In re Trico Marine Services, Inc.

Decision Date22 November 2006
Docket NumberAdversary No. 05-2313.,Bankruptcy No. 04-17985(SMB).
PartiesIn re: TRICO MARINE SERVICES, INC., et al., Debtors. Steven Salsberg and Gloria Salsberg, Plaintiffs, v. Trico Marine Services, Inc., Trico Marine Assets, Inc., Trico Marine Operators, Inc. and Trico Marine International, Inc. Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

Kirkland & Ellis LLP, New York City (Matthew Solum, Peter Asplund, Lisa Laukitis, Of Counsel), for Defendant.

Steven C. Salsberg, New York City, pro se.

Law Office of Joseph P. Garland, New York City (Joseph P. Garland, Of Counsel), for plaintiff Gloris Salsberg.

OPINION AND ORDER DENYING PLAINTIFFS' MOTION FOR LEAVE TO AMEND THE COMPLAINT

STUART M. BERNSTEIN, Chief Bankruptcy Judge.

The plaintiffs, Steven Salsberg ("Steven") and Gloria Salsberg ("Gloria"), are former shareholders of the debtor Trico Marine Services, Inc. Their shares were cancelled under the confirmed plan (the "Plan"). Contending that the confirmation was procured through the perjurious testimony of Trevor Turbidy, the debtors' former chief financial officer and present chief executive officer, the Salsbergs sought unsuccessfully to vacate the confirmation order. They then filed a claim for damages against the debtors. They now seek leave to amend their complaint to assert a damage claim against Turbidy, arguing that his perjury was a fraud on the Court.

Their proposed pleading is legally insufficient, and would not survive a motion to dismiss. Since the proposed amendment is futile, leave to amend is denied.

BACKGROUND

The background to this dispute is set forth in the Court's prior opinions reported at Salsberg v. Trico Marine Servs., Inc. (In re Trico Marine Servs., Inc.), 337 B.R. 811 (Bankr.S.D.N.Y.2006)("Trico I") and Salsberg v. Trico Marine Servs., Inc. (In re Trico Marine Servs., Inc.), 343 B.R. 68 (Bankr.S.D.N.Y.2006)("Trico II"). As this opinion focuses on the legal sufficiency of the proposed Second Amended Complaint ("SAC"), I recount the material facts alleged in that pleading, and assume that they are true.1

A. The Fraud

The debtors filed their chapter 11 petitions on December 21, 2004. (SAC, ¶ 18.) They confirmed their pre-packaged Plan on or about January 19, 2005, and the Plan became effective on March 15, 2005. (Id., ¶ 16.) At the time of the confirmation hearing and the effective date, Steven owned 44,000 shares of common stock in Trico Marine Services, Inc. (Id.) Pursuant to the Plan, Steven's common shares were cancelled, and he received the aggregate of 1188 warrants. (See id.) After the confirmation hearing, he transferred the aggregate of 87 warrants to his mother, Gloria, together with the fraud claims asserted in this litigation. (See id. ¶¶ 17, 59, 64.)

The gravamen of the Salsbergs' claims appear to center on two, related frauds pertaining to the disclosure of the debtors' 2004 fourth quarter operating results. The debtors' Disclosure Statement, which was signed by the debtors' then-chief executive officer, Thomas Fairly, on November 12, 2004, included certain financial information and projections. (Id. ¶¶ 23-24.) The fourth quarter projections were based on the information available as of September 30, 2004. (Id. ¶ 25.) The Disclosure Statement projected fourth quarter revenues of $24.9 million. (Id. ¶ 28.)

By the time of the January 19, 2005 confirmation hearing, the fourth quarter had closed. The debtors' actual revenue for the fourth quarter was $33.7 million, (id., ¶ 29), or 35% higher than the projection in the Disclosure Statement. (Id. ¶ 30.) Turbidy nevertheless testified at the confirmation hearing "without qualification albeit preliminarily" that the fourth quarter revenue was fairly consistent with and not materially higher than the projected revenue: (Id. ¶ 32.)2 Turbidy's testimony was false, and was made with knowledge of the falsity, or with reckless disregard of the truth. (SAC, ¶¶ 32, 38.) Turbidy also personally benefited, because the value of the stock options that he received increased, and his prominence and personal stature were enhanced. (Id. ¶ 39.)

Furthermore, the financial projections in the Disclosure Statement were misleading, even if they were correct when they were made. The financial projections were unrealistic, contained false information and used unreasonably false assumptions, all apparently connected to the incorrect misstated fourth quarter operating results. (Id. ¶ 42.) Had the Court known that the actual fourth quarter revenue was $33.7 million, it would not have relied on the financial projections or any valuation based on those projections. (Id.)

