Tepper v. Keefe Bruyette & Woods Inc et al
Filing
53
Memorandum Opinion and Order granting in part and denying in part 42 Findings and Recommendations re: 25 MOTION to Dismiss Plaintiff's Original Complaint. The court grants Defendants' Motion to Dismiss with respect to Plaintiff 's fraudulent transfer claim under New York and Texas law and breach of the duty of good faith and fair dealing claim for lack of standing and dismisses them with prejudice. Defendants' Motion to Dismiss is denied in all other respects. (Ordered by Judge Sam A Lindsay on 9/19/2012) (ykp)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
KENNETH TEPPER, in his
capacity as the Liquidation Trustee
for the GFGI Liquidation Trust,
Plaintiff,
v.
KEEFE BRUYETTE & WOODS, INC.,
and KBW, INC.,
Defendants.
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Civil Action No. 3:11-CV-2087-L-BK
MEMORANDUM OPINION AND ORDER
Before the court is Defendants’ Motion to Dismiss Plaintiff’s Complaint, filed on November
28, 2011, by Defendants Keefe Bruyette & Woods, Inc. and KBW, Inc. The court referred the
motion to United States Magistrate Judge Renee Harris Toliver on April 20, 2012, for findings and
recommendations. The magistrate judge issued her Findings, Conclusions, and Recommendation
(“Report”) on May 25, 2012, recommending that Defendants’ motion to dismiss, based on Plaintiff’s
lack of standing, be granted in part and denied in part. Both parties filed objections to the Report.
Having reviewed the pleadings, objections, record, applicable law, and the findings and conclusions
of the magistrate judge, the court determines that the findings and conclusions are correct with
respect to Plaintiff’s standing to pursue a fraudulent transfer claim under the Bankruptcy Code and
contract claim and Plaintiff’s lack of standing to pursue a claim for breach of the duty of good faith
and fair dealing. The court rejects the magistrate judge’s finding and conclusion that Plaintiff has
standing to pursue his fraudulent transfer claims under New York and Texas law but does not have
Memorandum Opinion and Order - Page 1
standing to pursue his alleged securities fraud claims under 15 U.S.C. §§ 78i, 78j, and 78t-1, and 17
C.F.R. § 240.10b-5.
I.
Background
Plaintiff Kenneth Tepper (“Plaintiff” or “Tepper”) brought this action on August 22, 2011,
in his capacity as the Liquidation Trustee for the Guaranty Financial Group, Inc. (“GFGI”)
Liquidation Trust, against Defendants Keefe Bruyette & Woods, Inc. (“KBW”) and KBW, Inc.
(collectively, “Defendants”). Plaintiff asserts the following claims against Defendants: (1) fraudulent
transfer under 11 U.S.C. §§ 544, 548, and 550, Texas Business Commerce Code § 24.001 et seq.,
and New York Debtor and Creditor Law 271, et seq. (Count I); (2) violations of United States
Securities Laws 11 U.S.C. § 541; sections 9, 10(b), and 20A of the Securities Exchange Act of 1934;
15 U.S.C. §§ 78i, 78j, and 78t-1; and Rule 10b-5 and C.F.R. § 240.10b-5 based on, among other
things, KBW’s alleged fraudulent short selling of Guaranty Financial Group, Inc. (“GFG”) stock
(Count II); (3) breach of contract under 11 U.S.C. § 541 and applicable state law (Count III); and (4)
breach of the duty of good faith and fair dealing under 11 U.S.C. § 541 and applicable state law
(Count IV).
This action and Plaintiff’s claims arise out of the chapter 11 bankruptcy proceeding, Case No.
09-35582-bjh, filed by GFG and certain of its affiliates (collectively, Debtors”) on August 27, 2009,
in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. Debtors
filed their Amended Disclosure Statement (“Disclosure Statement”) and Second Amended Joint Plan
of Liquidation for Guaranty Financial Group, Inc., et al (the “Plan”) on May 6, 2011. It is
undisputed that these documents, together with the Liquidation Trust Agreement, provided for the
establishment of the GFGI Liquidation Trust, the appointment of Tepper as Liquidation Trustee, and
Memorandum Opinion and Order - Page 2
the transfer of all of GFG’s assets to the GFGI Liquidation Trust and the FDIC. On May 11, 2011,
the Plan was confirmed by the bankruptcy court.
