Wimbledon Fin. Master Fund v. Miller

• Decision Date: 02 August 2022
• Docket Number: 18 Civ. 8004 (PAE)
• Parties: WIMBLEDON FINANCING MASTER FUND LTD., Plaintiff, v. BIENERT MILLER & KATZMAN, PLC and STEVEN J. KATZMAN, Defendants.
• Court: U.S. District Court — Southern District of New York

WIMBLEDON FINANCING MASTER FUND LTD., Plaintiff, v. BIENERT MILLER & KATZMAN, PLC and STEVEN J. KATZMAN, Defendants.

No. 18 Civ. 8004 (PAE)

United States District Court, S.D. New York

August 2, 2022

OPINION & ORDER

PAUL A. ENGELMAYER, UNITED STATES DISTRICT JUDGE

This case arises from competing claims by creditors to recover money from a convicted fraudster, David Bergstein (“Bergstein”). The plaintiff here, Wimbledon Financing Master Fund Ltd. (“Wimbledon”), a creditor of Bergstein's, obtained an $8,497,578.75 money judgment against Bergstein and others. After Wimbledon had served a restraining notice on Bergstein, but before it took other steps to secure its priority, Bergstein, through his lawyer Steven J. Katzman (“Katzman”), negotiated a settlement agreement with a different Bergstein creditor The Wimbledon Fund, SPC (“Class TT”). Katzman then facilitated two sequential wire transfers from Bergstein to Class TT to satisfy the settlement agreement, one for $2,412 million, the next for $5 million. As pled, these transfers left Bergstein without funds to pay the judgment against Wimbledon.

Wimbledon initially sought relief in New York state court against Katzman, his law firm, Bienert Miller & Katzman PLC (“BMK”), and Bergstein. Wimbledon moved for contempt against them, based on the first of the wire transfers to Class TT. Wimbledon did not then know about the second, larger wire transfer. That action resulted in a finding of contempt against Katzman, BMK, and Bergstein. But the state court declined to order Katzman and BMK to pay to Wimbledon the $2,412 million they had caused their client to divert in violation of the restraining notice. It found that remedy excessive. To the extent the contempt sanction had a monetary component, it required Katzman and BMK only to pay Wimbledon's attorneys fees and associated costs.

Wimbledon now sues Katzman and BMK in federal court, for negligence and gross negligence. As relief, it seeks the sums ($2,412 million and $5 million) that Katzman and BMK caused Bergstein to pay in violation of its restraining notice.

Pending now are the parties' cross-motions for summary judgment. These raise, among others, issues of res judicata. For the following reasons, the Court grants defendants' summary judgment motion in part. This ruling precludes Wimbledon's claims that seek recovery from Katzman and BMK arising from the $2,412 million transfer. The Court denies the remaining motions. This leaves standing and to be tried to a jury, Wimbledon's claims against Katzman and BMK arising from the $5 million transfer.

I. Background

A. Factual Background^[1]

1. Overview

This litigation is the latest installment in a contest between two victims of Bergstein's fraud-plaintiff Wimbledon and non-party Class TT-to recover their losses from the same pot of money. Wimbledon and Class TT each sought to enforce judgments against Bergstein and his fraudulent transferees. In July 2017, after securing its judgment in the supreme court of New York County for more than $8 million, Wimbledon served restraining notices on Bergstein and his lawyers to prevent disbursement of Bergstein's funds, including funds held in BMK's client trust account on behalf of Bergstein that had been enjoined in the Class TT litigation. The next month, Katzman-Bergstein's lawyer in a suit brought by Class TT in California federal court- negotiated and executed a settlement with Class TT. In connection with that settlement, Bergstein, despite having received Wimbledon's restraining notices, participated, in August 2017 and in December 2017, respectively, in sending $2,412 million and $5 million of Bergstein's restrained funds to Class TT.

In February 2018, Wimbledon moved in New York state supreme court in Manhattan for contempt against Bergstein and his professional legal corporation, BMK. The court found the two in contempt, a judgment affirmed on appeal in June 2019. In March 2019, Wimbledon also sued Class TT to recover the second $5 million installment of the settlement funds, which was dismissed by the New York state supreme court. Class TT and Wimbledon later settled while an appeal was pending. In this lawsuit, Wimbledon seeks to hold Bergstein and BMK liable for the sum it would have received had Bergstein and BMK not, as alleged, negligently permitted Bergstein's restrained funds to be delivered to Class TT.

2. Parties and Relevant Non-Parties

Wimbledon is an exempted liability company organized under the laws of the Cayman Islands. JSF ¶ 1. On July 17, 2014, the Grand Court of the Cayman Islands, Financial Services Division, appointed Chris Johnson and Russell Homer as joint official liquidators to conduct a court-supervised liquidation of Wimbledon. Id. ¶ 2.

BMK was a California professional legal corporation with its office located in San Clemente, California. Id. ¶ 3. Katzman was a BMK shareholder. Id. ¶ 4.

