complaint (the AC). Plaintiff Stillwater Liquidating LLC ...stillwater liqudating llc, plaintiff, -against-partner reinsurance company, ltd., brevet asset solutions, llc, brevet capital

Majority Opinion >

Pagination* BL

SUPREME COURT OF NEW YORK, NEW YORKCOUNTY

STILLWATER LIQUDATING LLC, Plaintiff, -against-PARTNER REINSURANCE COMPANY, LTD.,BREVET ASSET SOLUTIONS, LLC, BREVET

CAPITAL MANAGEMENT LLC, and LFRCOLLECTIONS, LLC, Defendants. Index No.:

652451/2015

652451/2015

January 23, 2017, DecidedTHIS OPINION IS UNCORRECTED AND WILL NOTBE PUBLISHED IN THE PRINTED OFFICIALREPORTS.

SHIRLEY WERNER KORNREICH, J.S.C.

SHIRLEY WERNER KORNREICH

DECISION & ORDERSHIRLEY WERNER KORNREICH, J.:

Defendants Partner Reinsurance Company, Ltd.(PartnerRe), Brevet Asset Solutions, LLC (BAS),Brevet Capital Management LLC (collectively withBAS, Brevet), and LFR Collections, LLC (LFR) move,pursuant to CPLR 3211 , to dismiss the amendedcomplaint (the AC). Plaintiff Stillwater Liquidating LLC(Stillwater Liquidating or plaintiff) opposes the motion.Defendants' motion is granted in part and denied inpart for the reasons that follow.

1. Factual Background & Procedural HistoryAs this is a motion to dismiss, the facts recited aretaken from the AC (see Dkt. 20)1 and the documentaryevidence submitted by the parties. The plaintiff in thisaction, Stillwater Liquidating, is a Delaware LLC formedpursuant to a Global Settlement Agreement entered

into by creditors of two failed hedge funds, StillwaterAsset Backed Fund LP (Stillwater Onshore) andStillwater Asset Backed Offshore Fund, Ltd. (StillwaterOffshore) (collectively, the Funds), and approved byfederal district and bankruptcy courts in the SouthernDistrict of New York. See AC ¶¶ 1-3. Between 2004and 2009, Stillwater Onshore, among other things,originated hundreds of millions of dollars in loans tolaw firms, secured by nearly $1 billion of those firms'accounts receivable. AC ¶ 16. Stillwater Offshoreowned participation interests in the loans andreceivables (the Law Firm Loans).2 AC ¶ 19.According to plaintiff, non-parties Stillwater CapitalPartners, LLC and Stillwater Capital Partners, Inc.controlled the Funds and operated them as alter egoswithout adhering to corporate formalities. AC ¶¶14-15.3

Plaintiff, essentially, is an SPV created to collect onmore than $575 million allegedly owed by the Funds totheir creditors. AC ¶¶ 5, 22. In this action, plaintiffseeks to unwind two related transactions involving theFunds and PartnerRe on the ground that they areconstructive fraudulent transfers under New YorkDebtor and Creditor Law (DCL) §§ 274, 275, and 278.In the first transaction, the Funds' interest in the LawFirm Loans was transferred to non-party StillwaterFunding LLC (Stillwater Funding), and StillwaterFunding subsequently pledged the Law Firm Loans toPartnerRe as collateral for a $31.5 million loan (thePartnerRe Loan). The second transaction involved thesettlement of Stillwater Funding's default on thePartnerRe Loan, pursuant to which PartnerRe tookcontrol of the Law Firm Loans, which were allegedlyworth tens (if not hundreds) of millions of dollars morethan the amount of Stillwater Funding's debt toPartnerRe. Plaintiff's operative pleading, the AC, alsoasserts claims for violations of PartnerRe's obligationsunder Article [*2] 9 of the New York UniformCommercial Code (UCC), declaratory judgment againstall defendants, unjust enrichment against alldefendants, conversion against PartnerRe and LFR,breach of fiduciary duty against all defendants, andbreach of contract against PartnerRe.

To begin, plaintiff alleges in the AC, on information andbelief, that the Funds "became illiquid at the end of2008, and, as a result, were unable to pay theircreditors." AC ¶ 21. By 2009, the Funds allegedly owedmore than $575 million to their creditors. AC ¶ 22. InJuly 2009, despite their alleged insolvency, the Funds

Stillwater Liqudating LLC v. Partner Reinsurance Co., No. 652451/2015, 2017 BL 46049 (Sup. Ct. Jan. 23, 2017), Court Opinion

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arranged for a credit line of up to $31.5 million fromPartnerRe. The PartnerRe Loan is governed by twocontracts dated as of July 27, 2009: (1) a NotePurchase Agreement (the NPA) (Dkt. 26) betweenStillwater Funding (as issuer), Stillwater Onshore (asservicer), and PartnerRe (as purchaser); and (2) anIndenture (Dkt. 27) between Stillwater Funding andnon-party Wilmington Trust Company (the Trustee).Both agreements are governed by New York law andcontain New York forum selection clauses. See Dkt. 26at 27-28; Dkt. 27 at 84-85.

