APL-2017-00014
New York County Clerk’s Index Nos. 651693/10, 653357/11,
653363/11 and 653181/11
Court of Appeals
STATE OF NEW YORK
Index No. 651693/10
CORTLANDT STREET RECOVERY CORP.,
Plaintiff,
against
HELLAS TELECOMMUNICATIONS, S.À.R.L., HELLAS TELECOMMUNICATIONS
FINANCE, S.C.A., HELLAS TELECOMMUNICATIONS I, S.À.R.L.,
APAX PARTNERS, LLP and TPG CAPITAL, L.P.,
Defendants.
(Additional Caption on the Reverse and Following Page)
>> >>
BRIEF FOR PLAINTIFF-RESPONDENT
Jared B. Stamell
Andrew R. Goldenberg
STAMELL & SCHAGER, LLP
Attorneys for Plaintiff-Respondent
1 Liberty Plaza, 35th Floor
New York, New York 10006
212-566-4047
Mark C. Zauderer
Grant A. Shehigian
FLEMMING ZULACK WILLIAMSON
ZAUDERER LLP
Of Counsel
1 Liberty Plaza
New York, New York 10006
212-412-9500Date Completed: May 24, 2017
To Be Argued By:
Mark C. Zauderer
Time Requested: 30 Minutes
Index No. 653357/11
CORTLANDT STREET RECOVERY CORP.,
Plaintiff,
and
WILMINGTON TRUST COMPANY, as Trustee,
Plaintiff-Respondent,
against
DAVID BONDERMAN, JAMES COULTER, MARTIN HALUSA, JOHN MEGRUE,
GIANCARLO ALIBERTI, MATTHIAS CALICE, TPG CAPITAL-N.Y., LLP, APAX
PARTNERS, L.P., d/b/a Apax Partners of New York, TPG PARTNERS IV, L.P.,
TPG ADVISORS IV, INC., TPG GENPAR IV, L.P., TPG ADVISORS II, INC.,
T3 GENPAR II, L.P., T3 PARTNERS II, L.P., T3 PARALLEL II, L.P., APAX PARTNERS
EUROPE MANAGERS LIMITED, APAX EUROPE VI GP CO. LIMITED, APAX EUROPE
VI GP, L.P., APAX EUROPE VI-A, L.P., APAX EUROPE VI-I, L.P., TROY,
L.P. INC., APAX WW NOMINEES LTD., TPG TROY, LLC and T3 TROY, LLC,
Defendants-Appellants,
and
HELLAS TELECOMMUNICATIONS II, S.C.A., HELLAS TELECOMMUNICATIONS
CO-INVEST LTD., HELLAS TELECOMMUNICATIONS EMPLOYEES LTD.,
TCW HT-CO-INVEST I L.P. and TCW HT CO-INVEST II L.P.,
Defendants.
Index No. 653363/11
WILMINGTON TRUST COMPANY, as Trustee and
CORTLANDT STREET RECOVERY CORP.,
Plaintiffs,
against
HELLAS TELECOMMUNICATIONS FINANCE, S.C.A.
and HELLAS TELECOMMUNICATIONS I, S.À.R.L.,
Defendants.
Index No. 653181/11
CORTLANDT STREET RECOVERY CORP.,
Plaintiff,
against
HELLAS TELECOMMUNICATIONS II, S.C.A., HELLAS TELECOMMUNICATIONS
CO-INVEST LTD., HELLAS TELECOMMUNICATIONS EMPLOYEES LTD.,
TCW HT-CO-INVEST I L.P. and TCW HT CO-INVEST II L.P.,
Defendants,
HELLAS TELECOMMUNICATIONS I, S.À.R.L., HELLAS TELECOMMUNICATIONS,
S.À.R.L., APAX PARTNERS, LLP, TPG CAPITAL, L.P., DAVID BONDERMAN,
JAMES COULTER, MARTIN HALUSA, JOHN MEGRUE, GIANCARLO ALIBERTI,
MATTHIAS CALICE, TPG CAPITAL-N.Y., LLP, APAX PARTNERS, L.P., d/b/a Apax
Partners of New York, TPG PARTNERS IV, L.P., TPG ADVISORS IV, INC.,
TPG GENPAR IV, L.P., TPG ADVISORS II, INC., T3 GENPAR II, L.P., T3 PARTNERS
II, L.P., T3 PARALLEL II, L.P., APAX PARTNERS EUROPE MANAGERS LIMITED, APAX
EUROPE VI GP CO. LIMITED, APAX EUROPE VI GP, L.P., APAX EUROPE VI-A,
L.P., APAX EUROPE VI-I, L.P., TROY, L.P. INC., APAX WW NOMINEES LTD., TPG
TROY, LLC and T3 TROY, LLC,
Defendants,
and
MARGARET ELIZABETH MILLS, ALAN MICHAEL HUDSON, ERNST & YOUNG, LLP,
Administrators of Hellas Telecommunications II, S.C.A. and BANK OF
NEW YORK MELLON, Common Depository for the Global Subordinated Notes
of Hellas Telecommunications II, S.C.A.,
Additional Defendants.
DISCLOSURE STATEMENT PURSUANT TO § 500.1(f) OF
THE RULES OF THE COURT OF APPEALS
Pursuant to Rule 500.1(f) of the Rules of Practice of the Court of Appeals
State of New York, Plaintiff-Respondent Wilmington Trust Company (“WTC”)
certifies that the following are parents, subsidiaries and/or affiliates of WTC:
WTC is a wholly owned subsidiary of M&T Bank Corporation.
i
TABLE OF CONTENTS
PRELIMINARY STATEMENT ............................................................................... 1
COUNTERSTATEMENT OF QUESTIONS PRESENTED .................................... 5
COUNTERSTATEMENT OF FACTS ..................................................................... 6
A. Appellants Caused Their Alter Egos to Borrow €1 billion and
Divert the Loan Proceeds to Themselves ......................................................... 6
B. The Judgment and Related Proceedings ........................................................... 8
ARGUMENT ............................................................................................................. 9
I. The First Department Correctly Held that the Trustee has Standing
to Prosecute Remedies in Accordance With the Indenture ................................. 9
A. Appellants’ Unnatural Reading of § 6.03 Does Not Reconcile
with the Plain Meaning of “Any Available Remedy” ....................................10
B. The Trustee Is Authorized to Pursue All Remedies to Collect the
Notes and Enforce the Notes and Indenture ...................................................14
C. Appellants’ Cases Actually Support, and Do Not Undermine, the
Trustee’s Authority .........................................................................................18
D. Other Provisions in the Indenture Do Not Compel Any Different
Interpretation of the Trustee’s Authority ........................................................20
E. The Trustee has Authority to Enforce the Notes and Indenture
and “Pursue Any Available Remedy” Under § 6.03 Regardless
of Whether Noteholders Gave Direction to the Trustee .................................21
II. The First Department Correctly Held that the Complaint Sufficiently
States a Cause of Action Against Appellants Under an Alter Ego/Veil
Piercing Theory ..................................................................................................22
A. The Trustee’s Detailed Allegations Satisfy The Liberal Notice
Pleading Standard For Alter Ego Liability In New York ...............................22
ii
B. Appellants Attempt to Expand the Notice Pleading Standard
for Alter Ego Liability ....................................................................................27
C. Alter Ego/Veil Piercing Claims Alleging Appellants, the Issuer
and Guarantor are a Single Entity Do Not Duplicate Fraudulent
Conveyance Claims that the Issuer Transferred Loan Proceeds
to Appellants for No Consideration ................................................................32
CONCLUSION ........................................................................................................33
NEW YORK STATE COURT OF APPEALS
CERTIFICATE OF COMPLIANCE .................................................................34
iii
TABLE OF AUTHORITIES
Page(s)
Cases
2406-12 Amsterdam Assocs. LLC v. Alianza LLC,
136 A.D.3d 512 (1st Dep’t 2016) ................................................................. 23, 27
ABN AMRO Bank, N.V. v. MBIA Inc.,
17 N.Y.3d 208 (2011) ......................................................................................... 32
Aetna Cas. & Sur. Co. v. Merchants Mut. Ins. Co.,
84 A.D.2d 736 (1st Dep’t 1981) ......................................................................... 29
AG Capital Funding Partners, L.P. v. State St. Bank & Trust Co.,
11 N.Y.3d 146 (2008) ......................................................................................... 11
Baby Phat Holding Co., LLC v. Kellwood Co.,
123 A.D.3d 405 (1st Dep’t 2014) ................................................................. 24, 31
Banker’s Tr. Co. v. Hale & Kilburn Corp.,
84 F.2d 401 (2d Cir. 1936) ................................................................................. 31
Bd. of Managers of Caton Court Condo. v. Caton Dev. LP,
2013 WL 6182944 (Sup. Ct., Kings Cty. 2013) ................................................. 28
Bluebird Partners, L.P. v. First Fid. Bank, N.J.,
