Brophy et al v. Salkin
Filing
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OPINION AND ORDER AFFIRMING RULINGS OF BANKRUPTCY COURT. Closing Case. Signed by Judge James I. Cohn on 9/24/2015. (ar2) NOTICE: If there are sealed documents in this case, they may be unsealed after 1 year or as directed by Court Order, unless they have been designated to be permanently sealed. See Local Rule 5.4 and Administrative Order 2014-69.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 14-62780-CIV-COHN
CHRISTOPHER BROPHY
and TARA LEWIS,
Appellants,
v.
SONIA SALKIN, as Chapter 7 Trustee
for the Estate of the Debtor,
Appellee.
/
OPINION AND ORDER AFFIRMING RULINGS OF BANKRUPTCY COURT
THIS CAUSE is before the Court upon the Amended Notice of Appeal [DE 4]
filed by Christopher Brophy and Tara Lewis, the Court-appointed lead plaintiffs on
behalf of the Plaintiff Class in the In re Jiangbo Pharmaceuticals, Inc. Securities
Litigation. The Court has reviewed parties’ briefs, the record in this case, and is
otherwise advised in the premises. For the reasons discussed herein, the Court affirms
each of the Bankruptcy Court’s rulings at issue.
I.
BACKGROUND
This bankruptcy appeal arises from two orders of the Bankruptcy Court: (1) the
Order Granting Motion, as Amended, of Chapter 7 Trustee: to Approve Settlement and
Compromise of Controversy with Elsa Sung and Request for Entry of a Bar Order and
Denying the Motion for Relief from Stay (“Settlement Order”); and (2) the Bar Order
Pursuant to Settlement Agreement Between and Among: (I) Chapter 7 Trustee Sonya L.
Salkin; (II) Former Officer of Debtor, Elsa Sung; and (III) National Union Fire Insurance
Company of Pittsburgh, PA (“Bar Order”) (collectively, “Orders”). See DE 9 at 1, Exs.
1–2. In this appeal, Appellants Christopher Brophy and Tara Lewis (aka “Securities
Plaintiffs”) challenge the Settlement Order and the Bar Order, which enjoins them from
further prosecuting a securities class action as lead plaintiffs against former directors
and officers (“D&O”) of the Debtor, Jiangbo Pharmaceuticals, Inc., f/k/a Genesis
Pharmaceuticals Enterprises, Inc. (“Jiangbo”). Id. at 1–2. Appellee Sonya Salkin is the
Chapter 7 Trustee of the bankruptcy estate of Jiangbo (“Estate”) and seeks affirmance
of both Orders. See DE 13. The heart of the dispute is Appellants’ ability to seek
monies from Jiangbo’s Executive and Organization Liability Policy (“D&O Policy”), which
covered certain claims against Jiangbo and its D&O.
On June 6, 2011, the independent members of Jiangbo’s audit committee
resigned after the company’s management repeatedly obstructed the committee’s
investigation into matters raised by an SEC investigation. DE 9 at 6. Thereafter, the
members of Jiangbo’s senior management “wholly abandoned U.S. legal and financial
obligations,” ultimately causing the company to be dissolved by the State of Florida. Id.
at 7. All of Jiangbo’s assets except for its D&O Policy were located offshore. Id.
In July 2011, shareholders of Jiangbo commenced a class action lawsuit in the
Southern District of Florida alleging violations of U.S. securities laws (“Securities Class
Action”), and in November 2011, Appellants were appointed lead plaintiffs. Id. In
August 2012, the Court dismissed the securities fraud claims against Jiangbo’s former
auditor, Frazer LLP (“Frazer”), and its former Chief Financial Officer, Elsa Sung, who
was the only Jiangbo D&O to defend the claims. DE 9, Ex. 1 at 12. The Court
concluded that the Securities Plaintiffs had sufficiently alleged false statements by
Jiangbo but failed to adequately plead scienter as to Sung and Frazer. DE 9 at 7. The
Eleventh Circuit affirmed the District Court’s order, but the Securities Class Action
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remains pending as to Jiangbo and its China-based executives, against whom
Appellants have moved for default judgments. Id. at 8; DE 13 at 4.
