Newman v. Sun Capital, Inc. et al
Filing
304
OPINION AND ORDER withholding approval of the Settlement Agreement. The Court will not approve those portions of the Settlement Agreement which seek to discourage cooperation with law enforcement officials. The parties shall have thirty (30) days t o revise those provisions of the Settlement Agreement which discourage cooperation with law enforcement officials, or to inform the Court they decline to do so. Objections may be filed within thirty (30) days of the filing of the changes or the notice that no changes will be made, LIMITED ONLY TO THIS PROPOSED MODIFICATION. See Opinion and Order for details. Signed by Judge John E. Steele on 5/17/2012. (SVC)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FORT MYERS DIVISION
DANIEL S. NEWMAN, as a Receiver for
Founding Partners Capital Management
Company; Founding Partners StableValue Fund, L.P.; Founding Partners
Stable-Value
Fund,
II,
L.P.;
Founding Partners Global Fund, Ltd.,
and Founding Partners Hybrid-Value
Fund, L.P.,
Plaintiff,
vs.
Case No.
2:09-cv-445-FtM-29SPC
SUN
CAPITAL,
INC.
a
Florida
corporation; SUN CAPITAL HEALTHCARE,
INC., a Florida corporation; HLP
PROPERTIES OF PORT ARTHUR, LLC, a
Texas limited liability company,
Defendants.
___________________________________
OPINION AND ORDER
The issue before the Court is whether to approve a proposed
settlement agreement between the Receiver and defendants, to which
numerous objections have been filed.
For the reasons set forth
below, the Court would approve the settlement agreement except for
one non-financial provision. The Court will suggest a modification
of that provision; will give the parties an opportunity to consider
such a modification; and will withhold a final decision pending
notification by the parties as to their positions on the proposed
modification.
I.
This matter came before the Court on a Joint Motion for
Expedited Approval of Proposed Procedure to Obtain Court Approval
of the Proposed Settlement Transaction (Doc. #248) and Supplement
(Doc. #249), both filed on December 9, 2011.
Order
Preliminar[il]y
Approving
The Court entered an
Settlement
Transaction
and
Scheduling Deadlines (Doc. #255) on December 27, 2011, as clarified
by an Order (Doc. #258) filed on January 12, 2012.
Objections to
the proposed settlement agreement were filed by the Roman Catholic
Church of the Archdiocese of New Orleans (Doc. #259), 118 Investors
(Docs. #260, 262), and TJNJH Investment Partnership and Kathleen
Ann Olberts (Docs. #264, 275).
The objectors adopted each other’s
objections, except perhaps for those objections unique to the Roman
Catholic Church of the Archdiocese of New Orleans1, TJNJH, and
Olberts2.
Defendants’ Omnibus Memorandum In Response to Investor
Objections (Doc. #278) and The Receiver’s Response to Investor
Objections (Doc. #279) were filed on February 24, 2012.
Receiver’s
Notice
of
Compliance
with
the
Court’s
The
Order
Preliminarily Approving the Settlement Transaction (Doc. #292) and
the Receivers’ Notice of Filing [of the Disclosure of Fees and
Costs] (Doc. #293) were then filed.
The 118 Investors also filed
1
Specifically, the Archdiocese of New Orleans asserts an
objection based on religious freedoms contained in the United
States Constitution. This objection was not adopted by any other
objector.
2
TJNJH and Olberts joined in the objections with the 118 other
Investors. In addition, they also filed a separate objection (Doc.
275-5) which raise matters relevant only to investors in both
Stable-Value and Hybrid-Value funds.
2
a sealed Confidential Supplement to Objections of Investors to
Proposed Settlement (Doc. #S-4), to which the Receiver filed a
sealed Response (Doc. #S-5).
The Court held a fairness hearing on the proposed settlement
on March 30, 2012, and heard from counsel for the parties and
counsel for
the
objectors.
Defendants and the
Receiver,
as
requested by the Court (Doc. #299), filed supplemental responses to
the Hybrid-Value Objection on May 11, 2012. (Docs. ##302-303.) As
the Court stated at the end of the fairness hearing, the Court
appreciates the assistance of all counsel in the development and
discussion of the issues in this case.
II.
A.
SEC Action
The origin of this case began with a five-count civil action
in Case No. 2:09-cv-229-29SPC filed by the United States Securities
and Exchange Commission (the SEC) against Founding Partners Capital
Management Company (“Founding Partners Management”) and William L.
Gunlicks (“Gunlicks”) (“the SEC Action”) on April 20, 2009.
The
SEC Action also named two Sun Capital entities and the four other
Founding Partners entities as relief defendants. Founding Partners
Management was described as a Florida corporation registered as an
investment advisor with the SEC, and Gunlicks was described as the
president,
CEO,
and
sole
shareholder
of
Founding
Partners
Management, and the beneficiary of management fees obtained by
3
Founding Partners Management.
The SEC Action alleged that Founding Partners Management and
Gunlicks (collectively the “SEC Defendants”) operated three hedge
funds and one mutual fund which solicited funds from various
investors.
Since 2001,
Founding Partners Management made loans
with the investment funds to Sun Capital, Inc. and Sun Capital
Healthcare, Inc. (collectively, “Sun Capital”) through its primary
fund, Founding Partners Stable-Value Fund, LP (“Stable-Value”).
Sun
Capital,
Inc.
utilized
the
loans
from
Founding
Partners
Management to fund the discounted purchase of accounts receivables;
Sun Capital Healthcare, Inc. utilized the loans from Founding
Partners Management to purchase discounted accounts receivable from
healthcare providers.
Sun Capital would draw on the loans to
purchase the discounted receivables, and then repay the loans after
collecting the receivables from the payors. The SEC Action alleged
that the SEC defendants had solicited funds from investors based
upon representations that the Stable-Value loans to Sun Capital
constituted a safe investment opportunity.
These representations
included that Sun Capital was factoring short-term (i.e., collected
within 150 days), highly liquid receivables that fully secured the
loans made by Stable-Value to Sun Capital.
The
SEC
Defendants
Action
alleged
that
beginning in
permitted
Sun
Capital
to
2004,
purchase
the
SEC
longer-term
receivables that were less liquid and much riskier, and to use loan
4
proceeds to make working capital loans to financially troubled
hospitals that Sun Capital had purchased.
The SEC Defendants were
alleged to have continued to solicit investors without disclosing
the change in use of the underlying loans and the increased risks
presented to the safety of their investments.
The SEC Action alleged that Sun Capital owed $550 million on
the Stable-Value loans, only 32% of which was invested in and
secured by the less risky, short-term receivables that the SEC
Defendants had described to their investors.
The $550 million
constituted 99% of Stable-Value’s portfolio, and all that remained
of investors’ money was Sun Capital receivables and any other
assets of Sun Capital securing the loans.
