Ball v. Soundview Composite Ltd. (In re Soundview Elite Ltd.)

• Decision Date: 04 January 2016
• Docket Number: Adv. Proc. No. 14-01923 (REG),Case No. 13–13098 (REG) (Jointly Administered)
• Citation: 543 B.R. 78
• Parties: In re Soundview Elite Ltd., et al., Debtors. Corinne Ball, as Chapter 11 Trustee of Soundview Elite Ltd., Plaintiff, v. Soundview Composite Ltd., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

543 B.R. 78

In re Soundview Elite Ltd., et al., Debtors.Corinne Ball, as Chapter 11 Trustee of Soundview Elite Ltd., Plaintiff,

v.Soundview Composite Ltd., Defendant.

Case No. 13–13098 (REG) (Jointly Administered)

Adv. Proc. No. 14-01923 (REG)

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

Signed January 4, 2016

JONES DAY, Counsel for Plaintiff Corinne Ball, as Chapter 11 Trustee of Debtor Soundview Elite Ltd., 222 East 41st Street, New York, New York 10017, By: William J. Hine, Esq. (argued), Veerle Roovers, Esq.

LAW OFFICE OF PETER M. LEVINE, Former¹ Counsel for Defendant Soundview Composite Ltd., 99 Park Avenue, Suite 330, New York, New York 10016, By: Peter M. Levine, Esq. (argued)

SHER TREMONTE LLP, Successor Counsel for Defendant Soundview Composite Ltd., 80 Broad Street, Suite 1301, New York, New York 10004, By: Robert Knuts, Esq.²

DECISION ON MOTIONS FOR SUMMARY JUDGMENT AND ASSET FREEZING PRELIMINARY INJUNCTION

ROBERT E. GERBER, UNITED STATES BANKRUPTCY JUDGE:

In the chapter 11 cases of debtors Soundview Elite Ltd. ("Elite ") and its affiliates (collectively, and with Elite, the "Soundview Debtors "), plaintiff Corinne Ball (the "Trustee ") was appointed chapter 11 trustee for the Soundview Debtors after this Court removed Alphonse Fletcher ("Fletcher ") and others under Mr. Fletcher's control from possession.³ Until the Soundview Debtors needed to be liquidated (in the Cayman Islands, under which they were organized, and the United States, where they were headquartered), the Soundview Debtors were investment companies—"open ended mutual funds"⁴ —taking investor money and placing that money in other investments.

One such investment (in this case, by debtor Elite, one of the six companies that are debtors in this chapter 11 case) was in another investment company, defendant Soundview Composite Ltd. ("Composite "), which is not a debtor in this Court. As of the time of the events relevant here, Composite was also under Mr. Fletcher's control, and it remains under Mr. Fletcher's control.

In this adversary proceeding under the umbrella of the Soundview Debtors' chapter 11 cases, the Trustee, on behalf of debtor Elite, sues to recover the "Owed Amount ," i.e., the net asset value of Elite's investment—which effectively is everything Composite would have after the payment of Composite's creditor liabilities,⁵ since Elite is the only shareholder with an economic interest in Composite⁶ —after Elite made a redemption request that Composite repeatedly acknowledged but now refuses to honor. The Trustee also seeks a preliminary injunction (replacing a consensual hold on Elite's assets that was put into place when this controversy first came up) freezing Composite's assets to avoid their dissipation.

More specifically, the Trustee seeks (i) turnover, under sections 541 and 542 of the Bankruptcy Code, of the net asset value of Elite's holdings; (ii) an accounting; (iii) attorneys' fees, costs, and litigation expenses, and (iv) other relief that the Court considers proper.

The Trustee now moves, pursuant to Fed.R.Bankr.P. 7056 and Fed.R.Civ.P. 56, for summary judgment—though this might better be regarded as partial summary judgment, because (as the Trustee readily acknowledges) the Debtor's redemption entitlement—while to the entirety of Composite's remaining assets—is to those assets after the payment of any senior third-party creditor claims, which are not yet known with precision.

Composite's position—i.e., Mr. Fletcher's position—is inexplicable, and offensive to the Court. It is obvious that once any existing senior Composite liabilities have been satisfied, the entire remaining balance of Composite's assets rightfully belongs to Elite. That Elite made a redemption request has been repeatedly acknowledged by persons and entities acting for Mr. Fletcher, or entities under Mr. Fletcher's control. Mr. Fletcher, acting through companies he controlled, was on both sides of the redemption request at the time it was made. But Mr. Fletcher (who, as noted, still controls Composite) nevertheless refuses to return Elite's investment—or what is left of it.

