Doc723 motion to vacate claims & stay further proceeding


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Doc723 motion to vacate claims & stay further proceeding

  1. 1. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 1 of 17Peter FranklinState Bar No. 07378000Doug SkierskiState Bar No. 24008046Erin K. LovallState Bar No. 24032553FRANKLIN SKIERSKI LOVALL HAYWARD, LLP10501 N. Central Expressway, Suite 106Dallas, Texas 75231Telephone: (972) 755-7100Facsimile: (972) 755-7110Counsel for Matthew D. Orwig, Chapter 11 Trustee IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISIONIN RE: § §FIRSTPLUS FINANCIAL GROUP, INC., § CASE NO. 09-33918-HDH § DEBTOR. §CHAPTER 11 TRUSTEE’S MOTION TO (1) VACATE CLAIMS ORDERS PURSUANT TO FEDERAL RULE OF CIVIL PROCEDURE 60(B) AND (2) STAY OF FURTHER PROCEEDINGS Matthew D. Orwig, the duly appointed Chapter 11 Trustee in the above-captionedbankruptcy case (the “Trustee”), files this motion for relief under Federal Rule of CivilProcedure 60(b) (the “Motion”). In support thereof, the Trustee respectfully shows as follows: Jurisdiction The Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 157 and 1334. Thismatter is a core proceeding within the meaning of 28 U.S.C. § 157(a) & (b)(2)(A) & (B). Venueof this proceeding in this district is proper under 28 U.S.C. §§ 1408 and 1409. The statutory bases for the relief requested herein are Bankruptcy Code §§ 105(a) and502(j), Federal Rules of Bankruptcy Procedure 3008 and 9024, and Federal Rule of CivilProcedure 60.
  2. 2. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 2 of 17 Background A. Procedural History On June 23, 2009 (the “Petition Date”), FirstPlus Financial Group, Inc. (the “Debtor”)filed a petition with the Court under chapter 11 of the Bankruptcy Code. No official committeeof unsecured creditors has been appointed in this case. On July 14, 2009, the United States Trustee (the “UST”) filed a Motion for theAppointment of a Chapter 11 Trustee Under 11 U.S.C. § 1104 or, in the Alternative, Conversionto Chapter 7 Under 11 U.S.C. § 1112(b) (the “Trustee Motion”) [Docket No. 50]. The TrusteeMotion was ultimately unopposed and, by order of the Court dated July 24, 2009, the Courtappointed the Trustee. The Trustee’s appointment was subsequently subject to an election, atwhich the Trustee was elected, which election was upheld by the Court in an order entered onOctober 20, 2009 [Docket No. 238]. On June 21, 2011, the Trustee filed his Complaint initiating an adversary proceedingstyled and numbered Matthew D. Orwig, Chapter 11 Trustee, v. Robert Freeman,, Adv.Pro. No. 11-03397-HDH (the “Complaint” and the “Adversary Proceeding”). In the AdversaryProceeding, the Trustee seeks, inter alia, to avoid certain transfers and unwind certaintransactions, including those related to an entity known as the Premier Group LLC (“Premier”). B. The Claims and the Objections1 On August 24, 2010, Learned Associates of North America (“Learned”) and Seven HillsManagement, LLC (“Seven Hills”) filed claims against the Debtor [Claim Nos. 35 & 37,respectively], each in the amount of $275,000 (the “Claims”). The alleged basis for the Claimswas listed as “Promissory Notes.” Each Claim was filed with a copy of an adversary proceeding1 For further information on the details of how the claims arose, see generally Complaint at 28–31, Orwig v.Freeman, et al., Adversary No. 11-03397 (Bankr. N.D. Tex. June 11, 2011) (hereinafter the “Complaint”)CHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 2 OF 17
  3. 3. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 3 of 17filed against the Debtor and various of its subsidiaries to recover money allegedly owed as aresult of default under certain alleged promissory notes.2 Seven Hills and Learned subsequentlyfiled amended proofs of claims without attaching the adversary documents. The Claims are alleged to have arisen out of the purchase of Premier by a subsidiary ofthe Debtor. Learned and Seven Hills each owned 25% of Premier. Shortly before the Debtorpurchased Premier, Premier had acquired another company for cash and the assumption ofsubstantial liabilities of that company. Though the acquired company owned real property, thecompany was essentially worthless. All of this was part of a fraudulent scheme to loot theDebtor. In exchange for transferring their (now apparently worthless) interests in Premier to theDebtor, the Debtor guaranteed $100,000 promissory