The SEC alleged that the
investors’ money was at immediate risk of being used to support Sun
Capital’s
working
directly to
continued
recent
the
capital
SEC
to solicit
redemption
requirements
Defendants;
investors
requests;
that
without
that
the
and
the
of
SEC
being
Defendants
disclosing
SEC
diverted
had
significant
Defendants
falsely
represented to investors that they had audited financial statements
for 2007; that the SEC Defendants failed to disclose a consent
Order
in
a
SEC
administrative
proceeding;
and
that
the
SEC
Defendants used fund assets to pay personnel expenses.
On April 20, 2009, the Court entered an ex parte temporary
Order Freezing Assets and Other Emergency Relief (the “Asset Freeze
Order”), which applied to the SEC defendants and certain named
5
relief defendants, and an Order Appointing Receiver for certain
Founding Partner entities (the Receivership Entities).
The Asset
Freeze Order was continued in effect by an Opinion and Order filed
on May 7, 2009.
On May 13, 2009, the Court denied an SEC request
for an asset freeze order as to Sun Capital, and disqualified and
removed the initial Receiver.
On May 20, 2009, the Court entered
an Order Appointing Replacement Receiver (the “Receivership Order”)
appointing Daniel S. Newman, Esq. as the replacement receiver (the
Receiver) of the Receivership Entities.
The Receivership Order
provided that the Receiver shall, among other things:
(a) Take immediate possession of all property, assets and
estates of every kind of Founding Partners and each of
the Founding Partners Relief Defendants, whatsoever and
wheresoever located, . . .;
(b) Investigate the manner in which the affairs of
Founding Partners and the Founding Partners Relief
Defendants were conducted and institute such actions and
legal proceedings, for the benefit and on behalf of
Founding Partners or the Founding Partners Relief
Defendants and their investors and other creditors as the
Receiver deems necessary against those individuals,
corporations,
partnerships,
associations
and/or
unincorporated organizations which the Receiver may claim
have wrongfully, illegally or otherwise improperly
misappropriated or transferred money or other proceeds
directly or indirectly traceable from investors in
Founding Partners and the Founding Partners Relief
Defendants . . .; and
. . .
(f) Defend, compromise or settle legal actions, including
the instant proceeding, in which Founding Partners, any
of the Founding Partners Relief Defendants, or the
Receiver are a party, commenced either prior to or
subsequent to this Order, with authorization of this
Court . . . .
6
The SEC Action remains pending.
B.
Current Case - “Sun Capital Litigation”
On July 14, 2009, the Receiver filed a nine-count Complaint
(Doc. #1) against three Sun Capital entities seeking the recovery
of over $500 million (the “Sun Capital Litigation”).
The lawsuit
asserted breach of contract claims arising from the loan agreements
between Stable-Value
and
Sun
Capital,
as well
as
claims
for
replevin, foreclosure of security interest, fraudulent transfer,
and aiding and abetting breach of fiduciary duty.
The case has
been extensively litigated, with no foreseeable end in sight.
The
Sun Capital defendants filed an Answer, raised eighteen (18)
Affirmative Defenses, and filed a six-count Counterclaim alleging
breach of
contract
and
promissory
estoppel
(Doc.
#29).
The
Receiver was allowed to file a twelve-count Amended Complaint (Doc.
#195), and is prepared to file an additional case asserting claims
which the Court precluded from being brought as part of the instant
case.3
(See Doc. #193.)
On June 1, 2010, the Receiver served numerous subpoenas duces
tecum on the Sun Capital entities and related entities.
Sun
Capital then filed a Motion to Stay the litigation for 120 days for
purposes
of
settlement
discussions
(Doc.
#196).
The
Motion
essentially asserted that a significant group of investors were
3
The Receiver advised the Court at the evidentiary hearing that
the parties in this case have a tolling agreement as to this
potential Complaint.
7
engaging in a palace coup of sorts by attempting to settle the Sun
Capital Litigation (and more) without the Receiver’s participation.
The Receiver opposed the Motion to Stay arguing, among other
things, that claims in the Sun Capital Litigation belonged to the
Receivership, and thus any settlement must involve the Receiver.
On July 8, 2010, the Court issued an Order (Doc. #202) staying
the Sun Capital Litigation for 60 days.
In its Order, the Court
stated, among other things:
The Court clearly has the discretionary authority to
grant a reasonable stay in a case, and pursuit of a
settlement can be a reasonable basis for a stay. This
particular case is not typical, and literally cries out
for a good faith effort at resolution before the only
people left standing are the lawyers and other litigation
professionals. It would appear that a settlement may
only be accomplished if the efforts include substantial
involvement of an informed Receiver in the settlement
process. The Receiver was appointed not only for his
legal and business acumen, but to bring common sense to
a process, which by its very nature can be complex.
(Doc. #202, pp. 1-2).
The stay has been extended several times to
allow continued settlement discussion, and remains in effect.
A
number of significant motions remain fully briefed and pending.
C.
The Settlement Agreement
The terms of the Settlement Agreement (Doc. #249) proposed by
the parties to the Sun Capital Litigation extend significantly
beyond the parties and claims in this case in an effort to arrive
at a global settlement as to Sun Capital. The Settlement Agreement
provides for relief which none of the parties could obtain through
this litigation.
It directly impacts the parties and consenting
8
investors, and also indirectly impacts non-consenting investors.
The
ownership
Settlement
interests
Agreement
in
the
essentially
Sun
Capital
provides
factoring
that
the
companies,
hospital companies, and associated real estate holding companies
will be transferred to a newly formed, wholly-owned subsidiary of
Stable-Value, the Founding Partners Designee, LLC, a Delaware
limited liability company (FP Designee) (Doc. #248-3, Exh. 4), in
exchange for broad releases of investor and Receiver claims and
potential claims and for financial considerations.
Following the
conclusion
process,
of
a
Court-approved
investor
claims
the
Receiver will distribute membership interests in the FP Designee to
those investors of the Receivership Entities who join in the
Settlement Agreement.
This will effectively transfer ownership of
FP Designee from Stable-Value to the investors whose interests are
validated through the claims process.
Those investors will run FP
Designee, effectively taking charge of the efforts they hope will
maximize recovery of their investments.
Investors who do not
participate in the Settlement Agreement will not be eligible for
distribution of a membership interest in FP Designee, but retain
all rights and claims they may have against the Sun Capital related
parties (although Sun Capital would essentially be owned by the
settling investors).
More
specifically,
the
material
Settlement Agreement are as follows:
9
terms
of
the
proposed
(1)
Parties:
On one side of the Settlement Agreement are the
Affiliated Companies, the Principals, the Spouses, and Dawson. The
Affiliated Companies consist of defendants Sun Capital, Inc. (SCI)
and
Sun
Capital
Healthcare,
Inc.
