Sec. & Exch. Comm'n v. ICP Asset Mgmt. LLC, 10 Civ. 4791 (LAK)

Decision Date24 January 2012
Docket Number10 Civ. 4791 (LAK)
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ICP ASSET MANAGEMENT, LLC, et al., Defendants.
CourtU.S. District Court — Southern District of New York
MEMORANDUM OPINION

Appearances:

Joseph O. Boryshansky

Mark S. Germann

Joshua R. Pater

SECURITIES AND EXCHANGE COMMISSION

Attorneys for Plaintiff

Emily J. Mathieu

James M. Roberts

Simon J. Miller

THOMPSON HINE LLP

Attorneys for Relief Defendant Bertrand H. Smyers

LEWIS A. KAPLAN, District Judge.

The Securities and Exchange Commission ("SEC" or "Commission") brought this action principally against Thomas C. Priore, ICP Asset Management, LLC, and other entities controlled by him (collectively, "ICP") for alleged repeated violations of the federal securities laws.1

At the heart of the claim is ICP's activities with respect to four multibillion dollar collateralized debt obligations know as the Triaxx CDOs. According to the complaint, Priore and ICP, as the mortgage market declined, repeatedly engaged in improper transactions that defrauded the Triaxx CDOs of tens of millions of dollars in order to protect another ICP client against losses and to line their own pockets.2

Relief defendant Bertrand H. Smyers - to whom Priore allegedly transferred millions of dollars in personal assets as trustee of various trusts, as the storm clouds gathered and the risk of substantial personal liability approached - moved to dismiss the complaint as to him.3 He argued that the complaint fails to state a claim against him under the Federal Debt Collection Procedures Act ("FDCPA")4 and, on that assumption, that there is no basis for this Court to exercise personal jurisdiction over him.5 The Court previously denied the motion.6 This opinion sets forth its reasoning.

Facts

What is important at present is not the details of the SEC's substantive allegations against Priore and ICP, but the relationship of the SEC's investigation to allegedly fraudulent conveyances by Priore and his wife to Smyers as trustee. The amended complaint, the allegationsof which are taken as true for purposes of this motion, asserts the following.7

In March 2009, the SEC began an on-site examination of, among other things, Priore's and ICP's conduct in relation to the Triaxx CDOs and other ICP-managed accounts. Its staff interviewed Priore and other ICP personnel and made a number of requests for information.8 At the time the on-site examination began, Priore owned residences in Westchester County, New York, and Martha's Vineyard, Massachusetts, properties on which he long had been making mortgage and other loan payments.9

In or about September and early October 2009, the SEC's interest in Priore and ICP apparently increased. It issued a document preservation notice as well as subpoenas for documents and for testimony from Priore and another.10 These developments were known to Priore11 and were followed in October by admissions from Priore's and ICP's counsel that ICP had garnered $24 million in fees that it would not have earned but for certain questionable transactions involving the Triaxx CDOs.12

In mid-October - after the issuance of the subpoenas and shortly after counsel made these admissions - Priore met with an estate planning attorney and began the process of establishing the following trusts:

• The "Lori A. Priore Revocable Trust" (the "LAPR Trust"), established for the benefit of family members. The LAPR Trust, when eventually signed, designated Priore and his wife as co-trustees and gave his wife the power to appoint and remove trustees during her lifetime and to direct the disposition of trust property.
• The "Thomas C. Priore Thirty-Five Year Qualified Personal Residence Trust" (the "TCP QPRT"). The TCP QPRT, an irrevocable trust, when signed, designated Priore, his wife, and Smyers as co-trustees and gave them the power to dispose of trust property for the benefit of Priore.
• The "Lori A. Priore Thirty-Two Year Qualified Personal Residence Trust" (the "LAP QPRT"). The LAP QPRT, also irrevocable, when signed,
designated Priore, his wife, and Smyers as co-trustees and gave them the power to dispose of trust property for the benefit of Mrs. Priore.13

On March 8, 2010, the SEC staff informed counsel for Priore and ICP that it soon would issue Wells notices to Priore and ICP - i.e., notices indicating that the staff intended to recommend to the Commission that it charge Priore and ICP with federal securities law violations.14 On the following day, staff advised Priore's counsel that it expected that the Commission would charge Priore and ICP with fraud.15

