In re Bennett Funding Group, Inc.
| Decision Date | 15 July 2003 |
| Docket Number | Docket No. 01-5066.,Docket No. 01-5062.,Docket No. 01-5064.,Docket No. 01-5068. |
| Citation | 336 F.3d 94 |
| Parties | In re: THE BENNETT FUNDING GROUP, INC., Debtor. Richard C. Breeden, Trustee of The Bennett Funding Group, Inc., et al., Plaintiff-Appellant, v. Kirkpatrick & Lockhart LLP, Richard D. Marshall, Eugene R. Licker, Storch & Brenner, LLP, Irving M. Pollack, Arthur Andersen & Company, Robinson, St. John & Wayne, et al., Defendant-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Jay G. Strum, Kaye Scholer, LLP, New York, New York, Dennis R. McCoy, Hiscock, Barclay, Saperston & Day, LLP, Buffalo, N.Y. for plaintiff-appellant.
Janice J. DiGennaro, Rivkin Radler LLP, Uniondale, N.Y. for defendant-appellees Robinson, St. John & Wayne, et al.
Irwin H. Warren, Weil, Gotshal & Manges LLP, New York, N.Y. (Robert F. Carangelo, Jeffrey M. Greilsheimer on the brief), for defendant-appellee Arthur Andersen LLP.
Richard Spinogatti, Proskauer Rose LLP, New York, N.Y. (Allison B. Feld, on the brief), for defendant-appellees Kirkpatrick & Lockhart LLP, et al.
Gary Naftalis, Kramer Levin Naftalis & Frankel LLP, New York, N.Y. (Gregory A. Horowitz, on the brief), for defendant-appellees Storch & Brenner, LLP, et al.
Before: JACOBS and POOLER, Circuit Judges, and BAER, Jr.,* District Judge.
Richard C. Breeden is trustee of the Bennett Funding Group, Inc. (hereinafter "BFG"), a defunct company that was used as the vehicle for a Ponzi scheme. Breeden sued, inter alia, the company's lawyers and an accounting firm on the theory that they should have detected the fraud. The trustee alleges that Arthur Anderson (hereinafter "AA") was negligent in (1) issuing "clean" opinions for BFG's 1989 and 1990 audit years and (2) failing to notify appropriate authorities at BFG or law enforcement authorities when it (a) discovered problems with BFG's statements and its compliance with securities laws and regulations in 1992, (b) refused to issue a statement for 1991, and (c) withdrew its statement for 1990. The trustee's complaint against the law firms alleges that they submitted a letter to the Securities and Exchange Commission ("SEC") which was false and designed to delay or hinder the SEC investigation of BFG. On August 21, 2001, the United States District Court for the Southern District of New York (Sprizzo, J.) granted summary judgment dismissing the complaint (Breeden v. Kirkpatrick & Lockhart LLP, 268 B.R. 704 (S.D.N.Y.2001)) on the ground that the trustee lacked standing to sue third parties where the fraud was perpetrated by the debtor itself. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir.1991). By then, the remaining defendants were Kirkpatrick & Lockhart LLP ("Kirkpatrick"), Robinson, St John & Wayne LLP ("Robinson") and Storch & Brenner LLP ("Storch") (collectively "the law firm defendants") and the accountants.
The court had previously denied a motion to dismiss on standing grounds, but a year later entertained the motions presently under review on the papers as supplemented by a four-day evidentiary hearing at which the court heard witnesses and received in evidence a number of documents and deposition transcripts. Thus, the trustee was afforded the further opportunity to establish the existence of a genuine issue of material fact. On August 21, 2002, the court granted summary judgment. See Breeden, 268 B.R. at 714.
The trustee appeals on the grounds (i) that the rule of Wagoner applies only if all the company's decision-makers were implicated, a circumstance shown to be lacking here; and (ii) that conducting an evidentiary hearing in the context of a summary judgment motion deprived him of the constitutional right to a jury trial.