(SCHI),
along
with
Success
Healthcare, LLC (Success), Promise Healthcare, Inc. (Promise) and
forty-six
(46)
specifically
identified
affiliate/subsidiary
entities (including defendant HLP Properties of Port Arthur, LLC).
(Doc. #249, pp. 49-51, Annex I.)
The individual Principals are
Peter R. Baronoff (Baronoff), Howard B. Koslow (Koslow), and
Lawrence Leder (Leder).
The Spouses are Malinda Baronoff, Jane
Koslow, and Carole Leder.
Dawson is Mark Dawson.
On the other
side of the Settlement Agreement are the Receiver; FP Designee; and
Founding Partners
Stable-Value Fund, Ltd (Stable-Value), Founding
Partners Global Fund, Ltd (Global), Founding Partners Stable Value
Fund II, L.P. (Stable Value II), and Founding Partners Hybrid-Value
Fund, L.P. (Hybrid-Value) (collectively, Founding Partners).
(2)
Required Percentage of Investor Participation:
The
Settlement Agreement is conditioned on a certain minimum percentage
of investors agreeing to participate by executing a form Consent
(Doc. #248-2) and a form Release of Claims (Doc. #248-1) attached
to the Settlement Agreement.
Unless waived by the parties, at
least
Fund
51%
in
number
of
the
Investors,
and
66-2/3%
of
investment of Fund Investors in Founding Partners, must execute
releases
in
order
for
the
obligations
10
under
the
Settlement
Agreement to commence.
(3)
(Doc. #249, p. 8, Article IV, 4.1(e).)
What Receiver and Settling Investors Receive:
If at
least the requisite number of investors approve the Settlement
Agreement,
the
Receiver
and
settling
investors
receive
the
following:
(a)
Ownership of Various Entities: The newly-created
entity, FP Designee, will become the owner of various entities now
owned
or
controlled
Spouses, and/or
by
Dawson.
the
Affiliated
This
Companies,
transfer
Principals,
of ownership
will
be
accomplished by the following transactions:
(i)
Promise:
Principals and Spouses will transfer
100% of their equity interests in eleven identified entities to
Promise (Doc. #249-1, pp. 5-15.)
Promise will issue common stock
and will issue preferred stock with a liquidation preference and
mandatory redemption value of $75 million.
Ninety-six percent
(96%) of the common shares and 100% of the preferred shares of
Promise will be issued to SCHI in exchange for the cancellation of
$150 million indebtedness due SCHI from Promise (Doc. #249-1, Exh.
C.)
The remaining 4% of the common stock (the Retained Equity)
will be retained by Principals, Spouses, and Dawson.
An Amended
and Restated Articles of Incorporation (Doc. #249-3, Exh. F) will
be entered by the new ownership of Promise.
Pursuant to the next
transaction, this Promise stock (less the 4%) will effectively be
owned by FP Designee.
11
(ii)
SCHI/SCI:
Principals
and
Spouses
will
transfer 100% of the shares of SCHI and SCI to FP Designee (Doc.
#249-1, Exh. B-1.) An Amended and Restated Stockholders’ Agreement
(Doc. #249-3, Exh. H) will be entered.
(iii)
Success:
Principals
and
Spouses
will
transfer 100% of their equity interests in Success to FP Designee
(Doc. #249-1, Exh. B-2.)
(iv)
Other Entities:
Principals and Spouses will
transfer 100% of their equity interests in Superior Hospital
Corporation, Inc. to FP Designee.4
(b)
Description of Entities:
The Receiver represents
that collectively the entities own or lease and operate eighteen
hospitals, two medical office buildings and a nursing school.
(i)
Promise:
Promise’s facilities consist of
fifteen long term acute care hospitals which provide medical care
to
patients
who
suffer
from
conditions
too
complex
to
be
effectively managed by skilled nursing or sub-acute facilities, and
require inpatient care for longer durations than general acute care
4
The Settlement Agreement specifically states that 100% will
go to “each of the entities identified on Schedule 2.1(g) pursuant
to an Equity Transfer Agreement in the form attached as Exhibit G.”
(Doc. #249, p. 4.) However, Schedule 2.1(g) is not attached to the
Settlement Agreement. The Equity Transfer Agreement, provided in
Exhibit G, however, states that 100% will go to the corresponding
companies listed in Exhibit A to the Equity Transfer Agreement
which is attached to the Settlement Agreement. (Doc. #249-3, p.
21.) The only company listed in Exhibit A is Superior Hospital
Corporation, Inc.
12
hospitals are organized or staffed to provide.
(ii)
Success:
Success,
the
community-based
hospital division, operates two general acute care hospitals and
one psychiatric facility as well as two medical office buildings
and a nursing school.
Success hospitals offer a variety of
medical-surgical services such as primary care, emergency services,
general surgery, bariatric surgery, internal medicine, cardiology,
oncology, senior care, and wound care, and provide inpatient and
outpatient
ancillary
diagnosis.
services
Success’s
including
psychiatric
hospital
rehabilitation
offers
acute
and
and
geriatric services as well as other behavioral care programs.
(iii)
Other Entities:
The other entities involved
own real estate which is utilized by Promise or Success.
(c)
Senior Term Loan:
After the ownership transfers
described above, Promise will execute a Loan and Security Agreement
(Doc. #249-1, Exh. D) with SCHI.
This is a guaranteed $75 million
senior secured term loan which accrues interest at LIBOR5 plus 7.5%
annually, payable quarterly. As of closing, this will be deemed to
be fully funded from previous loans made by SCHI to Promise.
The
loan will be repaid upon maturity, which shall not exceed five
years after the closing.
This loan is secured by a first-priority
security interest in all assets of Promise and its operating and
real estate subsidiaries, except for: (I) those assets in which the
5
LIBOR is the acronym for London Interbank Offered Rate.
13
Principals,
Spouses
and
Dawson
are
being
granted
a
security
interest (in which SCHI is obtaining a subordinated second-priority
security interest), and (ii) certain accounts and books and records
and other related assets, which are being pledged to secure a line
of credit that Promise intends to obtain as a condition precedent
to the closing.
(d)
Subordinated
Term
Loan:
After
the
ownership
transfers described above, Promise will also execute a Subordinated
Term Note (Doc. #249-2, Exh. E) with SCHI.
This is a guaranteed
$125 million subordinated term note which accrues interest at 12%
annually, payable quarterly, and is subordinated to the Senior Term
Loan.
As of the closing, this loan will be deemed to be fully
funded from previous loans made by SCHI to Promise, and shall have
a term of five years after closing.
This loan is secured by a
second-priority security interest in all assets of Promise and its
subsidiaries,
Principals,
except
Spouses
for:
and
(I)
those
Dawson
are
assets
being
in
which
granted
a
the
Sun
security
interest (in which SCHI is obtaining a subordinated third-priority
security interest); and (ii) certain accounts and books and records
and other related assets, which are being pledged to secure a line
of credit that Promise intends to obtain as a condition precedent
to the closing.