Priore and his wife acted promptly. During the March 15-18, 2010 period, Priore transferred the Martha's Vineyard residence to himself and his wife as tenants in common, each with a 50 percent interest, and they in turn transferred their interests to the TCP QPRT and the LAPQPRT, respectively, for $1 each.16 On March 18, 2010, Priore transferred the Westchester property to himself and his wife as trustees of the LAPR Trust - a trust that is revocable solely by Mrs. Priore.17

The two properties thus transferred represented a substantial portion of Priore's assets. Priore previously had not been engaged in estate planning or created trusts to administer his personal assets. The transfers were made with knowledge of the Commission's threatened fraud charges and awareness of Priore's potential exposure to millions of dollars of liability. According to the complaint, the transfers were made for the purpose of hindering the Commission's ability to collect disgorgement, penalties, and interest from him in the event it prevailed in the threatened action.18

As Smyers serves as a trustee for the TCP QPRT and the LAP QPRT, he is named as a relief defendant in this suit. Despite this connection to Priore and the alleged fraudulent transfers, Smyers argued that the complaint fails to state a cause of action against him under the FDCPA and that this Court lacks personal jurisdiction over the state law claims brought against him. Each argument is analyzed below.

Discussion
The FDCPA Claims

The FDCPA allows the United States "to recover a judgment on a debt; or . . . toobtain, before judgment on a claim for a debt, a remedy in connection with such a claim.19 Its purpose was "to create a comprehensive statutory framework for the collection of debts owed to the United States government" in order to "improve the efficiency and speed in collecting those debts."20

Smyers argued that the amended complaint fails to state a cause of action against him under the FDCPA for two reasons. First, he relied on the language in Section 3304(b)(1)(A)-(B) to argue that the FDCPA claims were insufficient because the complaint does not allege that he is a "debtor" or that he made the transfer in question.21 Second, in an argument first raised in his reply memorandum, Smyers asserted the SEC did not state a claim under Section 3304(b) because it had not alleged that a debt currently exists in light of the fact that the Act defines "debt" as "an amount that is owing to the United States."22 Smyers' arguments, however, betrayed a fundamental misinterpretation of the FDCPA.

Smyers essentially abandoned his first argument, viz. that the SEC must allege thathe is a "debtor" to proceed under the FDCPA, in his reply memorandum and at oral argument.23 In any event, this argument was unconvincing because the provisions of the Act cited by Smyers simply list the elements required to establish that a fraudulent transfer occurred; they do not specify or restrict who can be named as a defendant in a fraudulent transfer action.24 Moreover, several sections of the FDCPA specifically provide that a transferee who is party to a fraudulent transfer is subject to suit. For example, Section 3307 provides that a judgment may be entered "against . . . the first transferee of the asset or the person for whose benefit the transfer was made; or . . . any subsequent transferee . . . ."25 Section 3306 states also that the SEC can obtain "a remedy under this chapter against the asset transferred or other property of the transferee."26 Finally, case law supports the proposition that an FDCPA claim lies against a transferee.27 Smyers' first FDCPA argument therefore was wholly without merit.

Smyers second argument stated that he is not a proper defendant because no debt currently is owing to the United States.28 In other words, Smyers contended that claims brought under 28 U.S.C. § 3304(b) must allege that a debt exists and, because the Act defines "debt" as "an amount owing to the United States," no debt exists here. In addressing Smyers' second contention,this Court naturally begins its analysis the statute's text. At the outset, however, it is important to note the structure of the Act because some of the definitions and terms apply only to certain of its subchapters.

The FDCPA is divided into four subchapters. Subchapter A includes definitions for the entire chapter and general provisions. Subchapter B addresses prejudgment remedies, Subchapter C postjudgment remedies, and Subchapter D - under which the SEC's claims against Smyers are brought - fraudulent transfer claims. The latter includes definitions that apply only to fraudulent transfer actions.

Although the use of the present tense in the definition of "debt"29 appears to support Smyers' argument that a present or outstanding debt must exist to proceed under Section 3304(b), other provisions in the FDCPA suggest that the term "debt" includes contingent claims, at least in the fraudulent transfer context. Indeed, Section 3304, which is part of Subchapter D, addresses the fact that actionable fraudulent transfers can be made before a "debt" arises and states that "a transfer is fraudulent as to a debt to the United States, whether such debt arises before or after the transfer is made . . . [if such transfer is designed to] hinder, delay, or defraud a creditor."30

Moreover, when other defined...

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