Soros Fund Management LLC v. Tradewinds Holdings, Inc. et al
OPINION & ORDER: For the reasons stated above, Plaintiff's request for a preliminary or permanent injunction enjoining the proceedings in North Carolina state court is DENIED, and as further set forth in this order. (Signed by Judge John F. Keenan on 5/16/2017) (ap)
Case 1:09-md-02013-PAC Document 57
Filed 09/30/10 Page 1 of 45
DOC #: _________________
DATE FILED: 05/16/2017
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW X
SOROS FUND MANAGEMENT LLC,
In re FANNIE MAE 2008 SECURITIES
08 Civ. 7831 (PAC)
09 MD 2013 (PAC)
No. 17 Civ. 3187 (JFK)
OPINION & ORDER
OPINION & ORDER
TRADEWINDS HOLDINGS, INC., and :
COREOLIS HOLDINGS, INC.
HONORABLE PAUL A. CROTTY, X
------------------------------ United States District Judge:
JOHN F. KEENAN, United States District Judge: 1
On May 1, 2017, Soros Fund Management LLC (“SFM LLC” or the
The early years of this decade saw a boom in home financing which was fueled, among
“Plaintiff”) filed a complaint seeking a preliminary and
other things, by low interest rates and lax credit conditions. New lending instruments, such as
permanent injunction to enjoin TradeWinds Holdings, Inc. (“TW
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
Holdings”) and Coreolis Holdings, Inc. (“Corelois,” and,
kept the boom going. Borrowers played a role too; they took on unmanageable risks on the
collectively, the “Defendants”) from pursuing an action pending
assumption that the market would continue to rise and that refinancing options would always be
in North Carolina state court. Plaintiff also requested
available in the future. Lending discipline was lacking in the system. Mortgage originators did
declaratory relief. The Court held a hearing on May 8, 2017,
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
and issued an order denying Plaintiff’s request for injunctive
originators sold their loans into the secondary mortgage market, often as securitized packages
relief on May 9, 2017. This Opinion reflects the Court’s
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
reasons for that denial.
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
and home prices began to fall. In light of the changing housing market, banks modified their
The parties (and related entities) have a complex
lending practices and became unwilling to refinance home mortgages without refinancing.
litigation history, with which familiarity is presumed. For the
sake of context, the Court provides a short summary of the
Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
dated June 22, 2009. For
relevant proceedings. purposes of this Motion, all allegations drawn from the are taken as true.
The facts below are in the Amended Complaint
complaint and the Court’s previous decision in TradeWinds
Airlines, Inc. v. Soros, 101 F. Supp. 3d 270 (S.D.N.Y. 2015).
A. The Parties
Plaintiff is an investment advisory firm organized as a
limited liability company under Delaware law. (Compl. ¶ 3.)
of Plaintiff’s members–George Soros, Robert Soros, and Jonathan
Soros—are citizens of the state of New York. (Id.)
is a Delaware corporation with its former principal place of
business in North Carolina. (Id. ¶ 4.)
Coreolis is a Delaware
corporation with its principal place of business in California.
(Id. ¶ 5.)
Coreolis owns TW Holdings, which, in turn, owns
TradeWinds Airlines, Inc. (“TW Airlines”). (Id.)
the parties, TW Airlines is a Chapter 7 debtor in bankruptcy
proceedings pending before the Bankruptcy Court for the Southern
District of Florida. (Tr. of Hr’g at 11, 29.)
Although not a party to the instant action, C-S Aviation
Services, Inc. (“C-S”) is a key player in the history of this
Incorporated under Delaware law in 1994, C-S was a
management company for an aircraft leasing business from which
Defendants and TW Airlines leased aircraft. See TradeWinds
Airlines, Inc. v. Soros, 101 F. Supp. 3d 270, 273, 277 (S.D.N.Y.
Its sole shareholder until at least July 2003 was
Purnendu Chatterjee, Mr. Soros’ frequent business partner. Id.
