Yip v. Grant Thornton LLP (In re Providence Fin. Invs., Inc.), Case No. 16-20516-BKC-AJC

• Citation: 593 B.R. 884
• Decision Date: 09 October 2018
• Docket Number: Case No. 16-20516-BKC-AJC, Case No. 16-20517-BKC-AJC (Jointly Administered),Adv. No. 18-1289-BKC-AJC-A
• Parties: IN RE: PROVIDENCE FINANCIAL INVESTMENTS, INC., Providence Fixed Income Fund, LLC, Debtors. Maria Yip, as Trustee of Providence Financial Investments, Inc. and Providence Fixed Income Fund, LLC, Plaintiff, v. Grant Thornton LLP, Cadwalader Wickersham & Taft LLP, & Greene Espel PLLP, Defendants.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Florida

593 B.R. 884

IN RE: PROVIDENCE FINANCIAL INVESTMENTS, INC., Providence Fixed Income Fund, LLC, Debtors.Maria Yip, as Trustee of Providence Financial Investments, Inc. and Providence Fixed Income Fund, LLC, Plaintiff,

v.Grant Thornton LLP, Cadwalader Wickersham & Taft LLP, & Greene Espel PLLP, Defendants.

Case No. 16-20516-BKC-AJC

Case No. 16-20517-BKC-AJC (Jointly Administered)

Adv. No. 18-1289-BKC-AJC-A

United States Bankruptcy Court, S.D. Florida.

Signed October 9, 2018

Ashley J. Dillman Bruce, Berger Singerman LLP, Fort Lauderdale, FL, James D. Gassenheimer, Berger Singerman LLP, Miami, FL, for Plaintiff.

Mark A. Levy, Esq, Brinkley Morgan, Fort Lauderdale, FL, David H. Smith, Washington, DC, Joaquin J. Alemany, Jose A. Casal, Solomon B. Genet, Miami, FL, Robert W. Davis, Holland & Knight LLP, Orlando, FL, for Defendants.

ORDER GRANTING IN PART MOTION TO COMPEL ARBITRATION AND STAY PENDING ADVERSARY PROCEEDING [ECF NO. 10]

A. Jay Cristol, Judge, United States Bankruptcy Court

THIS MATTER came before the Court at a hearing on September 11, 2018 ("Hearing") upon the Motion to Compel Arbitration and Stay Pending Adversary Proceeding ("Motion") [ECF No. 10] filed by Cadwalader, Wickersham & Taft LLP ("Cadwalader") and the Response to the Motion ("Response") [ECF No. 22] filed by Plaintiff, Maria Yip, as Chapter 7 Trustee ("Trustee") for the jointly administered bankruptcy estates of Providence Financial Investments, Inc. ("Providence Financial") and Providence Fixed Income Fund, LLC ("Providence Fund" and, together with Providence Financial, the "Debtors"). The Court having carefully reviewed and considered the Motion, Response, Court file,¹ argument of counsel and being otherwise advised the premises, grants the Motion for the following reasons.

I. FACTUAL BACKGROUND

On August 21, 2018, Trustee filed her Amended Complaint against Defendants, Cadwalader, Grant Thornton LLP ("GT"), and Greene Espel, PLLP ("GE") (collectively the "Defendants") relating to pre-petition professional services that Defendants provided to Debtors ("Complaint") [ECF No. 7]. As against all Defendants, the Trustee asserts a claim for aiding and abetting fraud on account of such pre-petition services. The Trustee also seeks an accounting and turnover of Debtors' property allegedly still in Defendants' hands. No other claims are asserted against Cadwalader. The allegations in the Complaint, summarized below, are assumed as true solely for purposes of the Court's analysis.

The Debtors were part of a global Ponzi scheme that from 2010 to 2016 raised over $64 million in the United States and $150 million worldwide. Id. at ¶¶ 23, 37. Antonio Buzaneli ("Buzaneli"), who has since pled guilty to thirteen counts of criminal misconduct, was the Chief Executive Officer ("CEO") of the Debtors, as well as the CEO of numerous affiliates of the Debtors in the United States, and throughout the world, including London, Hong Kong, Taipei, Shanghai, Suzhou, Singapore, Cayman Islands, Brazil, Guernsey, Canada, Istanbul, Dubai, and Panama (collectively the "Providence Entities"). Id. at ¶¶ 24, 31. The Providence Entities commingled funds and were operated without corporate formalities such that their independent identities were non-existent and they were merely alter egos of the Debtors. Id. at ¶¶ 28, 97. The Providence Entities recruited investors to purchase promissory notes, the proceeds of which would be used to provide working capital in the form of intercompany loans to various businesses in Brazil. Id. at ¶¶ 3, 49. The Brazilian companies would then use the intercompany loan proceeds to acquire receivables or other financial instruments. Id. at ¶ 49. In total, the Providence Entities promised annual returns of 12% to 13% to the investors through the investments in factoring accounts receivable in the Brazilian businesses. Id. at ¶¶ 3, 49. The investors' funds, however, were instead diverted to other uses, some being used to pay principal and interest payments to old investors (the "Fraud"). Id. at ¶¶ 50, 51.

On January 31, 2016, the U.S. Securities and Exchange Commission ("SEC") served several of the Providence Entities with an SEC Subpoena requesting various financial, accounting, and tax records, as well as documentation on the investor promissory notes. Id. at ¶ 60. The SEC also requested a presentation addressing the details on the transactions involving the Providence Entities. Id. at ¶ 63.

