in Foreign Proceedings. Icp Strategic Credit Income Master Fund Ltd. v. Dla Piper LLP (In re Icp Strategic Credit Income Fund Ltd.), Case No. 13-12116 (REG)
| Decision Date | 15 September 2015 |
| Docket Number | Adversary Proceeding No. 14-01835 (REG),Case No. 13-12116 (REG) |
| Parties | In re: ICP STRATEGIC CREDIT INCOME FUND LTD., et al., Debtors in Foreign Proceedings. ICP STRATEGIC CREDIT INCOME MASTER FUND LTD., ICP STRATEGIC CREDIT INCOME FUND LTD., and HUGH DICKSON and STEPHEN AKERS, solely in their capacity as the Foreign Representatives and Joint Official Liquidators of ICP Strategic Credit Income Fund Ltd. and ICP Strategic Credit Income Master Fund Ltd., Plaintiffs, v. DLA PIPER LLP (US), Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
REID COLLINS & TSAI LLP
ICP Strategic Credit Income Fund Ltd. and
ICP Strategic Credit Income Master Fund Ltd.
One Penn Plaza, 49th Floor
New York, New York 10119
By: William T. Reid, IV, Esq. (argued)
Rachel Fleishman, Esq.
1301 S. Capital of Texas Hwy, C300
Austin, Texas 78746
By: Craig A. Boneau, Esq.
Joshua J. Bruckerhoff, Esq.
GIBSON DUNN & CRUTCHER LLP
200 Park Avenue
New York, New York 10166-0193
By: Kevin S. Rosen, Esq. (argued)
Craig H. Millet, Esq.
Matthew S. Kahn, Esq.
In this adversary proceeding under the umbrella of the jointly administered chapter 15 cases of foreign debtors ICP Strategic Credit Income Fund Ltd. (the "Feeder Fund") and ICP Strategic Credit Income Master Fund Ltd. (the "Master Fund," and with the Feeder Fund, the "Funds"), Plaintiffs Hugh Dickson and Michael Saville,1 in their capacity as the Foreign Representatives and the Joint Official Liquidators of the Funds (the "Liquidators"), and the Funds for whom the Liquidators act,2 assert claims against DLA Piper LLP (US) ("DLA Piper") for (1) aiding and abetting fraud; (2) aiding and abetting breaches of fiduciary duty; and (3) "fraudulent trading" pursuant to section 147 of the Cayman Islands Companies Law (the "Cayman Fraudulent Trading Claim"). DLA Piper moves to dismiss the complaint under Fed.R.Civ.P. 12(b)(6).
For the reasons discussed below, the Court concludes that the Liquidators have (though just barely) alleged claims for primary violations (as that expression is used in aiding and abetting jurisprudence) of breach of fiduciary duties owed to the Funds. But the Liquidators have not done so for fraud or fraudulent trading. The Court further concludes that(assuming that the Liquidators could show substantial assistance by the delivery of routine legal services if DLA Piper provided them knowing that it was doing something wrong) the Liquidators have failed to plausibly allege the "knowledge" prong of the claim for aiding and abetting breaches of fiduciary duty—that DLA Piper knew that it was assisting in a violation of duty. And most obviously, the Liquidators are barred from recovery by the in pari delicto defense under New York's "Wagoner Rule."
Accordingly, each of the claims must be, and is, dismissed.
Under familiar principles, for the purposes of determining this motion to dismiss (and for that purpose only), the Court takes the allegations of the Complaint as true.3 The material allegations of the Complaint, shorn of unnecessary repetition and conclusory statements, follow.
The Liquidators allege that DLA Piper aided and abetted fraud and breaches of fiduciary duty committed by the Funds' investment manager4 (also referred to as "collateral manager") ICP Asset Management LLC (the "Manager"),5 and Thomas Priore ("Priore"), one of the Funds' directors and the Manager's majority owner. The Liquidators allege thatDLA Piper wrongfully assisted Priore and the Manager when Priore caused the Manager to utilize—and the Liquidators allege "misappropriate"—over $36 million from the Funds to meet obligations owed not by the Funds, but by Triaxx Funding High Grade I, Ltd. ("Triaxx Funding"), another investment vehicle the Manager also managed.
As alleged in the Complaint, Triaxx Funding was a collateralized debt obligation6 that purchased and held residential mortgage-backed securities. Barclays Bank PLC ("Barclays") funded Triaxx Funding's purchase of those residential mortgage-backed securities. Barclays funded the purchases as a margin lender; Triaxx Funding was required to make payments to Barclays (i.e., was subject to "margin calls") if the value of Barclays' collateral—the residential mortgage-backed securities—dipped below a specified level.7 In the event that Triaxx Funding failed to meet a margin call, Barclays could liquidate the collateral and sell the vast majority of Triaxx Funding's assets to cover the debt.8
About half of the Funds' net asset value was invested in Triaxx Funding.9 As the investment manager of both the Funds and Triaxx Funding, the Manager received management fees in proportion to the assets each had under management.
