United States District Court, S.D. New York
In re STILLWATER ASSET BACKED OFFSHORE FUND LTD., Debtor. STILLWATER LIQUIDATING LLC, Plaintiff-Appellant,
NET FIVE PALM POINTE, LLC; NET FIVE HOLDINGS LLC; PLANET FIVE DEVELOPMENT GROUP LLC; NET FIVE SOUTH BEACH LLC; NET FIVE AT KINGS HOTEL LLC; NET FIVE AT HALLANDATE LLC; BOGGY CREEK VILLAS, LLC; NET FIVE EAST LYME, LLC; NET FIVE-FDA AT ISLAMORADA, LLC; 1888 BOGGY CREEK ROAD, LLC; PLANET FIVE AT GEROVA LLC; PAUL ROHAN; ERIC HALTER; PARADIGM CREDIT CORPORATION; SAUNDERS CAPITAL LLC; CALHOUN COMMERCIAL CONSTRUCTION LLC; JUDGE STREET REALTY LLC; SFN DEKALB HOLDINGS LLC; MEMPHIS BLUES ACQUISITION GROUP, LLC; SHREEJI HOSPITALITY OF CHARLOTTE, LLC; REDROCK KINGS, LLC; JOHN R. AND YVETTE DANIEL III; STEPHEN J. AND VICKI MCDONALD; CL RP STONECREST LLC; 335 WASHINGTON AVENUE - MIAMI BEACH LLC; 347 WASHINGTON AVENUE - MIAMI BEACH LLC; AND ALMA BANK., Defendants-Appellees, GEROVA FINANCIAL GROUP LTD., Nominal Defendant.
OPINION AND ORDER
Edgardo Radios, U.S.D.J.
Liquidating LLC (“Stillwater Liquidating” or
“Appellant”) appeals from an October 26, 2016
Order (the “October Order”), and an October 26,
2016 Judgment (the “October Judgment”) by
Bankruptcy Judge Michael E. Wiles for the Southern District
of New York. No. 14-02245 (MEW) Adversary Proceeding
(“Adv. Proc.”), Docs. 388, 389. The bankruptcy
court granted in part various motions to dismiss Stillwater
Liquidating's First Amended Complaint (“FAC”)
pursuant to Federal Rule of Civil Procedure 12(b)(6), which
is applicable to bankruptcy courts through Federal Rule of
Bankruptcy Procedure 7012(b). For the reasons set forth
below, the appeal is DISMISSED and the bankruptcy court's
decision is AFFIRMED.
Factual and Procedural Background
appeal arises from an adversary proceeding brought by
Stillwater Liquidating in connection with the bankruptcy of
debtor Stillwater Asset Backed Offshore Fund Ltd. (the
“Debtor Fund”). FAC ¶ 1. Stillwater
Liquidating-an entity created pursuant to a settlement
agreement in the underlying bankruptcy proceeding to pursue
certain claims-seeks recovery on behalf of the creditors of
the Debtor Fund and eleven other “related” funds
that were not debtors in the underlying bankruptcy
proceedings (the “Non-Debtor Funds”).
Id. Hereinafter, the Court refers to the Debtor Fund
and the eleven related Non-Debtor Funds collectively as the
“Stillwater Funds.” Stillwater Liquidating
alleges that the Stillwater Funds were defrauded when their
assets were transferred to Gerova Financial Group, Ltd.
(“Gerova Financial”) and Gerova AB Holdings, Ltd.
(“Gerova Holdings, ” and together,
“Gerova”)-nearly three years before the Debtor
Fund filed its bankruptcy petition-and were then either
subsequently transferred to various individual purchasers and
entities or used to obtain loans. Id. ¶¶
The Debtor Fund and Related Funds
Debtor Fund was a Cayman Islands offshore investment company
originally formed to invest in a portfolio of loans.
