In re Cbi Holding Co., Inc.

• Decision Date: 25 October 2004
• Docket Number: Adversary No. 01-CIV-0131 (KMW).,Bankruptcy No. 94-B-438129 (BRL).
• Citation: 318 B.R. 761
• Parties: In re CBI HOLDING COMPANY, INC., et al., Debtors, Ernst & Young and Ernst & Young, LLP, Appellants, v. Bankruptcy Services, Inc., Appellee.
• Court: U.S. Bankruptcy Court — Southern District of New York

318 B.R. 761

In re CBI HOLDING COMPANY, INC., et al., Debtors Ernst & Young and Ernst & Young, LLP, Appellants, v. Bankruptcy Services, Inc., Appellee.

Bankruptcy No. 94-B-438129 (BRL).

Adversary No. 01-CIV-0131 (KMW).

United States Bankruptcy Court, S.D. New York.

October 25, 2004.

Andrew L. Frey, David Michael Hillman, Hector Gonzalez, Mayer Brown Rowe & Maw LLP, Harry Simeon Davis, Schulte Roth & Zabel LLP, New York City, for Appellants.

Arthur Steinberg, Jay G. Strum, Robert B. Bernstein, Kaye, Scholer, Fierman, Hays & Handler, L.L.P., New York City, for Appellee.

ORDER

KIMBA M. WOOD, District Judge.

On June 26, 2004, this Court issued an Opinion & Order (the "June Order") resolving some, but not all, of the issues on appeal. The Court concluded, inter alia, that Ernst & Young and Ernst & Young, LLP (collectively, "Ernst & Young") were entitled to a jury trial with respect to the claims brought by Bankruptcy Services, Inc. ("BSI") on behalf of Trust Company of the West ("TCW") in its role as a creditor of CBI Holding Company, Inc. ("CBI"). The Court ordered the parties to provide additional briefing on the question of whether the Court's conclusion that Ernst & Young is entitled to a jury trial with respect to BSI's claims on behalf of TCW necessitates a new trial on BSI's claims on behalf of CBI as well. The Court indicated in the June Order that the resolution of that question would render moot some, if not all, of the outstanding issues on appeal.¹ The Court has received the parties' supplemental briefs on the jury trial question.

On July 8, 2004, Ernst & Young filed a motion for rehearing, in which Ernst &amp Young asked the Court to reconsider two of its earlier holdings, and to rule on several additional issues that the Court left unresolved in the June Order.² That motion became fully briefed on August 13, 2004. For the reasons stated below, the Court grants the motion for rehearing, vacates in full the judgment of the United States Bankruptcy Court, and directs the Clerk of the Court to enter final judgment in favor of Ernst & Young.

Because the June Order addressed the factual and procedural background of this case in full, the Court will not repeat the history of this case.

I. Standard on a Motion for Rehearing

When a party moves for reconsideration of a court order, Local Civil Rule 6.3 requires the movant to identify "the matters or controlling decisions which counsel believes the court has overlooked." Local Civil Rule 6.3. The standard for reconsideration is "`strict in order to dissuade repetitive arguments in issues that have already been considered fully by the court.'" Travelers Ins. Co. v. Buffalo Reinsurance Co., 739 F.Supp. 209, 211 (S.D.N.Y.1990) (quoting Caleb & Co. v. E.I. DuPont de Nemours & Co., 624 F.Supp. 747, 748 (S.D.N.Y.1985)); accord Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir.1995). The Court does not, on a motion for reconsideration, reconsider arguments that it has already considered and rejected. Travelers, 739 F.Supp. at 211. This is so even if the Court considered but did not address, or did not address at length, a party's argument. See Ades v. Deloitte & Touche, 843 F.Supp. 888, 893 (S.D.N.Y.1994); Market St. Ltd. Partners v. Englander Capital Corp., No. 92 Civ. 7434(LMM), 1993 WL 276062, at *1 (S.D.N.Y. July 21, 1993). A motion for reconsideration "is not a substitute for appeal." Morales v. Quintiles Transnational Corp., 25 F.Supp.2d 369, 372 (S.D.N.Y.1998).

Ernst & Young asks the Court to reconsider only two of the Court's conclusions in the June Order: (1) the Court's conclusion that pursuant to Second Circuit law, BSI has standing to assert CBI's negligence and breach of contract claims, notwithstanding the fact that BSI may not have standing to assert CBI's fraud claims, see June Order, 41-46; and (2) the Court's conclusion that pursuant to Second Circuit law, BSI has standing to assert TCW's fraud claims, because "a claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors....", see id. at 46-47 (citing Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir.1991)). The remainder of Ernst & Young's arguments on the motion for rehearing urge the Court to rule on issues that the Court expressly declined to consider in the June Order. Thus, the Court applies the standard for a motion for reconsideration only with respect to the two claims that Ernst & Young is asking the Court to reconsider; the Court will consider the remaining arguments contained in the motion for rehearing on their own merits.

