Claridge Assocs., LLC v. Schepis (In re Pursuit Capital Mgmt., LLC)

Citation595 B.R. 631
Decision Date02 November 2018
Docket NumberCase No. 14-10610 (LSS),Adv. Proc. No. 16-50083(LSS)
Parties IN RE: PURSUIT CAPITAL MANAGEMENT, LLC, Debtor. Claridge Associates, LLC, Jamiscott LLC, Leslie Schneider and Lillian Schneider Collectively as the Creditors, Transferees, and Assignees of the Estate of Pursuit Capital Management, LLC, Plaintiffs, v. Anthony Schepis, Frank Canelas, Ruth Canelas, Northeast Capital Management, LLC, Pursuit Partners, LLC, Pursuit Investment Management, LLC, Pursuit Capital Management Fund I, L.P., Pursuit Capital Partners (Cayman) Ltd., Pursuit Capital Master (Cayman) Ltd., Pursuit Opportunity Fund I, L.P., Pursuit Opportunity Fund I, Ltd., and Pursuit Opportunity Fund I Master Ltd., Defendants.
CourtU.S. Bankruptcy Court — District of Delaware

595 B.R. 631

IN RE: PURSUIT CAPITAL MANAGEMENT, LLC, Debtor.

Claridge Associates, LLC, Jamiscott LLC, Leslie Schneider and Lillian Schneider Collectively as the Creditors, Transferees, and Assignees of the Estate of Pursuit Capital Management, LLC, Plaintiffs,
v.
Anthony Schepis, Frank Canelas, Ruth Canelas, Northeast Capital Management, LLC, Pursuit Partners, LLC, Pursuit Investment Management, LLC, Pursuit Capital Management Fund I, L.P., Pursuit Capital Partners (Cayman) Ltd., Pursuit Capital Master (Cayman) Ltd., Pursuit Opportunity Fund I, L.P., Pursuit Opportunity Fund I, Ltd., and Pursuit Opportunity Fund I Master Ltd., Defendants.

Case No. 14-10610 (LSS)
Adv. Proc.
No. 16-50083(LSS)

United States Bankruptcy Court, D. Delaware.

Signed November 2, 2018


595 B.R. 638

Lindsay C. Cornacchia, Sarah Garvey-Potvin, Wendy B. Reilly, Debevoise & Plimpton LLP, New York, NY, Jesse N. Silverman, Dilworth Paxson LLP, Philadelphia, PA, for Plaintiff.

Frederick B. Rosner, Frederick Brian Rosner, The Rosner Law Group LLC, Joanne P. Pinckney, Pinckney, Weidinger, Urban & Joyce LLC, R. Craig Martin, Wilmington, DE, Rocco A. Cavaliere, Sarah E. Coleman, Tarter Krinsky & Drogin LLP, New York, NY, Sabato P. Fiano, Esq, Bridgeport, CT, for Defendant.

OPINION 1

LAURIE SELBER SILVERSTEIN, UNITED STATES BANKRUPTCY JUDGE

Before the Court is Defendants' Motion to Dismiss Complaint on Jurisdictional Grounds2 through which Defendants seek

595 B.R. 639

to dismiss or stay this adversary proceeding on multiple grounds, some at least nominally jurisdictional, most not. Plaintiffs and Defendants have completed their briefing.3 I deferred ruling on the Motion to Dismiss pending a ruling by the Third Circuit on an appeal from an order in the main case.4 The Third Circuit has since ruled5 and this matter is now ripe for review.

Background6

Prior to its bankruptcy filing, Pursuit Capital Management, LLC ("Debtor") was the general partner of two investment partnerships—Defendant Pursuit Capital Management Fund I, L.P. ("Capital Fund") and Defendant Pursuit Opportunity Fund I, L.P. ("Opportunity Fund," and collectively with the Capital Fund, the "Feeder Funds") (D.I. 1 ¶ 1). Defendants Anthony Schepis ("Schepis") and Frank Canelas ("Canelas") were Debtor's sole owners, managers and controlling principals. They were also the sole owners, managers and controlling principals of all other entity defendants—(i) Pursuit Partners, LLC, a broker-dealer ("Pursuit-Broker Dealer"), (ii) Pursuit Investment Management, LLC, an investment management company ("Pursuit Investment Manager"), (iii) Pursuit Capital Partners (Cayman) Ltd., an offshore fund, (iv) Pursuit Capital Master (Cayman) Ltd., an offshore master fund; (v) Pursuit Opportunity Fund I, Ltd., an offshore fund; and (vi) Pursuit Opportunity Fund I Master Ltd., a master fund organized under the laws of the Cayman Islands. Plaintiffs assert that these Defendants, collectively, are a "unitary enterprise" known as the "Pursuit Hedge Fund." Defendant Northeast Capital Management, LLC was formed by Schepis and Canelas to be a successor general partner to Debtor in the Feeder Funds. Defendant Ruth Canelas is the wife of Frank Canelas.7

Plaintiffs, in then individual capacities, as well as other investors, including Alpha Beta Capital Partners, L.P. ("Alpha Beta"), were investors in the Capital Fund. (D.I. 1 ¶ 39). By 2009, the Capital Fund ceased making new investments and started to wind down. (D.I. 1 ¶ 39). Litigation ensued as the Debtor and/or other Defendants

595 B.R. 640

were sued in multiple jurisdictions. As detailed in the Complaint, in May 2012, the Schneiders commenced arbitration proceedings against Debtor alleging "mismanagement of [then] investment, the misuse of the Capital Fund's remaining assets, and the failure to make distributions ... promised." (D.I. 1 ¶ 40). After two phases of arbitration, and in two separate and lengthy opinions, the arbitrator awarded the Schneiders approximately $5 million. The Supreme Court of New York confirmed the arbitration awards and issued judgments against Debtor in the amounts awarded by the arbitrator. (D.I. 1 ¶ 40). Those judgments have not been paid. Plaintiffs also allege that prepetition, and during the course of the litigation, Debtor systematically transferred assets for no consideration to various of the other Defendants to make Debtor judgment proof. (D.I. 1 ¶¶ 38, 73).

