The Wimbledon Fund, SC CLass TT v. Graybox LLC et al

Filing 70

MINUTES (IN CHAMBERS)- EX PARTE APPLICATION FOR STAY SUPPLEMENTAL BRIEFING RE: REQUIREMENT OF A BOND 61 ; FINAL ORDER GRANTING PRELIMINARY INJUNCTION by Judge Christina A. Snyder. The Court finds that staying the effect of its order granting Wimb ledon's request for a preliminary injunction is not appropriate at this time and DENIES Graybox's application 61 . IT IS HEREBY ORDERED that defendants, as well as their officers, agents, servants, employees, and attorneys, and all oth er persons or entities in concert or participation with any of them whether acting directly or through any corporation or other entity, subsidiary, division, or other device, including but not limited to, fictitious business names, is ENJOINED from transferring, either directly or indirectly, $2,412,000 out of any of defendants' accounts upon receipt of the Settlement Funds. This injunction further extends to the client trust account of Graybox's attorney, Katzman, and his la w firm, BMK. Moreover, defendants and all of the aforementioned persons or entities are ENJOINED from taking any actions that would direct the Settlement Funds outside the scope of the Courts injunction or cause, in any manner, the dissipation of the Settlement Funds before they are deposited in the accounts of any of defendants, their attorneys or any other persons or entities connected with defendants. As security for this injunction, Wimbledon is ordered to post a bond of $100,000. (lom)

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL

‘O’

Case No.

2:15-cv-06633-CAS(AJWx)

Title

THE WIMBLEDON FUND, SPC (CLASS TT) V. GRAYBOX, L.L.C.,
ET AL.

Present: The Honorable

Date

October 20, 2015

CHRISTINA A. SNYDER

Catherine Jeang
Deputy Clerk

Not Present
Court Reporter / Recorder

N/A
Tape No.

Attorneys Present for Plaintiffs:

Attorneys Present for Defendants:

Not Present

Not Present

Proceedings:

(IN CHAMBERS) - EX PARTE APPLICATION FOR STAY
SUPPLEMENTAL BRIEFING RE: REQUIREMENT OF A
BOND
FINAL ORDER GRANTING PRELIMINARY INJUNCTION

I.

INTRODUCTION AND BACKGROUND

Plaintiff, The Wimbledon Fund, SPC (Class TT) (“Wimbledon”), filed this action
on August 28, 2015 against defendants Graybox, L.L.C. (“Graybox”), Integrated
Administration, Eugene Scher, as trustee of the Bergstein Trust, and Cascade
Technologies, Corp. (collectively, “defendants”). Dkt. 1. In brief, the complaint alleges
that Wimbledon was the victim of a fraudulent investment scheme involving an
investment advisory company named Swartz IP Services Group (“SIP”). See generally
Id. Wimbledon asserts that in November and December 2011, it invested $17.7 million
dollars with SIP pursuant to a note purchase agreement, but that subsequently SIP caused
this investment to be transferred to various third parties, including defendants. Id. at 4-6.
Wimbledon asserts that these transfers violated its agreement with SIP and constituted
fraudulent transfers in violation of the California Uniform Fraudulent Transfer Act
(“CUFTA”). See id. Accordingly, Wimbledon asserts claims against defendants for
recovery of fraudulent transfers pursuant to California Civil Code §§ 3439.04, 3439.05,
and 3439.07. Id. at 7-12.
On September 9, 2015, Wimbledon filed a request for a preliminary injunction
freezing the assets of Graybox. Dkt. 16. The purpose of this injunction was to prevent
CV-90 (06/04)

CIVIL MINUTES - GENERAL

Page 1 of 6

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-06633-CAS(AJWx)

October 20, 2015

Title

THE WIMBLEDON FUND, SPC (CLASS TT) V. GRAYBOX, L.L.C.,
ET AL.

Graybox from dissipating roughly $2.9 million dollars Graybox is expected to receive
pursuant to a settlement agreement (the “Settlement Agreement”) in an ongoing
bankruptcy case in the Southern District of New York. Id. at 1. Wimbledon believes that
the proceeds of this settlement agreement (the “Settlement Funds”) are the only funds
from which it will likely be able to satisfy its fraudulent transfer claim against Graybox.
Id. On September 29, 2015, the Court granted Wimbledon’s request for a preliminary
injunction. Dkt. 54. In the Court’s order it requested that the parties file supplemental
briefing regarding an appropriate bond, if any, to secure the injunction. Dkt. 56, at 14. In
addition, Wimbledon was directed to submit a proposed order specifying the parameters
of its requested asset freeze. Id. at 13-14.
On October 6, 2015, Graybox filed a notice of appeal of the Court’s order granting
Wimbledon’s request for a preliminary injunction. Dkt. 58. That same day, Graybox
filed an ex parte application requesting that the Court stay the effect of its preliminary
injunction order during the pendency of Graybox’s appeal. Dkt. 61. On October 8, 2015,
Wimbledon filed an opposition, Dkt. 63, and on October 9, 2015, Graybox filed a reply,
Dkt. 64.
II.