Pursuant to the NPA and Indenture, PartnerRe issuednotes to Stillwater Funding (the Notes). StillwaterFunding's obligation to pay off the Notes was securedby collateral — the Law Firm Loans owned by theFunds. Between July 24 and December 4, 2009,Stillwater Funding received the maximum availableamount under the credit facility from PartnerRe —$31.5 million.4 According to plaintiff, at the time theNDA was executed in 2009, the Law Firm Loans wereworth $221 million. See AC ¶ 28.5 Under section 2.4(b)of the NPA, Stillwater Funding was required to makemonthly principal and interest payments on this debt.See Dkt. 26 at 11. The interest rate was 21.25% perannum, and increased to 28% upon default. See id.at 6-7.6 Upon default, moreover, PartnerRe had theright, under section 5.2(a) of the Indenture, toaccelerate payment on the Notes and direct theTrustee to foreclose on the Law Firm Loans inaccordance with section 5.4(a). See Dkt. 27 at 53.

On December 15, 2009, approximately five monthsafter the NDA was entered into, Stillwater Fundingdefaulted on the NDA by failing to make its monthlypayment on the Notes. In response, plaintiff allegesthat ParnerRe attempted to "obtain for itself the fullvalue of the Law [Firm] Loans." See AC ¶ 38.7 Morethan a year-and-a-half after plaintiff's default, on June17, 2011, Stillwater Funding and PartnerRe, amongothers,8 entered into a Consent Foreclosure and SaleAgreement (the CFSA). See Dkt. 28. The CFSA isgoverned by New York law and contains a New Yorkforum selection clause. See id. at 33-34.

The CFSA's "Whereas" clauses memorialize itscontext:

WHEREAS, as a result of, among other things,[Stillwater Funding's] failure to make thepayments required under the terms of the [Notes]

and as demanded pursuant to the terms of theAcceleration Notice, the [Trustee], for the benefitof [PartnerRe], currently has the right to enforceits security interest in and lien upon the [Law FirmLoans] pursuant to the terms of the Indenture andapplicable law, including the right to foreclose onand [*3] sell the [Law Firm Loans] in accordancewith the applicable provisions of [the UCC];WHEREAS, [the Trustee] has given notice to[Stillwater Funding] that it may dispose of the[Law Firm Loans] under the applicable provisionsof the [UCC] by entering into a private saletransaction on or after June 13, 2011;WHEREAS, in contemplation of a Private UCCSale, [Stillwater Funding], Stillwater Capital andthe [PartnerRe] engaged in settlementnegotiations in an attempt to consensually andfinally resolve various matters as to the KnownDefaults and the aforementioned failures to payamounts due; [and] WHEREAS, as a result ofsuch negotiations, the Parties hereto haveagreed to provide for the foreclosure of the lienand security interest of the [Trustee] and theabsolute surrender, transfer and conveyance ofthe [Law Firm Loans] from [Stillwater Funding] to[PartnerRe] (with the simultaneous contributionof [the Law Firm Loans] by [PartnerRe] to[LF12]), in full satisfaction of the outstandingobligations of the [Stillwater Funding] under theIndenture and other Basic Documents, upon theterms and conditions set forth herein.

See id. at 7 (emphasis added; paragraph breaks andlettering omitted). Simply put, the CFSA purports to bea contract whereby PartnerRe foreclosed on the LawFirm Loans in full satisfaction of the $39 million,inclusive of interest and fees accrued since the default,allegedly owed on the Notes by virtue of StillwaterFunding's default. Despite the CFSA purporting to be aforeclosure agreement, section 11.1 provides StillwaterFunding the right, for five years, and under certaincircumstances, to receive 80% of the proceeds on theLaw Firm Loans in excess of the amount owed toPartnerRe. See id. at 29-30.

Section 3 of the CFSA contains broad releasesbetween the parties to the CFSA that only excludebreaches of the CFSA post-dating its execution, as wellas fraud, gross recklessness, and intentionalmisconduct. See id. at 16-17. Plaintiff and the Funds'creditors are not parties to the CFSA and, therefore, as




explained below, are not bound by CFSA's releases.

Section 8.4 addresses the value of the collateral, i.e.,the Law Firm Loans:

Each of the Issuer Parties [defined to includeStillwater Funding] [see id. at 12]acknowledges and agrees that: (a) theSecured Parties [defined to mean theTrustee, PartnerRe, and BAS] assertthat [Stillwater Funding] has no equity in [the LawFirm Loans] and the current fair market value ofthe [the Law Firm Loans], commonly known asthe "as-is value," is significantly less than theamount of the obligations owing to the SecuredParties that are secured by [the Law Firm Loans];(b) any diminution in the value of the [Law FirmLoans], if any, from and after January 27, 2010has not resulted from any action or inaction byany of the Foreclosing Parties; and (c) [StillwaterFunding] is receiving, at a minimum, reasonablyequivalent value and fair consideration in returnfor the Sale and the other transactionscontemplated by the Sale Documents and thatthe Sale and such other transactions are in thebest interests of [Stillwater Funding], its [*4]estate, its creditors, and other parties in interest.

See id. at 26 (emphasis added).

