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IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DMSION In re:
§
COLORSTARGRO~RSOF
COLORADO, INC., VAST, INC., and COLOR STAR, LLC, Debtors.
§ § § § § §
Chapter 11 Case No. 13-42959
(Jointly Administer ed)
OBJECTION OF REGIONS BANK, ADMINISTRATIVE AGENT, TO CLAIM NO.5 FILED BY NEXBANK SECURITIES, INC. D/B/A NEXBANK CAPITAL ADVISORS, F/K/A BARRIER ADVISORS AGAINST DEBTOR COLOR STAR, LLC NO HEARING WILL BE CONDUCTED ON THIS OBJECTION UNLESS A WRITTEN RESPONSE IS FILED WITH THE CLERK OF THE UNITED STATES BANKRUPTCY COURT AND SERVED UPON THE PARTY FILING THIS PLEADING WITHIN TWENTY-ONE (21) DAYS FROM THE DATE OF SERVICE UNLESS THE COURT SHORTENS OR EXTENDS THE TIME FOR FILING SUCH RESPONSE. IF NO RESPONSE IS TIMELY SERVED AND FILED, THIS PLEADING SHALL BE DEE'MED UNOPPOSED, AND THE COURT MAY ENTER AN ORDER GRANTING THE RELIEF SOUGHT. IF A RESPONSE IS FILED AND SERVED IN A TIMELY MANNER, THE COURT WILL THEREAFTER SET A HEARING. IF YOU FAIL TO APPEAR AT THE HEARING, YOUR R ESPONSE MAY BE STRICKEN. THE COURT RESERVES THE IUGHT TO SET A HEARING ON ANY MATTER. Regions Bank ("Regions") as Administl·ative Agent acting for and on behalf of Regions and Comerica Bank ("Comerica"), secured creditors and parties in interest, files this Objection (the ''Objection") to Proof of C laim No. 5 flied by NexBank Securities, Inc. d/b/a NexBank Capital Advisors, tlk/a Barrier Advisors ("Barrier") against debtor Color Star, LLC and in support thereof: shows the Court as follows:
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I. INTRODUCTION
1.
Although Barrier has been aware of this bankruptcy action for months, it now
suddenly asserts an unsecured claim against the estate for less than $25,000-allcgedly for an unliquidated prepetition indemnity right that it says Debtors owed to Barrier pursuant to a professional services contract. Barrier's claim fails both procedmally and substantively. 2.
First, Barrier's claim fails to comply with the Bankruptcy Rules. Barrier has
refused to disclose the contract that forms the basis of its claim. The Court should reject Barrier's claim for this reason, among others. 3.
Second, Barrier's claim lacks substantive merit. Barrier asks to recover funds
from Debtors' bankruptcy estates alongside the other unpaid unsecured creditors because Debtors allegedly agreed to indemnify Barrier for Barrier's own intentional misconduct. But Barrier's fraudulent and possibly criminal conduct worsened Debtors' financial condition to the direct detriment of the bona fide unsecured creditors. Barrier seeks to recover only its defense costs arising from fraud actions brought by Debtors' commercial lenders. These lenders base their actions upon allegations that Barrier masterminded a conspiracy with Debtors to misrepresent Debtors' financial condition to the lenders in order to obtain more than $60 milltion in commercial loans- funds that Debtors could never have obtained without deceit. Indeed, the lenders' actions assert that Barrier concocted this fraud with the intention of earning more than $1 million in fees for itself. 4.
rn other words, BatTier claims that it should not only keep its inflated million-
dollar professional fee for brokering a loan that forced Debtors into bankruptcy, but that Debtors must also indemnify Barrier for its knowing and intentional misconduct in doing so. Astonishingly, Barrier claims that it is ent1tled to indemnity fi.·om even if/enders obtain judgment
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against Barrier. 1 The very contract that Barrier is refusing to disclose may expressly preclude its
claim. 5.
Barrier owed contractual and other legal duties to Debtors before the Petition
Date. Barrier breached those duties to Debtors' detriment. Rather than owing an indemnity to Barrier, Debtors likely have claims against Barrier for breach of contract and breach of fiduciary duty. Whether Debtors ultimately assert those claims remains to be seen. 6.
Accordingly, and for the reasons explained below, this Court should reject
Barriers' claim as defective under the Bankruptcy Code.
n. JURISDICTION AND VENUE
7.
This Court has jurisdiction to hear and determine this Objection pursuant to 28
U.S.C. sections 157 and 1334. This Objection concerns the administration of the Debtors' bankruptcy estates and therefore is a core proceeding pursuant to 28 U.S.C. section 157(b)(2)(A) and (B). 8.
Venue is proper in this Court pursuant to 28 U.S.C. sections 1408 and 1409.
IIl. BACKGRO UND A.