(e)
Mutual Releases:
Upon closing the transaction, the
Receiver and the Sun Capital-related individuals and entities will
14
exchange mutual general releases in an agreed-upon Release of
Claims form (Docs. ##248-1, 249-3, Exh. M.) The mutual releases do
not release
each
other from
Transaction Documents.
claims arising
from
the
closing
The contents of the releases are discussed
more fully below.
(f)
Distribution
from
Receiver:
Following
the
conclusion of a Court-approved claims process by investors, the
Receiver will distribute membership interests in the FP Designee to
releasing investors of the Receivership Entities pursuant to an
Equity Transfer
Agreement
(Doc.
#249-3,
Exh.
G.)
This
will
effectively transfer ownership of FP Designee from Stable-Value to
those releasing investors whose interests are validated through the
claims process.
(g)
Rights of Recourse:
The Principals and Dawson make
certain representations and warranties to the FP Designee in
Schedule 5.2(a) to the Settlement Agreement and in a Disclosure
Statement substantially in the form as Exhibit N attached to the
Settlement
Agreement.
These
representations
and
warranties
survive for a period of 18 months after the closing of the
transactions (or until certain earlier liquidity events).
Any
claim for breach of these representations and warranties must be
brought by FP Designee within that 18-month or shorter period.
(4)
number
What Defendants (and Others) Receive:
of
investors
approve
the
15
Settlement
If a sufficient
Agreement,
the
defendants (and others) receive the following:
(a) Releases: The form Release of Claims (Docs. #248-1,
Doc.
#249-3,
Exh.
M)
is
a
broad
release
involving
not
only
defendants in this case but related persons and entities.
The
persons and entities to be released (Releasees) are virtually
anyone connected with the defendants, but excluding certain named
persons and
entities.
The
Receiver
and
investors
doing
the
releasing (Releasors) broadly give up all past, current, and future
claims for liability in any way related to the investments, loans,
credit relationship, or use of loan proceeds; release claims in a
list of specific pending civil actions or proceedings (and one
criminal investigation); and release any act or omission of the
Receiver.
The claims to be released therefore include, without
limitation, the parties’ claims in the Sun Capital Litigation and
the Receiver’s as-yet un-asserted claims against individuals and
entities other than the defendants that the Receiver had sought to
add to this case by amendment.
The release does not, however,
include any claim arising under or relating to the performance or
enforcement of the closing Transaction Documents.
The Releasors
agree not to commence any action involving the Released Claims,
except to
enforce
a
release
executed in
connection
with the
Settlement Agreement.
(b)
Investor “Gag” Provision:
The Release of Claims
obligates the Releasors not “to assist or cooperate with any other
16
person to commence, prosecute or pursue any claim against any
Releasee,” but allows Releasors to respond to subpoenas or court
orders (Docs. #248-1, 249-3, Exh. M.)
The Releasors must notify
the affected party of any such supboena or court order.
(c) Confidentiality Provision: The Settlement Agreement
provides for a broad confidentiality agreement precluding settling
investors
from
disclosing
a
wide
array
of
information
about
Principals, Spouses, Dawson, and Sun Capital (Doc. #249, §7.7.)
The Settlement Agreement defines confidential information as any
information
other
than
“publicly
available
or
freely
material lawfully obtained from another source.”
provision
also
includes
non-disclosure
of
the
useable
(Id.)
terms
of
The
the
settlement transactions contemplated by the Settlement Agreement,
although most of that information is publicly available in the
court file.
Additionally, all information obtained from the other
parties and attorneys is deemed confidential.
(d) Indemnification for Breach of Release and Settlement
Agreement:
If a Releasor breaches the release provisions, the
Releasor must indemnify and hold harmless each Releasee from
broadly defined losses and damages (Doc. #248-1.)
the
Principals,
Spouses,
and
Dawson
Additionally,
(collectively
the
“Indemnitees”) are indemnified from and after the closing by
Promise, Success, SCHI, SCI and FP Designee for any claims relating
to the Indemnitees’ actions or omissions on behalf of any of the
17
Settlement Entities.
The indemnification obligations include a
duty by the indemnifying parties to defend the Indemnitees and to
advance all necessary and reasonable expenses relating to any
indemnified proceedings. Certain types of claims, however, are not
covered by such indemnification.
(e)
Baronoff Employment Agreement:
Peter Baronoff will
enter into an Employment and Consulting Agreement with Promise and
Success, which provides for what is believed to be market-rate
compensation for his continuing services as President and CEO of
Promise and Success. The Agreement has been filed under seal (Doc.
#S-4), but provides for a substantial salary, potential bonuses,
and payment for consulting services.
(f)
Koslow Consulting Agreement:
Howard Koslow will
enter into a Consulting Agreement with Promise which provides for
payment of $1,800,000 in $50,000 monthly installments for three
years in exchange for his consulting services. Payment of the fees
are secured by a Performance Security.
(g)
(Doc. #249-3, Exh. J.)
Leder Consulting Agreement:
Lawrence Leder will
enter into a Consulting Agreement with Promise which provides for
payment of $1,800,000 in $50,000 monthly installments for three
years in exchange for his consulting services. Payment of the fees
are secured by a Performance Security.
(Doc. #249-3, Exh. K.)
(h) Secured Notes: Principals, Spouses, and Dawson will
receive
Secured
Promissory
Notes
18
in
the
aggregate
amount
of
$5,884,000 payable by Promise (Doc. #249-3, Exh. L.)
The secured
notes will be issued in proportion to their ownership interests in
Promise following the closing.
The secured notes will generally
provide for payment of the amounts, without interest, in three
annual payments.
(i)
First Priority Lien (Performance Security):
The
Principals will be granted a first-priority lien on certain real
and personal property of certain of the Settlement Entities as
security for any payments due to the Principals, Spouses, or Dawson
under the Secured Promissory Notes, the Consulting Agreements, and
for
certain
continuing
personal
guaranty
obligations
of
the
Principals.
(j)
principal
Loan Forgiveness:
made
by
various
Sun
Loans totaling $1.7 million in
Capital-related
entities
to
Principals and Spouses will be forgiven in their entirety.
(k) Cancellation of Indebtedness: SCHI will cancel $150
million indebtedness owed by Promise in exchange for the 96% of the
common shares and 100% of the preferred shares of Promise.
(l) Insurance: For a period of six years after closing,
Promise
and
Success
will
maintain
director’s
and
officer’s
insurance for the benefit of any Indemnitee who was serving as a
director, officer, employee, consultant or agent of any of the
Settlement Entities.
(m)
Promise Stock Ownership:
19
The Principals, Spouses
and Dawson will continue to own 4% of the issued and outstanding
common stock of Promise, in approximate proportion to their current
ownership interests in Promise.
