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In re Stillwater Asset Backed Offshore Fund Ltd.

United States District Court, S.D. New York

March 30, 2018

In re STILLWATER ASSET BACKED OFFSHORE FUND LTD., Debtor. STILLWATER LIQUIDATING LLC, Plaintiff-Appellant,
v.
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.

         Stillwater 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.

         I. Factual and Procedural Background[1]

         This 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. ¶¶ 7-9.

         A. The Debtor Fund and Related Funds

         The 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”).[2] 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.

         Stillwater Capital Partners, Inc. (“SCP”) was the outside investment manager of the Debtor Fund. Id. ¶ 54. It also managed the Non-Debtor Funds.[3] 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.[4] See FAC ¶ 21. The Non-Debtor Funds are not parties to this adversary proceeding.

         B. The Gerova Transfer

         On 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.[5] 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.

         Following 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.

         C. Subsequent Transfers and Encumbrances

         In May 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”).[6] 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.

         Stillwater 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.[7] 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 Carolina;
• 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, Georgia; and
• Stephen J. and Vickie McDonald, residing in Roswell, Georgia.

Id. ¶¶ 42-53.

         The Hard Money Lenders include Defendants Paradigm Credit Corporation (“Paradigm”) and Saunders Capital LLC (“Saunders”).[8] 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. ¶ 155.

         D. The Debtor Fund's Bankruptcy Proceedings

         On 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. 183.

         Stillwater 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. ¶ 21.

         E. The Adversary Proceedings

         Stillwater 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.

         According 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.

         On 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. ...


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