248 A.D.2d 219 (1st Dep’t 1998) ....................................................................... 13
Central Bank of Denver, N.A. v. Deloitte & Touche,
928 P.2d 754-56 (Colo. App. 1996) ................................................................... 20
Chase Manhattan Bank (Nat. Ass’n) v. 264 Water St. Associates,
174 A.D.2d 504 (1st Dep’t 1991) ....................................................................... 32
Cont’l Bank, N.A. v. Caton,
1990 WL 129452 (D. Kan. 1990) ................................................................. 19, 28
Cortlandt St. Recovery Corp. v Hellas Telecom., S.à.r.l.,
142 A.D. 3d 833 (1st Dep’t 2016) ...............................................................passim
D. Klein & Son, Inc. v. Good Decision, Inc.,
147 F. App’x 195 (2d Cir. 2005) .................................................................. 30, 31
iv
Feldbaum v. McCrory Corp.,
1992 WL 119095 (Del Ch. 1992) ................................................................. 17, 18
Foley v. D’Agostino,
21 A.D.2d 60 (1st Dep’t 1964) ........................................................................... 24
Hearn 45 St. Corp. v. Jano,
283 N.Y. 139 (1940) ........................................................................................... 12
Holme v. Glob. Minerals & Metals Corp.,
2009 WL 387034 (Sup. Ct., N.Y. Cty 2009) ................................................ 23, 27
JSC Foreign Econ. Ass’n Technostroyexport v. Int’l Dev. & Trade
Servs.,
295 F. Supp. 2d 366 (S.D.N.Y. 2003) ................................................................ 33
Lange v. Citibank, N.A.,
2002 WL 2005728 (Del. Ch. 2002) .............................................................. 17, 18
LaSalle Nat’l Bank v. Perelman,
141 F. Supp. 2d 451 (D. Del. 2001).................................................................... 31
Ledy v. Wilson,
38 A.D.3d 214 (1st Dep’t 2007) ......................................................................... 23
Moss v. Garcia-Chamorro,
110 A.D.3d 475 (1st Dep’t 2013) ....................................................................... 32
Open Door Foods, LLC v. Pasta Machines, Inc.,
136 A.D.3d 1002 (2d Dep’t 2016) ...................................................................... 30
Premier Bank v. Tierney,
114 F. Supp. 2d 877 (W.D. Mo. 2000) ............................................................... 20
Quadrant Structured Prod. Co. v. Vertin,
23 N.Y.3d 549 (2014) ..................................................................................passim
Regions Bank v. Blount Parrish & Co.,
2001 WL 726989 (N.D. Ill. 2001) ...................................................................... 19
Secon Serv. Sys., Inc. v. St. Joseph Bank & Trust Co.,
855 F.2d 406 (7th Cir. 1988) .............................................................................. 31
v
Small v. Sullivan,
157 N.E. 261 (1927) ........................................................................................... 31
Taberna Preferred Funding II, Ltd. v. Advance Realty Grp. LLC,
2014 N.Y. Misc. LEXIS 4339 (Sup. Ct., N.Y. Cty. 2014) ................................. 12
Tap Holdings, LLC v. Orix Finance Corp.,
109 A.D.3d 167 (1st Dep’t 2013) ........................................................... 27, 28, 29
TNS Holdings, Inc. v. MKI Sec. Corp.,
92 N.Y.2d 335, 703 N.E.2d 749 (1998).............................................................. 30
U.S. Bank, N.A. v. U.S. Timberlands Klamath Falls, LLC,
864 A.2d 930 (Del. Ch. 2004) ................................................................ 15, 18, 19
Walkovsky v. Carlton,
18 N.Y.2d 414 (1966) ......................................................................................... 29
In re Washington Public Power Supply System Securities Litigation,
623 F. Supp. 1466 (W.D. Wash. 1985) .............................................................. 20
Wilmington Trust Co. v. Hellas Telecommunications, S.à.r.l.,
2016 WL 7339112 (S.D.N.Y. 2016) ................................................................... 28
Wm. Passalacqua Builders v. Resnick Developers South, Inc.,
933 F.2d 131 (2d Cir. 1991) ............................................................................... 33
Statutes
CPLR 3013 ........................................................................................................passim
CPLR 3016 ............................................................................................................... 23
Other Authorities
N.Y. Prac., Contract Law § 18:6 .............................................................................. 32
1
PRELIMINARY STATEMENT
“An indenture is essentially a written agreement that bestows legal title of
the securities in a single Trustee to protect the interests of individual investors who
may be numerous or unknown to each other.” Quadrant Structured Prod. Co. v.
Vertin, 23 N.Y.3d 549, 555 (2014). “The contract, or ‘indenture,’ identifies the
rights of all parties concerned, as well as the duties of the trustee (a third-party
administrator), the obligations of the borrower, and the remedies available to the
investors.” Id. (citation omitted).
The primary issue raised in this appeal is whether Plaintiff-Respondent
Wilmington Trust Company (the “Trustee”), a trustee appointed pursuant to that
certain trust indenture (the “Indenture”), has authority under the Indenture to seek
repayment of the subject notes (the “Notes”) from Defendants-Appellants – the
entities and individuals that owned and/or controlled the issuer and guarantor of
the Notes and, immediately after their issuance, improperly received the proceeds
from the sale of the Notes. Through its Complaint, the Trustee seeks to pursue
fraudulent conveyance, breach of contract, alter ego and unjust enrichment claims
against Appellants (the “Collection and Enforcement Claims”), to recover amounts
due under the defaulted Notes and Indenture for the benefit of all holders of the
Notes (the “Noteholders”).
2
The Collection and Enforcement Claims brought by the Trustee against
Appellants plainly fit within the purpose and intent of the Indenture. Section 6.03
of the Indenture (remedies clause) authorizes to the Trustee to prosecute these
claims providing, in pertinent part:
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal,
premium, if any, and interest on the Notes or to enforce the
performance of any provision of the Notes or this Indenture.
[A485 (citations omitted)] Section 6.03 empowers the Trustee to pursue any
remedy to collect amounts due under the Notes, authorizing the Trustee to
prosecute each of the Collection and Enforcement Claims. Appellants point to no
authority authorizing Noteholders to pursue these claims or to bar enforcement of
these claims which would, in effect, render the Indenture meaningless.
In addition to a remedies clause, like § 6.03 here, bond indentures typically
include a separate “no-action” clause which imposes certain prerequisites on suits
by individual noteholders to discourage suits by minority bondholders in favor of a
single action initiated by an indenture trustee. In Quadrant, this Court held that
when an indenture authorizes a trustee to enforce the indenture and securities (as is
the case here), only the trustee, and not individual bondholders, is authorized to
pursue claims “whether those claims be contractual in nature and based on the
indenture agreement, or arise from the common law and statute.” Quadrant, 23
N.Y.3d at 561.