This Retained Equity will be
subordinate to certain amounts payable under the Senior Term
Facility, the Subordinated Term Loan, and the Preferred Stock.
In
addition,
to
one-half of
the Retained
Equity
may
be
subject
cancellation under certain circumstances.
(5)
Miscellaneous Other Provisions
(a)
Governance
Structure
of
FP
Designee
Prior
to
Distribution:
Upon Court approval, FP Designee will be formed by
the
as
Receiver
a
subsidiary
of
Stable-Value
operating
in
accordance with the FP Designee organizational documents.
(i)
Prior
to
the
distribution
of
the
equity
interests in FP Designee to releasing investors whose interests are
validated in the claims process, FP Designee shall be managed by a
board of managers (the “Board”) consisting of five members.
(ii)
The Receiver (or his designee) may be one of
the five members of the Board, and the remaining four members are
to be persons associated with various investors in the Receivership
Funds (or their designees) and reasonably qualified to serve in
such positions.
(iii)
Baronoff will be entitled to one seat on the
Board of Directors of Promise for as long as he serves as CEO of
Promise.
20
(iv) Until the distribution of membership interests
of FP Designee to releasing investors is completed, the approval of
the Receiver or his designee on the Board shall be required to
approve certain major decisions specified in the FP Designee’s
organizational documents.
(v) In the event that a majority of the other Board
members oppose the vote of the Receiver or his designee on any such
major decision, they may, if the Court authorizes such a procedure
as part of its continuing jurisdiction over the supervision of the
Receivership, petition this Court to potentially overrule the vote
of the Receiver or his designee on such major decisions.
(vi)
distribution
of
FP Designee anticipates that following the
membership
interests
to
releasing
investors
pursuant to the pre-closing claims process, new Board elections
will be held, with the Board to be selected by vote of the members
of FP Designee.
(b)
parties
to
Conditions to Closing:
consummate
the
The obligations of the
transactions
contemplated
by
the
Transaction Documents are contingent upon, among other things,
(i) entry of an order of the Court approving the
Settlement Agreement and granting related relief;
(ii) the Receiver’s receipt of advice as to the
application of New York law to the applicable Transaction Documents
by New York corporate counsel to be retained by the Receiver and to
21
be paid by the Settlement Entities or Sun Entities, and the
Receiver being satisfied with such advice;
(iii)
receipt
of
all
necessary
governmental
authorizations or third-party consents;
(iv) accuracy of representations and warranties of
each party and performance of the covenants applicable to such
party;
(v) entry by Promise into a working capital line of
credit; and
(vi)
the
solicitation
of
releases
from
all
Receivership Fund investors and receipt of a sufficient number of
executed releases from the investors in the four Receivership
Funds.
III.
Although this case does not involve a class action, all
parties and investors, including the objectors, agree that the
Court applies the standard developed in class action cases for
review of the proposed settlement agreement.6
A district court
reviews a class action settlement for fairness, reasonableness,
adequacy, and the lack of collusion between the parties, and
considers such factors as: “(1) the likelihood of success at trial;
(2) the range of possible recovery; (3) the range of possible
6
Court approval of a settlement in this case is only required
because the Receiver is compromising claims affecting the
Receivership Entities in the SEC Action.
22
recovery at which a settlement is fair, adequate, and reasonable;
(4)
the
anticipated
complexity,
expense,
and
duration
of
litigation; (5) the opposition to the settlement; and (6) the stage
of proceedings at which the settlement was achieved.”
Faught v.
Am. Home Shield Corp., 668 F.3d 1233, 1240 (11th Cir. 2011).
also Cotton v. Hinton, 559 F.2d 1326 (5th Cir. 1977).7
See
Approval of
a settlement agreement is within the sound discretion of the court.
Christo v. Padgett, 223 F.3d 1324, 1335 (11th Cir. 2000); Leverso
v. Southtrust Bank, 18 F.3d 1527, 1531 (11th Cir. 1994).
A.
Factors For Fair, Reasonable, and Adequate Settlement
The ultimate issue is whether the Settlement Agreement is
fair, reasonable, and adequate.8
The very nature of settlement is
compromise, which leaves no one completely satisfied.
Simply
because good faith arguments can be articulated does not render a
settlement unfair, unreasonable, or inadequate. This is especially
so in this case, where regardless of the Court’s view, each
investor gets to vote with his feet.
away,
not
individual
sign
the
claims
Consent
against
or
An investor can simply walk
Release,
defendants,
or
and
if
pursue
the
its
own
Settlement
7
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.
1981) (en banc) the Eleventh Circuit adopted as binding precedent
all the decisions of the former Fifth Circuit handed down prior to
the close of business on September 30, 1981.
8
No one argues that there has been collusion between the
parties, and the Court affirmatively finds a lack of collusion.
23
Agreement is approved, against FP Designee.
(1)
Likelihood of Success at Trial
The Receiver evaluates his likelihood of success in the case
as “uncertain.”
(Doc. #279, p. 8.)
a realistic appraisal.
This seems to the
Court to be
While convinced of the merits of the case,
the Receiver candidly notes that both legal and factual issues are
hotly contested
Receiver
on
and
the
Court
has
several
key
already ruled
requests.
The
against
strongest
the
individual
investor claim appears to be that of the Archdiocese, but that only
comprises a very small percentage of the claims to be settled.
Sun
Capital remains vociferous as to its innocence, and significant
defenses and counterclaims have been asserted. Litigation outcomes
are seldom a certainty, but this case appears to be especially
problematic for all involved.
(2)
Range of Possible Recovery
The possible judgment in this case in favor of the Receiver
ranges from $0 to the $500 million-plus sought in the Complaint.
The
range
of
possible
recovery
on
any
positive
judgment
is
substantially less, since the likely collectable value of even a
$550 million judgment may be virtually pennies on the dollar.
The
Receiver views the value of defendants (estimated by the Receiver
at between $115 and $203 million) as being their assets and the
ongoing business operations of Promise, not in an ability to pay a
judgment.
The
objectors
have
24
submitted
sealed
documents
questioning the future viability of the entities as an ongoing
business.
Additionally, defendants have asserted a Counterclaim
which may be offset against any recovery by the Receiver.
Receiver
also
notes
the
possibility
protection for defendants.
of
eventual
The
bankruptcy
As Receiver’s counsel stated at the
fairness hearing, even a litigation win may be simply a pyrrhic
victory.
(3) Range of Possible Fair, Adequate, and Reasonable Recovery
The
range
similarly large.
of
fair,
adequate
and
reasonable
recovery
is
All things being equal, the defendants owe the
$500 million-plus loaned to them.
But the uncertainty of judgment
and recovery by the Receiver also infects the calculation of a
reasonable settlement range.
As discussed in more detail below,
the Court concludes that the proposed Settlement Agreement is well
within the range of fair, adequate, and reasonable recoveries.