Allegedly, prior to entering into the CFSA, PartnerRethreatened to conduct, respectively, a public andprivate sale of the Law Firm Loans in March and June2011. See AC ¶¶ 54, 56. These threats, according toplaintiff, were made in bad faith and caused StillwaterFunding to enter into the CFSA under conditions ofduress. Plaintiff claims that, at the time, the Law FirmLoans were worth approximately $286 million and theaccounts receivable securing such loans were worthmore than $1 billion. Hence, plaintiff claims that theexchange of approximately $286 million worth ofcollateral to satisfy a debt worth less than $40 million isnot fair consideration. In light of the alleged insolvencyof the Funds and Stillwater Funding, plaintiff claims thatthe CFSA was a constructive fraudulent conveyancethat had the effect of hindering their creditors' collectionefforts (i.e., but for the CFSA, the Funds' creditorswould have had the right to go after the Funds'membership interest in Stillwater Funding, which wouldhave had value but for the foreclosure on its principalasset, the Law Firm Loans). Likewise, plaintiff contends

that the terms of the CFSA are procedurally andsubstantive unconscionable (i.e., made in bad faithunder the UCC) because:

For example, evidently cognizant of theunconscionability of seizing $286 million in valuein exchange for illusory forgiveness of $39 millionin debt, the [CFSA] purports to grant theStillwater Parties a right to receive a contingentpayment out of any collections, recoveries orfurther sales with respect to the [Law FirmLoans]. That right, however, also was purelyillusory. PartnerRe, LFR (the entity to whichPartnerRe caused the [Law Firm Loans] to betransferred) and Brevet (whom LFR hired toservice the [Law Firm Loans]) explicitlydisclaimed in the [CFSA] any obligations at all tomake any collection, recovery or sales efforts; theStillwater Parties' right to receive the contingentpayment would expire after 5 years, creating aconflict of interest incentivizing the Defendantssimply to wait until then before making any realeffort to monetize the [Law Firm Loans];9 thecontingent payment right would only obtain afterthe Defendants fully recouped out of collections,recoveries and sales the entire $39 million in debtPartnerRe purportedly forgave, after theDefendants recouped all costs associated withsuch collections, recoveries and sales, and afterDefendants recouped out of collections,recoveries and sales an "Acquirer Return" of 19%per annum,10 compounding quarterly, on the$39 million debt PartnerRe supposedly forgave,and all costs associated with Defendants'collection, recovery and sales efforts. Moreover,the Stillwater Parties' rights to the contingentpayment could be cancelled at any time ifDefendants merely assign their rights under the[CFSA] to a third party. By way of example, ifDefendants made no collection, recovery or salesefforts with respect to the [Law Firm Loans] untilthe end of [*5] the five year period, Defendants atthat point would need to collect nearly$100,000,000 before the Stillwater Parties wouldsee a dime; and if the Defendants simply waitedto the day after the Stillwater Parties' entitlementto the contingent payment expires, or at any timesimply assigned their rights under the SaleAgreement to a third party, the Stillwater Partieswould receive nothing at all even if thesubsequent collections and recoveries total




multiples of $100,000,000.

AC ¶ 74 (emphasis added).11 According to the AC, asof March 31, 2014 (i.e., nearly three years after theCFSA was executed), Brevet and the law firm of MayerBrown, acting as servicer and enforcement counselunder the CFSA, collected approximately $11 millionon the Law Firm Loans and were paid about $8.7million in fees and expenses for doing so. See AC ¶¶90-91.

Plaintiff commenced this action on July 10, 2015 andfiled its AC on December 23, 2015. Defendants filedthe instant motion to dismiss on February 29, 2016,arguing, among other things, that plaintiff failed toproperly plead a DCL claim for constructive fraudulentconveyance. Consequently, according to defendants,the remainder of plaintiff's causes of action failbecause, for instance, if the court does not hold thatthe CFSA is unenforceable, the remaining causes ofaction dependent on the parties' relationship beinggoverned by their pre-CFSA rights would necessarilybe infirm. The court reserved on the motion after oralargument. See Dkt. 43 (10/27/16 Tr.).

II. DiscussionOn a motion to dismiss, the court must accept as truethe facts alleged in the complaint as well as allreasonable inferences that may be gleaned from thosefacts. Amaro v Gani Realty Corp., 60 AD3d 491 (1stDept 2009); Skillgames, LLC v Brody, 1 AD3d 247 ,250 (1st Dept 2003), citing McGill v Parker, 179 AD2d98 , 105 (1st Dept 1992); see also Cron v HargroFabrics, Inc., 91 NY2d 362 , 366 (1998). The court isnot permitted to assess the merits of the complaint orany of its factual allegations, but may only determine if,assuming the truth of the facts alleged and theinferences that can be drawn from them, the complaintstates the elements of a legally cognizable cause ofaction. Skillgames, id., citing Guggenheimer vGinzburg, 43 NY2d 268 , 275 (1977). Deficiencies inthe complaint may be remedied by affidavits submittedby the plaintiff. Amaro, 60 NY3d at 491 . "However,factual allegations that do not state a viable cause ofaction, that consist of bare legal conclusions, or thatare inherently incredible or clearly contradicted bydocumentary evidence are not entitled to suchconsideration." Skillgames, 1 AD3d at 250 , citingCaniglia v Chicago Tribune-New York News Syndicate,204 AD2d 233 (1st Dept 1994). Further, where the

defendant seeks to dismiss the complaint based upondocumentary evidence, the motion will succeed if "thedocumentary evidence utterly refutes plaintiffs factualallegations, conclusively establishing a defense as amatter of law." Goshen v Mutual Life Ins. Co. of NY.,98 NY2d 314 , 326 (2002) (citation omitted); Leon vMartinez, 84 NY2d 83 , 88 (1994).