The Bankruptcy Case
9.
On December 15, 2013 (the "Petition Date"), each of the Debtors filed voluntary
petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"), thereby initiating their bankruptcy cases and creating their respective bankruptcy estates.
1
In discussions with Debtors' counsel and other participants in this bankruptcy action, Barrier has repeatedly argued that it cannot be liable to the Lenders for fraud because the Lenders supposedly "knew" the same things Barrier knew about accounting irregularities on Debtors' financial statements. That assertion is false. But even taking Barrier's argument at face value, the logical implication of that argument is that Barrier and Debtors together knowingly submiltedfalseflnancial documentation to afederally-insuredflmmcial institution which is to say, they committed bank fraud.
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From the Petition Date through January 6, 2014, the first interim period, the Debtors continued to operate and manage their businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. Pursuant to sale orders entered January 14, 2014, the Debtors sold substantiaLly all of their assets and ceased conducting any business operations. B.
The Lenders' State Court Actions 10.
As of the Petition Date, Debtors had more than $65 million in outstanding debt to
a group of commercial lenders that included Regions, Comerica, and MCG Capital Corporation ("MCG"). Approximately $52 million of that debt was "senior" debt provided by Regions and Cornerica, secured by substantially all of the Debtors' assets. MCG provided more than $13 million of Debtors' total commercial debt as "junior" debt that was effectively unsecured. Although the senior lenders have recouped some of their outstanding debt through sales of the Debtors' assets in this proceeding, the commercial lenders remain by far the bankruptcy estates' three largest unsecured creditors-having Jost tens of millions of doLlars in unrecovered loan funds. 11.
The lenders contend (and will prove) that their losses resulted from a conspi racy
among Debtors and certain of their financial and legal professionals to defraud the lenders and MCG. 12.
In order to recover the tens of millions of dollars in outstanding debt that lhe
Debtors cannot repay, the lenders have initiated fraud actions in Texas state court against Banier. The pleadings in the state court actions describe how Barrier's head of investment banking, Barrett Kingsriter, 2 masterminded the $60 million fraud conspiracy. Parts II.B.i and Il.B.ii below briefly describe the state court actions in more detail.
2
AJso a Texas-licensed lawyer.
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i.
The MCG State Court Action
13.
On December 12, 2013, prior to the Petition Date, MCG Capital Corporation and
its affiliate, Solutions Capital I, L.P. (collectively "MCG"), filed a petition (the " MCG Petition")
in the Dallas County lOlst Jud icial District Court (the "State Court") against Barrier, Huibert Verbeek, Engelbrecht Verbeek, Kenney Verbeek Jack Ormberget and Ehrhardt Keefe Steiner & Hottman PC (collectively, the "MCG State Court Action Defendants"), thus initiating the "MCG State Court Action." On January 27, 2014, MCG filed a first amended petition that identified Barrier as a d/b/a ofNexBank Securities, Inc. 14.
In its amended petition, MCG alleges that the MCG State Court Action
Defendants engaged in "egregious, fraudulent, and negligent misconduct, which induced [MCG] to provide a $13.5 million loan ... and [the MCG State Court Action Plaintiffs] to enter into a November 15, 2012 subordinated credit agreement and related documents [the ("Loan Package")]. .. with [the non-party Debtors]." Amended Petition at~ 2. MCG's amended petition identifies seven causes of action alleging violations of the Texas Securities Act, fraud, conspiracy to commit fraud and negligent misrepresentation.
ii.
The Regions Bank State Court Action
15.
On February 13, 2014, Regions filed a petition in the State Court (the "Regions
Petition") against Barrier, Barrett Kingsriter, Huibert Verbeek, Kenney Verbeek, Englebrecht "Brett" Verbeek, Jack Ormberget, Nikki llw·st Gibson, Elu-hardt Keefe Steiner & Hottman, P.C. and EKS&H, LLP (collectively, the "Regions State Court Action Defendants''), thus initiating lhe "Regions State Court Action. " 16.
In the Regions Petition, Regions alleges that the Regions State Court Action
Defendants conspired to procure the $66 million Loan Package "through a massive accounting
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fraud." Regions Petition at ~ I . The Regions Petition identifies three causes of action alleging fraud and fraudulent misrepresentations, conspiracy to defraud and negligent misrepresentation and negligence per se. 17.
The trial court consolidated the MCG State Court Action and the Regions State
Court Action (collectively, the "State Court Actions"). The parties are currently proceeding together in discovery. 18.
Against t his background, Barrier now appears in the bankruptcies with a belated
claim for less than $25,000 in professional fees. 19.