In response to the Subpoena, Providence Financial and non-Debtor Providence Entity Providence Global, Inc. ("Providence Global") engaged Cadwalader "in connection with responding to civil subpoenas issued to some of the Providence Entities by the U.S. Securities and Exchange Commission." Id. at ¶ 64. On February 1, 2016, in order to document the engagement, Buzaneli, as Chief Executive Officer of Providence Financial and Providence Global, signed an engagement letter with Cadwalader ("Engagement Letter"). Motion at Ex. A. The Engagement Letter, in the section titled "Resolution of Disputes – Mediation and Arbitration" ("Arbitration Provision") provides that

"any dispute arising out of or relating to [Cadwalader's] rendering professional services to you or [Cadwalader's] fees, disbursements, and charges will first be submitted to private, non-binding mediation ...." Engagement Letter at 5. "If resolution through mediation is not achieved, any such dispute will be finally resolved by private, confidential binding arbitration ... [which] will be conducted in New York City ...." Id. "Any issue concerning the extent to which any dispute is subject to arbitration, or concerning the applicability, interpretation or enforceability of any of these procedures shall be governed by the Federal Arbitration Act and resolved by the arbitrators." Id.

In addition, Buzaneli, on behalf of the Providence Entities, also engaged GE and GT, to respond to the Subpoena. Compl. at ¶ 65. In that capacity, GT representatives interviewed Buzaneli and other officers of the Providence Entities regarding their use of investor funds. Id. Trustee alleges that it was during that investigation that GT purportedly learned of the Fraud, and in late February 2016, shared its findings with GE and Cadwalader. Id. at ¶¶ 75, 76.

Pursuant to the Engagement Letter, Cadwalader, together with GT and GE, prepared a PowerPoint presentation, as requested by the SEC, and on March 21, 2016, Cadwalader, GT, and GE made the presentation to representatives of the SEC in Chicago. Id. at ¶¶ 79, 82. The Trustee alleges that the Defendants "took painstaking efforts to omit any references to fraud as they collaboratively refined the PowerPoint presentation" and that because of such efforts, Buzaneli continued to solicit and enroll new investors, continued to transfer funds between the Providence Entities, and continued to utilize the funds for his personal use. Id. at ¶¶ 80, 89; see also Motion at 5.

Two and half months later, on June 7, 2016, the SEC filed a complaint in the United States District Court for the District of Minnesota, against the Debtors and other Providence Entities, alleging violation of various securities laws. Id. at ¶ 86. A month and a half after that filing, Debtors filed separate voluntary petitions for relief under Chapter 7, title 11, United States Code, which cases are being jointly administered.

On August 21, 2018, Trustee filed her Amended Complaint, which asserts the following claims against the Defendants, including Cadwalader: Count I for Aiding and Abetting Fraud ("Aiding and Abetting Claim"), Count VIII for Turnover ("Turnover Claim"), and Count IX for Equitable Accounting ("Accounting Claim") (collectively the "Cadwalader Claims"). Counts II through VII consist of fraudulent transfer counts asserted against only GE.

In its Motion, Cadwalader argues that its Arbitration Provision specifically encompasses the Cadwalader Claims, as they are disputes "arising out of or related to [Cadwalader's] rendering professional services to" Providence Financial pursuant to the Engagement Letter and as such, are subject to binding arbitration pursuant to the Federal Arbitration Act ("FAA") and applicable law. Motion at ¶ 3. Cadwalader also argues in response to the Trustee, that even though Providence Fund was not a signatory to the Engagement Letter, the claims asserted by the Trustee on behalf of Providence Fund are arbitrable because Providence Fund's claims against Cadwalader are inextricably intertwined with Providence Financial's claims against Cadwalader. Reply at 3-6.

Trustee opposes Cadwalader's Motion to Compel, arguing that the Arbitration Provision does not apply to the Cadwalader Claims because the Aiding and Abetting Claim is really a tort claim that has no relationship to the Engagement Letter. Response, ECF No. 22, at § 1. The Trustee also argues that there is an inherent conflict between arbitrating the Cadwalader Claims and the underlying purpose of the Bankruptcy Code because sending the Cadwalader Claims to arbitration, while retaining the claims against the remaining Defendants, would be inefficient, risk inconsistent results, and would be too costly to the Trustee. Id. at § 2. Lastly, the Trustee argues that the Court cannot order Providence Fund to arbitrate since it was not a signatory to the Engagement Letter. Id. at 15-16; Response to Motion to Clarify at 3-7. The Court addresses each argument in turn.

II. ANALYSIS

A. The Arbitration Provision is Valid and Enforceable

Under the FAA, written agreements to arbitrate controversies arising out of an existing contract "shall be valid, irrevocable and enforceable." 9 U.S.C. § 2. The FAA embodies a liberal federal policy in favor of arbitration. See Whiting-Turner Contracting Co. v. Elec. Mach. Enters. (In re Elec. Mach. Enters.) , 479 F.3d 791 (11th Cir. 2007) (hereinafter " Whiting-Turner ").

In Whiting-Turner , the seminal case on enforceability of arbitration agreements in the Eleventh Circuit, the court first looked to whether the parties ...