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In re Stanwich Financial Services Corp.

United States District Court, D. Connecticut

March 8, 2018




          Twenty years ago a structured settlement company then known as Settlement Services Treasury Assignments, Inc. (“SSTAI”) was sold to a man named Charles Bradley. SSTAI declared bankruptcy four years later. Plaintiff as the liquidating agent commenced this adversary proceeding, claiming in relevant part that the sale of SSTAI had in fact been a leveraged buyout and that it had violated Rhode Island's fraudulent transfer laws.

         The focus of this ruling is plaintiff's effort to recover against SSTAI's law firm, defendant Hinckley, Allen & Snyder, LLP (“Hinckley Allen”), for certain legal fees paid to Hinckley Allen as well as for $3.5 million that passed through Hinckley Allen's escrow account as part of the sale. Both parties now seek summary judgment on all or most of these claims, and plaintiff has additionally moved to exclude the testimony of Hinckley Allen's expert witness, Maryellen Seybold. Because I conclude that Hinckley Allen was a mere conduit for the escrow payment, and that plaintiff's claims as to the legal fees are either time-barred or cannot be substantiated, I will grant Hinckley Allen's motion for summary judgment in full.


         SSTAI had a simple business model. When a victorious court plaintiff wished to receive the proceeds of a judgment over time rather than as one immediate payment, SSTAI would enter into a series of contracts between that plaintiff and the defendant in the case. The defendant would pay the judgment to SSTAI rather than to the plaintiff. SSTAI would then use this money to purchase Treasury bonds, and it would promise to pay the interest payments and redemption value of these bonds to the victorious plaintiff over time, as recurring payments and then as a final lump-sum. The face value of the bonds precisely matched SSTAI's obligations to the creditor-plaintiffs, and SSTAI promised never to sell these bonds, thus providing the creditor-plaintiffs with maximum security. Doc. #69 at 6-13 (¶¶ 13-37).

         By the 1990s, however, economic conditions had caused the true market value of these bonds to rise above their face value. Id. at 21 (¶ 73). Jonathan Pardee, who had acquired a controlling interest in SSTAI in 1993, wanted to gain access to this excess value. Id. at 21 (¶ 74). To do this, he engaged in “reverse repo” transactions, wherein SSTAI sold the Treasury bonds to financial institutions for their full market value, in exchange for an obligation to repurchase the bonds for the same price later on. See id. at 30-32 (¶¶ 115-27) The proceeds of these “reverse repo” transactions were then invested in more Treasury bonds, with face values equal to the market value of the old bonds.

         Plaintiff sees this maneuver as a sinister plot by Pardee to extract value from SSTAI in violation of the promises it had made and the fiduciary duties it owed to its creditor-plaintiffs. Doc. #68 at 21-32. Hinckley Allen, on the other hand, argues that Pardee was engaged in reasonable business transactions that did not affect the creditors' rights. Doc. #76 at 8-9.

         Regardless, Pardee eventually decided to sell the company, and by 1997 he found a buyer: Charles Bradley, the chairman of a firm called Stanwich Partners, Inc. Doc. #69 at 37 (¶¶ 152-53). Pardee, along with the other shareholders of SSTAI, sold the company to Bradley on May 20, 1997, and the complex web of transactions that comprised that sale are at the heart of this case. See id. at 41-47 (¶¶ 176-205).

         First, Bradley established a shell corporation called SST Acquisition Corp. (“SSTAC”). On May 20, 1997, SSTAI commenced a reverse repo transaction with Morgan Stanley, sending about $16.6 million in face value of Treasury bonds to Morgan Stanley in exchange for $19.4 million in cash (and a $19.4 million obligation to repurchase). Most of this $19.4 million was then loaned to three entities controlled by Bradley, including Consumer Portfolio Services, Inc. (“CPS”), which was Bradley's main subprime auto lending company. CPS received $14.5 million; the two other entities received $1.5 million and $833, 400, respectively. CPS used its $14.5 million to purchase preferred stock of SSTAC, thus seeding the shell corporation with money, and SSTAC used $13.333 million of that money to purchase the SSTAI shares of Pardee and the other shareholders.