DISCUSSION
A.

Application to Stay

Pursuant to Federal Rule of Civil Procedure 62(c), “while an appeal is pending
from an interlocutory order . . . that grants . . . an injunction, the court may suspend,
modify, restore, or grant an injunction on terms for bond or other terms that secure the
opposing party’s rights.” “A stay is ‘an exercise of judicial discretion, and the propriety
of its issue is dependent upon the circumstances of the particular case. The party
requesting a stay bears the burden of showing that the circumstances justify an exercise
of that discretion.’ ” Norsworthy v. Beard, 2015 WL 1907518, at *1 (N.D. Cal. Apr. 27,
2015) (citing Nken v. Holder, 556 U.S. 418, 433-34 (2009)); see also McClatchy
Newspapers v. Central Valley Typographical Union No. 46, 686 F.2d 731, 734 (9th
Cir.1982) (“Rule 62(c) codifies the ‘long established’ and narrowly limited right of a trial
court to make orders appropriate to preserve the status quo while the case is pending in
[an] appellate court.”). In determining whether to grant a stay, courts apply a standard
similar to the standard for issuing a preliminary injunction. See Nkken, 556 U.S., at 434
CV-90 (06/04)

CIVIL MINUTES - GENERAL

Page 2 of 6

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-06633-CAS(AJWx)

October 20, 2015

Title

THE WIMBLEDON FUND, SPC (CLASS TT) V. GRAYBOX, L.L.C.,
ET AL.

(Identifying four factors for a court to consider in issuing a stay: “(1) whether the stay
applicant has made a strong showing that he is likely to succeed on the merits; (2)
whether the applicant will be irreparably injured absent a stay; (3) whether issuance of
the stay will substantially injure the other parties interested in the proceeding; and (4)
where the public interest lies.”).
Here, Graybox devotes much of its brief to arguing that the Court has likely abused
its discretion in granting a preliminary injunction in favor of Wimbledon and therefore it
is likely that the Court’s injunction will be overturned on appeal. Accordingly, Graybox
contends that it has made a strong showing that it is likely to succeed on the merits of its
appeal. While Graybox is of course entitled to its appeal, for the reasons stated more
fully in the Court’s injunction order, the Court finds that it properly enjoined Graybox’s
assets.
Moreover, granting a stay at this time would fly in the face of the Court’s prior
order. When the Court ordered a freeze of Graybox’s assets, it explained that, absent an
injunction, Wimbledon was likely to suffer irreparable injury. Specifically, the Court
noted that there were serious questions regarding Graybox’s corporate integrity and its
primary manager David Bergstein’s pattern of transferring assets between other entities
he appeared to either own or exert control over. The Court stated, “[t]aken together, this
evidence supports an inference that there is a ‘substantial danger’ that Graybox, upon
receipt of the settlement proceeds, will transfer or otherwise dissipate those funds, before
this action is concluded.”
Therefore, were the Court to stay the effect of its injunction Graybox would likely
dissipate the settlement funds. In fact, Graybox has stated that it intends to dissipate the
settlement funds. Graybox claims that, pursuant to the settlement agreement, it is
obligated to distribute the settlement funds to various third parties. Dkt. 61, at 5-6.
Accordingly, if the Court were to grant Graybox’s application for a stay it may likely
render the pending appeal moot, as there would be no assets left for the Court to freeze.
And, as explained more fully in the Court’s injunction order, Wimbledon will suffer
irreparable injury because it will likely have no means of recovering on its fraudulent
transfer claim against Graybox.

CV-90 (06/04)

CIVIL MINUTES - GENERAL

Page 3 of 6

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-06633-CAS(AJWx)

October 20, 2015

Title

THE WIMBLEDON FUND, SPC (CLASS TT) V. GRAYBOX, L.L.C.,
ET AL.

Therefore, the Court finds that staying the effect of its order granting Wimbledon’s
request for a preliminary injunction is not appropriate at this time and DENIES
Graybox’s application.
B.

Bond

Federal Rule of Civil Procedure 65(c) states that “[t]he court may issue a
preliminary injunction or a temporary restraining order only if the movant gives security
in an amount that the court considers proper to pay the costs and damages sustained by
any party found to have been wrongfully enjoined or restrained.” The proper amount of a
bond is a matter within the discretion of the district court. Stockslager v. Carroll Elec.
Co-op. Corp., 528 F.2d 949, 951 (8th Cir.1976). Generally, Rule 65 requires that the
amount of the bond be tied to the damages and costs that the wrongfully enjoined
defendant can be expected to incur. See Gateway Eastern Ry. Co. v. Terminal R.R. Ass’n
of St. Louis, 35 F.3d 1134, 1141 (7th Cir. 1994).
Graybox argues that under the terms of the Settlement Agreement it is obligated to
distribute the Settlement Funds to various third parties. Dkt. 57, at 1-2. Failure to
comply with these obligations, Graybox contends, will result in the breaches of multiple
agreements as well as subseqeunt claims for damages. Id. at 6. Graybox believes that at
least some of these claims will be asserted against Graybox and that the resulting
damages to Graybox may be at least $10 million. Id. at 10. Wimbledon responds that
there is no credible evidence that Graybox will suffer harm, let alone harm in the amount
of $10 million, as a result of the Court’s injunction. Dkt. 65, at 2. Rather, Wimbledon
contends that, in the event the agreements Graybox identifies are breached, it is
Graybox’s managing member David Bergstein, Graybox’s law firm Bienert , Miller &
Katzman (“BMK”), and various other entities, all of which are owned or controlled in
some manner by David Bergstein, who will be sued for damages. Id.
As an initial matter, the Court notes that Wimbledon is correct that the relevant
inquiry in setting the bond is the potential harm to Graybox resulting from the injunction.
See Jorgensen v. Cassiday, 320 F.3d 906, 919 (9th Cir. 2003) (“The district court may
dispense with the filing of a bond when it concludes there is no realistic likelihood of
harm to the defendant from enjoining his or her conduct.”) (emphasis added)). Graybox
CV-90 (06/04)

