Broyles v. Cantor Fitzgerald & Co. et al

Filing 85

RULING Adopting #78 Report and Recommendations, of the U.S. Magistrate Judge...It is further ORDERED that the Notice of Preliminary Injunction (Doc. 79) does not affect defendant Cantor Fitzgerald & Co., nor does it prevent plaintiffs from litigating questions raised by Cantors anticipated motion to dismiss. Signed by Judge James J. Brady on 06/26/2012. (KDC)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA
JOSEPH N. BROYLES
CIVIL ACTION
VERSUS
NO. 10-854-JJB
CANTOR FITZGERALD & CO., ET AL.
consolidated with
JOSEPH N. BROYLES, ET AL.
CIVIL ACTION
VERSUS
NO. 10-857-JJB
CANTOR FITZGERALD & CO., ET AL.
RULING ON MAGISTRATE JUDGE’S REPORT AND RECOMMENDATION AND
EFFECT OF INJUNCTION
Before the Court are two matters.

The first is a Supplemental Report and

Recommendation issued by Magistrate Judge Stephen Riedlinger concerning removal
jurisdiction. (Doc. 78). 1 The second concerns a Notice of Preliminary Injunction. (Doc. 79).
Oral argument is unnecessary.
I.
Commonwealth Advisers, Inc. (“Commonwealth”) and its CEO Walter Morales
(“Morales”) solicited the plaintiffs to invest in one or more “pooled asset” hedge funds that were
created and controlled by Commonwealth. (Doc. 59 at 10). Plaintiffs collectively invested
millions to acquire a membership interest in these funds, which were supposed to each have
individual investment strategies, but the plaintiffs allege that all the funds had essentially the
same investment strategy of investing in collateralized debt obligations (CDO) (referred to as
“Collybus notes”), which were created by Cantor Fitzgerald & Co. (“Cantor”). (Doc. 59 at 11).
1

All docket references will be to the lead case, No. 10-854, unless otherwise indicated.

1

Plaintiff Joseph Broyles filed two suits which this Court has consolidated. The first, Case
No. 10-854, a direct suit filed on September 16, 2010, and removed to this Court, contains class
allegations against Cantor, Commonwealth, and Commonwealth’s officers or relevant
shareholders, 2 alleging that plaintiff-investors were harmed by misrepresentations and breaches
of fiduciary obligations related to decisions made by Morales and Commonwealth about their
investment accounts. (Doc. 59 at 12). A derivative action, which was also removed to this court,
was filed on November 8, 2010, was also filed by the investors in the name of the hedge funds. 3
(See Doc. 1, Case No. 10-857). That suit asserts that the managers of those funds breached their
fiduciary duty to their shareholders because they invested in the Collybus notes as a result of
receiving improper financial benefits from Cantor even though the investments harmed
shareholder interests. (No. 10-857, Doc. 1-6 at 31).
On October 25, 2011, the funds filed for bankruptcy protection, 4 and thereafter they
entered into an agreement with the plaintiff-investors, which tolled various deadlines and
enjoined further litigation in the direct suit.

(Doc. 79-1).

In early February, the tolling

agreement expired, and the debtor funds worried that their interests would be affected negatively
if the direct suit proceeded because it could, among other things, jeopardize the reorganization
plan in the bankruptcy court or weaken the debtor’s limited assets. (Doc. 79-1). On April 5,
2012, some of the debtors sought declaratory and injunctive relief against the plaintiff-investors
in an adversary proceeding (Adv. Proceeding No. 12-50470 (Bankr. D. Del.)) to prevent further
2

This group consists of CEO Walter Morales, shareholder and control person Jennifer Morales, compliance officer
and Vice President James F. O’Beirne, shareholder and control person Noel Caldwell, and Chief Compliance
Officer/Chief Operating Officer Willie Warrington, Jr.
3
The funds are CA Core Fixed Income Fund, LLC; CA Core Fixed Income Offshore Fund, Ltd. a/k/a CA Core
Fixed Income Fund, Ltd; CA High Yield Fund, LLC); CA High Yield Offshore Fund, Ltd. a/k/a CA High Yield
Fund, Ltd.; CA Strategic Equity Fund, LLC); CA Strategic Equity Offshore Fund, Ltd., Sand Spring Capital III,
LLC; Sand Spring Capital III, Ltd.; and Sand Spring Capital III Master Fund, LLC.
4
The funds have all filed for Chapter 11 bankruptcy, and their cases have been consolidated before the United States
Bankruptcy Court for the District of Delaware. (See Lead Case, Chapter 11 No. 11-13393, (Bankr. D. Del.)).