3
Here, through the Collection and Enforcement Claims, the Trustee seeks to
collect amounts owed on the Notes and enforce the terms of the Notes and
Indenture, as authorized in § 6.03, and for no other damages. As the Appellate
Division First Department (the “First Department”) correctly held:
This provision [§6.03] confers standing on the Trustee to pursue, not
only the breach of contract claims, but also the fraudulent conveyance
and other aforementioned claims, which seek recovery solely of the
amounts due under the notes, for the benefit of all noteholders on a
pro rata basis, as a remedy for an alleged injury suffered ratably by all
noteholders by reason of their status as noteholders.
Cortlandt St. Recovery Corp. v Hellas Telecom., S.à.r.l., 142 A.D. 3d 833, 833-34
(1st Dep’t 2016). In accord with this Court’s analysis in Quadrant of the plain
meaning of an indenture (Quadrant, 23 N.Y.3d at 560), the First Department’s
holding gives effect to the plain meaning of § 6.03, which authorizes the Trustee to
“pursue any available remedy” to collect the amounts due under the Notes. There
is no limitation as to the parties the Trustee may pursue, and the sole limitation as
to remedy is that it be available to the Trustee.
The other issue raised in this appeal is whether the Trustee’s Complaint
sufficiently states a cause of action against Appellants under an alter ego/veil
piercing theory, by which Appellants and the issuer and guarantor of the Notes are
deemed a single entity, so that Appellants are liable on the Notes.
Appellants are private equity investment funds and their individual
principals, who describe themselves as a consortium, under the control of global
4
private equity groups TPG Capital (“TPG”) and Apax Partners (“Apax” and
together with TPG and Appellants, the “Consortium”), which owned and
controlled the issuer of the Notes, Hellas Finance Telecommunications S.C.A.
(“Hellas Finance”), and guarantor of the Notes, Hellas Telecommunications I,
S.à.r.l. (“Hellas I”). The Complaint alleges the Consortium also owned and
controlled the ultimate parent of Hellas Finance and Hellas I, Hellas
Telecommunications, S.à.r.l. (“Hellas”).
The Trustee alleges that Appellants, operating as the Consortium, dominated
and controlled Hellas Finance and Hellas I, causing Hellas Finance to sell the
Notes to investors pursuant to an Offering Memorandum (the “OM”) and then
immediately transfer the loan proceeds (hundreds of millions of dollars) to
Appellants, leaving Hellas Finance and Hellas I insolvent and unable to satisfy
their debts to Noteholders under the Notes and Indenture. The First Department
concluded that WTC’s alter-ego/veil-piercing cause of action is supported by well-
pleaded allegations in the Complaint (particularly pre-answer and pre-discovery)
that reference exhibits attached to the Complaint, including the Indenture, Notes,
OM and references to SEC filings:
We also find that, in view of the allegation that defendants controlled
the issuer of the notes and caused the issuer to divest itself of the
proceeds of the sale of the notes almost immediately after the notes
were sold, thereby rendering the issuer insolvent, the complaint
sufficiently states a cause of action against these defendants under a
5
veil-piercing theory, at least at this pre-answer, pre-discovery stage.
Cortlandt, 142 A.D. 3d at 834.
The First Department’s decision is consistent with New York’s liberal notice
pleading standard for alter ego/veil-piercing liability that requires only that the
allegations are sufficiently particular to apprise the court and parties of the subject
matter of the controversy. Appellants acknowledge that “notice pleading” applies
pursuant to CPLR 3013 (App. Br. at 27), but argue that it is “wholly conclusory” to
plead “the Appellants as a single entity” and to label them together as the “Private
Equity Defendants.” Id. at 3. However, Appellants’ argument belies their own
description of themselves as a Consortium acting together as a single entity.
[A825 (“… our principal owners have been a consortium of private equity
investment funds affiliated with, or advised and managed by Apax or TPG. Apax
and TPG manage funds totaling approximately $20 billion and over $14 billion
….”); see also A814, A825-826, A861, A886]. Significantly, while Appellants
complain about so-called “group pleading,” they do not, and cannot, dispute that
the Trustee’s allegations provide notice of the basis for their liability – the sole
requirement of CPLR 3013.
COUNTERSTATEMENT OF QUESTIONS PRESENTED
1. Does WTC have standing to prosecute the Collection and
Enforcement Claims against Appellants, when the Indenture specifically authorizes
6
the Trustee to pursue any remedy to collect payment of the Notes and to enforce
the terms of the Notes and Indenture?
2. Does the Complaint sufficiently state a cause of action against
Appellants under an alter-ego/veil-piercing theory at this pre-answer, pre-discovery
stage, when the Complaint alleges that Appellants, as part of a self-described
Consortium under global parents TPG and Apax, controlled and dominated the
issuer of the Notes, and caused the issuer to divest itself of the proceeds of the sale
of the Notes immediately after the Notes were sold, thereby rendering the issuer
insolvent, and unable to satisfy its obligations to Noteholders under the Notes and
Indenture?
COUNTERSTATEMENT OF FACTS
A. Appellants Caused Their Alter Egos to Borrow €1 billion and Divert the
Loan Proceeds to Themselves
In June 2005, with an initial investment of €50 million, Appellants acquired
a profitable, nearly debt-free company called TIM Hellas Telecommunications
S.A. (“TIM Hellas”). [A544-545, (Compl. ¶¶ 106, 109-110)] To own TIM Hellas,
Appellants created a complex, multi-company corporate group of shell companies,
the “Hellas Group,” which included Hellas Finance and Hellas I,1 and as directed
by Appellants, the Hellas Group borrowed heavily. [Id.] Appellants owned the
1 In addition to Hellas Finance and Hellas I, the Hellas Group includes Hellas and Hellas
Telecommunications II, S.à.r.l. (“Hellas II”).
7
Hellas Group as part of “a consortium of private equity funds affiliated with, or
advised and managed by [their ultimate parent companies] Apax and TPG.”
[A256; A528-529, A531, (Compl. ¶¶ 29, 36, 47)]
By year-end 2005, the Hellas Group had built up debts of €1.6 billion and its
financial statements showed only €40 million in equity. [A546, (Compl. ¶ 120)]
By September 30, 2006, debts had increased to €1.94 billion and shareholders’
equity was only a nominal €15.7 million. [A548, (Compl. ¶ 131)] On December
18, 2006, the auditors of the Hellas Group appraised the value of one of its shell
companies, Hellas II, which was going to borrow €1.2 billion in three days, at a
measly €2.8 million. [A550, (Compl. ¶¶ 140-141)]
On December 21, 2006, the Notes were issued by Hellas Finance and
guaranteed by Hellas I to raise €200 million. [A524, (Compl. ¶ 8)] The
transaction was governed by the OM and Indenture and was part of a larger sale of
notes by other Hellas Group companies. [A525, A529, (Compl. ¶¶ 10, 33)] While
Appellants describe the transaction as a “recapitalization,” in effect, the transaction
was designed to improperly distribute loan proceeds to Appellants by redeeming
equity securities from Hellas, Hellas I and Hellas II referred to as Convertible
Preferred Equity Certificates (“CPECs”). [A545, A551 (Compl. ¶¶ 113, 142)]
None of the loan proceeds transferred to Appellants were used to repay debt,
even though Hellas was choking on debt, but instead were paid to Appellants as a
8
dividend at a time when the Hellas Group had no profits, no retained earnings and
no distributable reserves that could properly permit a dividend payment, which
rendered the Hellas Group (including Hellas Finance and Hellas I) insolvent and
unable to repay the money borrowed under the Notes. [A549-551, A552, A557,
(Compl. ¶¶ 136-139, 142, 145, 177)] Appellants, as a Consortium, masterminded
this Note transaction, effectuated through their control of the Hellas Group,
causing the Hellas Group to borrow €1.5 billion (€200 million by Hellas Finance)
and immediately fund the redemption, leaving the Hellas Group (and Hellas
Finance and Hellas I, in particular) insolvent and unable to satisfy their debts as
they became due. [A551, A557, (Compl. ¶¶ 142, 177)]
In pursuing the Collection and Enforcement Claims against Appellants, the
Trustee – consistent with the plain meaning of § 6.03 of the Indenture – is fulfilling
its fundamental role to enforce the Notes and the Indenture and to recover the loss
to Noteholders caused by Appellants’ violation of the Indenture.
