Stillwater Liquidating LLC v. Net Five At Palm Pointe, LLC (In re Stillwater Asset Backed Offshore Fund Ltd.)

• Decision Date: 02 September 2016
• Docket Number: Case No. 12-14140 (MEW),Adv. Pro. No. 14-02245 (MEW)
• Citation: 559 B.R. 563
• Parties: In re: Stillwater Asset Backed Offshore Fund Ltd., Debtor. Stillwater Liquidating LLC, Plaintiff, v. Net Five at Palm Pointe, LLC, et al., Defendants. Gerova Financial Group Ltd., Nominal Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

559 B.R. 563

In re: Stillwater Asset Backed Offshore Fund Ltd., Debtor.

Stillwater Liquidating LLC, Plaintiff,

v.Net Five at Palm Pointe, LLC, et al., Defendants.

Gerova Financial Group Ltd., Nominal Defendant.

Case No. 12-14140 (MEW)

Adv. Pro. No. 14-02245 (MEW)

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

Signed September 2, 2016

FOLEY & LARDNER LLP, New York, New York, Counsel to Stillwater Liquidating LLC, By: Douglas Spelfogel, Esq., Richard J. Bernard, Esq., David B. Goroff, Esq., Katherine R. Catenese, Esq.

MARC STUART GOLDBERG, LLC., Scarsdale, New York, Counsel to Paul Rohan, Gregory Laubach, Eric Halter, Net Five at Palm Pointe, LLC, Net Five Holdings LLC, Planet Five Development Group LLC, Net Five South Beach LLC, Net Five at Kings Hotel LLC and Planet Five at Gerova, LLC, By: Marc Stuart Goldberg, Esq.

BERLANDI NUSSBAUM & REITZAS LLP, New York, New York, Counsel to Paradigm Credit Corporation, By: Joshua T. Reitzas, Esq., Jay Nussbaum, Esq.

DORF & NELSON LLP, Rye, New York, Counsel to Calhoun Commercial Construction LLC, By: Jonathan B. Nelson, Esq., Laura-Michelle Horgan, Esq.

BUTLER, FITZGERALD, FIVESON & McCARTHY, New York, New York, Counsel to SFN DeKalb Holdings, LLC, By: David K. Fiveson, Esq.

ACKERMAN, LEVINE, CULLEN, BRICKMAN & LIMMER, LLP, Great Neck, New York, Counsel to John R. Daniel, Yvette Daniel, Stephen J. McDonald and Vicki McDonald, By: Brian J. Grieco, Esq.

OPINION ON MOTIONS TO DISMISS

MICHAEL E. WILES, UNITED STATES BANKRUPTCY JUDGE

Stillwater Liquidating LLC claims that the “Stillwater Funds” were defrauded in 2010 when their assets were transferred to the Gerova group of companies and then, a few months later, to the Net Five group of companies. Stillwater Liquidating seeks to recover the properties or their values. Some defendants are persons and entities who allegedly committed the fraud. Other defendants are buyers of real property, or secured lenders, who are sued as “subsequent transferees” of properties that the Stillwater Funds once owned. See 11 U.S.C. § 550. The secured lenders (but not the buyers) also are accused of aiding and abetting the alleged fraud and joining in a conspiracy to commit it.

These claims sound straightforward, but they are not. The original Complaint was eighty-one pages long. The Court directed that clarifying amendments be made, which led to the filing of a thirty-four page Supplement with 949 pages of exhibits. An Amended Complaint made further changes and is 124 pages long, with 112 pages of its own exhibits. The hope was that the amendments would provide clarity, particularly as to the alleged fraudulent transfers. Instead, Stillwater Liquidating has stubbornly mischaracterized transactions, conflated parties and events, and tried to gloss over important details about the assets that were transferred and the nature of the Stillwater Funds' property interests. As a result the lengthy pleadings are packed with plain errors, contradictions and poorly conceived claims.

Many of the defendants filed motions to dismiss. Some of the moving defendants have since settled the claims and have been dismissed from the case. This Opinion addresses the remaining motions. The Court holds:

(1) All claims asserted against Paradigm Credit Corporation (“Paradigm ”), Calhoun Commercial Construction LLC (“Calhoun ”), SFN Dekalb Holdings LLC (“SFN ”), John R. Daniel and Yvette Daniel (the “Daniels ”), and Stephen J. McDonald and Vicki McDonald (the “McDonalds ”) should be dismissed; and

(2) To the extent the Amended Complaint asserts fraudulent transfer claims against the Net Five Defendants (defined below) based on transfers of assets that never belonged to a debtor in a bankruptcy case, those claims also should be dismissed. However, the Net Five Defendants' joinder in motions to dismiss filed by other parties is not, by itself, sufficient to warrant a dismissal of the other claims against them.

The Court will hold a conference on September 27, 2016 at 11:00 a.m. to discuss further proceedings, including whether all or some of the dismissals should be with prejudice.

