Molner v. Reed Smith, LLP (In re Aramid Entm't Fund, LLC)

• Decision Date: 30 April 2021
• Docket Number: Adv. Proc. No. 20-1313 (DSJ),Case No. 14-11802 (SHL)
• Parties: IN RE: ARAMID ENTERTAINMENT FUND, LLC, et al., Recognized Debtors. David Molner, Plaintiff, v. Reed Smith, LLP, James C. McCarroll, Geoffrey Varga, James L. Sanders, Francesca Mok, Kurt Gwynne, Jordan W. Siev, David Bree, Roger Hanson, Donald W. Seymour, Jess Shakespeare, Kinetic Partners, Duff & Phelps, LLC & DMS Governance, Ltd., Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

628 B.R. 584

IN RE: ARAMID ENTERTAINMENT FUND, LLC, et al., Recognized Debtors.¹

David Molner, Plaintiff,

v.Reed Smith, LLP, James C. McCarroll, Geoffrey Varga, James L. Sanders, Francesca Mok, Kurt Gwynne, Jordan W. Siev, David Bree, Roger Hanson, Donald W. Seymour, Jess Shakespeare, Kinetic Partners, Duff & Phelps, LLC & DMS Governance, Ltd., Defendants.

Case No. 14-11802 (SHL)

Adv. Proc. No. 20-1313 (DSJ)

United States Bankruptcy Court, S.D. New York.

Signed April 30, 2021

BOSKO PC, Counsel for David Molner, 10880 Wilshire Boulevard, Suite 1101, Los Angeles, CA 90024, By: David I. Bosko, Esq.

GIBSON, DUNN & CRUTCHER, LLP, Counsel for Reed Smith LLP, James C. McCarroll, James L. Sanders, Francisca Mok, and Jordan W. Siev, 200 Park Avenue, 50th Floor, New York, NY 10166, By: David Michael Feldman, Esq. Nancy Elizabeth Hart, Esq. William John Moccia, Esq. Kevin S. Rosen, Esq.

STEPTOE & JOHNSON, LLP, Counsel for Geoffrey Varga, Jess Shakespeare, Kinetic Partners, and Duff & Pheps, LLC, 1114 Avenue of the Americas, New York, NY 10036, By: Julie Christine Amadeo, Esq. Christopher M. Paparella, Esq. Jeffery Mark Reisner, Esq.

SADIS & GOLDBERG, Counsel for David Bree, 551 Fifth Avenue, New York, NY 10176, By: Douglas Hirsch, Esq. Jennifer A. Rossan, Esq.

FOLEY & LARDNER LLP, Counsel for David M. Seymour, Roger Hanson, and DMS Governance, Ltd., 90 Park Ave 29th, Floor New York, NY 10016, By: Katherine R. Catanese, Esq.

OPINION AND ORDER DENYING MOTION FOR REMAND BASED ON MANDATORY OR PERMISSIVE ABSTENTION

DAVID S. JONES UNITED STATES BANKRUPTCY JUDGE

Before the Court is the motion [ECF No. 6] of plaintiff David Molner ("Molner ") for an order of abstention and remand of this adversary proceeding to state court, where Molner originally filed the case. Molner worked for Aramid Entertainment Fund, Limited (the "Fund "), one of the debtors in the underlying Chapter 11 proceedings (the "Aramid Bankruptcy "). Molner contends that a series of actors (the "Defendants "), among them Reed Smith, LLP ("Reed Smith "), the Fund's counsel, conspired to oust him from the Fund, just as he was preparing to liquidate the Fund in the Cayman Islands. Molner sued the Defendants in New York State Supreme Court (the "State Court Action "), and Reed Smith removed the action. Molner's motion seeks a remand of the action to state court, arguing that the requirements for mandatory abstention under 28 U.S.C. § 1334(c)(2) are met, or, in the alternative, that the Court should permissively abstain as authorized by 28 U.S.C. § 1334(c)(1) and order an equitable remand under 28 U.S.C. § 1452(b). For the reasons discussed below, the Court denies Molner's motion.

I. BACKGROUND

A. Pre-Petition Events

Molner managed the Fund pursuant to service provision agreements between the Fund and two entities: Aramid Capital Partners, LLP ("ACP " and the "ACP Services Agreement "), and Asset Resolution Partners, Ltd. ("ARP " and the "ARP Services Agreement ").² See Notice of Removal [AP ECF No. 1]. ACP served as the Fund's only voting shareholder. See Memorandum in Support of Motion to Abstain and/or Remand [AP ECF No. 6-1] at 9.

Reed Smith represented the Fund, and, although it never represented Molner personally, Molner alleged that the firm interacted with him "directly" on "more than a hundred occasions in [Molner's] capacity as the Fund's manager." [Id. ] Through this ongoing relationship, Molner gained familiarity with a number of Reed Smith's attorneys, including defendants James C. McCarroll ("McCarroll "), James L. Sanders ("Sanders "), Kurt Gwynne ("Gwynne "), Francisca Mok ("Mok "), and Jordan W. Siev ("Siev " and, collectively, the "Individual Lawyer Defendants "). [Id. ] For example, when Reed Smith investigated a lawsuit filed against ACP, Molner shared confidential ACP information with the firm, and Molner and Reed Smith signed a Joint Privilege and Common Interest Defense Agreement. [Id. ].