B. The Judgment and Related Proceedings
Following default by Hellas Finance and Hellas I under the Notes and
Indenture, in a related summary judgment action (Index No. 653363/11), the IAS
Court entered judgment in favor of the Trustee in excess of $565 million, which
with interest, now exceeds $700 million (the “Judgment”). Upon entry of the
Judgment, Hellas Finance and Hellas I (collectively, the “Judgment Debtors”)
9
declared bankruptcy. This action, Index No. 653357/11 (“Cortlandt II”), was filed
simultaneously by the Trustee, as indenture trustee, to recover the assets looted
from the Judgment Debtors by Appellants, and now to recover on the Judgment.
[A524, (Compl. ¶¶ 7, 9)]
Through the order entered on September 17, 2014 [Doc. No. 199] (the “Sept.
2014 Order”), the IAS Court granted Appellants’ motion to dismiss the Cortlandt II
action, which was reversed by the First Department. [A36-37] The IAS Court had
held that the Indenture did not authorize the Trustee to prosecute the causes pled in
the Complaint [id.] and dismissed the fourth cause, alter ego, for failure to state a
claim on the grounds that the allegations were insufficient. [A37 n.12] The First
Department disagreed and reversed these two holdings. Cortlandt, 142 A.D. 3d at
833-34.
ARGUMENT
I. The First Department Correctly Held that the Trustee has Standing to
Prosecute Remedies in Accordance With the Indenture
The First Department correctly held that:
Supreme Court erred in dismissing the complaint in the action bearing
Index No. 653357/11 to the extent that the complaint in that action has
been filed by plaintiff Wilmington Trust Company, as indenture
trustee (the Trustee).
Cortlandt, 142 A.D. 3d at 833.
10
In the instant action, the Trustee seeks to recover the amounts due under the
Notes and reduced to that certain final, non-appealable Judgment through the
prosecution of remedies available to it under New York law, i.e., the Collection
and Enforcement Claims.
As the First Department acknowledged:
Significantly, the Trustee does not assert causes of action for
fraudulent misrepresentation or other claims seeking recovery for
particular injuries unique to individual noteholders, nor does the
Trustee seek a measure of damages other than the amounts due under
the notes.
Id. at 834.
Following well established law, the First Department analyzed the language
in the Indenture conferring standing on the Trustee, and the types of remedies the
Trustee seeks to prosecute in the Collection and Enforcement Claims, and correctly
confirmed the Trustee’s standing to prosecute these claims against Appellants to
recover on the Judgment entered on the Notes.
A. Appellants’ Unnatural Reading of § 6.03 Does Not Reconcile with the
Plain Meaning of “Any Available Remedy”
The Trustee and Appellants begin with the same premise – the enforcement
of the plain language of the Indenture. Quadrant, 23 N.Y.3d at 550 (citing
Greenfield v. Philles Records, 98 N.Y.2d 562, 569 (2002) and Vermont Teddy Bear
Co. v. 583 Madison Realty Co., 1 N.Y.3d 470, 475 (2004)); see also AG Capital
11
Funding Partners, L.P. v. State St. Bank & Trust Co., 11 N.Y.3d 146, 156 (2008).2
Thereafter, the parties diverge.
Section 6.03 of the Indenture provides as follows:
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal,
premium, if any, and interest on the Notes or to enforce the
performance of any provision of the Notes or this Indenture.
After default (which Appellants do not dispute has occurred and Judgment entered
here), § 6.03 specifically authorizes the Trustee to pursue “any available remedy”
to collect on the Notes. “Remedy” has been defined as follows:
Remedy n. (13c) 1. The means of enforcing a right or preventing or
redressing a wrong; legal or equitable relief. — Also termed civil
remedy. 2. Remedial action. 3. A right by which an aggrieved party
may seek relief without resort to a tribunal. Black’s Law Dictionary
(10th ed. 2014).
The commentary accompanying the “remedy” definition states:
A remedy is anything a court can do for a litigant who has been
wronged or is about to be wronged. The two most common remedies
are judgments that plaintiffs are entitled to collect sums of money
from defendants (damages) and orders to defendants to refrain from
their wrongful conduct or to undo its consequences (injunctions).
(citing Douglas Laycock, Modern American Remedies 1 (4th ed.
2010) (emphasis added)).
2Appellants cite these cases for the propositions that an indenture is a contract and interpreted
under contract law, clear and unambiguous contract language must be enforced according to the
plain meaning of its words, and an indenture trustee’s rights and duties are defined in the
indenture. We agree.
12
The Collection and Enforcement Claims constitute remedies to claw back
money from third parties to collect on the Notes/Judgment. New York Debtor &
Creditor Law (“DCL”) provides unsatisfied creditors, such as the Trustee, with
statutory remedies to pursue transferees such as Appellants. Fraudulent
conveyance claims constitute an “enforcement tool that ensures a debtor’s assets
are available to satisfy his obligations to creditors.” Taberna Preferred Funding II,
Ltd. v. Advance Realty Grp. LLC, 2014 N.Y. Misc. LEXIS 4339, at *29-30 (Sup.
Ct., N.Y. Cty. 2014) (without the DCL and other remedies to ensure “creditors’
rights manifest into a real recovery,” a party is left with a “worthless,
unrecoverable judgment”).
The purpose of an action under the DCL is to require the debtor to recover
fraudulently transferred property so that the property may be used to satisfy the
debt owed to the creditor. See Hearn 45 St. Corp. v. Jano, 283 N.Y. 139, 142-43
(1940) (“The object of [the DCL] is to enable a creditor to obtain his due despite
efforts on the part of a debtor to allude payment.” Fraudulent conveyance claims
allow a creditor to collect on his debt by “undo[ing] the transfer of title so as to
bring within the ambit of execution those assets upon which the creditor is rightly
entitled to levy”).
The Trustee’s other claims are for legal and equitable relief that unsatisfied
creditors regularly pursue under New York law against insiders of a dissolved or
13
insolvent debtor. Where, as here, Appellants stripped the hundreds of millions of
dollars raised through the issuance of the Notes from companies they owned or
controlled, a creditor, such as the Trustee, armed with New York law, may pursue
fraudulent conveyances, alter ego and other available remedies to secure
repayment.
In the face of the breadth of claims that “remedy” encompasses, Appellants
want to limit “remedy” in § 6.03 solely to suits against the issuer and guarantor of
the Notes for claims under the terms and conditions of the Notes, thereby
preventing actions against the transferees of the proceeds from the sale of the
Notes (i.e., Appellants). Such a reading defies logic and adds words that are not in
§ 6.03, and would provide license to fraudsters to divert assets from the issuer to
themselves without a remedy for their wrongful conduct.
Well known rules of contract interpretation require courts to enforce the
plain meaning of the contract language. Bluebird Partners, L.P. v. First Fid. Bank,
N.J., 248 A.D.2d 219, 224 (1st Dep’t 1998) (“The task of the court is to enforce the
plain meaning of an unambiguous agreement…”). Here, the plain meaning of §
6.03 supports the Trustee’s independent standing to bring the Collection and
Enforcement Claims, as it expressly empowers the Trustee to pursue “any
available remedy” (without limiting such remedy solely to the terms and conditions
of the Notes) against any party (§ 6.03 contains no words limiting the parties from
14
whom the Trustee may seek remedy), including Appellants, to recover the amounts
due (i.e., principal, premium and interest) on the Notes and enforce the Indenture
and Notes or enforce any provision of the Notes and Indenture.
