In re PHOENIX DIVERSIFIED INVESTMENT CORPORATION

• Decision Date: 01 November 2010
• Docket Number: Bankruptcy No. 08-15917-EPK.,Adversary No. 10-03113-EPK.
• Citation: 439 B.R. 231
• Parties: In re PHOENIX DIVERSIFIED INVESTMENT CORPORATION, Debtor. Kenneth A. Welt, Chapter 7 Trustee of Phoenix Diversified Investment Corporation, Plaintiff, v. EfloorTrade, LLC; John Moore, individually; Kyle H. Kelley, individually; Kelley Goldberg Leach and Cohn, P.L.; and CCIP Orlando, Ltd., LLC, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Florida

439 B.R. 231

In re PHOENIX DIVERSIFIED INVESTMENT CORPORATION, Debtor.

Kenneth A. Welt, Chapter 7 Trustee of Phoenix Diversified Investment Corporation, Plaintiff,

v.EfloorTrade, LLC; John Moore, individually; Kyle H. Kelley, individually; Kelley Goldberg Leach and Cohn, P.L.; and CCIP Orlando, Ltd., LLC, Defendants.

Bankruptcy No. 08-15917-EPK.

Adversary No. 10-03113-EPK.

United States Bankruptcy Court,S.D. Florida,

West Palm Beach Division.

Nov. 1, 2010.

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Solomon B. Genet, Meland Russin & Budwick, P.A., Miami, FL, for Plaintiff.

Nicholas B. Bangos, Esq., Lawrence D. Smith, Esq., Miami, FL, Jeffrey A. Blaker, Esq., West Palm Beach, FL, for Defendants.

John Moore, Orlando, FL, pro se.

AMENDED ORDER DENYING MOTIONS TO DISMISS

ERIK P. KIMBALL, Bankruptcy Judge.

THIS MATTER came before the Court upon the Defendant CCIP Orlando, Ltd., LLC's Motion to Dismiss or, in the Alternative, Motion for Permissive Abstention [DE 11] (the “CCIP Motion”) filed by CCIP Orlando, Ltd., LLC (“CCIP”) and the Defendants, Kyle H. Kelley and Kelley Goldberg Leach & Cohn, P.L.'s Motion to Dismiss Adversary Proceeding or in the Alternative for Abstention and Incorporated Memorandum of Law [DE 17] (the “Kelley Motion”) filed by Kyle H. Kelley, individually (“Mr. Kelley”) and Kelley, Goldberg, Leach & Cohn, P.L. (“KGLC,” and, together with Mr. Kelley, the “Kelley Defendants”). The Court refers to the Kelley Defendants and CCIP, collectively, as the “Moving Defendants.” In addition to the CCIP Motion and the Kelley Motion, the Court reviewed the response and reply briefs filed by the parties. For the reasons set forth below, the Court denies all relief requested in the CCIP Motion and the Kelley Motion. ¹

Procedural and Factual Background

For purposes of the CCIP Motion and the Kelley Motion, the Court accepts all allegations in the Complaint in the light most favorable to the plaintiff. Dunn v. Air Line Pilots Ass'n, 193 F.3d 1185, 1190 (11th Cir.1999). All factual allegations set forth below are as alleged in the Complaint.

Plaintiff Kenneth A. Welt (the “Trustee”) is the chapter 7 trustee of Phoenix Diversified Investment Corp. (the “Debtor” or “Phoenix”). The Debtor was a commodities and futures trading and investment entity. (Compl.¶ 10.) Michael Meisner (“Mr. Meisner”) was the primary controlling person of the Debtor. (Compl. ¶ 10.) Noam Bengal, Lorraine Hildebrand, Victoria Meisner, Michelle Sareen, and Eric Polirer were employees, officers, and/or directors of the Debtor with authority over certain financial and operational aspects of the Debtor's business, including authority over certain of the Debtor's bank accounts and trading accounts. (Compl. ¶¶ 90-91.) Mr. Meisner used the Debtor to operate a Ponzi scheme, violate the Commodity Exchange Act, and breach his duties to the Debtor. (Compl. ¶ 10.)

The Trustee brings this adversary proceeding against five defendants: (1) EfloorTrade, LLC (“EFT”), (2) John Moore (“Mr. Moore” and, with EFT, the “EFT Defendants”); (3) Mr. Kelley; (4) KGLC; and (5) CCIP.

EFT was the principal introducing broker for the Debtor. EFT facilitated communications between the Debtor and Man Financial, Inc. n/k/a MF Global, Inc. (“Man Financial”), the Debtor's main clearing firm and future commodities merchant. Mr. Moore is the majority owner and controlling person of EFT. (Compl. ¶¶ 11-12.)

The Kelley Defendants acted as business advisors and accountants for EFT. KGLC is an accounting firm. Mr. Kelley is a Certified Public Accountant and a partner in KGLC. Mr. Kelley was a minority owner of EFT, a lender to EFT, the Chief Financial Officer of EFT, and an EFT registered principal. (Compl. ¶¶ 15-16.) CCIP is the successor-in-interest to KGLC. (Compl. 19.)

The Complaint contains six counts: against the EFT Defendants for negligence (Count I); against the EFT Defendants for breach of fiduciary duty (Count II); against the EFT Defendants for aiding and abetting Mr. Meisner's breach of fiduciary duty (Count III); against the Kelley Defendants for professional negligence (Count IV); against the Kelley Defendants for aiding and abetting Mr. Meisner's breach of fiduciary duty (Count V); and against CCIP as to the claims in Count IV and Count V under a theory of successor liability (Count VI). The Moving Defendants challenge Counts IV, V, and VI of the Complaint.