This case involves what at the time it was uncovered was characterized as the greatest Ponzi scheme on record and resulted from the sale and resale of the same office equipment leases. BFG, a closely-held family business, raised capital for its operations from private investors and institutions. (A1020-21; A1024-25). It is undisputed that Bud and Kathleen Bennett were the sole shareholders of BFG; that one son, Patrick Bennett, was CFO; and another son, Michael, Deputy CEO. Together they had control over every decision made at BFG. Although BFG is only one of several Bennett entities collectively referred to as the "Bennett Companies," each such entity "was held, directly or indirectly, by members of the Bennet family, who treated the [entities] as alter egos." Aff. Of Stewart M. Weissman, in Supp. Of Trustee's Mot. For an Ord. Substantively Consolidating the Debtors' Estates ¶ 17. The record is replete with references such as, "[T]he Bennett family treated its complex network of companies as a single empire ...." (A1032). Every Bennett family member was on the BFG Board, more specifically, Bud Bennett was BFG's Chairman and CEO, and Kathleen Bennett was BFG's President. (A2301-02; A6438-6439). The trustee concedes that BFG was a Bennett family "dictatorship." (A6761). In a report submitted pursuant to 11 U.S.C. § 1106, the trustee admitted "Patrick Bennett's control of the finances of the Bennett companies was complete...." (A1037). According to appellees, the Bennetts' fraudulent activities must be imputed to BFG — and, by extension, to the trustee — rather than to the professionals who were alleged to be complicit in the fraud. (Appellees' Brief at 36). The trustee, not surprisingly, disagrees.
The Board of Directors plays an integral part in this elaborate scheme. While the Bennett family always held at least 50% of the seats on the Board, there were other directors. It is undisputed, however, that each director was handpicked by Bud and each was a BFG employee; there were no "outside directors." (A2899-2902; A7416; A7489-90). The Board meetings were scripted in advance and each Board member was provided with his "speaking parts" in advance of the meeting. (A2191-95; A2900; A7525; A7615-16; A7875-81). The hearing also brought to light the following facts.
First, it became clear that "[t]he Bennett family, in particular Bud and Patrick Bennett, did no[t] tolerate any questioning that could have uncovered the fraud." (A1032). For instance, at least one employee, Keith Braudrick, BFG's Comptroller from 1990 to 1994, was fired because he sought additional information and documentation with respect to certain transactions that he was directed to record on the books of the company. (A2913-18).
Second, when confronted with clear evidence of fraud in late 1995, Bud and Kathleen sought to guarantee control over BFG and its finances in perpetuity and placed all of BFG stock in a trust, the language of which expressly assured that Patrick was to be appointed Chairman of the Board and CEO of BFG. (A2416).
Third, as far back as 1992, the auditor's report found that "[t]he unassigned inventory list from the [computer system] is not correct [and] contains both leases which have not been sold and leases that have been sold." (A2205). According to appellees, the outside audit clearly demonstrated how assignment of the same leases was made to multiple buyers and lenders and yet nothing was done to correct the problem. (A2088-89).
Fourth, Bud and Kathleen were on notice of the Ponzi scheme when in October 1995, two groups of employees discovered that BFG had pledged more than $50 million in leases that had already been sold to investors. (A2095; A7387-88; A7421; A7593; A7719). Once again the Bennetts did nothing and Patrick remained in control. (A8146; A8053-54; A8060; A8086-88). Further, the trustee concedes that the Bennetts diverted funds to themselves or to entities that they owned — including funds to maintain Bud and Kathleen's yacht, The Lady Kathleen. (A6962 at ¶ 70; A1101).
Fifth, in 1995, BFG finally hired Arkin, Schaeffer & Kaplan, a New York law firm ("Arkin law firm"), to investigate the double pledging. (A2067-68; A2117; A2126; A2140; A2148; A2153-54). The Arkin law firm was retained after several BFG employees threatened to resign over the discrepancies that had come to light. Thereafter, Bud and Patrick agreed to an oversight committee. (A2405-06; A7443-47; A7917). The trustee maintains that the fact that Bud and Kathleen Bennett retained an outside law firm to investigate the allegations of double-pledging strongly suggests that they themselves were unaware of the fraud that was being perpetrated. In its report dated March 7, 1996, the Arkin law firm concluded that "[w]hether the double pledging was intentional or the result of an innocent error is inconclusive; however, at a minimum [BFG] was grossly negligent in allowing the double pledging to occur." (A2100).
When AA refused to issue a clean opinion in 1991, Bud personally fired AA without ever even a mention to the Board. (A6564-65). Consequently, the Board neither discussed nor investigated the reasons behind AA's discharge. (A6566-67; A7616-17). The oversight committee that was created in 1995 by the Bennetts after the double-pledging came to light was without power according to one of its members to fire Patrick or "to carry out the recommendations" it might have made. (A7937-39).
The trustee contends that there were innocent insiders at BFG — including William Lester, Richard MacPherson, Kevin Kuppel, and Paul Usztok — who would have tried to put an end to the fraud had they been privy to it. However, appellees maintain that it is clear that the trustee's purportedly innocent insiders — who might have had the best of intentions — were without any power to do anything anyway. For instance, Kevin Kuppel, BFG's treasurer, testified at the hearing that he had no "responsibility for the cash flow, ... no authority or responsibility regarding bank accounts, ... [and] didn't even know what the cash disbursement process was at the Bennett Funding Group." (A7606-07). Similarly, Richard...
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