When the value of its residential mortgage-backed securities declined, Triaxx Funding became subject to margin calls from Barclays. But Triaxx Funding did not have sufficient funds to meet the margin calls. This, the Complaint alleges, led the Manager and Priore toseek alternative ways for Triaxx Funding to meet the margin payments—in connection with which the Manager and Priore allegedly "looked to [DLA Piper] for a solution."10
The Funds were incorporated in 2005 as exempted limited liability companies under the Cayman Islands Companies Law. The Feeder Fund invested approximately $174 million in the Master Fund, which the Master Fund then invested along with the contributions of its two other shareholders.
About five years after their incorporation, the Funds were put into liquidation proceedings in the Cayman Islands. Shareholders of the Feeder Fund filed a winding-up petition in May 2010. The Cayman Islands Grand Court appointed Hugh Dickson and Stephen Akers as the Joint Official Liquidators of the Feeder Fund, and removed the prior management—the Manager and Priore. A few months later, the Master Fund's shareholders placed the Master Fund too in liquidation. Dickson and Akers again were appointed as Joint Official Liquidators. Later, Saville took Akers' place.
About three years after the Funds entered liquidation in the Caymans, the Liquidators came to this Court seeking recognition of the Funds' Cayman liquidation proceedings as foreign main proceedings under Chapter 15 of the Bankruptcy Code. The Court granted recognition in August 2013.
A few months later, the Funds and the Liquidators commenced this action in New York State Supreme Court. In January 2014, DLA Piper removed the action to the UnitedStates District Court for the Southern District of New York.11 Shortly after removal, the District Court referred the case to the Bankruptcy Court.
DLA Piper is a law firm with one of its several offices in New York City. DLA Piper attorney Lucien White ("White"), based out of the firm's New York City office, acted on DLA Piper's behalf in connection with the alleged wrongful activity.
Though not named as defendants in this adversary proceeding, the Manager, Priore, Barclays and the Trustee also had roles in connection with the allegations in the Complaint.
The Manager, a Delaware corporation, was based in New York. It was founded by Priore, who was also the Manager's president and chief investment officer. The Manager served as an investment manager and "collateral manager" to both Triaxx Funding and the Funds. Pursuant to an October 2006 Investment Management Agreement with the Master Fund, the Complaint alleges, "[the Manager] owed [the Master Fund] the fiduciary duty to invest [the Master Fund's] assets in good faith and give [the Master Fund] 'the benefit of its best judgment and efforts in rendering services'. . . ."12
Priore was a director of each of the Funds, owing each fiduciary duties. The Funds also had two independent directors in the Cayman Islands, but these directors, the Complaint alleges, were "unaware of Priore's and the Manager's wrongful acts" due to the Manager's and Priore's concealment of them. If the independent directors had known of the wrongfulactivity, the Complaint alleges, "they could and would have taken action to stop the fraud on the . . . Funds."13 Likewise, the Complaint alleges, the Funds also had innocent investors, also unaware of the Manager's and Priore's wrongdoing, but had they known, they "could and would have taken action to stop the fraud on the . . . Funds."14 In fact, it was these innocent shareholders who placed the Feeder Fund, and later the Master Fund, in liquidation proceedings in the Caymans.
As noted above, Barclays funded Triaxx Funding's purchase of its residential mortgage-backed securities. As discussed below, Barclays accepted payment from the Master Fund (in lieu of Triaxx Funding) on the margin call obligations.15
A trustee acting in connection with the transactions that are the subject of the Complaint at issue (the "Trustee")—originally LaSalle, and later Bank of America—valued the collateral posted by Triaxx Funding, and determined whether the value was below a specified level (thus requiring a payment from Triaxx Funding to Barclays), or above it (thus requiring a payment from Barclays to Triaxx Funding). Irrespective of a payment's direction, it would flow through the Trustee. The Trustee also was responsible for declaring events of default, upon which Barclays could liquidate its collateral.
At the heart of the Complaint are ten transfers, totaling $36.5 million (the "Transfers"), by which the Manager and Priore caused the Funds to satisfy Triaxx Funding's margin call obligations to Barclays. As alleged in the Complaint, White acted wrongfully in advising the Manager and Priore, and negotiating and drafting the documents necessary to effectuate the...
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