United States District Court, S.D. New York
IN RE ICP STRATEGIC CREDIT INCOME FUND LTD., Debtor.
DLA PIPER L.L.P. (US), Appellee. ICP STRATEGIC CREDIT INCOME FUND, LTD., ICP STRATEGIC CREDIT INCOME MASTER FUND, LTD., and HUGH DICKSON, and MICHAEL SAVILLE, in their capacity as Joint Official Liquidators of ICP Strategic Credit Income Fund, Ltd. and ICP Strategic Credit Income Master Fund, Ltd., Appellants,
William T. Reid Reid Collins & Tsai LLP Joshua J.
Bruckerhoff Craig A. Boneau Diamond McCarthy LLP Counsel for
Matthew S. Kahn Kevin S. Rosen Gibson, Dunn & Crutcher,
LLP Counsel for Defendant-Appellee
MEMORANDUM & OPINION
S. BRODERICK, United States District Judge
ICP Strategic Credit Income Fund, Ltd. (the “Feeder
Fund”), ICP Strategic Credit Income Master Fund, Ltd.
(the “Master Fund, ” and, together with Feeder
Fund, the “Funds” or the “SCIF
Funds”), and Hugh Dickson and Michael Saville in their
capacity as the Joint Official Liquidators of the Funds
(together, the “Liquidators”) appealed the
Decision and Order of United States Bankruptcy Judge (Gerber,
BJ.) dismissing their complaint against Appellee DLA
Piper LLP (US) (“DLA Piper” or
“DLA”), brought as an adversary proceeding after
being removed from New York state court, asserting claims for
aiding and abetting fraud, aiding and abetting breach of
fiduciary duty, and fraudulent trading under Section 147 of
the Cayman Islands Companies Law. Because I find, consistent
with the Bankruptcy Court's determination, that New York
law applies and requires dismissal on in pari
delicto grounds, the Bankruptcy Court's decision is
AFFIRMED and the appeal is DISMISSED.
case is about certain financial transactions orchestrated by
an investment manager, ICP Asset Management
(“ICP”), and its President and CEO, Thomas
Priore. ICP essentially used money belonging to the SCIF
Funds, a hedge fund client, to cover financial obligations
owed by Triaxx Funding High Grade I, Ltd.
(“Triaxx”), another investment vehicle managed by
ICP. The law firm DLA Piper represented Triaxx and ICP, and
helped create the documents that facilitated the transfers,
which totaled over $36 million dollars over the course of
SCIF Funds were incorporated in 2005 as exempted limited
liability companies under Cayman Islands Companies Law.
(Compl. ¶¶ 17-18.) The Feeder Fund invested
approximately $174 million into the Master Fund, which the
Master Fund invested, together with contributions from its
two other shareholders, for a total of approximately $245
million. (Id.) The Funds had two independent
directors in the Cayman Islands, Roger Hanson and Ronan
Guilfoyle. (Id. ¶ 28.)
to an October 25, 2006 Investment Management Agreement, ICP
served as SCIF Master's investment manager. (Id.
¶ 26.) Under that agreement, “ICP owed SCIF Master
the fiduciary duty to invest SCIF Master's assets in good
faith and give SCIF Master ‘the benefit of its best
judgment and efforts in rendering its services, ' among
other things.” (Id.) Priore served as director
of the Funds. (Id. ¶ 27.)
also the collateral manager of Triaxx, the issuer of certain
collateralized debt obligations in which the Funds had
invested approximately 50% of its net asset value.
(Id. ¶¶ 2-3.)
The Triaxx Funding CDO
2007, Triaxx entered into a Master Repurchase Agreement
(“MRA”) with Barclays Bank PLC. (Id.
¶ 31.) Under the MRA, Barclays essentially provided
Triaxx with a loan by providing financing to be paid back at
a later date, and secured by certain collateral.
(Id.) Pursuant to the MRA, if the value of the
collateral dropped below a certain level, Barclays would
issue a “margin call” requiring additional
collateral. (Id.) Should Triaxx fail to meet the
margin call, Barclays could declare default and liquidate the
collateral. (Id.) If, on the other hand, the value
of the collateral increased above a certain point, Barclays
would transfer margin excess funds to Triaxx. (See
The October 2008 Misappropriation of Funds
mortgage markets began to decline in late 2007, the value of
residential mortgage-backed securities (“RMBS”)
held by Triaxx also decreased, resulting in margin deficits.