In light of the claims' procedural and substantive defects- not to mention the
practical obstacles presented by the millions of dollars of bona fide claims and the bankruptcy estates' diminishing assets
Barrier's true motive is revealed. Barrier did not file its claim in
order to recover its defense costs. Rather, Barrier hopes to use its minimal (and defective) claim as a springboard for Barrier to seek orders from this Court that wi ll circumvent the ordinary course of litigation in the State Court Actions.
C.
The Barrier Proof of Claim 20.
On March 28, 20 14, Barrier liled a proof of claim in the bankruptcy case of
debtor Color Star, LLC. (Case No. 13-42961) as an unsecured c laim in the amount of $24,017.50 (Claim No. 5, the "Barrier Claim"). 3 In compliance with Local Bankruptcy Rule 3007(a)( I ). a copy of the Barrier Claim is attached hereto as Exhibit A. 21.
The Barrier Claim includes a "Rider" stating that the Barrier Claim is an
"estimate" of prepetition professional fees costs and expenses incurred by Barrier in the State
3
Barrier filed identical claims in the bankruptcy case of Vast, Inc. (Case No. 13-42960) and Color Star, LLC (Case No. 13-42961). In compliance with Local Bankruptcy Rule 3007(c), Regions is filing separate, but substantively identical, objections to each of the three Barrier claims.
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Court Actions and that such amounts are payable under the terms of an "Engagement Agreement" between the Debtors and Barrier dated August 2, 2012. 22.
Barrier failed to attach the alleged Engagement Agreement to its proof of claim.
Barrier alleges that the Engagement Agreement is confidential, that it has provided a copy to the Debtors and their counsel, and that '·[u]pon request of the Bankruptcy Court, [Barrier] shall make 4
the Engagement Agreement available to the Bankruptcy Court for an in camera review. " Barrier further asserts that "[u]pon an Order of the Bankruptcy Court, or as otherwise agreed to by [Barrier] and the [Debtors], [Barrier] shall make the Engagement Agreement available to a partyin-interest in these Consolidated Cases."5
IV. OBJECTION A.
The Court Should Disallow Barrier's Claim for Failure to Provide Substantiating Documentation 23.
Regions objects to the Barrier Claim because it fails to provide documentation
substantiating the claim. Bankruptcy Rule 300l(c)(l ) states that when a claim is based on a writing, "a copy of the writing shall be filed with the proof of claim." Case law recognizes that, when a claimant fails to comply with Rule 3001, the Court may not consider the claim as prima facie evidence of the validity or amount of the claim, and the claim is subject to disallowance.6 The official proof of claim form also requires a claimant to attach "copies of documents that show the debt exists ...." 7
~ Rider at footnote I. 5
!d.
6
See In re Kirkland, 572 F.3d 838, 84 I (I Oth Cir. 2009); see also In re Residential Capital, LLC, 2013 WL 5524728
at 7
*4 (Bankr. S.D.N.Y. Oct. 4, 2013).
Official Proof of Claim Form (Fonn B !0) at p. 2,, 7.
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Furthetmore, Bankruptcy Rule 3007(d)(6) specifically cites noncompliance with
applicable bankruptcy rules, under circumstances where the objecting party is unable to determine the validity of the claim because of the noncompliance, as a basis to disallow the claim. 25.
Barrier has failed! to meet these requirements. The proof of claim does not attach
a copy of the Engagement Agreement, which BatTier alleges gives rise to its claim. Barrier's sole basis for not complying with the Bankruptcy Rules is that the Engagement Agreement is a lleged ly "confidential." However, Barrier could have attached a redacted copy. 8 Instead, Barrier c hose to vaguely summarize the document and essentially asks the parties in interest in the case (aside from the Debtors), to accept Barrier's word that the Debtors actually owe these amounts to Barrier. That simply is not sufficient. T he Court should enforce the Bankruptcy Rule requirements and should disallow the Barrier Claim for the failure to attach sufficient documentation. B.
T he Court Should Disallow Barrier's Claim Under Bankruptcy Code Section 502(e)(1)(B) 26.
Regions also objects to the Barrier CLaim and requests entry of an order under
Bankruptcy Code section 502(e)(l)(B) disallowing the claim. Bankruptcy Code section 502(e)(l )(B) requires the Court to disallow "any claim for reimbursement or contribution of an entity liable with the debtor on ... to the extent that ... such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim for reimbursement or distribution ...." 27.
Thus, section 502(e)(l)(B) has three elements: "(i) the claim must be one for
reimbursement or contribution; (ii) the entity asserting the claim for reimbursement or 8
See Oflicial Proof of Claim Form at~ 7 (stating that redacted copies of documents may be attached).
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contribution must be 'liable with the debtor' or have secured the claim of a creditor; and (ili) the claim must be contingent at the time of its allowance or disallowance."9
28.
As to the fust element, courts have recognized that, for the purposes of section
502(e)(l)(B), "the concept of reimbursement includes indemnity." 10 29.
