agent as the plaintiff of record pursuant to the court's January 14, 2004 confirmation order).
David B. Zabel, Esq., Cohen and Wolf, P.C., Bridgeport, CT, For Defendant Hinckley Allen.
Scott D. Rosen, Esq., Cohn Birnbaum Shea, P.C., Hartford, CT, For Defendant Bear Stearns.
MEMORANDUM AND ORDER ON LIQUIDATING AGENT'S SECOND MOTION FOR LEAVE TO AMEND COMPLAINT
INTRODUCTION
This adversary proceeding has a long history. Its progress has been interrupted by appeals and, most recently, a motion to withdraw the reference. That motion having been denied, the plaintiff Liquidating Agent now requests the court to rule on its outstanding Motion for Leave to Amend the Complaint (doc. #217) ("Motion to Amend"). The Motion to Amend seeks to augment the factual allegations of the original complaint and delete certain causes of action. The defendants Bear Stearns Co., Inc. ("Bear Stearns") and Hinckley, Allen Synder. LLP ("Hinckley Allen") have objected. For the reasons that follow, the plaintiff's Motion to Amend is denied.
BACKGROUND
The court has written numerous decisions in this adversary proceeding which provided a detailed background of the case. Familiarity with the facts and lengthy procedural history of this proceeding is assumed. The court repeats here only that portion of the background which is necessary for this ruling.
See, e.g., Official Committee of Unsecured Creditors v. Pardee et al. (In re Stanwich Fin. Servs. Corp.), 288 B.R. 24 (Bankr. D. Conn 2002) (addressing standing of creditors' committee to commence and prosecute avoidance proceeding) (" Stanwich I"); Official Committee of Unsecured Creditors v. Pardee et al. (In re Stanwich Fin. Servs. Corp.), 291 B.R. 25 (Bankr. D. Conn. 2003) (denying Pardee Defendants' motion to dismiss because statute of limitations to bring an avoidance action is subject to equitable tolling) (" Stanwich II"); Official Committee of Unsecured Creditors v. Pardee et al. (In re Stanwich Fin. Servs. Corp.), 317 B.R. 224 (Bankr. D. Conn. 2004) (denying Liquidating Agent's first motion to amend complaint on application of Wagoner rule; Liquidating Agent provided opportunity to file a second amended complaint) (" Stanwich III"); Official Committee of Unsecured Creditors v. Pardee et al. (In re Stanwich Fin. Servs. Corp.), 377 B.R. 432 (Bankr. D. Conn. 2004) (finding that granting the Liquidating Agent's Rule 9019 motion may be prejudicial to the Pardee Defendants, sustaining the Pardee Defendants' objection to said motion) (" Stanwich IV"); Official Committee of Unsecured Creditors v. Pardee et al. (In re Stanwich Fin. Servs. Corp.), 2008 WL 638363 (Bankr. D. Conn. Mar. 3, 2008) (denying the Pardee Defendants' request to dissolve TRO) (" Stanwich V").
The court denied the plaintiff's first motion to amend its complaint in part because it found that under the Wagoner rule, see Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991), it lacked standing. See Stanwich III, 317 B.R. at 231. The basis of this second Motion to Amend against Bear Stearns and Hinckley Allen is that those defendants were compensated for their alleged assistance in the Debtor's 1997 leveraged buyout ("LBO") transaction at the core of this adversary proceeding. It is those payments that the plaintiff alleges constitute fraudulent transfers which it seeks to avoid pursuant to Bankruptcy Code §§ 544, 548, 550, and 551, as well as Rhode Island General Laws §§ 6-16-4, 6-16-5(a).
The fraudulent transfer claims against Bear Stearns are raised in Counts V and VI of the Second Amended Complaint and those against Hinckley Allen are raised in Counts I, II, V, and VI.
DISCUSSION
The resolution of this Motion to Amend again centers on the issue of standing, i.e., does the plaintiff have standing to assert claims against Bear Stearns and Hinckley Allen. See Hirsch v. Arthur Andersen Co. (In re Colonial Realty Co.), 72 F.3d 1085, 1091 (2d Cir. 1995) ; Wagoner, 944 F.2d at 118. To have standing, "[a] plaintiff must [1] allege personal injury [2] fairly traceable to the defendant's allegedly unlawful conduct and [3] likely to be redressed by the requested relief." Hirsch, 72 F.3d at 1091 (quoting Allen v. Wright, 468 U.S. 737, 751 (1984)) (brackets in Hirsch; further citation omitted). In other words, "[t]o determine standing, the court must look to the nature of the wrongs alleged in the complaint without regard to the plaintiff's designation . . . and the nature of the injury for which relief is sought." In re Hampton Hotel, Investors, L.P., 289 B.R. 563, 576 (Bankr. S.D.N.Y. 2003) (quoting In re Granite Partners, L.P., 194 B.R. 318, 325 (Bankr. S.D.N.Y. 1996) (further citation omitted)) (emphasis added).
As this court has previously held in this adversary proceeding:
[W]hen "a bankruptcy corporation has joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors." [ Wagoner, 944 F.2d at 118.] Moreover, when the alleged malfeasor is the corporation's sole shareholder and decision-maker, the Wagoner rule bars the trustee from suing even if the trustee claims that the debtor was harmed because, in that situation, the third party aider-and-abetter cannot be liable to the debtor. Id. at 120; see also In re Bennett Funding Group, Inc., 336 F.3d 94, 100 (2d Cir. 2003); [ In re] Mediators, [ Inc.], 105 F.3d [822,] 827 [(2d Cir. 19970], ("[W]here the principal and agent are one and the same," if the agent is alleged to have stripped the corporation of assets, it is presumed that the principal, who is the same individual merely wearing a different hat, had knowledge of the actions.)
