Springer et al v. Code Rebel Corporation et al

Filing 53

MEMORANDUM & ORDER: terminating 31 Motion to Appoint ; granting 35 Letter Motion to Stay ; granting 18 Letter Motion to Stay ; granting 23 Motion to Appoint Counsel ; granting 23 Motion to Appoint ; terminating 24 Motion to Appoint ; terminating 24 Motion to Appoint Counsel ; terminating 28 Motion to Appoint ; terminating 28 Motion to Appoint Counsel. In conclusion, the Court hereby appoints Plaintiffs William Tran and Adrian Ybarra as lead Plaintiffs, approves the Ros en Law Firm, P.A., and Pomerantz LLP, as co-lead counsel for the purported class, and temporarily stays this matter to allow the Individual Defendants to seek their requested stay from the Bankruptcy Court. This resolves Dkt. Nos. 18, 23, 24, 28, 31, 35. SO ORDERED. (Signed by Judge Alison J. Nathan on 3/02/2017) (ama)

UNITED STA TES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

Robert Springer, et al.,

Plaintiffs,
16-cv-3492 (AJN)

-v-

Code Rebel Corporation, et al.,

MEMORANDUM &
ORDER

Defendants.

ALISON J. NA THAN, District Judge:
Before the Court are two sets of motions. First, Plaintiffs William Tran and Adrian Ybarra
seek appointment as Lead Plaintiffs in this purported securities class action, and to have their
chosen counsel, The Rosen Law Firm, P.A., and Pomerantz, LLP, approved as co-lead counsel
for the purported class. See Dkt. No. 23. Second, the individual defendants in this case, Arben
Kryeziu a/k/a Arben Kane ("Kane") and Reid Dabney ("Individual Defendants"), move for an
order extending the automatic bankruptcy stay to the claims asserted against the Individual
Defendants. See Dkt. No. 35. For the reasons that follow, Plaintiffs' Tran and Ybarra's motions
are granted, and the Court defers to the United States Bankruptcy Court for the District of
Delaware to decide, in the first instance, the appropriateness of staying this action as against the
Individual Defendants.

I.

Appointment of Lead Plaintiff and Lead Counsel

As noted, on July 11, 2016, Plaintiffs William Tran and Adrian Ybarra moved for the Court
to appoint them as lead plaintiffs in this securities class action. Dkt. No. 23. Tran and Ybarra
also moved for approval of their chosen counsel, The Rosen Law Firm, P.A., and Pomerantz
LLP, as co-lead counsel for the purported class. Id. Three competing motions were originally
filed on the same day by George Torres, Dkt. No. 24, Afaq Shaik, Dkt. No. 28, and Larry
Strowbridge, Dkt. No. 31, but all three have since been withdrawn, and Torres, Shaik, and
Strowbridge have all indicated that they do not oppose appointment of Tran and Ybarra as lead
plaintiffs. See Dkt. No. 41; Dkt. No. 44; Dkt. No. 46. No other opposition been filed. For the
reasons articulated below, the Comi appoints Tran and Ybarra Lead Plaintiffs and approves their
chosen law firms as co-counsel for the class.
A. Appointment of Lead Plaintiffs
Though Tran and Ybarra's motion is now unopposed, the Court nevertheless addresses the
requirements under the Private Securities Litigation Reform Act of 1995 (the "PSLRA") for
appointment of lead plaintiffs, as other courts have done so even in the context of unopposed
motions. See, e.g., In re Symbol Techs., Inc. Sec. Litig., No. 05-CV-3923 (DRH)(JO), 2006 WL
1120619, at *2 (E.D.N.Y. Apr. 26, 2006) (engaging in a similar inquiry to address the merits of
an unopposed motion for appointment of lead plaintiff and class counsel); accord Yousefl v.

Lockheed Martin Corp., 70 F. Supp. 2d 1061, 1070 (C.D. Cal. 1999) ("When determining which
class member to appoint lead plaintiff, a comi should consider the rebuttable presumption factors
enumerated in the Act, even when the motion is unopposed.").