As to the second element, "it is well-established that contingent claims for
indemnity are covered by § 502(e)(l)(B) where the claimant is co-liable with the debtor on the underlying claim. 11 30.
As to the third element, indemnification claims related to defense costs may be
contingent if, for example, the debtor's liability for the costs is contingent on certain findings in the underlying lawsuit, such as a finding of good faith. 31.
12
The first two elements clearly apply to the Barrier Claim. Barrier asserts a right to
indemnification (not advancement) of fees. Moreover, the Debtors are potentially co-liable with Barrier in the underlying State Court Actions. 32.
As to the thjrd C'!cmcnt, Barrier's refusal to provide a copy of the Engagement
Agreement prevents Regions from definitively determining whether Barrier's ultimate right to indemnity is contingent on a finding in the State Court Actions. However, as required by Local Rule 3007(a)(2), attached hereto as Exhibit B is the Declaration of B. Lynn Johnston in support of this Objection. As set forth in Mr. Johnston's declaration, .Debtors and Scouler & Company
9
In re Wedtech Corp., 85 B.R. 285,289 (Bankr. S.D.N.Y. 1988).
10
In re Drexel Burnham, 146 B.R. 92, 95 (S.D.N.Y. 1992) (quoting in re Wedtech Corp. , 85 B.R. at 289).
11
In re Drexel Burnham, 146 B.R. at 96 (collecting cases); see also In reTouch America Holdings, Inc., 409 B.R. 712, 719 (Bankr. D. Del. 2009) (distinguishing between a right to advancement of attomeys' fees and a right to
indemnification for attorneys' fees and concluding that asserted costs of defense should be disallowed because "ftlhc interdependence between [the claimant's] defense costs and the underlying action for indemnification costs places all of [the claimant's] claims under the umbrella of§ 502(e)(l )(B).") (internal quotation marks omitted). 12
/n re Drexel Burnht1m, 146 B.R. at 97.
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LLC executed an engagement agreement that Debtors have filed with this Court. 13 The Scouter
& Company engagement agreement contains an indemnity provision, but provides that indemnification is contingent upon a '·fmal judgment" that the losses did not result from the indemnified party' s "gross negligence or willful mjsconduct." 14 33.
In his declaration, Mr. Johnston notes that he would expect that any engagement
agreement between Debtors and Barrier would contain a similar provision with respect to any alleged indemnification. 15 34.
If indeed the Engagement Agreement provides for this common type of
contingency, then the third element is met and the Court should disallow the Barrier Claim p ursuant to Bankruptcy Code section 502(e)(1 )(B). 35.
As demonstrated above, Regions has rebutted the Barrier Claim's presumption of
validity under Bankruptcy Rule 3001 (f). Consequently, the burden of proof shifts to Barrier to demonstrate its entitlement to an allowed claim. If Barrier is unwilling, or unable, to meet this burden, the Court should disallow the Barrier Claim. For these reasons, Regions requests that the Court enter an order, substantively in the form attached hereto as Exhibit C, 16 disallowing the Barrier Claim and entering such other and further relief as is just under the circumstances.
13
Doc. 168-1, Ex. A, p.l4-17.
1 "'
/d.; Declaration of B. Lynn Johnston (Ex. B).
l:5
Declaration ofB. Lynn Johnston (Ex. B).
16
In compliance with Local Bankruptcy Rule 3007(a)(4), the proposed order confom1s to TXEB Local Fom1 3007.
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Respectfully submitted, KA NE R USSELL COLEMAN & LOGAN P C
By: Is/ Michael P. Ridulfo Michael P. Ridulfo State Bar No. 16902020 915 Milam Street, Suite 2200 Houston. Texas 77002 Telephone: (713) 425-7400 Telecopier: (7D) 425-7700
George H. Barber State Bar No. 01705650 Jason B. Binfo rd State Bar No. 24045499 3700 Thanksgiving Tower 160 I Elm Street Dallas, Texas 75201 Telephone: (214) 777-4200 Telecopier: (214) 777-4299
Attonuys for R egions Onnk ns Administrative Agent and as Lender CERTIFI CATE OF ERVICE I hereby certify that on April 21 5', 2014 a true and correct copy of the foregoing objection was served on the parties listed below via ECF Notification and United States First Class Mail and by United States First Class Mail, ECF Notification and Email on the parties listed on the April 14,2014 official service list.
Is/ Michael P. Ridulfo Michael P. Ridulfo NexBank Securities, lnc. d/b/a NexBank Capital Advisors flk/a Barrier Advisors c/o Cole, Scholotz, Meissel, Forman & Leonard, P.A. 301 Commerce Street, Suite 1700 Fort Worth, TX 76102 Attn: Michael D. Warner, Esq.