As an initial matter, the court rejects defendants'argument that section 3 of the CFSA releaseddefendants from any liability they may have for theclaims [*6] asserted in this action by plaintiff. At aminimum, the first cause of action under the DCL isnot covered by the release since plaintiff is not aparty to the CFSA and the CFSA does not purport to(nor could it) release non-signatory creditors' claimsagainst defendants.12 Moreover, the DCL claim, ifmeritorious, would result in the CFSA being deemedunenforceable. Additionally, the release carves out thevery sort of behavior alleged in the AC, namely fraudand intentional misconduct.

Turning now to the merits, DCL § 278(1) provides:

Where a conveyance or obligation is fraudulentas to a creditor, such creditor, when his claim hasmatured, may, as against any person except apurchaser for fair consideration withoutknowledge of the fraud at the time of thepurchase, or one who has derived titleimmediately or mediately from such a purchaser,

a. Have the conveyance set aside or obligationannulled to the extent necessary to satisfy hisclaim, or

b. Disregard the conveyance and attach or levyexecution upon the property conveyed.

(emphasis added). In this case, by virtue of the CFSAallegedly amounting to a fraudulent conveyance,plaintiff seeks to set aside the transfers of the Law FirmLoans to defendants and/or recover the Law FirmLoans or their value from defendants. See Dkt. 20 at26 (AC, Prayer for Relief).

Generally, to establish a fraudulent conveyance, theplaintiff must prove either intentional or constructivefraud. See Wall St. Assocs. v Brodsky, 257 AD2d 526 ,529 (1st Dept 1999). In this case, plaintiff only assertsa claim for constructive fraudulent conveyance under




DCL §§ 274 and 275. Section 274 provides:

Every conveyance made without fairconsideration when the person making it isengaged or is about to engage in a business ortransaction for which the property remaining inhis hands after the conveyance is anunreasonably small capital, is fraudulent as tocreditors and as to other persons who becomecreditors during the continuance of such businessor transaction without regard to his actual intent.

(emphasis added). In other words, a creditor states aclaim under § 274 when it alleges a debtor entered intoa transaction made without fair consideration whichresults in the debtor being left with insufficient funds topay off its creditors; intent is not an element of theclaim. See CIT Group/Commercial Servs., Inc. v 160-09 Jamaica Ave. Ltd. P 'ship, 25 AD3d 301 , 302 (1stDept 2006) ("A conveyance that renders the conveyorinsolvent is fraudulent as to creditors without regard toactual intent, if the conveyance was made without fairconsideration"). Likewise, DCL § 275 provides:

Every conveyance made and every obligationincurred without fair consideration when theperson making the conveyance or entering intothe obligation intends or believes that he willincur debts beyond his ability to pay as theymature, is fraudulent as to both present andfuture creditors.

(emphasis added); see CIT Group, 25,AD3d at 302("Also fraudulent are conveyances made without fairconsideration when the conveyor 'intends or believesthat he will incur debts beyond his ability [*7] to pay asthey mature.").

Integral to DCL §§ 274 and 275 and constructive fraudis the absence of "fair consideration", defined in DCL §272:

Fair consideration is given for property, or obligation,

a. When in exchange for such property, orobligation, as a fair equivalent therefor, and ingood faith, property is conveyed or an antecedentdebt is satisfied, or

b. When such property, or obligation is receivedin good faith to secure a present advance or

antecedent debt in amount not disproportionatelysmall as compared with the value of the property,or obligation obtained.

(emphasis added),13 Also, even if fair consideration isshown, the transfer is still constructively fraudulent if itwas not made in good faith. See CIT Group, 25 AD3dat 303 ("Good faith is required of both the transferorand the transferee, and it is lacking when there is afailure to deal honestly, fairly, and openly"), quotingBerner Trucking, Inc. v Brown, 281 AD2d 924 , 925(1st Dept 2001); see also Sardis v Frankel, 113 AD3d135 , 142 (1st Dept 2014).

