Whitaker Sec., LLC v. Rosenfeld (In re Rosenfeld), Case No.: 14–11347 (MEW)

• Decision Date: 16 December 2015
• Docket Number: Case No.: 14–11347 (MEW),Adv. Proc. No.: 14–02251 (MEW)
• Citation: 543 B.R. 60
• Parties: In re: Evan Rosenfeld, Debtor. Whitaker Securities, LLC, Plaintiff, v. Evan Rosenfeld, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

543 B.R. 60

In re: Evan Rosenfeld, Debtor.Whitaker Securities, LLC, Plaintiff,

v.Evan Rosenfeld, Defendant.

Case No.: 14–11347 (MEW)

Adv. Proc. No.: 14–02251 (MEW)

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

Signed December 16, 2015

LINDABURY, McCORMICK, ESTABROOK & COOPER, P.C., Attorneys for Plaintiff Whitaker Securities, LLC, 331 Newman Springs Road, Suite 225, Red Bank, NJ 07701, By: Scott C. Pyfer

THE MEYERS LAW FIRM, Attorneys for Defendant Evan Rosenfeld, 1123 Broadway, Suite 301, New York, N.Y. 10010, By: Glenn R. Meyers

DECISION GRANTING MOTION TO DISMISS WITHOUT PREJUDICE APPEARANCES:

MICHAEL E. WILES, UNITED STATES BANKRUPTCY JUDGE

Whitaker Securities LLC claims that it suffered losses because its former employee, debtor Evan Rosenfeld, made unsuitable and unauthorized securities trades for customers. Whitaker argues that its claims to recover the losses from Rosenfeld are excepted from discharge in Rosenfeld's chapter 7 case. Rosenfeld has moved to dismiss Whitaker's nondischargeability Complaint. The motion to dismiss is granted without prejudice to Whitaker's right to file a revised complaint.

JURISDICTION

This is a core proceeding to determine "the dischargeability of particular debts," see 28 U.S.C. § 157(b)(2)(I), and this Court has jurisdiction under 28 U.S.C. §§ 1334(a) and 157(a).

DOCUMENTS RELEVANT TO THE MOTION

The Complaint alleges that Whitaker's claims are excepted from discharge, but the claims themselves are set forth in an amended statement of claim that Whitaker filed with the Financial Industry Regulatory Authority. The Complaint also refers to a settlement with customers in another FINRA arbitration. The parties disagree as to which documents from these proceedings should be considered by the Court in ruling on the motion to dismiss. Whitaker argues that the Court should review the Complaint, the settlement agreement, and the amended FINRA statement of claims against Rosenfeld. (Opp'n to Mot. to Dismiss 2, ECF No. 7.) Rosenfeld argues that the entire record of both FINRA arbitrations has been "incorporated and referenced" in the Complaint. (Mot. to Dismiss ¶¶ 8, 17, ECF No. 5.)

In ruling on a motion to dismiss a court is entitled to consider the facts alleged in the complaint, documents attached to it or incorporated in it by reference, documents "integral" to the complaint and relied upon in it, and facts of which judicial notice may be taken. Grant v. County of Erie, 542 Fed.Appx. 21, 23 (2d Cir.2013) (citing Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir.2000) ; Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir.1995) ; Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993) ).

A. The FINRA Statement of Claim

The incorporation of other pleadings by reference is allowed by Rule 10(c) of the Federal Rules of Civil Procedure, made applicable here by Bankruptcy Rule 7010. There is some disagreement among the courts as to whether Rule 10(c) permits the adoption of allegations in a pleading in a completely separate action. See, e.g., Sherman v. A.J. Pegno Constr. Corp., 528 F.Supp.2d 320, 323 n. 5 (S.D.N.Y.2007) (allowing incorporation by reference of allegations stated in a "Standard Asbestos Complaint" in individual plaintiffs' complaints); Constellation Energy Commodities Group Inc. v. Transfield ER Cape Ltd., 801 F.Supp.2d 211, 223 (S.D.N.Y.2011) (disallowing adoption of pleadings by another plaintiff in a separate action); United States v. Int'l Longshoremen's Ass'n, 518 F.Supp.2d 422, 465 (E.D.N.Y.2007) (noting split of authorities on the issue). The reluctance of some courts to allow incorporation by reference is grounded in the fear that such pleading will not provide adequate notice as to the incorporating party's claims, defenses, or factual allegations. See Cooper v. Nationwide Mut. Ins. Co., 2002 WL 31478874, at *5, 2002 U.S. Dist. LEXIS 21552, at *19 (E.D.Pa. Nov. 7, 2002). Here, there is no danger of such prejudice. The parties are the same as those in the FINRA arbitration, the Complaint alleges that the claims that are excepted from discharge are the FINRA claims, and the parties did not dispute that the FINRA statement of claim should be treated as part of the Complaint for purposes of the motion to dismiss.