Prior to filing bankruptcy, GFG engaged Defendants as a financial or investment advisor in
January 2008, and entered into a Non-Disclosure Agreement and General Advisory Services
Agreement pursuant to which Defendants provided financial advice and investment banking services
to GFG. Plaintiff contends that at the same time KBW was advising GFG and purporting to help
it raise capital, KBW was also betting against GFG in the public marketplace and using confidential
information provided to it to “short” the stock of GFG and profit at GFG’s expense. Plaintiff
maintains that KBW’s shortselling of GFG’s stock undermined GFG’s efforts to raise capital by
sending a negative message to the market from GFG’s own investment banker and negatively
impacted the price of GFG’s stock. Although some capital was raised by KBW, Plaintiff argues that
the $20 million in compensation paid by GFG was grossly disproportionate to KBW’s efforts.
Plaintiff further asserts that at the time the $20 million was transferred to KBW in 2008, GFG was
insolvent or became insolvent as a result of the transfers. Plaintiff, through this action, seeks to
recover the $20 million that GFG paid to KBW.
On November 28, 2011, Defendants moved, pursuant to Rule 12(b)(1), to dismiss all of
Plaintiff’s claims for lack of standing. At issue in Defendants’ motion and the parties’ objections
to the magistrate judge’s Report is whether the claims asserted by Plaintiff were sufficiently reserved
under the Plan and Disclosure Statement to satisfy 11 U.S.C. § 1123(b)(3).
II.
Applicable Standard
Federal Rule of Civil Procedure 72 sets forth the standard of review for magistrate findings
and recommendations. Fed. R. Civ. P. 72. When a magistrate judge’s findings and recommendations
Memorandum Opinion and Order - Page 3
pertain to a dispositive motion, the court must conduct a de novo review of “any part of the
magistrate judge’s disposition that has been properly objected to,” and it “may accept, reject, or
modify the recommended disposition; receive further evidence; or return the matter to the magistrate
judge with instructions.” Fed. R. Civ. P. 72(b)(3).
III.
Analysis
The magistrate judge recommended that Defendants’ motion to dismiss be granted with
regard to Plaintiff’s claims for securities fraud (Count II) and breach of the duty of good faith and
fair dealing (Count IV) and denied with regard to Plaintiff’s claims for fraudulent transfer (Count
I) and contract (Count III).
A.
Defendants’ Objections - Fraudulent Transfer and Contract Claims
Defendants contend that the magistrate judge erred in concluding that Plaintiff has standing
to pursue his fraudulent transfer and contract claims. As to both claims, Defendants assert that the
Fifth Circuit has never held that the mere reference to an action and applicable statute is sufficient
to retain claims under 11 U.S.C. § 1123(b)(3). Rather, according to Defendants, the cases in which
the Fifth Circuit has found a debtor’s plan or disclosure statement language sufficient to constitute
an effective reservation of claims, the reservation language has identified something more than just
the claim and statutory provision. Defendants contend, based on In re Texas Wyoming Drilling,
Incorporated, 647 F.3d 547 (5th Cir. 2011); In re MPF Holding U.S. LLC, 443 B.R. 736 (Bankr.
S.D. Tex. 2011); In re Bigler LP, Nos. 09-38188, 09-38189, 09-38190, 09-38192, 09-38194, 2010
WL 6972610 (Trial Order) (Bankr. S.D. Tex. Nov. 09, 2010); and other cases; that the “something
more” under the Fifth Circuit’s “specific and unequivocal” standard includes identification of
prospective defendants, the possible amount of recovery, and the basis for the claim. Defendants
Memorandum Opinion and Order - Page 4
therefore argue that the mere reference to and reservation in the Plan and Disclosure Statement of
“claims on contract” and “all Avoidance Actions,” without more, is not sufficiently specific under
Fifth Circuit precedent to preserve these claims. Defendants contend that, even more compelling,
is the Disclosure Statement’s identification of specific prospective defendants and the recovery
amounts of potentially avoidable transfers that did not include any reference to Defendants or the $20
million contract action asserted by Plaintiff in this action. Finally, Defendants contend that, even
assuming that the identification of a claim and statute is sufficient to reserve a claim, the Plan and
Disclosure Statement makes no reference to the New York or Texas statutes under which Plaintiff’s
fraudulent transfer claim is brought.