notes to Seven Hills and Learned andassumed two other $100,000 promissory notes owed by Premier to Seven Hills and Learned. Thetwo promissory notes showing obligations allegedly owed by Premier to Seven Hills andLearned were purportedly for loans made to Premier while Seven Hills and Learned ownedPremier. These three promissory notes form the basis of the Claims. The Trustee filed objections to the Claims [Docket Nos. 158 and 160] (as latersupplemented and amended, the “Objections”).3 The Trustee initially objected to the Claimsbecause (1) Seven Hills and Learned did not attach documents supporting the Claims, (2) theywere scheduled as disputed and the adversary proceedings attached as the basis for the Claimdemonstrate conclusively that the Claims were disputed, and (3) they were part of a fraudulentscheme to loot the Debtor and its subsidiaries of stock and cash. The Trustee later supplementedthe Objections, alleging, among other things, that the Debtor received no consideration for2 The subject of each adversary proceeding was also the subject of state-court litigation against the Debtor in theCourt of Common Pleas of Philadelphia County, Pennsylvania.3 The Trustee subsequently filed supplemental objections to the Claims [Docket No. 414].CHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 3 OF 17
  4. 4. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 4 of 17guaranteeing the Premier transaction and that the “loans” purportedly owed by Premier wereactually equity contributions made by Learned and Seven Hills. The Trustee further objected tothe Claims because Seven Hills and Learned benefited from the Premier transactions as insiders. The Court entered orders allowing the Claims in part and disallowing the Claims in part[Docket Nos. 512 and 513] (the “Claim Orders”). For each Claim, the Court allowed $100,000in principal, plus interest, totaling $114,641.67. In the Claim Orders, the Court noted that therewas consideration supporting the Debtor’s guarantees because the acquisition of Premier by theDebtor’s subsidiary improved the Debtor’s overall financial picture (which, in light of theinformation contained in the Indictment described below which was previously unknown to theTrustee and the Court, appears to be incorrect) and the subsidiary paid the Debtor certain funds. C. The Indictment After the entry of the Claim Orders, an indictment was filed by the DOJ against variousmembers and close associates of the Lucchese crime family (the “Indictment”). The Indictmentcontained information previously unavailable to the Trustee and the Court. The Indictmentdescribes the actions and roles of, among others, Nicodemo Scarfo, Jr. (“Scarfo”) and SalvatorePelullo (“Pelullo”) in taking control of the Debtor and looting it for their own personal benefit.4See generally Indictment, U.S. v. Scarfo, et al., Crim. No. 11-740(RBK) (D.N.J. Oct. 26, 2011).The Indictment is incorporated herein by reference as if fully set forth herein. Scarfo, Pelullo, and others took over the Debtor by threatening and coercing existingmanagement into creating a board of directors and management team that would serve at thedirection of Scarfo and Pelullo. See Id. ¶ 8–9. These individuals planned to loot the Debtor and4 According to the Indictment, Scarfo was a high-ranking member of the Lucchese crime family and Pelullo was anassociate of the Philadelphia and Lucchese crime families and was a close friend, confidant, and associate of Scarfo.Indictment at 11.CHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 4 OF 17
  5. 5. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 5 of 17realize additional profits by selling the Debtor’s stock at artificially high prices by fraudulentlyincreasing the value of the Debtor’s stock. Id. ¶ 10–12. To conceal their involvement in the takeover of the Debtor, Scarfo, Pelullo, and others,among other things, used ownership in various entities unrelated to the Debtor to launder theproceeds taken from the Debtor and use those proceeds to finance lavish lifestyles. Id. ¶ 11.Learned was the corporate alter ego of, and controlled by, Scarfo, used to defraud the Debtor,launder money, and conceal Scarfo’s involvement in the scheme.5 Id. ¶ 16. Similarly, Seven Hills was the corporate alter ego of, and controlled by, Pelullo. Id. ¶ 17.Seven Hills was owned by the Coconut Grove Trust. Id. Like the trust that owned Learned, theCoconut Grove Trust, ostensibly created for