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Citigroup Global Markets, Inc. v. KLCC Investments

January 11, 2007


The opinion of the court was delivered by: Sand, J.


Citigroup Global Markets, Inc. (Citigroup) initiated this interpleader action under 28 U.S.C. §§ 1335, 1397, and 2361 (2000) to resolve competing claims by KLCC Investments, LLC and D and D Trust to a certain securities account maintained at Citigroup. KLCC filed a counterclaim against Citigroup for breach of contract, breach of good faith, conversion, and negligence. Before the Court are: (1) D and D Trust's motion to dismiss for lack of personal jurisdiction or to abstain in deference to parallel proceedings in New Jersey state court, (2) Citigroup's motion for discharge as interpleader plaintiff and to stay other actions relating to the property at issue, and (3) KLCC's cross motion for partial summary judgment dismissing the interpleader action.


This case relates to a securities account at Citigroup that was opened in June 2005 by Solomon Dwek. The account contains various securities, the bulk of which consist of stock in four local banks. The current value of the assets in the account is approximately $7 million, but the assets are volatile and illiquid. Citigroup asserts that because the shares held in the account vastly exceed the average daily trading volume of stock in the four banks, any attempt to liquidate the assets would drastically decrease their market value. (Pl.'s Mem. in Supp. of Mot. to Discharge at 11-13.) Citigroup further asserts that to maintain the value of the account, the assets must be actively managed and traded. (Id. at 13-14.) The assets have not been traded since the initiation of this action and have lost approximately $1 million in value based on the change in share price since April 2006. (Id. at 14.) Citigroup claims no interest in the assets.

Shortly after opening the account on June 30, 2005, Dwek, Citigroup, and Kenneth Cayre (the principal of KLCC) executed a control agreement granting KLCC certain rights over the Dwek account. The control agreement referenced a separate security agreement in which Dwek granted KLCC a security interest in the Dwek account as collateral for a loan from KLCC for Dwek to purchase a certain property in Red Bank, New Jersey pursuant to a separate profit participation agreement.*fn1 KLCC claims that these agreements gave it a perfected security interest in the Dwek account.

On October 3, 2005, Dwek opened a $10 million revolving line of credit with Amboy Bank (predecessors in interest to interpleader defendant D and D Trust).*fn2 As collateral for this loan, Dwek pledged what was identified in an October 12, 2005 UCC Financing Statement as an investment account held by Brown & Company in the name of Amboy bank worth $10 million. (See Sharpf Decl. Ex. A.) D and D claims that Dwek promised to fund this account with the assets held in his account at Citigroup, which is the account at issue in this case. (Scharpf Decl. ¶ 5.)

Some time in late January and early February, Dwek attempted to transfer his assets at Citigroup to Brown & Company to be held for Amboy Bank. On January 31, 2006, Citigroup received a letter on what appeared to be KLCC letterhead with what appeared to be Cayre's signature terminating KLCC's pledge agreement on the Dwek account. (Jenkins Decl. Ex. K.) KLCC claims that this letter was a forgery. On February 15, 2006, Dwek sent a letter directing Citigroup to transfer the assets to Brown & Company. (Jenkins Decl. Ex. J.) Amboy Bank was under the impression that this transfer would take several days, and that there may have been a previous pledge agreement on the assets, but that it had been released. (See D and D Mem. in Supp. of Mot. to Dismiss at 5.)

On February 24, 2006, Citigroup received an email from Cayre's attorney stating that KLCC had not authorized any transfer of assets from the Dwek account and that any transfer would be in violation of the control agreement. (Jenkins Decl. Ex. L.) Citigroup terminated the transfer. Citigroup claims that it attempted to notify Amboy Bank that the transfer had been terminated, but was unsuccessful. Amboy Bank claims that it received no notice that the transfer was not completed.

On April 24-25, 2006, the FBI and PNC Bank initiated criminal and civil proceedings against Dwek in New Jersey state court for defrauding PNC Bank of $23 million dollars in an unfunded transfer.

On April 26, KLCC instructed Citigroup to liquidate the Dwek account and transfer all of the funds into a KLCC account at HSBC, (Jenkins Decl. Ex. H), but rescinded the order the next day. (Id. Ex. I.) Instead, KLCC directed Citigroup to transfer the assets to newly created account at Citigroup in KLCC's name. On May 1, 2006, at KLCC's direction, Citigroup began the process of transferring the assets now in KLCC's account at Citigroup to an account at Bear Stearns & Co.

On May 3, 2006, the Superior Court of New Jersey, Monmouth County in PNC Bank v. Dwek, No. MON-C-133-06 issued an order freezing all assets in which Dwek or Dwek-controlled entities had an interest. The order was published in the Asbury Press the following day, along with an article alleging that Cayre was the recipient of $2 million of the money that Dwek allegedly stole from PNC Bank.

On May 8, 2006, Amboy Bank contacted Citigroup about the status of the aborted February transfer and informed Citigroup that Amboy had an interest in the assets that had been in the Dwek account as collateral for a loan. In light of this claim and the potential that the assets were frozen by the New Jersey court order, Citigroup halted the transfer of the assets from the KLCC account to Bear Stearns.

Various claims by Dwek's creditors have been consolidated with the PNC Bank case in the New Jersey court before Judge Alexander Lehrer. Judge Lehrer appointed a fiscal agent to manage the frozen Dwek-owned properties. In an order dated November 1, 2006, Judge Lehrer appointed the person who had been merely a fiscal agent as the "Trustee in Liquidation," granting him all of the powers of a receiver in bankruptcy. (Citigroup's Supp'l Mem. at 2-4.) The Trustee in Liquidation was charged with marshalling and liquidating Dwek's assets and distributing them to his creditors. (Id.)

Citigroup attempted to intervene in the New Jersey action by filing an order to show cause to interplead on June 1, 2006. When Citigroup learned that the court would not consider interpleader relief for at least 120 days, however, Citigroup withdrew the motion. Citigroup proposed bringing the matter to federal court by way of consent order which would provide for the joint management of the assets during the pendency of the action. On July 14, 2006, after the parties were unable to agree on a joint management plan, KLCC commenced an action in New York state court against Citigroup. It is unlikely that the New York court would be able to obtain personal jurisdiction over D and D Trust as it is a New Jersey trust and has no contacts with New York. Citigroup commenced a statutory interpleader action in this Court on July 17, 2006.


We deal first with D and D Trust's motion to dismiss for lack of personal jurisdiction or to abstain in deference to ...

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