Appellants improperly graft extra-textual language into the Indenture in their
misplaced effort to prohibit the Trustee from suing any party but the issuer and
guarantor of the Notes for recovery. The Trustee has already sued these obligors
and has an unsatisfied Judgment on the Notes against them. The Judgment
Debtors have no ability to pay the Judgment because issuance of the Notes and use
of the sale proceeds to redeem Appellants’ equity securities, stripped the Judgment
Debtors’ assets. Reading the language to limit the Trustee’s standing solely
against the Judgment Debtors would permit the wholesale diversion of a bond
issuer’s assets to insiders, by eviscerating the indenture trustee’s recovery
remedies. It would be inconsistent with both the clear language of the Indenture
and would frustrate its purpose.
B. The Trustee Is Authorized to Pursue All Remedies to Collect the
Notes and Enforce the Notes and Indenture
The Trustee necessarily has standing to assert all rights and pursue all
remedies collectively for the benefit of all Noteholders under the Indenture, in
particular where, as here, noteholders do not have the right to assert claims to
enforce notes and/or indentures. The alternative would lead to what a court has
declared to be an “absurd result,” where neither noteholders nor the trustee would
15
have authority to assert causes of action to collect and enforce the notes and
indenture. U.S. Bank, N.A. v. U.S. Timberlands Klamath Falls, LLC, 864 A.2d
930, 940 (Del. Ch. 2004).
Appellants’ argument, in substance, is that no one should have the authority
to assert causes of action against them. But the Indenture expressly grants the
Trustee direct standing and authority to prosecute the Collection and Enforcement
Claims. Section 6.03 of the Indenture states the Trustee may “pursue any available
remedy” to collect on the Notes “or to enforce the performance of any provision of
the Notes or this Indenture.”
This Court has interpreted the standing issue herein from the context of a
bondholder’s standing to sue in Quadrant. 23 N.Y.3d at 561-62. A no-action
clause (§ 6.06 in the Indenture here [A486]) prevents individual noteholders from
suing on claims which a trustee is authorized to pursue. Quadrant, 23 N.Y. 3d at
561-62. In Quadrant, this Court held that when such a clause “refers to both the
indenture and the securities [here, the Notes are securities] the securityholder’s
claims are subject to the terms of the no-action clause, whether those claims be
contractual in nature and based on the indenture agreement, or arise from common
law and statute.” Id. at 561.
Here, the no-action clause in the Indenture (§ 6.06) specifically incorporates
the remedies clause (§ 6.03) and, a fortiori, where the Trustee takes action,
16
necessarily bars the Noteholders from bringing claims and remedies arising under
both the Indenture and the Notes, as stated in § 6.03. [A486] In addition, as a
corollary, § 6.03 of the Indenture authorizes the Trustee to enforce the Indenture
and Notes where § 6.06 prohibits noteholders from enforcing the Indenture and
Notes. [A485] Thus, applying Quadrant’s reasoning, §§ 6.03 and 6.06 confer
authority on the Trustee to prosecute the Collection and Enforcement Claims
against all parties, including Appellants, for the benefit of all Noteholders ratably.
Otherwise, there would be no party to pursue those claims to collect on the Notes.
In both Quadrant and the First Department’s decision, the Courts expressly
recognized this relationship between a trustee’s authority and the “no-action”
limitation on noteholders and analyzed two Delaware court decisions interpreting
indentures under New York law, Feldbaum v. McCrory Corp., 1992 WL 119095
(Del Ch. 1992) and Lange v. Citibank, N.A., 2002 WL 2005728 (Del. Ch. 2002).
In Feldbaum and Lange – cited by the Court in Quadrant – the courts denied
individual noteholders standing to assert claims derived from violations of the
indentures, concluding that claims, including fraudulent conveyance claims, can be
“prosecuted by the trustees representing the bondholders as a group....” Feldbaum,
1992 WL 119095 at *8; Lange, 2002 WL 2005728 at *7 (citing Feldbaum and
concluding that fraudulent conveyance claims brought by noteholders may be
asserted by the indenture trustee).
17
The Feldbaum court held that the trustee in the first instance, not the
bondholders, had standing to pursue claims against non-parties:
No-action clauses address these twin problems by delegating the right
to bring a suit enforcing rights of bondholders to the trustee, or to the
holders of a substantial amount of bonds, and by delegating to the
trustee the right to prosecute such a suit in the first instance.
Feldbaum, 1992 WL 119095, *6. The decision characterized fraudulent
conveyance claims as claims that injure all bondholders equally and held that “it is
clear that they can be prosecuted by the trustees….” Id. at *8.
The Lange court similarly held that the indenture trustee in the first instance,
not the individual bondholders, had standing to sue non-parties to the bonds and
indenture for fraudulent conveyance claims and the bondholders’ failure to comply
with the prerequisites set forth in the “no-action” clause prevented them from
bringing such actions. Lange, 2002 WL 2005728 at *5-7.
Lange and Feldbaum each hold that fraudulent conveyance and other similar
claims that are not unique to particular injuries suffered by a bondholder (such as
inducement and misrepresentation claims discussed below), and seek to secure
payment of amounts due under the bonds for the benefit of all Noteholders ratably,
belong to the Trustee to prosecute in the first instance.
While Lange and Feldbaum focus on the interpretation of “no-action”
clauses in an indenture which limit the rights of individual noteholders to bring
18
actions, the correlative purpose of the no-action clause is to ensure that the trustee
will be able to bring actions to benefit all noteholders as a group without dilution.
Taking the analysis one step further, the court in U.S. Bank affirmatively
held that an indenture trustee has standing to assert non-contractual claims,
including claims for avoidance of fraudulent transfers, under an “any available
remedy” provision like § 6.03 of the Indenture. U.S. Bank, 864 A.2d at 940-42.
The court expounded on the analysis in Feldbaum, holding that “valid policy
reasons favor” the interaction between the no-action clause (§ 6.06 of the Indenture
here) and remedies clause (§ 6.03 of the Indenture here). Id. at 942 n.39 (“[I]t is
more sensible to read sections 6.3 and 6.6 of the Indenture in concert. Since
section 6.6 requires noteholders seeking to assert non-contractual claims to make
demand upon the Trustee, that section must implicitly recognize the power of the
Trustee to bring the claims…”).
C. Appellants’ Cases Actually Support, and Do Not Undermine, the
Trustee’s Authority
The Trustee does not seek to enforce or collect on claims belonging to
individual Noteholders (e.g., securities fraud, fraud in the inducement or
misrepresentation) for their particular unique injuries. Rather, the Trustee seeks to
exercise “any available remedy” to “collect payment” on the Notes (which benefits
all Noteholders ratably for their general injury of nonpayment on the Notes), as
empowered by § 6.03. The Collection and Enforcement Claims constitute just
19
such remedies. The cases cited by Appellants actually support, not refute, the
Trustee’s position that the Collection and Enforcement Claims belong to the
Trustee, not the Noteholders.
Appellants cite to cases from other jurisdictions that do not involve
recovering, collecting or enforcing payment of the underlying notes, rather, they
involve trustees pursuing other claims that belong to individual bondholders for
their particular, unique injuries. For example, in Regions Bank v. Blount Parrish &
Co., 2001 WL 726989, at *2 (N.D. Ill. 2001), the indenture trustee filed a fraud
complaint against an underwriter of bonds based on misrepresentations in a
prospectus. In Cont’l Bank, N.A. v. Caton, 1990 WL 129452, at *1-*2 (D. Kan.
1990), the indenture trustee sued on behalf of the issuer and the purchasers/holders
of revenue bonds against the underwriters for misrepresentations and omissions,
securities fraud, RICO and fraud. Similarly, in Premier Bank v. Tierney, 114 F.