the benefit of Pelullo’s children, was actuallycontrolled by Pelullo and used to conceal his ownership in various entities, including the Debtorand Seven Hills. Id. Seven Hills was used to defraud the Debtor, launder money, and concealPelullo’s involvement in the scheme. Id. In addition to the takeover of the Debtor’s board by directors close to Scarfo and Pelullo,various associates of Scarfo and Pelullo inside the Debtor created fraudulent consultingagreements between the Debtor and, among others, Seven Hills and Learned. See id. ¶ 10.These consulting agreements funneled money to Scarfo and Pelullo and gave them de factocontrol over the Debtor. Id. These fraudulent transactions resulted in losses to the Debtor and itsshareholders of at least $12 million. Id. ¶ 13. Loans to and from the Debtor, like the purported promissory notes underlying the Claims,were one method used to defraud the Debtor, utilized because the ultimate use of the proceedscould not be easily traced. See id. ¶ 51(b) (detailing conversations between Pelullo and others5 Although Learned was ostensibly owned by a trust named for Scarfo’s mother that was for the benefit of Scarfo’schildren, the trust was merely a vehicle controlled by Scarfo to launder proceeds obtained from the Debtor andconceal his ownership interest in various entities, including the Debtor and Learned. Id. ¶ 16.CHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 5 OF 17
  6. 6. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 6 of 17where Pelullo complained about fraudulent use of corporate credits cards being too detailed andpreferring to see “a . . . check . . . as an advance, a loan, whatever”). Scarfo, Pelullo, and certain of their associates further attempted to conceal their massivefraud from federal authorities. They made false statements and omitted material informationfrom filings required to be made to the U.S. Securities and Exchange Commission. Id. ¶ 11.Furthermore, in 2005 Scarfo began serving a term of federal supervised release as a result of a2002 felony conviction. Id. ¶¶ 22. Scarfo was required, as a term of his probation, to inform hisprobation officer about his contact with convicted felons, any employment he obtained, and anyfinancial transactions in which he was involved that exceeded $500. Id. Scarfo’s associates tookspecial care to conceal his involvement in the scheme from law enforcement and regulatoryagencies, the U.S. District Court for the District of New Jersey, and the U.S. Probation Office forthe District of New Jersey. Id. ¶ 11. Until the DOJ filed and unsealed its indictment, the Trustee was unaware of the extent ofthe fraud committed against the Debtor and how it was accomplished. The DOJ seized asubstantial portion of the relevant records from Debtor and other parties and has access toevidence uncovered as part of its investigation, to which the Trustee has no access. The DOJ’scriminal prosecution has hindered the Trustee’s ability to discover information related to theClaims. By way of example, the Trustee knew Seven Hills and Learned had worked asconsultants for the Debtor, but lacked the evidence in DOJ’s possession that establishes howSeven Hills and Learned were conduits used to launder money and transfer it from the Debtor toScarfo, Pelullo and others. The Trustee was further unaware of the exact breakdown of entitiesbeing used to hide the true ownership of Seven Hills and Learned and carry out an extensivefraud on the Debtor.CHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 6 OF 17
  7. 7. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 7 of 17 The criminal proceedings against Scarfo and Pelullo continue. As such, the discoveryprocess in relation to the Objections will likely be stayed until those proceedings finish. Relief Requested In this Motion, the Trustee requests that the Court enter an order (i) vacating the ClaimOrders and (ii) staying further proceedings with respect to the Objections until the criminalproceedings conclude.A. The Court should vacate the Claim Orders. The Court should vacate the Claim Orders because (i) there is newly discoveredevidence; (ii) Seven Hills and Learned engaged in fraud, misrepresentation, and misconduct; and(iii) extraordinary circumstances exist that justify granting such relief. The Bankruptcy Codeand Federal Rules of Bankruptcy Procedure permit a claim that has been allowed to bereconsidered for cause. See 11 U.S.C. § 