B. Procedural History
1. The North Carolina Action
In 2003, Deutsche Bank, as successor in interest to the
owners of a fleet of commercial aircraft, sued TW Airlines and
Defendants in North Carolina state court (the “North Carolina
Action”). (Compl. ¶ 10.)
TW Airlines and Defendants
counterclaimed, asserting that C-S had fraudulently induced TW
Airlines to sign the leases. (Id. ¶ 11.)
Defendants, and TW Airlines ultimately settled the claims at
issue in the North Carolina Action, but C-S failed to appear,
since having gone out of business. (Id. ¶¶ 12-13.)
was entered against C-S in 2004. (Id. ¶ 13.)
In 2008, TW Airlines obtained a default judgment against
C-S and sued Mr. Soros and Mr. Chatterjee in a veil-piercing
action in the Southern District of New York. (Id. ¶¶ 14-15.)
2010, a North Carolina state court entered default judgments
against C-S in favor of (1) Coreolis and TW Holdings, and (2) TW
Airlines.1 (Id. ¶ 16.)
Coreolis and TW Holdings subsequently
commenced a veil-piercing action in the Southern District of New
York against Mr. Soros and Mr. Chatterjee, alleging that they
were C-S’ alter egos and responsible for its debts. (Id. ¶ 17.)
The 2008 default judgment against C-S had been vacated in 2009.
(Compl. ¶ 16.)
2. The SDNY Action
In TradeWinds Airlines, Inc. v. Soros, 101 F. Supp. 3d 270
(S.D.N.Y. 2015) (the “SDNY Action”), the Court granted summary
judgment for Mr. Soros and Mr. Chatterjee, whom Defendants and
TW Airlines alleged were C-S’ alter egos and should be held
liable for the unsatisfied default judgment they held against
C-S in the wake of the North Carolina Action.
rejected Defendants and TW Airlines’ arguments that the
corporate veil of C-S should be pierced as to Mr. Soros and Mr.
Chatterjee, finding that “the absence of evidence suggesting a
‘mingling of the operations’ of C-S Aviation and Soros and
Chatterjee is fatal to Plaintiffs’ claims.” TradeWinds, 101 F.
Supp. 3d at 279.
As relevant here, the Court explained:
Consideration of the evidence Plaintiffs [i.e.,
Defendants in the instant action] set forth could
not lead a rational trier of fact to conclude
that there was a ‘mingling of the operations’ of
C-S Aviation and Soros and Chatterjee. At most,
the evidence suggests that C-S Aviation may have
been intertwined with SFM LLC, the Holding
Companies, the Investors, and the SPVs. But
given Plaintiffs’ theory of this case—that Soros
and Chatterjee are C-S Aviation’s alter egos—
Plaintiffs have advanced no argument and offer no
evidence that the corporate forms of SFM LLC, the
Holding Companies, the Investors, or the SPVs
should be disregarded. Indeed, Plaintiffs
specifically argue that this is not a double-veil
The Court also observed that “there are no allegations that
SFM LLC commingled its finances with” C-S. Id. at 282.
Second Circuit affirmed the Court’s decision in a summary order.
See TradeWinds Airlines Inc. v. Soros, 637 F. App’x 53 (2d Cir.
3. The State Court Action
In May 2016, Defendants and TW Airlines brought suit in
North Carolina state court (the “State Court Action”), asserting
a veil-piercing claim against Plaintiff and seeking to hold it
liable as the alter ego of C-S. (Compl. ¶ 20; Klotz Decl. Exs.
According to the amended complaint filed in the State
Court Action, this Court, in the SDNY Action, found that C-S
“was actually controlled during the relevant period by”
Plaintiff and that “the record evidence pointed to piercing the
veil as to” Plaintiff “rather than the individual principals.”
(Compl. ¶ 21; Klotz Decl. Ex. M ¶ 6.)
