Cobalt Multifamily Investors I, LLC et al v. Shapiro et al
OPINION & ORDER re: 201 FIRST MOTION to Dismiss Cross-Claims Asserted by the Cohen Defendants and for a Bar Order filed by Philip L. Chapman, 199 MOTION to Approve Settlement Agreement filed by Anthony Paduano. For the foregoing reasons, the Court DENIES the Settling Parties Motion for a Bar Order and DENIES their Motion to Approve the Settlement Agreement. [Dkt. Nos. 201, 199]. (Signed by Judge Kimba M. Wood on 9/27/2013) (rsh)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
COBALT MULTIFAMILY INVESTORS I,
LLC, et al.,
06 Civ. 6468 (KMW) (MHD)
OPINION & ORDER
MARK A. SHAPIRO, et al.,
KIMBA M. WOOD, UNITED STATES DISTRICT JUDGE:
The court-appointed receiver (the “Receiver”) for Plaintiffs Cobalt Multifamily Investors
I, LLC, and its related entities (collectively, “Cobalt”) filed suit against three sets of attorneys
and their law firms who provided services to Cobalt before the company’s collapse.1 These
attorneys and their law firms are: (1) Robert F. Cohen and his firm, Cohen & Werz LLC (the
“Cohen Defendants”); (2) Martin P. Unger and his firm, Certilman Balin Adler & Hyman LLC
(the “Certilman Defendants”); and (3) Philip Chapman and his firm, Lum, Danzis, Drasco &
Positan LLC (the “Lum Defendants”).
On March 7, 2012, this Court, based on an extensive conflict of laws analysis, ruled that
the Receiver had standing to sue the Cohen and Lum Defendants, but lacked standing to sue the
Certilman Defendants. See Cobalt Multifamily Investors I, LLC v. Shapiro, 857 F. Supp. 2d
419, 435 (S.D.N.Y. 2012) (Wood, J.) [Dkt. No. 172]. The Court, therefore, dismissed the
Receiver’s claims against the Certilman Defendants. Id.2
The Receiver’s suit originally included claims against Cobalt’s principals: Mark A. Shapiro, Irving J.
Stitsky, and William B. Foster. After these individuals were convicted of securities fraud, the Receiver
voluntarily dismissed its claims against them. [Dkt. No. 63].
In that Opinion and Order, the Court detailed this case’s procedural and factual background, familiarity
with which is assumed. See Cobalt, 857 F. Supp. 2d at 424–27.
The Receiver and the Lum Defendants (the “Settling Parties”) have since entered into a
Settlement Agreement, for which they seek court approval. [Dkt. No. 200 Ex. 1 (Settlement
Agreement); Dkt. No. 199 (Motion to Approve the Settlement Agreement)]. The Agreement is
conditioned on the issuance by this Court of an order “barring any future derivative claim,
whether such claim sounds in indemnification or contribution, against the settling defendants,
including, but not limited to, any cross-claims previously asserted by [the Certilman
Defendants].” [Dkt. No. 201 (Motion for a Bar Order)]. Because the only other nonsettling
defendants—the Cohen Defendants—have already agreed to dismiss their cross-claims against
the Lum Defendants with prejudice, [Dkt. No. 207], the sole purpose of the requested bar order is
to extinguish potential nonparty claims, such as those of the Certilman Defendants.3
The Certilman Defendants sought the Court’s assurance that, because they had been
dismissed from the suit, they had no obligation to respond to the Settling Parties’ motion. The
Court agreed and ordered that the Certilman Defendants need not respond. [Dkt. No. 205].
Undeterred, the Settling Parties renewed their request by submitting to the Court a draft bar
order. [Dkt. No. 225].
For the reasons set forth below, the Court DENIES the Settling Parties’ Motion for a Bar
Order and DENIES their Motion to Approve the Settlement Agreement. [Dkt. Nos. 201, 199].
Motion for a Bar Order
Although “a district court may properly bar claims of nonsettling defendants against
settling defendants for contribution or indemnity,” Denney v. Deutsche Bank AG, 443 F.3d 253,
273 (2d Cir. 2006) (emphasis added), principles of due process and fundamental fairness
The Settling Parties had also moved to dismiss cross-claims asserted by the Cohen Defendants against
the Lum Defendants, [Dkt. No. 201], but this request was mooted by the Cohen Defendants’ agreement to
dismiss those claims with prejudice, which this Court so-ordered. [Dkt. No. 207].
preclude a court from barring claims of nonparties. It is a well settled “general rule that a person
cannot be deprived of his legal rights in a proceeding to which he is not a party.” Martin v.