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Under the PSLRA, "the Court is required to appoint the 'most adequate plaintiff as lead
plaintiff." Maliarov v. Eros Intern. PLC, Nos. 15-cv-8956 (AJN), 16-cv-223 (AJN), 2016 WL
1367246, at *2 (Apr. 5, 2016) (quoting 15 U.S.C. § 78u-4(a)(3)(B)(i)). The statute establishes a
rebuttable presumption that the "most adequate plaintiff'' is a plaintiff who, first, "has either filed
the complaint or made a motion in response to a notice," second, "has the largest financial
interest in the relief sought by the class," and third, "otherwise satisfies the requirements of Rule
23." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(aa)-(cc). "This presumption may only be rebutted by
proof that the purportedly most adequate plaintiff 'will not fairly and adequately protect the
interests of the class' or 'is subject to unique defenses that render such plaintiff incapable of
adequately representing the class."' Maliarov, 2016 WL 1367246, at *2 (quoting 15 U.S.C. §
78u-4( a)(3 )(B)(iii)(II)( aa), (bb )).
As an initial matter, Tran and Ybarra satisfied the first requirement, making a motion in
response to a notice, when they moved for appointment as lead plaintiffs. See In re Deutsche
BankAktiengesellschafi Sec. Litig., No. 16-cv-03495 (AT) (BCM), 2016 WL 5867497, at *4
(S.D.N.Y. Oct. 4, 2016).
Second, Tran and Ybarra have the "largest financial interest in the relief sought by the class"
of any plaintiff who moved for appointment of class counsel. § 78u-4(a)(3)(B)(iii)(I)(bb).
Courts in this district, in determining which plaintiff has the greatest such interest, look to the
following factors:
(1) the total number of shares purchased during the class period; (2) the net shares
purchased during the class period ... ; (3) the net funds expended during the class
period ... ; and (4) the approximate losses suffered.

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Maliarov, 2016 WL 1367246, at *2 (quoting Peters v. Jinkosolar Holding Co., Ltd., No. 11-CV7133 (JPO), 2012 WL 946875, at *5 (S.D.N.Y. Mar. 19, 2012)). The last factor, financial loss, is
the most important of the four. Peters, 2012 WL 946875, at *5.
Tran and Ybarra represent that they purchased a total of 3 9 ,004 shares during the class
period; that they purchased 27,032 net shares (subtracting the total sold from the total
purchased); that they expended $98,586.28 in net funds; and that they lost $97,775.32. See Dkt.
No. 25, Ex. 3. The other plaintiffs, in withdrawing their respective motions, acknowledged that
their financial interest was not as great. See Dkt. No. 27, Ex. 3 (noting that Torres purchased
22, 786 total shares and 14,486 net shares, expended $55,251.60 in net funds, and lost
$53,740.71); Dkt. No. 30, Ex. 3 (noting that Shaik purchased 9,000 total shares and 6,500 net
shares, expended $22,255.00 in net funds, and lost $21,657.06); Dkt. No. 33, Ex. 2 (noting that
Strowbridge purchased 69,735 total shares and 26,425 net shares; expended $73,990.00 in net
funds; and lost $69,836.25). No additional plaintiff has come forward suggesting she has a
greater financial interest in this litigation.
Third, Tran and Ybarra have made a sufficient preliminary showing that they can satisfy the
relevant requirements of Federal Rule of Civil Procedure 23. Rule 23(a) permits a party to sue
on behalf of a class subject to meeting four requirements:
(1) the class is so numerous that joinder of all members is impracticable; (2) there
are questions of law or fact common to the class; (3) the claims or defenses of the
representative parties are typical of the claims or defenses of the class; and (4) the
representative parties will fairly and adequately protect the interests of the class.
"For the purposes of appointment as lead plaintiff pursuant to the PSLRA ... , 'the moving
plaintiff must only make a preliminary showing that the adequacy and typicality requirements
have been met.'" In re Deutsche Bank Aktiengesellschafl Sec. Litig., 2016 WL 5867497, at *4
(quoting Janbay v. Canadian Solar, Inc., 272 F.R.D. 112, 120 (S.D.N.Y. 2010)).
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Tran and Ybarra have made preliminary showings ns to hoth requirements. "The typicality
requirement 'is satisfied when each class member's claim arises from the same course of events,
and each class member makes similar legal arguments to prove the defendant's liability."'
Maliarov, 2016 WL 1367246, at *6 (quoting In re Drexel Burnham Lambert Grp., Inc., 960 F.2d