B. The Settlement Agreement

The Complaint also discusses the terms of the settlement agreement among the parties and indicates that the amount paid by Whitaker pursuant to this agreement is the basis for part of its claim against Rosenfeld. Materials outside the complaint may be considered on a motion to dismiss if they are "integral" to the complaint and it is clear on the record that no dispute exists regarding authenticity or accuracy of the materials. Faulkner v. Beer, 463 F.3d 130, 133–35 (2d Cir.2006). Given that Whitaker's claim is one for indemnification or contribution of the amount paid pursuant to this settlement agreement, it is clearly integral to the Complaint, and each party treated the settlement agreement as something the Court should consider in ruling on the motion.

C. Other FINRA Arbitration Documents

The Complaint does not refer to any documents in the FINRA arbitrations with the exception of Whitaker's statement of claim against Rosenfeld, although the Complaint does mention that the prior FINRA claim by the customers was settled. Documents from that prior FINRA proceeding may be relevant to the merits of Whitaker's claim, but it cannot be said that they are integral to the Complaint or that the Complaint is predicated upon them. See Cortec Indus., Inc. v. Sum Holding, L.P., 949 F.2d 42, 47 (2d Cir.1991) (if plaintiff's claims are predicated on a document, defendant may attach that document to motion to dismiss even if plaintiff's complaint does not explicitly refer to it). The Court will not consider them in ruling on the motion to dismiss.

FACTS ALLEGED BY WHITAKER

The allegations made by Whitaker in the Complaint and in the FINRA statement of claim are presumed to be true for purposes of this decision.

Rosenfeld was employed by Whitaker as a retail broker. Rosenfeld convinced two customers (Morgenroth and Goldberg) to move several brokerage accounts to Whitaker, and Goldberg later opened another account at Whitaker. The customers relied on Rosenfeld to pick suitable securities and to buy and sell securities at the best times. Instead, Rosenfeld made risky and inappropriate trades, often without consulting the customers in advance. (Compl. ¶¶ 12–18, ECF No. 1; Am. FINRA Claim 4, ECF No. 7–1.)

Pursuant to Regulation T, Whitaker prohibits margin loans that exceed 75% of an account's value. At various times the accounts ran afoul of this limit. Penson Financial Services, Inc. (the clearing broker for Whitaker) restricted trading in the accounts when the limits were reached. Rosenfeld nevertheless continued to make unauthorized trades, with the help of a Penson employee who was Rosenfeld's friend. (Compl. ¶¶ 19–20; Am. FINRA Claim 5–9.) Rosenfeld did not tell the customers that they should liquidate securities or reduce their margin loans, and he continued to make trades without the customers' prior approval. (Am. FINRA Claim 6.)

In August 2008 an Operations Manager at Whitaker refused to allow further trading in an account. However, Rosenfeld and his cohort at Penson told the Operations Manager that the account was being reopened because additional mutual fund holdings were being deposited. The Operations Manager then agreed to allow further trades, which Rosenfeld again made without the customers' authorization. A few days later Penson liquidated the accounts after price movements resulted in a large negative equity balance. (Compl. ¶ 21; Am. FINRA Claim 10–12.)

After the accounts were liquidated the customers said they had not authorized the losing trades and refused to cover the losses. Penson withdrew $397,253.00 from Whitaker's revenue account to cover the negative balances, and Rosenfeld resigned as an employee of Whitaker. (Compl. ¶¶ 21–23; Am. FINRA Claim 12–13.) The customers later filed a FINRA statement of claim alleging that Rosenfeld and Whitaker were liable for other losses of principal that they had suffered. Whitaker settled that claim in September 2009 for $200,000.

Whitaker then filed its own FINRA statement of claim seeking contribution or indemnification from Rosenfeld for Whitaker's losses and alleging that Rosenfeld's conduct was wrongful in two ways: (a) the trades were unauthorized, and (b) the trades were not suitable for the customers. (Am. FINRA Claim 16–17.) Whitaker seeks recovery of its out-of-pocket losses ($597,253), the attorneys' fees it paid in the dispute with the customers ($92,973.85), and other costs.

The Complaint in this Court adds a number of new characterizations of Rosenfeld's conduct and new descriptions of Whitaker's legal theories. Whitaker alleges that:

• Rosenfeld breached an agreement to perform duties "faithfully, industriously, and to the best of [his] ability, experience and talents" (Compl.¶ 12);

• The trades and margin loans violated industry rules and regulations and Whitaker's internal policies (Compl.¶¶ 12, 16, 17);

• Rosenfeld violated fiduciary duties that he owed to Whitaker (Compl.¶ 13);

• Rosenfeld's trading amounted to mismanagement, fraud or defalcation in the course of Rosenfeld's duties as a fiduciary for the customers (Compl.¶¶ 13, 26, 29);

• The "unsuitable and unauthorized" trades were "fraudulent" as to the customers, and involved "trading securities by false pretenses, false representations and/or actual fraud" (Compl.23, 25, 26, 28, 29); and

• Rosenfeld intentionally made unauthorized trades and intentionally violated FINRA rules and Whitaker's policies, and this amounted to an infliction of willful and malicious injury. (Compl.¶¶ 12, 16, 17, 30, 31.)

DISCUSSION

I. Is Whitaker Entitled to Make Claims for Contribution or Indemnification?

Rosenfeld argues that he owes no contribution or indemnification obligation to Whitaker and that Whitaker therefore has no...