For the same reason, the valuation evidence presented at the confirmation hearing was also flawed. Richard Nejame, the debtors' valuation expert, did not use correct information, because he relied on the erroneous projections. (See id. ¶ 43.) Had Turbidy testified truthfully, his testimony would have impeached NeJame's testimony, and buttressed Steven's higher valuation. (Id. ¶ 45.) Most importantly, the truthful testimony would have supported a finding that the debtors were solvent. (Id. ¶ 46.)

B. This Litigation

The debtors commenced this lawsuit against the Trico debtors under 11 U.S.C. § 1144 to revoke the January 21, 2005 confirmation order. Treating the defendants' motion for judgment on the pleadings as a motion for summary judgment, the Court dismissed the complaint in Trico I. In substance, the Court concluded that even if the plaintiffs could prove fraud, the Court, could not restore the pre-confirmation status quo or protect innocent parties, and accordingly, could not vacate the confirmation order. The Court nevertheless granted the plaintiffs leave to replead in order to assert a damage claim. In Trico II, the Court granted the plaintiffs' motion for reargument, adhered to its original decision, and again granted leave to replead.

The plaintiffs then filed an Amended Complaint, (ECF Doc. # 33), demanding damages from the debtor-defendants under 11 U.S.C. § 1144 and under the separate theory that they had committed a "fraud on the court." The plaintiffs now seek leave to file the SAC for the purpose of joining Turbidy as a defendant on the latter claim.3 The SAC also drops Trico Marine International, Inc. as a defendant. The defendants oppose the motion, contending that the amendment is futile. In particular, they argue that the "fraud on the court" claim is legally insufficient, and the claims against Turbidy were time-barred.4

The defendants and/or the Court also questioned each plaintiff's standing. The defendants initially inquired whether Steven owned Trico common stock at the time of the confirmation hearing. He has since provided evidence that he acquired 44,000 shares of Trico common stock on January 14, 2005, prior to the confirmation hearing. Gloria, on the other hand, may never have owned any Trico common stock. The SAC alleges that Steven transferred warrants to Gloria, which were issued at the time that the shares were cancelled. In addition, the assignment does not answer whether Gloria acquired Steven's in personam fraud claim. Cf. Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 151 (2d Cir.1995)(in absence of explicit assignment of fraud claim, assignor of contract claim may rescind or sue for damages for fraud and deceit)(quoting Nearpark Realty Corp. v. City Investing Co., 112 N.Y.S.2d 816, 817 (N.Y.Sup.Ct.1952)); Fox v. Hirschfeld, 157 A.D. 364, 142 N.Y.S. 261, 263-64 (N.Y.App.Div.1913)(assignor of real estate contract retained claims for rescission and fraud).

DISCUSSION

Rule 60(b) of the Federal Rules of Civil Procedure authorizes relief from a final order based, among other grounds, on "fraud on the court." It states, in pertinent part:

"On motion and upon such terms as are just, the court may relieve a party or a party's legal representative from a final judgment, order, or proceeding for the following reasons: ... (3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party . . .. This rule does not limit the power of a court to entertain an independent action to relieve a party from a judgment, order, or proceeding, ... or to set aside a judgment for fraud upon the court."

"[F]raud upon the court is limited to that species of fraud which does or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery can not perform in the usual manner its impartial task of adjudging cases that are presented for adjudication." Serzysko v. Chase Manhattan Bank, 461 F.2d 699, 702 (2d Cir.), cert. denied, 409 U.S. 883, 93 S.Ct. 173, 34 L.Ed.2d 139 (1972); accord Kupferman v. Consolidated Research & Mfg. Corp., 459 F.2d 1072, 1078 (2d Cir.1972); Martina Theatre Corp. v. Schine Chain Theatres, Inc., 278 F.2d 798, 801 (2d Cir.1960). The main question raised by the defendants' opposition is whether Turbidy's perjury, without more, is sufficient to support a claim against him for "fraud on the court." The answer must begin with a consideration of the Supreme Court's decision in Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 64 S.Ct. 997, 88 L.Ed. 1250 (1944).

There, the lawyers for Hartford-Empire ("Hartford") wrote an article, which was signed by a supposed expert (Clarke), touting the revolutionary qualities of Hartford's product in order to support its patent application. Id. at 240. After the patent was granted, Hartford brought a patent infringement action against Hazel-Atlas, which the district court dismissed. Id. On appeal, Hartford's lawyers directed the Third Circuit to the false article, and the appellate court relied extensively on it in reversing the district court and remanding the case for trial. Id. Following remand, Hazel's investigators became suspicious and spoke to Clarke, who insisted...

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