Plaintiff counters that the heightened standard advocated by Defendants is not consistent with
Fifth Circuit precedent, which requires only a categorical reservation of claims. While the court in
In re Texas Wyoming Drilling concluded that the reservation of certain claims in the plan at issue
was sufficiently specific because the plan named the categories of actions to be pursued, the possible
amount of recovery, and the basis for the claims, Plaintiff contends that the court did not hold that
such specificity was required to meet the specific and unequivocal standard enunciated in In re
United Operating, LLC, 540 F.3d 351 (5th Cir. 2008), and declined to address the issue of whether
prospective defendants must be specifically identified. With the exception of In re MPF Holding
U.S. LLC, Plaintiff contends that none of the district court cases cited by Defendants has required
more than a categorical reservation of claims. Plaintiff further contends that Defendants’ argument
and citation to cases addressing blanket reservations such as “all causes of action” or “any and all
claims” are not relevant to this case because the Plan and Disclosure Statement refer to specific
categories of claims such as “preference claims,” “Avoidance Actions,” and “claims on contracts.”
Memorandum Opinion and Order - Page 5
Pl.’s Resp. 6. Plaintiff therefore contends that the reservation of “claims on contract” and
“Avoidance Actions,” the latter of which are defined as including “causes of action under §§ 506,
510, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551, and 553 of the Bankruptcy Code,” is
sufficiently specific to preserve such claims. Pl.’s Resp. 6.
Section 1123(b)(3) states:
Subject to subsection (a) of this section, a plan may . . . provide for
(A) the settlement or adjustment of any claim or interest belonging to the debtor or
to the estate; or
(B) the retention and enforcement by the debtor, by the trustee, or by a representative
of the estate appointed for such purpose, of any such claim or interest.
11 U.S.C. § 1123(b)(3)(A), (B). The Fifth Circuit’s specific and unequivocal standard applicable
to the reservation of claims was announced in In re United Operating, LLC, in which the court
explained:
[I]n some cases the Code allows a reorganized debtor to bring a post-confirmation
action on a “claim or interest belonging to the debtor or to the estate.” 11 U.S.C. §
1123(b)(3). A debtor may preserve its standing to bring such a claim (e.g., for fraud
or breach of fiduciary duty, or to avoid a preferential transfer) but only if the plan of
reorganization expressly provides for the claim’s “retention and enforcement by the
debtor.” § 1123(b)(3)(B). “After confirmation of a plan, the ability of the [debtor] to
enforce a claim once held by the estate is limited to that which has been retained in
the plan.” In re Paramount Plastics, Inc., 172 B.R. 331, 333 (Bankr. W.D. Wash.
1994); see also In re Tex. Gen. Petrol. Corp., 52 F.3d 1330, 1335 n.4 (5th Cir. 1995).
In re United Operating, LLC, 540 F.3d at 355 (footnotes omitted). The court went on to state that
for a debtor to preserve a claim, “the plan must expressly retain the right to pursue such actions.”
Id. (quotation omitted). To expressly retain the right to pursue an action, “[t]he reservation must be
‘specific and unequivocal.’” Id. (quoting Harstad v. First American Bank, 39 F.3d 898, 902 (8th Cir.
1994), and citing In re Ice Cream Liquidation, Inc., 319 B.R. 324, 337-38 (Bankr. D. Conn. 2005)).
Memorandum Opinion and Order - Page 6
Defendants correctly note that the plan and disclosure statement in In re Texas Wyoming
Drilling not only set forth the existence of the Avoidance Actions but also included “the possible
amount of recovery to which they would lead, [and] the basis for the actions.” In re Texas Wyoming
Drilling, 647 F.3d at 552. The court in In re Texas Wyoming Drilling, however, expressly declined
to “decide whether [under In re United Operating’s specific and unequivocal standard] a debtor
whose plan fails to identify any prospective defendants has standing to pursue post-conformation
claims against subsequently-named defendants.” Id. The court did not need to address this issue
because it determined that the disclosure statement identified prospective defendants as “‘[v]arious
pre-petition shareholders of the Debtor’ who might be sued for ‘fraudulent transfer and recovery of
dividends paid to shareholders.’” Id. Further, while the court held that the plan and disclosure
statement at issue were sufficiently specific under In re United Operating because they reserved the
debtor’s right to pursue Avoidance Actions against pre-petition shareholders, it did not hold, as
Defendants contend, that In re United Operating’s specific and unequivocal standard requires
something more than the retention of claims.
Rather, the court observed that “In re United Operating focused exclusively on the retention
of claims. It never held that intended defendants must be named in the plan.” Id. (emphasis in
original). The court went on to note that in In re United Operating, it had cited with approval In re
Ice Cream Liquidation, for the proposition that “the plan’s categorical reservation of ‘preference’
claims was sufficiently specific; plan need not itemize individual transfers that may be pursued as
preferential.” Id. According to the court, “In re Ice Cream Liquidation held that while creditors
must be told in the plan that avoidance actions will be pursued post-confirmation, individual
prospective defendants did not have to be identified.” Id. The court therefore concluded that “In re
Memorandum Opinion and Order - Page 7
United Operating’s citation to In re Ice Cream Liquidation’s holding supports the trustee’s argument
that a plan need not identify the prospective defendants.” Id.