In October 2011, certain shareholders of Jiangbo commenced a separate class
action seeking an award of damages against certain Jiangbo D&O for breach of
fiduciary duty, corporate waste, and gross mismanagement, and against Sung for aiding
and abetting breach of fiduciary duty (“Shareholder Derivative Action”). DE 13 at 3–4.
On March 13, 2013, Pope Investments, LLC, Hua-Mei 21st Century Partners, LP, and
Guerilla Partners, LP, filed a Chapter 7 Involuntary Petition (“Petition”) against Jiangbo,
and on April 17, 3013, Appellee was appointed Chapter 7 Trustee. Id. As Trustee,
Appellee removed the Shareholder Derivative Action to the Bankruptcy Court and
instituted an adversary proceeding (“Removed D&O Action”), intervened as the sole
plaintiff in that action, and exercised an automatic stay in the Securities Class Action as
to Jiangbo. DE 9 at 8, 10; DE 13 at 4.
Prior to filing the Shareholder Action or the Petition, National Union Fire
Insurance Company of Pittsburgh, Pa. (“National Union”) issued the D&O Policy (No.
01-421-72-35), covering certain claims against Jiangbo and its D&O during the one-year
policy period beginning December 14, 2009. DE 9 at 8. The D&O Policy is a “wasting
asset” policy with a limit of $3 million, meaning that the assets deplete with payment of
covered defense costs. Id. at 9; DE 13 at 5. As of September 2014, National Union
had expended approximately $1.25 million in defense fees and costs under the D&O
Policy in connection with the Securities Litigation, Shareholder Derivative Action, and
Removed D&O Action. DE 9 at 9.
On January 31, 2014, the Bankruptcy Court entered an Agreed Order requiring
Appellants, Appellee, and Sung to participate in mediation. DE 13 at 5. Appellee,
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Sung, and National Union (“Settling Parties”) agreed to an initial settlement in which
Appellee, as Trustee, would receive $595,000 from the D&O Policy and National Union
would retain the balance of the remaining coverage. DE 13 at 6. The agreement was
conditioned on the Bankruptcy Court’s approval of a bar order, and Appellants filed a
limited objection to that provision. Id. The Settling Parties amended the agreement
(“Amended Settlement”), increasing Appellee’s settlement payment to $900,000, but
again conditioning the settlement on a bar order. DE 9 at 11. The Bankruptcy Court
held an evidentiary hearing on the Amended Settlement on September 19, 2014. DE
13 at 8. Appellee testified that she was concerned that continued litigation against Sung
in the Removed D&O Action and the pending appeals would substantially deplete the
available remaining insurance proceeds, decreasing the amount available to satisfy a
potential judgment, and that a significant portion of the remaining proceeds would be
expended on defense costs without a prompt settlement. Id. at 9.
After applying the factors set forth in In re Justice Oaks II, Ltd., 898 F.2d 1544,
1549 (11th Cir. 1990), the Bankruptcy Court determined that “the Amended Settlement
is fair and reasonable, falls within the reasonable range of possible litigation outcomes,
and is in the best interests of the Estate because the settlement: (i) precludes any risks
associated with litigation and collection in this matter; (ii) provides a dividend available
to creditors; and (iii) allows for a distribution of the proceeds within a reasonable time.”
DE 9, Ex. 1 at 9. The Bankruptcy Court further determined that the “Bar Order satisfies
the requisite standard under the prevailing law in the Eleventh Circuit and is fair and
equitable.” Id. The Bankruptcy Court entered the Settlement Order and Bar Order on
November 20, 2014, and denied Appellants’ motion for relief from the automatic stay.
See DE 9, Exs. 1–2.
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Appellants responded to the Orders by filing briefs before this Court arguing that
the Bankruptcy Court lacked authority to bar their securities fraud claims, the Bar Order
was unfair and inequitable as a matter of law, and the automatic stay should be lifted to
allow Appellants to pursue their claims against Jiangbo. See DE 9, 20. The Bar Order
effectively prevents Appellants from pursuing their securities fraud claims, and because
Appellants’ claims are subordinated to approximately $28 million in general unsecured
creditor claims, they are also unlikely to receive payment from the Amended Settlement.
Id. at 2. Appellee filed an opposing brief arguing that the Bankruptcy Court properly
acted within its jurisdiction and discretion and seeking affirmance of the Orders. See
DE 13.
