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Cobalt Multifamily Investors I, LLC v. Shapiro

December 3, 2009

COBALT MULTIFAMILY INVESTORS I, LLC, ET AL., PLAINTIFFS,
v.
MARK A. SHAPIRO, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Kimba M. Wood, U.S.D.J.

OPINION AND ORDER ON MOTION FOR RECONSIDERATION OF JULY 2009 ORDER

I. Introduction

The court-appointed receiver (the "Receiver") for Plaintiffs Cobalt Multifamily Investors I, LLC, and its related, defunct entities (collectively, "Cobalt"), filed suit against numerous Defendants, including three sets of attorneys and their law firms ("Law Firm Defendants") who provided professional services to Cobalt. Law Firm Defendants moved to dismiss the claims against them on the ground that the Receiver lacks standing. On March 28, 2008, the Court granted the motion to dismiss the Receiver's claims against Law Firm Defendants.

In light of a subsequent decision issued by the Court of Appeals for the Second Circuit, Bankruptcy Services, Inc. v. Ernst & Young ("CBI Holding Co."), 529 F.3d 432 (2d Cir. 2008), the Receiver moved for reconsideration of the motion to dismiss. On July 15, 2009, the Court granted the motion for reconsideration on the ground that failure to do so would result in clear error. On reconsideration, the Court granted in part and denied in part Defendants' motion to dismiss. Relevant to the instant motion, the Court denied Law Firm Defendants' motion to dismiss Plaintiffs' legal malpractice and corporate looting claims.

One set of Law Firm Defendants, Martin P. Unger and his firm, Certilman Balin Adler & Hyman, LLC (collectively, "Certilman Defendants"), now moves for reconsideration of the Court's July 15, 2009 Order (hereinafter, "July 2009 Order"). Certilman Defendants submit that the Court committed clear error in the July 2009 Order by: (1) misapplying the adverse interest exception to the Wagoner rule; and (2) misapplying the sole actor exception to the adverse interest exception. Certilman Defendants also raise a new argument that dismissal of all claims against them is proper because they, in their role as outside attorneys for Cobalt, did not owe a fiduciary duty to shareholders and future shareholders.

In the alternative, Certilman Defendants argue that the Court should certify the July 2009 Order for an immediate appeal to the Second Circuit pursuant to 28 U.S.C. § 1292(b).

For the reasons discussed below, Certilman Defendants have not established that the Court committed clear error, or that the July 2009 Order should be certified for immediate appeal pursuant to 28 U.S.C. § 1292(b). Accordingly, the Court DENIES Certilman Defendants' motion for reconsideration and DENIES the motion for certification for an immediate appeal.

II. Legal Standard on Motion for Reconsideration

Federal Rule of Civil Procedure ("Rule") 54(b) provides that a court's order or decision "is subject to revision at any time before the entry of judgment." A party to the action can request a revision by filing a motion for reconsideration. Fed. R. Civ. 54(b); S.D.N.Y. Local Civ. R. 6.3. "Reconsideration of a court's previous order is an 'extraordinary remedy to be employed sparingly in the interests of finality and conservation of scarce judicial resources.'" Parrish v. Sollecito, 253 F. Supp. 2d 713, 715 (S.D.N.Y. 2003) (quoting In re Health Mgmt. Sys., Secs. Litig., 113 F. Supp. 2d 613, 614 (S.D.N.Y. 2000)). "Whether to grant or deny a motion for reconsideration . . . is in the sound discretion of a district court judge." Greenwald, 2003 WL 660844, at * 1 (internal quotation marks and citation omitted).

A district court should limit Rule 54(b) revisions to instances in which "there is an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent a manifest injustice." Official Comm. of Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand, LLP, 322 F.3d 147, 167 (2d Cir. 2003). A party moving for reconsideration must set forth "the matters or controlling decisions which [it] believes the court has overlooked." S.D.N.Y. Local Civ. R. 6.3.

