In Re Derivium Capital Llc.

• Decision Date: 14 September 2010
• Docket Number: Adversary No. 07-80119-JW.,Bankruptcy No. 05-15042-JW.
• Parties: In re DERIVIUM CAPITAL, LLC, Debtor(s). Grayson Consulting, Inc., Plaintiff(s), v. Wachovia Securities, LLC, f/k/a First Union Securities, Inc., and First Clearing, LLC, Defendant(s).
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina

437 B.R. 798

In re DERIVIUM CAPITAL, LLC, Debtor(s).Grayson Consulting, Inc., Plaintiff(s),

v.Wachovia Securities, LLC, f/k/a First Union Securities, Inc., and First Clearing, LLC, Defendant(s).

Bankruptcy No. 05-15042-JW.

Adversary No. 07-80119-JW.

United States Bankruptcy Court,D. South Carolina.

Sept. 14, 2010.

Derivium Capital, LLC, Tuxedo Park, NY, pro se.

Alisa J. Roberts, Christian Levine Simpson, Grayson and Kubli PC, Vienna, VA, Jason A. Daigle, Maybank Law Firm, LLC, Joseph C. Wilson, IV, Sonaly K. Hendricks, Pierce, Herns, Sloan, & McLeod, LLC, Charleston, SC, Victor A. Kubli, Kubli and Associates PC, Gaithersburg, MD, for Plaintiffs.

David A. Picon, Stephen L. Ratner, 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, George Wayne Hillis, Jr., Melissa Martin Burton, Parker, Hudson, Rainer & Dobbs LLP, Atlanta, GA, Jeffrey T. Kucera, Wachovia Building, Miami, FL, for Defendants.

JUDGMENT

JOHN E. WAITES, Chief Judge.

Based on the findings of fact and conclusions of law set forth in the attached Order, the Renewed Motion for Summary Judgment (“Renewed Motion”) filed by Wachovia Securities, LLC and First Clearing, LLC (“Defendants”), is granted in part and denied in part. Defendants' Renewed Motion is GRANTED as to (1) Plaintiff's fraudulent transfer claims pursuant to 11 U.S.C. §§ 544 and 548 with respect to transfers of stock from the Stock Loan Borrowers into the At-Issue Accounts, (2) Plaintiff's fraudulent transfer claims pursuant to 11 U.S.C. § 544 with respect to transfers of margin interest payments, and (3) Plaintiff's fraudulent transfer claims pursuant to 11 U.S.C. § 548 with respect to the cash transfers that Debtor and Bancroft directly deposited into their brokerage accounts with Defendants in the year prior to Debtor's bankruptcy filing. Defendants' Renewed Motion is DENIED to the extent that Defendants seek to bar Plaintiff's claims to transfers by Optech and WITCO based on waiver or prior court order, and as to Plaintiff's fraudulent transfer claims pursuant to 11 U.S.C. § 544 with respect to transfers of commissions, wire transfer fees, and prepayment fees. Defendants' Motion for Summary Judgment as to Plaintiff's Alter Ego Theory is denied.

ORDER

This matter comes before the Court on the Renewed Motion for Summary Judgment ¹ (“Renewed Motion”) and Motion for Summary Judgment as to Plaintiff's Alter Ego Theory (“Alter Ego Motion”) filed by Wachovia Securities, LLC and First Clearing, LLC (collectively, “Defendants” or “Wachovia”). Grayson Consulting, Inc. filed Objections to the Renewed Motion and Alter Ego Motion. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (H), and (O). Pursuant to Fed.R.Civ.P. 56(d), which is made applicable to this proceeding by Fed. R. Bankr.P. 7056, the Court makes the following Findings of Fact and Conclusions of Law. ²

FINDINGS OF FACT

I. Background

1. Derivium Capital, LLC (“Debtor”) is a limited liability company organized under and pursuant to the laws of the State of South Carolina, which was engaged in the business of the marketing and administration of a stock loan program, known as the 90% Stock-Loan Program (the “Program”), whereby its customers (“Stock Loan Borrowers”) pledged publicly traded stock to Debtor in exchange for a loan in the amount of 90% of the value of the stock. Upon maturity of the loan, the Stock Loan Borrowers had the option of tendering principal and interest and recovering their collateral, electing to surrender the stock in satisfaction of the loan with no further obligation, or refinancing the transaction for an additional term. Charles Cathcart, Scott Cathcart, and Yuri Debevc (“Derivium Owners”) were the owners and operators of Debtor.

