Cobalt Multifamily Investors I, LLC v. Shapiro

• Decision Date: 07 March 2012
• Docket Number: No. 06 Civ. 6468(KMW)(MHD).,06 Civ. 6468(KMW)(MHD).
• Citation: 857 F.Supp.2d 419
• Parties: COBALT MULTIFAMILY INVESTORS I, LLC, et al., Plaintiffs, v. Mark A. SHAPIRO, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

857 F.Supp.2d 419

COBALT MULTIFAMILY INVESTORS I, LLC, et al., Plaintiffs,

v.Mark A. SHAPIRO, et al., Defendants.

No. 06 Civ. 6468(KMW)(MHD).

United States District Court,

S.D. New York.

March 7, 2012.

Joseph E. Gasperetti, Leonard Weintraub, Paduano & Weintraub, New York, NY, for Plaintiffs.

Demetra Sophocleous, Morrison Mahoney, LLP, Anne Patrice Richter, Scott Christopher Tuttle, McManus, Collura & Richter, Russel David Francisco, Wolff and Samson, New York, NY, Robert Marvin Calica, Edward M. Ross, Judah Serfaty, Rosenberg Calica & Birney LLP, Garden City, NY, David M. Dugan, Gage Andretta, William E. Goydan, Gage Andretta, Wolff & Samson, P.C., West Orange, NJ, for Defendants.

OPINION AND ORDER

KIMBA M. WOOD, District Judge.

In August 2006, the court-appointed receiver (the “Receiver”) for Plaintiffs Cobalt Multifamily Investors I, LLC, and its related entities (collectively, “Cobalt”), filed suit against three sets of attorneys and their law firms who provided professional services to Cobalt before it collapsed. These attorneys and their law firms (collectively, the “Law Firm Defendants”) are: (1) Robert F. Cohen and his firm Cohen & Werz, LLC (collectively, the “Cohen Defendants”); (2) Martin P. Unger and his firm Certilman Balin Adler & Hyman, LLC (collectively, the “Certilman Defendants”); and (3) Philip Chapman and his firm Lum Danzis Drasco & Positan LLC (collectively, the “Lum Defendants”). The Receiver also filed claims in this action against Cobalt's principals, Mark A. Shapiro (“Shapiro”), Irving J. Stitsky (“Stitsky”), and William B. Foster (“Foster”) (collectively, the “Cobalt Principals”). After the Cobalt Principals were convicted of securities fraud relating to their management of the Cobalt entities, the claims against them were voluntarily dismissed by the Receiver. (Dkt. No. 63.)

On March 28, 2008, the Court granted the Law Firm Defendants' motions to dismiss the Receiver's Complaint on the ground that the Receiver lacked standing to bring the claims. Cobalt Multifamily Investors I, LLC v. Shapiro, No. 06–cv–6468, 2008 WL 833237 (S.D.N.Y. Mar. 28, 2008) (hereinafter “the 2008 Dismissal Order”). (Dkt. No. 58.) In light of the Second Circuit's partial reversal of Ernst & Young v. Bankr. Servs. (In re CBI Holding Co.), 318 B.R. 761 (S.D.N.Y.2004), rev'd in part,529 F.3d 432 (2d Cir.2008), upon which this Court had based its decision, the Receiver moved for reconsideration of the Law Firm Defendants' motions to dismiss. (Dkt. No. 75.) The Court granted the motion for reconsideration on the ground that failure to do so would result in clear error. (Dkt. No. 85.)

On July 15, 2009, upon reconsideration, the Court granted in part and dismissed in part the motions to dismiss, concluding that the Receiver had standing to bring only: (1) legal malpractice claims against the Law Firm Defendants; (2) aiding and abetting conversion, breach of contract, and breach of fiduciary duties claims against the Cohen Defendants; and (3) a conversion and unjust enrichment claim against only Cohen. Cobalt Multifamily Investors I, LLC v. Shapiro, No. 06–cv–6468, 2009 WL 2058530 (S.D.N.Y. July 15, 2009) (hereinafter “the 2009 Partial Dismissal Order”). (Dkt No. 85.)

On December 23, 2009, in an unrelated case, the Second Circuit certified to the New York Court of Appeals a series of questions relating to the application of the “adverse interest” exception to the Wagoner rule and the related “sole actor” exception. Kirschner v. Grant Thornton LLP, 2009 WL 1286326 (S.D.N.Y. Apr. 14, 2009)( Kirschner I ),questions certified sub nom.Kirschner v. KPMG LLP, 590 F.3d 186 (2d Cir.2009)( Kirschner II ),answering certified questions,15 N.Y.3d 446, 912 N.Y.S.2d 508, 938 N.E.2d 941 (2010)( Kirschner III ),aff'd,626 F.3d 673 (2d Cir.2010)( Kirschner IV ). Upon the application of the Certilman Defendants, the Court granted a stay of discovery pending the New York Court of Appeals' decision on the ground that the decision would impact adjudication of the claims pending in this litigation. (Dkt. No. 116.)