(Id. ¶ 40.) Barclays issued margin calls that
Triaxx was unable to meet. (Id.) Between March and
October 2008, Triaxx engaged in a number of transfers of
bonds, unrelated to the transaction here, to satisfy its
obligations to Barclays. (Id. ¶ 41.) However,
by late 2008, Priore and ICP were no longer able to sell
additional bonds to cover the margin payments, and were
forced to find another source of capital. (Id. .
October 2008, ICP asked DLA Piper attorney Lucien White
whether an entity other than Triaxx could satisfy the margin
payment. (Id. ¶¶ 43-44.) On October 28,
2008, an ICP employee asked White if it was “possible
to just post [the margin] to [Barclays] in escrow for
[Barclays'] benefit if the deal unwinds but otherwise not
part of the deal structure?” (Id. ¶ 44.)
next day, White emailed Barclays' counsel at Cadwalader
Triaxx Funding needs to post $7.5mm to Barclays today.
We'd like to have an icp affiliate post the cash directly
in lieu of Triaxx Funding doing it (to avoid the painful
mechanics of issuing new Credit Enhancement Notes, setting up
a designed CE with the trustee and all the cash transfer
Think we can do it by having (I) a short letter agt between
Barclays and the funder of the cash and (II) a written waiver
of the mra margin requirement by Barclays in favour of Triaxx
(which should include acknowledgement that future margin
requirement would take into account the fact that Barclays
has the $7.5mm in cash).
(Id. ¶ 45.) After sending the email, White told
ICP to fund the margin payment “from an entity other
than ICP” because DLA wanted “to reduce the
argument that [ICP] has implicitly accepted additional
obligations under the transaction.” (Id.
¶ 46.) The ICP employee then told White that “[i]t
will be from our Hedge Fund [SCIF Master] not from ICPAM -
does that help?” (Id.) White responded:
agreed to the funding deal, and ICP caused SCIF Master to
transfer $7, 175, 455 to Barclays on October 29, 2008.
(Id. ¶ 47.) DLA then began drafting what would
become the Waiver Letter and Direction Letter between Barclays
and Triaxx. (Id. ¶ 48.) Barclays' counsel
told White that it would reserve Barclays' rights
“in case there are any claw-back proceedings.”
(Id. ¶¶ 48-49.) Another ICP employee
reviewed the draft Waiver Letter and told White, “I am
not sure that we see where this margin payment
[i.e., the payment from SCIF Master] is senior to
other margin in the deal.” (Id. ¶ 50.)
White responded: “That goes in the letter agreement
between the fund [SCIF Master] and Barclays that I have to
draft. I'd like to keep it out of this document to avoid
muddying the waters.” (Id.)
Waiver Letter, Barclays “(i) acknowledged that it
‘received, on October 29, 2008, $7, 175, 455.22 in
immediately available funds from [SCIF Master], which amount
has been applied by Barclays to meet the margin payment
obligations' of Triaxx Funding; and (ii) waived Triaxx
Funding's obligations under the MRA.” (Id.
¶ 51.) The Waiver Letter ultimately included
Barclays' reservation of rights in the event that SCIF
Master brought a fraudulent transfer claim against Barclays.
(Id. ¶ 52.)
time of this transaction, ICP and DLA Piper knew that the
Funds were not represented by counsel in connection with this
transaction, and White knew that the Funds had previously
been represented by the law firm Schulte Roth. (Id.
¶¶ 54, 101.) Despite this, White drafted a letter
agreement on behalf of the Funds between the Funds
and Barclays on October 31, 2008. (Id. ¶ 56.)
The purpose of the letter was to get Barclays' agreement
to pay excess margin to the Funds in the event that the RMBS
market improved. (Id.) However, Barclays refused to
sign the letter, and White later told ICP that “[i]f we
were to insist on it, they'd want the Issuer [Triaxx
Funding] to countersign it, which creates all kinds of
problems under the Indenture.” (Id. ¶
57.) Priore, ICP, and DLA Piper decided not to insist on
Barclays signing the letter agreement. (Id.)
Subsequent Transfers of Funds
2009, DLA documented nine additional payments from the Funds
to Barclays. (Id. ¶ 58.) During one such
transaction, the trustee, Bank of America, requested that
White “add a certification in the direction letter that
the Noteholders are not materially and adversely affected by
the transaction, ” which White added. (Id.
¶ 61.) The transfers totaled approximately $36.5 million
over a period of eleven months. (Id. ¶¶ 8,
several points, DLA billed Triaxx for legal services,
including “negotiating and drafting documents in
connection with [SCIF Master] funding of margin payments
under the Barclays MRA.” (Id. . ¶¶
Representations Made to ICP Employees and ...