In re Bennett Funding Group, Inc.

367 B.R. 302

In re The BENNETT FUNDING GROUP, INC., Debtors Richard C. Breeden, Trustee of The Bennett Funding Group, Inc., et al., Plaintiff, v. Patrick R. Bennett, Edmund T. Bennett, Kathleen M. Bennett, Michael A. Bennett, Gwen Bennett, Bennett Financial Associates, Bennett Funding of New York, Kenneth P. Kasarjian, Kenton Group, Inc., Charles Genovese, Hemlock Investor Associates, High Mountain Associates, Highwood Investor Associates, Mutual Investors Funding Corporation, Comfort Financial Associates, Comfort Associates, Inc., Olympus Property Management Corporation, Allegro Property & Finance, Inc., Joseph J. Canino, John Does 1-100, M.A. Bennett Associates, Ltd., Hotel Syracuse, Inc., Mahoney Cohen & Company, P.C., Defendants.

Bankruptcy No. 96-61376.

Adversary No. 96-70154.

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

May 2, 2007.

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Simpson, Thacher & Bartlett LLP (James G. Gamble, Esq., of Counsel), New York, NY, for § 1104 Trustee.

Patrick R. Bennett, Loretto, PA, Pro Se Defendant.

Amy Quandt, Esq.., Trial Attorney, Office of U.S. Trustee, Utica, NY.

Wasserman, Jurista & Stolz, P.C. (Michael Mc Laughlin, Esq., of Counsel), Millburn, NJ, for Official Committee of Unsecured Creditors.

MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

STEPHEN D. GERLING, Chief Judge.

Before the Court are two motions addressed to the Answer and Counterclaims ("Answer" or "Answer and Counterclaims") filed by Patrick Bennett ("Bennett") to the August 29, 1996 Amended Complaint ("Complaint") filed herein by Richard C. Breeden, Trustee ("Trustee") in the within adversary proceeding.

The Answer, filed on March 23, 2006, contains seven counterclaims ("Counterclaims") against several counterclaim defendants ("Counterdefendants")¹ and a third party complaint ("Third Party Complaint")²

Bennett was able to file a timely Answer in 2006 to the 1996 Complaint because the Trustee did not seek or obtain relief from the automatic stay in Bennett's personal Chapter 7 case in order to continue with the Adversary Proceeding until April 2006.³ This stay relief was obtained in order to "allow the BFG Trustee to pursue final judgment" in the subject Adversary Proceeding "for the limited purpose of establishing a claim against [Bennett] on behalf of the substantively consolidated [BFG] Estate." See Order Granting Trustee's Motion for Modification of the Automatic Stay, In re Bennett, Case No. 97-65399, April 3, 2006.

The first motion, the Trustee's Motion to, Dismiss Bennett's Counterclaims ("Trustee's Motion to Dismiss"), was filed on April 13, 2006, and seeks to dismiss Bennett's Counterclaims for failure to state a claim on which relief can be granted, pursuant to Federal Rule of Civil Procedure ("Fed.R.Civ.P." or "Rule") 12(b)(6).⁴

The second motion is Counterdefendant Wasserman, Jurista & Stolz, P.C.'s ("Wasserman") motion to dismiss the Counterclaims and the Third Party Complaint for failure to state a claim on which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6), or, in the alternative, for summary judgment pursuant to Fed.R.Civ.P. 56.

The Court first heard oral argument on both these motions at its motion term on July 27, 2006, in Binghamton, New York. The Court then adjourned the motions until the August 31; 2006 calender so that it could reflect on the papers submitted. The Court heard further oral argument on both these motions at its motion term on August 31, 2006, in Binghamton, New York. Upon the conclusion of that hearing, the Court allowed Bennett additional time to submit a Second Amended Answer and Counterclaims in order to address the Court's concerns as to specific dates of allegations, related to statute of limitations issues. Bennett filed his Second Amended Answer and Counterclaims on October 13, 2006. The same motions were then heard again at the Court's motion term on October 31, 2006, in Binghamton, New York.⁵ At the time of the hearing, the Court indicated that it would allow the parties an additional two weeks to file further Memoranda of Law, but it did not direct them to do so. Because none of the parties elected to file any further papers, the court deems the motion submitted for decision on October 31, 2006.

JURISDICTION

This court has the power to determine whether a proceeding is core. See In re Bennett Funding Group, Inc., 258 B.R. 67, 76 (Bankr.N.D.N.Y.2000) (holding that "[p]ursuant to 28 U.S.C. § 157(b)(3) it is within the province of the bankruptcy court to determine whether a matter is core or non-core."). See further analysis of the jurisdiction issue in Discussion section, infra.

