Doc723 motion to vacate claims & stay further proceeding

Case 09-33918-hdh11 Doc 723 Filed 01/06/12 Entered 01/06/12 16:49:17 Desc
Main Document Page 1 of 17

Peter Franklin
State Bar No. 07378000
Doug Skierski
Erin K. Lovall
FRANKLIN SKIERSKI LOVALL HAYWARD, LLP
10501 N. Central Expressway, Suite 106
Dallas, Texas 75231
Telephone: (972) 755-7100
Facsimile: (972) 755-7110

Counsel for Matthew D. Orwig, Chapter 11 Trustee

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION

IN 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-captioned

bankruptcy case (the “Trustee”), files this motion for relief under Federal Rule of Civil

Procedure 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. This

matter is a core proceeding within the meaning of 28 U.S.C. § 157(a) & (b)(2)(A) & (B). Venue

of 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) and

502(j), Federal Rules of Bankruptcy Procedure 3008 and 9024, and Federal Rule of Civil

Procedure 60.


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 committee

of unsecured creditors has been appointed in this case.

On July 14, 2009, the United States Trustee (the “UST”) filed a Motion for the

Appointment of a Chapter 11 Trustee Under 11 U.S.C. § 1104 or, in the Alternative, Conversion

to Chapter 7 Under 11 U.S.C. § 1112(b) (the “Trustee Motion”) [Docket No. 50]. The Trustee

Motion was ultimately unopposed and, by order of the Court dated July 24, 2009, the Court

appointed the Trustee. The Trustee’s appointment was subsequently subject to an election, at

which the Trustee was elected, which election was upheld by the Court in an order entered on

October 20, 2009 [Docket No. 238].

On June 21, 2011, the Trustee filed his Complaint initiating an adversary proceeding

styled and numbered Matthew D. Orwig, Chapter 11 Trustee, v. Robert Freeman, et.al., Adv.

Pro. No. 11-03397-HDH (the “Complaint” and the “Adversary Proceeding”). In the Adversary

Proceeding, the Trustee seeks, inter alia, to avoid certain transfers and unwind certain

transactions, 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 Hills

Management, 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 Claims

was listed as “Promissory Notes.” Each Claim was filed with a copy of an adversary proceeding

1
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


filed against the Debtor and various of its subsidiaries to recover money allegedly owed as a

result of default under certain alleged promissory notes.2 Seven Hills and Learned subsequently

filed 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 of

the Debtor. Learned and Seven Hills each owned 25% of Premier. Shortly before the Debtor

purchased Premier, Premier had acquired another company for cash and the assumption of

substantial liabilities of that company. Though the acquired company owned real property, the

company was essentially worthless. All of this was part of a fraudulent scheme to loot the

Debtor. In exchange for transferring their (now apparently worthless) interests in Premier to the

Debtor, the Debtor guaranteed $100,000 promissory notes to Seven Hills and Learned and

assumed two other $100,000 promissory notes owed by Premier to Seven Hills and Learned. The

two promissory notes showing obligations allegedly owed by Premier to Seven Hills and

Learned were purportedly for loans made to Premier while Seven Hills and Learned owned

Premier. These three promissory notes form the basis of the Claims.

The Trustee filed objections to the Claims [Docket Nos. 158 and 160] (as later

supplemented and amended, the “Objections”).3 The Trustee initially objected to the Claims

because (1) Seven Hills and Learned did not attach documents supporting the Claims, (2) they

were scheduled as disputed and the adversary proceedings attached as the basis for the Claim

demonstrate conclusively that the Claims were disputed, and (3) they were part of a fraudulent

scheme to loot the Debtor and its subsidiaries of stock and cash. The Trustee later supplemented

the Objections, alleging, among other things, that the Debtor received no consideration for

2
The subject of each adversary proceeding was also the subject of state-court litigation against the Debtor in the
Court of Common Pleas of Philadelphia County, Pennsylvania.
3
The Trustee subsequently filed supplemental objections to the Claims [Docket No. 414].



