Tilton v. MBIA Inc.
| Decision Date | 18 September 2020 |
| Docket Number | 19cv9733 |
| Citation | 620 B.R. 707 |
| Parties | Lynn TILTON, et ano., Plaintiffs, v. MBIA INC., et ano., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Akiva Shapiro, Brian Craig Ascher, Mary Beth Maloney, Randy M. Mastro, Robert F. Serio, Gibson, Dunn & Crutcher, LLP, New York, NY, for Plaintiffs.
Joshua Paul Arnold, Jonathan M. Hoff, Cadwalader, Wickersham & Taft LLP, New York, NY, for Defendants.
Plaintiffs Lynn Tilton and Patriarch Partners XV, LLC (collectively, "Tilton") brought this action against Defendants MBIA Inc. and MBIA Insurance Corporation (collectively, "MBIA") in the Supreme Court of the State of New York, Westchester County, alleging state law claims for fraudulent inducement, promissory fraud, and promissory estoppel. MBIA removed this action and moves under 28 U.S.C. §§ 1404(a) and 1412 to transfer this case to the United States District Court for the District of Delaware for referral to the Delaware Bankruptcy Court, where a related Chapter 11 bankruptcy proceedings is pending. Tilton moves to remand this action back to state court. For the reasons that follow, MBIA's motion is denied and Tilton's motion is granted.
This action arises from a string of lawsuits concerning the Zohar investment vehicles. See, e.g., Zohar CDO 2003-1, Ltd. v. Patriarch Partners, LLC, 286 F. Supp. 3d 634 (S.D.N.Y. 2017). The Zohar Funds are comprised of three separate investment vehicles: Zohar CDO 2003-1, Limited (" Zohar I"), Zohar II 2005-1, Ltd. ("Zohar II"), and Zohar III, Ltd. ("Zohar III," and together with Zohar I and Zohar II, the "Zohar Funds"). The Zohar Funds are collateral loan obligation funds formed by Tilton between 2003 and 2007. The Zohar Funds issued notes to investors to raise capital to then invest in the debt and equity of distressed portfolio companies. (Compl. ¶ 40.) The Zohar I Class A notes matured on November 20, 2015 and the Zohar II Class A notes matured on January 20, 2017. (Compl. ¶¶ 6, 11, 52.) In an effort to enhance the credit rating of the notes, MBIA issued financial guaranty policies for the benefit of Zohar I Class A-1 and Class A-2 notes, but not the Zohar I Class A-3 notes and the Zohar II Class A-1, Class A-2 and Class A-3 notes. (Compl. ¶¶ 45–47.) MBIA did not issue any guarantees for notes offered by Zohar III. If MBIA was required to pay on the guarantees, it acquired certain rights, such as rising in priority in the payment waterfall and gaining voting rights. (Compl. ¶ 52.)
Tilton is the chief executive officer and owner of Patriarch Partners, LLC and affiliated entities. (Compl. ¶¶ 36–37.) Affiliates of Patriarch Partners, LLC serve as collateral managers of the Zohar Funds. (Compl. ¶ 39.) Tilton beneficially holds preference shares in the Zohar Funds and the Zohar I Class A-3 notes. (Compl. ¶ 55.) Tilton is also the sole board member or managing member for most of the portfolio companies. (Compl. ¶ 36.)
As the 2008 financial crisis took its toll on the portfolio companies, Tilton and MBIA began to believe that the Zohar Funds might default on their notes. (Compl. ¶¶ 6, 65, 67–70.) Tilton alleges that MBIA had an exposure of approximately $150 million Zohar I and $800 million exposure for Zohar II. (Compl. ¶ 72.) In 2012, Tilton attempted to work with MBIA to restructure the funds, primarily by extending the Zohar I maturity date from November 2015 to January 2017. (Compl. ¶¶ 67–86.) However, in order to effectuate the restructuring, Tilton needed the consent of all of the Zohar I noteholders. (See Compl. ¶¶ 47, 68, 101.) An institutional investor held the MBIA-insured Zohar I A-1 notes, MBIA held the Zohar I A-2 notes, and a third party held the non-MBIA-insured Zohar I A-3 notes. (Compl. ¶ 55.) In October 2012, Tilton began discussions with an MBIA senior executive about restructuring. (Compl. ¶¶ 67–86.) Tilton alleges that this executive represented that the Zohar I A-3 noteholder was an "impediment" to the restructuring. (Compl. ¶ 72.) Further, she alleges MBIA told her that if she purchased the Zohar I A-3 notes, MBIA would extend the maturities for both Zohar I and Zohar II.
(Compl. ¶ 72.) On March 26, 2015, Tilton purchased the Zohar I A-3 notes for approximately $100 million. (Compl. ¶¶ 55, 95–96.) MBIA then refused to extend the maturities for the Zohar Funds. (Compl. ¶¶ 97–107.)
