Great W. Ins. Co. v. Graham
| Decision Date | 22 June 2020 |
| Docket Number | 18-CV-6249 (VSB) |
| Parties | GREAT WESTERN INSURANCE CO., Plaintiff, v. MARK GRAHAM, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Appearances:
Gerard D. Kelly
John Prinzivalli
Nicholas Kord Lagemann
Stephen McInerney
Sidley Austin LLP
Chicago, IL
Nicholas Kord Lagemann
McElroy, Deutsche, Mulvaney & Carpenter, LLP
New York, NY
Eric R. Breslin
Melissa S. Geller
Leah Ariel Mintz
Duane Morris LLP
Counsel for Defendants Mark Graham, Blue Capital Management, Inc., Blue Alternative Asset Management, LLC, Blue Elite Fund Ltd., Blue Elite Fund LP, and Blue II Ltd.
Huaou Yan
Stephanie C Chomentowski
Blank Rome LLP
Counsel for Defendants Wilmington Savings Fund Society, FSB, and Christiana Trust Michael Steven Gordon
Baker & Hostetler LLP
Counsel for Defendants Donald Solow, Regatta Holdings LLC, Cygnet 001 Master Trust, Cygnet 001 Master Trust Series 2011-A, Cygnet 001 Master Trust Series 2011-C, Cygnet 001 Master Trust Series 2013-A
Andrew Jacobson
Laura Elizabeth Miller
Shrey Sharma
Seward & Kissel LLP
Counsel for Defendant Sancus Capital Blue Credit Opportunities Fund Ltd.
Greenberg Traurig, LLP
Counsel for Defendants Ability Insurance Company, Advantage Capital Holding, LLC, Dan Cathcart, and Kenneth King
Law Office of Andy S. Oh, PLLC
Forest Hills, NY
Plaintiff Great Western Insurance Company brings this action against Defendants, asserting various state common law claims as well as violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq. Before me are six motions to dismiss, filed by the following groups of Defendants: (1) Mark Graham, Blue Capital Management, Inc. ("BCM"), Blue Alternative Asset Management, LLC ("BAAM"), Blue Elite Fund Ltd. ("BEF Ltd."), Blue Elite Fund LP ("BEF LP"), and Blue II Ltd ("Blue II") (collectively, the "Blue Defendants"); (2) Wilmington Savings Fund Society, FSB, and Christiana Trust ("WSFS"); (3) Donald Solow, Regatta Holdings LLC ("Regatta"), Cygnet 001 Master Trust ("Cygnet"), Cygnet 001 Master Trust Series 2011-A ("Series 2011-A"), Cygnet 001 Master Trust Series 2011-C("Series 2011-C"), Cygnet 001 Master Trust Series 2013-A ("Series 2013-A," and, together with Series 2011-A and Series 2011-C, the "Cygnet Series Trusts") (the "SRC Defendants"); (4) Sancus Capital Blue Credit Opportunities Fund Ltd. ("Sancus"); (5) Ability Insurance Company ("Ability"), Advantage Capital Holding, LLC ("ACH"), Dan Cathcart, and Kenneth King (the "Ability Defendants"); and (6) Gregory Tolaram ("Tolaram"). Because Plaintiff has not made a prima facie showing of jurisdiction as to BEF Ltd., Blue II, or WSFS, but has made a sufficient start toward establishing jurisdiction, Plaintiff is granted leave to conduct limited jurisdictional discovery as to BEF Ltd., Blue II, and WSFS. Because I cannot reach the merits of the claims against those defendants without being satisfied that I have jurisdiction over them, the motions to dismiss by BEF Ltd., Blue II, and WSFS are denied without prejudice to refiling after the completion of jurisdictional discovery. Because Plaintiff has made a prima facie showing of jurisdiction as to Tolaram and BCM, their motions to dismiss for lack of personal jurisdiction are DENIED.
Because Plaintiff has alleged conduct that would be actionable as securities fraud, Defendants' motions to dismiss Plaintiff's RICO claims are GRANTED. Defendants' motions to dismiss Plaintiff's state common law claims against them are also GRANTED IN PART AND DENIED IN PART. Defendants' motions are granted to the extent that Plaintiff has failed to state claims of: fraud against Regatta; aiding and abetting a breach of fiduciary duty against Regatta, Cygnet, Series 2011-A, Series 2013-A, and ACH; aiding and abetting fraud against BEF LP, Regatta, Cygnet, Series 2011-A, Series 2013-A, Sancus, and ACH; and civil conspiracy to commit fraud against any Defendant. Defendants' remaining motions are DENIED.
Plaintiff is a Utah-based insurance company alleging that Defendants engaged in a complex and massive fraud against it, resulting in losses exceeding $135 million. Plaintiff alleges that during the course of this fraud, Defendants maintained numerous interconnections with one another, unbeknownst to Plaintiff, that allowed Defendants to loot Plaintiff's assets and engage in self-dealing.