502(j); Fed. R. Bankr. P. 3008. The Court hasdiscretion to reconsider and allow or disallow a claim, but the decision to reconsider a claimalready litigated is governed by Federal Rule of Civil Procedure 60(b), made applicable tobankruptcy proceedings by Federal Rule of Bankruptcy Procedure 9024. See Colley v. Nat’lBank of Tex. (In re Colley), 814 F.2d 1008, 1010 (5th Cir. 1987). Rule 60(b) describes when the Court may grant a party relief from a final order,judgment, or proceeding. Among other reasons, such relief is permissible if there (1) is newlydiscovered evidence that could not have been discovered with reasonable diligence in time for anew trial under Rule 59(b); (2) was fraud, misrepresentation, or misconduct by an opposingparty; or (3) is any other reason justifying relief. Fed. R. Civ. P. 60(b)(2), (3), & (6). Rule 60(b)provides an equitable remedy that should be liberally construed to accomplish substantial justice.In re Jack Kline Co., 440 B.R. 712, 729–30 (Bankr. S.D. Tex. 2010) (quoting Castleberry v.CHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 7 OF 17
  8. 8. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 8 of 17CitiFinancing Mortg. Co., 230 F. App’x 352, 356 (5th Cir. 2007) (not designated forpublication)). A motion pursuant to Rule 60(b) must be filed “within a reasonable time,” but the movantcannot make a motion for relief under Rule 60(b)(1), (2), or (3) more than one year after theorder or judgment was entered. Fed. R. Civ. P. 60(c). i.) The Claim Orders should be vacated because there is newly discovered evidence that could not have been discovered with reasonable diligence. A movant is entitled to relief under Rule 60(b)(2) when it discovers evidence that was inexistence at the time of the trial but was not discovered until after the trial. In re Harbor Fin.Grp., 303 B.R. 124, 135 (Bankr. N.D. Tex. 2003). To be entitled to relief from an order, themovant must show that (1) it exercised due diligence in obtaining the information and (2) theevidence is credible, admissible, material, controlling and would have produced a different resultif it were available before the original judgment. Goldstein v. MCI WorldCom, 340 F.3d 238,257 (5th Cir. 2003). The Trustee seeks relief from the Claim Orders based upon the newly discoveredevidence in the Indictment. Although the information uncovered in the Indictment existed whenthe Trustee filed his Objections, the Trustee discovered only after the entry of the Claim Ordersthat there exists proof in the DOJ’s possession establishing Seven Hills and Learned wereessentially conduits for siphoning funds from the Debtor to, among others, Scarfo and Pelullo.Given the sophisticated nature of the transactions engaged in by Scarfo, Pelullo, and others aswell as the multiple layers of entities they relied upon, the Trustee could not have known, eventhrough the exercise of reasonable diligence, the exact nature and extent of the fraudulentscheme. Thus, the fraudulent concealment of the involvement of Scarfo and Pelullo in Learnedand Seven Hills, respectively, made it nearly impossible for the Trustee to obtain evidence ofCHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 8 OF 17
  9. 9. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 9 of 17Learned and Seven Hills’ involvement in the fraudulent scheme, of which the Claims and thenotes upon which they were based were part and parcel. This Motion is timely; it was filed less than two months after the Indictment wasunsealed and became available to the Trustee and within a year of the Claim Orders. TheTrustee also has not engaged in additional discovery to supplement the Indictment, becauseattempts to do so might interfere with the ongoing criminal prosecution and would likely bestayed if he attempted to do so; indeed, the DOJ has filed a motion to stay discovery. Eventhough the Trustee does not have much of the information underlying the Indictment, theIndictment sufficiently shows that Rule 60(b) relief is justified with respect to the Objections. The newly discovered evidence would have led to a different outcome in the Objectionproceedings. Had the Trustee known the Indictment information during the Objectionproceedings, he could have investigated the information underlying the allegations in theIndictment and developed other grounds and evidence for disallowance of the Claims, includingthat they involved fraudulent transfers to insiders and that the Claims