In January 2014, Molner approached a subcommittee of the Fund's Board of Directors, comprised of defendants David Bree ("Bree ") and Roger Hanson ("Hanson "), with a plan to voluntarily liquidate the Fund in the Cayman Islands (the "Voluntary Liquidation Plan "). [Id. ] Molner contends that: (1) Reed Smith and the Individual Lawyer Defendants feigned support for the Voluntary Liquidation Plan, making misrepresentations to Molner, the Fund's Board, and the Fund's shareholders; (2) he relied on Reed Smith's recommendation when he hired defendants Geoffrey Varga ("Varga ") and Jess Shakespeare ("Shakespeare ") to be the plan's joint voluntary liquidators ("JVLs "), along with Varga and Shakespeare's firm, defendant Kinetic Partners (now Duff & Phelps, LLC); (3) he hired DMS Services ("DMS ") and its founder Donald Seymour ("Seymour ") to help him prepare the Voluntary Liquidation Plan; and (4) Reed Smith, the Individual Lawyer Defendants, Varga, and Shakespeare all assured Molner that they were working towards liquidating the Fund in the Cayman Islands, and that they would not proceed with a bankruptcy in the United States absent Molner's consent. [Id. at 6 n. 1, 9–11].

Approximately one month before the Aramid Bankruptcy petition date, the parties agreed to terminate the ACP Services Agreement. [ECF No. 1 at 4]. Thereafter, Molner continued to manage the Fund via the ARP Services Agreement. [Id. ]

B. The Filing of the Chapter 11 Petition and Molner's Termination

In June 2014, Varga and McCarroll commenced the Aramid Bankruptcy by filing or causing to be filed a Chapter 11 petition in this Court. [Bankr. ECF No. 1]. The Hon. Sean H. Lane was assigned.

Varga filed a declaration, pursuant to Local Rule 1007-2, that described the Voluntary Liquidation Plan and Molner's role with the Fund as follows. [Bankr. ECF No. 2]. The Fund was an investment fund organized under the laws of the Cayman Islands that provided short and medium-term liquidity to producers and distributors of entertainment assets. Id. at 5–6. The Fund owned debtor Aramid Entertainment, Inc., which worked on the Fund's activities in the United States. [Id. at 6–7]. Debtor Aramid Liquidating Trust, Limited had no business operations, but it had the right to all equity distributions from the Fund. [Id. at 4 n.2]. The Fund's board retained non-debtor ACP—the entity Molner managed—to, inter alia , refer investment opportunities and prepare due diligence reports on certain investments. [Id. at 7–8]. The parties terminated ACP prior to the petition date. [Id. at 8]. Also prior to the petition date, the Fund retained ARP to help monetize assets and pursue or defend certain legal proceedings. [Id. ]

Varga further declared that the Debtors faced liquidity concerns based on the inability to collect on certain loans and litigation stemming from those loans. [Id. at 9].

Another factor was that ACP, through Molner, had brought a "multitude of litigation" on behalf of the Debtors or caused the Debtors to appear as defendants, which resulted in substantial litigation expenses. [Id. at 10–18].

From Molner's perspective, the filing of the Chapter 11 petition came as an unwelcome surprise. [See AP ECF No. 6-1 at 11]. He also alleged that it precipitated his termination from the Fund:

At the moment the filing was submitted, Molner went from being the leader of a carefully thought through Voluntary Liquidation Plan strategically limited to the Cayman Islands (as well as a plan that investors were supportive of and which Molner believed would maximize the return to creditors), to being the obsolete and vulnerable manager of a bankrupt entity. After the bankruptcy filing, Plaintiff was thrown to the dogs. He was fired, ousted, sued, and deprived of all the financial and reputational benefits the Defendants promised him.

[Id. ] Specifically, in October 2014, the Debtors moved under 11 U.S.C. § 365(a) to reject an executory contract between the Debtors and ARP, which they argued the business no longer needed. [Bankr. ECF No. 127 at 1–3]. The Court authorized the agreement's rejection. [Bankr. ECF No. 217].

Molner, ACP, and ARP—with Molner acting on ACP and ARP's behalf— separately filed proofs of claim during the Aramid Bankruptcy. [See Claims Register Nos. 41, 42, 44]; [Bankr. ECF No. 521]. The Debtors objected to all three claims. [Bankr. ECF Nos. 521 (Molner), 522 (ACP), 523 (ARP)]. As to Molner's claim, the Debtors argued, inter alia , that Molner engaged in misconduct that was not indemnifiable:

Indeed, the numerous Molner Litigations referred to in the Molner Claims are directly related to, if not the product of, Molner's misconduct, including, but not limited to breaching his obligations owed to the Debtors under the ACP Services Agreement and the ARP Services Agreement, managing the Debtors in a manner inconsistent with their investment guidelines and objectives, aiding and abetting breaches of fiduciary duties by the Debtors' former services providers, taking improper and exorbitant fees from the Debtors without conferring corresponding value to the Debtors, and setting the Debtors upon a course of hopeless and, ultimately, liability-generating litigations. Indeed, Molner's misconduct and stewardship was a substantial contributing factor in the Debtors' Chapter 11 cases.

[Bankr. ECF No. 521. at 9–10].

In February 2016, while these three Molner-related claims remained pending, the Court confirmed the Debtors' Modified First Amended Joint Liquidating Plan of Reorganization (the "Plan "). [Bankr. ECF No. 710 (the "Confirmation Order "); see Bankr. ECF No. 667 (the Plan)]. The Plan provided for the establishment of a Distribution Trust to resolve all disputed claims and interests of the estate. [Bankr. ECF No. 667 at 23–26]. The Plan also contained exculpation provisions for "released parties" that protected them from liability for any act taken or omitted in connection with the Debtors' post-petition activity. [Id. at 32]. The Confirmation Order determined, inter alia , that the Debtors proposed the Plan in good faith. [Bankr. ECF No. 710 ...