Defendants argue that the PartnerRe Loan, asgoverned by the NDA and Indenture, is not, on its own,a fraudulent conveyance. Plaintiff does not contendotherwise. Rather, plaintiff argues that the NDA andCFSA should be viewed as part of a single transaction.This is neither a necessary nor tenable basis forplaintiff to recover the Law Firm Loans under DCL §278. As noted earlier, there is no question that thePartnerRe Loan is not a fraudulent conveyancebecause borrowing money secured by more valuablecollateral is not considered a transaction with unfairconsideration. See In re Jesup & Lamont, Inc., 507 BR452 , 472 (Bankr SDNY 2014) ("Ordinarily[,]collateralization of a legitimate debt is not a fraudulentconveyance."), citing In re Pfeifer, [2013 BL 194845],2013 WL 3828509 , at *3 (Bankr SDNY 2013)(explaining why "[m]any decisions in this District and inother Districts applying New York law have consistentlyused a per se rule that the grant of collateral for alegitimate antecedent debt is not a constructivefraudulent conveyance."). Securing a debt with morevaluable collateral is not nefarious since, upon default,the debtor has the right to the value of the collateralthat exceeds the amount of the debt. See Chemtex,LLC v St. Anthony Enterprises, Inc., 490 FSupp2d 536, 545 (SDNY 2007) ("the value of the collateral is notrelevant in determining whether the debtor receivedreasonably equivalent value in exchange for itsgranting the security interest, because the rights of asecured creditor in collateral are always restricted bythe amount of the debt"), citing In re Applied TheoryCorp., 323 BR 838 , 841 (Bankr SDNY 2005) ("Thesecurity interest did not provide the Lenders with a rightto receive anything more than the amount of the moneythey had provided, and the debtor's liabilities did notincrease due to the security interest. The securityinterest was granted in respect of an antecedent




debt—debt that arose by reason of the Lenders havingprovided the debtor with actual cash in the amount ofthe debt."), gird 330 BR 362 (SDNY 2005).Accordingly, merely securing the $31.5 million loanwith more than $200 million in collateral was not afraudulent conveyance.

The same is not true [*8] of the CFSA. First, the courtrejects defendants' contention that the CFSA was aforeclosure and that, under New York law, aforeclosure is not a voluntary act that amounts to a"conveyance" for the purposes of the DCL. As plaintiffcorrectly avers, the terms of the CFSA govern, not thetitle given to it. See N.E. Gen. Corp. v WellingtonAdvertising, Inc., 82 NY2d 158 , 162 (1993) (substanceof a contract governs, not its "nomenclature"). That thecontact's name incudes the word "foreclosure" is notdispositive. To assess whether the CFSA resulted in aconveyance for the purposes of the DCL, its economicsubstance must be evaluated. See Chemical Bank vMeltzer, 93 NY2d 296 , 304 (1999) ("this transactionmust be analyzed as an integrated whole. To adopt theapproach employed by the lower courts would elevateform over substance, obfuscate the nature of[defendant's] legal obligations and gloss over theessential character of this transaction.").

The AC contains well-pleaded allegations that theCFSA did not result in a bona fine foreclosure, andcertainly not one that comports with Article 9 of theUCC and its good faith obligations. As noted inComment 11 (Role of Good Faith) to UCC § 9-620 :

Section 1-203 imposes an obligation of good faithon a secured party's enforcement under thisArticle. This obligation may not be disclaimed byagreement. See Section 1-102. Thus, a proposaland acceptance made under this section in badfaith would not be effective. For example, asecured party's proposal to accept marketablesecurities worth $1,000 in full satisfaction ofindebtedness in the amount of $100, made in thehopes that the debtor might inadvertently fail toobject, would be made in bad faith. On the otherhand, in the normal case proposals andacceptances should be not second-guessed onthe basis of the "value" of the collateral involved.Disputes about valuation or even a clear excessof collateral value over the amount of obligationssatisfied do not necessarily demonstrate theabsence of good faith.

(emphasis added); see Tudisco v Duerr, 89 AD3d 1372, 1376 (4th Dept 2011) ("Defendants had an obligationto enforce the security agreement in good faith [seegenerally UCC 1-203 ]. Defendants, however, retainedthe backhoes and bulldozer without complying with theprovisions of the UCC, either by disposing of thosepieces of equipment in a commercially reasonablemanner and paying any surplus to plaintiffs [see UCC9-610 [a] , [b]; 9-615 [d] [1]], or by obtaining plaintiffs'consent after the default to retain the equipment insatisfaction of debt [see UCC 9-620 [a] [1]; [c]]. Wetherefore conclude that, because plaintiffs establishedthat the value of the backhoes and the bulldozerexceeded the amount that they owed on thepromissory note, plaintiffs had a possessory interest inthat equipment and defendants' dominion over it was inderogation of the rights of plaintiffs.") (emphasisadded).

A proper foreclosure under the UCC would haveresulted in the value of the debt in excess of theproceeds being remitted to the debtor. Plaintiffplausibly alleges that the economic reality of the CFSAis that defendants obtained rights in the Law FirmLoans with a value far in excess [*9] of the amountowed to it by Stillwater Funding. In other words, plaintiffalleges, the consideration was not fair and, thus, wasnot made in good faith.

Defendants, perhaps recognizing that fair value is aquestion requiring discovery, seek to take the CFSAentirely out of the purview of the DCL by contendingthat the CFSA could not amount to a fraudulentconveyance because "PartnerRe was a valid andacknowledged creditor of [Stillwater Funding]." SeeDkt. 34 at 26. This argument misses the mark. While acreditor has every right to seek full payment of a debtdespite the existence of other creditors, "[t]he rule thata debtor may generally favor one creditor over another[see Ultramar Energy v Chase Manhattan Bank, 191AD2d 86 , 90-91 (1st Dept 1993)] is not a license toengage in sham transactions in furtherance of thatpreference." CIT Group, 25 AD3d at 302 .14PartnerRe, as a creditor of Stillwater Funding, wasnot entitled, through the CFSA or otherwise, to settleStillwater Funding's default by obtaining fromStillwater Funding consideration disproportionately inexcess of the value of Stillwater Funding's debt.Here, plaintiff alleges that the value obtained byPartnerRe was in excess of Stillwater Funding's debt