Wilks, 490 U.S. 755, 759 (1989); see also Parklane Hosiery Co. v. Shore, 439 U.S. 322, 327 n.7
(1979) (“It is a violation of due process for a judgment to be binding on a litigant who was not a
party or a privy and therefore has never had an opportunity to be heard.”); Hansberry v. Lee,
311 U.S. 32, 40 (1940) (“It is a principle of general application in Anglo-American jurisprudence
that one is not bound by a judgment in personam in a litigation in which he is not designated as a
party or to which he has not been made a party by service of process.”).
Other courts to consider the issue have similarly concluded that they lacked the authority
to issue bar orders extinguishing nonparty claims. One such case, Armstrong v. Collins, was
initiated by a court-appointed receiver who entered into a settlement conditioned on “the entry by
the Court of an Order … barring third parties with notice of the Settlement from pursuing any
claim against the Settling Defendants.” No. 01-CV-2437, 2010 WL 1141158, at *1, *15
(S.D.N.Y. Mar. 24, 2010) (Crotty, J.). The agreement was “so ordered,” but counsel for the
receiver refused to file the application for a bar order because he was not “satisfied with the legal
support” offered by the settling defendant “for the Court’s authority to issue a bar order binding
non-parties.” Id. at *15–16 (noting that the receiver also “did his own research on the issue,
discussed the matter with SEC staff attorneys and contacted other receivers for their opinion,”
but found “no legal basis for the Court issuing a bar order binding non-parties”). The settling
defendant asked the Armstrong court to nonetheless enforce the settlement agreement, but it
refused. The court saw “no indication” that the receiver’s attorney had declined to submit the
bar order motion “in anything but good faith” and concluded that his “concerns regarding the
Court’s authority to issue a bar order binding non-parties are justified.” Id. at *26; see also
Perkins v. Johnson, No. 06-CV-01503, 2007 WL 521170, at *1 (D. Colo. Feb. 15, 2007)
(“[F]undamental principles of due process preclude me from giving effect to that portion of the
parties’ agreement affecting the rights of ‘any defendants who may be added at a later time.’”);
Alvarado Partners, L.P. v. Mehta, 723 F. Supp. 540, 554 (D. Colo. 1989) (refusing to approve a
proffered partial settlement that sought to “bar potential claims of non-parties to this action,”
because “[f]undamental due process principles prohibit claim extinguishment against anyone not
a party to this action”).
The Settling Parties have not cited a single decision holding that a court may issue a bar
order against nonparty claims. Rather, they direct the Court to two bar orders executed by
district courts in this jurisdiction that purport to apply to nonparties.4 See Carroll v. LeBoeuf,
Lamb, Greene & MacRae, L.L.P., No. 05-CV-391 (S.D.N.Y. July 16, 2008) (Kaplan, J.) (Bar
Order and Final Judgment at 2 [Dkt. No. 227]) (barring contribution or indemnity claims by
nonsettling defendants as well as “any other person or entity”); Compudyne Corp. v. Shane, No.
05-CV-4300 (S.D.N.Y. July 18, 2007) (Sweet, J.) (Bar Order Injunction and Dismissal of Claims
at 2 [Dkt. No. 86]) (including, in definition of “Barred Persons,” “any other person or entity that
directly or through his/her/its counsel has been served with notice of the hearing on the
Motion”). Neither court, however, addressed its authority to bind nonparties, nor heard any
objection to the proposed orders on that basis. See Carroll, 2008 WL 2789766; Compudyne,
These two bar orders are cited only in a letter to the Court sent by the Lum Defendants after the Court
ordered that the Certilman Defendants need not respond to the Settling Parties’ bar order request. [Dkt.
No. 225]. The Lum Defendants’ Memorandum of Law in support of their motion, in fact, provides no
authority whatsoever for the proposition that the requested bar order “is appropriate as to the Certilman
Defendants just as it would be against any other unnamed defendant,” a contention that is made solely in
a single footnoted sentence. (See Lum Defs.’ Mem. at 17 n.22 [Dkt. No. 203]). The Lum Defendants’
memorandum focuses, instead, on the bases upon which the Court should grant a bar order, but they do
not argue that any of these bases, including Section 78-u4 of the Private Securities Litigation Reform Act
of 1995, provides the Court with authority to bind nonparties.