I. Background

Although there are many Stillwater Funds, there are only two funds that owned assets that are relevant to the pending motions to dismiss. One is a Delaware limited partnership named Stillwater Asset Backed Fund, L.P.; the parties have referred to this entity as the “Onshore Fund,” but in order to distinguish it more easily from other funds the Court will refer to it as the “Delaware Fund .” Prior to 2010 the Delaware Fund and its subsidiaries made real estate loans and other types of loans. The other relevant fund is a Cayman Islands entity named Stillwater Asset Backed Offshore Fund Ltd. (the “Offshore Fund ”), which was the debtor in the bankruptcy case in which this adversary proceeding has been filed. The Offshore Fund bought “participation interests” that related to loans made by the Delaware Fund and by other entities.

In January 2010 the Stillwater Funds entered into a number of agreements with the Gerova companies. Stillwater Liquidating alleges that through these agreements the assets of the Delaware Fund and the Offshore Fund were transferred to the Gerova companies. Those assets allegedly included mortgage loans, real properties and participation interests in the same.

In May 2010, the Gerova companies agreed with an entity named Planet Five Development Group LLC (“Planet Five ”), and with two individuals who were associated with Planet Five, to form a joint venture. The joint venture company was a Florida limited liability company named Net Five Holdings LLC (“Net Five Holdings ”). Stillwater Liquidating alleges that the Gerova companies transferred the assets formerly owned by the Delaware Fund and the Offshore Fund to Net Five Holdings and its subsidiaries.

At various times after May 2010 the lender and buyer defendants either bought properties that had once been owned by the Stillwater Funds and their subsidiaries, or made loans that were secured by such properties.

Investors in the Stillwater Funds were unhappy with the 2010 transactions, and at least three separate class actions were filed in the United States District Court for the Southern District of New York in 2011, alleging violations of federal securities laws and breaches of fiduciary duty by Gerova, various individuals and the managers of the Stillwater Funds. See In re Stillwater Capital Partners Inc. Litigation , Case No. 11–CV–2737; Goldberg, et al. v. Gerova Financial Group, Ltd., et al. , Case No. 11–CV–07107; Arar, et al. v. Gerova Financial Group, Ltd., et al. , Case No. 11–CV–3081. In 2012, a number of investors also commenced an involuntary bankruptcy case in this Court against the Offshore Fund; that case later was converted to a voluntary chapter 11 case (Case No. 12–14140).

Stillwater Liquidating was formed as part of a settlement agreement in 2014 that resolved the three class actions listed above and other disputes. The settlement was “memorialized” in four documents: a Global Settlement Agreement, a so-called “Stillwater Agreement,” the limited liability agreement through which Stillwater Liquidating was formed, and the confirmed plan of reorganization in the Offshore Fund's chapter 11 case, which was confirmed by Judge Gropper on August 13, 2014. Amended Complaint ¶ 1 n.4, ECF No. 297. The Amended Complaint alleges that through these agreements Stillwater Liquidating is now the owner of “all of the claims owned by Gerova relating to the assets at issue hereunder and formerly owned by the Stillwater Funds,” as well as “all of the claims owned by the Stillwater Funds.” Id. ¶¶ 21, 22, 65.

II. The Claims

The Amended Complaint asserts 16 claims. Some are statutory claims, and others are common law claims. All of the claims are asserted by Stillwater Liquidating as the alleged assignee of other entities.

The primary claims are fraudulent transfer claims asserted by Stillwater Liquidating as alleged assignee of the Stillwater Funds. Counts I through IV name “Gerova” and “Net Five” as defendants (more on those defined terms below). These four claims allege that the transfers of the Stillwater Funds' assets to Gerova, and Gerova's later transfers of those assets to Net Five, “individually and collectively” were fraudulent transfers that were designed to defraud the creditors of the Stillwater Funds. Amended Complaint ¶¶ 389, 397, 405, 413. Stillwater Liquidating contends that the Stillwater Funds may challenge those fraudulent transfers pursuant to section 544 of the Bankruptcy Code and New York state law.¹ Gerova has previously settled all claims against it and is named as a “nominal” defendant “for the purposes of avoiding the transfers and pursuing” later transferees. Id. ¶ 24. Net Five is named as a defendant “to the extent that the transfers to Gerova and then Net Five are collapsed.” Id. ¶ 15(a).

Count V alleges that the buyer and lender defendants are “subsequent transferees” from whom Stillwater Liquidating may recover the fraudulently transferred assets or their values. Paragraph 15(b) of the Amended Complaint, and the title of Count V, state that “Net Five” is a defendant in Count V. Curiously, however, the supporting allegations merely allege that “Net Five” made transfers to other persons, and the transfers to Net Five are not included among the “Subsequent Transfers” that are challenged in the Amended Complaint. Id. ¶¶ 15(b), 421-36.

Counts VI through IX are common law claims that are also asserted by Stillwater Liquidating as the alleged assignee of the Stillwater Funds.² More particularly:

• Count VI alleges that the Gerova transfers constituted a “conversion” of property for which Gerova, Net Five and Messrs. Rohan and Halter are liable.

• Count VII focuses on the transfers to Net Five and actions subsequently taken by Net Five. It alleges that Gerova, Net Five and Messrs. Rohan and Halter conspired through these actions “to ensure that the Stillwater Assets remained out of reach of the Stillwater Funds” and

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