guaranteeing the Premier transaction and that the “loans” purportedly owed by Premier were

actually equity contributions made by Learned and Seven Hills. The Trustee further objected to

the 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 $100,000

in principal, plus interest, totaling $114,641.67. In the Claim Orders, the Court noted that there

was consideration supporting the Debtor’s guarantees because the acquisition of Premier by the

Debtor’s subsidiary improved the Debtor’s overall financial picture (which, in light of the

information contained in the Indictment described below which was previously unknown to the

Trustee 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 various

members and close associates of the Lucchese crime family (the “Indictment”). The Indictment

contained information previously unavailable to the Trustee and the Court. The Indictment

describes the actions and roles of, among others, Nicodemo Scarfo, Jr. (“Scarfo”) and Salvatore

Pelullo (“Pelullo”) in taking control of the Debtor and looting it for their own personal benefit.4

See 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 existing

management into creating a board of directors and management team that would serve at the

direction of Scarfo and Pelullo. See Id. ¶ 8–9. These individuals planned to loot the Debtor and

4
According to the Indictment, Scarfo was a high-ranking member of the Lucchese crime family and Pelullo was an
associate of the Philadelphia and Lucchese crime families and was a close friend, confidant, and associate of Scarfo.
Indictment at 11.



realize additional profits by selling the Debtor’s stock at artificially high prices by fraudulently

increasing 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 the

proceeds 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, the

Coconut Grove Trust, ostensibly created for the benefit of Pelullo’s children, was actually

controlled by Pelullo and used to conceal his ownership in various entities, including the Debtor

and Seven Hills. Id. Seven Hills was used to defraud the Debtor, launder money, and conceal

Pelullo’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 consulting

agreements 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 facto

control over the Debtor. Id. These fraudulent transactions resulted in losses to the Debtor and its

shareholders 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 proceeds

could not be easily traced. See id. ¶ 51(b) (detailing conversations between Pelullo and others
5
Although Learned was ostensibly owned by a trust named for Scarfo’s mother that was for the benefit of Scarfo’s
children, the trust was merely a vehicle controlled by Scarfo to launder proceeds obtained from the Debtor and
conceal his ownership interest in various entities, including the Debtor and Learned. Id. ¶ 16.



where Pelullo complained about fraudulent use of corporate credits cards being too detailed and

preferring to see “a . . . check . . . as an advance, a loan, whatever”).

Scarfo, Pelullo, and certain of their associates further attempted to conceal their massive

fraud from federal authorities. They made false statements and omitted material information

from 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 a

2002 felony conviction. Id. ¶¶ 22. Scarfo was required, as a term of his probation, to inform his

probation officer about his contact with convicted felons, any employment he obtained, and any

financial transactions in which he was involved that exceeded $500. Id. Scarfo’s associates took

special care to conceal his involvement in the scheme from law enforcement and regulatory

agencies, the U.S. District Court for the District of New Jersey, and the U.S. Probation Office for

the District of New Jersey. Id. ¶ 11.

Until the DOJ filed and unsealed its indictment, the Trustee was unaware of the extent of

the fraud committed against the Debtor and how it was accomplished. The DOJ seized a

substantial portion of the relevant records from Debtor and other parties and has access to

evidence uncovered as part of its investigation, to which the Trustee has no access. The DOJ’s

criminal prosecution has hindered the Trustee’s ability to discover information related to the

Claims. By way of example, the Trustee knew Seven Hills and Learned had worked as

consultants for the Debtor, but lacked the evidence in DOJ’s possession that establishes how

Seven Hills and Learned were conduits used to launder money and transfer it from the Debtor to

Scarfo, Pelullo and others. The Trustee was further unaware of the exact breakdown of entities

being used to hide the true ownership of Seven Hills and Learned and carry out an extensive

fraud on the Debtor.



The criminal proceedings against Scarfo and Pelullo continue. As such, the discovery

process 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 Claim

Orders and (ii) staying further proceedings with respect to the Objections until the criminal

proceedings conclude.