On behalf of Composite, Mr. Fletcher contends that almost all of the evidence supporting the redemption request is inadmissible, and that what is admissible is "ambiguous"; that he can find no record of the redemption request and (though he and his staff were on both sides of the transaction at the time, and repeatedly acknowledged it before) cannot remember it; and that he isn't sure whether, assuming any redemption request was made, the request complied with necessary formalities. Mr. Fletcher also contends that Composite has the right, under "gating"⁷ provisions in the investment documents, to "gate" Elite's redemption request—even though there are no other Composite shareholders to protect; gating here would serve no purpose; and he offers no evidence to support the notion that Composite took any action to gate this redemption request.

Sooner or later, the Trustee will win. But Mr. Fletcher's resistance to meeting his obligations to his investors, and constraints on the statutory and constitutional authority of a bankruptcy judge to enter a final order bringing the resistance to an end, have tied this case up in knots.

To minimize the delay Fletcher's resistance has occasioned, and given how obvious her entitlement (at least in overall terms) is, the Trustee has sought to recover her entitlement by the Bankruptcy Code's "Turnover" provision, section 542 of the Code. But for reasons discussed below, the Trustee's entitlement is not one that section 542 can enforce, and her main entitlements are to declaratory relief, an accounting, and a related judgment—as to which a bankruptcy judge cannot enter a final order. And the Court also needs to quantify Composite's creditor claims before it can fix the amount of the inevitable judgment. The most the Court can grant at this point is partial summary judgment (though this, because it is not a final order, is fully within the Court's statutory and constitutional authority) and an injunction freezing Composite's assets until the issues are fully determined and (as is certain) the Trustee ultimately wins.

The Court grants each, for the reasons described below.

Facts

Under familiar principles, the Court relies solely on undisputed facts.

A. The Composite Articles of Association and Private Placement Memorandum

Composite was formed in May 2007 under the "Articles of Association of Soundview Composite, Ltd." (the "Composite Articles ").⁸ That same month, Composite issued a Confidential Private Placement Memorandum (the "Placement Memorandum ") setting forth the terms and conditions of a stock offering by which Composite would offer six classes of non-voting shares.⁹

Among other things, the Placement Memorandum described shareholders' entitlement to redeem their shares. As described in the Placement Memorandum, a shareholder has the right to redeem some or all of its Composite shares on any quarterly redemption date by sending a facsimile request for redemption to Composite's subadministrator.¹⁰ The Composite Articles prescribe that any redemption request:

"[ (i) ] shall be in writing,

[ (ii) ] shall specify the number and Class of Participating Shares to which it relates or indicate the manner in which the number of Participating Shares to be redeemed is to be determined and

[ (iii) ] shall be signed by the holder thereof ..."¹¹

The Placement Memorandum established that redemptions may only be made on the last business day of each calendar quarter (each, a "Redemption Date "), and that a redemption request must be received at least 45 days prior to a Redemption Date in order for the redemption to be honored on that date.¹² Unless waived by the directors of Composite, a redemption request received within 45 days of a Redemption Date would be deferred until the subsequent Redemption Date.¹³

The Placement Memorandum also provided that redemption of shares is "contingent upon the Fund having sufficient assets to discharge its liabilities on the Redemption Date," and that the "maximum Net Asset Value of Shares that may be redeemed on any Redemption Date is 10% of the Net Asset Value of the Fund, unless such limitation is waived by the Directors in their sole discretion."¹⁴ The Composite Articles also included a limitation of this kind as follows:

If one or more Redemptions Requests are received in respect of any one Redemption Day that would, if satisfied, result in the redemptions of an amount equal to more than 10% of the total net asset value of the Company or any Master Fund, the Directors may determine in their absolute discretion to reduce the amount of each Redemption Request so that Redemption Requests represent in aggregate an amount equal to no more than 10% of the total net asset value of the Company or any Master Fund.¹⁵

The Placement Memorandum also stated that Composite's directors could suspend redemptions and the determination of Net Asset Value under certain circumstances.¹⁶

Absent such restrictions on redemptions, the Placement Memorandum required payment of "not less than 90% of the estimated value of the Shares requested to be redeemed" to be made within 40 days following the Redemption Date of redeemed shares, with "the remaining balance of the net redemption proceeds" being paid "within ten Business Days after the official Net Asset value of the applicable Class is published."¹⁷ The Placement Memorandum granted Composite the right to make redemptions "in kind"—i.e., by providing securities it owned instead of cash.¹⁸ And the Placement Memorandum also provided that "[s]hares also may be redeemed at such other times on such terms and conditions as the Directors, acting in their sole discretion, may decide."¹⁹

In August 2009, Elite subscribed to Composite shares issued under the Placement Memorandum, purchasing 15,311 Class H Shares for approximately $12.87 million (the "Composite Shares ").²⁰ Since it purchased the Composite Shares,...