To aid in understanding the alleged scheme, I briefly summarize the alleged interconnections among Defendants. Mark Graham, Donald Solow, Gregory Tolaram, Dan Cathcart, and Kenneth King are the individual defendants. Atlantic is the ultimate beneficial owner of Alpha Holdings, which is the owner of Alpha. (SAC ¶¶ 47-48.)2 Graham and Solow together owned roughly 100 percent of the common stock of Alpha Holdings; Alpha Holdings and Atlantic together owned 100 percent of the preferred shares of Alpha. (Id. ¶ 65.) Tolaram, Graham, and Solow, along with dismissed defendants Drake and Lynch,3 were directors and owners of Alpha; Tolaram served as chief operating officer. (Id. ¶¶ 46-48, 65; Am. Trust Agmt. 14.) Tolaram was the chief operating officer of Alpha as well as a director and owner of Atlantic, and served as a representative of Alpha, Alpha Holdings, and Atlantic in the companies' dealings with Plaintiff. (Id. ¶ 47; Am. Trust Agmt. 15.)4 Graham co-foundedBAAM and has owned "all interest and LLC stock" in it since 2009. (SAC ¶¶ 3, 67.) Graham is also president and sole owner of BCM, a Puerto Rico corporation. (Id. ¶ 11, 78.) BEF Ltd., BEF LP, Blue II, and Sancus were all allegedly created and operated by Graham. (Id. ¶¶ 49-51.) Tolaram served as an authorized signatory for Blue II. (Id. ¶ 107.) ACH wholly owns Ability; Ability owns 13.68 percent of Sancus; and ACH owns 80 percent of Sancus. (Id. ¶ 128.) Cathcart was the former CFO of Ability Re; both Cathcart and King are directors of Ability; and King is president and CEO of Ability, as well as chairman and CEO of ACH. (Id. ¶¶ 125, 129.) ACH and King also own Atlantic Coast Life, which is run by Cathcart as CEO. (Id. ¶ 127, 129.) Solow is the sole owner of Regatta, which in turn owns Cygnet and all the Cygnet Series Trusts. (Id. ¶ 41.)
In 2009, Plaintiff entered into a Coinsurance Agreement with Ability Reinsurance (Bermuda) Limited ("Ability Re"). (Id. ¶ 2.) Pursuant to that agreement (the "Coinsurance Agreement"), Ability Re assumed 75 percent of dollars paid in claims by Plaintiff on certain policies. (Id. ¶ 60; id. at 29 n.2). In order to secure Ability Re's payment obligations, and in compliance with Utah's Insurance Code, the parties entered into a trust agreement, under which they created a trust account into which Ability Re was to deposit and maintain "qualifying assets," as defined by the Coinsurance Agreement and the Utah Insurance Code, with a market value of no less than 102 percent of Ability Re's share of reserve liabilities. (Id. ¶ 61.) Plaintiff transferred $135 million in cash to Ability Re, which in turn established the trust account with BNY Mellon as trustee and transferred that $135 million, along with $18 million of its own funds, into the account in order to meet the 102 percent threshold. (Id. ¶ 62.) This brought the total value of the assets backing the Coinsurance Agreement to $153 million. (Id.)
In 2012, Cathcart, who at the time was the Chief Financial Officer ("CFO") of AbilityRe, informed Plaintiff that Ability Re was leaving the reinsurance business. (Id. ¶ 63.) Cathcart introduced Plaintiff to Graham, Solow, and Alpha, on whose board Graham and Solow served, vouched for Graham's investment management skills, and "recommended" that Plaintiff move its business to Alpha. (Id.) Plaintiff requested to buy its business back from Ability Re, but Cathcart refused on the basis that "Alpha had offered Ability Re more money to buy the business than Great Western could afford to pay." (Id.)
At the same time as Ability Re and Cathcart were "pressuring" Plaintiff into entering into a reinsurance relationship with Alpha, and unbeknownst to Plaintiff, Graham, Solow and Alpha were assisting ACH in acquiring Ability. (Id. ¶ 68.) Among other things, Alpha provided Ability with a surplus infusion, including by issuing a surplus note, entered into its own coinsurance agreement with Ability, and paid Ability Re a commission on the ultimate novation of Plaintiff's business. (Id.)
In June 2012, Alpha replaced Ability Re as the reinsurer for Plaintiff through a Novation Agreement that modified the Coinsurance Agreement by, among other things, requiring that the BNY Mellon trust account be liquidated and the assets transferred to a new trust account. (Id. ¶ 64.) The Novation Agreement required Alpha to establish a trust account5 and maintain in it 102 percent of its reserve obligations, in the form of certain qualifying assets, as well as a supplementary trust account with 4 percent of Alpha's reserve obligations. (Id. ¶ 66.)
Accordingly, Alpha established the Trust Account and a Supplementary Trust Account with WSFS as trustee, and in July 2012, Alpha, Plaintiff, and WSFS entered into an "Amended and Restated Trust Agreement" (the "Trust Agreement"). (Id. ¶ 67.) This Trust Agreementestablished Alpha as the grantor of the trust, Great Western as the beneficiary, and WSFS as the trustee; it also identifies BAAM, a non-signatory, as the investment manager for the Trust Account. (Id.) The Trust Agreement required that the assets be invested in certain qualified assets in order for Great Western to receive "reinsurance credit" from its regulator. (Id. ¶ 69.) According to Plaintiff, these assets "generally needed to be cash or low-risk investments, such as U.S. Treasury securities," (id.); however, the Trust Agreement itself contains...
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