Krys v. Aaron

• Decision Date: 22 May 2015
• Docket Number: Civil Action No. 14–2098 (JBS/AMD).
• Parties: Kenneth M. KRYS, Margot Macinnis, and the Harbour Trust Co. Ltd., Plaintiffs, v. Robert AARON, Derivative Portfolio Management LLC, DPM–Mellon, LLC, Derivative Portfolio Management, Ltd., DPM–Mellon, Ltd., and Bank of New York Mellon Corporation, Defendants.
• Court: U.S. District Court — District of New Jersey

106 F.Supp.3d 492

Kenneth M. KRYS, Margot Macinnis, and the Harbour Trust Co. Ltd., Plaintiffs,

v.Robert AARON, Derivative Portfolio Management LLC, DPM–Mellon, LLC, Derivative Portfolio Management, Ltd., DPM–Mellon, Ltd., and Bank of New York Mellon Corporation, Defendants.

Civil Action No. 14–2098 (JBS/AMD).

United States District Court, D. New Jersey.

Signed May 22, 2015.

David J. Molton, Esq., Andrew S. Dash, Esq., Mason C. Simpson, Esq., Brown Rudnick LLP, Seven Times Square, New York, N.Y., and, Leo R. Beus, Esq., L. Richard Williams, Esq., Malcolm Loeb, Esq., Thomas A. Gilson, Esq., Lee M. Andelin, Esq., Beus Gilbert PLLC, Phoenix, A.Z., for Plaintiffs.

B. John Pendleton, Jr., Esq., Andrew O. Bunn, Esq., Kristin A. Pacio, Esq., Gina Trimarco, Esq., DLA Piper LLP (US), Short Hills, N.J., for Defendants.

OPINION

SIMANDLE, Chief Judge:

I. INTRODUCTION

This lengthy multi-district securities litigation generally arises from the complex financial and brokerage relationships between, and ultimate bankruptcy proceedings of, three entities (and the multitude of affiliates associated with each): PlusFunds Group, Inc. (hereinafter, "PlusFunds"), SPhinX Funds (hereinafter, "SPhinX"), and Refco, Inc. (hereinafter, "Refco").

As relevant here, following the revelation that several of Refco's officers and directors participated in a wide-scale, fraudulent underreporting of corporate liabilities, Refco filed for bankruptcy on October 17, 2005, followed shortly thereafter by PlusFunds' bankruptcy filing on March 6, 2006, and SPhinX's initiation of voluntary liquidation proceedings under the insolvency laws of the Cayman Islands on June 30, 2006.

In connection with the administration of these insolvent estates, the restructuring officer of PlusFunds entered into an asset sale agreement with the Joint Official Liquidators (hereinafter, the "JOLs") of SPhinX, in which PlusFunds assigned its rights in the PlusFunds' Causes of Actions (hereinafter, the "Causes of Action" or "Claims") to a SPhinX liquidating trust created for the sole and exclusive benefit of the JOLs. The SPhinX Trust Agreement (hereinafter, the "Agreement"), which effectuated the Trust's existence and the transfer of the Causes of Action, formalized the SPhinX Trustee's authority, and the manner in which to administer the Causes of Action, the Trust's only asset. The SPhinX Trustee thereafter commenced its efforts to pursue the acquired Causes of Action in multiple state and federal forums.

Indeed, in the pending litigation, Plaintiffs Kenneth M. Krys and Margot Macinnis, the JOLS, and The Harbour Trust Co. Ltd., the Trustee of the SPhinX Trust (collectively, "Plaintiffs"), purport to assert such Causes of Action for the benefit of PlusFunds' principal creditors, SPhinX. Plaintiffs, for example, allege in this action that the former directors of SPhinX, Defendants Derivatives Portfolio Management, LLC, Derivatives Portfolio Management, Ltd., DPM–Mellon, LLC, DPM–Mellon, LTD, and Robert Aaron (hereinafter, "Defendants"), failed to take certain corrective steps in the face of Refco's potential insolvency—"garden variety common law claims" of the type included within the acquired Claims. See Krys v. Sugrue, Nos. 08–3065, 08–3086, 08–7416, 2008 WL 4700920, at *11 (S.D.N.Y. Oct. 23, 2008) (describing the PlusFunds' Causes of Action).

Defendants, however, now move to dismiss the PlusFunds' Causes of Action, on the ground that the undisputed expiration of the Trust on September 20, 2012 automatically divested the Trustee and the Trust itself of any cognizable interest in, and standing to prosecute, the Causes of Action. (See generally Defs.' Br. at 18–21; Defs.' Reply at 2–6, 9–11.) In addition, Defendants submit that any distribution of the Causes of Action to the Trust's sole beneficiaries, the JOLs, whether by operation of law under the Trust Agreement or otherwise, would contravene New Jersey's prohibition against pre-judgment assignment of tort claims under New Jersey law, thereby also depriving the JOLs of standing to prosecute the claims on their own behalf. (See generally Defs.' Br. at 18–19.) Defendants therefore argue that no party to this litigation possesses standing to pursue the Claims, requiring that they be eliminated and dismissed from this action as moot.¹