Id. ¶ 64; No. 12-14140 (MEW) Bankruptcy
Petition (“Bankr. Pet.”), Doc. 34 at 3. The
Debtor Fund's investments were in the form of
“participation interests” in loans issued by
Stillwater Asset Backed Fund LP, a Delaware corporation that
made real estate loans and other types of loans (the
“Delaware Fund”). FAC ¶¶ 2, 63, 69;
Bankr. Pet., Doc. 34 at 3. The Debtor Fund's investments
consisted of “participation interests” in 24
loans issued by the Delaware Fund. FAC ¶ 2. Each of the
Debtor Fund's investments was governed by a Master Loan
Participation Agreement (“MLPA”) between the
Debtor Fund and the Delaware Fund. Id. ¶¶
2, 71. The MLPAs define “participation interest”
as the undivided beneficial interest of the Debtor Fund in
the loan payments and the underlying collateral. Id.
¶ 71. The MLPAs provided that the Delaware Fund would
hold the loan payments and collateral “in trust”
in its own name for the pro rata benefit of itself
and the Debtor Fund. Id. ¶¶ 2, 73; MLPA
§§ 1.1, 3.1(a), 3.5. The MLPAs further state that
the agreements “shall not be deemed to represent a
pledge of any interest in the Loans by the [Delaware Fund] to
the [Debtor Fund].” MLPA § 7.10. Of the 24 loans
issued by the Delaware Fund in which the Debtor Fund
invested, 23 were for real property and one was for life
insurance policies. FAC ¶ 2.
Capital Partners, Inc. (“SCP”) was the outside
investment manager of the Debtor Fund. Id. ¶
54. It also managed the Non-Debtor Funds. Id.
¶ 58. SCP is not a party to this action. Other than
stating that the Non-Debtor Funds are “related”
to the Debtor Fund, Stillwater Liquidating does not describe
the relationship between the funds in great
detail. See FAC ¶ 21. The Non-Debtor
Funds are not parties to this adversary proceeding.
The Gerova Transfer
December 31, 2009, SCP caused the Stillwater Funds to enter
into an asset purchase agreement and various merger
agreements (collectively, the “Asset Purchase
Agreement”) with Gerova. Id. ¶¶ 4, 91.
Pursuant to the Asset Purchase Agreement, on January 20,
2010, SCP caused all of the Stillwater Funds'
assets-which included the 24 participation interests of the
Debtor Fund in loans issued by the Delaware Fund-to be
transferred “in bulk” to Gerova. Id.
¶¶ 4, 91. For ease of reference, the Court refers
to this transfer as the “Gerova Transfer”
hereinafter. In exchange, Gerova was required to provide the
Stillwater Funds with $385 million worth of stocks, and
agreed to assume enumerated liabilities of the Stillwater
Funds. Id. ¶ 92. However, Stillwater
Liquidating alleges that Gerova never transferred any stocks
to the Stillwater Funds and failed to pay any of their
liabilities. Id. ¶¶ 4, 96, 98, 102.
the Gerova Transfer, the Delaware Fund was merged with
Stillwater Asset Backed Fund II LP, one of the Non-Debtor
Funds, into Stillwater Asset Backed Holdings LP. Id.
Stillwater Real Estate Partners, LP; (10) Stillwater WPB
Venture LP; and (11) Stillwater WPB Venture II LP. FAC ¶
1, n. 3. ¶ 97. The Debtor Fund was merged and
consolidated into Gerova Asset Backed Holdings LP, a Delaware
entity. Id. Both of these merged entities were owned
and controlled by Gerova Financial. Id.
Subsequent Transfers and Encumbrances
2010, Gerova and Planet Five, a Florida-based real estate
developer, formed a joint venture named Net Five Holdings by
entering into an operating agreement (the “Operating
Agreement”). See id. ¶¶ 25, 103.
Paul Rohan, the founder of Planet Five, serves as the manager
of Net Five Holdings, and Eric Halter served as its Chief
Operations Officer during the relevant time period.
