Greystone Community Reinvestment v. Berean Capital
| Decision Date | 29 July 2009 |
| Docket Number | No. 3:02-cv-1703 (CFD).,3:02-cv-1703 (CFD). |
| Citation | 638 F.Supp.2d 278 |
| Court | U.S. District Court — District of Connecticut |
| Parties | GREYSTONE COMMUNITY REINVESTMENT ASSOCIATION, INC., plaintiff v. BEREAN CAPITAL, INC. and Jackson Securities, Inc., defendants. |
Eliot B. Gersten, John Joseph Robaczynski, Gersten, Clifford & Rome, LLP, Hartford, CT, for Plaintiff.
Liam S. Burke, Paula Cruz Cedillo, Thomas J. Finn, Thomas J. Finn, Jorden Burt, Simsbury, CT, Ari J. Hoffman, Cohen & Wolf, P.C., Bridgeport, CT, Michael V. Coleman, Epstein Becker and Green, PC, Atlanta, GA, for Defendants.
RULING ON MOTIONS FOR SUMMARY JUDGMENT
This case was initially brought by the plaintiff Greystone Community Reinvestment Associates, Inc. ("Greystone") against defendant Berean Capital, Inc. ("Berean"). Greystone alleged breaches of confidentiality, contract, and fiduciary obligation by Berean, as well as tort and CUTPA violations. Greystone subsequently amended its complaint to allege that Jackson Securities, LLC ("Jackson" or "Jackson Securities") should be liable as a successor to Berean after the 2005 sale of substantially all of Berean's assets to Jackson in an alleged merger/consolidation, and to include factual allegations arising out of Berean's failure to disclose the material effect of the alleged merger on the instant litigation. Both Greystone and Jackson have filed motions for summary judgment on the issue of successor liability. Jackson has moved, in the alternative, for severance of the successor liability issue into a separate trial. For the following reasons, the Court finds that Illinois law applies to the successor liability issue and that genuine issues of material fact remain as to the liability of Jackson as successor to Berean. The motions for summary judgment are denied, and the motion for severance is also denied.
This case was initially filed in the Connecticut Superior Court by the plaintiff Greystone against defendant Berean and was removed to federal court on August 23, 2002. Greystone's initial claims against Berean arose out of (1) Berean's alleged breach of a confidentiality agreement regarding Greystone's idea for a "CRA Securitization" investment product, (2) Berean's interference with Greystone's settlement agreement with First Union National Bank of North Carolina ("First Union") during litigation resulting from First Union's use of Greystone confidential information (received from Berean) to market a competing CRA Securitization product with Bear Stearns & Co., and (3) Berean's pursuit of its own arbitration proceeding against First Union. Greystone alleged breach of contract, breach of fiduciary duty, fraud, fraudulent concealment, intentional interference with business expectations, civil theft, and CUTPA violations against Berean.
In May 2005, while this action was still pending, Jackson Financial Corporation ("JFC"), the sole member of Jackson Securities2 as well as of two related entities, Jackson Financial Products, LLC ("JFP") and Jackson Management Services, LLC ("JMS"), Dudley Brown (the owner of 100% of Berean's capital stock) and Berean entered into a Transaction and Contribution Agreement ("Transaction Agreement" or "Trans. Agr."). On June 1, 2005, Jackson Securities and Dudley Brown also entered into an Amended and Restated Operating Agreement ("Operating Agreement" or "Op. Agr.") for Jackson Securities. Through these two contracts,
1. Berean contributed "substantially all" of its operating assets and leases, including furniture, furnishings, and office equipment for all of its locations,3 to Jackson Securities (Transaction Agreement Section 2.3);
2. Jackson Securities extended employment offers to each of Berean's former employees (Trans. Agr. § 2.9);
3. Jackson assumed liability only for Berean's "current liabilities arising out of the operation of Berean in the regular and ordinary course of business in an amount not to exceed $75,000" (Trans. Agr. § 2.5);4
4. JFC contributed 100% of the membership interests of JFP and JMS, to become wholly-owned subsidiaries of Jackson Securities (Trans. Agr. § 2.6);
5. Dudley Brown contributed $250,000 to Jackson Securities (Trans. Agr. § 2.2) and extended to Jackson Securities a loan of $80,000 (Trans. Agr. § 2.8) 6. Dudley Brown (100% owner of Berean) and Reuben R. McDaniel, III (45% owner of JFC5) entered into employment agreements to work as Co-Chairman/CEO and Co-Chairman/President, respectively, of Jackson Securities (Op. Agr. § 5.7); and