The Court now will turn to the substance of the arguments that the parties have
raised in their briefs. Arguments not raised in the briefs are waived. See, e.g., Bank of
Am., N.A. v. Mukamai (In re Egidi), 571 F.3d 1156, 1163 (11th Cir. 2009).
II.
JURISDICTION
The federal district courts are courts of limited jurisdiction. Federated Mut. Ins.
Co. v. McKinnon Motors, LLC, 329 F.3d 805, 807 (11th Cir. 2003). In appeals from the
bankruptcy courts, a district court has jurisdiction to review three types of orders:
(1) final orders; (2) interlocutory appeals relating to certain orders issued under 11
U.S.C. § 1121(d); and (3) other interlocutory orders, only by leave of the court. Neidich
v. Lorenzo (In re Lorenzo), No. 13-23100, 2014 WL 1877408 at *2 (S.D. Fla. May 9,
2014). In this appeal, the Bankruptcy Court’s Settlement Order and Bar Order
constitute “final orders” and are therefore properly before this Court.
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III. LEGAL STANDARD
In reviewing the Bankruptcy Court’s merits determinations, this Court examines
factual determinations for clear error and legal conclusions de novo. HDR Architecture,
P.C. v. Maguire Grp. Holdings, 523 B.R. 879, 885-86 (S.D. Fla. 2014). Discretionary
determinations, including the approval of settlements or compromises, are reviewed for
abuse of discretion. In re Superior Homes & Invs., LLC, No. 12-15451, 2013 WL
2477057 at *2 (11th Cir. June 10, 2013). An abuse of discretion occurs when the ruling
is “founded on an error of law or misapplication of the law to the facts.” HDR
Architecture, P.C., 523 B.R. at 887 (quoting Park Nat. Bank v. Univ. Ctr. Hotel, Inc., No.
1:06-cv-00077-MP-AK, 2007 WL 604936 at *1 (N.D. Fla. Feb. 22, 2007)).
IV. DISCUSSION
When determining whether to enter a bar order against a non-settling party, the
court must reasonably determine that the bar order is fair and equitable. U.S. Oil & Gas
v. Wolfson, 967 F.2d 489, 496 (11th Cir.1992). Bar orders incorporated into settlements
are considered fair and equitable if: (1) the bar order fulfills the long-standing public
policy of encouraging pretrial settlements; (2) the settlement satisfies the requirements
for the approval of settlements under Justice Oaks for a fair and reasonable agreement;
and (3) the bar order satisfies the nonexclusive set of factors for approval of bar orders
set forth in Matter of Munford, Inc., 97 F.3d 449 (11th Cir. 1996). See id. at 454–55.
The Munford factors include: (1) the non-debtor third-party claims which will be barred
are “interrelated” with the estate’s claims; (2) the parties opposed to the bar order have
not presented sufficient evidence of the strength and existence of their claims against
the beneficiary of the bar order; (3) the estate’s litigation against the beneficiary of the
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bar order is complex; and (4) the continued litigation by the estate and other parties
against the beneficiary of the bar order will deplete resources. See id.
Appellants do not contest that the Settlement Agreement encourages the public
policy of pretrial settlement or that, absent the bar-order provision, the Settlement
Agreement would be fair and reasonable. Instead, the parties’ disagreement hinges on
the first and second Munford factors—whether Appellants’ securities fraud claims are
sufficiently interrelated with those of the Estate and the relative strength of those claims
as to the insurance coverage. See DE 20 at 1–2.
A. Interrelatedness of Claims
For a bankruptcy court to issue a bar order as part of a settlement, the nondebtor third-party claims to be barred must be “interrelated” with the estate’s claims.
See Munford, 97 F.3d at 455. The Eleventh Circuit has not clearly defined what it
means for claims to be interrelated, but it has observed that “a truly independent claim .
. . might be per se inappropriate to bar.” In re HealthSouth Corp. Sec. Litig., 572 F.3d
854, 865 (11th Cir. 2009). A claim may be “truly independent” if, for example, it is “not
based on the claimants’ liability to the instant plaintiffs or claims based on damages
completely separate from the instant damages.” AAL High Yield Bond Fund v. Deloitte
& Touche LLP, 361 F.3d 1305, 1311 (11th Cir. 2004). To date, the Eleventh Circuit has
found only cross-claims for indemnity and contribution among co-defendants or similar
claims to be interrelated. It has not decided whether separate claims of a settling estate
and a non-settling third-party against the same or similar defendants may be
interrelated for the purpose of issuing a bar order. The Court agrees with the
Bankruptcy Court that they can.