The Plan lists “Avoidance Actions as assets of the trustee following the confirmation of the
bankruptcy plan, and the term “Avoidance Actions” is defined as “any causes of action arising under
§§ 506, 510, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551, and 553 of the Bankruptcy Code.”
Report 14; Defs.’ App. 42, 50. The Plan also reserves “Rights of Action,” which are defined to
include claims “in contract” and “claims on contract.” Report 15; Defs.’ App. 41, 58, 69. Based on
the holdings in In re Texas Wyoming Drilling and In re United Operating, the court determines that
the Plan’s categorical reference to and reservation of contract claims and avoidance actions is
sufficiently specific to reserve Plaintiff’s contract claim, as well as Plaintiff’s fraudulent transfer
claims under sections 544, 548, and 550 of the Bankruptcy Code.
Further, while a summary of transfers to creditors within the 90-day period before the
bankruptcy Petition date and to insider creditors within the one-year period before the Petition date
is included in Exhibit 3 to the Disclosure Statement, neither the Disclosure Statement nor the Plan
limit avoidance litigation to claims against these entities. See Defs.’ App. 122. The court therefore
disagrees with Defendants’ contention that the failure to include Defendants or the $20 million
transfer undermines Plaintiff’s standing to pursue an avoidance action against them. More
importantly, as already noted, neither In re Texas Wyoming Drilling nor In re United Operating
requires that a specific prospective defendant, potential amount of recovery, or the claim basis be
included in a plan or disclosure statement to satisfy the specific and unequivocal standard for
Memorandum Opinion and Order - Page 8
reserving claims. To the extent that the district court cases cited by Defendants held to the contrary,
the court declines to follow them.1
The court, however, agrees with Defendants that Plaintiff’s pursuit of a fraudulent transfer
claim under Texas and New York statutory law is not supported by the Plan, which only provides
for avoidance claims under the aforementioned sections of the Bankruptcy Code. The court
concludes that Plaintiff has standing to pursue his contract claim and fraudulent transfer claim under
sections 544, 548, and 550 of the Bankruptcy Code but does not have standing to pursue a fraudulent
transfer claim under Texas and New York statutory law. Accordingly, Defendants’ objections are
sustained in part and overruled in part consistent with this ruling. Plaintiff’s fraudulent transfer
claim under Texas and New York statutory law will therefore be dismissed.
B.
Plaintiff’s Objections - Securities Fraud and Duty of Good Faith Claims
Plaintiff contends that the magistrate judge erred in determining that the reservation of claims
in the Plan and Disclosure Statement is not sufficiently specific to preserve his claims for securities
fraud and breach of the duty of good faith and fair dealing. Plaintiff notes that the Plan reserved all
“Rights of Action,” which is defined to include “fraud” claims and claims “for breaches of duties
imposed by law.” Defs.’ App. 58. Plaintiff further asserts, without reference to authority, that under
New York law, which governs the parties’ agreements, and Texas law, where GFG is located, the
implied covenant of good faith and fair dealing is a duty imposed by law. In addition, Plaintiff
argues, based on In re Texas General Petroleum Corporation, 52 F.3d 1330 (5th Cir. 1995), and In
re Torch Liquidating Trust, 561 F.3d 377, 387 (5th Cir. 2009), the latter of which was decided after
1
In re MPF Holding U.S. LLC is on appeal, and it and In re Bigler LP were decided before In re Texas
Wyoming Drilling. As a result, the courts in these cases did not have the benefit of the Fifth Circuit’s reasoning and
holding in In re Texas Wyoming Drilling.
Memorandum Opinion and Order - Page 9
In re United Operating, that the specific and unequivocal standard applicable to debtors does not
apply to liquidation trustees. According to Plaintiff, to have standing as a liquidation trustee, he need
only show that he was appointed and that he is a representative of the estate.
In response, Defendants contend that section 1123(b)(3)(B) of the Bankruptcy Code requires
Plaintiff to satisfy the representative requirement in addition to In re United Operating’s specific and
unequivocal standard for reserving claims. Defendants argue that the court’s analysis in In re Texas
General Petroleum Corporation is inapplicable to this case because it dealt with the issue of whether
the trustee had authority to enforce any claims of the estate, not whether specific claims were
sufficiently reserved under the plan. Defendants further assert that nothing in In re Torch
Liquidating Trust implies that a trustee’s appointed status as the estate representative suffices,
without more, to permit the assertion on the estate’s behalf of any claim not properly reserved.