2007 WL 2106554. In the absence of any discussion on this issue, the bar orders executed in
Carroll and Compudyne are inapposite.
The Lum Defendants argue that the general rule against nonparty preclusion is
inapplicable here because the Certilman Defendants were previously a party to this suit and the
Receiver can still appeal the Court’s dismissal of the Certilman Defendants.5 But “a party is
bound only as to matters properly raised during the period in which he is a party.” 18A Charles
Alan Wright et al., Federal Practice & Procedure: Jurisdiction § 4449 (2d ed. updated 2013); see
also Flanzbaum v. M & M Transp. Co., 286 F.2d 500, 503 (2d Cir. 1961) (“The complaint which
sought to bring in M & M as a party was dismissed. Not having been a party to the earlier action,
M & M is not bound by any adjudication made therein.”). Regardless of whether or not the
Certilman Defendants might be brought back as a party on appeal, they are not a party to this suit
now and thus cannot be bound by the requested bar order.6
The Lum Defendants try to find support for this position in Taylor v. Sturgell, which articulated six
narrow categories of exceptions to the basic “rule against nonparty preclusion,” but they misconstrue
Taylor’s language. 553 U.S. 880, 893–95 (2008). The Lum Defendants suggest that one of Taylor’s
exceptions is that nonparties that were “adequately represented earlier in the action” can be bound. [See
Dkt. No. 224]. This is not what Taylor says, and it is unclear from where the Lum Defendants draw this
conclusion; they do not provide a pincite. The Court’s best guess is that the Lum Defendants
misunderstand Taylor’s third exception. Although Taylor’s third exception states that a nonparty may be
bound if he or she “was ‘adequately represented by someone with the same interests who [wa]s a party’ to
the suit,” it does so as a modification to a quotation from Richards v. Jefferson County. See Taylor, 553
U.S. at 894 (quoting 517 U.S. 793, 798 (1996)) (brackets in original). Richards explains, in contrast, that
“[w]e have recognized an exception to the general rule when, in certain limited circumstances, a person,
although not a party, has his interests adequately represented by someone with the same interests who is a
party.” 517 U.S. at 798 (quoting Wilks, 490 U.S. at 762 n.2) (emphasis added). Taylor apparently
modified the quote because it was discussing the preclusive effect of an earlier, concluded suit. The
Supreme Court did not suggest that a dismissed defendant could be bound as to issues raised after it was
dismissed. Cf. Taylor, 553 U.S. at 894–95 (listing, as examples of representative suits that would qualify
under the exception, “properly conducted class actions” and “suits brought by trustees, guardians, and
other fiduciaries”). And the Lum Defendants do not contend—nor could they—that they, the Receiver, or
the Cohen Defendants adequately represent the Certilman Defendants.
For the same reason, the Court cannot accept the Lum Defendants’ contention that the Bar Order
adequately protects nonparties and, therefore, the Court need not be concerned with extinguishing
nonparty claims. Even if the Court had the authority to bind nonparties, in their absence it would be
Accordingly, the Court declines to issue the requested bar order.
Motion to Approve the Settlement Agreement
“Whether to approve a settlement normally rests in the discretion of a district judge.” In
re Masters Mates & Pilots Pension Plan and IRAP Litig., 957 F.2d 1020, 1025–26 (2d Cir.
1992). The Settlement Agreement in this case provides the Lum Defendants with the right to
declare the agreement void ab initio if the request for the bar order is not granted. Because the
Court has denied the Settling Parties’ motion for a bar order, the Court also denies the Settling
Parties’ motion to approve their settlement.
For the foregoing reasons, the Court DENIES the Settling Parties’ Motion for a Bar
Order and DENIES their Motion to Approve the Settlement Agreement. [Dkt. Nos. 201, 199].
Dated: New York, New York
September 27, 2013
Kimba M. Wood
United States District Judge
unable to “determin[e] that the settlement ha[d] been entered into in good faith and that no one ha[d] been
set apart for unfair treatment.” In re Masters Mates & Pilots Pension Plan and IRAP Litig., 957 F.2d
1020, 1031 (2d Cir. 1992) (stating that “[a] settlement bar should not be approved unless it is narrowly
tailored and preceded by” this judicial determination). For example, the Certilman Defendants are not
before the Court to provide full briefing on the Settling Parties’ legal arguments, nor have the Certilman
Defendants participated in discovery regarding potential indemnity obligations that may exist between
them and the Lum Defendants.
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