A. The Court should vacate the Claim Orders.

The Court should vacate the Claim Orders because (i) there is newly discovered

evidence; (ii) Seven Hills and Learned engaged in fraud, misrepresentation, and misconduct; and

(iii) extraordinary circumstances exist that justify granting such relief. The Bankruptcy Code

and Federal Rules of Bankruptcy Procedure permit a claim that has been allowed to be

reconsidered for cause. See 11 U.S.C. § 502(j); Fed. R. Bankr. P. 3008. The Court has

discretion to reconsider and allow or disallow a claim, but the decision to reconsider a claim

already litigated is governed by Federal Rule of Civil Procedure 60(b), made applicable to

bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 9024. See Colley v. Nat’l

Bank 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 newly

discovered evidence that could not have been discovered with reasonable diligence in time for a

new trial under Rule 59(b); (2) was fraud, misrepresentation, or misconduct by an opposing

party; 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.



CitiFinancing Mortg. Co., 230 F. App’x 352, 356 (5th Cir. 2007) (not designated for

publication)).

A motion pursuant to Rule 60(b) must be filed “within a reasonable time,” but the movant

cannot make a motion for relief under Rule 60(b)(1), (2), or (3) more than one year after the

order 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 in

existence 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, the

movant must show that (1) it exercised due diligence in obtaining the information and (2) the

evidence is credible, admissible, material, controlling and would have produced a different result

if 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 discovered

evidence in the Indictment. Although the information uncovered in the Indictment existed when

the Trustee filed his Objections, the Trustee discovered only after the entry of the Claim Orders

that there exists proof in the DOJ’s possession establishing Seven Hills and Learned were

essentially 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 as

well as the multiple layers of entities they relied upon, the Trustee could not have known, even

through the exercise of reasonable diligence, the exact nature and extent of the fraudulent

scheme. Thus, the fraudulent concealment of the involvement of Scarfo and Pelullo in Learned

and Seven Hills, respectively, made it nearly impossible for the Trustee to obtain evidence of



Learned and Seven Hills’ involvement in the fraudulent scheme, of which the Claims and the

notes upon which they were based were part and parcel.

This Motion is timely; it was filed less than two months after the Indictment was

unsealed and became available to the Trustee and within a year of the Claim Orders. The

Trustee also has not engaged in additional discovery to supplement the Indictment, because

attempts to do so might interfere with the ongoing criminal prosecution and would likely be

stayed if he attempted to do so; indeed, the DOJ has filed a motion to stay discovery. Even

though the Trustee does not have much of the information underlying the Indictment, the

Indictment 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 Objection

proceedings. Had the Trustee known the Indictment information during the Objection

proceedings, he could have investigated the information underlying the allegations in the

Indictment and developed other grounds and evidence for disallowance of the Claims, including

that they involved fraudulent transfers to insiders and that the Claims were part of a scheme to

steal millions of dollars from the Debtor. The Trustee could also have established that it was

proper to subordinate the Claims as insider claims. However, because of evidence concealed by

Seven 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 the

Objections. 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 under

investigation, 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 the

Debtor.



Moreover, the information in the Indictment was uncovered after a substantial, years-long

investigation by the DOJ, which possesses significant powers and resources to uncover fraud and

malfeasance not available to the Trustee. Additionally, the discovery process in this case has

been significantly hampered and delayed by the ongoing DOJ proceedings, making the discovery

of even basic information difficult. For example, key individuals like Scarfo contend that they

have no records relating to the Debtor because the DOJ seized them all, preventing the Trustee

from discovering this evidence by propounding discovery on Scarfo. The Trustee cannot compel

the DOJ to provide Scarfo’s seized records, frustrating the Trustee’s ability to discover this

information.

