Penson Techs. LLC v. Schonfeld Grp. Holdings LLC (In re Penson Worldwide)

• Decision Date: 19 October 2020
• Docket Number: Docket Ref. Nos. 49,55,51,58,Adversary No. 16-51522 (LSS),Case No. 13-10061 (LSS) (Jointly Administered),50
• Citation: Penson Techs. LLC v. Schonfeld Grp. Holdings LLC (In re Penson Worldwide), 624 B.R. 66 (Bankr. Del. 2020)
• Parties: IN RE: PENSON WORLDWIDE, et al., Debtors. Penson Technologies LLC, (successor in interest to SAI Holdings, Inc. and Penson Financial Services, Inc.), Plaintiff, v. Schonfeld Group Holdings LLC, Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

624 B.R. 66

IN RE: PENSON WORLDWIDE, et al., Debtors.

Penson Technologies LLC, (successor in interest to SAI Holdings, Inc. and Penson Financial Services, Inc.), Plaintiff,

v.Schonfeld Group Holdings LLC, Defendant.

Case No. 13-10061 (LSS) (Jointly Administered)

Adversary No. 16-51522 (LSS)

Docket Ref. Nos. 49

50

51

55

58

United States Bankruptcy Court, D. Delaware.

Signed October 19, 2020

Michael S. Neiburg, Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, Victoria D. Whitney, Mayer Brown LLP, Virginia J. Palitz, New York, NY, for Plaintiff.

Andrew L. Cole, Cole Schotz, P.C., Wilmington, DE, Mark G. Hanchet, Mayer Brown LLP, Christopher J. Houpt, New York, NY, Wendy F. Klein, Warren A. Usatine, Michael R. Yellin, Esq., Cole Schotz P.C., Hackensack, NJ, Sean T. Scott, Mayer Brown LLP, Chicago, IL, for Defendant.

OPINION

LAURIE SELBER SILVERSTEIN, UNITED STATES BANKRUPTCY JUDGE

Plaintiff Penson Technologies LLC, as "successor in interest" to SAI Holdings, Inc. ("SAI") and Penson Financial Services, Inc. ("PFSI"), initiated this post-confirmation adversary proceeding seeking to recover damages for alleged breaches of contract against Defendant Schonfeld Group Holdings LLC. Plaintiff also objected to Defendant's proof of claim. Before the Court is Defendant's motion for summary judgment (the "Motion"¹ ) on each count set forth in the Complaint. For the reasons set forth below, the Motion is granted.

Background

A. The Acquisition

In November 2006, Defendant's wholly-owned subsidiary Schonfeld Securities, LLC ("SSLLC" or "Seller"), sold its clearing and joint back office operations (defined as the "Business") to SAI Holdings, Inc. as memorialized in that certain Asset Purchase Agreement ("APA") dated as of November 20, 2006.² Defendant signed the APA both as Manager of SSLLC and in its own capacity for purposes of certain sections of the APA (including section 6.02, below). The parties agree that SSLLC later assigned its rights and obligations under the APA to Defendant.³

The assets sold included all of Seller's assets, powers and rights of any type used in the Business. Those assets included certain clearing agreements with Seller's affiliated proprietary trading firms, known as introducing brokers or correspondents. More specifically, and as explained in the APA, the sale of that asset really meant that Seller permitted its affiliates who were introducing brokers to enter into newly signed clearing arrangements with Buyer's wholly owned subsidiary, PFSI.

Pursuant to the APA, PFSI and Opus Trading Fund, LLC ("Opus"), an introducing broker, executed a clearing agreement by which PFSI would provide clearing and financing services to Opus for a period of ten years ("Clearing Agreement").⁴ This agreement was subsequently replaced by another clearing agreement between the parties, namely that certain Portfolio Margining Account Side Agreement ("PMA Side Agreement"), which was also effective for approximately ten years.⁵ Both clearing agreements provide that PFSI would be Opus' exclusive clearing broker during the ten-year term of the contract.⁶

The APA further contemplates that Defendant would provide certain guarantees. Specifically, section 6.02 of the APA provides in relevant part:

Covenants and Guaranties of the Manager. Schonfeld Group Holdings LLC [Defendant], the manager of the Company [Seller] and a Company Member (the "Manager"), hereby agrees to absolutely, unconditionally and irrevocably guarantee the immediate payment of, and the full, complete and timely performance of, each of the Company's obligations contemplated by this Agreement and the Ancillary Agreements pursuant to the terms of a Guaranty Agreement ("Guaranty Agreement") to be executed and delivered to Buyer simultaneously herewith.⁷

Consistent with section 6.02, contemporaneously with execution of the APA, Defendant executed that certain Unconditional Guaranty Agreement (the "Guaranty Agreement").⁸ Under the Guaranty Agreement, Defendant "absolutely, unconditionally and irrevocably guarantees to the Companies [PFSI and SAI] the full and timely payment and/or performance, as the case may be, of all of the Guaranteed Obligations."⁹ "Guaranteed Obligations" is defined as:

(i) to PFSI the full and complete performance by the Introducing Brokers (as set forth in sections 1(e), 11(b), 17 and 20(d) of the Clearing Agreements), and

(ii) to SAI, the full and complete payment and performance of the obligations of Seller under the APA.¹⁰