After Plaintiff attempted
to remove the State Court Action to federal court in the Middle
District of North Carolina in June 2016, the North Carolina
federal court granted Defendants and TW Airlines’ motion to
remand the case to North Carolina state court in March 2017.
(Compl. ¶¶ 23, 26.)
Plaintiff was due to answer or move in the
State Court Action on May 10, 2017.
4. Plaintiff’s Request for Injunctive Relief
Plaintiff filed the instant complaint on May 1, 2017,
requesting injunctive relief pursuant to the All Writs Act, 28
U.S.C. § 1651, and the Anti-Injunction Act, 28 U.S.C. § 2283,
enjoining Defendants from pursuing the State Court Action, as
well as a declaratory judgment under 28 U.S.C. § 2201 stating
that Plaintiff is not liable for the default judgments
Defendants hold against C-S.
On May 2, 2017, the Court issued
an order to show cause why Defendants should not be enjoined
from pursuing the State Court Action.
II. Applicable Law
Under the All Writs Act, federal courts have the power to
“issue all writs necessary or appropriate in aid of their
respective jurisdictions and agreeable to the usages and
principles of law.” 28 U.S.C. § 1651(a).
This power, however,
is circumscribed by the Anti-Injunction Act, which limits a
federal court’s power to enjoin a proceeding in state court.
Under the Anti-Injunction Act, “[a] court of the United States
may not grant an injunction to stay proceedings in a State court
except as expressly authorized by Act of Congress, or where
necessary in aid of its jurisdiction, or to protect or
effectuate its judgments.” 28 U.S.C. § 2283.
“The authority of
a United States court to issue an injunction ‘to protect . . .
its judgments’ from further litigation in state courts is known
as the ‘relitigation exception’ to the broad prohibition of the
Anti-Injunction Act.” Smith v. Woosley, 399 F.3d 428, 431 (2d
Cir. 2005) (quoting 28 U.S.C. § 2283).
exception “authorizes an injunction to prevent state litigation
of a claim or issue ‘that previously was presented to and
decided by the federal court.’” Smith v. Bayer Corp., 564 U.S.
299, 306 (2011) (quoting Chick Kam Choo v. Exxon Corp., 486 U.S.
140, 147 (1988)).
“Due in no small part to the fundamental constitutional
independence of the States,” however, “Congress adopted a
general policy under which state proceedings ‘should normally be
allowed to continue unimpaired by intervention of the lower
federal courts, with relief from error, if any, through the
state appellate courts and ultimately’” the Supreme Court. Choo,
486 U.S. at 146 (quoting Atl. Coast Line R. Co. v. Locomotive
Eng’rs, 398 U.S. 281, 287 (1970)).
Any doubt “as to the
propriety of a federal injunction against state court
proceedings should be resolved in favor of permitting the state
courts to proceed.”2 Smith, 564 U.S. at 306 (quoting Atl. Coast
Line, 398 U.S. at 297).
In light of these considerations,
“every benefit of the doubt goes toward the state court” in
determining the propriety of an injunction under the
relitigation exception. Id. at 307.
Moreover, “deciding whether and how prior litigation has
preclusive effect is usually the bailiwick of the second court
. . . .” Smith, 564 U.S. at 307 (emphasis in original).
In the Supreme Court’s most recent decision regarding the
Anti-Injunction Act, it articulated a two-part test to determine
whether the relitigation exception applies and a federal court
injunction of a state court proceeding may issue. See Smith, 564
U.S. at 307-08.
“First, the issue the federal court decided
must be the same one as the one presented in the state
tribunal.” Id. at 307.
“[S]econd, [the party to be bound] must
have been a party to the federal suit, or else must fall within
one of a few discrete exceptions to the general rule against
binding nonparties.” Id. at 308.
As to the preliminary inquiry,
the issue previously decided by a federal court was not the same
one as the issue presented in the state court because the
proceedings entailed separate questions regarding the legal
standard for class certification under Federal Rule of Civil
Procedure 23, on the one hand, and West Virginia Rule of Civil
Procedure 23, on the other. Id. at 309-12.