by more than $200 million. To be sure, the actualvalue of the Law Firm Loans is a question of factrequiring discovery because defendants have notsubmitted any evidence that clearly shows that thevalue of the Law Firm Loans was only worthapproximately $40 million.15 On the other hand,plaintiff has pleaded facts raising issues about whethersuch alleged foreclosure was conducted in good faithas required by Article 9 of the UCC. According todefendants, since Stillwater Funding may still have theright to some of the proceeds from the Law FirmLoans, that value somehow renders the considerationreceived by PartnerRe fair. At best, this is a question offact for discovery.

Based on the terms of the CFSA and the AC's wellpleaded allegations, plaintiff claims the CFSA wassimply a scam. If plaintiff's valuations are correct(and, again, they must be assumed to be correct forthe purposes of this motion), the value PartnerRewill realize under of the CFSA will be well in excessof the $40 million allegedly owed at the time theCFSA was executed.16 PartnerRe had no right toobtain for itself value disproportionally higher than thedebt owed by Stillwater Funding. Doing so would be afraud on Stillwater Funding's creditors.

Indeed, the very point of the DCL is to ensure thatan insolvent17 debtor does not dissipate assets toanyone in excess of what may be considered fairconsideration. Here, despite the exceedinglycomplex underlying facts and contracts, this caseinvolves a simple question: did PartnerRe obtainfrom Stillwater Funding consideration to settleStillwater Funding's default disproportionally inexcess of the debt owed to PartnerRe? In the AC,plaintiff alleges this is the case because the value ofthe rights to the Law Firm Loans that inured toPartnerRe was worth far more than the debt.18 As aresult, the Funds' creditors lost the ability to [*10]enforce their own claims against the Funds. TheFunds, after all, gave up their assets (the Law FirmLoans) for ownership of Stillwater Funding, which, inturn, gave up the Law Firm Loans to PartnerRe. TheFunds were the real beneficial owners of the LawFirm Loans, so it is the Funds' creditors that directlysuffer from Stillwater Funding relinquishing the LawFirm Loans. PartnerRe, along with those thatoperated the Funds and Stillwater Funding, had noright to cause the Law Firm Loans to be exchangedfor disproportionally less than they were worth. If

they did so, the Funds' creditors, such as plaintiff,were defrauded for the purposes of DCL § 278because their ability to collect a judgment from theFunds was impaired.19

That being said, the remainder of the AC's causes ofaction are dismissed. The claim that the CFSA isunconscionable is dismissed as duplicative of the otherDCL and UCC claims because a finding that the CFSAis unconscionable turns on the consideration beinggrossly unfair, the same claim as that alleged under theDCL. See B.D. Estate, 114 AD3d at 478 , quoting Kingv Fox, 7 NY3d 181 , 191 (2006) ("[Alt common law anunconscionable agreement was one that no promisor(absent delusion) would make on the one hand and nohonest and fair promisee would accept on the other."),accord Gillman v Chase Manhattan Bank, N.A., 73NY2d 1 , 10 (1988). Likewise, the declaratory judgmentcause of action is dismissed as duplicative since adeclaration regarding the validity of the subjectcontracts is duplicative of the relief sought on plaintiff'ssurviving DCL and UCC claims. See Cherry Hill MarketCorp. v Cozen O'Connor P.C., 118 AD3d 514 , 515(1st Dept 2014), citing Apple Records, Inc. v CapitolRecords, Inc., 137 AD2d 50 , 54 (1st Dept 1988) ("Acause of action for a declaratory judgment isunnecessary and inappropriate when the plaintiff hasan adequate, alternative remedy in another form ofaction, such as breach of contract."). The quasi-contract claims of unjust enrichment and conversion,moreover, must be dismissed since a writtenagreement governs the parties' rights. See Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382 , 388(1987). In any event, the possible recovery on thegrounds of unjust enrichment or conversion entirelyturn on the merits of the DCL and UCC claims, whichare the only proffered bases for finding that it would be"against equity and good conscience" to permitdefendants' recovery of the Law Firm Loans. See Georgia Malone & Co. v Rieder, 19 NY3d 511 , 516(2012). Finally, the causes of action for breach offiduciary duty and breach of contract based on thealleged UCC violation, even if not otherwise subject todismissal for the reasons set forth in defendants' briefs,also seek duplicative relief. Accordingly, it is

ORDERED that defendants' motion to dismiss theamended complaint is granted with respect to the thirdthrough seventh causes of action, which are herebydismissed, and the motion is otherwise denied; and it isfurther




ORDERED that the parties are to appear in Part 54,Supreme Court, New York County, 60 Centre Street,Room 228, New York, NY, for a preliminary conferenceon February 28, 2017, at 11:30 in the forenoon, andthe parties' pre- [*11] conference joint letter shall be e-filed and faxed to Chambers at least one weekbeforehand.

