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Neil H. Ackerman, Chapter 7 Trustee of Marine Risks, Inc., E.D. v. Walter Pilipiak

August 25, 2011


Bankr. Adv. Proc. No. 06-08416

The opinion of the court was delivered by: Seybert, District Judge:


In this bankruptcy appeal, Neil H. Ackerman ("Appellant" or the "Trustee"), the Chapter 7 Trustee of Debtor Marine Risks, Incorporated ("Debtor" or "MRI"), challenges the Bankruptcy Court's decision (1) denying in part the Trustee's request to amend his Adversary Complaint against Defendant Walter Pilipiak ("Appellee" or "Defendant") and (2) dismissing the Complaint pursuant to Federal Rule of Civil Procedure 52 and Federal Rule of Bankruptcy Procedure 7052 (the "Bankruptcy Order"). Defendant cross-appeals, arguing that the Bankruptcy Court erred by amending portions of the Trustee's Complaint to conform with the evidence at trial and by not including an award of costs and fees in the Bankruptcy Order. Also pending is Defendant's Rule 11 motion to sanction the Trustee for his alleged bad faith in prosecuting this appeal.

For the following reasons, the Bankruptcy Order is AFFIRMED in its entirety and the Trustee's appeal and Defendant's cross-appeal are dismissed. Defendant's Rule 11 motion is DENIED.


MRI was a New York insurance brokerage, specializing in marine and automobile insurance. Bruce Keyes was its majority shareholder and, at all relevant times, a director of the company and its president. Defendant, also a shareholder, was an officer and director of MRI.

In 1997, after his responsibilities at MRI were increased to include oversight of MRI's general operations, Defendant learned that MRI was retaining premium checks belonging to MRI's clients. (See Bankr. Order at 7.) When Defendant confronted Keyes about his discovery, Keyes directed that false memo bills be drawn up to hide the discrepancies. Id. Defendant thereafter conducted an internal investigation of MRI's billing processes, eventually concluding that MRI had been improperly retaining funds that belonged to its clients. Id. at 8.

In late 1997--not long after Defendant confronted Keyes about the questionable billing practices--MRI underwent a restructuring and Defendant's role in MRI's operations was reduced over his objection. Id. at 8-9. In early 1998, Defendant was interviewed by the New York State Department of Insurance about his internal investigation into MRI's billing irregularities. Id. That spring, he discussed his findings with prosecutors from the Manhattan District Attorney's office. Id. Keyes was indicted on fraud and larceny charges in November 1998, and he was arrested on November 12, 1998. Id. at 10.

In a post-indictment letter to MRI's shareholders, Keyes characterized the indictment as a grave threat to MRI's business: "At this writing, we have over 50% of our clients' renewals coming up within the next thirty days and can safely say that most, if not all, of these renewals are in serious jeopardy due solely to the criminal indictment brought by the District Attorney's office." Id. at 16 (quoting Def. Ex. W-2).

Almost immediately after Keyes was arrested, MRI's clients and other parties began contacting the company with questions. An officer of Cosmos, a rival insurance broker, called Defendant and asked whether Keyes was interested in selling MRI in light of his impending prosecution. Id. at 10.

Defendant responded that Cosmos has to speak directly with Keyes. Id.

On December 2, 1998, Keyes, who had declined his employees' pleas to step down while his prosecution was pending, told MRI's management that he planned on selling MRI's assets to a competitor, Nausch, Hogan and Murray ("NHM"). Id. at 11. Keyes said that he had agreed to the following terms of a letter of intent ("Letter of Intent") between the parties: beginning January 1, 1999, NHM would acquire all of MRI's ongoing business interests and would receive any clients that wanted to transfer from MRI to NHM. In return, NHM would pay MRI's shareholders 20% of the commissions generated by MRI's former clients for the following five years. MRI itself would receive nothing in exchange for its assets.*fn1 Id. 11-12.

The NHM-MRI deal was contingent on NHM's being satisfied with its due diligence on MRI. Id. at 12. Keyes signed the Letter of Intent on behalf of MRI and added "subject to shareholder approval." Id. The deal provided that NHM would hire "all key employees and branch office personnel currently employed by" MRI; Keyes explained at the meeting that Bill Murray, one of NHM's founding members, would determine which MRI employees would be kept by NHM. Id. at 13.

At the December 2, 1998 meeting, Defendant told Keyes that Cosmos was interested in doing a transaction with MRI, but Keyes told Defendant that MRI would not deal with Cosmos because MRI's largest client, Nippon Express, would object. Id. at 13-14. The next day, Defendant contacted Cosmos about a job opportunity. A few days later, he offered to join Cosmos as president and as a director. As part of the employment package, Defendant offered to bring six key employees and a book of MRI's business with him to Cosmos. Id. at 15.

Between December 3 and December 21, 1998, Defendant continued to meet with MRI's clients to negotiate renewals of their insurance contracts, which were scheduled to expire at year's end. Id. at 14. According to an email between employees of ACL, an MRI client, Defendant provided ACL with a renewal contract but told ACL that he would decide shortly whether to leave MRI. The email explained that the reason for Defendant's impending decision "is that Bruce Keyes has announced the sale of [MRI] to [NHM] selling Walter down the river. Policies are in Walter's control as the Broker of Record. I have scheduled appointment here with a broker from Marsh-Sedgwick, on Wednesday: 12/9." Id. at 14 (quoting Trustee's Ex. 87). Although he had contact with MRI's clients during this time, Defendant testified that he did not advise clients that he was seeking employment with Cosmos. Id. at 17.

Defendant resigned from MRI on December 21, 1998 and began working for Cosmos on the same day. Id. Several MRI employees and twelve MRI clients followed Defendant to Cosmos. Although Nippon Express, MRI's largest and most important client, did not renew its business with MRI following the indictment, it did not take its business to Cosmos. See id. at 15, 17-18.

On the same day that Defendant left MRI, NHM decided not to follow through with the proposal to buy MRI's assets. Id. at 18. MRI's revenues for 1999 were sharply lower than those for 1998. Keyes was convicted of fraud, and MRI officially went out of business in 2001 after its and Keyes' insurance licenses were revoked (Keyes' because of ...

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