Anti-Injunction Act did not authorize enjoining the state
proceeding. Id. at 312.
Previously, the Supreme Court observed that the
relitigation exception “is founded in the well-recognized
concepts of res judicata and collateral estoppel.” Choo, 486
U.S. at 147.
“Res judicata, or claim preclusion, bars the
revival of claims that already have been litigated.” Staffer v.
Bouchard Transp. Co., Inc., 878 F.2d 638, 643 (2d Cir. 1989).
Under New York law, “the doctrine of res judicata also operates
to preclude litigation of matters that could have or should have
been raised in a prior proceeding arising from the same ‘factual
grouping,’ ‘transaction,’ or ‘series of transactions.’” Ferris
v. Cuevas, 118 F.3d 122, 126 (2d Cir. 1997) (quoting Bd. of
Managers of Windridge Condos. One v. Horn, 651 N.Y.S.2d 326, 327
(N.Y. App. Div. 1996)).
Here, Plaintiff argues that the claim
Defendants bring against it in the State Court Action is barred
by res judicata, and urges the Court to enjoin Defendants from
pursuing the State Court Action on that basis. (Pl.’s Mem. at 1,
Plaintiff’s argument, however, conflates the applicable
standards under the Anti-Injunction Act and the doctrine of res
Second Circuit authority is clear that analysis under
the relitigation exception and res judicata is not co-extensive.
Under the relitigation exception, the inquiry is narrower and is
restricted to only those matters actually decided by a federal
The Second Circuit instructs:
[T]he part of the relitigation exception to the
Anti–Injunction Act that is based on concerns of
res judicata is more narrowly tailored than the
doctrine of res judicata. The relitigation
exception does not protect the full res judicata
effect of a federal court’s judgment; rather, it
protects only matters that actually have been
decided by a federal court.
Staffer, 878 F.2d at 643.
In Smith, the Supreme Court,
articulated a similarly narrow focus.3 564 U.S. at 306 (“The
provision authorizes an injunction to prevent state litigation
of a claim or issue ‘that previously was presented to and
decided by the federal court.’” (quoting Choo, 486 U.S. at
Courts beyond this Circuit agree. See, e.g., 202 N.
Monroe, LLC v. Sower, 850 F.3d 265, 271 n.3 (6th Cir. 2017)
(“[R]es judicata generally precludes an issue that ‘should have
been litigated,’ whereas the relitigation exception applies only
to those claims or issues that ‘actually have been decided.’”
(citations omitted)); SFM Holdings, Ltd. v. Banc of Am. Sec.,
LLC, 764 F.3d 1327, 1336 (11th Cir. 2014) (“Whether the
principles of claim preclusion may ‘inform’ one’s view of the
relitigation exception, the relitigation exception is narrower
and only authorizes an injunction to prevent state litigation of
a claim or issue that previously was presented to and decided by
the federal court.” (citation and internal quotation marks
omitted)); Fharmacy Records v. Nassar, 806 F. Supp. 2d 1030,
1034 (E.D. Mich. 2011) (“[U]nlike claim and issue preclusion,
In Choo, the Supreme Court also addressed the narrow focus of
the relitigation exception. “[A]n essential prerequisite for
applying the relitigation exception is that the claims or issues
which the federal injunction insulates from litigation in state
proceedings actually have been decided by the federal court.”
486 U.S. at 148. The Court added: “[T]his prerequisite is
strict and narrow.” Id.
the relitigation exception is tightly circumscribed by
overriding tenets of federalism . . . .”).
Bearing these principles in mind, the Court concludes that
the issue presented in the State Court Action is not the same
issue as the one previously decided by this Court.
Defendants, the issue to be adjudicated in the State Court
Action is whether Plaintiff is the alter ego of C-S. (See Defs.’
Mem. in Opp’n at 1.)