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IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DMSION In re:
§
COLORSTARGRO~RSOF
COLORADO, INC., VAST, INC., and COLOR STAR, LLC, Debtors.
§ § § § § §
Chapter 11 Case No. 13-42959
(Jointly Administer ed)
OBJECTION OF REGIONS BANK, ADMINISTRATIVE AGENT, TO CLAIM NO.5 FILED BY NEXBANK SECURITIES, INC. D/B/A NEXBANK CAPITAL ADVISORS, F/K/A BARRIER ADVISORS AGAINST DEBTOR COLOR STAR, LLC NO HEARING WILL BE CONDUCTED ON THIS OBJECTION UNLESS A WRITTEN RESPONSE IS FILED WITH THE CLERK OF THE UNITED STATES BANKRUPTCY COURT AND SERVED UPON THE PARTY FILING THIS PLEADING WITHIN TWENTY-ONE (21) DAYS FROM THE DATE OF SERVICE UNLESS THE COURT SHORTENS OR EXTENDS THE TIME FOR FILING SUCH RESPONSE. IF NO RESPONSE IS TIMELY SERVED AND FILED, THIS PLEADING SHALL BE DEE'MED UNOPPOSED, AND THE COURT MAY ENTER AN ORDER GRANTING THE RELIEF SOUGHT. IF A RESPONSE IS FILED AND SERVED IN A TIMELY MANNER, THE COURT WILL THEREAFTER SET A HEARING. IF YOU FAIL TO APPEAR AT THE HEARING, YOUR R ESPONSE MAY BE STRICKEN. THE COURT RESERVES THE IUGHT TO SET A HEARING ON ANY MATTER. Regions Bank ("Regions") as Administl·ative Agent acting for and on behalf of Regions and Comerica Bank ("Comerica"), secured creditors and parties in interest, files this Objection (the ''Objection") to Proof of C laim No. 5 flied by NexBank Securities, Inc. d/b/a NexBank Capital Advisors, tlk/a Barrier Advisors ("Barrier") against debtor Color Star, LLC and in support thereof: shows the Court as follows:
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I. INTRODUCTION
1.
Although Barrier has been aware of this bankruptcy action for months, it now
suddenly asserts an unsecured claim against the estate for less than $25,000-allcgedly for an unliquidated prepetition indemnity right that it says Debtors owed to Barrier pursuant to a professional services contract. Barrier's claim fails both procedmally and substantively. 2.
First, Barrier's claim fails to comply with the Bankruptcy Rules. Barrier has
refused to disclose the contract that forms the basis of its claim. The Court should reject Barrier's claim for this reason, among others. 3.
Second, Barrier's claim lacks substantive merit. Barrier asks to recover funds
from Debtors' bankruptcy estates alongside the other unpaid unsecured creditors because Debtors allegedly agreed to indemnify Barrier for Barrier's own intentional misconduct. But Barrier's fraudulent and possibly criminal conduct worsened Debtors' financial condition to the direct detriment of the bona fide unsecured creditors. Barrier seeks to recover only its defense costs arising from fraud actions brought by Debtors' commercial lenders. These lenders base their actions upon allegations that Barrier masterminded a conspiracy with Debtors to misrepresent Debtors' financial condition to the lenders in order to obtain more than $60 milltion in commercial loans- funds that Debtors could never have obtained without deceit. Indeed, the lenders' actions assert that Barrier concocted this fraud with the intention of earning more than $1 million in fees for itself. 4.
rn other words, BatTier claims that it should not only keep its inflated million-
dollar professional fee for brokering a loan that forced Debtors into bankruptcy, but that Debtors must also indemnify Barrier for its knowing and intentional misconduct in doing so. Astonishingly, Barrier claims that it is ent1tled to indemnity fi.·om even if/enders obtain judgment
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against Barrier. 1 The very contract that Barrier is refusing to disclose may expressly preclude its
claim. 5.
Barrier owed contractual and other legal duties to Debtors before the Petition
Date. Barrier breached those duties to Debtors' detriment. Rather than owing an indemnity to Barrier, Debtors likely have claims against Barrier for breach of contract and breach of fiduciary duty. Whether Debtors ultimately assert those claims remains to be seen. 6.
Accordingly, and for the reasons explained below, this Court should reject
Barriers' claim as defective under the Bankruptcy Code.
n. JURISDICTION AND VENUE
7.
This Court has jurisdiction to hear and determine this Objection pursuant to 28
U.S.C. sections 157 and 1334. This Objection concerns the administration of the Debtors' bankruptcy estates and therefore is a core proceeding pursuant to 28 U.S.C. section 157(b)(2)(A) and (B). 8.
Venue is proper in this Court pursuant to 28 U.S.C. sections 1408 and 1409.
IIl. BACKGRO UND A.