Dated: January 23, 2017

ENTER:

/s/ Shirley Werner Kornreich

J.S.C.

fn1

References to "Dkt." followed by a number refer todocuments filed in this action on the New York StateCourts Electronic Filing system (NYSCEF).

fn2

For simplicity's sake, the court (in accordance withthe parties' briefing) refers to these assets as LawFirm Loans, but it should be noted that they alsoapparently include life insurance policies. SeeAC ¶¶ 17, 28. Two of those law firms (Khorrami,Pollard & Abir, LLP and the Tate Law Group,LLC [TLG]) (see Dkt. 26 at 51) have been involvedin litigation in this court over their firms' fundingarrangements. See, e.g., Hamilton Capital VII, LLCv Khorrami, LLP, 48 Misc3d 1223 (A) (Sup Ct, NYCounty 2015 ); Tate Law Group, LLC v StillwaterFunding, LLC, 2012 WL 10008053 (Sup Ct, NYCounty 2012 ) (rejecting TLG's claim to piercePartnerRe's corporate veil based on allegationsregarding its subsidiary, LFR).

fn3

This allegation, which is not challenged bydefendants at this juncture, is assumed to be true onthis motion, despite the AC not containing therequite factual detail that would ordinarily benecessary to state a claim to pierce the corporateveil (a claim not asserted in the AC) under Delawarelaw (the Funds are incorporated in Delaware), such

as the so-called fraud prong. See generally Crossev BCBSD, Inc., 836 A2d 492 , 497 (Del 2003). Thisalter ego allegation has no bearing on the issuesdecided herein.

fn4

The credit line was initially $30 million, but wasincreased to $31.5 million (i.e. the MaximumPrincipal Amount, as defined in the NPA [seeDkt. 26 at 7], was increased). According to theaffidavit of Kathleen A. Servidea (Dkt. 29) andthe wire transfers attached thereto (Dkt. 30-33),the $31.5 million was collectively dispersed onJuly 24, August 21, September 18, andDecember 4, 2009. This information wassubmitted by defendants to refute the contentionin paragraph 34 of the AC that recordspossessed by plaintiff indicate that only $13million was funded and that only $6-8 million wasissued to provide credit support for the Law FirmLoans (the latter issue, it should be noted, is notrefuted by documentary evidence sinceServidea's affidavit does not address the use ofthe proceeds, nor could such information in anaffidavit be considered on a motion to dismiss [see Basis Yield Alpha Fund (Master) v Goldman SachsGroup, Inc., 115 AD3d 128 , 134 n.4 (1st Dept2014)]).

fn5

Simply put, the Funds transferred their interest in theLaw Firm Loans to Stillwater Funding in exchangefor all of the membership interests in StillwaterFunding (a Delaware LLC). Thus, instead of theFunds borrowing the money directly from PartnerReand pledging the Law Firm Loans as collateral, theparties structured an economically equivalenttransaction by which the borrower, StillwaterFunding, a newly formed LLC wholly owned by theFunds, did this. The NPA, on its face, is not afraudulent transaction under the DCL, nor was thetransfer of the Law Firm Loans by the Funds inexchange for the equity in Stillwater Funding. While,for instance, paragraph 31 of the AC complains thatthe Funds encumbered over $200 million inexchange for a $31.5 million credit facility, even ifthe Funds were insolvent, under the authority citedherein, this is not constructively fraudulent since theFunds gained access to $31.5 million in value by




virtue of their ownership of Stillwater Funding. Whilethey put up collateral (allegedly) well in excess of$31.5 million, even upon default, a foreclosure couldonly result in retention of the amount of the debt; theexcess value of the collateral would be returned toStillwater Funding, and that value would be realizedby the Funds by virtue of their ownership ofStillwater Funding. Consequently, at this stage of thetransaction, it cannot be said that the Funds gave upvalue disproportionate to what it received, the sinequa non of a DCL claim. That being said, asexplained herein, other DCL issues arise fromStillwater Funding's default under the NPA.

fn6

While a corporate entity cannot avail itself of a civilusury defense, contrary to the argument made bydefendants, under General Obligations Law §5-521(3) , a corporate entity is still subject to thecriminal usury rate, which was apparently exceededhere. See B.D. Estate Planning Corp. vTrachtenberg, [2013 BL 359596], 2013 WL 839779(Sup Ct, NY County 2013 ), aff'd 114 AD3d 477 (1stDept 2014). While a usury defense has not beenpleaded, usury has been raised as a factor the courtshould consider when assessing the fair value of theconsideration for the purposes of the DCL claims.

fn7

Allegedly, the sub-servicer of the Law Firm Loans,non-party Oxbridge Financial Group (Oxbridge),proposed a number of options to make PartnerRewhole while retaining Stillwater Funding's interest inthe Law Firms Loans, such as a liquidation thatwould supposedly provide $60-80 million inproceeds, which would have been more thanenough to fully pay off PartnerRe. See AC ¶¶ 39-46.PartnerRe rejected Oxbridge's proposals, allegedly,because of PartnerRe's desire to realize a greaterreturn on the Law Firm Loans. These allegations areassumed to be true on this motion and raisequestions of fact about PartnerRe's good faithobligations under the UCC.

fn8

Other parties to the contract include the Funds, theTrustee, and Brevet. See Dkt. 28 at 2, 6.