2. The Stock Loan Borrowers were informed by the Derivium Owners or their agents that the Program, through a complex and secret hedging strategy, both protected against the risk of stock depreciation and allowed the Stock Loan Borrowers to recapture their stock if the stock appreciated over the term of the loan. However, Debtor, under the control of the Derivium Owners, was immediately selling the stock and transferring the proceeds through various offshore businesses without the Stock Loan Borrowers' knowledge. As a result, following the maturity of some of the stock loans, Debtor was unable to satisfy its obligation to return the pledged stock. The Program is alleged to have been a complicated Ponzi scheme. ³

3. To carry out the Program, Debtor used certain brokerage accounts with Defendants and other entities (“At-Issue Accounts”). ⁴ These accounts were opened under the names of Debtor, Bancroft Ventures Limited (“Bancroft”), WITCO Services (UK) Ltd. (“WITCO”), and Optech Limited (“Optech”). The At-Issue Accounts were subject to certain account agreements with Wachovia or its predecessor, which outlined the parties' rights with respect to those accounts. Specifically, the account agreements provided Wachovia with the right to (1) liquidate positions in the At-Issue Accounts in any circumstance which in its opinion warranted such action, (2) require Debtor or the Stock Loan Entities to maintain positions as deemed necessary or advisable by Wachovia, (3) prevent Debtor or the Stock Loan Entities from closing the At-Issue Accounts if there were open short positions and outstanding debts to Wachovia, and (4) sell any or all assets in the At-Issue Accounts without demand for margin or additional margin or other notice. In addition, the account agreements provided that Wachovia retained a security interest in all securities and/or other property held in any At-Issue Account.

4. As part of the Program, Debtor accepted transfers of pledged stock from Stock Loan Borrowers into its brokerage account at Wachovia, as well as the brokerage accounts of the other Stock Loan Entities. The Derivium Owners would then direct a transfer of the pledged stock from the initial account into another account held by the Stock Loan Entities, at which point the Derivium Owners would direct Wachovia to liquidate the stock, for which Wachovia would receive a brokerage commission and other fees for its services. Debtor would fund the loan to the Stock Loan Borrowers from the proceeds of the sale of the pledged stock.

5. The following facts regarding the transfers at issue in this case are undisputed: a. At least 1 million in securities were transferred from the Stock Loan Borrowers into the At-Issue Accounts.

b. During the one-year pre-petition period, at least 8,500 in cash was transferred into the Bancroft At-Issue Account from bank accounts held in the names of Bancroft and Debtor.

c. During the three-year pre-petition period, Wachovia received at least 2,414.49 in commissions and margin interest payments from Debtor and the Stock Loan Entities.

d. During the one-year pre-petition period, Wachovia received at least 3,839.75 in commissions and margin interest payments from Debtor and the Stock Loan Entities.

II. Procedural History

6. Debtor filed this bankruptcy case as a case under chapter 11 of the Bankruptcy Code on September 1, 2005, in the United States Bankruptcy Court for the Southern District of New York. The Bankruptcy Court in New York subsequently converted the case to a case under chapter 7 and transferred venue to this District.

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

8. On August 31, 2007, the Trustee commenced this adversary proceeding against Defendants by filing a complaint alleging eleven claims for relief: aiding and abetting fraud (First Claim); aiding and abetting breach of fiduciary duty (Second Claim); aiding and abetting fraudulent conveyance (Third Claim); aiding and abetting conversion (Fourth Claim); negligence (Fifth Claim); breach of fiduciary duty (Sixth Claim); conversion (Seventh Claim); civil conspiracy (Eighth Claim); constructive trust (Ninth Claim); and fraudulent conveyance (Tenth and Eleventh Claims).

9. Grayson Consulting, Inc. subsequently purchased the Trustee's rights in this action for $25,000 and an agreement to pay the estate a percentage of any net recovery in this matter. Grayson Consulting, Inc. (“Plaintiff”) was substituted for the Trustee as Plaintiff and filed an Amended Complaint on December 21, 2007.

10. Defendants moved to dismiss each claim asserted against them. On June 10, 2008, the Court entered an Order dismissing the First through the Ninth Claims with prejudice based on the doctrine of in pari delicto, and dismissed the Tenth and Eleventh Claims with leave to amend.

11. The June 10, 2008 Order identified three deficiencies with respect to the fraudulent conveyance claims: (1) the amended complaint “fails to specifically allege a transfer of Debtor's property to Wachovia;” (2) the amended complaint “fails to sufficiently set forth facts demonstrating that Debtor was indebted at the time of the alleged transfers” for purposes of the § 544 claim; and (3) the amended complaint “fails to provide sufficient detail of when the alleged fraudulent transfers by Debtor to Wachovia took place and the particular source of these transfers” pursuant to Fed.R.Civ.P. 9(b).

12. Plaintiff filed a Second Amended Complaint on June 24, 2008. The complaint, as amended, alleges that Debtor had brokerage accounts with Defendants held both in Debtor's name and in the names of the Stock Loan Entities, and that such accounts were believed to be margin accounts over which Defendants exercised dominion and control. Plaintiff seeks recovery of Debtor property that was fraudulently transferred to Defendants under 11 U.S.C. §§ 544 and 548, including all money or property that was transferred into the accounts held in the name of Debtor and the Stock Loan Entities, and commissions, interest, and...