The court agrees that section 1123(b)(3)(B) requires Plaintiff to satisfy the representative
requirement and In re United Operating’s specific and unequivocal standard for reserving claims
because section 1123(b)(3)(B) applies equally to “the retention and enforcement by the debtor, by
the trustee, or by a representative of the estate appointed for such purpose, of any such claim or
interest.” 11. U.S.C. § 1123(b)(3)(B). Moreover, as correctly noted by Defendants, at issue in In
re Texas General Petroleum Corporation and In re Torch Liquidating Trust was whether the trustee
had authority to enforce any claims of the estate, not whether specific claims were sufficiently
reserved under the plan. As a result, they are not relevant to the court’s analysis as to whether
Plaintiff’s claims for securities fraud violations and the breach of the duty of good faith and fair
dealing were sufficiently reserved under the Plan.
Memorandum Opinion and Order - Page 10
The magistrate judge concluded that the Plan’s reservation of “claims in tort” was not
sufficiently specific to reserve a federal securities fraud action, Report 15-16; however, because the
Plan did reserve “such claims and defenses as fraud,” the court concludes that Plaintiff has standing
to pursue his claim for alleged securities fraud violations. On the other hand, the court disagrees
with Plaintiff that the Plan’s general reference to tort claims or claims based on “breaches of duties
imposed by law” is sufficiently specific to reserve a claim for the breach of the duty of good faith
and fair dealing. While In re United Operating held that the “the plan’s categorical reservation of
‘preference’ claims was sufficiently specific” to satisfy the specific and unequivocal test, the court
determines that “claims . . . for breaches of duties imposed by law” necessarily includes a wide
variety of different types of tort claims and thus is not sufficiently specific to preserve a claim for
breach of the duty of good faith and fair dealing. See In re United Operating, LLC, 540 F.3d at 355.
The court therefore concludes that Plaintiff has standing to pursue his securities fraud violations
claim but not his claim for breach of the duty of good faith and fair dealing. Accordingly, Plaintiff’s
objections are sustained in part and overruled in part consistent with this ruling, and Plaintiff’s
claim for breach of the duty of good faith and fair dealing will be dismissed.
IV.
Conclusion
For the reasons explained, the court determines that the findings and conclusions are correct
with respect to Plaintiff’s standing to pursue a fraudulent transfer claim under the Bankruptcy Code
and contract claim and Plaintiff’s lack of standing to pursue a claim for breach of the duty of good
faith and fair dealing, and they are accepted as those of the court. The court rejects the magistrate
judge’s findings and conclusions that Plaintiff has standing to pursue a fraudulent transfer claim
under New York and Texas law but does not have standing to pursue his alleged securities fraud
Memorandum Opinion and Order - Page 11
claims under 15 U.S.C. §§ 78i, 78j, and 78t-1, and 17 C.F.R. § 240.10b-5. Accordingly, the court
grants Defendants’ Motion to Dismiss Plaintiff’s with respect to Plaintiff’s fraudulent transfer claim
under New York and Texas law and breach of the duty of good faith and fair dealing claim for lack
of standing and dismisses them with prejudice.2 Defendants’ Motion to Dismiss is denied in all
other respects.
It is so ordered this 19th day of September, 2012.
_________________________________
Sam A. Lindsay
United States District Judge
2
Dismissal for lack of subject matter jurisdiction or standing is usually without prejudice, while dismissal for
failure to state a claim is with prejudice. Sepulvado v. Louisiana Bd. of Pardons and Parole, 114 F. App’x 620, *2 (5th
Cir. 2004). There are instances, however, where a dismissal for lack of standing is with prejudice. See, e.g., Baton Rouge
Building and Constr. Trades Council AFL CIO v. Jacobs Constructors, Inc., 804 F.2d 879, 881 (5th Cir. 1986)
(affirming district court’s dismissal with prejudice based on lack of standing); Westfall v. Miller, 77 F.3d 868 (5th Cir.
1996) (same). Dismissal with prejudice is proper under the facts of this case because as previously noted, the claims at
issue were not sufficiently reserved under the Plan and Disclosure Statement, and Plaintiff is therefore precluded from
asserting the claims in a post-confirmation action.
Memorandum Opinion and Order - Page 12
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