7. Dudley Brown acquired 50% of the ownership share in Jackson Securities .
The Transaction Agreement states that "Brown and [Jackson Financial Corporation] desire to combine Brown's investment banking business experience with [Jackson Securities'] investment banking business and for Brown and [Jackson Financial Corporation] to own [Jackson Securities] on a 50/50 basis." Trans. Agr. at 1. Exhibit A to the Operating Agreement lists the post-merger members of Jackson Securities and their membership shares: Brown with 50%, and Jackson Financial Corporation with 50%.
The Transaction Agreement contains a choice of law provision which provides that "This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of Illinois, without giving effect to conflict of laws rules." Trans. Agr. § 10.8. The Operating Agreement contains a choice of law provision which provides that the laws of Georgia apply. Op. Agr. § 14.2.
The Transaction Agreement also contained indemnification provisions by which each of the three parties (Brown, Berean, and JFC) indemnified Jackson Securities against damages arising from
(a) any inaccuracy in or breach of any of the representations or warranties made by [Brown/Berean/JFC] in this Agreement; (b) any inaccuracy or misrepresentation in a certificate or affidavit delivered by [Brown/Berean/JFC] at the Closing in accordance with the provisions of this Agreement; (c) any breach by [Brown/Berean/JFC] of the covenant, agreement or obligation of [Brown/Berean/JFC] contained in this Agreement; and [(d), as to Brown; (e) as to Berean and JFC] all investigations, actions, suits, proceedings and judgments relating to any of the foregoing.
The indemnifications by Berean and JFC also included an additional clause indemnifying Jackson for damages arising out of "(d) the operation of [Berean/JFC, JFP, JMS or Jackson] at any time before or after [the] Closing."6 Op. Agr., Art. IX, §§ 9.2, 9.3, 9.4.
On June 7, 2005, Jackson Securities issued a news release entitled "Jackson Securities and Berean Capital merger forms stronger minority-owned investment bank." The release stated that Jackson had "merged" with Berean and that
The merger will result in a powerful national presence through the alignment of the two firms' complementary business line strengths and expanded geographic coverage. The merger sets a precedent for strategic consolidation amongst minority firms in the financial sector. Through this merger, Jackson Securities and Berean Capital have demonstrated a long-term commitment to growing the expanded and consolidated Firm's capabilities to service and reach its growing client base throughout the United States. Jackson Securities will announce the merger on Wednesday, June 8....
The press release continues to describe how McDaniel, Jackson's President/CEO, and Brown "began talks of merging their firms at the 2004 NASP Conference" and quotes Brown: The press release then quotes McDaniel: Jackson asserts that Brown's statements in the news release were made for marketing purposes.
Brown also stated in a NASD "Broker-Check" Report that "I have merged most of Berean Capital into Jackson Securities." Greystone discovered this by obtaining the report in 2007 during preparation for this trial.
Neither the Transaction Agreement nor the Operating Agreement provided for the dissolution of Berean after the transaction. On the contrary, the Operating Agreement contained the following provision:
Notwithstanding the foregoing, Brown may continue to hold an ownership interest in Berean Capital, Inc. ("Berean") and through Berean carry on such business activities as $5,000 broker/dealers are permitted to carry on, including, without limitation, performing private placements and acting as a conduit for certain other securities transactions.
Op. Agr. § 5.11(b). Berean's securities license appears to be the only asset it retained after the 2005 transaction.7
Brown stated in his deposition that Brown Deposition at 9. He also reported to FINRA, a securities market regulator, that Berean FINRA BrokerCheck Report for Dudley Brown, at 5. He also stated in that report that Id. at 11....
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