In re Bayou Group, LLC

396 B.R. 810

In re BAYOU GROUP, LLC, et al., Debtors.

Bayou Accredited Fund, LLC v. Redwood Growth Partners, L.P.

Bayou No Leverage Fund, LLC v. Christian Brothers High School Endowment.

Bayou Superfund, LLC v. D. Canale Beverages, Inc.

Bayou No Leverage Fund, LLC v. Fred Montesi IRA and Fred Montesi.

Bayou Superfund, LLC v. Helen Yulman Revocable Trust.

Bayou Superfund, LLC v. Heritage Hedged Equity Fund LP.

Bayou Superfund, LLC v. John D. Canale III.

Bayou Superfund, LLC v. KFI Capital Partners LLC.

Bayou Superfund, LLC v. Mary P. Smythe Residuary Trust.

Bayou Superfund, LLC v. Mary Jane Pidgeon Sledge.

Bayou No Leverage Fund, LLC v. Mayer and Morris Kaplan Foundation.

Bayou Superfund, LLC v. YK Investment Partnership II.

Bayou Superfund, LLC v. Marvin E. Bruce Living Trust.

Bayou Accredited Fund, LLC v. Freestone Low Volatility Partners LP.

Bayou Superfund, LLC v. William Strang.

Bayou Superfund, LLC v. Randall M. Rothstein and Sheryl B. Rothstein.

Bayou Superfund, LLC v. Alan Osofsky.

Bayou Accredited Fund, LLC v. Madison Capital Advisors Ltd.

Bayou Superfund, LLC v. Highgate Partners LP.

Bayou No Leverage Fund, LLC v. DW Resources Defined Benefit Plan and Marc Daniels.

Bayou Superfund, LLC v. Michael Mann.

Bayou Superfund, LLC v. Myrna Bennett.

Bayou Superfund, LLC v. H & B Hedge Fund II LLC.

Bayou No Leverage Fund, LLC v. Marc Fleisher IRA and Marc Fleisher.

Bayou No Leverage Fund, LLC v. Peter Haje IRA and Peter Haje.

Bayou Superfund, LLC v. Kevin Bass.

Bayou Superfund, LLC v. Michael Davidson.

Bayou Superfund, LLC v. Sterling Stamos Security Fund, L.P., Sterling Stamos Security Fund— Friends and Family, L.P., Sterling Stamos Growth Fund, L.P., and Sterling Stamos Liquidity Fund, L.P.

Bayou Superfund, LLC v. DB Structured Products Inc.

Bayou Superfund, LLC v. High Sierra Investments.

Bayou No Leverage Fund, LLC v. John Barr III IRA and John Barr III.

Bayou Superfund, LLC v. Neil D. Cohen.

Bayou Accredited Fund, LLC v. Edward Sorkin and Virginia Sorkin.

Bankruptcy No. 06 B 22306(ASH).

Adversary No. 06-08318A.

Adversary No. 06-08320A.

Adversary No. 06-08321A.

Adversary No. 06-08329A.

Adversary No. 06-08332A.

Adversary No. 06-08333A.

Adversary No. 06-08336A.

Adversary No. 06-08337A.

Adversary No. 06-08338A.

Adversary No. 06-08339A.

Adversary No. 06-08340A.

Adversary No. 06-08341A.

Adversary No. 06-08368A.

Adversary No. 06-08373A.

Adversary No. 06-08387A.

Adversary No. 06-08389A.

Adversary No. 06-08398A.

Adversary No. 06-08403A.

Adversary No. 06-08412A.

Adversary No. 06-08415A.

Adversary No. 06-08419A.

Adversary No. 06-08420A.

Adversary No. 06-08422A.

Adversary No. 06-08423A.

Adversary No. 06-08430A.

Adversary No. 06-08431A.

Adversary No. 06-08435A.

Adversary No. 06-08493A.

Adversary No. 06-08494A.

Adversary No. 07-08243A.

Adversary No. 07-08244A.

Adversary No. 07-08245A.

Adversary No. 07-08246A.

United States Bankruptcy Court, S.D. New York.

October 16, 2008.

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Gary J. Mennitt, Esq., Jonathan D. Perry, Esq., Elise Scherr Frejka, Esq., Dechert LLP, Tracy L. Klestadt, Esq., Brendan Scott, Esq., Klestadt & Winters, LLP, New York, NY, for the Debtors and Debtors-in-Possession.

Carole Neville, Esq., Sonnenschein Nath & Rosenthal LLP, New York, NY, for Twenty-four Defendants.

Jeff F. Friedman, Esq., Katten, Muchin, Rosenman, LLP, New York, NY, for Peter Haje IRA and Peter Haje.

Richard B. Feldman, Esq., Rosenberg Feldman Smith, LLP, New York, NY, for Freestone Low Volatility Partners, LP.

Kevin Burke, Esq., Cahill, Gordon & Reindel, New York, NY, for DB Structured Products Inc.

Marcy Harris, Esq., Schulte, Roth & Zabel, LLP, New York, NY, for Sterling Stamos Security Fund, L.P., Sterling Stamos Security Fund—Friends and Family, L.P., Sterling Stamos Growth Fund, L.P., and Sterling Stamos Liquidity Fund, L.P.

Joseph W. Allen, Esq., Jaeckle Fleischmann & Mugel, LLP, Buffalo, NY, for Christian Brothers High School Endowment.