285, 291 (2d Cir. 1992)). In this case Tran and Ybarra, like all members of the class, allege that
the Defendants made false and misleading statements about Code Rebel's financial condition.
See Dkt. No. 25, at 5. Tran and Ybarra's claims, then, appear typical of the purported class as a

whole. See Dkt. No. 1 ~19.
To satisfy the adequacy requirement at this stage of the proceedings, Tran and Ybarra must
make a preliminary showing that "(1) [their choice of] class counsel is qualified, experienced,
and generally able to conduct the litigation; (2) there is no conflict between the proposed lead
plaintiffl:s] and the members of the class; and (3) [they have] a sufficient interest in the outcome
of the case to ensure vigorous advocacy." Foley v. Transocean Ltd., 272 F.R.D. 126, 131
(S.D.N.Y. 2011). Here, Tran and Ybarra provided documents demonstrating the extensive
experience of their two chosen law firms, The Rosen Law Firm, P.A., and Pomerantz LLP, in
complex securities class action suits, see Dkt. No. 25, Ex. 4, Ex. 5, and indeed, no other plaintiff
suggests otherwise. Nor does any plaintiff suggest that either Tran or Ybarra would have a
particular conflict between his own interests and those of the class, generally, or that either
plaintiffs financial interest in the litigation would be insufficient to ensure vigorous advocacy.
Finally, given the lack of opposition to Tran and YbatTa's motion, the Court has been
presented with no proof that they "will not fairly and adequately protect the interests of the class"
or are "subject to unique defenses that render such plaintiffl: s] incapable of adequately

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representing the class." § 78u-4(a)(3)(B)(iii)(Il)(aa), (bb)). Thus, the Court GRANTS Tran and
Ybarra's motion to be appointed lead plaintiffs.

B. Approval of lead counsel

The PSLRA also provides that "[t]he most adequate plaintiff shall, subject to the approval of
the court, select and retain counsel to represent the class." 15 U.S.C. § 78u-4(a)(3)(B)(v).
"There is a strong presumption in favor of approving a properly-selected lead plaintiff's decision
as to counsel." Maliarov, 2016 WL 1367246, at *7 (quoting Topping v. Deloitte Touche

Tohmatsu CPA, Ltd., 95 F. Supp. 3d 607, 623 (S.D.N.Y. 2015)). It is evident from the
documentation provided to the Court that both law firms the lead Plaintiffs seek appointed as cocounsel have had "extensive involvement in complex securities class action litigation," id. See
Dkt. No. 25, Ex. 4, Ex. 5, The Court thus approves The Rosen Law Firm, P.A., and Pomerantz
LLC, as co-lead counsel.

II.

The Motion for a Stay

The Court next addresses the motion of the Individual Defendants seeking an order extending
the automatic stay of claims asserted against Code Rebel Corporation (the "Debtor") to claims
asserted against the Individual Defendants. For the reasons that follow, the Court declines to
address the scope of the automatic stay in the first instance, and, under its equitable powers,
temporarily stays this action for 60 days to permit the Individual Defendants to seek their
requested relief from the United States Bankruptcy Court for the District of Delaware.
A. Procedural History

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On May 10, 2016, the Plaintiffs in this case filed a Complaint against Defendants Code Rebel
Corp., Kane, and Dabney, alleging securities fraud under Sections IO(b) and 20(a) of the
Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a). See Dkt. No. I. Shortly thereafter, on May 18, 2016,
Code Rebel Corporation filed a voluntary petition seeking bankruptcy protection under Chapter 7
of 11 U.S.C. § 101, et seq, in the United States Bankruptcy Court for the District of Delaware.