FACTS

On July 6, 1996, the Trustee commenced this adversary proceeding by filing a complaint in The Bennett Funding Group Inc.'s case⁶ against numerous defendants, including Bennett personally.⁷ This complaint was amended on August 29, 1996, and it was in response to this amended complaint ("Complaint") that Bennett filed his Answer and Counterclaims. The Complaint contains allegations relating to what this Court has previously characterized as a "financial superweb" of dealings involving entities owned and/or controlled by the Bennett family, including Bennett. The Complaint contains forty-three counts in which the Trustee alleges, inter alia, actual and constructive fraud, unreasonably small capital, breach of fiduciary duty, negligence, turnover, and constructive trust.

Since the filing of the Trustee's Complaint, Bennett was prosecuted and tried on criminal charges in the U.S. District Court for the Southern District of New York. Bennett was convicted on seven counts of perjury and obstruction on March 2, 1999. At a second trial, ending on June 10, 1999, Bennett was convicted of forty-two felony counts of securities fraud, bank fraud, money laundering and transacting business with unlawfully obtained property. See Trustee's Statement of Uncontested Facts, ¶¶ 16, 23.⁸ The jury also returned a forfeiture verdict against Bennett in the amount of $109,088,889.11.⁹

Bennett filed his Answer and Counterclaims on March 23, 2006. The Trustee filed his Motion to Dismiss on April 13, 2006. Bennett then filed his Reply in Opposition to Defendants' Motion to Dismiss ("Bennett's Reply Motion") on July 18, 2006, to which the Trustee responded on July 24, 2006, with his Reply Memorandum of Law in Support of Defendants' Motion to Dismiss ("Trustee's Reply Memorandum of Law"). On August 28, 2006, Bennett filed his First Amended Answer and Counterclaims, with a supporting Memorandum of Law which, inter alia, expanded upon the alleged predicate acts set out in Bennett's Answer and Counterclaims.

As mentioned supra, the Court heard oral argument from the Trustee, Bennett, the Official Committee of Unsecured Creditors and the United States Trustee at its motion terms on July 27, August 31, and October 31, 2006 in Binghamton, New York.

On September 27, 2006, the Court issued an Order Requiring Defendant/Counterclaim Plaintiff Bennett to Amend his Counterclaims to Provide Greater Specificity. This Order required Bennett to provide more detail as to dates when the wrongful acts or misstatements alleged in his Answer and Counterclaims were made or took place, as well as greater particularity regarding these acts and misstatements alleged to have been made by the various Counterdefendants.

On October 13, 2006, Bennett filed his Second Amended Answer and Counterclaims, also supported by a Memorandum of Law, which, inter alia, withdrew Counterclaims 1,2,4,5, and 7, leaving only Counterclaims 3 and 6. The Second Amended Answer also added Simpson Thacher as a Counterdefendant on Counterclaim 3, and alleged a new RICO "injury" as a result of the Trustee lifting the stay in Bennett's personal Chapter 7 case in April 2006 in order to pursue the subject adversary proceeding against Bennett. See Second Amended Answer and Counterclaims, ¶ AA 62.

On March 14, 2007, this Court granted partial summary judgment to the Trustee on Count XI of the Complaint, denied partial summary judgment to the Trustee on Count XXVII and submitted proposed findings of fact and recommendations to the District Court that partial summary judgment be granted to the Trustee on Count XXIX of the Complaint. In that same Decision, the Court also denied Bennett's motion to dismiss Counts I through IV and VI through XXVIII of the Complaint, and submitted proposed findings of fact and recommendations to the District Court that Bennett's motion to dismiss Counts V and XXIX through XLIII of the Complaint also be denied.

ARGUMENT

Bennett's Answer and Counterclaims¹⁰

As stated above, only Counterclaims 3 and 6 remain of the original seven Counterclaims Each Counterclaim purports to arise from acts alleged to have occurred after the filing of the BFG bankruptcy petition.

Counterclaim 3

Counterclaim 3 alleges that the Trustee breached his fiduciary duty¹¹ to BFG by:

1) violating 18 U.S.C. §§ 152, 153, 154 and 645,

2) conducting an improper personal relationship with a former BFG employee,

3) fraudulently receiving property from the estate through his improper personal relationship with that former employee,

4) conducting the BFG estate as a RICO enterprise,¹²

5) conducting a scheme to close down BFG rather than reorganizing the company, and

6) liquidating BFG assets, including Equivest, Inc., at below market values.¹³

Bennett seeks $550 million in damages in this Counterclaim.

The six allegations which comprise this Counterclaim are, according to Bennett, based on the information contained in ¶¶ 63 to 188 of the Answer and Counterclaims. These one hundred twenty five paragraphs, spread over thirty-three pages, contain a rambling, discursive, sometimes irrelevant and often unsupported concatenation of alleged breaches of fiduciary duty committed by the Trustee and other co-conspirators.¹⁴

Because this Counterclaim arises from alleged conduct by the...