Reconsideration is appropriate where the court has overlooked "controlling decisions" that, "had they been considered, might have reasonably altered the result." Greenwald v. Orb Commc'ns & Mktg., Inc., No. 00-1939, 2003 WL 660844, at *1 (S.D.N.Y. Feb. 27, 2003) (quotation marks and citations omitted). "Controlling decisions include decisions from the United States Court of Appeals for the Second Circuit; they do not include decisions from other circuits or district courts, even courts in the Southern District of New York." Langsam v. Vallarta Gardens, No. 08-2222, 2009 WL 2252612, at *2 (S.D.N.Y. July 28, 2009). Where the movant fails to show that any controlling authority has been overlooked, and merely offers substantially the same arguments offered on the original motion, the motion for reconsideration must be denied. See Shrader v. CSX Tramp., Inc., 70 F.3d 255, 257 (2d Cir. 1995); see also Shamis v. Ambassador Factors Corp., 187 F.R.D. 148, 151 (S.D.N.Y. 1999) ("Local Rule 6.3 is to be narrowly construed and strictly applied so as to avoid repetitive arguments on issues that have been considered fully by the court.").

Courts should not grant a motion for reconsideration in order to allow a party "[to] advance new facts, issues or arguments not previously presented to the Court." Shamis, 187 F.R.D. at 151 (internal quotations and citations omitted); see also Brown v. Barnhart, No. 04-2450, 2005 WL 1423241, at *1 (S.D.N.Y. June 16, 2005).

III. Analysis of Arguments in Support of Reconsideration

A. Application of Adverse Interest Exception

1. Legal Standard

A receiver or trustee representing a bankrupt corporation generally does not have standing to assert claims against third parties for defrauding the corporation where the third parties assisted corporate managers in committing the alleged fraud. See In re Bennett Funding Group, Inc., 336 F.3d 94, 99-100 (2d Cir. 2003). This legal principle is based on the Wagoner rule, which states that a bankruptcy trustee has standing to assert only those claims that the bankrupt corporation itself could have brought. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991).

The adverse interest exception is an exception to the Wagoner rule that is applicable when the corporate managers "totally abandoned [the corporation's] interests and [acted] entirely for his own or another's purposes." Center v. Hampton Affiliates, Inc., 66 N.Y. 2d 782, 784-85 (1985). Determination of the exception's applicability requires a court to engage in a fact-specific inquiry. Such an inquiry may include consideration of (1) the manager's intent with respect to abandoning the corporation's interests, (2) the nature and extent of the benefit (if any) obtained by the manager as a result of the fraudulent conduct, (3) the nature and extent of the benefit (if any) received by the corporation itself as a result of the fraudulent conduct, (4) the various financial losses caused by the fraudulent conduct, and (5) other dynamics and details of the fraud relevant to analysis the party's standing to sue. See In re CBI Holding Co., Inc., 529 F.3d at 451-53.

If a court finds that the adverse interest exception applies, the receiver or trustee representing the bankrupt corporation has standing to assert claims against a third party that assisted the corporate agent in the fraudulent conduct. In re Bennett Funding Group, 336 F.3d at 100 (citing Wight v. BankAmerica Corp., 219 F.3d 79, 87 (2d Cir. 2000).

2. Defendants' Argument

Certilman Defendants submit that this Court "misapprehended or misinterpreted" the Second Circuit's holding in CBI Holding Co. such that the Court wrongly "render[ed] ultimate human intent the touchstone of the adverse interest exception." Defs. Mem. at 6 (D.E. 87). According to Certilman Defendants, the Court misinterpreted CBI Holding Co. as setting forth an intent-based standard that requires a court to consider only the subjective intent of a corporation's managers when deciding whether those managers "totally abandoned" the interests of a corporation.

In support of their argument, Certilman Defendants emphasize two post-CBI Holding Co. court decisions, one issued by a court in this district, Kirschner, as Trustee of the Refco Litigation Trust, v. Grant Thornton LLP (hereinafter "Refco"), No. 07-11604, 2009 WL 1286326 (S.D.N.Y. Apr. 14, 2009), and one issued by the Delaware Chancery Court, American ...


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