were part of a scheme tosteal millions of dollars from the Debtor. The Trustee could also have established that it wasproper to subordinate the Claims as insider claims. However, because of evidence concealed bySeven Hills and Learned and maintained under seal by the DOJ in preparation for its Indictment,the Trustee was prevented from providing evidence that would have helped him prevail in theObjections. Although the Trustee was aware of some relationship among Seven Hills, Learned,and the Debtor and that certain parties involved in the Premier transaction were underinvestigation, the Trustee lacked the evidence that the DOJ apparently has in its possession,evidence that will prove that the Claims and underlying notes were part of a scheme to loot theDebtor.CHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 9 OF 17
  10. 10. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 10 of 17 Moreover, the information in the Indictment was uncovered after a substantial, years-longinvestigation by the DOJ, which possesses significant powers and resources to uncover fraud andmalfeasance not available to the Trustee. Additionally, the discovery process in this case hasbeen significantly hampered and delayed by the ongoing DOJ proceedings, making the discoveryof even basic information difficult. For example, key individuals like Scarfo contend that theyhave no records relating to the Debtor because the DOJ seized them all, preventing the Trusteefrom discovering this evidence by propounding discovery on Scarfo. The Trustee cannot compelthe DOJ to provide Scarfo’s seized records, frustrating the Trustee’s ability to discover thisinformation. Because the Trustee has new evidence that was previously unknown to him, even afterexercising reasonable diligence, which information would have changed the outcome of theObjection proceedings, the Claim Orders should be vacated. ii.) The Trustee is entitled to relief under Rule 60(b)(3) because there was fraud, misrepresentation, or misconduct by the parties opposing the Trustee. Relief based on fraud requires a plausible allegation of fraud of a greater order ofmagnitude than simple fraud. Turner v. Pleasant, ___ F.3d ___, 2011 WL 5865604, at *5 (5thCir. 2011). The movant must also show that it was not at fault for failing to uncover the fraud.Id. That the fraud was eventually uncovered by someone other than the movant does notdemonstrate that the movant was at fault for failing to uncover the fraud. Id. In Turner, thejudge presiding over the plaintiffs’ case was close friends with and spent significant time withthe attorney and an expert witness for the defense. Id. at *1. The defense attorney frequentlyserved as secret intermediary between a company and the judge in arranging all-expenses paidtrips for the judge. Id. The judge ruled in favor of the defendants, largely because he determinedCHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 10 OF 17
  11. 11. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 11 of 17the credibility of the defense expert was better than that of the plaintiffs’ expert. Id. After theverdict was rendered, the plaintiffs filed motions for new trial and recusal based on the judge’spartiality toward the defense, but the judge denied them as unsubstantiated, and his ruling wasupheld on appeal. Id. at *1–*2. Later, a complaint was filed against the judge that ultimately ledto the judge being impeached and removed from the bench. Id. at *2. The report of the HouseJudiciary Committee specifically referred to the Turners’ suit in describing the judge’smisconduct. Id. The Turners then filed an independent action6 to attack the judgment, which thedistrict court ruled was barred by the doctrine of res judicata. Id. at *3. However, the FifthCircuit reversed and remanded the action, holding that the unusual circumstances surroundingthe relationship between the judge and the defense counsel and expert were sufficient to show aplausible allegation of fraud. Id. at *5. The Fifth Circuit further held that there were sufficientfacts to plausibly allege a lack of fault by the Turners in failing to uncover the fraud. Id.Although the Turners could have deposed the judge, and Congress eventually uncovered thefraud, a deposition would have required the Turners to get the judge’s permission whileCongress had power to hold the judge in contempt if he did not testify. Id. The court in In re Jack Kline Co., 440 B.R. 712 (Bankr. S.D. Tex. 2010) summarizes thestandard for relief under Rule 60(b)(3)’s misconduct element: The Trustee, as the moving party under Rule 60(b)(3), must show: “(1) that the adverse party engaged in . . . misconduct, and (2) that this misconduct prevented the moving party from fully and fairly presenting his case.” Williams v. Thaler, 602 F.3d 291, 311 (5th Cir. 2010) (quoting Hesling v. CSX Transp., Inc., 396 F.3d 632, 641 (5th Cir. 2005)). Misconduct may occur regardless of “whether there was evil, innocent or careless, purpose.” Bros. Inc. v. W.E. Grace Manu. Co., 351 F.2d 208, 211 (5th Cir. 1965), cert. denied, 383 U.S. 936 (1966). “For the term to have meaning . . . it must differ from both ‘fraud’ and ‘misrepresentation.’”6 Although Turner is procedurally different, the Trustee seeks the same relief. The Turners brought an independentaction, rather than a motion under Rule 60(b), because the deadline to bring such a motion had passed. Turner, 2011WL 5865604, at *6.CHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 11 OF 17
  12. 12. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 12 of 17 MMAR Group, Inc. v. Dow Jones & Co., 187 F.R.D. 282, 285 (S.D. Tex. 1999) (quoting Anderson v. Cryovac, Inc., 862 F.2d 910, 923 (1st Cir. 1988) (internal quotations and citations omitted)). “Definition of this difference requires [the court] to take an expansive view of ‘misconduct [,]’” which may include “accidental omissions.” Id. (quoting Anderson, 862 F.2d at 923) (emphasis added); see also Rozier, 573 F.2d at 1339 (concluding that withholding information called for by discovery is considered misconduct). Jack Kline, 440 B.R. at 731. Information that is improperly withheld does not have to be information that would havealtered the outcome of a case if it had been disclosed. Hesling, 396 F.3d at 641. In other words,“Rule 60(b)(3) ‘is aimed at judgments [that] are unfairly obtained, not at those [that] are factuallyincorrect.” Williams, 602 F.3d at 311 (quoting Hesling, 396 F.3d at 641). Seven Hills and Learned engaged in fraud and misconduct. The fraud at issue was notsimple, ordinary fraud. Scarfo, Pelullo, and others used Seven Hills, Learned, and other relatedtrusts and entities to conceal their intentions and actions, obscure their connections to thetransactions, and loot millions of dollars from the Debtor. In doing so, they knowingly failed todisclose information and fabricated other information to prevent the Trustee and others fromfully understanding what was happening. As with the magnitude of the fraud in Turner that ledto the extraordinary punishment of the judge by impeachment and removal from the bench, thefraud undertaken by Scarfo and Pelullo through Learned and Seven Hill led to the extraordinaryresult of a DOJ investigation and indictment. The Trustee is not at fault for failing to uncover the full extent and nature of the massivefraud of which the Claims are a part. The DOJ investigation into the acquisition andmismanagement of the Debtor, including, inter alia, the seizure of many of the Debtor’s records,has hindered the Trustee’s ability to uncover the fraud. As with the fraud in Turner, it wasuncovered after an entity with significantly greater resources and investigative powers beganCHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 12 OF 17
  13. 13. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 13 of 17looking into the matter. As such, the eventual discovery of the fraud by the DOJ does not showthe Trustee should have discovered the fraud. As a part of the fraudulent scheme in which they were involved, Seven Hills and Learnedengaged in misconduct, including the filing of the Claims. Seven Hills and Learned participatedin transactions designed to obscure the true nature of the transactions and omitted other details ofthe transactions. The intentional deception and withholding of information prevented the Trusteefrom fully and fairly presenting his case. Even if the Claim Orders would still be correct afterthis was disclosed, the Trustee is entitled to relief from the Claim Orders because they wereunfairly decided, and the Claim Orders should be vacated pursuant to Rule 60(b)(3). iii.) The Trustee is entitled to relief under Rule 60(b)(6) because there are other reasons that justify relief. Rule 60(b)(6) is a catch-all provision designed to provide relief when the grounds forrelief in 60(b)(1)–(5) do not justify granting relief. Limon