Rothenberg v. Oak Rock Fin., LLC

• Decision Date: 31 March 2015
• Docket Number: 14-cv-3879,14-cv-3713,14-cv-3714,14-cv-4450 (SJF),14-cv-3874,14-cv-3700,14-cv-3876,14-cv-3878,14-cv-3873
• Parties: Rothenberg et al Appellants, v. Oak Rock Financial, LLC et al Appellee.
• Court: U.S. District Court — Eastern District of New York

Rothenberg et al Appellants, v. Oak Rock Financial, LLC et al Appellee.

14-cv-3700

14-cv-3713

14-cv-3714

14-cv-3873

14-cv-3874

14-cv-3876

14-cv-3878

14-cv-3879

14-cv-4450 (SJF)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

March 31, 2015

OPINION AND ORDER

FEUERSTEIN, J.

Appellants appeal from orders entered April 24, 2014 (the "April 24, 2014 Orders") by the United States Bankruptcy Court for the Eastern District of New York (the "Bankruptcy Court") which found that Appellants did not hold "true participations" and granted summary judgment in favor of Israel Discount Bank of New York ("IDB" or "Appellee").

I. BACKGROUND

A. The Parties

Oak Rock Financial, LLC ("Oak Rock" or "Debtor") is a Delaware limited liability company with its principal place of business at 3900 Veterans Highway, Suite 351, Bohemia, New York 11716. [Adversary Proceeding 13-08709, Docket Entry No. 44 ¶ 2]. Oak Rock "is an asset-based lending company that provides financing to third parties pursuant to financing installment contracts for the purchase of goods ranging from automotive products, furniture and electronics to equipment and appliances." April 10, 2014 Supplemental Findings of Fact and Conclusions of Law ("Supplemental Findings"), at 3; [Bankruptcy Case 8:13-bk-72251 ("Bankruptcy Docket"), Docket Entry No. 61 (Declaration of Clifford Zucker in Support of Chapter 11 Petition and First-Day Motions ("Zucker Decl.") ¶ 9)]. Oak Rock's business model involves borrowing money from both commercial banks and private investors which it then loansto selected dealers, who in turn use the funds to finance installment contracts for the purchase of consumer goods or to extend small business loans. Zucker Decl. ¶ 9.

IDB is a New York State chartered, FDIC insured full-service commercial bank, with its principal place of business located at 511 Fifth Avenue, New York, New York. [Adversary Proceeding 13-08709, Docket Entry No. 44 ¶ 1]. IDB is the agent for a group of banks financing Debtor's operations. Supplemental Findings, at 2.

Appellants are various individuals and/or entities that are parties to financing agreements with the Debtor labeled "participation agreements." Supplemental Findings, at 1. The Appellants and the associated district court and Bankruptcy Court case numbers are provided below:

• District Court Case No. 14-03700/Bankruptcy Case No. 13-08079 - Eric Rothenberg, Alisse Rothenberg, Jeffrey Rapaport, Shelley Saftler, Corey M. Saftler, Corey Mr. Saftler CGM IRA Custodian, Laura Kaplan, Arlene Saftler, Jane Doe No. 1, as custodian or trustee of Eric Jay Rothenberg Rollover IRA and Jane Doe No. 2, as trustee of Jeffrey Rapaport M.D. Defined Benefit Profit Sharing Plan (the "Rothenberg Appellants");

• District Court Case No. 14-03713/Bankruptcy Case No. 13-08102 - "POS Funding"

• District Court Case No. 14-03714/Bankruptcy Case No. 13-08154 - Alan Guber, Florence Guber, and Jacalyn Weidhorn, (the "Guber Appellants");

• District Court Case No. 14-03873/Bankruptcy Case No. 13-08103 - the Brown Family Group (together with Rose McGeever, the "Brown Appellants");

• District Court Case No. 14-03874/Bankruptcy Case No. 13-08077 - ZFI Endowment Partners, L.P. ("ZFI");

• District Court Case No. 14-03876/Bankruptcy Case No. 13-08078 - U.S. Small Business Administration as Receiver for Redstone Business Lenders LLC ("Redstone"), Finquest, Inc., Birnberg Group of Florida, Inc., the Birnberg Foundation, Jack Birnberg, as trustee of the Michal Birnberg Trust, and Louise Birnberg, as trustee for the Jack Birnberg Trust (the "Birnberg Appellants");

• District Court Case No. 14-03878/Bankruptcy Case No. 13-08157 - Estate of Elinor Yagerman, James J. Gries Supplemental Trust Fund A/K/A Estate of James Gries,Clinton Brown III, John Grillo Natalie Grillo, as an individual, Natalie Grillo as custodian for Emily Grillo, Natalie Grillo as custodian for Christopher Grillo, Natalie Grillo as custodian for Matthew Grillo, Natalie Grillo as custodian for Samantha Grillo, Christian Garsault, Maria Garsault, Elena Fischer, Robert Waynes, Margarita Cardwell, Miriam Cardwell, Lizbeth Garcia a/k/a Lizbeth Garcia Mesa, Charles Cobb, as an individual, Jennifer Cobb, Charles Cobb as custodian for Tyler Cobb, Charles Cobb as custodian for Caitlyn Cobb, Rose McGeever, Lauren Clark, and William Clark (the "Yagerman Appellants");

