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In re ICP Strategic Credit Income Fund Ltd.

United States District Court, S.D. New York

May 9, 2017

IN RE ICP STRATEGIC CREDIT INCOME FUND LTD., Debtor.
v.
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 Plaintiffs-Appellants

          Matthew S. Kahn Kevin S. Rosen Gibson, Dunn & Crutcher, LLP Counsel for Defendant-Appellee

          MEMORANDUM & OPINION

          VERNON S. BRODERICK, United States District Judge

         Appellants 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.

         I. Background[1]

         A. Overview

         This 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 eleven months.

         The SCIF Funds were incorporated in 2005 as exempted limited liability companies under Cayman Islands Companies Law. (Compl. ¶¶ 17-18.)[2] 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.)

         Pursuant 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.)

         ICP was 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.)

         B. The Triaxx Funding CDO

         In 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 id)

         C. The October 2008 Misappropriation of Funds

         As the 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. . ¶ 42.)

         In 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.)

         The next day, White emailed Barclays' counsel at Cadwalader the following:

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 headaches).
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: “Yep.” (Id.)

         Barclays 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[3] and Direction Letter[4] 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.)

         In the 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.)

         At the 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.)

         D. Subsequent Transfers of Funds

         Throughout 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, 123a.)

         At 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. . ¶¶ 71; 93-99.)

         E. Representations Made to ICP Employees and ...


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