The Bankruptcy Case
9.
On December 15, 2013 (the "Petition Date"), each of the Debtors filed voluntary
petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"), thereby initiating their bankruptcy cases and creating their respective bankruptcy estates.
1
In discussions with Debtors' counsel and other participants in this bankruptcy action, Barrier has repeatedly argued that it cannot be liable to the Lenders for fraud because the Lenders supposedly "knew" the same things Barrier knew about accounting irregularities on Debtors' financial statements. That assertion is false. But even taking Barrier's argument at face value, the logical implication of that argument is that Barrier and Debtors together knowingly submiltedfalseflnancial documentation to afederally-insuredflmmcial institution which is to say, they committed bank fraud.
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From the Petition Date through January 6, 2014, the first interim period, the Debtors continued to operate and manage their businesses as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. Pursuant to sale orders entered January 14, 2014, the Debtors sold substantiaLly all of their assets and ceased conducting any business operations. B.
The Lenders' State Court Actions 10.
As of the Petition Date, Debtors had more than $65 million in outstanding debt to
a group of commercial lenders that included Regions, Comerica, and MCG Capital Corporation ("MCG"). Approximately $52 million of that debt was "senior" debt provided by Regions and Cornerica, secured by substantially all of the Debtors' assets. MCG provided more than $13 million of Debtors' total commercial debt as "junior" debt that was effectively unsecured. Although the senior lenders have recouped some of their outstanding debt through sales of the Debtors' assets in this proceeding, the commercial lenders remain by far the bankruptcy estates' three largest unsecured creditors-having Jost tens of millions of doLlars in unrecovered loan funds. 11.
The lenders contend (and will prove) that their losses resulted from a conspi racy
among Debtors and certain of their financial and legal professionals to defraud the lenders and MCG. 12.
In order to recover the tens of millions of dollars in outstanding debt that lhe
Debtors cannot repay, the lenders have initiated fraud actions in Texas state court against Banier. The pleadings in the state court actions describe how Barrier's head of investment banking, Barrett Kingsriter, 2 masterminded the $60 million fraud conspiracy. Parts II.B.i and Il.B.ii below briefly describe the state court actions in more detail.
2
AJso a Texas-licensed lawyer.
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i.
The MCG State Court Action
13.
On December 12, 2013, prior to the Petition Date, MCG Capital Corporation and
its affiliate, Solutions Capital I, L.P. (collectively "MCG"), filed a petition (the " MCG Petition")
in the Dallas County lOlst Jud icial District Court (the "State Court") against Barrier, Huibert Verbeek, Engelbrecht Verbeek, Kenney Verbeek Jack Ormberget and Ehrhardt Keefe Steiner & Hottman PC (collectively, the "MCG State Court Action Defendants"), thus initiating the "MCG State Court Action." On January 27, 2014, MCG filed a first amended petition that identified Barrier as a d/b/a ofNexBank Securities, Inc. 14.
In its amended petition, MCG alleges that the MCG State Court Action
Defendants engaged in "egregious, fraudulent, and negligent misconduct, which induced [MCG] to provide a $13.5 million loan ... and [the MCG State Court Action Plaintiffs] to enter into a November 15, 2012 subordinated credit agreement and related documents [the ("Loan Package")]. .. with [the non-party Debtors]." Amended Petition at~ 2. MCG's amended petition identifies seven causes of action alleging violations of the Texas Securities Act, fraud, conspiracy to commit fraud and negligent misrepresentation.
ii.
The Regions Bank State Court Action
15.
On February 13, 2014, Regions filed a petition in the State Court (the "Regions
Petition") against Barrier, Barrett Kingsriter, Huibert Verbeek, Kenney Verbeek, Englebrecht "Brett" Verbeek, Jack Ormberget, Nikki llw·st Gibson, Elu-hardt Keefe Steiner & Hottman, P.C. and EKS&H, LLP (collectively, the "Regions State Court Action Defendants''), thus initiating lhe "Regions State Court Action. " 16.
In the Regions Petition, Regions alleges that the Regions State Court Action
Defendants conspired to procure the $66 million Loan Package "through a massive accounting
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fraud." Regions Petition at ~ I . The Regions Petition identifies three causes of action alleging fraud and fraudulent misrepresentations, conspiracy to defraud and negligent misrepresentation and negligence per se. 17.
The trial court consolidated the MCG State Court Action and the Regions State
Court Action (collectively, the "State Court Actions"). The parties are currently proceeding together in discovery. 18.
Against t his background, Barrier now appears in the bankruptcies with a belated
claim for less than $25,000 in professional fees. 19.