CIVIL MINUTES - GENERAL

Page 4 of 6

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-06633-CAS(AJWx)

October 20, 2015

Title

THE WIMBLEDON FUND, SPC (CLASS TT) V. GRAYBOX, L.L.C.,
ET AL.

appears to concede that liability for the potential breaches it identifies will be shared by
various third parties in addition to Graybox. Dkt. 57, at 8 (“Graybox (among others) will
likely be subject to suit for breaches of various agreements”) (emphasis added). The
extent to which third parties or Graybox’s attorneys may suffer harm as a result of the
injunction is not appropriately considered by the Court in setting the bond. See Ungar v.
Arafat, 634 F.3d 46, 53 (1st Cir. 2011) (holding that pension fund that was not subject to
the injunction “lack[ed] standing to complain about the absence of a bond.”); Com. of
Puerto Rico v. Price Comm’n, 342 F. Supp. 1311, 1312 (D.P.R. 1972) (“The requirement
of security is intended to protect the party restrained or enjoined, as the case may be,
against such costs and damages as may be incurred or suffered by the party as a result of
being wrongfully restrained or enjoined.”) (emphasis added). Moreover, other than the
conclusory statements in the declaration of David Bergstein, Graybox has submitted no
evidence in support of its claim that, if the agreements are breached, “actual resulting
damages will be at least $10 million.” See Dkt. 57-2, Bergstein Decl. ¶ 14.
However, in light of the agreements Graybox has identified, it is at least
conceivable that Graybox may suffer some harm as a result of the Court’s injunction.
While the evidence presented may not support Graybox’s inordinate request for a bond of
$10 million, Graybox will likely be required to expend resources defending against suits
for breach of contract and may be liable for damages. Accordingly, the Court orders
Wimbledon to post a bond of $100,000. In the event that Graybox is found to have been
wrongfully enjoined, the Court concludes that a $100,000 bond is sufficient to redress
any costs or damages that may stem from the injunction.
C.

Proper Scope of Injunctive Relief

On September 29, 2015, the Court held a hearing regarding Wimbledon’s request
for a preliminary injunction. At the conclusion of the hearing, the Court orally enjoined
Graybox from transferring $2,412,000 out of any of its accounts upon receipt of the
$2,900,000 in Settlement Funds. Graybox’s attorney, Steven Katzman (“Katzman”),
represented that, in accordance with the Settlement Agreement, the Settlement Funds
were to be delivered to the client trust account of Katzman’s firm, Bienert, Miller, &
Katzman (“BMK”). Accordingly, the Court ordered that the injunction would extend to
the client trust account of BMK. This order memorializes the injunction the Court issued
from the bench on September 29, 2015.
CV-90 (06/04)

CIVIL MINUTES - GENERAL

Page 5 of 6

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Date

‘O’

Case No.

2:15-cv-06633-CAS(AJWx)

October 20, 2015

Title

THE WIMBLEDON FUND, SPC (CLASS TT) V. GRAYBOX, L.L.C.,
ET AL.

Accordingly, IT IS HEREBY ORDERED that defendants, as well as their
officers, agents, servants, employees, and attorneys, and all other persons or entities in
concert or participation with any of them whether acting directly or through any
corporation or other entity, subsidiary, division, or other device, including but not limited
to, fictitious business names, is ENJOINED from transferring, either directly or
indirectly, $2,412,000 out of any of defendants’ accounts upon receipt of the Settlement
Funds. This injunction further extends to the client trust account of Graybox’s attorney,
Katzman, and his law firm, BMK. Moreover, defendants and all of the aforementioned
persons or entities are ENJOINED from taking any actions that would direct the
Settlement Funds outside the scope of the Court’s injunction or cause, in any manner, the
dissipation of the Settlement Funds before they are deposited in the accounts of any of
defendants, their attorneys or any other persons or entities connected with defendants. As
security for this injunction, Wimbledon is ordered to post a bond of $100,000.
IT IS SO ORDERED.
00
Initials of Preparer

CV-90 (06/04)

CIVIL MINUTES - GENERAL

:

00

CMJ

Page 6 of 6