The Debtor was incorporated in 2001. Mr. Meisner, its primary controlling officer, operated the Debtor as an investment company. From 2003 through May 2008, the Debtor solicited, accepted, and pooled tens of millions of dollars from over one hundred people and entities for the purpose of trading. (Compl. ¶¶ 21-22.)

Mr. Meisner purposefully failed to register the Debtor with the Commodity Futures Trading Commission and the National Futures Association. Such failure included not registering as a Commodity Pool Operator (“CPO”) with regard to his operation of the Debtor. This violated the Commodity Exchange Act. (Compl. ¶¶ 23 and 24.)

Mr. Meisner failed to register as a CPO because registration would have subjected the Debtor to certain requirements intended to safeguard the Debtor's customers against fraud and other abuses. These requirements include financial disclosures and reporting and the possible retention of an in-house compliance officer. The registration requirements would have made it impossible for Mr. Meisner to continue to act wrongfully through the Debtor. (Compl. ¶¶ 24-25.)

In 2004, the Debtor became a customer of EFT. The relationship between EFT and the Debtor grew closer, and EFT became a trusted advisor to the Debtor, a relationship that exceeded the typical relationship between an introducing broker and its customer. (Compl. ¶ 34.) The EFT Defendants provided the Debtor advice on the preparation of financial statements, the structure of the Debtor's trading operations, the Debtor's corporate governance, possible new business opportunities, the way in which the market was moving, and, through technology support and assistance, the Debtor's actual trading mechanisms. (Compl. ¶ 107.) Likewise, the Moore family and the Meisner family developed a personal relationship. (Compl. ¶ 32.) Mr. Moore hired Mr. Meisner to work for him as a branch manager of Diamond Head Capital, LLC, a licensed commodity trading advisor of which Mr. Moore was the majority owner and controlling person. (Compl. ¶¶ 13, 36.)

As a result of the relationship between the EFT Defendants and the Debtor, the EFT Defendants (a) owed the Debtor the duties of loyalty and care and the duty to act in a non-negligent manner, and (b) had a fiduciary duty to the Debtor. The EFT Defendants breached these duties and were negligent, causing the Debtor to suffer damage in an amount of tens of millions of dollars. The EFT Defendants breached their duties to the Debtor by failing to ensure compliance with the Debtor's corporate governance, enabling the Debtor to continue trading with the knowledge that Mr. Meisner presented financial information that was inaccurate and inconsistent with other information, and failing to inform the Debtor of the red flags of Mr. Meisner's wrongful acts and the harm he was causing to the Debtor. (Compl. ¶¶ 109, 112-119.)

Further, the EFT Defendants aided and abetted Mr. Meisner's breach of fiduciary duty. As the Debtor's primary controlling person, Mr. Meisner had a fiduciary duty to the Debtor. (Compl. ¶ 122.) Mr. Meisner breached his fiduciary duty to the Debtor by violating the Commodity Exchange Act, operating a Ponzi scheme through the Debtor, maintaining control over the Debtor notwithstanding changes in the Debtor's corporate governance apparently ceding control to others, and misrepresenting the Debtor's financial state. (Compl. ¶ 123.) The EFT Defendants knew that Mr. Meisner owed fiduciary duties to the Debtor and that Mr. Meisner breached those duties. (Compl. ¶¶ 124-25.) The EFT Defendants assisted Mr. Meisner in his wrongdoing and breach of duties by, for example, coordinating the sham dissociation of Mr. Meisner from management of the Debtor in 2005. (Compl. ¶¶ 42-43, 126.) The EFT Defendants also assisted Mr. Meisner when he caused the Debtor to act as a CPO in violation of the Commodity Exchange Act. The EFT Defendants failed to act to prevent Mr. Meisner's wrongful acts when applicable law and practice required the EFT Defendants to take action. (Compl. ¶¶ 127-28.)

In 2005, Man Financial required the Debtor to provide a financial statement in order to continue operations through Man Financial. (Compl. ¶ 66.) Following the EFT Defendants' recommendation, the Debtor hired the Kelley Defendants to provide this financial statement. (Compl. ¶ 66.) The financial statement is incomplete and unsatisfactory on its face and is inconsistent and contradicts other financial information known to the Kelley Defendants. (Compl. ¶ 70, 73.) Further, the Kelley Defendants had an undisclosed material conflict of interest and lacked independence from Mr. Meisner and the Debtor. (Compl. ¶ 75, 78.) The Kelley Defendants were aware that Mr. Meisner was pooling funds in the Debtor without proper registration and was therefore violating the Commodity Exchange Act. (Compl. ¶ 79.) The Kelley Defendants knew that Mr. Meisner kept control of the Debtor notwithstanding his disassociation from the Debtor. The Kelley Defendants nevertheless accepted the retention and financial representations necessary to prepare the financial statement for the Debtor. (Compl. ¶ 80.) The Kelley Defendants failed to review the financial statement in derogation of their own internal policy and procedure. (Compl. ¶ 85.) The Kelley Defendants did not perform their professional services in good faith. (Compl. ¶ 87.) The Kelley Defendants' actions and inactions resulted in damage to the Debtor in the tens of millions of dollars.

Subject Matter Jurisdiction

The Kelley Defendants...