Because the Trustee has new evidence that was previously unknown to him, even after

exercising reasonable diligence, which information would have changed the outcome of the

Objection 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 of

magnitude than simple fraud. Turner v. Pleasant, ___ F.3d ___, 2011 WL 5865604, at *5 (5th

Cir. 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 not

demonstrate that the movant was at fault for failing to uncover the fraud. Id. In Turner, the

judge presiding over the plaintiffs’ case was close friends with and spent significant time with

the attorney and an expert witness for the defense. Id. at *1. The defense attorney frequently

served as secret intermediary between a company and the judge in arranging all-expenses paid

trips for the judge. Id. The judge ruled in favor of the defendants, largely because he determined



the credibility of the defense expert was better than that of the plaintiffs’ expert. Id. After the

verdict was rendered, the plaintiffs filed motions for new trial and recusal based on the judge’s

partiality toward the defense, but the judge denied them as unsubstantiated, and his ruling was

upheld on appeal. Id. at *1–*2. Later, a complaint was filed against the judge that ultimately led

to the judge being impeached and removed from the bench. Id. at *2. The report of the House

Judiciary Committee specifically referred to the Turners’ suit in describing the judge’s

misconduct. Id. The Turners then filed an independent action6 to attack the judgment, which the

district court ruled was barred by the doctrine of res judicata. Id. at *3. However, the Fifth

Circuit reversed and remanded the action, holding that the unusual circumstances surrounding

the relationship between the judge and the defense counsel and expert were sufficient to show a

plausible allegation of fraud. Id. at *5. The Fifth Circuit further held that there were sufficient

facts 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 the

fraud, a deposition would have required the Turners to get the judge’s permission while

Congress 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 the

standard 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 independent
action, rather than a motion under Rule 60(b), because the deadline to bring such a motion had passed. Turner, 2011
WL 5865604, at *6.



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 have

altered 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 factually

incorrect.” 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 not

simple, ordinary fraud. Scarfo, Pelullo, and others used Seven Hills, Learned, and other related

trusts and entities to conceal their intentions and actions, obscure their connections to the

transactions, and loot millions of dollars from the Debtor. In doing so, they knowingly failed to

disclose information and fabricated other information to prevent the Trustee and others from

fully understanding what was happening. As with the magnitude of the fraud in Turner that led

to the extraordinary punishment of the judge by impeachment and removal from the bench, the

fraud undertaken by Scarfo and Pelullo through Learned and Seven Hill led to the extraordinary

result of a DOJ investigation and indictment.

The Trustee is not at fault for failing to uncover the full extent and nature of the massive

fraud of which the Claims are a part. The DOJ investigation into the acquisition and

mismanagement 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 was

uncovered after an entity with significantly greater resources and investigative powers began



looking into the matter. As such, the eventual discovery of the fraud by the DOJ does not show

the Trustee should have discovered the fraud.

As a part of the fraudulent scheme in which they were involved, Seven Hills and Learned

engaged in misconduct, including the filing of the Claims. Seven Hills and Learned participated

in transactions designed to obscure the true nature of the transactions and omitted other details of

the transactions. The intentional deception and withholding of information prevented the Trustee

from fully and fairly presenting his case. Even if the Claim Orders would still be correct after

this was disclosed, the Trustee is entitled to relief from the Claim Orders because they were

unfairly 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 for

relief in 60(b)(1)–(5) do not justify granting relief. Limon v. Double Eagle Marine, L.L.C., 771

F. Supp. 2d 672, 679 (S.D. Tex. 2011). Rule 60(b)(6) is a “grand reservoir of equitable power to

do justice” that is to be invoked in “extraordinary circumstances.” Hernandez v. Thaler, 630

F.3d 420, 429 (5th Cir. 2011) (internal quotations omitted). Circumstances are exceptional when

they bar adequate redress or prevent the movant from having a full and fair opportunity to litigate

its 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 (5th

Cir. 2010) (not designated for publication).

Although there is no absolute time bar on when a Rule 60(b)(6) motion can be made, “a

court should scrutinize the particular circumstances of the case and balance the interest in finality



with 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 case

showing that the Court should vacate the Claim Orders to ensure justice. First, these proceedings

have been slowed by the Trustee’s lack of power to conduct adequate discovery in light of the

ongoing criminal proceedings. It would be patently unfair and fundamentally unjust for Seven

Hills and Learned to profit from a delay caused by the need for the DOJ to investigate and

prosecute their misconduct. Accordingly, the Claim orders should also be vacated pursuant to

Rule 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 Adversary

Proceeding, the Court should stay the Objection proceedings. The Court’s next step after

vacating 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 has

inherent power to control how it disposes of cases on its docket, including the power to stay

proceedings. Landis v. N. Am. Co., 299 U.S. 248, 254 (1936). The determination of whether to