In light of the claims' procedural and substantive defects- not to mention the
practical obstacles presented by the millions of dollars of bona fide claims and the bankruptcy estates' diminishing assets
Barrier's true motive is revealed. Barrier did not file its claim in
order to recover its defense costs. Rather, Barrier hopes to use its minimal (and defective) claim as a springboard for Barrier to seek orders from this Court that wi ll circumvent the ordinary course of litigation in the State Court Actions.
C.
The Barrier Proof of Claim 20.
On March 28, 20 14, Barrier liled a proof of claim in the bankruptcy case of
debtor Color Star, LLC. (Case No. 13-42961) as an unsecured c laim in the amount of $24,017.50 (Claim No. 5, the "Barrier Claim"). 3 In compliance with Local Bankruptcy Rule 3007(a)( I ). a copy of the Barrier Claim is attached hereto as Exhibit A. 21.
The Barrier Claim includes a "Rider" stating that the Barrier Claim is an
"estimate" of prepetition professional fees costs and expenses incurred by Barrier in the State
3
Barrier filed identical claims in the bankruptcy case of Vast, Inc. (Case No. 13-42960) and Color Star, LLC (Case No. 13-42961). In compliance with Local Bankruptcy Rule 3007(c), Regions is filing separate, but substantively identical, objections to each of the three Barrier claims.
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Court Actions and that such amounts are payable under the terms of an "Engagement Agreement" between the Debtors and Barrier dated August 2, 2012. 22.
Barrier failed to attach the alleged Engagement Agreement to its proof of claim.
Barrier alleges that the Engagement Agreement is confidential, that it has provided a copy to the Debtors and their counsel, and that '·[u]pon request of the Bankruptcy Court, [Barrier] shall make 4
the Engagement Agreement available to the Bankruptcy Court for an in camera review. " Barrier further asserts that "[u]pon an Order of the Bankruptcy Court, or as otherwise agreed to by [Barrier] and the [Debtors], [Barrier] shall make the Engagement Agreement available to a partyin-interest in these Consolidated Cases."5
IV. OBJECTION A.
The Court Should Disallow Barrier's Claim for Failure to Provide Substantiating Documentation 23.
Regions objects to the Barrier Claim because it fails to provide documentation
substantiating the claim. Bankruptcy Rule 300l(c)(l ) states that when a claim is based on a writing, "a copy of the writing shall be filed with the proof of claim." Case law recognizes that, when a claimant fails to comply with Rule 3001, the Court may not consider the claim as prima facie evidence of the validity or amount of the claim, and the claim is subject to disallowance.6 The official proof of claim form also requires a claimant to attach "copies of documents that show the debt exists ...." 7
~ Rider at footnote I. 5
!d.
6
See In re Kirkland, 572 F.3d 838, 84 I (I Oth Cir. 2009); see also In re Residential Capital, LLC, 2013 WL 5524728
at 7
*4 (Bankr. S.D.N.Y. Oct. 4, 2013).
Official Proof of Claim Form (Fonn B !0) at p. 2,, 7.
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Furthetmore, Bankruptcy Rule 3007(d)(6) specifically cites noncompliance with
applicable bankruptcy rules, under circumstances where the objecting party is unable to determine the validity of the claim because of the noncompliance, as a basis to disallow the claim. 25.
Barrier has failed! to meet these requirements. The proof of claim does not attach
a copy of the Engagement Agreement, which BatTier alleges gives rise to its claim. Barrier's sole basis for not complying with the Bankruptcy Rules is that the Engagement Agreement is a lleged ly "confidential." However, Barrier could have attached a redacted copy. 8 Instead, Barrier c hose to vaguely summarize the document and essentially asks the parties in interest in the case (aside from the Debtors), to accept Barrier's word that the Debtors actually owe these amounts to Barrier. That simply is not sufficient. T he Court should enforce the Bankruptcy Rule requirements and should disallow the Barrier Claim for the failure to attach sufficient documentation. B.
T he Court Should Disallow Barrier's Claim Under Bankruptcy Code Section 502(e)(1)(B) 26.
Regions also objects to the Barrier CLaim and requests entry of an order under
Bankruptcy Code section 502(e)(l)(B) disallowing the claim. Bankruptcy Code section 502(e)(l )(B) requires the Court to disallow "any claim for reimbursement or contribution of an entity liable with the debtor on ... to the extent that ... such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim for reimbursement or distribution ...." 27.
Thus, section 502(e)(l)(B) has three elements: "(i) the claim must be one for
reimbursement or contribution; (ii) the entity asserting the claim for reimbursement or 8
See Oflicial Proof of Claim Form at~ 7 (stating that redacted copies of documents may be attached).
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contribution must be 'liable with the debtor' or have secured the claim of a creditor; and (ili) the claim must be contingent at the time of its allowance or disallowance."9
28.
As to the fust element, courts have recognized that, for the purposes of section
502(e)(l)(B), "the concept of reimbursement includes indemnity." 10 29.