Id. ¶¶ 36-37. As part of its capital
contribution to Net Five Holdings, Gerova contributed more
than 100 parcels of property worth tens of millions of
dollars. Id. ¶ 113. Stillwater Liquidating
claims that these parcels of property are traceable to the
assets originally transferred from the Stillwater Funds in
the Gerova Transfer. Id. ¶ 113. These assets
were then either used to obtain loans from so-called
“Hard Money Lenders” or were purchased by other
individuals and entities (the “Purchaser
Defendants”). Id. ¶ 148.
Liquidating alleges that in many cases, Net Five Holdings
first transferred ownership of the assets to various Special
Purpose Entities (“SPEs”) it had created for the
sole purpose of facilitating subsequent transfers, in an
effort to add layers of complexity and make it more difficult
for creditors of the Stillwater Funds to pursue the
assets. Id. ¶ 149. The SPEs, in
turn, transferred the assets to the Purchaser Defendants.
Id. For many of the transferred assets, the title
records of the properties were either never changed from one
of the Stillwater Funds, or were only changed belatedly when
Net Five Holdings wanted to sell or pledge the assets.
Id. The following Purchaser Defendants are the
alleged subsequent transferees of the assets at issue and are
Defendants in this case:
• 335 Washington Avenue - Miami Beach, LLC (“335
Washington”), a Florida limited liability company
located in Miami, Florida;
• 347 Washington Avenue - Miami Beach, LLC (“347
Washington”), a Florida limited liability company
located in Miami, Florida;
• Calhoun Commercial Construction LLC
(“Calhoun”) located in Calhoun, Georgia;
• Judge Street Realty LLC (“Judge Realty”),
located in New York, New York;
• SFN Dekalb Holdings LLC (“SFN”), located
in Duluth, Georgia; • CL-RP Stonecrest LLC
(“Stonecrest”), a Georgia limited liability
company located in Minneapolis, Minnesota;
• Memphis Blues Acquisition Group, LLC (“Memphis
Blues”), located in Eads, Tennessee;
• Shreeji Hospitality of Charlotte, LLC
(“Shreeji”), located in Charlotte, North
• Redrock Kings, LLC (“Redrock”), located in
New York, New York;
• Alma Bank, located in Astoria, New York;
• John R. and Yvette Daniel III, residing in Kennesaw,
• Stephen J. and Vickie McDonald, residing in Roswell,
Id. ¶¶ 42-53.
Hard Money Lenders include Defendants Paradigm Credit
Corporation (“Paradigm”) and Saunders Capital LLC
(“Saunders”). Id. ¶¶ 39-40.
Paradigm is located in New York, New York, and Saunders is
located in New Caanan, Connecticut. Id. For some of
the assets, the Hard Money Lenders entered into borrowing
agreements with Net Five Holdings, accepting liens on
property that Stillwater Liquidating contends originally
belonged to the Stillwater Funds. Id. ¶¶
153, 155. Specifically, Paradigm provided two loans to Net
Five Holdings on August 5, 2010 and December 20, 2011.
Id. ¶¶ 159, 190, 271. Saunders provided
two loans to Net Five Holdings on June 11, 2010 and September
17, 2010. Id. ¶ 156. These loans allegedly
allowed Net Five Holdings and related Defendants to reap
benefits without assuming any of the risks. Id.
The Debtor Fund's Bankruptcy Proceedings
October 3, 2012, the Debtor Fund filed an involuntary
petition for Chapter 11 bankruptcy before Bankruptcy Judge
Allan L. Gropper. FAC ¶¶ 20, 125; Bankr. Pet., Doc.