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Specifically, the Court concludes that the Bankruptcy Court did not err in finding
Appellants’ securities fraud claims sufficiently interrelated with the Estate’s claims in the
Removed D&O Action. As the Eleventh Circuit stated in U.S. Oil & Gas with respect to
cross-claims, if the claims extinguished by a bar order “arise out of the same facts as
those underlying the litigation, then the district court may exercise its discretion to bar
such claims in reaching a fair and equitable settlement.” 967 F.2d at 96. It was not
erroneous for the Bankruptcy Court to apply this same standard to claims of settling and
non-settling plaintiffs against common defendants, particularly in the absence of clear
controlling authority. The Bankruptcy Court also reasonably concluded in applying this
standard that the claims were interrelated because they “arise out of the same common
nucleus of operative facts and circumstances and are based on similar, if not identical,
acts and omissions.” See DE 9, Ex. 1 at 11. Both sets of claims “sought damages
based upon acts and omissions involving the disclosure of materially inaccurate
information to third parties and improper insider transactions.” Id.
Appellants challenge the Bankruptcy Court’s conclusion, arguing that (1) their
claims are truly independent because they (1) are direct claims that seek separate
damages from, and are in no way contingent or dependent upon, the Estate’s claims
that Appellee pursued in the Removed D&O Action, and (2) seek to recover assets that
are neither Estate assets nor assets to which Appellee may assert an equitable claim.
DE 9 at 18. Although a court may consider these factors in determining whether
Appellants’ claims are truly independent, it may nonetheless find the claims interrelated.
The Munford test is controlling, and it simply does not require the barred claims to be
property of the estate or dependent upon estate claims to be interrelated.
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In In re Van Diepen, P.A., an unpublished opinion upon which Appellants rely,
the Eleventh Circuit affirmed a bar order as part of an approved settlement where the
court determined that the barred fraudulent transfer claims were part of the bankruptcy
estate. 236 F. App’x 498, 502 (11h Cir. 2007). Although the Eleventh Circuit mentioned
in dicta that the bankruptcy court would not have had “authority to include in a
settlement agreement a release of third party non-debtors . . . where their property [was]
not part of the bankruptcy estate,” id., the Court does not read this statement as
creating a new, binding standard for the interrelatedness of claims.
Appellants also rely heavily upon Judge Cristol’s recent order in In re
Fontainebleau Las Vegas Holdings, LLC, No. 09-21481-BKC-AJC, ECF No. 4491
(Bankr. S.D. Fla. July 11, 2014), to support their argument that the Bankruptcy Court did
not have authority to bar Appellants’ securities fraud claims. See DE 9 at 16; DE 20 at
3. In considering a bar order similar to the one at hand, Judge Cristol determined that
claims for fraud and negligent misrepresentation asserted by non-debtor plaintiffs in a
separate state-court action fell within the meaning of “truly independent claims.” In re
Fontainebleau, No. 09-21481-BKC-AJC, ECF No. 4491 at 7. However, Judge Cristol
further held that a bar order may nonetheless be appropriate if “unusual circumstances”
were present, such as “where the targets of those independent claims were insolvent.”
Id. at 8. Although the Court respects Judge Cristol’s opinion, his order is not binding on
this Court. And even if it were, under the Fontainebleau framework, this case would
contain “unusual circumstances” in which a bar order may be appropriate. The only
recoverable Jiangbo asset in the United States—the D&O Policy—was “wasting” as a
result of litigation that was “both complex and expensive” for the Estate to pursue and
“would likely be appealed” regardless of the outcome. DE 9, Ex. 1 at 8. Absent
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approval of the Bar Order, the parties would not agree to a settlement, the Estate would
not receive the $900,000 to pay its creditors, and the finite recoverable assets of the
D&O Policy would likely be expended on litigation costs. Id. at 8–12. Therefore, the
Bankruptcy Court did not abuse its discretion in finding the claims sufficiently
interrelated, or otherwise the circumstances sufficiently unusual, to warrant a Bar Order.