As to the second element, "it is well-established that contingent claims for
indemnity are covered by § 502(e)(l)(B) where the claimant is co-liable with the debtor on the underlying claim. 11 30.
As to the third element, indemnification claims related to defense costs may be
contingent if, for example, the debtor's liability for the costs is contingent on certain findings in the underlying lawsuit, such as a finding of good faith. 31.
12
The first two elements clearly apply to the Barrier Claim. Barrier asserts a right to
indemnification (not advancement) of fees. Moreover, the Debtors are potentially co-liable with Barrier in the underlying State Court Actions. 32.
As to the thjrd C'!cmcnt, Barrier's refusal to provide a copy of the Engagement
Agreement prevents Regions from definitively determining whether Barrier's ultimate right to indemnity is contingent on a finding in the State Court Actions. However, as required by Local Rule 3007(a)(2), attached hereto as Exhibit B is the Declaration of B. Lynn Johnston in support of this Objection. As set forth in Mr. Johnston's declaration, .Debtors and Scouler & Company
9
In re Wedtech Corp., 85 B.R. 285,289 (Bankr. S.D.N.Y. 1988).
10
In re Drexel Burnham, 146 B.R. 92, 95 (S.D.N.Y. 1992) (quoting in re Wedtech Corp. , 85 B.R. at 289).
11
In re Drexel Burnham, 146 B.R. at 96 (collecting cases); see also In reTouch America Holdings, Inc., 409 B.R. 712, 719 (Bankr. D. Del. 2009) (distinguishing between a right to advancement of attomeys' fees and a right to
indemnification for attorneys' fees and concluding that asserted costs of defense should be disallowed because "ftlhc interdependence between [the claimant's] defense costs and the underlying action for indemnification costs places all of [the claimant's] claims under the umbrella of§ 502(e)(l )(B).") (internal quotation marks omitted). 12
/n re Drexel Burnht1m, 146 B.R. at 97.
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LLC executed an engagement agreement that Debtors have filed with this Court. 13 The Scouter
& Company engagement agreement contains an indemnity provision, but provides that indemnification is contingent upon a '·fmal judgment" that the losses did not result from the indemnified party' s "gross negligence or willful mjsconduct." 14 33.
In his declaration, Mr. Johnston notes that he would expect that any engagement
agreement between Debtors and Barrier would contain a similar provision with respect to any alleged indemnification. 15 34.
If indeed the Engagement Agreement provides for this common type of
contingency, then the third element is met and the Court should disallow the Barrier Claim p ursuant to Bankruptcy Code section 502(e)(1 )(B). 35.
As demonstrated above, Regions has rebutted the Barrier Claim's presumption of
validity under Bankruptcy Rule 3001 (f). Consequently, the burden of proof shifts to Barrier to demonstrate its entitlement to an allowed claim. If Barrier is unwilling, or unable, to meet this burden, the Court should disallow the Barrier Claim. For these reasons, Regions requests that the Court enter an order, substantively in the form attached hereto as Exhibit C, 16 disallowing the Barrier Claim and entering such other and further relief as is just under the circumstances.
13
Doc. 168-1, Ex. A, p.l4-17.
1 "'
/d.; Declaration of B. Lynn Johnston (Ex. B).
l:5
Declaration ofB. Lynn Johnston (Ex. B).
16
In compliance with Local Bankruptcy Rule 3007(a)(4), the proposed order confom1s to TXEB Local Fom1 3007.
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Respectfully submitted, KA NE R USSELL COLEMAN & LOGAN P C
By: Is/ Michael P. Ridulfo Michael P. Ridulfo State Bar No. 16902020 915 Milam Street, Suite 2200 Houston. Texas 77002 Telephone: (713) 425-7400 Telecopier: (7D) 425-7700
George H. Barber State Bar No. 01705650 Jason B. Binfo rd State Bar No. 24045499 3700 Thanksgiving Tower 160 I Elm Street Dallas, Texas 75201 Telephone: (214) 777-4200 Telecopier: (214) 777-4299
Attonuys for R egions Onnk ns Administrative Agent and as Lender CERTIFI CATE OF ERVICE I hereby certify that on April 21 5', 2014 a true and correct copy of the foregoing objection was served on the parties listed below via ECF Notification and United States First Class Mail and by United States First Class Mail, ECF Notification and Email on the parties listed on the April 14,2014 official service list.
Is/ Michael P. Ridulfo Michael P. Ridulfo NexBank Securities, lnc. d/b/a NexBank Capital Advisors flk/a Barrier Advisors c/o Cole, Scholotz, Meissel, Forman & Leonard, P.A. 301 Commerce Street, Suite 1700 Fort Worth, TX 76102 Attn: Michael D. Warner, Esq.
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EXHIBIT C