After the New York Court of Appeals issued its decision in Kirschner III, the Law Firm Defendants moved for reconsideration of this Court's 2009 Partial Dismissal Order. (Dkt. Nos. 126, 128, 130.) By report and recommendation, dated September 9, 2011 (the “Report”), familiarity with which is assumed, Magistrate Judge Michael H. Dolinger recommended that the motions be denied. Specifically, the Report concluded that: (1) Kirschner III did not constitute an intervening change in controlling law, and (2) the Court's 2009 Partial Dismissal Order did not constitute clear error. (Report 25.) The Law Firm Defendants each filed timely written objections to portions of the Report.

The Court has carefully reviewed the Report's thorough analysis and the parties' corresponding objections. For the reasons set forth below, the Court GRANTS the Law Firm Defendants' motions to reconsider on the ground that failure to do so would result in clear error. Upon reconsideration, the Court GRANTS IN PART and DENIES IN PART the Law Firm Defendants' motions to dismiss and DENIES the Receiver's request for leave to replead. The Court DENIES the Lum Defendants' motion to dismiss for failure to timely file an affidavit of merit pursuant to N.J. Stat. Ann. § 2A:53A–27, (Dkt. No. 134), and GRANTS the Receiver's cross-motion for an extension of time to file the required affidavit nunc pro tunc. (Dkt. No. 141.)

I. BACKGROUND¹A. Facts

The Complaint alleges that the Cobalt Principals engaged in a massive fraud by using Cobalt to perpetrate a Ponzi scheme, which included their making egregious misrepresentations in order to persuade members of the public to invest millions of dollars in the enterprise. In the written materials disseminated to potential and actual investors, the Cobalt Principals allegedly misrepresented: (1) their personal and professional backgrounds, including their past criminal histories; (2) Stitsky's and Foster's involvement in Cobalt; (3) their plans for the investors' funds; and (4) the nature and scope of Cobalt's property holdings. The Cobalt Principals are alleged to have appropriated the majority of the funds invested in Cobalt for their own personal use.

The Complaint alleges that each of the Law Firm Defendants, as counsel for the Cobalt entities in varying capacities, assisted the Cobalt Principals in committing investor fraud. The Cohen Defendants are alleged to have, inter alia, aided in the creation of Vail Mountain Trust (“Vail”), an entity created by Shapiro in order to conceal his misappropriation of investor funds. (Compl. ¶¶ 94–95.) The Complaint alleges that the Cohen Defendants facilitated the transfer of over $9 million in investor funds from Cobalt to Vail, and from Vail to the Cobalt Principals for their personal expenses. (Compl. ¶¶ 97–103.)

The Complaint alleges that the Certilman Defendants, inter alia: (1) approved several private placement memoranda (“PPMs”) issued to investors, which they knew contained material misrepresentations; (2) failed to perform due diligence that would have revealed that Cobalt was being operated as a Ponzi scheme with no positive cash flow; and (3) despite knowing that Shapiro was misusing investor funds for personal use, failed to apprise Cobalt of that fact or suggest that it be disclosed to investors. (Compl. ¶¶ 108–21.)

The Complaint alleges that the Lum Defendants, inter alia: (1) prepared and approved PPMs that they knew contained material misrepresentations; and (2) failed to perform due diligence that would have revealed that Cobalt was being operated as a Ponzi scheme with no positive cash flow. (Compl. ¶¶ 122–33.)

B. Procedural History

1. The 2008 Dismissal Order

In October 2006, the Law Firm Defendants filed motions to dismiss, arguing, inter alia, that the Receiver lacked standing to file suit, pursuant to the rule of standing articulated in Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir.1991). (Dkt. Nos.21, 23, 26.) The so-called Wagoner rule stands for the well-settled proposition that a bankrupt corporation, and by extension, an entity that stands in the corporation's shoes, lacks standing to assert claims against third parties for defrauding the corporation where the third parties assisted corporate managers in committing the alleged fraud. Wagoner, 944 F.2d at 120;In re Bennett Funding Grp., Inc., 336 F.3d 94, 99–100 (2d Cir.2003).²

The Receiver argued that the Court should apply the “adverse interest” exception to the Wagoner rule, which states that where an individual corporate principal has “ totally abandoned [the corporation's] interests and [is] acting entirely for his own or another's purposes,” Kirschner III, 15 N.Y.3d at 466, 912 N.Y.S.2d 508, 938 N.E.2d 941 (quoting Center v. Hampton Affiliates, Inc., 66 N.Y.2d 782, 784–85, 497 N.Y.S.2d 898, 488 N.E.2d 828 (1985)) (emphasis in original), Wagoner does not apply, and the corporation has standing to assert claims against a third party that assisted the corporate agent in defrauding the corporation.

The Court rejected the Receiver's argument, finding that the Cobalt Principals had not totally abandoned the interests of the corporation because the Complaint alleged that they had provided at least some financial benefit to the Cobalt entities, such as: (1) using corporate funds accumulated by the fraud to pay promised returns to some investors; and (2) misappropriating most, but not all, of the funds raised from investors. 2008 Dismissal Order, 2008 WL 833237 at *4. Accordingly, the Court held that the Receiver lacked standing pursuant to the Wagoner rule and granted the Law Firm Defendants' motions to dismiss in their entireties in March 2008.

2. Motion for Reconsideration of the 2008 Dismissal Order; the 2009 Partial Dismissal Order

In June 2008, the Receiver moved for reconsideration of the 2008 Dismissal Order based on the Second Circuit's opinion in Bankr. Servs., Inc. v....