See Dkt. No. 10; see also In re Code Rebel Corp., No. 16-11236 (Bankr. D. Del. May 18, 2016),
ECF No. I. The effect of the bankruptcy was to automatically stay litigation against Code Rebel
itself. See 11 U.S.C. § 362(a). The question of whether the bankruptcy stay applies to the
Individual Defendants, however, is more complicated. See Queenie Ltd. v. Nygard Intern., 321
F.3d 282, 287 (2d Cir. 2003) ("The automatic [bankruptcy] stay can apply to non-debtors, but
normally does so only when a claim against the non-debtor will have an immediate adverse
economic consequence for the debtor's estate.").
On June 20, 2016, this Court ordered the parties to submit a joint letter indicating whether the
case should proceed against the Individual Defendants, Kane and Dabney, or whether it should
be stayed in light of the bankruptcy proceedings. Dkt. No. 11. The parties submitted that letter
on June 29, 2016, taking divergent positions. Dkt. No. 13. This Court thereafter ordered
supplemental briefing on three questions:
1. Whether arguments about the effect of litigation on Code Rebel Corporation's
bankruptcy should be directed to this Court or to the bankruptcy court in the first
instance,
2. On what, if any, basis could Plaintiff apply the doctrine of collateral estoppel to
preclude Code Rebel from challenging a ruling of this Court with respect to the
Individual Defendants?
3. If the Court were to stay this action with respect to the Individual Defendants,
how long should the stay remain in place?
Dkt. No. 14.

7

On July 8, 2016, the Individual Defendants' formally moved for a stay and submitted a
supplemental brief in support of their motion. See Dkt. No. 35; see also Dkt. No. 37 (hereafter,
"Mot. to Stay"). In that memorandum, they first argue that this Court has jurisdiction to
determine whether this Action should be stayed, a proposition which is not in dispute. See Mot.
to Stay at 1 (citing In re Baldwin-United Corp. Litig., 765 F.2d 343, 347 (2d Cir. 1985) ("The
court in which the litigation claimed to be stayed is pending has jurisdiction to determine not
only its own jurisdiction but also the more precise question whether the proceeding pending
before it is subject to the automatic stay."). The Individual Defendants further acknowledge that
this Comi has the discretion to defer to the Bankruptcy Court to decide, in the first instance, the
scope of the automatic stay, a proposition that is also not in dispute. See Mot. to Stay at 2;
Baldwin, 765 F.2d at 347 ("Whether [the district court] ought to exercise its authority [to

determine whether the Action before it is stayed], however, is a different question."). The
Individual Defendants nevertheless argue that this Court, rather than the Bankruptcy Court,
should determine the scope of the stay in the first instance for one reason: given that the parties
have already submitted briefing as to the issue before this Court, it would be wasteful to ask
them to resubmit that briefing before the Bankruptcy Court. See Mot. to Stay at 2. On the
merits, the Individual Defendants argue that the stay is warranted, first, because they have a right
of indemnification from Code Rebel (rendering an award of damages against them effectively an
award of damages against the debtor), id. at 3, and second, that principles of collateral estoppel
would bind Code Rebel to any adverse determinations made against the Individual Defendants in
this Action, id. at 4.
On July 15, 2016, the Plaintiffs' filed their opposition. Dkt. No. 38 (hereafter, "Opp."). In
that opposition, they argue, first, that the Bankruptcy Court, rather than this Court, should rule on

8

the scope of the stay in the first instance. See Opp. at 3. Turning to the merits, they argue that
neither the possibility of indemnification nor of collateral estoppel, in this case, justifies a stay
against the Individual Defendants. See id. at 3-10.
On July 20, 2016, the Trustee for the estate of Code Rebel, Jeoffrey L. Burtch, filed a letter
with this Court supporting the Individual Defendants' motion for a stay. Dkt. No. 40 ("Letter").
In that letter, the Trustee makes reference to a Directors' and Officers' Liability Insurance Policy
(the "D&O Policy") owned by the Debtor. See Id. at 2. The Trustee represents that the policy is
a "wasting policy," and as such that it "will be eroded by legal fees consumed in defending this
action and any other similar actions." Id. He thus asks for a temporary stay so as to explore the
possibility of a settlement with the insurance carrier before the limit of the policy is fully eroded.
See id.