(4)
Anticipated
Complexity,
Expense,
and
Duration
of
Litigation
There is no question that if this case does not settle, its
litigation will be lengthy, time-consuming, expensive, and most
likely unsatisfying to all concerned.
are approximately $2 million.
The Receiver-related fees
Just the sealed documents on the
pending motion for a preliminary injunction are more than a foot
thick.
Discovery would continue, with 61 subpoenas from the
Receiver alone outstanding.
Issues seem to abound, and no issue
25
seems
too
small
to
demand
close
attention
and
substantial
memoranda. Counsel for the Receiver stated at the fairness hearing
that if litigation is to proceed, the complaint in the anticipated
new case would be “bigger, messier, uglier, and more involved than
the current proceedings.”
(5)
This factor clearly favors settlement.
Stage of Proceedings of Settlement
While it pains the Court to state about a case filed in 2009,
the proposed Settlement Agreement comes at a relatively early stage
of the court proceedings.
Major motions and issues are pending,
significant discovery is sought by the parties if there is no
settlement, and the shadow of a complex and lengthy trial does not
yet loom over the case.
(6)
Opposition to the Settlement
The
proposed
opposition
for
a
Settlement
material
Agreement
number
of
has
drawn
investors.
significant
As
noted
previously, three sets of objections have been filed concerning the
proposed Settlement Agreement.
As the Court understands, the
objectors do not object to a settlement of the litigation in
principle, but object to this settlement. The Court will summarize
and then discuss the major objections by category.
The Court
adopts the positions articulated by the Receiver (Doc. #279, pp. 647)
and
defendants
(Doc.
#278,
pp.
4-42)
to
the
extent
not
inconsistent with the discussion below.
(a)
Lack of Reliable Information:
26
The objectors all
assert a need and desire for more reliable information about Sun
Capital before being called upon to decide whether to accept the
Settlement Agreement.
reliable
financial
The objectors seek what they consider to be
information,
such
as
audited
financial
statements and interim financial statements prepared in accordance
with U.S. Generally Accepted accounting Principals (GAAP), to
support the value of the Sun Capital settlement entities.
The
objectors recognize the voluminous information provided via the
Receiver’s online data room and do not contest the Receiver’s
diligence in providing the information.
Instead, the objectors
assert this information is tainted because it comes in large part
from the persons accused of wronging in the first place.
The
objectors seek completed audits for 2009 and 2010, supplemented by
GAAP-based
interim
financials
for
2011,
plus
production
of
information regarding the tax impact of the proposed settlement on
the settling entities and Founding Partner funds, a formal tax
opinion, and a third-party valuation opinion as to the value of the
settlement entities. The objectors also seek additional discovery,
including various unaudited financial statements.
All this is
necessary, the objectors assert, in order to form a reliable
opinion of the value of the settlement assets to make the ultimate
determination as to whether to accept the Settlement Agreement.
It is a fact of litigation life that no one wants to make a
settlement decision until the last tidbit of information has been
27
obtained.
It is also a fact of litigation life, however, that by
the time all information sought is obtained, the benefits of
settlement may have long since evaporated.
It is clear to the
Court that a tremendous amount of information has been obtained and
shared, although clearly not as exhaustive as it will be if the
case is not settled.
Further, even if the settlement is rejected
and litigation proceeds, not all of the information sought by the
objectors will necessarily be available.
The Court finds that the
information obtained and shared by the Receiver, as summarized at
Doc. #279, pp. 16-22, is sufficient to allow the investors to make
intelligent decisions as to the Settlement Agreement.
(b)
Lack of Financial Transparency:
The objectors
assert that certain aspects of the Settlement Agreement have been
sealed, thus preventing the investors from accurately valuing the
assets they are to receive.
The sealed information relates to the
amount and terms of the working capital line of credit for Promise
and the third-party advisory fees paid by defendants in connection
with the proposed settlement.
paid
to
the
FP
Investor
There is also an objection to fees
Steering
Committee.
Additionally,
objectors assert they have not been provided six specified items of
promised confidential information.
(Doc. #260, p. 17.)
Much of the requested information has now been disclosed.
(See Docs. #279, p. 26; #293).
The Court therefore concludes that
the investors have been provided ample information to make a
28
reasonable evaluation of the Settlement Agreement.
(c)
Continued
Participation
by
Principals:
The
objectors take exception to the consulting agreements with the
Principals
and
the
continued
employment
of
Baranoff
as
CEO.
Essentially, the objectors assert this simply continues to keep the
fox in the hen house.
At the fairness hearing, counsel for the Receiver stated that
this issue had been considered and it was determined that the
Receiver needed the expertise of these individuals to give the FP
Designee a better chance of success.
A board of directors will
exist which will provide close supervision.
The Court finds the
objectors’
concludes
concerns
to
be
justified,
but
that
the
Receiver’s position and protective measures are reasonable.
(d)
Indemnification Provisions:
The objectors assert
that the indemnification obligation under the Settlement Agreement
is over broad, unduly favorable to the Principals, and potentially
limitless.
It essentially requires the releasing investors to
indemnify the Principals for their fraudulent behavior, and to
ultimately be responsible for paying any recovery obtained by nonreleasing investors.
The investors are certainly correct in their observations that
the indemnification provisions are broad and favorable to the
Principals.
Counsel for the Receiver indicated this, and many
other provisions, were the subject of intensive negotiations.
29
There is nothing unusual about indemnification in general, and the
investors will simply have to decide for themselves whether the
breadth and scope of this indemnification provision is unduly
favorable towards the Principals. While the provision is certainly
worthy of careful consideration, it does not render the Settlement
Agreement inherently unfair, unreasonable, or inadequate.
(e)
Limitations on Setoff Rights:
The objectors object
to FP Designee’s limited rights of setoff against future payments
owed to the Principals in § 9.15 of the Settlement Agreement if
there are breaches of any representation, warranty or covenant in
the Transaction Documents. Objectors assert this superficial right
is “practically useless.”
(Doc. #260, p. 18).
This is so,
objectors contend, because damages can only be set off against
amounts owed after a final, non-appealable judgment, and by the
time such a judgment is obtained it is likely that there will be
little or nothing in the way of payments still owed to the
Principals
and
therefore
little
to
be
set
off
against.
Additionally, these investors object because the provision would
not cover breaches of representations, warranties or covenants of
Sun Capital, which are substantially more extensive than those of
the Principals.
The set-off provision includes an escrow provision which
ameliorates some of the concerns.
The desire of a final judgment
is certainly not unreasonable or unfair to warrant disapproval of
30
the settlement agreement.
The investors will simply have to weigh
this provision along with the others to determine if the Settlement
Agreement overall meets with their approval.
(f) Formula for Distribution of Investor Interest in New
Entity:
The objectors assert that the terms for determining an
investor’s
share
in
FP
Designee
are
vague.
