In re Derivium Capital, LLC

• Decision Date: 19 September 2008
• Docket Number: C/A No. 05-15042-JW.,Adversary No. 07-80119-JW.
• Citation: 396 B.R. 184
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: In re DERIVIUM CAPITAL, LLC, Debtor. Grayson Consulting, Inc., Plaintiff, v. Wachovia Securities, LLC, Wachovia Securities Financial Network, LLC, First Clearing, LLC, Defendants.

396 B.R. 184

In re DERIVIUM CAPITAL, LLC, Debtor Grayson Consulting, Inc., Plaintiff, v. Wachovia Securities, LLC, Wachovia Securities Financial Network, LLC, First Clearing, LLC, Defendants.

C/A No. 05-15042-JW.

Adversary No. 07-80119-JW.

United States Bankruptcy Court, D. South Carolina.

September 19, 2008.

Derivium Capital, LLC, pro se.

Alisa J. Roberts, Grayson and Kubli PC, Christian Levine Simpson, Vienna, VA, Jason A. Daigle, Joseph C. Wilson, IV, Pierce, Herns, Sloan & McLeod, LLC, Charleston, SC, for Plaintiffs.

David A. Picon, Proskauer Rose LLP, New York, NY, J. Ronald Jones, Jr., George Trenholm Walker, David Brian Wheeler, Charleston, SC, Matthew Triggs, Proskauer Rose LLP, Boca Raton, FL, Stephen L. Ratner, Proskauer Rose LLP, New York, NY, George Wayne Hillis, Jr., Melissa Martin Burton, Parker Hudson Rainer & Dobbs LLP, Atlanta, GA, Jeffrey T. Kucera, Miami, FL, for Defendants.

ORDER

JOHN E. WAITES, Bankruptcy Judge.

This matter comes before the Court on the Motion to Dismiss ("Motion") filed by Wachovia Securities, LLC, Wachovia Securities Financial Network, LLC, and First Clearing, LLC (collectively referred to as "Wachovia"). Plaintiff Grayson Consulting, Inc. ("Grayson") filed an objection to the Motion (the "Objection"). This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (H), and (0). Pursuant to Fed.R.Civ.P. 52, made applicable to this proceeding by Fed. R. Bankr.P. 7052, the Court makes the following Findings of Fact and Conclusions of Law.¹

FINDINGS OF FACT²

1. On September 1, 2005, Derivium Capital, LLC ("Debtor") filed the abovecaptioned bankruptcy case as a case under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York.

2. On November 4, 2005, the Bankruptcy Court in New York converted this case to a case under Chapter 7 and transferred venue to this District.

3. On November 7, 2005, Kevin Campbell ("Trustee") was appointed as the Chapter 7 trustee for Debtor.

4. Prior to the petition date, Debtor was owned and operated by Charles Cathcart, Scott Cathcart, and Yuri Debevc ("Derivium Owners").

5. Debtor operated a "stock-loan" program whereby borrowers could pledge publicly traded stock to Debtor in exchange for a loan in the amount of 90% of the value of the stock. At the maturity of the loan, the borrowers could either pay the loan and recover their stock or elect to pay nothing and treat the loan as satisfied by the previously pledged stock or refinance the transaction for an additional term.

6. According to the allegations in the Second Amended Complaint, the borrowers were promised by Debtor, through the Derivium Owners, that this program, through a complex and secret hedging strategy, both protected against the risk of stock depreciation and allowed the borrowers to recapture the benefit of their stock if the stock appreciated over the term of the loan. However, unbeknownst to the borrowers, Debtor was immediately selling the pledged stock and transferring the proceeds through a network of other entities also controlled by the Derivium Owners. As a result, following the maturity of some of the stock loans, Debtor was unable to satisfy its obligation to return the pledged stock.

7. In total, it is alleged that Debtor together with Bancroft Ventures Limited ("Bancroft"), received and liquidated over $1 billion in stock, thus receiving approximately $100 million in proceeds. The Derivium Owners, by and through the actions of Debtor, allegedly received and used the bulk of these proceeds for various failed businesses and their personal use.

8. The network of lenders and businesses involved in the stock-loan program, including Bancroft Ventures Limited ("Bancroft"), are alleged to be all one and the same organization, with no distinct or legitimate corporate separation; having the same customers, employees, offices and property; and all being controlled by the Derivium Owners.