v. Double Eagle Marine, L.L.C., 771F. Supp. 2d 672, 679 (S.D. Tex. 2011). Rule 60(b)(6) is a “grand reservoir of equitable power todo justice” that is to be invoked in “extraordinary circumstances.” Hernandez v. Thaler, 630F.3d 420, 429 (5th Cir. 2011) (internal quotations omitted). Circumstances are exceptional whenthey bar adequate redress or prevent the movant from having a full and fair opportunity to litigateits claim. Halliburton Energy Servs., Inc. v. NL Indus., 618 F. Supp. 2d 614, 653 (S.D. Tex.2009). Relief is warranted where enforcement of the judgment or order is “patently unfair” or“fundamentally unjust,” Lindy Invs. III v. Shakertown 1992 Inc., 360 F. App’x 510, 513, 514 (5thCir. 2010) (not designated for publication). Although there is no absolute time bar on when a Rule 60(b)(6) motion can be made, “acourt should scrutinize the particular circumstances of the case and balance the interest in finalityCHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 13 OF 17
  14. 14. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 14 of 17with the moving party’s reason for delay” to determine if the motion was made timely.Halliburton Energy, 618 F. Supp. 2d at 626. In addition to the grounds set forth above, there are additional circumstances in this caseshowing that the Court should vacate the Claim Orders to ensure justice. First, these proceedingshave been slowed by the Trustee’s lack of power to conduct adequate discovery in light of theongoing criminal proceedings. It would be patently unfair and fundamentally unjust for SevenHills and Learned to profit from a delay caused by the need for the DOJ to investigate andprosecute their misconduct. Accordingly, the Claim orders should also be vacated pursuant toRule 60(b)(6).B. The Objection proceedings should be stayed to allow the criminal proceedings to conclude.7 If the Court declines to consolidate the Objection proceedings with the AdversaryProceeding, the Court should stay the Objection proceedings. The Court’s next step aftervacating the Claim Orders would ordinarily be to revisit and decide the merits of the claims.See, e.g., Litton Loan Servicing, LLP v. Eads (In re Eads), 417 B.R. 728, 744–50 (Bankr. E.D.Tex. 2009) (discussing the merits of the case after vacating a default order). But the Court hasinherent power to control how it disposes of cases on its docket, including the power to stayproceedings. Landis v. N. Am. Co., 299 U.S. 248, 254 (1936). The determination of whether to7 The Trustee reserves the right to seek consolidation of the Objections with the Adversary Proceeding under FederalRule of Civil Procedure 42(a). If multiple actions involve “a common question of law or fact,” the Court may “joinfor hearing or trial any or all matters at issue in the action[,] consolidate the actions[,] or issue any other orders toavoid unnecessary cost or delay.” Fed. R. Civ. P. 42(a); Fed. R. Bankr. P. 7042 & 9014. Rule 42(a) provides “anexpansive [standard], allowing consolidation of the broad range of cases brought in federal court.” 8 Moore’sFederal Practice § 42.10[1][a], at 42-9 (3d ed. 1998).The Trustee believes consolidation of the Objections and the Adversary Proceeding is appropriate because the twomatters contain common questions of law and fact. The Complaint and the Objections both involve, inter alia, thetakeover of Premier by the Debtor. See Complaint 22–31. The Trustee seeks avoidance of the Premier transactionas a fraudulent transfer and equitable subordination the Claims based on Seven Hills’ and Learned’s “inequitable,unconscionable and unfair conduct.” Id. at 74–76. Similarly, he objects to the Claims based on inappropriateconduct undertaken by Seven Hills and Learned in the Premier transaction.CHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 14 OF 17