Separately, Alpha Beta sued Pursuit Investment Manager, Schepis and Canelas in New York state court asserting tortious conduct in connection with their investments in the Feeder Funds; they also filed a separate arbitration proceeding against the Capital Fund and the Opportunity Fund for similar tortious conduct.8 The 2010 litigation was settled through a confidential settlement agreement, which, itself, spawned further litigation.

In the meantime, certain Defendants were prosecuting prepetition litigation. In 2008, Defendants Pursuit Broker-Dealer and Pursuit Investment Manager sued UBS Securities LLC in Connecticut state court for losses suffered by the Feeder Funds as a result of collateralized debt obligations sold to the funds by UBS. (D.I. 1 ¶ 52). Damages in excess of $104.5 million plus punitive damages were asserted against UBS. (D.I. 1 ¶ 52). The UBS matter was settled for an unknown amount, and Plaintiffs allege that certain of the settlement proceeds should have gone to Debtor. (D.I. 1 ¶ 52). Plaintiffs assert that under both the Capital Fund limited partnership agreement and the Opportunity Fund limited partnership agreement, Debtor is due an incentive fee of 20% of profits earned by investors in those funds; this fee is termed "carried interest." (D.I. 1 ¶¶ 55, 56). By extension, therefore, Debtor is entitled to 20% of any profits to the Feeder Funds from the UBS proceeds. (D.I. 1 ¶ 57). Plaintiffs allege that Schepis and Canelas secretly formed Defendant Northeast Capital Management one month before the bankruptcy filing to replace Debtor as the general partner of each Feeder Fund in order to seize Debtor's interest in the proceeds of the UBS Litigation. (D.I. 1 ¶¶ 62-67).

Further, in 2013, Debtor and other Defendants sued Alpha Beta in New York state court.9 This matter remained pending when the bankruptcy petition was filed and was listed in Debtor's Schedules.

The Bankruptcy Case

On March 21, 2014, Schepis and Canelas put Debtor into a voluntary chapter 7 proceeding. Jeoffrey L. Burtch was appointed the chapter 7 trustee ("Trustee"). About one year later, on March 2, 2015, Trustee filed his Motion for an Order Approving Agreement to Settle, Transfer and Assign Certain Claims, Rights and Interests

595 B.R. 641

("Sale Motion")10 seeking approval of an agreement11 with Alpha Beta and the Claridge Group (i.e. Claridge Associates, LLC, Jamiscott LLC, Leslie Schneider, and Lillian and Leonard Schneider).12 Through the Sale Motion and agreement, Trustee sought to administer all assets and causes of action as detailed therein.

In the Sale Motion and agreement, Trustee stated that the only assets listed on Debtor's schedules were claims, specifically: (i) certain prepetition litigation Debtor brought against Alpha Beta and others in the State of New York, defined as the "New York Action" and (ii) potential indemnification claims against the Capital Fund, defined as the "Indemnification Claims." Trustee also recognized that a footnote in Debtor's Statement of Financial Affairs reflected a disbursement of $645,571.22 to Debtor's members in the year before the bankruptcy filing, defined as the "Potential Avoidance Claim."13 And, Trustee stated that the Claridge Group identified two additional potential assets: (i) certain additional rights, claims and causes of action against Debtor affiliates, including fraudulent conveyance actions, defined, collectively with the Potential Avoidance Claim as the "Debtor Claims" and (ii) Debtor's interest in the proceeds of the UBS litigation, defined as the "UBS Claim." These claims, collectively, comprise all of Debtor's assets and/or all sources of recovery for the bankruptcy estate. (Main Case D.I. 66 ¶¶ 7-9, 11).

As the estate had no funds to pursue the claims (Main Case D.I. 66 ¶ 12), Trustee decided to administer them by entering into the agreement "to settle, transfer and assign" the claims on the following terms. The Claridge Group and Alpha Beta were to pay Trustee $125,000 within twenty days after court approval of the agreement. In exchange, Trustee was to sell, transfer and convey to the Claridge Group and Alpha Beta, free and clear of all liens, claims and interests, all the right, title and interest of Debtor and the Estate to the Debtor Claims, the Indemnification Claims, the UBS Claim and all Debtor's books and records. Further, upon receipt of the $125,000 payment, the New York Action was to he settled and dismissed. The assignments, sales, transfers and conveyances were on an "as is where is" basis, with no representations or warranties of any kind. And, the agreement was to be submitted to the bankruptcy court for approval through a sale motion under § 363(b) and (f) of the Bankruptcy Code ("Sale Motion").

The Sale Motion was originally scheduled to be heard in...

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