Supp. 2d 877, 879 (W.D. Mo. 2000), the indenture trustee sued a director of the
bonds’ guarantor in tort for negligence in failing to disclose the guarantor’s true
financial condition, which the court held constituted “the bondholders’
freestanding tort claims.” Id. at 881.3
3Appellants also cite Central Bank of Denver, N.A. v. Deloitte & Touche, 928 P.2d 754-56 (Colo.
App. 1996) (App. Br. 19 n.8), where the indenture related to municipal specific revenue bonds
containing restrictions on sources of payment regardless of default under these bonds. Id. at
755-56. The Indenture here does not contain any comparable provisions, which the court
exclusively relied upon to limit recovery under the remedies clause. Id. at 755-57. In addition,
20
Accordingly, Appellants conflate the Trustee’s authority to pursue claims
under § 6.03 with individual claims belonging to individual Noteholders for their
particular, unique injuries. As the First Department correctly observed,
“[s]ignificantly, the trustee does not assert causes of action for fraudulent
misrepresentation or other claims seeking recovery for particular injuries unique to
individual noteholders, nor does the trustee seek a measure of damages other than
the amounts due under the notes.” Cortlandt, 142 A.D.3d at 834.
D. Other Provisions in the Indenture Do Not Compel Any Different
Interpretation of the Trustee’s Authority
Appellants further argue that other sections in the Indenture limit the
Trustee’s authority under § 6.03. App. Br. at 19-20. Appellants point to § 14.07
[A507] which concerns the personal liability of the corporate officers of the Hellas
Group, and § 14.09 [A507-A508] which concerns the jurisdiction and venue of
courts in New York over disputes. However, neither section concerns the authority
of the Trustee under the Indenture, or otherwise changes the clear, unequivocal and
plain language in § 6.03 authorizing the Trustee to “pursue any available remedy to
collect … or to enforce [the Notes or Indenture].”
of particular significance, the Central Bank of Denver court held that the injuries complained of
“would vary from plaintiff to plaintiff depending on if and when each bondholder relied on
defendant’s audit information.” Id. at 758. Appellants also cite a decision in which a trustee had
standing to pursue securities fraud, In re Washington Public Power Supply System Securities
Litigation, 623 F. Supp. 1466, 1483 (W.D. Wash. 1985), because of specific language in the
indenture.
21
In fact, the Indenture contains are other clauses which do concern the duties
and rights of the Trustee that reinforce the authority granted to the Trustee by §
6.03. For example, § 7.01(a) entitled “Duties of Trustee” [A488] states:
If an Event of Default has occurred and is continuing, the Trustee will
exercise such of the rights and powers vested in it by this Indenture,
and use the same degree of care and skill in its exercise, as a prudent
person would exercise or use under the circumstances in the conduct
of such person’s own affairs. (emphasis added).
The inclusion of broader language in describing claims in §§ 14.07 and
14.09 does not limit the Trustee’s standing granted under § 6.03. Based upon (i)
the clear and plain language of § 6.03, (ii) the persuasive legal precedent, (iii) the
types of remedies the Trustee seeks to prosecute in the Collection and Enforcement
Claims, (iv) the general type of injury suffered by all Noteholders equally by
nonpayment of the Notes, rather than a particular unique injury to individual
Noteholders, and (v) the measure of damages the Trustee seeks to collect (i.e. the
Judgment/Notes), § 6.03 of the Indenture confers standing on the Trustee to
Prosecute the Collection and Enforcement Claims.
E. The Trustee has Authority to Enforce the Notes and Indenture and
“Pursue Any Available Remedy” Under § 6.03 Regardless of
Whether Noteholders Gave Direction to the Trustee
Appellants argue no proper authorizing direction was given by Noteholders
to the Trustee under § 6.05 of the Indenture to bring fraudulent conveyance and
22
other claims against Appellants. App. Br. at 22-24. Section 6.05 of the Indenture
provides:
Holders of a majority in aggregate principal amount of the then
outstanding Notes may direct the time, method and place of
conducting any proceeding for exercising any remedy available to the
Trustee or exercising any trust or power conferred upon it.
[A485]
Significantly, § 6.05 does not create a prerequisite to act on the Trustee.
Section 6.05 is permissive – “Holders . . . may direct . . . .” [Id.] Section 6.05
directions constitute a common means by which holders, who have the financial
stake in the outcome, guide the actions of trustees, who are agents of the
indentures, in pursuing remedies for the ultimate benefit of the noteholders. The
existence or not of a direction, regardless of the validity or the Trustee’s
acceptance, does not alter the Trustee’s independent standing and authority to
pursue all remedies under § 6.03, including the Collection and Enforcement
Claims.
II. The First Department Correctly Held that the Complaint Sufficiently
States a Cause of Action Against Appellants Under an Alter Ego/Veil
Piercing Theory
A. The Trustee’s Detailed Allegations Satisfy The Liberal Notice
Pleading Standard For Alter Ego Liability In New York
“The theory of piercing the corporate veil involves a fact laden inquiry,
which is unsuited for resolution on a pre-answer, pre-discovery motion to dismiss.”
23
Holme v. Glob. Minerals & Metals Corp., 2009 WL 387034, at *7 (Sup. Ct., N.Y.
Cty 2009), aff’d, 63 A.D.3d 417 (1st Dep’t 2009); see also Ledy v. Wilson, 38
A.D.3d 214, 215 (1st Dep’t 2007) (claim to pierce the corporate veil unsuited for
resolution on summary judgment which involves a more exacting standard than on
a motion to dismiss.). The First Department correctly held that the Trustee’s claim
is sufficient at this “pre-answer, pre-discovery stage.” Cortlandt, 142 A.D. 3d at
834.
Appellants acknowledge that alter ego/veil-piercing claims are subject to the
liberal notice pleading requirements of CPLR 3013. 2406-12 Amsterdam Assocs.
LLC v. Alianza LLC, 136 A.D.3d 512, 512 (1st Dep’t 2016) (Scarpulla, J.) (A
“[p]laintiff [is] not required to plead the elements of alter ego liability with the
particularity required by CPLR 3016(b). . . .”). The primary function of notice
pleading under CPLR 3013 is to “adequately advis[e] the adverse party of the
pleader’s claim or defense” and “[p]leadings should not be dismissed or ordered
amended unless the allegations therein are not sufficiently particular to apprise the
court and parties of the subject matter of the controversy.” Foley v. D’Agostino, 21
A.D.2d 60, 63 (1st Dep’t 1964); CPRL 3013.
Appellants also acknowledge that to plead alter ego liability with sufficient
particularity under CPLR 3013, a “plaintiff is generally required to allege
‘complete domination of the corporation [] in respect to the transaction attacked’
24
and ‘that such domination was used to commit a fraud or wrong against the
plaintiff which resulted in plaintiff’s injury.” Baby Phat Holding Co., LLC v.
Kellwood Co., 123 A.D.3d 405, 407 (1st Dep’t 2014) (quoting Matter of Morris v.
New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141 (1993)).
Consistent with this well-established (and undisputed) notice pleading
standard for alter ego liability, the Complaint is replete with specific factual
allegations detailing (i) the domination and control Appellants exerted over the
Judgment Debtors in the issuance of the Notes and use of those sale proceeds to
redeem Appellants’ equity securities and (ii) that such domination was used to strip
the loan proceeds from the Notes out of the Judgment Debtors and transfer them to
Appellants, leaving the Judgment Debtors insolvent and unable to satisfy their
debts under the Notes and Indenture. The allegations include, among other things,
that:
Appellants are the firms, funds, partners and individuals that make up
the Consortium that owned and controlled the Hellas Entities. [A527
(Compl. ¶ 12];
At the direction and under the control of Appellants, the Hellas
Entities borrowed money through the Notes with no intention of
repaying the loans and transferred the loan proceeds to their
owners, Appellants, in a series of fraudulent conveyances.
