In re F-Squared Inv. Mgmt., LLC

• Citation: 546 B.R. 538
• Decision Date: 18 March 2016
• Docket Number: Case No. 15–11469 (LSS) Jointly Administered
• Parties: In re: F-Squared Investment Management, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

546 B.R. 538

In re: F-Squared Investment Management, LLC, et al., Debtors.

Case No. 15–11469 (LSS) Jointly Administered

United States Bankruptcy Court, D. Delaware.

Signed March 18, 2016

Joseph Charles Barsalona II, Rachel Layne Biblo, Brendan Joseph Schlauch, Zachary I. Shapiro, Russell C. Silberglied, Amanda R. Steele, Richards, Layton and Finger, Wilmington, DE, for Debtors.

MEMORANDUM ORDER

Laurie Selber Silverstein

, United States Bankruptcy Judge

(i) DISMISSING, WITHOUT PREJUDICE, DEBTORS' THIRD OMNIBUS OBJECTION (SUBSTANTIVE) TO THE PROOFS OF CLAIM OF PLAINTIFFS IN THE PUTATIVE CLASS ACTION YOUNGERS V. VIRTUS INV. PARTNERS, INC. ; and

(ii) GRANTING, IN PART, MOTION OF THE YOUNGERS PLAINTIFFS FOR RELIEF FROM THE AUTOMATIC STAY PURSUANT TO 11 U.S.C. § 362(d)

TO PROCEED WITH THE YOUNGERS LITIGATION

Before the Court is the objection (the "Claim Objection"¹ ) of the F2 Liquidation Trust (the "Trust") to three class proofs of claim, which were filed by Mark Youngers, Kimball Lloyd, and Frances Briggs (together, the "Youngers Plaintiffs"), as the court appointed lead plaintiffs on behalf of themselves and other similarly situated class members (the "Class Members") in a class action (the "Youngers Action"² ) now pending in the United States District Court for the Southern District of New York (the "District Court"), and the Youngers Plaintiffs' motion (the "Lift Stay Motion"³ ) seeking an order lifting the automatic stay to permit the Youngers Action to proceed in the District Court. Having determined that the Court has jurisdiction to consider the Objection and the Lift Stay Motion as core proceedings pursuant to 28 U.S.C. §§ 157(b)(2)(B), (G), (O)

and 1334 ; and having considered (i) the Objection, the Youngers Plaintiffs' response⁴ and the Trust's reply⁵ to the Objection; (ii) the Lift Stay Motion and the Trust's response to the Lift Stay Motion;⁶ (iii) the Youngers Proofs of Claim,⁷ the second amended complaint in the Youngers Action (the "Second Amended Complaint") and documents referenced therein;⁸ (iv) the arguments made by counsel at the hearings conducted before this Court on January 26, 2016⁹ and February 18, 2016;¹⁰ and it appearing that adequate notice was given of the Objection and the Lift Stay Motion; and after due deliberation, the Court FINDS as follows:

Background

1. Prepetition, F–Squared Institutional Advisors, LLC, F–Squared Investment Management, LLC, and F–Squared Investments, Inc. (collectively, the "Debtors" or "F–Squared") marketed and managed an investment strategy known as the "AlphaSector Strategy" to securities wholesalers and brokers.¹¹ The AlphaSector Strategy was based on an algorithm that produced signals indicating whether an investment fund should buy or sell shares in nine industry exchange traded funds.¹²

2. The Youngers Plaintiffs initiated the Youngers Action against Virtus Investment Partners ("Virtus"), certain entities related to Virtus, the Debtors, and certain of their respective officers and directors.¹³

3. In that action, the Youngers Plaintiffs allege that, beginning in the fall of 2009, Virtus and F–Squared cooperated to create and manage mutual funds that utilized the AlphaSector Strategy (the "AlphaSector Funds").¹⁴ Virtus Opportunities Trust ("VOT"), a Delaware statutory trust controlled by Virtus, issued mutual fund shares in the AlphaSector Funds to investors, including the Youngers Plaintiffs.¹⁵

4. The Youngers Plaintiffs further allege that VOT's registration statements from September 30, 2009 to June 11, 2013 stated that the AlphaSector Strategy had been used to manage actual investments since 2001, and that from 2001 to 2008 those investments generated a 380% greater return than the S & P 500 Index did over the same period.¹⁶ VOT's 2014 registration statement did not include these historical returns.¹⁷

5. The Youngers Plaintiffs further allege that the statements regarding the AlphaSector Strategy's historical returns were false or misleading. Further, they allege that when VOT and certain of its officers and directors included the historical returns in VOT's registration statements, they violated the Securities Act of 1933 (the "Securities Act") and the Securities and Exchange Act of 1934 (the "Exchange Act") and certain fiduciary duties.