B. Discussion
The Court concludes that, on the specific facts of this case, the Court should defer to the
Bankruptcy Co mi to determine the scope of the automatic stay in the first instance.
The Court reaches this determination for several reasons. First, as the Trustee has observed
in motions filed in the Bankruptcy Court, there are now multiple actions pending against the
Individual Defendants in separate jurisdictions. See In re: Code Rebel Corp., Case No. 16-11236
(BLS) i! 7 (Bankr. D. Del.), Dkt. No. 20 (Jul. 27, 2016). In addition to the action pending in this
Court, at least two purported class actions have been filed in the Superior Court of the State of
California against, inter alia, Kane and Dabney. The existence of multiple actions in distinct
jurisdictions (with a potential bevy of plaintiffs) weighs in favor of centralizing a determination
as to the scope of the automatic stay in the bankruptcy court. See Baldwin, 765 F.2d at 349 ("If
the applicability of the stay to contribution and indemnity claims filed in response to post9

petition first-party complaints but arising out of pre-petition conduct is determined in various
district courts throughout the country, the ability of the Bankruptcy Court to assure equality of
treatment among creditors will be seriously threatened.").
Second, there are no special considerations in this case indicating that this Court, rather than
the Bankruptcy Court, should make the first determination as to the scope of the stay. This Court
does not have "substantial experience and familiarity" with the case, a factor courts have relied
on in deciding to determine, in the first instance, the scope of automatic stays. See, e.g.,
Patterson v. Newspaper & Mail Deliverers' Union o.fN. Y & Vicinity, 138 B.R. 149, 152

(S.D.N.Y. 1992) (declining to defer to the Bankruptcy Comito determine whether to stay
enforcement of an aspect of a consent decree, entered into almost twenty year prior to the
bankruptcy, because the district court had "substantial experience and familiarity with the"
decree, its enforcement, and the facts of the case). Indeed, the motions resolved in this Order are
the first, and only, motions the parties have filed in this case. Nor is the question of the scope of
a stay in this case the sort that, in Baldwin, the Second Circuit indicated could be resolved by the
district court without causing any potential problems for the bankruptcy proceedings. Compare
Baldwin, 765 F.2d at 348 ("The possibility of conflicting decisions is far more serious in this

complex Chapter 11 proceeding with its numerous indemnity claimants than would be the case
when a District Court determines that a particular governmental enforcement action is within one
of the exceptions to the automatic stay.").
Finally, an additional equitable consideration weighs in favor of deferring to the Bankruptcy
Court. The Trustee represented in his letter that the existence of the D&O Policy may be
relevant to the determination of whether a stay should apply in this case. See Letter 1-2. Indeed,
the Trustee has consistently represented to the Bankruptcy Court his belief that the policy, and its

10

proceeds, are likely property of the Bankruptcy Estate pursuant to 11 U.S.C. § 541. See, e.g., Jn

re: Code Rebel Corp., Case No. 16-11236 (BLS)

~

10 (Bankr. D. Del.), Dkt. No. 20 (Jul. 27,

2016). The Bankruptcy Court has also twice approved stipulations between the Trustee and the
Individual Defendants to permit those defendants to access portions of the proceeds from the
insurance policy to pay for their defense without fully depleting the policy's limits. See In re:

Code Rebel Corp., Case No. 16-11236 (BLS) (Bankr. D. Del.), Dkt. No. 26 (Aug. 29, 2016); In
re: Code Rebel Corp., Case No. 16-11236 (BLS) (Bankr. D. Del.), Dkt. No. 38 (Jan. 19, 2017).
The Plaintiffs, who in any case ask this Court to defer to the Bankruptcy Court, filed a letter
in response to the Trustee's, arguing that proceeds of the D&O Policy are not prope1iy of the
Bankruptcy Court, and thus that an automatic stay designed to shield these proceeds would not
be justified. See Dkt. No. 45, at 2. To support this argument, they cite to the Trustee's
description of the policy in his first motion to the Bankruptcy Court for approval of the first
stipulation, which reads: "The D&O Policy contains Insuring Clauses (A) - (D). Insuring Clause
A covers loss arising from any claim made against a Former Director during the policy period for
a wrongful act. Pursuant to Clause IV (H) of the D&O Policy, any loss resulting from claims
under Insuring Clause (A) holds a priority in distribution of policy proceeds over claims against
the Debtor. Further, the D&O Policy provides for the payment of defense costs as part of the
loss and that any such payment reduces the limit of liability." In re: Code Rebel Corp., Case No.
16-11236 (BLS)