As relevant here, section 11(b) of the Clearing Agreement—now section 5 of the PMA Side Agreement—contains Opus' contract exclusivity obligation ("Contract Exclusivity Provision").¹¹

SAI paid the purchase price in Penson Worldwide Inc. ("PWI") common stock with initial consideration of 1,085,294 shares of PWI stock and four subsequent "earnout" payments to be made based on performance of the introducing brokers over the next four years.¹²

B. Termination of the Opus/PFSI Relationship

On January 26, 2012, Opus sent PFSI a letter notifying PFSI that it would be terminating the PMA Side Agreement, effective January 31, 2012. In the letter, Opus asserts that certain restrictions placed upon PFSI by the Financial Industry Regulatory Authority made it impossible or impracticable for PFSI to continue to provide services.¹³ On January 30, 2012, PFSI responded, rejecting Opus' unilateral termination of the PMA Side Agreement and asserting that Opus' termination was a breach of the agreement.¹⁴

C. Penson's Bankruptcy

On January 11, 2013, SAI, PFSI and three affiliated entities ("Debtors") filed voluntary bankruptcy petitions in this court. Debtors' cases were jointly administered. On July 31, 2013, the Court entered an order confirming the Fifth Amended Joint Liquidation Plan of Penson Worldwide, Inc. and its Affiliated Debtors (the "Plan").¹⁵ The Plan became effective on August 15, 2013 (the "Effective Date").¹⁶ Pursuant to the Plan, on or before the Effective Date, Plaintiff was formed as a Delaware limited liability company and all of Debtors' assets were conveyed or transferred to Plaintiff, including claims and causes of action.¹⁷ Plaintiff was authorized to prosecute all causes of action for the benefit of four classes of membership interests. The bankruptcy estates were not substantively consolidated.

Defendant timely filed a proof of claim in the SAI bankruptcy case asserting a general unsecured claim in the amount of $3,783,932 asserting an unpaid earnout payment owed under the APA in connection with the sale of the Business.¹⁸

D. The FINRA Arbitration

On January 27, 2014, Plaintiff, on behalf of PFSI, filed a Statement of Claim with the Financial Industry Regulatory Authority against Opus, commencing a binding arbitration proceeding (the "FINRA Arbitration").¹⁹ Plaintiff asserted two separate claims for two separate harms. The First Cause of Action sought approximately $1.8 million in compensatory damages for nonpayment of trades PFSI executed on behalf of Opus under the PMA Side Agreement prior to its termination (the "Failure to Pay Claim"). The Second Cause of Action sought damages in excess of $20 million for lost revenue for the remaining term of the PMA Side Agreement (the "Early Termination Claim"). The basis of the Second Cause of Action was Opus' alleged breach of the Contract Exclusivity Provision found in section 5 of the PMA Side Agreement.²⁰

Opus filed its Answer and Affirmative Defenses in the FINRA Arbitration generally denying all allegations in the Statement of Claim and asserting twenty-three affirmative defenses.²¹

A panel of three arbitrators was appointed. The arbitrators accepted pre-hearing and post-hearing submissions and heard testimony and argument over six days.²² On February 26, 2016, the FINRA arbitration panel entered an award (the "Arbitration Award"), in favor of Plaintiff/PFSI.²³ The relevant part of the Arbitration Award reads as follows:

CASE SUMMARY

Claimant [Plaintiff/PFSI] asserted the following causes of action: breach of contract for failure to pay, and breach of contract exclusivity.

Unless specifically admitted in its Answer, Respondent [Opus] denied the allegations made in the Statement of Claim and asserted various affirmative defenses.

RELIEF REQUESTED

In the Statement of Claim, Claimant requested compensatory damages for breach of contract for failure to pay in the amount of $1,800,000.00, plus accrued interest, and compensatory damages for breach of contract of exclusivity in the amount of $20,000,000.00, plus accrued interest.

In the Statement of Answer, Respondent requested dismissal of the Statement of Claim with prejudice, attorneys' fees, costs, and such other relief as the Panel deems just and equitable.

At the close of the hearing, Claimant requested compensatory damages for breach of contract for failure to pay in the amount of $2,458,802.67, and compensatory damages for breach of contract of exclusivity in the amount of $21,264,169.00.

OTHER ISSUES CONSIDERED AND DECIDED

The Arbitrators acknowledge that they have each read the pleadings and other materials filed by the parties.

At the conclusion of Claimant's Case in Chief Respondent requested dismissal of the Statement of Claim. After due deliberation the Panel denied the Motion on the grounds that the Claimant had established a prima facie case.

* * *

AWARD

After considering the pleadings, the testimony and evidence presented at the hearing, the Panel has decided in full and final resolution of the issues submitted for determination as follows:

1. Respondent is liable for and shall pay to Claimant compensatory damages in the sum of $1,018,300.06 plus accrued interest of $101,830.00 calculated at the rate of 2.5% from January 31, 2012 to January 31, 2016.

2. Any and all relief not specifically addressed herein, including attorneys' fees is denied.²⁴

The Arbitration Award was subsequently confirmed as a judgment of the Supreme Court of the State of New York, County of New York,²⁵ and paid in full.²⁶

E. The Adversary Proceeding

On November...