6. The Youngers Plaintiffs also assert several causes of action against the Debtors. They argue that each of the causes of action entitles the Class Members to a claim against the Debtors for the full amount of the damages the Class Members suffered as a result of VOT disseminating false historical returns. Initially, the Youngers Plaintiffs allege that, under § 15 of the Securities Act and § 20 of the Exchange Act, the Debtors are liable as control persons because they directed the VOT board of directors to include the false historical returns in the VOT registration statements. The Youngers Plaintiffs also allege that the Debtors owed a fiduciary duty to the Class Members, and that they breached that fiduciary duty. Finally, they allege that the Debtors aided and abetted the breaches of fiduciary duty committed by VOT and other defendants.

The Bankruptcy Cases

7. On July 8, 2015 (the "Petition Date"), the Debtors each filed a chapter 11 bankruptcy petition, which stayed the Youngers Action solely as to the Debtors.

8. As of the Petition Date, the District Court had appointed the Youngers Plaintiffs as lead plaintiffs on behalf of the Class Members, but the class had not been certified. Discovery had not begun, but was stayed under the Private Securities Litigation Reform Act, which imposes an automatic stay on discovery while a motion to dismiss is pending.¹⁸

9. On September 14, 2015, the three Youngers Plaintiffs, on behalf of all the Class Members, each filed a separate class proof of claim (the "Youngers Proofs of Claim") based on the allegations made in the Youngers Action. The Debtors responded with the Objection.

10. On January 7, 2016, the Youngers Plaintiffs filed the Lift Stay Motion in order to continue the Youngers Action against the Debtors in the District Court; the Debtors oppose this request.

11. The Court heard argument on the Claim Objection and the Lift Stay Motion on January 26, 2016 and February 18, 2016, respectively. Both matters were taken under advisement.

The Claim Objection; The Trust Did Not Carry Its Burden of Production

12. At both hearings, there was discussion of the appropriate standard by which the Court should consider the Objection to the Proofs of Claim. At the January 26 hearing, the Trust argued that the Youngers Proofs of Claim had to satisfy either the motion to dismiss or motion for summary judgment standard.¹⁹ At the February 18 hearing, however, the Trust changed its position, arguing that the Youngers Proofs of Claim must meet the standard expressed in In re Allegheny Intern., Inc ., 954 F.2d 167 (3d Cir.1992)

.²⁰ Given the Trust's position, and as this is an objection to proofs of claim, the Court will consider the Objection under the Allegheny standards.²¹

13. In reviewing a claim to which an objection has been filed, it is helpful to recite the Allegheny

standards as originally enunciated by the Third Circuit.²²

Allegheny speaks to both the shifting burden of production as between claimant and objector as well as the ultimate burden of persuasion:

2 The burden of proof for claims brought in bankruptcy court under 11 U.S.C.A. § 502(a) rests on different parties at different times. Initially, the claimant must allege facts sufficient to support the claim. If the averments in his filed claim meet this standard of sufficiency, it is "prima facie " valid. In other words, a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the initial obligation to go forward. The burden of going forward then shifts to objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said that the objector must produce evidence equal in force to the prima facie case. In practice, the objector must produce evidence, which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence. The burden of persuasion is always on the claimant.²³

14. Bankruptcy Rule 3001 assists a claimant in satisfying its obligation to go forward, (i.e., its initial burden of production). Pursuant to Bankruptcy Rule 3001(f), if a proof of claim is filed "in accordance" with Bankruptcy Rule 3001, the allegations in the proof of claim are treated as "prima facie evidence of the validity and amount of the claims."²⁴ Because a properly filed proof of claim is treated not merely as a document containing arguments and assertions, but as evidence that sufficiently supports its claims,²⁵ a proof of claim that is filed "in accordance" with Bankruptcy Rule 3001 serves to satisfy the claimant's initial burden of production.²⁶

15. In order for a proof of claim to be filed "in accordance" with Bankruptcy Rule 3001

, it must be in writing and conform substantially to the Official Form.²⁷ Consistent with the treatment of the claim as evidence, the Official Form requires the claimant to sign the form under penalty of perjury.²⁸ Multiple courts and commentators also require that a proof of claim "allege facts sufficient to support the claim"²⁹ In determining whether a proof of claim contains sufficient allegations, a reviewing court will assume the allegations are true and ask whether the facts establish the necessary elements of a claim.³⁰ At first blush, this standard sounds like the same pleading standard that courts apply when reviewing a Rule 12(b) motion to dismiss. Several courts suggest, however, that the proof of claim pleading standard is a "relatively low threshold" that is less burdensome than the...