Plaintiffs, however, argue that the Trust remains in existence, because the prerequisite for its expiration, namely, distribution, has not yet occurred. (See generally Pls.' Opp'n at 19–20.) Moreover, even if the Trust terminated, Plaintiffs argue that the Trustee nevertheless retained the continuing authority to litigate the Causes of Action and to distribute the subsequent proceeds of the Claims to the JOLs. (See generally Pl.'s Opp'n at 19–22.) In the alternative, Plaintiffs argue that the JOLs possess the inherent authority in their own right to step "into the shoes of the SPhinX Trustee" and to litigate the PlusFunds Causes of Action. (Id. at 8–18.) Plaintiffs therefore insist that the PlusFunds' Claims remain ripe for adjudication, because Defendants "cannot show that both the Trustee and the JOLs lack standing to bring the PlusFunds claims." (Id. at 4 (emphasis in original).)

The principal issues before the Court therefore concern the status of the SPhinX Trust and the Trustee's authority over the PlusFunds' Claims. The Court must, in particular, consider whether the Trust reached its natural expiration resulting in the automatic divestiture of its assets and the Trustee's authority, or whether the Trustee retained certain powers despite the potential termination. In the event the Trust and the Trustee's authority have terminated, the Court must then consider whether the Claims have, by operation of law, been devised to the Trust's beneficiaries, the JOLs.²

For the reasons that follow, Defendants' motion to eliminate the PlusFunds' causes of action will be denied.

II. BACKGROUND

A. Factual and Procedural Background

Because resolution of the pending motion relates inextricably to the procedural posture of this lengthy litigation in multiple courts, the Court will discuss the factual predicate and procedural circumstances of this litigation in unison. For the purposes of the pending motion, however, the Court need not retrace every facet of the parties' convoluted history. Rather, the Court must only introduce the relevant background of the PlusFunds' Causes of Action, in addition to the relevant procedural circumstances giving rise to the pending motion and the arguments advanced by the parties.

1. Creation of the SPhinX Trust and Assignment of the PlusFunds' Causes of Action

On April 26, 2007, PlusFunds and the JOLs entered into an agreement whereby SPhinX paid PlusFunds $4 million in cash in exchange for all of PlusFunds' rights, title, and interest in the PlusFunds' Causes of Action, including, "the right to recover anything of value" with regard to any potential claim that PlusFunds may have pursued on its own against Defendants. (Pendleton Dec., Ex. B.) The Agreement, accordingly, directed that the Causes of Action be assigned to and vest in the SPhinX Trust, and designated the JOLs as "the sole and exclusive beneficiaries" of "all recoveries and proceeds of the Causes of Action." (Id. )

The PlusFunds' Fifth Amended Plan of Liquidation, which the Bankruptcy Court approved on August 7, 2007, in turn, incorporated the terms of the asset sale agreement, called for the establishment of the SPhinX Trust, and provided that the transfer of the Causes of Action would deprive the PlusFunds' estate of any continuing interest in the Claims (other than as a limited set off). (Pendleton Dec., Exs. C & D.)

On September 20, 2007, PlusFunds and SPhinX then executed the Trust Agreement itself. (See Pendleton Dec., Ex. E.) The Agreement expresses the Trust's limited purpose, namely, to collect, distribute, and liquidate the Causes of Action, and specifies various provisions for the Trust's administration, including an identification of the Trustee's rights, privileges, and powers.³ (Id. )

As relevant here, the Agreement further specifies two circumstances upon which the Trust would terminate. First, the Trust provides for termination upon distribution of all Trust Assets, and specifically states that:

[u]pon payment of all costs, expenses, and obligations (including the final distribution to Beneficiaries) incurred in connection with administering the SPhinX Trust, and distribution of Assets in accordance with the Plan, the Confirmation Order and this Agreement, the Trust shall terminate the SPhinX Trust by filing (a) with the Bankruptcy Court a "Notice of Termination of the SPhinX Trust," which references the Plan and Confirmation Order, and (b) a certified copy of such notice with the New York Secretary, upon which the Trustee shall have no further responsibility in connection with the SPhinX Trust.

(Id. at § 10.2 (hereinafter, "Section 10.2").) In the alternative, and as relevant here, the Trust provides that,

on the fifth anniversary of the Effective Date [that is, on September 20, 2012], unless otherwise extended for cause by the Bankruptcy Court, the Trustee shall distribute all of the Assets in accordance with the Plan and immediately thereafter, the SPhinX Trust shall terminate and the Trustee shall have no further responsibility in connection therewith[.]

(Id. at § 10.3 (hereinafter, "Section 10.3").) Despite this limited existence, however, section 10.3 also provides the Trustee with the right, upon motion and approval of the Bankruptcy Court, to successive one year extensions provided that the Trustee sought and obtained approval for such extension "not earlier than six months prior" to the Trust's termination. (Id. )

Under either circumstance, the Agreement nevertheless contemplates the post-termination continuation of the SPhinX Trust, and specifically states that, upon

the termination of the SPhinX Trust, the Trustee shall retain for a period of two (2) years the books, records, Beneficiary lists, and

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