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Daiwa Securities America, Inc. v. Grande Holdings Limited

November 20, 2007

DAIWA SECURITIES AMERICA, INC., PLAINTIFF,
v.
THE GRANDE HOLDINGS LIMITED, DEFENDANT.



The opinion of the court was delivered by: John Gleeson, United States District Judge

PUBLICATION ONLY

MEMORANDUM AND ORDER

Plaintiff Daiwa Securities America, Inc. ("Daiwa") sues The Grande Holdings Ltd. ("Grande") seeking indemnification for legal defense costs it incurred in connection with Fred Kayne, et al. v. MTC Electronic Technologies Co., Ltd., et al. (Kayne), No. 95 CV 2499 (JG) (JO) (E.D.N.Y. Dec. 19, 2005). Grande moves for judgment on the pleadings, claiming that the terms of a mutual bar order entered in Kayne prevent Daiwa from making any claims for indemnification. Daiwa claims that the language of the Kayne bar order only precludes claims for indemnification based on Daiwa's liability to the Kayne plaintiffs, not claims for indemnification based on Daiwa's defense costs. For the reasons stated below, Grande's motion for judgment on the pleadings is denied.

BACKGROUND

Beginning in 1993, Daiwa -- an underwriter for the electronics manufacturing company MTC -- has been a named co-defendant in several class and individual actions alleging securities fraud on the part of MTC in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). See, e.g., In re MTC Electronic Technologies Shareholder Litigation, No. 93 CV 876 (JG)(CLP) (E.D.N.Y. Dec. 19, 2005); Sun Yung Kim v. Miko Leung, et al., No. 94 CV 5744 (JG)(JO) (E.D.N.Y. Mar. 11, 1998); Todd Ellis, et al., v. Miko Leung, et al., No. 94 CV 1763 (E.D.N.Y. Apr. 26, 2002); Fred Kayne, et al., v. MTC Electronic Technologies Co. Ltd., et al. (Kayne), No. 95 CV 2499 (JG)(JO) (E.D.N.Y. Dec. 19, 2005). The plaintiffs allege that MTC fraudulently misrepresented the scope of its sales in China, leading to an increase in MTC stock values and, eventually, millions of dollars in losses to investors. Daiwa brought cross-claims against MTC for indemnity and contribution pursuant to Letter Agreements with MTC, the Underwriting Agreement, and securities laws.

In the instant action filed on January 20, 1998, Daiwa alleges that Grande, as MTC's largest single shareholder, took control of MTC's board of directors, stripped MTC of its assets, and misappropriated the assets for itself in order to render MTC judgment-proof and unable to satisfy its indemnification obligations pursuant to its agreements with Daiwa. Compl. ¶¶ 10-11. Daiwa also argues that after a 1994 proxy contest between Grande and MTC, Grande's slate of directors effectively became MTC directors and Grande exercised complete dominion and control over MTC as its largest single shareholder. Compl. ¶¶ 21-23. In 1995, MTC changed its name to GrandeTel Technologies Inc., which Daiwa cites as "the most public recognition of the fact that Grande now controls MTC." Id. ¶ 29. In total, Daiwa alleges that Grande siphoned $19.7 million away from MTC. In light of the pervasive control that Grande exercised over MTC, Daiwa seeks to "pierce the corporate veil" and hold Grande responsible for its indemnity claims against MTC.

However, while Daiwa's action against Grande was pending, the other suits were proceeding apace. In the related Kayne case, 95 CV 2499 (JG)(JO), the plaintiff class settled with defendants BDO Dunwoody ("BDO"), HSBC Bank Canada ("HSBC"), and HSBC executive Ron Driol, and I entered a bar order preventing non-settling co-defendants from making any claims against BDO related to this litigation.*fn1 Non-settling defendants, including Daiwa, appealed that order, seeking, inter alia, (1) to modify the bar order to block claims for contribution and indemnity only, and (2) to impose a reciprocal bar on BDO.*fn2 The court of appeals held that Daiwa and other non-settling defendants were entitled to a modification of the bar order. Gerber v. MTC Elec. Techs. Co., Ltd., 329 F.3d 297, 307 (2d Cir. 2003). The only claims BDO could properly extinguish, the court found, were those for damages based on the non-settling defendant's liability to the plaintiffs. Id. at 306-07 ("[A] modification to the bar orders is necessary to ensure that the only claims that are extinguished are claims where the injury is the non-settling defendants' liability to the plaintiffs."). The Circuit modified the BDO bar order to read as follows:

Each of the Non-Settling Defendants is hereby permanently BARRED, ENJOINED, and RESTRAINED from commencing, prosecuting, or asserting any claim for indemnity or contribution against BDO (or any other claim against BDO where the injury to the Non-Settling Defendant is the Non-Settling Defendant's liability to the plaintiffs), arising or reasonably flowing from the claims or allegations in the Kayne action, whether arising under state, federal, or foreign law as claims, cross-claims, counterclaims, or third-party claims, in the Kayne action, in this Court, in any federal or state court, or in any other court, arbitration proceeding, administrative agency, or other forum in the United States, Canada, or elsewhere (collectively, the "Barred Claims"). These Barred Claims include, but are not limited to, any and all claims arising out of or reasonably flowing from "comfort letters" issued to Non-Settling Defendant Daiwa by BDO in connection with MTC, to the extent that the injury to the Non-Settling Defendant under any such claim is its liability to the Kayne plaintiffs.

Id. at 307 (italics signify additions). The Circuit remanded the matter to me to determine whether the bar order should be mutual (that is, whether it should incorporate a reciprocal bar against BDO). Id. at 309.

On remand, Daiwa argued that the BDO bar order should be mutual. It also sought approval for a mutual bar order in its own settlement with the Kayne plaintiffs. The proposed Daiwa bar order used language which was essentially identical -- with one omission detailed below -- to the BDO bar order as modified by the court of appeals in Gerber. The relevant passage reads:

[Daiwa] is hereby permanently barred, enjoined and restrained from commencing, prosecuting, or asserting any claim for indemnity or contribution (or any other claim where the injury to [Daiwa] is [Daiwa]'s liability to the Plaintiffs), arising out of or reasonably flowing from the claims or allegations in Kayne, whether arising under state, federal or foreign law as claims, cross-claims, counterclaims, or third party claims, in Kayne, in this Court, in any federal or state court, or in any court, arbitration proceeding, administrative agency or forum in the United States, Canada or elsewhere, or in any other manner, including but not limited to offset.

Arden Aff. Ex. B 4. Daiwa requested that the Daiwa bar order be made non-mutual only if I determined that the BDO bar order should be made non-mutual. In re MTC, 2005 WL 1322889, at *3. I determined that the BDO bar order should be mutual, id. at *5, and approved the Daiwa bar order as a mutual bar order, id. at *1.

Grande now seeks to invoke the Daiwa bar order to prevent Daiwa from seeking indemnity against it in this action. Daiwa argues that the bar order does not preclude all claims for indemnity, only claims for indemnity where the injury to Daiwa is Daiwa's liability to the Kayne plaintiffs. Daiwa argues that the bar ...


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