The
Settlement
Agreement provides that the exact formula for this calculation will
be submitted by the Receiver to the Court as part of a request to
approve a claims process.
formula now.
Objectors claim a need for the precise
The Court finds that a precise formula is not
necessary for the investors to be able to determine whether to
approve or disapprove the Settlement Agreement.
(g)
Magnitude of Related Party Transactions:
The
investors object to the magnitude of related party transactions
orchestrated by the Principals since the date of the Security
Agreements.
The transactions exist, and they are addressed as set
forth in the Settlement Agreement.
The investors can keep the
magnitude in mind as they contemplate the proposed resolution of
the case.
(h)
Lack of Evaluation of Investor Claims By Receiver:
The objectors assert that the Receiver should have performed a more
detailed investigation of the individual claims which will be given
up pursuant to the releases.
The objectors assert that not all
claims are identical in terms of merit or strength, and that no
31
effort was made in the settlement process to determine the factual
basis for the claims.
its claim
The Archdiocese, for example, asserts that
is the strongest and is unique and “highly viable”
(Doc. #259, p. 15.)
The Court finds that the Receiver has performed a sufficient
evaluation of the investor claims and had no obligation to conduct
any additional evaluation of the investor claims than was done in
this case.
It would be surprising if all claims were of equal
strength or merit, but this does not suggest that the Settlement
Agreement would be different.
The individual investors are in the
best position to evaluate the strength and merit of their own
claims, and factor that into their evaluation as to whether or not
to accept the Settlement Agreement.
Even when claims of non-
settlors are to be barred, only a “very preliminary peek” is
suggested. In re Healthsouth Corp. Sec. Litig., 572 F.3d 854, 86768 (11th Cir. 2009).
(i)
Release of Criminal Investigation:
The Archdiocese
of New Orleans (the Archdiocese) objects to that portion of the
Settlement
Agreement
release
which
identifies
a
criminal
investigation by the Louisiana Attorney General as one of the
claims subject to the Settlement Agreement and the releases.
Archdiocese
also
objects
to
the
provision
of
the
The
Settlement
Agreement release which precludes assistance or cooperation with
anyone, including law enforcement officials.
32
This
objection,
especially
when
coupled
with
the
broad
confidentiality agreement contained in the Settlement Agreement,
gives the Court grave concern.
investors
have
investigation
the
or
legal
None of the parties or the
ability
prosecution.
to
“release”
Whether
to
a
criminal
investigate
and
prosecute, and what charge to file, are decisions that generally
rest in the sole discretion of the executive branch, United States
v. Batchelder, 442 U.S. 114, 124 (1979), and is not subject to the
private agreement between citizens.
A person who relies upon a
confidentiality agreement to preclude testimony in a criminal
proceeding does so at his peril.
855, 871 (11th Cir. 2010).
United States v. Snipes, 611 F.3d
Additionally, even where a private
confidentiality agreement is otherwise proper, it will not be
enforced where its effect becomes obstructive of the rights of nonparties. See, e.g., Nestor v. Posner-Gerstenhaber, 857 So. 2d 953,
955 (Fla. 3rd DCA 2003); Scott v. Nelson, 697 So. 2d 1300, 1301
(Fla. 1st DCA 1997).
The Court will not approve a settlement agreement which
precludes a person or entity from doing what is commonly recognized
as a public duty - cooperating with law enforcement regarding the
apprehension and prosecution of those who violate criminal laws.
The prosecuting authorities may or may not decide to charge anyone
or any entity, but it will not be because this Court has sanctioned
a gag order which precludes cooperation.
33
As one New York court has
stated in the employment context,
Restrictions on discussion of the outcome of litigation
do not carry the same risks as restraints on freedom of
expression regarding underlying wrongdoing, if any.
While such matters as monetary amounts of settlements, or
even their very existence, may be of little or no genuine
public interest, the courts can hardly be called upon to
enforce an employer-employee exit agreement for the
covering up of wrongdoing which might violate criminal
laws. Disclosures of wrongdoing do not constitute
revelations of trade secrets which can be prohibited by
agreements binding on former employees.
McGrane v. Reader’s Digest Ass’n, 822 F. Supp. 1044, 1052 (S.D.N.Y.
1993).
See also Chambers v. Capital Cities/ABC, 159 F.R.D. 441,
444 (S.D.N.Y. 1995).
At the fairness hearing counsel for the Receiver asserted this
was not the intent of the Settlement Agreement.
If so, modifying
the release and confidentiality language to clarify should not be
problematic.
provision
of
Thus, the Court does not approve this non-financial
the
Settlement
Agreement,
but
will
provide
an
opportunity to revise this provision keeping the following in mind:
The current Release of Claims, as written, releases all claims
related in any way to matters listed in Exhibit A (Doc. #248-1, p.
2.)
This
whatsoever.
exhibit
should
not
include
any
criminal
matter
Further, the broad confidentiality provision (Doc.
#249, §7.7) should be revised to make clear that it
is not
applicable to cooperation with law enforcement officials.
Any
other provision which may be fairly interpreted as restricting the
ability of parties to the Settlement Agreement to cooperate with
34
law enforcement officials will not be approved by this Court.
The
parties shall have thirty (30) days to revise this provision of the
Settlement Agreement and the investors shall have thirty (30) days
thereafter to submit their objections limited to this modification.
(j)
Scope of Release:
Some of the investors object to
the scope of the release as it relates to non-defendant third
parties.
They assert that the Settlement Agreement compromises
claims the Receiver does not own, and claims against third parties
not formally before the Court as defendants.
These objectors also
assert that the global settlement lacks consideration and violates
due process because they were denied access to discovery and their
cases (if filed, such as was done by the Archdiocese) were stayed
by the Receivership Order.
These objectors also assert that the
Court lacks jurisdiction to approve such a settlement agreement.
Objectors want to participate in the recovery provided in the
Settlement Agreement without waiving or releasing their direct
claims against the defendants and related parties. They claim that
the denial of such participation without releases is “tantamount to
denial of due process.”
(Doc. #259, p. 13).
Additionally,
objectors point to bankruptcy court cases which refuse to confirm
a plan for reorganization containing third party releases. (Id. at
14-15.)
These objections are overruled.
No investor is compelled to
accept the Settlement Agreement, and no investor suffers the loss
35
of a claim unless the investor accepts the Settlement Agreement.
There is clearly consideration if the settlement is accepted, and
no violation of due process.
The Court also rejects the argument
that it cannot approve a settlement which provides for third party
releases.
See e.g., In re Van Diepen, 236 F. App’x 498, 503 (11th
Cir. 2007).
Settlement agreements frequently include provisions
extinguishing future claims by settling and even non-settling
parties
to
facilitate
settlement.
In
re
Healthsouth
Corp.
Securities Litigation, 572 F.3d 854, 856 n.3 (11th Cir. 2009).
