Securities and Exchange Commisison v. Pentagon Capital Management PLC et al
Filing
250
OPINION re: 243 MOTION for Fees and Expenses or, in the Alternative, to Withdraw as Counsel for Pentagon Capital Management PLC filed by Pentagon Capital Management PLC. Based upon the conclusions set forth above, the Pepper Hamilton's motion to modify the restraining notice with respect to the relevant fees is granted. (Signed by Judge Robert W. Sweet on 10/18/2013) (cd)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------X
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
08 Civ. 3324(RWS)
-against-
OPINION
PENTAGON CAPITAL MANAGEMENT PLC and
LEWIS CHESTER,
Defendants,
-andPENTAGON SPECIAL PURPOSE FUND, LTD.,
Relief Defendant.
------------------------------------------X
A P PEA RAN C E S:
Attorneys for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
New York Regional Office
3 World Financial Center, Suite 400
New York, NY 10281
By:
Paul G. Gizzi, Esq.
Christopher J. Dunnigan, Esq.
John C. Lehmann Jr., Esq.
Attorneys for Defendants
PEPPER HAMILTON LLP
Hamilton Square
600 Fourteenth Street, N.W.
Washington, DC 20005-20004
By:
Frank C. Razzano, Esq.
Ivan B. Knauer, Esq.
Matthew D. Foster, Esq.
1
Sweet, D.J.
Pepper
Defendant Pent
lton LLP ("
Hamilton"), counsel for
Capital Management PLC ("PCM"), has moved to
modify the restraining notice issued by the Plaintiff Securities
and Exchange Commission ("SEC") to allow for fees and expenses
or, in the alternative, to withdraw.
Ba
set forth below, the motion to modi
the restrain
on the conclusions
notice is
ed.
Prior Proceedings
Prior proceedings and the
desc
s in this action are
in the opinions of this court, dated
and February 10, 2009 granting judgment in
See SEC v. Pent
PLC,
ry 14, 2012
r of the SEC.
F. Supp.
2012 WL 479576 (S.D.N.Y. February 14, 2012) i
Capital Mgmt. PLC, 612 F. Supp. 2d 241 (S.D.N.Y. 2009).
summary of the procedural background relevant to t
A brief
instant
motion follows:
On March 28, 2012, this Court entered a Final Judgment
of over $98.6 mill
Defendant.
against the Defendants and Relief
On April 25, 2012, Defendants fi
2
a notice of
appeal.
nt motion by the Defendant
ied a subs
s Court
Lewis Chester ("Chester"), PCM, and Pent
, Ltd. ("
supers
of
P
for a s
s bond
se
of execution without posting a
accordance with Rule 62 of the Federal Rules
1 Procedure.
Chester and PCM, but not PSPF,
motion to the Second Circu
2012,
Special
Second Ci
for the same relief.
t denied
motion.
a
On May 23,
(Dunnigan Decl., Ex.
1) .
On June 7, 2012, the SEC served a restraining notice
pursuant to New York Civil Practice Law
Chester,
requests.
PCM and PSPF, as well as
On June 12, 2012, t
to PCM and PSPF.
5222 on
t-judgment document
SEC propounded interrogatories
These discovery
sts were
on Pepper Hamilton, counsel for PCM, Chester,
On June 28, 2012, after se
inte
§
On June 13, 2012, the SEC propounded
interrogatories to Chester.
se
Rules
ories, PCM
ce of
led for
PSPF.
restraining notice and
stration in the Un
Kingdom (Def. Memo at 3).
On July 5, 2012, Squire Sanders (UK) LLP, the U.K.
counsel for the Administrators, sent letters to both Pepper
Hamilton and the SEC.
In the first letter (the "Pepper Hamilton
3
Letter"), the Administrators agreed to let Pepper Hamilton keep
a flat fee paid to it on February 17, 2012, and agreed to
underwrite additional expenses for Chester and PCM's appeal to
the Second Circuit.
However, the Administrator instructed
Pepper Hamilton not to respond to the pending discovery
requests.
(Knauer Declo, Ex. 1, pgs. 2-3).
In the Administrators' second letter (the "SEC
Letter"), the Administrators informed the SEC that "Pentagon has
entered administration because it is insolvent and there are
very limited funds in the administration estate to enable the
Company to be involved in the Post-Judgment Proceedings."
(Dunnigan Decl. Ex. 5, pg. 3).
The Administrators also informed
the SEC that they viewed the SEC's United States based judgment
as unenforceable outside the United States unless it was
domesticated in the U.K.