  15. 15. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 15 of 17stay proceedings is a balancing of competing interests. Id. at 254–55. The party seeking a stayof proceedings “must make out a clear case of hardship or inequity in being required to goforward.” Id. at 255. The stay should be reasonably tailored in length and scope. In re Davis,730 F.2d 176, 178–79 (5th Cir. 1984) (citing Landis). The Trustee requests that the Court stay the Objection proceedings until after the criminalproceedings prosecuted by the DOJ are completed. The discretion and secrecy required by theDOJ investigation has hindered the Trustee’s ability to investigate the circumstances surroundingthe Claims. Although the Trustee now has the Indictment demonstrating that the Claims shouldbe disallowed, he will not be able to access the information underlying the Indictment until afterthe criminal proceedings finish. In addition, the DOJ has filed a motion to stay the Trustee’sadversary case against Scarfo, Pelullo, and others until the criminal proceedings are concluded.If the Trustee were forced to proceed on the merits of his Objections before the criminalproceedings are completed, he would face hardship and suffer inequity in the Objectionproceedings and, if he were unsuccessful, would have to seek an additional reconsideration afterthe criminal proceedings were concluded and further evidence became available. Staying the Objection proceedings would also benefit the Debtor’s creditors and is in thepublic interest. The Debtor’s creditors benefit because the Trustee could properly investigate thevalidity of the Claims to ensure proper treatment of the Claims. The public interest is servedboth by allowing the Claims to be properly adjudicated and by allowing the DOJ to continue itsprosecution without having to worry about the Trustee seeking information that couldcompromise the DOJ’s case. Such a stay would be reasonable even though its duration could not be accuratelypredicted in advance. Because the criminal defendants are entitled to a speedy trial, it is unlikelyCHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 15 OF 17
  16. 16. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 16 of 17that the DOJ’s criminal proceedings will last an inordinate amount of time. U.S. Const. amend.VI; Barker v. Wingo, 407 U.S. 514, 515 (1972). Moreover, delaying the final determination ofthe Claims will not prejudice any party, as the Trustee’s proposed Plan can be confirmed anddistributions can be made while reserving for the Claims in the event that they are eventuallyallowed. Accordingly, at this stage, staying the proceedings related to the Claims and Objectionswill not prejudice any party or cause any delay to the Debtor’s case as a whole. WHEREFORE, the Trustee respectfully requests that the Court enter an order (i) grantingthe relief requested herein; (ii) vacating the Claim Orders; (iii) staying the Objectionsproceedings; and (iv) granting him such other and further relief as is just and proper.Dated: January 6, 2012 Respectfully Submitted, FRANKLIN SKIERSKI LOVALL HAYWARD LLP By: /s/ Doug Skierski Peter Franklin State Bar No. 07378000 Doug Skierski State Bar No. 24008046 Erin K. Lovall State Bar No. 24032553 10501 N. Central Expressway, Suite 106 Dallas, Texas 75231 Telephone: (972) 755-7100 Facsimile: (972) 755-7110 Counsel for Matthew D. Orwig, Chapter 11 TrusteeCHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 16 OF 17
  17. 17. Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc Main Document Page 17 of 17 CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the above and foregoing was sentelectronically by the Court’s CM/ECF system to all parties receiving CM/ECF notice in this caseon January 6, 2012. Pursuant to Federal Rule of Civil Procedure 4(h)(1)(B) and Texas CivilPractice and Remedies Code § 17.044, Seven Hills will be served with a true and correct copy ofthe foregoing through the Texas Secretary of State. True and correct copies of the above andforegoing will also be sent to Seven Hills and Learned at the following addresses via First ClassUnited States mail: Learned Associates of North America, LLC c/o Gary B. Freedman 7909 Bustleton Avenue Philadelphia, PA 19152 Seven Hills Management, LLC c/o Anna Pelullo 1231 Bainbridge Street, 3rd Floor Philadelphia, PA 19147 /s/ Doug Skierski Doug Skierski CERTIFICATE OF CONFERENCE Counsel for the Trustee conferred with counsel for Learned on January 6, 2012, regardingthe matters contained in this Motion. Counsel for Learned opposed the relief requested in thisMotion. Counsel for the Trustee has not conferred with counsel for Seven Hills because there iscurrently no counsel listed on PACER representing Seven Hills. Counsel for the Trustee did not confer with counsel for any other parties in interest in thiscase regarding the matters contained in this Motion. Holding a conference with such a largenumber of parties in interest would not be practicable. /s/ Peter A. Franklin Peter A. FranklinCHAPTER 11 TRUSTEE’S MOTION PURSUANT TO RULE 60(B) PAGE 17 OF 17