At oral argument, Plaintiff’s counsel
agreed with that characterization of the issue. (See Tr. of Hr’g
In contrast, in the SDNY Action, this Court considered
and decided not that question, but whether Mr. Soros or Mr.
Chatterjee was the alter ego of C-S. See TradeWinds, 101 F.
Supp. 3d at 272, 279.
Moreover, the Court observed that:
“Plaintiffs have advanced no argument and offer no evidence that
the corporate forms of SFM LLC, the Holding Companies, the
Investors, or the SPVs should be disregarded.” Id. at 279.
Accordingly, Defendants’ argument that the State Court Action
does not involve the “same issue” or a matter that “actually
[has] been decided” by a federal court is accurate and carries
the day. See Smith, 564 U.S. at 308; Choo, 486 U.S. at 148.
Several additional factors counsel against injunctive
First, at oral argument, Plaintiff’s counsel
acknowledged that, if the injunction were granted, there was a
“theoretical possibility of inconsistent rulings” because
neither TW Airlines nor C-S are parties to the instant
litigation, but both are parties in the State Court Action
pending in North Carolina. (Tr. of Hr’g at 13.)
Plaintiff’s counsel also acknowledged that satisfactory
resolution of all claims by all parties can be achieved in the
North Carolina state court. (Id. at 14-15.)
Third, allowing the
North Carolina state court to proceed does not alleviate its
obligation to consider the preclusive effect of the prior
federal judgment. See 202 N. Monroe, 850 F.3d at 273-74.
applying preclusion principles, the North Carolina state court
may well conclude that res judicata, in fact, operates to bar
Defendants’ claim, but that question is properly left for the
state court to determine. See Staffer, 878 F.2d at 643 (“Here,
the proper forum for a complete investigation of the res
judicata effects of the district court’s judgment is the state
court, ‘which [is] presumed competent to resolve’ such matters.”
(quoting Choo, 486 U.S. at 150)).
Contrary to Plaintiff’s argument, the Second Circuit’s
decision in Wyly v. Weiss, 697 F.3d 131 (2d Cir. 2012), does not
compel a different result.
In Wyly, the Second Circuit
considered whether, under the relitigation exception, a district
court properly enjoined a state court action for legal
malpractice. 697 F.3d at 133.
Defendants in the state court
action had served as class counsel in a previously settled
federal class action suit. Id. at 136.
Prior to the filing of
the state malpractice action, the district court had approved
settlement in the federal class action, as well as an award of
attorney’s fees to class counsel that it found to be “fair and
reasonable.” Id. at 141.
The subsequent state court claim for
legal malpractice required proof of counsel’s deficient
The Second Circuit affirmed the district court’s decision
to enjoin the state court proceeding.
In “an issue of first
impression,” the Second Circuit decided that “the deficientperformance prong of New York’s legal malpractice rule is
identical to the reasonable-performance issue that the District
Court decided.” Id. at 141-42.
The district court’s findings
“were possible only if counsel’s performance met or exceeded the
minimal standards of professional competence—otherwise an award
of fees would not have been fair and reasonable in the
circumstances.” Id. at 142.
Accordingly, the Second Circuit
concluded that the state court action sought to relitigate the
same issue that the district court already resolved.
Here, unlike in Wyly, the question resolved in the earlier
federal court action is not a necessary element of a claim
brought in a subsequent state court proceeding.
whether Mr. Soros or Mr. Chatterjee is the alter ego of C-S and
whether Plaintiff is the alter ego of C-S are distinct
Although it likely would have been more efficient
had Defendants brought their claim against Plaintiff in the SDNY
Action, they did not.
Nevertheless, the Court is confident that
the state courts of North Carolina are competent to evaluate
Plaintiff's arguments and determine whether Plaintiff is
entitled to any relief. See Choo, 486 U.S. at 150.
For the reasons stated above,
Plaintiff's request for a
preliminary or permanent injunction enjoining the proceedings in
North Carolina state court is DENIED.
New York, New York
United States District Judge
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