On July 5, 2012,
Pepper Hamilton sent a letter to this
Court asking to be relieved as counsel for PCM and PSPF.
On
July 9, 2012, counsel for the Administrators sent a further
letter to Pepper Hamilton, stating that PCM would no longer pay
4
for any of PSPF's 1
1 costs.
25, 2012, Pepper Hamilton's
After
effect of
cont
. 1).
On
st to withdraw was
Court deni
withdraw, counsel for the
(Knauer Decl.
ly
ed.
Pepper Hamilton's motion to
rties corresponded rega
the
SEC's restraining notice on Pepper Hamilton's
ing representation of its clients.
On August 21, 2012,
counsel proposed the following:
• Pepper Hamilton can cont
to draw down the flat fee
while
senting the administrators for PCM
Chester in the appeal to the Second Circuit;
• Pepper Hamilton can cha
the administrators for PCM
the reasonable expenses incurred incident to the
appeal; and
• Pepper Hamilton can cha
administrators for an
hourly basis for the fees and expenses incurred in
representing the administrators
PCM in the post
judgment discovery
ss in
Southern
st ct of
New York.
This amount is initially capped at $25,000
and, if necessa
[Pepper
Iton wou J be in
contact with [the SEC] when the bills reach[ed]
s
amount so
t [they could] agree on another
amount.
(Pepper Hamilton's Exh
t A (nEx. AU), E-mail from M. Foster to
SEC responded the same day,
C. Dunnigan (Aug. 27, 2012).)
indicating that it agreed to
SEC's ri
"
three requests, n rese
to take afferent pos
(Ex. B, E-mail
C. Dunni
ng the
ion at a later time
to M. Foster (Aug. 27,
5
2012).)
The parties' agreement allowed Pepper Hamilton to
continue to receive payment for its work
the appeal and for PCM
r PCM and Chester on
post-judgment proceedings in this
Court, without any substantive limitation on the legal
on the
sentation aside from the monetary
st-judgment
representation.
Following this Court's decis
notice and the part
Iton with Sey
s' agreement, Chester
aced Pepper
rth Shaw LLP ("Seyfarth Shaw").
to incur legal fees
agreed to allow Seyfarth
If of Chester to deal wi
on
s, the restraining
The SEC
to $25,000
post-judgment discovery
thout violating the restraining notice.
On August 8, 2013, t
cision, affi
Second Circuit issued its
ng in part and vacating and remandi
in part
the Court's ruling.
al.
725 F.3d 279, 287
(2d Cir. 2013)
(Vacating penalty award in
light of the Supreme Court's decision in Gabelli v.
Ct. 1216 (2013) and wi
regard to t
imposition of joint and
several liability of the penalty upon Defendants).
Hamilton sought the SEC's
133 S
Pepper
rmission to receive a new retainer
from PCM from which the attorneys would draw down
6
r payment of
s incurred in prepa
ling a petition on PCM and
ng and
nc, and to charge PCM's
Chester's behalf for rehearing en
administrators for reasonable
nses incurred in the
preparation and filing of such
ition.
requests as violating the restraini
The SEC denied both
notice.
The SEC stated
tit,
woulq] view any pa
s
r attorneys' fees other
than the reasonable costs to p
the pending
requested discovery as
lat
the restraining
notice. For the pending
scovery, [the SEC requested
that Pepper Hamilton] please
de an estimate of
what it [would] cost to p
discovery. [The
Sec also stated it would] need to
ew the
statement(s) before any payment [wa]s made. And to be
clear, [the SEC] note[d] that t
of any possible
objection to the pending requests
not be
rmitted - only the costs of p
t
requested
discovery [would the SEC] view as
olating the
restraining notice.
(Ex. E., E-mail from P. Gizzi to M. Foster (S
. 6, 2013).) On
September 4, 2013, the SEC again requested
an est
r Hamilton
of how much in fees would be necessary to respond to
the
9 discovery requests.
To date,
has not
an estimate of its post-j
r Hamilton
fees.
rth Shaw, counsel for Chester, has accumulated
$32,000 in 1
1
s to date, which is $7,000 in excess of
SEC's allotted amount, and seeks an additional $3,000 to
with outstanding
production issues.
7
1
Seyfarth Shaw is
currently
ing paid by
ster personally.