On the eve of Zohar I's maturity, Tilton filed the instant action in the Supreme Court of the State of New York. (ECF No. 1-1.) Tilton asserted causes of action for fraud, breach of contract, and promissory estoppel. (Compl. ¶¶ 31, 126–155.) On February 19, 2016, MBIA moved to dismiss the case. (ECF No. 1-11.) The state court dismissed the breach of contract claim but allowed the fraud and promissory estoppel claims to move forward. (ECF No. 1-24.) The parties then began discovery. (ECF No. 1-27.) On December 13, 2017, the parties both moved for summary judgment. (ECF No. 1-43.) The New York State Supreme Court did not rule on the motions.
Concurrent with filing the instant action that was stayed due to the Bankruptcy, Zohar I defaulted on its notes. (Compl. ¶ 116.) Pursuant to the guarantees it issued, MBIA paid approximately $149 million to Zohar I noteholders. (See Compl. ¶ 115; Notice of Removal, ECF No. 1 ¶5.) Because of the payment, MBIA gained rights to liquidate Zohar I's collateral and rose in Zohar I's waterfall, such that MBIA would be made whole before Tilton received distributions.
On November 22, 2015, Tilton commenced an involuntary Chapter 11 proceeding against Zohar I in the United States Bankruptcy Court for the Southern District of New York. See In re Zohar CDO 2003-1, Ltd., No. 15-23680-RDD (Bankr. S.D.N.Y. Nov. 22, 2015). On February 5, 2016, Tilton withdrew the petition. See In re Zohar CDO 2003-1, Ltd., No. 15-23680 (Bankr. S.D.N.Y. Feb. 6, 2016), ECF No. 44.
On March 3, 2016, the Patriarch Entities resigned as the collateral managers of the Zohar funds and were replaced by a third-party. (ECF No. 27-5 ¶ 178.) MBIA then began a liquidation auction of the Zohar I collateral. In an effort to halt the auction, Tilton filed another suit in New York State Supreme Court to enjoin the auction. That case was removed to this District. See Patriarch Partners XV, LLC v. U.S. Bank Nat'l Ass'n, No. 16-cv-7128 (S.D.N.Y. Sept. 13, 2016), ECF No. 1. On October 10, 2016, a judge in this District denied Tilton's motion for a preliminary injunction. See Patriarch Partners XV, LLC, No. 16-cv-7128 (S.D.N.Y. Oct. 18, 2016), ECF No. 76. The auction went forward and MBIA acquired all of Zohar I's collateral through a no-cash credit bid of approximately $150 million. (Compl. ¶ 150.)
On March 11, 2018, Tilton directed the Zohar Funds to file voluntary Chapter 11 petitions in the Delaware Bankruptcy Court. See In re Zohar III, Corp., No. 18-10512, 2018 WL 2432033 (Bankr. D. Del. Mar 11, 2018) (the "Bankruptcy"). The Bankruptcy stayed the instant action, as well as the numerous other litigations. To quell the sparring in bankruptcy court, the parties entered into a settlement agreement, to monetize the Zohar Parties' interests in the portfolio companies. (Decl. of Jonathan M. Hoff in Opp'n to Tilton's Mot. to Remand, ECF No. 27 ("Hoff Decl."), Ex. 5 ("Settlement Agreement"), ¶¶ 8, 10–12.) The Settlement Agreement expired on September 30, 2019. (Notice of Removal, ECF No. 1 ¶ 10.) The next day, Tilton filed an equitable subordination complaint in the Delaware Bankruptcy Court. (Hoff Decl., Ex. 4 ("Subordination Compl.").)
After receiving a copy of the Subordination Complaint on October 1, 2019, MBIA removed the instant action that was stayed due to the Bankruptcy to this Court on October 21, 2020 with the intention of moving to transfer the case to Delaware. (Notice of Removal, ECF No. 1.)
This Court begins with Tilton's remand motion because Tilton argues, in part, that this Court lacks subject matter jurisdiction over this case. See Smartmatic USA Corp. v. Dominion Voting Sys. Corp., 2013 WL 5798986, at *3 (S.D.N.Y. Oct. 22, 2013) .
Cases filed in state court may be removed to federal court when "the district courts of the United States have original jurisdiction." 28 U.S.C. § 1441(a). "Removal statutes are construed narrowly and all uncertainties are resolved in favor of remand in order to promote the goals of federalism, restrict federal court jurisdiction, and support the plaintiff's right to choose the forum." Cohen v. KIND L.L.C., 207 F. Supp. 3d 269, 270 (S.D.N.Y. 2016) (quotation marks omitted); accord Blockbuster, Inc. v. Galeno, 472 F.3d 53, 56–58 (2d Cir. 2006). The removing party has the burden of demonstrating that federal jurisdiction exists. See Grimo v. Blue Cross/Blue Shield, 34 F.3d 148, 151 (2d Cir. 1994). "It is a fundamental princip[le] of law that whether subject matter jurisdiction exists is a question answered by looking to the complaint as it existed at the time the petition for removal was filed." Zerafa v. Montefiore Hosp. Hous. Co., 403 F. Supp. 2d 320, 325 (S.D.N.Y. 2005).
Tilton first asserts that there is no subject matter jurisdiction over this action. MBIA counters that jurisdiction exists under 28 U.S.C. § 1334(b). Section 1334 provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." Actions arising under Title 11 are "any matter under which a...
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