1. During the bankruptcy proceeding, the Debtor Fund entered
into a settlement with, inter alia, Gerova (the
“Settlement”). FAC ¶ 24. The Settlement was
memorialized by the Global Settlement Agreement dated
December 23, 2013, the Stillwater Agreement dated December
23, 2013, the Stillwater Liquidation LLC Agreement dated July
10, 2014, and the Joint Chapter 11 Plan proposed by the
Debtor Fund and the official committee of its unsecured
creditors. Id. ¶ 20; Docs. 21-34, 21-35, 21-36,
21-39. On August 13, 2014, Bankruptcy Judge Gropper confirmed
the Joint Chapter 11 Plan. FAC ¶ 22; Bankr. Pet., Doc.
Liquidation is a Delaware limited liability company that was
formed pursuant to the Settlement. FAC ¶ 20. The FAC
alleges that the Settlement gave Stillwater Liquidating (1)
Gerova's ownership interest in the assets that had
belonged to the Debtor Fund and the Non-Debtor Funds, (2) the
Debtor Fund and the Non-Debtor Funds' ownership interests
in all of the tangible and intangible assets and claims they
formerly owned, and (3) claims against third parties related
to the Gerova Transfer and subsequent transfers. Id.
The Adversary Proceedings
Liquidating brought this adversary proceeding in the
bankruptcy court on October 2, 2012. Adv. Proc. Doc. 1.
Bankruptcy Judge Gropper initially presided over the
proceedings, but the case was transferred to Bankruptcy Judge
Wiles in January 2015. Appellant Br. at 4. Among other
things, Stillwater Liquidating seeks to avoid the transfer of
Stillwater Fund assets to the Purchaser Defendants and the
Hard Money Lenders, on the theory that the Gerova Transfer
and Gerova's subsequent transfer of assets to Net Five
Holdings were fraudulent. See FAC ¶ 15.
to Stillwater Liquidating, the Purchaser Defendants and the
Hard Money Lenders should have known that the transfers were
illegitimate because the following “red flags”
should have tipped them off that Gerova and Net Five Holdings
were fraudsters: (1) Gerova Financial failed to make
financial disclosures after 2009; (2) Gerova Financial's
CEO and Board Chairman resigned in the Spring of 2010 after
only three months in that position; (3) in January 2011,
Forbes and The Wall Street Journal published articles stating
that Gerova Financial was run by individuals implicated in
Ponzi schemes; (4) in January 2011, Dalrymple Finance LLC, an
industry watchdog, filed a report that described Gerova
Financial as a “classic fraud” affiliated with
Ponzi scammers; (5) in February 2010, the New York Stock
Exchange (“NYSE”) warned Gerova Financial that it
may be delisted, and Gerova Financial was eventually delisted
in February 2011; (6) between March and May 2011, various
creditors and investors filed a series of lawsuits against
Gerova and Net Five Holdings, including several class actions
concerning a scheme to defraud the Debtor Fund and related
funds; and (7) Net Five Holdings and its subsidiaries were
prohibited via a July 12, 2012 court order in one of the
class actions from transferring assets without disclosing
certain information to the class action plaintiffs.
Id. ¶¶ 14, 127-145.
March 30, 2015, Hard Money Lenders Paradigm, ASGAARD, and
Camden, and Purchaser Defendants John and Yvette Daniel, and
Stephen and Vickie McDonald filed four separate motions to
dismiss. Adv. Proc. Doc. 69, 70, 75, 77. On April 13, 2015,
Camden sought to join Paradigm and ASGAARD's motions to
dismiss. Adv. Proc. Doc. 101. On May 19, 2015, Net Five
Holdings, the Net Five SPEs, Rohan, and Halter (collectively,
the “Net Five Defendants”), and the Daniels and
McDonalds sought to join Camden's motion to dismiss. Adv.
Proc. Doc. 132, 133. On May 12, 2015, Stillwater Liquidating
filed a supplement to the Complaint at the direction of the
bankruptcy court. Adv. Proc. Doc. 130. On May 19, 2015,
Purchaser Defendant SFN filed its own motion to dismiss. Adv.
Proc. Doc. 135. ...