September 6, 2013, the
that
rth Shaw may
an additional $3,000 to complete document
represent
ster at his deposition.
agree to the
Bye-mail on
paid
scovery and to
The
has refused to
yment of $7,000 in excess of the previously
agreed-upon $25,000.1
On September 13, 2013,
motion before the Court see
restraining not
to allow
Pepper Hamilton filed this
an order ei
r modifying
r Hamilton to
certiora
en banc and potential subse
resent PCM in
petitions and
without limitation in the post judgment discovery requests, or
counsel for PCM.
thdraw as
lton leave to
alternatively granting Pepper
and mar
Its motion was
fully
submitted on October 16, 2013.
The Applicable Standard
A.
CPLR §
40
Under CPLR § 5240, a Court "may at any t
own
itiative or
motion of any interested
, on its
rson, and upon
1 It is unclear which,
i
any, counsel will represent Chester in the District
Court. No memorandum
motion on behalf of Chester with
to the
instant motion has been submitted.
8
such notice as it may
ire, make an order denying, limiting,
conditioning, regulating, extending or modifying the use of any
enforcement procedure." NY
CPLR § 5240.
omnibus section empowering t
court to exercise broad powers
over the use of enforcement
R.R. 661 N.Y.S.2d 20, 22
s."
(N.Y.
This section
r
"CPLR 5240 is an
Paz v. Long Island
. 2d Dep't 1997).
rizes modification or
"
lusion of any enforcement
otherwise provided for
Article 52," including CPLR 5222 restraining notice.
lin v. Altman
See
No. 92 Civ. 8106, 1997 U.S. Dist. LEXIS
11413, *9-10 (S.D.N.Y. Aug. 7, 1997); see also Cruz v. TO Bank,
N.A. 711 F.3d 261, 269-70 (2d Cir. 2013)
(CPLR 5240 is a "broad
ism for relief").
B. Local Civil Rule 1.4
Local Civil Rule 1.4, an "attorney who
attorney of record for a party may be rel
by
Court granted by order."
an order may
otherwise satis
and
or
aced only
Court and may not withdraw from a case
of
leave of t
s appeared as
thout
Local Civ. R. 1.4.
"
granted only upon a showing by affidavit or
ctory reasons for withdrawal or displacement
posture of
case.
"
9
Id.
Thus, a court
considers two issues in determining a motion to withdraw as
counsel, "t
wit
I
reasons
withdrawal
on the t
of the
the impact
eding."
the
Karimian v. T
No 10-3773 (AKH) (JCF) , 2012 WL 1900092, at *2
( S . D. N • Y •
May 11, 2011).
In making its determination, it is well-settl
that a
court has "considerable discretion in deciding a motion for
withdrawal of counsel."
Id.;
No. 00-3262, 2002 WL 59423, at *1 (S.D.N.Y. Jan. 16, 2002).
a motion
consider
leave to withdraw, a court may cons
"protracted history of
or not to
In
I
r
igation" when deciding whether
rmit counsel to withdraw.
SEC v. Great American
No. 07-10694, 2009 WL 4885153, at *5
(S.D.N.Y. Dec. 15, 2009).
In addition, courts have all
withdrawal based on non-payment.
v. Johnson Grossfie
See Promotica
America, Inc.
----------------------~------
, Inc., No. 98-7414, 2000 WL 424184, at *1
(S.D.N.Y. April 18, 2000)
("It is well sett
that nonpayment
of fees is a valid basis for the Court to grant counsel's motion
to
thdraw.
.ff);
Emile v. Browner, No. 95-3836, 1996 WL
724715, at *1 (S.D.N.Y. Dec. 17, 1996)
pay
1 fees,
attorney,
("When a client
ils to
fails to communicate or cooperate with the
and the
client relationship has broken
10
down,
se are more than sufficient reasons for counsel to be
relieved.
If) •
The Motion to Modify the Restraining Notice to Allow Specified
Counsel Fees is Granted
Pepper Hamilton has sought the modificat
restrain
CPLR
notice
§
of the
5240 with respect to attorney
fees to
rmit representing PCM in any further appellate
lit
, including filing an en bane rehearing
fil
a petition
judgment proceedings
these fees, acco
Supreme Court
ew, and
fore this court.
payment of
Pepper Hamilton, unjustly allows the SEC
s and best
prevents PCM from having a
opportunity to pursue appellate
in
the post-
Prevent
to use the restraining notice to dictate the ri
rests of PCM,
ition,
1 and fair
and to
its ri
s
post-judgment proceedings.
that its pos
The SEC does not
ude PCM from pursuing
adequately responding to
SEC insists that (1) s
ion seeks to
r appellate review or
t-judgment document
review would
futile;
5222 does not create a statutory exemption for atto
(3) CPLR
§
5240 does not create any substantive r
11
sts.
