United States District Court, D. Connecticut
In re STANWICH FINANCIAL SERVICES CORPORATION, Debtor.
BEAR STEARNS & CO., INC. and HINCKLEY, ALLEN & SNYDER, LLP, Defendants. THE LIQUIDATING AGENT OF STANWICH FINANCIAL SERVICES CORPORATION on behalf of THE LIQUIDATING ESTATE OF STANWICH FINANCIAL SERVICES CORPORATION AND ITS CREDITORS, Plaintiff,
RULING ON CROSS MOTIONS FOR SUMMARY JUDGMENT
JEFFREY ALKER MEYER UNITED STATES DISTRICT JUDGE.
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.
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.
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).
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.
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.
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).
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.
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
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). 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).
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.).
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.
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).
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).
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
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
(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 ...