7
The Trustee reserves the right to seek consolidation of the Objections with the Adversary Proceeding under Federal
Rule of Civil Procedure 42(a). If multiple actions involve “a common question of law or fact,” the Court may “join
for hearing or trial any or all matters at issue in the action[,] consolidate the actions[,] or issue any other orders to
avoid unnecessary cost or delay.” Fed. R. Civ. P. 42(a); Fed. R. Bankr. P. 7042 & 9014. Rule 42(a) provides “an
expansive [standard], allowing consolidation of the broad range of cases brought in federal court.” 8 Moore’s
Federal 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 two
matters contain common questions of law and fact. The Complaint and the Objections both involve, inter alia, the
takeover of Premier by the Debtor. See Complaint 22–31. The Trustee seeks avoidance of the Premier transaction
as 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 inappropriate
conduct undertaken by Seven Hills and Learned in the Premier transaction.



stay proceedings is a balancing of competing interests. Id. at 254–55. The party seeking a stay

of proceedings “must make out a clear case of hardship or inequity in being required to go

forward.” 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 criminal

proceedings prosecuted by the DOJ are completed. The discretion and secrecy required by the

DOJ investigation has hindered the Trustee’s ability to investigate the circumstances surrounding

the Claims. Although the Trustee now has the Indictment demonstrating that the Claims should

be disallowed, he will not be able to access the information underlying the Indictment until after

the criminal proceedings finish. In addition, the DOJ has filed a motion to stay the Trustee’s

adversary 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 criminal

proceedings are completed, he would face hardship and suffer inequity in the Objection

proceedings and, if he were unsuccessful, would have to seek an additional reconsideration after

the criminal proceedings were concluded and further evidence became available.

Staying the Objection proceedings would also benefit the Debtor’s creditors and is in the

public interest. The Debtor’s creditors benefit because the Trustee could properly investigate the

validity of the Claims to ensure proper treatment of the Claims. The public interest is served

both by allowing the Claims to be properly adjudicated and by allowing the DOJ to continue its

prosecution without having to worry about the Trustee seeking information that could

compromise the DOJ’s case.

Such a stay would be reasonable even though its duration could not be accurately

predicted in advance. Because the criminal defendants are entitled to a speedy trial, it is unlikely



that 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 of

the Claims will not prejudice any party, as the Trustee’s proposed Plan can be confirmed and

distributions can be made while reserving for the Claims in the event that they are eventually

allowed. Accordingly, at this stage, staying the proceedings related to the Claims and Objections

will 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) granting

the relief requested herein; (ii) vacating the Claim Orders; (iii) staying the Objections

proceedings; 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
pfranklin@fslhlaw.com
Doug Skierski
dskierski@fslhlaw.com
Erin K. Lovall
elovall@fslhlaw.com

10501 N. Central Expressway, Suite 106
Dallas, Texas 75231
Telephone: (972) 755-7100
Facsimile: (972) 755-7110

Counsel for Matthew D. Orwig, Chapter 11 Trustee



CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the above and foregoing was sent
electronically by the Court’s CM/ECF system to all parties receiving CM/ECF notice in this case
on January 6, 2012. Pursuant to Federal Rule of Civil Procedure 4(h)(1)(B) and Texas Civil
Practice and Remedies Code § 17.044, Seven Hills will be served with a true and correct copy of
the foregoing through the Texas Secretary of State. True and correct copies of the above and
foregoing will also be sent to Seven Hills and Learned at the following addresses via First Class
United 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, regarding
the matters contained in this Motion. Counsel for Learned opposed the relief requested in this
Motion.
Counsel for the Trustee has not conferred with counsel for Seven Hills because there is
currently no counsel listed on PACER representing Seven Hills.
Counsel for the Trustee did not confer with counsel for any other parties in interest in this
case regarding the matters contained in this Motion. Holding a conference with such a large
number of parties in interest would not be practicable.
/s/ Peter A. Franklin
Peter A. Franklin


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