(2) CPLR
s;
s for
§
judgment debtor or any third
rty and as such cannot
used to modify the restraining notice.
(SEC Memorandum in
Opposition, "Sec. Opp."; at 3-5.)
that CPLR
The SEC is correct
create substantive rights
statutory exemption
that CPLR
attorney fees.
§
5240
s not
5222 does not allow a
§
This
s not, however,
prevent district courts from modifying restraining notices
uant to CPLR
While CPLR
Ru
§
§
5240 to prevent harsh or unjust results.
5240 is a New York state procedural rule,
of Civil Procedure 69
1
des that "[tJhe procedure on
execution [of a federal judgment
money
s]-and in
proceedings supplementary to and in aid of judgment or
execution-must accord with t
court is located."
procedure of the state where t
AXA Versi
Ins. Co., 2013 WL 1790719, at *3
Restraining notices relat
AG v. New
(S.D.N.Y. Apr. 22, 2013).
to underlying judgments have been
ementary to and in aid of
found to be "unquestionabl[yJ s
judgment or execution" and as such within t
strict Courts.
hire
Id.; see also Karaha
purview of
LLC. v.
------------------~---------
~~~~~~~~~~~~~~~~~~~~~~~~~,
(2d
r. 2002)
(upholding a
313 F.
70
strict order's modification of a
restraining notice pursuant to CPLR § 5240).
12
Courts in this
Ci
have there
re
ermined that "[jJuris
ction to hear
ancillary disputes relating to execution and en
cement of
judgments is an inherent
ction over the
lying case.
rt of a court's juris
As the
Circuit recently reiterated,
'[pJrocess subsequent to judgment is as essent
ction as process
j
power would be
ci
j
1 to
to judgment, else
lete and entirely i
quate to
purposes for which it was conferred by the constitution."
=E=M-====-==-=~==~~=====-~-==in-=a,
2012)
695 F.3d 201, 208
v. Johnson Cnt
(quoting --~~----------------~Ri
Modi
(2d Cir.
73 U.S. 166 (1867)).
the restraining notice at issue under CPLR § 5240 to
ust results is Ii
se within this Court's
discretion.
Second Circuit decision in
Assocs. Defined Contribution Pension
666 F.3d 68, 78 (2d
Cir. 2011), upon which the SEC relies, is not to the contrary.
In Mi
--~~-
a district court until
the judgment
paid by a
r CPLR § 5240 to set as
the defendant moved
rty debtor.
i
The court held that CPLR § 5240
was a "state procedural rule" that
rights and
re
or its judgment.
fendant had been
had no relevance to the
s does not, though,
13
no substantive
ral proceeding
nt parties like
r Hamilton
the defendants in AXA
----------------~~--
Karaha Bodas Co., LLC., from usi
mechanism
through which to vi
CPLR
and
5240 as a procedural
§
cate certain rights restrained
by supplemental notices issued under NY CPLR § 5222.
AXA Versi
----------------~~--
, 2013 WL 1790719, at *3; Karaha Bodas Co.
LLC., 313 F.3d at 72.
Indeed, in both AXA Versiche
Karaha Bodas Co., the district courts used t
under CPLR § 5240 to modify restra
the
ir discretion
ing notices, not based on
ies constitutional rights or statutorily exempt
sm to
categories, but as a procedural me
resu
AG
r CPLR
s from the notices issued
AXA Vers
§
nt unjust
5222.
AG, 2013 WL 1790719, at *3 (modi
----------------~---
See
--~----~
ng
restraining notice to allow defendant to vindicate its property
rights
th respect to t
interest rate embedded
judgment); Karaha Bodas Co., 313 F.3d at 80
notice to account for only a percent a
restra
amount previously mandat
a statut
(modi
the
ing a
of the
). The fact that attorney fees are not
ly exempted category under CPLR § 5222 or that there
is no constitutional
to counsel in a civil proceeding does
not prevent a district court from modi
ng a restraining notice
in its discretion under CPLR § 5240 to prevent unjust results.
Indeed, CPLR
§
5240 exp1ic
ly provi
s that a Court "may at any
time, on its own initiative or the motion of any interested
14
person, and upon such notice as it may require, make an order
denying, limiting, conditioning, regulating, extending or
modifying the use of any en
5240; see also _ _ _ _ _v. _ _ _
Paz _ _
~L-
cement procedure." NY CLS CPLR §
Island R.R.