fn9

It should be noted that loans to law firmsworking on contingency, such as in mass tortcases, ordinarily are not expected to be paidoff for many years since such complexlitigation (the proceeds from which the loansare repaid) often takes many years to resolve.

fn10

This 19% return is one of the reasons whyplaintiff claims no true foreclosure took place.In a foreclosure, the parties to the underlyingdebt do not incur or receive further interestpayments.

fn11

The most difficult thing to understand is why, evenunder conditions of duress, the Funds (by virtue oftheir control over Stillwater Funding) would agree tothese terms if they were so one-sided. It should benoted that plaintiff does not allege that PartnerRewas in cahoots with the Funds (e.g., no kickbacksare alleged); after all, the claim asserted is forconstructive fraud (which does not require thepleading of scienter), not intentional fraud (whichdoes). That being said, since Stillwater Funding wasan SPV that was effectively judgment proof asidefrom its ownership of the Law Firm Loans, it doesnot make sense for Stillwater Funding to give up allof its interest in the Law Firm Loans in return forcanceling an uncollectable $40 million debt. In otherwords, the incentive to provide PartnerRe withgrossly excessive consideration does not existabsent bad motive. Since the court must assume thetruth of plaintiffs allegation as to the value of thecollateral (an issue only discovery can resolve), theAC permits a reasonable inference that the CFSAwas at least the product of constructive (andpossibly) actual fraud.

fn12

This is not a situation where plaintiff must step intothe shoes of the Funds and Stillwater Funding and,then, is subject to their rights and obligations underthe CFSA. The very purpose of the DCL is to protectcreditors from fraudulent actions taken by debtors




and those that wrongfully acquire the debtors'assets. Debtors and their fraudulent transfereescannot extinguish their creditors' rights by agreeingto waive their creditors' DCL claims.

fn13

DCL § 270 defines the terms assets, conveyance,creditor, and debt:

In this article "assets" of a debtor meansproperty not exempt from liability for his debts.To the extent that any property is liable for anydebts of the debtor, such property shall beincluded in his assets.

"Conveyance" includes every payment ofmoney, assignment, release, transfer, lease,mortgage or pledge of tangible or intangibleproperty, and also the creation of any lien orincumbrance.

"Creditor" is a person having any claim,whether matured or unmatured, liquidated orunliquidated, absolute, fixed or contingent.

"Debt" includes any legal liability, whethermatured or unmatured, liquidated orunliquidated, absolute, fixed or contingent.

Insolvency, moreover, is defined in DCL § 271:

1. A person is insolvent when the present fairsalable value of his assets is less than theamount that will be required to pay hisprobable liability on his existing debts as theybecome absolute and matured.

2. In determining whether a partnership isinsolvent there shall be added to thepartnership property the present fair salablevalue of the separate assets of each generalpartner in excess of the amount probablysufficient to meet the claims of his separatecreditors, and also the amount of any unpaidsubscription to the partnership of each limitedpartner, provided the present fair salable valueof the assets of such limited partner isprobably sufficient to pay his debts, includingsuch unpaid subscription.

fn14

Defendants do not cite any authority supporting theproposition that a fraudulent conveyance made to acreditor is not subject to the DCL. That is an absurdproposition. Aside from the holding in UltramarEnergy, DCL § 272(a) addresses how fairconsideration must be made for payment of anantecedent debt and belies the notion that a transferis not fraudulent if, as alleged here, the amount paidto the creditor is far more than the value of the debt.

fn15

That only $11 million may have been recovered onthe Law Firm Loans (as of 2014) is of no moment.The loans may take years to be paid off. Theirpresent value may be difficult to determine and willrequire expert discovery, but that militates againstdismissal at this juncture.

fn16

As plaintiff further avers, the 19% interest rate alongwith the significant collection fees may also ensurethat defendants end up with far more than they wereowed on the Notes. While the value of these "perks"is a question of fact, there is no doubt they may beconsidered when assessing the value of theconsideration since, but for the CFSA, defendantswould not have obtained this value. Again, it is theoverall substance of the agreement that must beaccounted for in determining the value of theconsideration.

fn17

On this motion, the allegations of the Funds' andStillwater Funding's insolvency have not beendisproven by defendants.

fn18

It is of no moment that section 8.4 of the CFSA, inconclusory fashion, states otherwise. A party cannotimmunize itself from liability under the DCL bymerely reciting in a contract with its co-conspiratorthat the consideration was fair.

fn19




If plaintiff prevails in this action, the court may(among other possible remedies) set aside the fairvalue of the Law Firm Loans given up by StillwaterFunding to PartnerRe in excess of StillwaterFunding's debt so that the value of the Funds'membership interest in Stillwater Funding may beused to satisfy the Funds' creditors.




General Information

Judge(s) Shirley Werner Kornreich

Topic(s) Debtor Creditor; Civil Procedure

Industries Financial Services

Date Filed 2017-01-23 00:00:00

Parties STILLWATER LIQUDATING LLC, Plaintiff, -against- PARTNERREINSURANCE COMPANY, LTD., BREVET ASSETSOLUTIONS, LLC, BREVET CAPITAL MANAGEMENTLLC, and LFR COLLECTIONS, LLC, Defendants. Index No.:652451/2015

Court New York Supreme Court