         The remaining $1.167 million in SSTAC, along with the $2.333 million initially transferred to Bradley's two other entities, was deposited in an escrow account managed by Hinckley Allen. This was done in order to prompt Pardee to cause a company he owned, Bellevue Capital Ventures (“Bellevue”), to repay a $3.5 million loan from SSTAI. Indeed, on May 21, Bellevue did repay this loan to SSTAI, and pursuant to the terms of the escrow agreement Hinckley Allen transferred the $3.5 million to Pardee. There is some evidence in the record suggesting that the $14.5 million loan to CPS was repaid by August 5, 1997. Doc. #77-4 at 2.

         Hinckley Allen also received $14, 249.20 in legal fees from SSTAI from September 1996 through March 1997, prior to the sale. Doc. #66 at 6 (¶ 26). Subsequent to the sale, Hinckley Allen billed the selling shareholders of SSTAI for a total of $75, 000 in legal fees. This was divided between a $49, 140 invoice to Pardee, a $15, 802.50 invoice to the Jonathan H. Pardee Charitable Remainder Trust (“CRUT”), and a $10, 057.50 invoice to the Dunbar Wheeler Trust, which was associated with Ogden Sutro, the other selling shareholder beside Pardee. Id. at 7 (¶ 29).[1] The invoice to the Dunbar Wheeler Trust was paid on August 7, 1997, and the invoices to Pardee and to CRUT were paid on August 20, 1997. Id. at 8-9 (¶ 31).

         SSTAI filed for bankruptcy on June 25, 2001, and this adversary proceeding was commenced on May 3, 2002. See In re Stanwich Financial Services Corp., No. 5:01-bk-50831 (Bankr. D. Conn.). Plaintiff seeks to recover as fraudulent transfers the $3.5 million that passed through the Hinckley Allen escrow account in May 1997 and the $89, 249.20 in total legal fees Hinckley Allen received from SSTAI and its selling shareholders. See Doc. #623 to No. 5:02-ap-05023 (Bankr. D. Conn.).

         After protracted litigation in the Bankruptcy Court, plaintiff filed a motion to withdraw reference, i.e., to transfer the case to the District Court, on May 12, 2015. Judge Underhill granted the motion on July 12, 2016 in light of the Supreme Court's decision in Stern v. Marshall, 564 U.S. 462 (2011). See Doc. #1, #12. Hinckley Allen now moves for summary judgment as to all of plaintiff's claims against it (Doc. #65), while plaintiff has moved for summary judgment solely as to its claims concerning the $3.5 million escrow payment (Doc. #67). Plaintiff has also moved to exclude the testimony of defendant's expert witness, Maryellen K. Sebold. (Doc. #70).


         The principles governing the Court's review of a motion for summary judgment are well established. Summary judgment may be granted only if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(a). I must view the facts in the light most favorable to the party who opposes the motion for summary judgment and then decide if those facts would be enough-if eventually proved at trial-to allow a reasonable jury to decide the case in favor of the opposing party. My role at summary judgment is not to judge the credibility of witnesses or to resolve close contested issues but solely to decide if there are enough facts that remain in dispute to warrant a trial. See generally Tolan v. Cotton, 134 S.Ct. 1861, 1866 (2014) (per curiam); Pollard v. New York Methodist Hosp., 861 F.3d 374, 378 (2d Cir. 2017).

         Plaintiff brings this action pursuant to 11 U.S.C. § 550(a), which provides that a bankruptcy trustee who has avoided a transaction made by the debtor pursuant to one of several other provisions of the Bankruptcy Code may “recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from-(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee.” This provision allowing for recovery against subsequent, as opposed to initial, transferees may not be used to recover against “a transferee that takes for value . . . in good faith, and without knowledge of the voidability of the transfer avoided, ” or a subsequent good faith transferee thereof. 11 U.S.C. § 550(b)(1).

         The substantive provision of the Bankruptcy Code that plaintiff has invoked to avoid the transfers at issue here is § 544(b)(1), which states in relevant part that “the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim.” This reference to “applicable law” will frequently refer to state law, see In re Palermo, 739 F.3d 99, 101-02 (2d Cir. 2014), and plaintiff here has invoked two provisions of the Rhode Island Uniform Fraudulent Transfers Act (RIUFTA) to support avoiding these transactions, R.I. Gen. Laws §§ 6-16-4 and 6-16-5.

         The first provision of Rhode Island law states that “A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) With actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) Without receiving a reasonably equivalent value in exchange for the transfer or ...

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