Non-party Bergstein resided in Hidden Hills, California, and is currently incarcerated in California. Id. ¶ 6. On March 1, 2018, a jury in this District found Bergstein guilty of seven counts of securities fraud, investment advisor fraud, wire fraud, and conspiracy to commit those offenses against three entities: Wimbledon, Class TT, and Weston Capital Partners Master Fund II, Ltd. (“Partners II”). Id. ¶ 64.

Class TT is a Cayman Islands segregated portfolio company. Id., ¶ 9. Partners II is an investment fund organized under Cayman Islands law. Id. ¶ 8.

Katzman and BMK represented Bergstein and non-party Graybox LLC (“Graybox”) in a civil suit brought by Class TT to enforce a judgment against Bergstein and Graybox. Graybox is a limited liability company organized under Nevada laws. Id. ¶ 7. Bergstein is the sole owner and officer of Graybox. Wimbledon 56.1 ¶ 1.

3. Events Leading to Class TT's Claim to Bergstein's Funds

a. Background of Bergstein's liability to Class TT

In December 2010, Bergstein and Kiarash Jam (“Jam”) established Swartz IP Services Group, Inc. (“SIP”). See Hubell Decl., Ex. Q at 2. In November 2011, Class TT entered into a note purchase agreement (“NPA”) with SIP, pursuant to which Class TT was to pay SIP in exchange for notes and warrants to purchase stock in a separate company. See Hubell Decl., Ex. I. On February 8, 2013, Class TT sued SIP for breach of contract arising out of the NPA in New York supreme court, county of New York. See Wimbledon Fund, SPC, v. Advisory IP Services Inc., Index No. 650446/2013; JSF ¶ 10; Hubell Decl., Ex. L. On November 24, 2015, Class TT obtained a judgment in the amount of $23,051,971.31 against SIP (the “Class TT Judgment”). See JSF ¶ 21; Hubell Decl., Ex. M.

b. Class TT sues Bergstein and Graybox in Texas and California to enforce its judgment

On July 30, 2015, Class TT sought a judicial declaration in the Southern District of Texas to hold SIP's directors, officers, and shareholders-including Bergstein and Jam-jointly and severally liable for the Class TT Judgment (the “Texas Action”). See JSF ¶ 13. On August 28, 2015, Class TT filed a separate lawsuit in the Central District of California seeking monetary and injunctive relief to recover its investments in SIP from alleged fraudulent transferees, including Graybox (the “California Action”). See JSF ¶ 14; Hubell Decl., Ex. P. Graybox was alleged to have received $2,412 million as a result of fraudulent transfers of Class TT's investments in SIP. See JSF ¶ 14. In both the Texas and California actions, Class TT did not assert a claim for breach of contract, either express or implied. Wimbledon 56.1 ¶¶ 2-3. On April 1, 2016, the Texas Action was transferred to the Central District of California and consolidated with the California Action. See JSF ¶ 24.

c. Graybox, a fraudulent transferee, enters into an unrelated settlement in a bankruptcy proceeding, pursuant to which it receives $2.9 million

On August 15, 2015, Bergstein and Graybox settled claims that they had with Aramid Entertainment Fund, Ltd. (“Aramid”) and its former counsel in Aramid's bankruptcy proceeding (the “Aramid bankruptcy”). See JSF ¶ 15; Katzman Decl. ¶¶ 6-7. Pursuant to the settlement, Graybox was to receive $2.9 million (the “Graybox settlement proceeds”). JSF ¶ 15. Bergstein and Graybox were represented by BMK in that proceeding; thus, the Graybox settlement proceeds were to be delivered to BMK's client trust account. Id. ¶ 16; Katzman Decl. ¶¶ 6-7; Hubell Deck, Exs. O, Q. Wimbledon, through its counsel in this action, Kaplan Rice, appeared and participated in the Aramid bankruptcy. See Def. 56.1 ¶ 77; Hubell Decl., Ex. E at 105.

d. Class TT obtains against the Graybox settlement funds a preliminary injunction, which is affirmed by the Ninth Circuit

On September 9, 2015, after Graybox's claims in the Aramid bankruptcy were settled but before the funds had been transferred to BMK's client trust account, Class TT filed a motion for a preliminary injunction in the California Action to enjoin the Graybox settlement proceeds from being disbursed to Graybox. JSF ¶ 17. On September 29, 2015, the court enjoined Graybox from transferring $2,412 million out of its accounts upon receipt of the $2.9 million in settlement funds (the “Preliminary Injunction”). Id. ¶ 18. On October 20, 2015, the court extended the injunction to BMK's client trust account. Id. ¶ 20. On April 18, 2016, the Ninth Circuit affirmed the injunction. Id. ¶ 27; Katzman Decl. ¶ 14; Hubell Decl., Ex. R.

e. Bergstein is indicted; the California Action is stayed

In November 2016, while the California Action was pending Bergstein was indicted in this District. JSF ¶ 28. He was charged with seven counts, including investment advisory fraud, securities fraud, wire fraud, and conspiracy to commit those offenses. Id. ¶ 30. On December 7, 2016, Bergstein moved...