~

22 (Del. Bkt. Ct.), Dkt. No. 20 (Jul. 27, 2016). The Plaintiffs argue that case

law holds that, assuming the Trustee's description to be correct, the policy's proceeds are not
property of the Debtor's estate. See Dkt. No. 45, at 2 (citing Jn re Daisy Sys. Sec. Litig., 132
B.R. 752, 755 (N.D. Cal. 1991), Jn re Louisana World Expo., Inc., 832 F.2d 1391, 1399 (5th Cir.
1987) ("LWE")). However, the question of whether the policy and its proceeds are property of

11

the Bankruptcy estate is in fact more complex than the Plaintiffs represent, and the Trustee's
description of the policy does not make it evident that the proceeds are not property of the
debtor's estate, nor conclusively resolve the issue. Compare In re Vitek, Inc., 51 F.3d 530, 53435 (5th Cir. 1995) (noting that, in LWE, "[t]he [insurance] policies ... provided liability
coverage only for the corporate debtor's directors and officers and for the obligation of the
corporation to indemnify those directors and officers," and going on to state that the Fifth Circuit
had "not yet grappled with how to treat the proceeds of a liability policy when (1) the policyowning debtor is but one of two or more coinsureds or additional named insureds, (2) the rights
of the other coinsured(s) or additional named insured(s) are not merely derivative of the rights of
one primary named insured, and (3) the aggregate potential liability substantially exceeds the
aggregate limits of available insurance coverage"); with In re: Code Rebel Corp., Case No. 1611236 (BLS)

~~

21- 22 (Del. Bkt. Ct.), Dkt. No. 20 (Jul. 27, 2016) (in which the Trustee,

describing the policy, suggests that, though indemnification of the former officers holds priority
to other claims under the policy, "claims against the Debtor" may also be covered); see also In re
Sacred Heart Hosp. of Norristown, 182 B.R. 413, 418, 421 (Bankr. E.D. Pa. 1995) (holding that,
because "the Debtor's own liability exposure is also covered by the D & 0 Policy [in addition to
the directors] ... [the Debtor] ha[d] a sufficient interest in the Proceeds as a whole to bring them
into the estate," and going on to criticize In Re Daisy Systems for any contrary holding).
Thus, the proper scope of the automatic stay in this case may turn on the precise contours of
the insurance policy cited by the Trustee. This Court is reticent to adjudicate such an issue in the
first instance where, first, it has not received a copy of the Policy; second, such adjudication
would require determining in the first instance whether a valuable potential asset of the Debtor's
Estate is or is not property covered by 11 U.S.C. § 541; and third, the Bankruptcy Court has in

12

fact resolved at least two motions involving, to some extent, this very question. Further, given
that lawsuits in multiple jurisdictions have the potential to each exhaust the policy's limits, the
importance of allowing the Bankruptcy Court to create consistency nationwide is all the more
significant.
In opposition to these equitable concerns, the Individual Defendants argue only that judicial
economy weighs in favor of this Court resolving their motion in the first instance. See Mot. to
Stay at 2. Given that this Court would, in any case, need to order production of the D&O Policy
to properly answer the question before it, and that the Individual Defendants have not addressed
the significance of that policy (and no party has addressed any of the case law the Court cites
above that is not referenced by the Plaintiffs), this concern is insufficient to tip the equities in
favor of this Court determining the scope of the stay.
The Court thus uses its equitable powers to stay this matter for 60 days, to provide the
Individual Defendants the opportunity to seek an order from the Bankruptcy Court addressing
the scope of the automatic stay. Should the Individual Defendants fail to seek such an order, the
Plaintiffs may write a letter to this Court in 60 days moving to lift the stay.

III.

Conclusion

In conclusion, the Court hereby appoints Plaintiffs William Tran and Adrian Ybarra as lead
Plaintiffs, approves the Rosen Law Firm, P.A., and Pomerantz LLP, as co-lead counsel for the
purported class, and temporarily stays this matter to allow the Individual Defendants to seek their
requested stay from the Bankruptcy Comi. This resolves Dkt. Nos. 18, 23, 24, 28, 31, 35.

SO ORDERED

'(. ~
Dated: liebramr_ _, 2017
13

New York, New York

United States District Judge

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