II. Analysis

A. BSI's Standing to Assert CBI's Fraud Claims Against Ernst & Young

In the June Order, the Court held that the fraudulent acts of certain members of CBI's management will be imputed to CBI itself — and will consequently strip BSI of standing to assert CBI's fraud claims — unless the managers "totally abandoned" CBI's interests, and acted "entirely" for their own or another's interest (this exception is also referred to as the "adverse interest" exception). See June Order, 28-41 (discussing, inter alia, Center v. Hampton Affiliates, Inc., 66 N.Y.2d 782, 785, 497 N.Y.S.2d 898, 488 N.E.2d 828 (1985); Wight v. Bankamerica Corp., 219 F.3d 79, 87 (2d Cir.2000); and In re Mediators, Inc., 105 F.3d 822, 827 (2d Cir.1997)). Rather than immediately decide whether the "adverse interest" exception was properly applied by the Bankruptcy Court below, however, the Court deferred judgment on that question until after the Court resolved the issue of whether Ernst & Young was now entitled to a jury trial on these claims. See June Order, 34-35.

Ernst & Young argues that there is no evidence in the record to support the finding of "total abandonment," and thus that the Court need not decide the jury trial issue (i.e., if the Court can conclude that there is insufficient evidence on the record for any trier of fact, whether it be the Bankruptcy Court below or some future jury, to conclude that CBI's managers "totally abandoned" CBI's interests, the Court need not decide whether a new trial is required). The Court agrees. Having reviewed the extensive record developed below, the Court finds that BSI has not met its burden of proving that CBI's managers "totally abandoned" CBI's interests when they committed their fraudulent acts.

BSI's claim that CBI's managers totally abandoned CBI's interests is premised on one exhibit and a portion of the testimony of Brian Mahoney, a former accounting supervisor at CBI. The exhibit upon which BSI relies is a vaguely worded schedule regarding the financial scenario that would need to occur "to reach 100 percent of bonus." DX 1018 (RE 1238).³ The text of the exhibit was found by an Ernst & Young employee, on the computer used by John O'Brien, the former Controller of CBI. Although BSI and the Bankruptcy Court below treat this document as evidence of the intention of CBI's managers in defrauding the company,⁴ Ernst & Young correctly points out here that the Bankruptcy Court declined to admit this document for that purpose, because the document was not authenticated. (RE 205). There is no testimony by O'Brien concerning the document; there is no indication of who created the document and for what purpose it was created. There is thus no basis to conclude that the document provides any evidence of O'Brien's intent in participating in the scheme to defraud CBI. The Mahoney testimony relied upon by BSI (but not the Bankruptcy Court below) to prove "total abandonment" is Mahoney's testimony that O'Brien told him that the "real reason" for failing to record liabilities and for overstating CBI's income was to ensure that Castello received his maximum bonus. (RE 265). Even if Mahoney's testimony, which is clearly hearsay, were admissible as an exception to the hearsay rule, its probative value is slight, in view of Mahoney's testimony immediately thereafter that he had no way of knowing whether O'Brien had some other purpose in mind for failing to record liabilities. (RE 266). Because the central issue for analyzing "total abandonment" is whether the managers were simultaneously serving their own interests and the company's interests, Mahoney's testimony lacks probative value.

Although it is not Ernst & Young's burden to prove that BSI lacks standing to bring CBI's claims, it is worth noting by way of contrast that the record contains some evidence that various corporate purposes were served by the managers' acts of fraud, at least some of which were distinct from the issue of Castello's bonus. For instance, CBI's managers hid invoices and left certain liabilities unrecorded in order to give false representations of CBI's profitability to lending banks, without which CBI would have risked triggering an event of default. (RE 293, 295). The Court also agrees with Ernst & Young that an adverse inference ought to be drawn from the fact that BSI chose not to offer any testimony by Paul Rogers, CBI's former senior financial officer. Rogers was allegedly a central figure in the fraud, and he thus possessed first-hand knowledge about the "real reason(s)" for the fraud. His settlement agreement with the Official Committee of Unsecured Creditors of the Debtors, approved by the Bankruptcy Court below, included an agreement by Rogers "to cooperate and assist the Committee, TCW, and the Disbursing Agent in connection with any litigation or claim they may have against ... any present or former professional person retained by the Debtors. This cooperation shall include without limitation testifying at any deposition or trial at the request of the Committee or TCW." (RE 808-09). The fact that BSI did not call Rogers to testify to the fact that CBI's managers had "totally abandoned" CBI's interests in conducting the fraud, and were serving only their own interests, thus warrants an adverse inference.

Having conducted a full review of the record on appeal, the Court...