_ _ _ _ _ _ _ _ _ ____
(N.Y. App. Div. 2d Dep't 1997)
661 N.Y.S.2d 20, 22
("CPLR 5240 is an omnibus section
empowering the court to exercise broad powers over the use of
enforcement procedures.").
The SEC has cited Potter v. MacLean, 904 n.Y.S.2d 551,
553 (App.
. 3rd Dep't 2010) as holding that New York law does
not recognize the right of a judgment debtor to use non-exempt
funds to pay counsel.
such restriction.
(SEC Opp. at 4.)
In Potter, the
Potter stands for no
fendant had an outstanding
maintenance obligation to his family of $33,000, but was
pursuing a divorce action
to his attorneys for $15,000.
which he had an outstanding bill
The collection unit, because of
his owed maintenance support, served a restraining notice on the
attorneys representing the defendant in his divorce action.
id.
See
The court held that restraining notices could be served on
the defendant's attorneys and that funds held for the purpose of
retaining an attorney were not included
t
money and property exempt from restra
Id.
that it was not "unmindful of the impact [its]
15
statutory list of
The court stat
cision [might]
on defendant's ability to retain counsel," but noted that a
party in a matrimonial proceeding does not have a constitutional
right to counsel.
reached
~solely
Id. In so dec
g, the court clarified
s conclusion not to vacate
restrai
upon the factual circumstances presented"
"emphasis placed upon a parent's duty to p
his or
r children."
Id.
notice
the
child support
The court further expla
that
it reached this conclusion "specifically [based on the] fact
that defendant ha[d] willfully
provide
broader
ial support
ral rule.
olated his obligation to
his chi
" and did not
te any
Id. at 553-54.
court in Potter chose to exercise its
scretion
not to alter the restraining notice, and nothing that it was not
ired to do so because
constitutionally prote
discretion in Ii
sented.
right in question was not a
ght does not bar this court's
of the di
factual circumstances
Here, PCM cannot pursue further appellate
ew
unless it has the ability to appoint and compensate counsel.
It
is well-establis
that a corporation cannot represent itself
in a civil action.
See Jones v. Niagara Frontier Transp. Auth.,
722 F.2d 20, 22
t
a corporat
(2d Cir. 1983)
(stating that "it is established
, which is an artificial entity that can only
16
act through agents, cannot proceed pro se.")
--------------------------~~------
1937)
i
, 20 F.
see also
369, 370 (S.D.N.Y.
(noting that "[w]hile a corporation is a legal entity, it
is also an artificial one, existing
y
t
the law; it can do no act, except t
its
counsel is not a constitutionally
case, perhaps regrettably
in the Trial Court
contemplation of
s.").
Though
ected right in a civil
see Sweet,
The Rabbi's Bea
1 "Gideon" and Justice
42 THE RECORD 915, 924
(Dec. 1997)), the SEC's position see
to prevent PCM from
pursuing its administrator's wis
s in continuing appellate
litigation and would deprive
r Hamilton of its independence
in its post-judgment
resentation.
contended that it would
pursue a continued liti
the best interest of t
of PCM's administrators
discretion to modi
unfair results.
here would result
a "waste" or "needless" for PCM to
ion it is not the arbiter what is
PCM estate, which is the responsibility
counsel.
CPLR § 5240 provides
procedures to prevent harsh
en
The
Although the SEC has
c
ctual circumstances pres
justice if PCM were
pursuing appellate relief and adequately responding to
post-judgment
notice will
scovery requests.
SEC's
As such, the restra
fied to allow Pepper Hamilton to represent
17
en bane rehearing and petitions,
PCM in
post-judgment discovery issues. 2
limitat
As this
has already determi
billing ar
s of fees is to be reso
administrators
Pepper Hamilton.
Mgmt.
without
, the amount and
by PCM, the
See
PLC, 2012 WL 3065981, at *3 (S.D.N.Y. July 25, 2012).
Because
Hamilton has only
ed to withdraw as an alternative to
the issue of withdrawal is rendered moot by this opinion and
will not be addressed.
2
18
Conclusion
upon the conclus
set forth above, t
Pepper
Hamilton's mot
to modify the restraining notice with respect
to the relevant
es is granted.
It is so ordered.
New York, NY
October /~, 2012
ROBERT W. SWEET
U.S.D.J.
19
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