(k)
Religious Rights:
The Archdiocese objects to the
Settlement Agreement as violating a host of its constitutional
rights
relating
Agreement
to
religious
contemplates
the
freedom.
investors
Since
the
ultimately
Settlement
owning
and
operating FP Designee, the Archdiocese is concerned that the
activities of the entity and its hospitals may deviate from any
number of its religious teachings and principles.
The Archdiocese
asserts that considering the Settlement Agreement itself also
violates its constitutional rights to religious freedom, free
speech, and association under the First Amendment.
The
Court
rejects
these
objections.
Nothing
about
the
Settlement Agreement impinges on the Archdiocese’s constitutional
rights.
The Archdiocese decided to invest in secular activities,
and now finds itself the victim of allegedly fraudulent statements.
The Archdiocese is free to reject the Settlement Agreement for any
36
reason, including the religious concerns it has articulated.
But
a settlement agreement is not required to be tailored to the
religious beliefs of each investor.
(l) Inclusion of Hybrid-Value Fund:
Objectors TJNJH and
Olberts9 (the Hybrid-Value objectors) object to the inclusion in
the Settlement Agreement of the Hybrid-Value fund in its entirety,
rather than inclusion limited to its actual investments made in the
Stable-Value funds. The Hybrid-Value Objectors assert that while
the Complaint relates to claims arising from loan agreements
between Stable-Value and Sun Capital entities, there are no loan or
other agreements between the Hybrid-Value fund and any Sun Capital
entity.
funds
The thrust of the settlement, they assert, is to pool
unrelated
to
this
action
and
then
have
a
pro-rata
distribution of assets recovered from all of the funds.
These
objectors further assert that any plan of distribution must be
entirely separate from that involving the Stable Value funds,
although the Hybrid-Value fund should be treated as a single
investor in Stable Value funds and share in any settlement on its
pro
rata
share
of
the
investment
in
Stable
Value
funds.
Additionally, the Hybrid-Value Objectors assert that a separate
plan as to how the Hybrid-Value fund should be managed in the
future must be developed with the full participation of its 12-15
9
TJNJH and Olberts are the only objectors who are investors in
both Stable Value and Hybrid Value.
37
investors
after
full
disclosure
of
material
by
the
Receiver
regarding the eleven private equity investments which comprise the
Hybrid-Value portfolio.
In response, the Receiver and the defendants contend that this
argument relates to the calculation of the shares of the Releasing
Investors’ interest in the FP Designee should the settlement be
approved.
Thus, this is a distribution issue and is prematurely
raised at this time.
As to the merits of Hybrid-Value Objectors’
objection, the Receiver contends that in the event he chooses to
utilize a pro rata distribution approach such a distribution would
be proper because the investors’ funds have been commingled and the
victims are similarly situated.
The defendants disagree with this
approach, and join with TJNJH and Olberts in arguing that Hybrid
Value
should
only
receive
settlement
proceeds
which
are
proportionate to Hybrid Value’s actual investment in Stable Value.
The Hybrid-Value Fund, unlike Stable-Value, was created for
investment in private equity. The Hybrid-Value Fund did not invest
fully in
Stable
Value,
which
ultimately
loaned
money
to
Sun
Capital, and there is no dispute that Hybrid-Value was not party to
any contract with Sun Capital or any of its affiliates.
The
parties seem to agree that at least a small portion of funds
invested into Hybrid-Value found its way into loans made to Sun
Entities, but the amount of funds involved, and how these funds
38
found their way into the loans, is unclear.10
Either Hybrid Value
invested directly in Stable Value, as the Complaint in the SEC
action suggests, or, SSR Capital Partners, LP11, one of the 11
separate investment vehicles within Hybrid-Value’s portfolio, made
an indirect investment of Hybrid-Value funds into Stable Value
which ultimately found their way into the Sun Capital loans.
The Hybrid-Value objectors do not make any argument that
Hybrid
Value
investors
should
be
excluded
from
settlement
negotiations in this case, nor do they make an argument that none
of
their
funds
should
be
included
in
the
settlement
funds.
Instead, these objectors assert that “it would be unreasonable and
unfair . . . for the Receiver to be allowed to lump the HybridValue
fund,
in
“Receivership
original).
its
Funds.”
entirety,
with
(Doc.
the
#275-5,
assets
pp.
of
all
other
8-9)(emphasis
in
Hybrid-Value Objectors also seek to be treated as a
single investor in Stable Value for purposes of distribution of FP
Designee.
These objectors assert that any distribution should be
on a pro rata basis based on the proportionate interest in Stable
Value.
10
The Hybrid-Value objectors specifically state, “only a small
portion of the funds invested by the dozen or so Hybrid-Value fund
investors in the private equity portfolio found its way into loans
made to Sun Entities and, significantly, no cognizable action has
been brought or even asserted by the Receiver in connection with
defrauding Hybrid-Value fund investors.” (Doc. #75-5, p. 7.)
11
SSR Capital Partners, LP is a hedge fund that invested in
Stable-Value.
39
The Hybrid-Value Objectors object to the manner in which the
Receiver will distribute assets, namely a pro rata distribution,
despite
the
fact
that
distribution plan.
the
Receiver
has
yet
to
establish
a
Thus, the objection, as it relates to pro rata
distribution, is speculation and premature. Accordingly, the Court
overrules this objection at this time. As to using the entirety of
the
assets
contained
in
the
Hybrid-Value
fund
as
funds
for
settlement, this is simply a settlement term that investors in
Hybrid-Value must consider when deciding whether or not to approve
the settlement, and does not render the Settlement Agreement unfair
or unreasonable.
The Hybrid-Value objectors also request that the Receiver
contact
all
possibility
of
of
the
Hybrid-Value
turning
over
Investors
direct
“to
responsibility
management and control of the fund to its investors.”
5, p. 9.)
discuss
for
the
the
(Doc. #275-
These objectors contend that they are capable of
assuming responsibility for the management and control of the
assets that underlie Hybrid-Value and therefore the Receiver should
relinquish control.
The Hybrid-Value objectors have failed to provide the Court
with a legitimate basis to terminate the receivership over this
entity.
To the extent that these objectors take issue with the
appointment of the Receiver, their objection is untimely and
without a demonstrated legitimate basis.
40
Accordingly, it is now
ORDERED:
1.
The Court withholds approval of the Settlement Agreement.
The Court
will
not
approve
those
portions
of
the
Settlement
Agreement which seek to discourage cooperation with law enforcement
officials.
2.
The parties shall have thirty (30) days to revise those
provisions of the Settlement Agreement which discourage cooperation
with law enforcement officials, or to inform the Court they decline
to do so.
3.
Objections may be filed within thirty (30) days of the
filing of the changes or the notice that no changes will be made,
limited only to this proposed modification.
DONE AND ORDERED at Fort Myers, Florida, this
May, 2012.
Copies:
Counsel of record
41
17th
day of
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