[A558 (Compl. ¶ 183];
The transfer of the loan proceeds from the Hellas Entities to
Appellants was perpetrated through a complex series of interrelated
actions between and among the Hellas Entities, under the control of
25
Appellants, to obscure the substance of such transactions. [A551,
A558 (Compl. ¶¶ 142(a)-(f), 184(h))];
Executives of the Appellant corporations were the managing directors
of the Hellas Entities and controlled the sale of the Notes and transfer
of the loans proceeds to Appellants. [A531, A536, A558 (Compl. ¶¶
46, 56-57, 184(b))];
Appellants Halusa, Megrue, Bonderman and Coulter own,
manage and control Appellants, exercising control of all related
entities, funds and individuals named as Defendants in the
Complaint. They are the ultimate decision makers in the funds
that invested in the Hellas Group and, in the case of Bonderman
and Coulter, the ultimate owners of TPG and its affiliate funds.
[A530 (Compl. ¶ 42)];
Appellants controlled the terms of the Note transaction and their
executives signed the Notes and Indenture and the documents used to
transfer the money to pay themselves. [A536-537, A558 (Compl. ¶¶
57, 62, 184(c))];
Appellants Bonderman and Coulter, directors, officers and sole
shareholders of the TPG funds that owned the Hellas Group
controlled Appellants affiliated with TPG. [A543 (Compl. ¶¶
95)];
Appellant Halusa is the worldwide Chief Executive Officer of
Apax and Appellant Megrue is the Chief Executive Officer of
Appellant, Apax-NY. Each advised and managed Appellant
Apax Europe VI. Each is a transferee of proceeds constituting
the fraudulent conveyances as alleged in the Complaint. [A530
(Compl. ¶ 43)];
Appellants Halusa and Megrue, members of Apax’s investment
committee, advised the general partners and managers of the
Apax funds that owned the Hellas Entities and they approved
the borrowings and fraudulent conveyances alleged in the
Complaint. [A542 (Compl. ¶¶ 92-93)];
26
Appellants Aliberti and Calice are the partners of Apax and
TPG responsible for transferring the loan proceeds to
Appellants. Aliberti and Calice signed the Notes and Indenture
and were officers of the Judgment Debtor, Hellas Finance.
Each is a transferee of proceeds of the fraudulent conveyances
alleged in the Complaint. [A531 (Compl. ¶¶ 45-46)];
Appellants treated and disposed of the Judgment Debtors’ corporate
loans as their own money and left Noteholders holding the bag – the
liability for the unpaid debt [A559 (Compl. ¶ 184(k))].
The Hellas Entities were inadequately capitalized by the first quarter
of 2006. They were forced to commit business suicide by paying the
borrowed funds to Appellants that the Hellas Entities could not repay
[A547-548, 559 (Compl. ¶¶ 129, 132, 184(f) and (i))].
As the First Department correctly held, these well-pled allegations of
Appellants’ domination and control, and abuse of that control to siphon funds out
of the Judgment Debtors to pay themselves, which left the Judgment Debtors
insolvent and unable to satisfy their debts to Noteholders, are sufficiently particular
to apprise the court and parties of the subject matter of the controversy, and they
clearly satisfy the liberal notice pleading requirements of CPLR 3013. See, e.g.,
Tap Holdings, LLC v. Orix Finance Corp., 109 A.D.3d 167, 175 (1st Dep’t 2013)
(denying motion to dismiss alter ego claim where it was alleged that a group of
aligned parties engineered a scheme for the sole purpose of extinguishing the note
holders’ claims and established a shell corporation in order to siphon off the funds
belonging to the issuer – “a sham intended to cut off the note holders’ ability to
collect.”); Holme, 2009 WL 387034 at *7 (denying motion to dismiss alter ego
27
claim where it was alleged that defendants transferred money to enrich themselves
and their other companies while stripping their alter ego of its assets and making it
judgment proof); 2406-12 Amsterdam, 136 A.D.3d at 513 (denying motion to
dismiss alter ego claim where it was alleged defendant transferred all of its assets
to a newly formed entity for the purpose of keeping those assets away from
creditors).
B. Appellants Attempt to Expand the Notice Pleading Standard for
Alter Ego Liability
Appellants assert, without support, that alter ego may not be alleged against
a group of defendants collectively and complain that “the complaint is devoid of
any allegations explaining how each defendant supposedly controlled the
[Judgment Debtors] or used that control to commit a fraud or other wrong against
the Noteholders.” App. Br. at 28. However, Appellants ignore the Trustee’s
detailed allegations describing Appellants’ control over the Judgment Debtors,
who fraudulently transferred the loan proceeds to Appellants.
While certain allegations are made against Appellants as a group, these are
accurate allegations (applicable to all of the Appellants) of the corporate structure
created by Appellants, who were members of the Consortium of affiliated entities
that owned and controlled the Judgment Debtors and acted together to appropriate
the proceeds from the sale of the Notes. Under these circumstances, the Trustee’s
allegations are entirely appropriate. See Tap Holdings, 109 A.D.3d at 175.
28
Appellants do not cite a single case supporting the proposition that so-called
“group pleading” is insufficient to satisfy the notice pleading requirements of
CPLR 3013.4 For example, Appellants cite Bd. of Managers of Caton Court
Condo. v. Caton Dev. LP, 2013 WL 6182944, at *7-8 (Sup. Ct., Kings Cty. 2013)
as holding that “group pleading was insufficiently specific to support veil-piercing
claims, ‘even under the liberal notice pleading requirements of CPLR 3013.’”
App. Br. at 27. In fact, in Caton, the court did not even address plaintiff’s
contention that “the grouping of the sponsor and its principals in all allegations of
fact of the complaint violates the pleading requirements of CPLR 3013 and
provides a discrete ground for dismissal…” Id. Rather, the court held only that
CPLR 3013 requires that a plaintiff allege “the material elements of each cause of
action asserted” and found that the subject allegations were deficient where, among
other things, they failed to assert that defendants used their alter ego’s assets as
their own or undercapitalized that alter ego. Id. However, here, the Trustee’s
allegations clearly describe, among other things, how Appellants transferred all of
4 Appellants also rely on the Federal District Court case, Wilmington Trust Co. v. Hellas
Telecommunications, S.à.r.l., 2016 WL 7339112 (S.D.N.Y. 2016) (App. Br. at 30) which does
not address the CPLR 3013 pleading standard.
29
the loan proceeds out of the Judgment Debtors and to themselves, leaving the
Judgment Debtors insolvent and the Noteholders without recourse.5
The First Department previously approved similar allegations as sufficient in
Tap Holdings. In Tap, the First Department held that plaintiff sufficiently pled an
alter ego claim where the complaint “plainly and specifically alleges that the
Senior Lenders, in a scheme engineered for the sole purpose of extinguishing the
note holders’ claims against the subordinated notes, … established [a shell
corporation] in order to siphon off the funds belonging to [the issuer of the notes].”
Tap Holdings, 109 A.D.3d at 175. Notably, the defendants in Tap were 11 senior
lenders defined together as a group of “Senior Lenders” and plaintiff’s alter ego
allegations were pled against that group collectively. Id. The First Department
held that alter ego liability is not limited to “precise and technical circumstances”
but rather, “such liability exists when any abuse of the corporate form is exercised
for the purpose of working an inequity on another.” Id. Similarly here, the
Trustee’s allegations sufficiently apprise Appellants of the Trustee’s claim – that
5Similarly, the other cases cited by Appellants make no finding with respect to “group pleading”
but hold only – for reasons that are not present here – that the subject allegations in those cases
did not meet even the liberal notice pleading requirements of CPLR 3013. See Walkovsky v.
Carlton, 18 N.Y.2d 414, 420 (1966) (CPLR 3013 requires “sufficiently [particularized]
statements” of defendant’s abuse of the corporate form that were nonexistent.); Aetna Cas. &
Sur. Co. v. Merchants Mut. Ins. Co., 84 A.D.2d 736 (1st Dep’t 1981) (addressing claims other
than alter ego/veil-piercing and holding generally that CPLR 3013 provides that “[a] defendant is
entitled to notice of ‘the material elements of each cause of action.’”).