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litigation, and the parties agreed to a preliminary injunction that protected the plaintiff-investors’
future litigation interests in the direct suit and avoided the substantial cost that would have
resulted from continuing litigation. (Doc. 80-1). The derivative action was automatically stayed
under the Bankruptcy Code and has remained stayed even though it is consolidated with the
direct suit. (Doc. 81 at 2). Cantor alleges it should not be bound in the direct action by the
injunction agreement because it occurred in secret and it was not a party to the adversary
proceedings. (Doc. 80 at 2).
II.
The two questions for this Court to consider are: 1) whether, after deciding that
jurisdiction in this case was proper, a subsequent decision of the Fifth Circuit dictates a different
conclusion; and 2) whether allowing the suit to proceed would be improper due to the injunction
issued by the Delaware bankruptcy court. The Court treats each in turn.
A.
After this Court found jurisdiction and removal proper under the Class Action Fairness
Act and the Securities Litigation Uniform Standards Act, the parties were directed to submit
briefs addressing the impact of the decision in Roland v. Green, 675 F.3d 503 (5th Cir. 2012).
The magistrate judge reviewed those filings and found jurisdiction and removal were proper.
Neither party objects to the magistrate judge’s report. Likewise, this Court finds no error in the
Report. Accordingly, the Court hereby CONFIRMS the Supplemental Report (Doc. 78) and
ADOPTS it. Jurisdiction has been established, and removal was proper. This reaffirms the
magistrate judge’s previous ruling (Doc. 55), which this Court also confirmed and adopted (Doc.
58).
B.
3

The Notice of Preliminary Injunction (Doc. 79) merits more detailed analysis. The
Delaware bankruptcy court issued an injunction based on a consent judgment between Broyles
and the hedge funds. Cantor was not a formal party to the agreement, but it was present at the
proceedings which resulted in the injunction being issued. The injunction was entered for the
express purpose of prohibiting either party from prosecuting the litigation in this court in order to
reserve the Delaware bankruptcy court as the proper forum for resolving the claims against the
funds.
The question is, how does this affect Cantor and its attempts to dismiss the suit in this
forum? Under Federal Rule of Civil Procedure 65(d)(2), an injunction binds three groups of
parties: A) the parties; B) the parties’ officers, agents, servants, employees and attorneys; and C)
other persons who are in active concert or participation with anyone described in Rule
65(d)(2)(A) or (B). The question, therefore, is whether Cantor acted in concert with the parties
who filed the adversary proceeding, because it is neither a party nor an agent of a party to the
injunction.
[Rule 65] is derived from the common law doctrine that a decree of injunction not
only binds the parties defendant but also those identified with them in interest, in
‘privity’ with them, represented by them or subject to their control. In essence it is
that defendants may not nullify a decree by carrying out prohibited acts through
aiders and abettors, although they were not parties to the original proceeding.
Regal Knitwear Co. v. N.L.R.B., 324 U.S. 9, 14 (1945). In FTC v. Assail, Inc., the Fifth Circuit
held three parties acted in concert with the defendant because a large amount of money in their
bank account came from the defendant and they were essentially acting as one company. 410
F.3d 256, 263 (5th Cir. 2005).
Cantor and Commonwealth were allegedly in “active concert” with each other in relation
to the funds of the plaintiff-investors because it is alleged that Cantor sold approximately $740
4

million worth of Collybus notes to Commonwealth for about $350 million in cash. (Doc. 59 at
4). Thus, the allegations relating to the merits of the underlying dispute allege active concert in
accord with Assail. The question before this Court, however, is whether the two parties were in
active concert with each other with respect to the injunction. Unlike in Assail, the question
presented here does not involve enjoining actions stemming from allegations on the merits.
Instead, it involves a separate question of procedure. In that respect, the interests of Cantor and
Commonwealth are adverse (and thus not in active concert) with respect to the injunction
because Cantor is objecting to the injunction agreed to by Commonwealth.
In Regal, the Supreme Court held that the purpose of the active concert standard was to
prevent defendants from carrying out illegal acts through “aiders and abettors.” 324 U.S. at 1314. But there is neither allegation nor evidence that Commonwealth is attempting to use Cantor
to carry out acts contrary to the injunction. Rather, Cantor wants the Court to rule on its motion
to dismiss in order to avoid litigating the question anew in Delaware or waiting until the
bankruptcy’s resolution to litigate it here. This does not fit the paradigm contemplated by Rule
65, Regal, or Assail, and therefore Cantor is not bound by the injunction entered by the Delaware
bankruptcy court.
As a necessary concomitant, the plaintiffs are likewise not bound by the injunction to the
limited extent that they may, consistently with the injunction against prosecuting claims against
the funds, defend against Cantor’s motion to dismiss the claims raised against it.

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III.
Accordingly, it is ORDERED that the Report and Recommendation of the magistrate
judge (Doc. 78) is hereby APPROVED and ADOPTED.
It is further ORDERED that the Notice of Preliminary Injunction (Doc. 79) does not
affect defendant Cantor Fitzgerald & Co., nor does it prevent plaintiffs from litigating questions
raised by Cantor’s anticipated motion to dismiss.
Signed in Baton Rouge, Louisiana, on June 21, 2012.





JAMES J. BRADY, DISTRICT JUDGE
MIDDLE DISTRICT OF LOUISIANA

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