9. To carry out the stock-loan program, Debtor used brokerage accounts with Wachovia and other entities.³ According to the Second Amended Complaint, the Derivium Owners would then direct a transfer of the pledged stock from Debtor's brokerage account to Bancroft's brokerage account, at which point the Derivium Owners directed Wachovia to liquidate the pledged stock, and Wachovia would receive a brokerage commission for executing the sale. As a result of Wachovia's participation in the liquidation of pledged collateral, it allegedly received millions of dollars in fees and commissions. This stock loan program is characterized by Grayson as a Ponzi scheme.⁴

10. According to the Second Amended Complaint, Debtor ceased doing business in its own name in December 2002. However, it continued to administer the loans, receive brokerage statements on behalf of other entities, control the accounts and issue account statements to its borrowers under its own letterhead.

11. After December 2002, borrowers allegedly were instructed to transfer pledged stock directly to Bancroft's brokerage account at Wachovia, at which point Wachovia would liquidate the pledged stock at the direction of the Derivium Owners.

12. On August 31, 2007, the Trustee filed the initial Complaint in this adversary. Grayson subsequently purchased the Trustee's rights for $25,000.00 and an agreement to repay Debtor's estate a small percentage of any net recovery in this matter. Grayson was substituted as plaintiff for the Trustee and filed an Amended Complaint on December 21, 2007.

13. On June 9, 2008, the Court entered an Order dismissing Grayson's common law claims (Counts One through Nine) with prejudice, concluding that Grayson's claims were barred by the doctrine of in pari delicto, and dismissed Grayson's statutory claims under §§ 544 and 548 of the Bankruptcy Code (Counts Ten and Eleven) without prejudice and with leave to amend ("Dismissal Order").

14. On June 24, 2008, Grayson filed a Second Amended Complaint, which included revised fraudulent conveyance claims under § 548 (Count Ten) and § 544 (Count Eleven) against Wachovia.

15. Wachovia has moved to dismiss the Second Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6) based upon alleged defects or defenses appearing on the face of the amended complaint.

CONCLUSIONS OF LAW

I. Applicable Standard for Determining Rule 12(b)(6) Motion

In deciding Wachovia's Rule 12(b)(6) motion to dismiss, the Court must take all well-pled material allegations of the. Second Amended Complaint as admitted and view them in the light most favorable to Grayson. See De Sole v. U.S., 947 F.2d 1169, 1171 (4th Cir.1991) (citing Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 1848, 23 L.Ed.2d 404 (1969)). The function of a motion to dismiss is to test "the sufficiency of a complaint; importantly, it does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses."⁵ See Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir.1992). The factual allegations of the Second Amended Complaint must be enough to raise Grayson's right to relief above the speculative level, on the assumption that all the allegations are true (even if doubtful in fact). Bell Atlantic Corp. v. Twombly, 550 U.S. 544, ___, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007). For most claims, the Federal Rules of Procedure require only a "short and plain statement of the claim showing that the pleader is entitled to relief, in order to give defendant fair notice of what ... the claim is and the grounds upon which it rests." See Fed.R.Civ.P. 8(a). However, claims based on fraud must be stated with particularity. Fed.R.Civ.P. 9(b) ("In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.")

Grayson's Second Amended Complaint seeks relief against Wachovia based on two causes of action: fraudulent transfer under state law pursuant § 544⁶ and fraudulent transfer pursuant to § 548. Wachovia's Motion asserts that Grayson has failed to state a claim as to each of these causes of action as a matter of law. Specifically, Wachovia asserts that the Second Amended Complaint fails (1) to plead that transfers of Debtor's property were made to Wachovia; (2) to plead fraud with sufficient particularity as required by Fed. R.Civ.P. 9(b); (3) to sufficiently set forth facts demonstrating that Debtor was indebted at the time of the alleged transfers for purposes of the § 544 claim; and (4) to set forth sufficient facts showing that Wachovia was an "initial transferee" of the stock transfers in order to recover the transfers pursuant to § 550.

II. Transfer of Debtor's Property-Alter Ego Theory

Wachovia first asserts that Grayson fails to state a claim under §§ 544 and 548, which apply only to transfers of Debtor's property, because Grayson seeks to recover non-debtor property, i.e., transfers from Bancroft. While the "alter ego" theory is not specifically mentioned in the Second Amended Complaint, Grayson argues in its Objection that Bancroft's property should be considered property of Debtor because Bancroft was the alter ego of Debtor and part of the Ponzi scheme operated by Debtor.⁷

In this case, the Court must apply the South Carolina law to determine whether the Grayson has adequately pled an alter ego theory to allow Bancroft's property to be considered property of Debtor and thereby enable transfers from Bancroft to Wachovia to be recovered under §§ 544 and 548. See Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc., 974 F.2d 545 (4th Cir.1992) (finding that Virginia state law should have been applied to determine whether corporate form should be disregarded under alter ego or veil piercing theory). The alter ego theory allows a court to impose liability on a second...