H. William Munno, Esq., Seward & Kissel, LLP, New York, NY, for Mary Jane Pidgeon Sledge.

P. Gregory Schwed, Esq., Loeb & Loeb, LLP, New York, NY, for Highgate Partners LP.

DECISIONS ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

ADLAI S. HARDIN, JR., Bankruptcy Judge.

Table of Contents

Page
Jurisdiction ..................................................................822
Overview of the Facts .........................................................822
Prior Motions to Dismiss ......................................................824
Discussion ....................................................................824
    I.  Standards for summary judgment ........................................824
    II.  Section 548(a) issues and conclusions ................................825
         A. The statute and case law ..........................................825
         B. The evidence: criminal pleas/allocutions and the Lenhart Report ...828
            1. What the evidence shows ........................................828
               (a) Guilty pleas and allocutions ...............................828
               (b) The Lenhart Report .........................................831
            2. Admissibility ..................................................834
               (a) Guilty pleas and allocutions ...............................834
               (b) The Lenhart Report .........................................835
         C. No triable issues of fact .........................................842
         D. Ultimate findings and conclusions .................................842
            1. Actual fraud under Section 548(a)(1)(A) ........................842
            2. Constructive fraud under Section 548(a)(1)(B) ..................843
    III. Section 548(c) issues and conclusions ................................843
         A. The statute and case law ..........................................843
         B. Background: good faith defenses accepted by plaintiffs ............853
            1. Proceedings not settled ........................................853
                  John Barr III IRA and John Barr III (Adv.Proc. No. 07-08244)
Myrna Bennett (Adv.Proc. No. 06-08420) Madison
Capital Advisors Ltd. (Adv.Proc. No. 06-08403) .............853
            2. Proceedings settled ............................................853
         C. Good faith defenses sustained .....................................854
            1. DB Structured Products, Inc. (Adv.Proc. No. 06-08494) ..........854

2. High Sierra Investments (Adv.Proc. No. 07-08243) ...............856
            3. Michael Mann (Adv.Proc. No. 06-08419) ..........................858
         D. Issues of fact requiring a trial ..................................860
            1. William Strang (Adv.Proc. No. 06-08387) Randall M. and
Sheryl B. Rothstein (Adv.Proc. No. 06-08389) Alan Osofsky
(Adv.Proc. No. 06-08398) DW Resources DBP and Marc
Daniels (Adv.Proc. No. 06-08415) Marc Fleisher IRA and
Marc Fleisher (Adv.Proc. No. 06-08423) Kevin Bass (Adv
Proc. No. 06-08431) Michael Davidson (Adv.Proc. No. 06-08435)
Neil D. Cohen (Adv.Proc. No. 07-08245) Edward and
Virginia Sorkin (Adv.Proc. No. 07-08246) ......................860
            2. Mary Jane Pidgeon Sledge (Adv.Proc. No. 06-08339) ..............860
            3. Sterling Stamos Funds (Adv.Proc. No. 06-08493) .................861
            4. Highgate Partners LP (Adv.Proc. No. 06-8412) ...................863
         E. Summary judgment granted for plaintiffs ...........................865
            1. Background: the Altegris due diligence .........................865
            2. Background: the Westervelt complaint ...........................867
            3. Investigation by CSG and Centennial ............................869
            4. Imputation of CSG's knowledge to its clients ...................872
            5. Facts specific to the CSG or Centennial clients ................874
               (a) Redwood Growth Partners, L.P. (Adv.Proc. No. 06-08318)
Heritage Hedged Equity Fund LP (Adv.Proc. No. 06-08333) ...874
               (b) Christian Brothers High School Endowment (Adv.Proc
No. 06-08320) .............................................874
               (c) D. Canale Beverages, Inc. (Adv.Proc. No. 06-08321) John
D. Canale III (Adv.Proc. No. 06-08336) ....................875
               (d) Marvin E. Bruce Living Trust (Adv.Proc. No. 06-08368) ......876
               (e) Mary P. Smythe Residuary Trust (Adv.Proc. No. 06-08338) ....877
               (f) KFI Capital Partners LLC (Adv.Proc. No. 06-08337) YK
Investment Partnership II (Adv.Proc. No. 06-08341)
Helen Yulman Revocable Trust (Adv.Proc. No. 06-08332)
Mayer and Morris Kaplan Foundation (Adv
Proc. No. 06-08340) .......................................878
               (g) Fred Montesi IRA and Fred Montesi (Adv.Proc. No. 06-08329) .879
            6. H & B Hedge Fund II LLC (Adv.Proc. No. 06-08422) ...............879
            7. Freestone Low Volatility Partners LP (Adv.Proc. No. 06-08373) ..880
            8. Peter Haje IRA and Peter Haje (Adv.Proc. No. 06-08430) .........881
    IV. Fictitious profits calculation on 2003 fund exchanges .................884
Orders ........................................................................885

Before the Court are motions, and in most cases cross-motions, for summary judgment in thirty-three adversary proceedings brought by plaintiffs-debtors Bayou Accredited Fund, LLC, Bayou No Leverage Fund, LLC and Bayou Superfund, LLC (collectively "plaintiffs," or the "Bayou hedge fund[s]," or simply "Bayou") against defendants-investors in the Bayou hedge funds who successfully redeemed their investments within one year prior to the public collapse in August 2005 of the Bayou hedge fund empire. Plaintiffs sue under Section 548(a) of the Bankruptcy Code, 11 U.S.C. §...