B. Likely Success of Barred Claims
The Bankruptcy Court also reasonably concluded that Appellants failed to prove
that their claims were likely to succeed. Under Munford, the non-settling party must
demonstrate that it is likely to succeed on the merits if its claims are permitted to go
forward. See Munford, 97 F.3d at 455. The Bankruptcy Court reasonably determined
that Appellants had not met this burden. First, at the time the Orders were entered, the
District Court had already dismissed the Securities Class Action against Sung and
Frazier, DE 9, Ex. 1 at 11–12, and the Eleventh Circuit has since affirmed the dismissal,
DE 9 at 8; DE 13 at 4. Second, the Bankruptcy Court concluded that Appellants’ claims
against Jiangbo and its D&O other than Sung were also unlikely to succeed. DE 9, Ex.
1 at 12. The D&O Policy required each insured to give National Union full cooperation
and defend claims against the Policy, but only Sung had done so in the Securities Class
Action. Id. Therefore, National Union denied coverage to Jiangbo and the insured
individuals, except for Sung, and the clerk entered defaults against them. Id.
Appellants contend that the Bankruptcy Court did not apply the correct legal
standard in assessing the likely success of their claims. DE 9 at 19. Under Florida law,
to constitute a breach of policy “lack of cooperation must be material and the insurance
company must show that it was substantially prejudiced in the particular case by the
failure to cooperate.” Am. Fire & Cas. Co. v. Vliet, 4 So. 2d 862, 863 (Fla. 1941).
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Although the Bankruptcy Court did not use the term “prejudice,” it appropriately
considered how “failure to defend resulted in clerk’s defaults,” DE 9, Ex. 1 at 12, which
is a form of prejudice to National Union.
Appellants further argue that the Bankruptcy Court failed to adequately assess
the prejudice suffered by National Union, because this Court could vacate the defaults
for “good cause” if Appellee, as Trustee, so requested. DE 9 at 19. However,
Appellants have already moved for default judgments, id. at 8, and it does not appear
that Appellee expressed to the Bankruptcy Court any intent to vacate the defaults. Nor
has she expressed such intent in this appeal. See DE 13. When the Bankruptcy Court
issued its Order, the possibility that Appellee would move to vacate the defaults would
have been mere speculation. The Bankruptcy Court reasonably concluded that under
such circumstances that National Union justifiably denied coverage to Jiangbo and its
D&O, except for Sung, under Florida law, and that Appellants, therefore, were unlikely
to prevail on their securities fraud claims.
Finally, Appellants argue that “the proposed Bar Order cannot be deemed fair
and equitable because it provides no compensation whatsoever to the Securities
Plaintiffs for the extinguishment of their claims.” DE 9 at 19. However, because the
Bankruptcy Court justifiably concluded that Appellants were unlikely to succeed on the
merits of their claims, it did not abuse its discretion in approving a settlement that did
not provide compensation to Appellants for those claims.
Finding all elements of the Munford test satisfied, the Court concludes that the
Bankruptcy Court did not abuse its discretion in issuing the Settlement Order and Bar
Order and that the Bar Order was fair and equitable as a matter of law. Furthermore,
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the Bankruptcy Court properly denied as moot Appellants’ motion for stay relief in light
of the Orders.
V.
CONCLUSION
For the reasons discussed herein, it is ORDERED AND ADJUDGED that the
Bankruptcy Court’s Order Granting Motion, as Amended, of Chapter 7 Trustee: to
Approve Settlement and Compromise of Controversy with Elsa Sung and Request for
Entry of a Bar Order and Denying the Motion for Relief from Stay (“Settlement Order”)
and Bar Order Pursuant to Settlement Agreement Between and Among: (I) Chapter 7
Trustee Sonya L. Salkin; (II) Former Officer of Debtor, Elsa Sung; and (III) National
Union Fire Insurance Company of Pittsburgh, PA (“Bar Order”) are AFFIRMED. The
Clerk of Court is directed to CLOSE this case.
DONE AND ORDERED in Chambers at Fort Lauderdale, Broward County,
Florida, this 24th day of September, 2015.
Copies provided to:
Counsel of record via CM/ECF
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