It has accordingly been determined in this circuit that a bankruptcy trustee or creditors' committee acting on behalf of a debtor corporation lacks standing to assert actions against alleged third-party aider-and-abetters when the sole shareholder of the debtor corporation is alleged to have perpetrated the fraud. See Hirsch [ v. Arthur Andersen Co.], 72 F.3d 1085, 1094 (2d Cir. 1995) [(further citations omitted)].
Stanwich III, 224 B.R. at 229.
"The Wagoner Rule is less a single rule than a process for analyzing whether and under what circumstances a trustee has standing to pursue a prepetition cause of action or is precluded from doing so by either the nature of the claim or the debtor's prepetition conduct." Picard v. Taylor (In re Park South Sec., LLC), 326 B.R. 505, 513 (Bankr. S.D.N.Y. 2005) (emphasis added). Moreover, Second Circuit Wagoner jurisprudence does not forestall, per se, the application of the rule simply because a bankruptcy trustee (or another representative of the bankruptcy estate) has invoked a statute to bring a claim. This second attempt to address defects contained in the first proposed amended complaint implicates those two concepts.
The plaintiff continues to allege that the debtor's sole shareholders, Pardee and Sutro, along with its professionals, including Bear Stearns and Hinckley Allen, acted in concert to defraud, inter alia, the debtor's creditors. In that effort, the plaintiff again alleges that Bear Stearns and Hinckley Allen knowingly participated with and assisted the fraudulent acts of Pardee and Sutro in planning and effectuating the Debtor's 1997 LBO. However, this time, the plaintiff eliminates the phrase "aiding and abetting". For example:
77. Despite their actual knowledge, Bear Stearns, R-H, Pardee, the other Selling Shareholders, and Hinckley Allen knowingly and intentionally marketed SSTAI as "a purchase of high quality, highly liquid and flexible assets, primarily US Treasury Bonds". . . . Pardee, with the help of Bear Stearns, Hinckley Allen and R-H, effected the sale of stock in SSTAI. . . .
78. . . . Bear Stearns, Pardee, Financial advisors at R-H and attorneys at Hinckley Allen . . . knew that SFSC would have no assets other than those belonging to the Treasury Bond Trusts, but caused or facilitated the sale of SSTAI to SFSC through a transaction that depleted trust assets by utilizing them to finance the purchase price . . .
Second Proposed Amended Complaint at ¶¶ 77, 78 (emphasis added).
The plaintiff's deletion of the phrase "aiding-and-abetting" is a mere cosmetic change and does not alter the fact that the plaintiff continues to assert its fraudulent transfer action against Bear Stearns and Hinckley Allen (and others) on the basis that they "assist[ed] or effectuate[d] the 1997 LBO", see id. at ¶ 171 (emphasis added ), i.e., they participated in the alleged scheme to defraud the debtor's creditors. See also id. at ¶ 39 (describing Pardee and Sutro as having "a scheme to 'harvest' the phantom 'surplus equity' for [Settlement Services Treasury Assignments, Inc. ("SSTAI")] solely for the shareholders' [ i.e., Pardee and Sutro's] financial gain"). "Helping" and "facilitating" are simply different words for "aiding and abetting".
"Aid" is defined as "2 a: the act of helping" or "2 b: help given". WEBSTER'S NEW COLLEGIATE DICTIONARY 25 (1975) (emphasis added). "Abet" is defined as "2: to assist or support in the achievement of a purpose". Id. at 2.
The plaintiff's second argument in support of its Motion to Amend is that linking its effort to a statutory cause of action avoids the consequences of the Wagoner rule. ( See Plaintiff's Reply Memo. at 4 (doc. #537)). But that strategy merely begs the question. Simply stated: before a claim, statutorily based or otherwise, may be asserted, a claimant must have standing to do so.
Second Circuit law is clear that "claims against a third party for defrauding a corporation with the cooperation of management [ i.e., sole shareholder/defendants Pardee and Sutro] accrues to creditors, not to the guilty corporation." Wagoner, 944 F.2d at 120 (further citation omitted); see also, e.g., The Mediators, Inc. v. Manney (In re The Mediators, Inc.), 105 F.3d 822, 826-27 (2d Cir. 1997); Hirsch, 72 F.3d 1085 (2d Cir. 1995). Therefore, the plaintiff remains blocked by the Wagoner rule to prosecute its proposed causes of action against Bear Stearns and Hinckley Allen.
It follows that allowing the plaintiff to amend its complaint would be futile. See Stanwich III, 224 B.R. at 226 ("In this circuit,'[a]n amendment is considered futile if the amended pleading fails to state a claim or would be subject to a motion to dismiss on some other basis.'" (quoting In re Kellogg, 166 B.R. 504, 506-07 (Bankr. D. Conn. 1994) (further citation omitted)). Finding the plaintiff lacks standing to prosecute this adversary proceeding against Bear Stearns and Hinkley Allen, the court will not address their other objections.
CONCLUSION
Accordingly, the plaintiff's Motion to Amend is denied, and
IT IS SO ORDERED.