• District Court Case No. 14-03879/Bankruptcy Case No. 13-08119 - Laurence and Maureen Cox (the "Cox Appellants"); and

• District Court Case No. 14-04450/Bankruptcy Case No. 13-08078 - Redstone and Birnberg Appellants)

B. Relevant Agreements

1. Oak Rock Credit Agreement

IDB, as lender and agent, various lenders and Oak Rock are parties to an Amended and Restated Credit Agreement dated May 27, 2011 (as amended and modified, the "Credit Agreement"). [Bankruptcy Docket, Docket Entry No. 5 (Declaration of Jerry Hertzman ("Hertzman Decl.") ¶ 11) and the exhibits thereto]. The lenders under the Credit Agreement agreed to provide to Oak Rock a revolving credit facility with a maximum credit of ninety-six million dollars ($96,000,000.00). Hertzman Decl. ¶ 13. Oak Rock also executed and delivered to IDB an Amended and Restated Security Agreement dated May 27, 2011 (the "Security Agreement") which restates a security interest in favor of IDB in all of Oak Rock's rights, title and interest in, inter alia, "All Accounts, Loan Receivables and all records, documents, collateral and other property related thereto," in addition to "all Collections and other monies due and to become due under the Client/Dealer Loan Agreements or otherwise." Hertzman Decl. ¶ 13 and Ex. C (Security Agreement § 3(a)(i)).

2. Oak Rock Dealer Loans

Part of Oak Rock's business model involved borrowing money from commercial banks and private investors which it then loaned to selected dealers. Zucker Decl. ¶ 9. In order to secure a loan from Oak Rock, a dealer agreed to follow Oak Rock's procedures, use approved retail contracts and was willing to personally guarantee the performance of all of the contracts that it wrote. Id. ¶ 10. Oak Rock offered dealers a revolving credit line upon execution of a loan, security and service agreement, which explained the credit line terms and conditions and granted Oak Rock a priority security interest in all of the dealer's assets. Id. The dealers also executed personal guarantees of all obligations due to Oak Rock from the dealership. Id.

Oak Rock entered into agreements with the following dealers: (i) Patriot's Home & Auto Outfitters, Inc.; (ii) Auto Underwriters of America, Inc. ("Auto Underwriters"); (iii) Gateway Acceptance; (iv) M.K. Auto, Inc.; (v) Special Financing Co, LLC and Out of the Box Financing, LLC; (vi) The College Network/United First Federal Funding Corp.; (vii) NowAuto Group, Inc.; (viii) Earth Wind & Solar, Inc.; (ix) Magic Moments d/b/a Platinum Acceptance, (x) RAS Group, Inc. and Century Liquidation, Inc.; (xi) North Shore Leasing and Funding Corp.; (xii) U.S. Military Loans, Inc.; (xiii) Merchants Advance, LLC and AmeriMerchant LLC ("Merchants Advance"); (xiv) XRIMS, LLC ("XRIMS"); (xv) The Junction, Inc., Help Me Ride, Inc.; (xvi) EZ Auto Rental, Inc.; (xvii) Gungho Investments of Colorado Springs, Inc. d/b/a The Alternate Source; (xviii) Nuevo Mundo Sales and Financing, LLC and Diamond Hot Rimz, LLC; (xix) Great Lakes Financial LLC; and (xx) Allied Financial Investments (collectively, the "Dealer Loan Agreements").

3. Alleged Participation Agreements

a. Alleged Participation Agreements

Each Appellant other than ZFI (the "Alleged Participants") entered into an agreement titled "Participation Agreement" (the "Alleged Participation Agreements") pursuant to which each Appellant purchased a "participating interest" in varying amounts in certain of the Debtor's financing agreements with the above-listed dealers. As noted by the Bankruptcy Court, each of the Alleged Participation Agreements contain paragraphs with the same or similar language including those set forth below.

Paragraph 1:

There are three different variations of paragraph 1:

a. Oak Rock hereby grants, bargains, sells and assigns to Participant as of this date for $___ a participating interest in the Agreement.....The participating interest shall bear interest at the rate of ___ percent (___%) per annum and shall be repayable to Participant in twenty-four equal monthly installments of $___ commencing on ___.

b. Oak Rock hereby grants, bargains, sells and assigns to Participant as of this date for $___ a participating interest in the Loan Agreement for a term of ___ year. The participating interest shall bear interest at the rate of ___ percent ($___ %) per annum and shall be repayable to the Participant at the end of each calendar month commencing on ___.

c. Oak Rock hereby grants, bargains, sells and assigns to Participant as of this date for $___ a participating interest in the Loan Agreement for a term of ___ year, The participating interest shall bear interest at the rate of ___ (___ %) per annum. Interest due to the Participant shall be added to Participant's participation balance at the end of each calendar month commencing ___.

Paragraph 5:

Oak Rock shall use its best efforts to conduct all transactions in accordance with sound practice and within the terms of the underlying agreements. Both parties hereto expressly understand and agree that no representations or warranties have been made with respect to the validity or adequacy of any collateral and that each party hereto has no recourse whatsoever to the other party excepting only for breach of this agreement, breach of trust or malfeasance.

Paragraph 6:

All compensation for the above transactions as and when actually received shall be divided between the parties hereto in proportion to their respective participating interest, except as follows: On the principal amount of Participant's participating interest, compensation is to be paid at a rate per annum of ___ %. Any and all losses shall be borne by and divided...