30
Appellants controlled and used the Judgment Debtors as instruments to defraud
Noteholders – satisfying the notice pleading standard of CPLR 3013, as the First
Department correctly held.
Finally, Appellants assert that alter ego liability is not possible here because
the Trustee knowingly contracted only with the Judgment Debtors and cannot seek
recovery from the related, non-signatory Appellants. App. Br. at 31-31. Such a
position is inconsistent with the basic concept of alter ego liability that effectively
eviscerates it. See Open Door Foods, LLC v. Pasta Machines, Inc., 136 A.D.3d
1002, 1004 (2d Dep’t 2016) (“The long-standing doctrine of ‘piercing the
corporate veil’ is an equitable exception to [the] general rule [of limited liability] . .
.”). While Appellants cite to cases confirming the general (and undisputed)
presumption of limited liability, these cases specifically recognize the alter ego
exception. See D. Klein & Son, Inc. v. Good Decision, Inc., 147 F. App’x 195, 198
(2d Cir. 2005) (disregarding the presumption where alter ego liability was
established); TNS Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335, 340, 703
N.E.2d 749, 752 (1998) (recognizing “an ‘alter ego’ exception, compelling the
‘alter egos’ of a signatory to arbitrate” under a contract); Secon Serv. Sys., Inc. v.
31
St. Joseph Bank & Trust Co., 855 F.2d 406, 415 (7th Cir. 1988) (veil piercing was
inappropriate only because plaintiff presented no evidence of wrongful conduct).6
Indeed, it is well-established that, where, as here, the Trustee alleges the
elements of an alter ego claim, equity pierces the corporate veil to allow liability to
be imposed against alter egos of the dominated corporation. D. Klein, 147 F.
App’x at 197; see also, N.Y. Prac., Contract Law § 18:6 (“A nonparty to a contract
may be held liable under the contract if the plaintiff is able to show that the
nonparty is the alter ego of a contracting party.”); Baby Phat, 123 A.D.3d at 407
(plaintiff adequately alleged alter ego liability to hold parent corporation liable for
subsidiary’s breach of contract).
6 In a footnote, Appellants argue that a “no-recourse” clause in the Indenture (§ 14.08) releases
Appellants from alter ego liability. App. Br. at 32 n.13. Appellants did not raise this issue in the
First Department; therefore, it should not be considered. However, a “no-recourse” clause may
only release contract claims retrospectively, not future acts or fraud and the fraudulent transfers
occurred after the Indenture was executed. See, e.g., Small v. Sullivan, 157 N.E. 261, 265 (1927)
(a no-recourse clause “did not and could not cover the future fraudulent acts of the directors”);
LaSalle Nat’l Bank v. Perelman, 141 F. Supp. 2d 451 (D. Del. 2001) (a no recourse clause may
apply only to contract claims); Banker’s Tr. Co. v. Hale & Kilburn Corp., 84 F.2d 401, 405 (2d
Cir. 1936) (a no recourse clause does not “protect stockholders who so appropriate property of
the corporation that its creditors are defrauded.”). Finally, § 14.07 only purports to releases a
“director, officer, employee, incorporator, member or stockholder” of Hellas Finance or Hellas I
and only two Appellants might fit into these categories.
32
C. Alter Ego/Veil Piercing Claims Alleging Appellants, the Issuer and
Guarantor are a Single Entity Do Not Duplicate Fraudulent
Conveyance Claims that the Issuer Transferred Loan Proceeds to
Appellants for No Consideration
Veil piercing involves disregarding the corporate form and results in the law
treating a corporation and its owners as a single entity. In other words, the law
views the corporation and the individual as collapsed into one. Fraudulent
conveyances are different. They involve the transfer of assets of a company or
individual to another distinct company or individual without consideration. See,
e.g., ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d 208, 219-220, 229 (2011)
(complaint adequately stated separate claims for abuse of the corporate form to
support a declaration piercing the corporate veil and fraudulent conveyance
claims); Moss v. Garcia-Chamorro, 110 A.D.3d 475, 476 (1st Dep’t 2013)
(affirming judgment granted in plaintiffs’ favor on theories of piercing the
corporate veil, corporate successor liability and fraudulent conveyance). Although
a plaintiff may allege that domination and control over a company caused that
company to make a fraudulent conveyance to a separate entity, that is not an alter
ego claim. Chase Manhattan Bank (Nat. Ass’n) v. 264 Water St. Associates, 174
A.D.2d 504, 505 (1st Dep’t 1991) (citing A/S Domino Mobler v. Braverman, 669
F. Supp. 592, 594 (S.D.N.Y. 1987)).
By showing Appellants used the issuer as an alter ego, WTC will establish
that Appellants are liable to pay the Notes because Appellants and the issuer
33
constitute a single entity, so that each Appellant is regarded as a signatory on the
Notes. Wm. Passalacqua Builders v. Resnick Developers South, Inc., 933 F.2d
131, 143 (2d Cir. 1991); see also JSC Foreign Econ. Ass’n Technostroyexport v.
Int’l Dev. & Trade Servs., 295 F. Supp. 2d 366, 380 (S.D.N.Y. 2003) (holding that
if defendant was an alter ego of the judgment debtor, she “would stand in the
shoes” of the judgment debtor and “would be considered to have been a defendant
in the [prior proceedings] and subsequently to be a judgment debtor…”).
CONCLUSION
For the reasons stated above, the Court should affirm the decision of the
First Department.
Dated: New York, New York
May 24, 2017
STAMELL & SCHAGER, LLP FLEMMING ZULACK
WILLIAMSON ZAUDERER LLP
By: /S/ Jared B. Stamell, Esq.
Jared B. Stamell, Esq. Mark C. Zauderer, Esq.
Andrew R. Goldenberg, Esq. Grant A. Shehigian, Esq.
1 Liberty Plaza 1 Liberty Plaza
New York, NY 10006 New York, NY 10006
Telephone: (212) 566-4047 Telephone: (212) 412-9500
Facsimile: (212) 566-4061 Facsimile: (212) 964-9200
Email: stamell@ssnylaw.com Email: mzauderer@fzwz.com
Email: goldenberg@ssnylaw.com Email: gsehigian@fzwz.com
Attorneys for Plaintiff-Respondent Of Counsel
34
NEW YORK STATE COURT OF APPEALS
CERTIFICATE OF COMPLIANCE
I hereby certify pursuant to 22 NYCRR PART 500.1(j) that the foregoing brief
was prepared on a computer using Microsoft Word.
Type. A proportionally spaced typeface was used, as follows:
Name of typeface: Times New Roman
Point size: 14
Line spacing: Double
Word Count. The total number of words in this brief, inclusive of point
headings and footnotes and exclusive of pages containing the table of contents,
table of citations, proof of service, certificate of compliance, statement of related
cases, or any authorized addendum containing statutes, rules, regulations, etc., is
7,367 words.
Dated: New York, New York
May 24, 2017
STAMELL & SCHAGER, LLP FLEMMING ZULACK
WILLIAMSON ZAUDERER LLP
By: /S/ Jared B. Stamell, Esq.
Jared B. Stamell, Esq. Mark C. Zauderer, Esq.
Andrew R. Goldenberg, Esq. Grant A. Shehigian, Esq.
1 Liberty Plaza 1 Liberty Plaza
New York, NY 10006 New York, NY 10006
Telephone: (212) 566-4047 Telephone: (212) 412-9500
Facsimile: (212) 566-4061 Facsimile: (212) 964-9200
Email: stamell@ssnylaw.com Email: mzauderer@fzwz.com
Email: goldenberg@ssnylaw.com Email: gsehigian@fzwz.com
Attorneys for Plaintiff-Respondent Of Counsel