In re SS Body Armor I, Inc.

615 B.R. 540

IN RE SS BODY ARMOR I, INC., et al., Debtors.

Case No. 10-11255(CSS) (Jointly Administered)

United States Bankruptcy Court, D. Delaware.

Signed April 15, 2020

PACHULSKI STANG ZIEHL & JONES LLP, Laura Davis Jones, Alan J. Kornfeld, James E. O'Neill, Elissa A. Wagner, 919 N. Market Street, 17^th Floor, Wilmington, DE 19899-8705, Counsel for SS Body Armor I, Inc.

THE ROSNER LAW GROUP LLC, Frederick B. Rosner, Scott J. Leonhardt, Jason A. Gibson, 824 Market N. Street, Suite 810, Wilmington, DE 19801 and ARENT FOX LLP, Robert M. Hirsh, Beth M. Brownstein, 1301 Avenue of the Americas, Floor 42, New York, NY 10019, Counsel for the Recovery Trust

POTTER ANDERSON & CORROON LLP, Jeremy W. Ryan, R. Stephen McNeill, 1313 North Market Street, P. O. Box 951, Wilmington, DE 19801, Counsel to the Equity Group

CROSS & SIMON, Christopher S. Simon, Kevin S. Mann, 913 North Market Street, 11^th Floor, Wilmington, DE 19899-1380 and LOWENSTEIN SANDLER LLP, Michael S. Etkin, 65 Livingston Avenue, Roseland, NJ 07068, Bankruptcy Counsel to Lead Plaintiff

Related Docket No. 4285

OPINION¹

Sontchi, C.J.

INTRODUCTION

Before the Court is the Motion to Enforce the Second Amended Joint Chapter 11 Plan of Liquidation Proposed by Debtors and Official Committee of Unsecured Creditors Regarding Allocation of Remission Proceeds Among the Debtors and Class Plaintiffs² (the "Motion to Enforce") filed by Jon Jacks and other asserted equity interest holders (the "Equity Group").³ By the Motion to Enforce, the Equity Group seeks an order compelling the Debtor (i) to petition the U.S. District Court for the Eastern District of New York ("EDNY District Court") to alter the Department of Justice's ("DOJ") allocation of its remission payment to the class action victims ("Class Plaintiffs") of David Brooks' securities fraud, and (ii) to calculate the division of shared recoveries among the Debtor and Class Plaintiffs under the settlement agreement between the Debtor and Class Plaintiffs ("Bankruptcy Settlement").

For the reasons set forth below, the Court will deny the request relating to DOJ's allocation of its remission award for lack of jurisdiction. However, the Court will require the parties to seek approval by the EDNY District Court of the amounts to be distributed under the Bankruptcy Settlement.

JURISDICTION

This Court has jurisdiction over the Motion to Enforce pursuant to 28 U.S.C. §§ 157 and 1334. This is a "core proceeding" under 28 U.S.C. § 157(b). Furthermore, the Equity Group has consented, pursuant to Local Bankruptcy Rule 9013(f), to entry of a final order by the Court in connection with the Motion to Enforce. Venue is proper in the Court, pursuant to 28 U.S.C. § 1409(a).

BACKGROUND

On and after September 9, 2005, multiple securities class actions were filed against the Debtors' former officers and directors and certain of their related companies.⁴ Those class actions were consolidated into the Class Action (defined in n. 2, supra ). Shortly thereafter, on September 14, 2005, and afterwards, multiple derivative actions were filed against the same defendants. Those actions were consolidated into the "Derivative Action."⁵ Both the Class Action and the Derivative Action were before the United States District Court for the Eastern District.

On November 30, 2006, the parties to the Class Action and the Derivative Action entered into a Stipulation and Agreement of Settlement (the "EDNY Stipulation") to resolve the plaintiffs' claims in those matters. Pursuant to the EDNY Stipulation, the Class Action was settled for $34.9 million in cash plus 3,184,713 shares of SSBA I common stock. The Derivative Action was settled for an additional $300,000 and the adoption of certain corporate governance policies. The $35.2 million in cash proceeds from the EDNY Stipulation was placed into an escrow account. As of 2011, the escrow account had an approximate value of $37 million (the "Escrowed Funds"). Ultimately, the EDNY Stipulation was rejected by the Debtors in these bankruptcy cases.

Following the Debtors' rejection of the EDNY Stipulation, the Debtors and the Class Plaintiffs, among others, subsequently agreed to a new settlement that adopted many of the terms of the EDNY Stipulation. This new settlement was reflected in the Settlement Agreement executed on February 6, 2015 (the "Original Settlement").⁶ In the Original Settlement, the Debtors agreed to the release of the Escrowed Funds to the Class Plaintiffs for distribution in accordance with the provisions of the EDNY Stipulation and the EDNY District Court's July 21, 2008 "Plan of Allocation."⁷ In return, the Class Plaintiffs agreed to provide the Debtors with a $20 million loan from the Escrowed Funds to fund the Plan.⁸ The parties further agreed to use "reasonable best efforts consistent with their respective fiduciary duties," to achieve a 50/50 split on "Shared Recovery Matters."⁹

The 50/50 split between the Debtors and Class Plaintiffs was not absolute. Section 3(f) of the Original Settlement provided in part:

"To the extent necessary, the balance of the Plaintiffs' Share, other than the Escrowed Funds and the Plaintiffs' Stock Share [i.e., the portion already agreed to be paid pursuant to the EDNY Stipulation], will be distributed among the Plaintiffs and the Additional Investor Victims in accordance with a distribution and allocation procedure to be established by the District Court in the Criminal Action with the advice and consent of the Office of the United States Attorney for the Eastern District of New York."¹⁰

Moreover, the Original Settlement contemplated that, after application of this procedure, any portion of the Class Plaintiffs' Share in excess of their allocated amounts would revert to the Debtors' estates for distribution under the Plan.

At the time of the Original Settlement, the Debtor and the Class Plaintiffs anticipated receiving approximately $91.4 million in criminal restitution, as ordered by the EDNY District Court in connection with David Brooks' criminal conviction. Thereafter, the Original Settlement was modified by a June 10, 2015 addendum (as modified, the "Bankruptcy Settlement").¹¹

Under Bankruptcy Settlement, any restitution awards ultimately received by the parties as well as any remission payments and any other recoveries realized from other Brooks-related litigation, were subject to the following sharing arrangement between the Debtor and Class Plaintiffs: the first $128.4 million of any net monetary recoveries would be divided 50-50 between the Debtors and the Class Plaintiffs; and any new monetary recoveries in excess of $128.4 million would be subject to a 63-37 division in favor of the Debtor.¹²

David Brook's death in October 2016, abated both his criminal conviction and the EDNY District Court's criminal restitution order.¹³ As a result, "everything associated with the [criminal] case [was] extinguished, leaving the defendant as if he had never been indicated or convicted" and requiring that the EDNY District Court's criminal restitution order, which could only be based on a valid conviction, to be vacated.¹⁴ As a result, the EDNY District Court's criminal restitution order and all loss calculations performed by the EDNY District Court with respect to the criminal restitution are null and void.

David Brooks' death did not, however, abate any of the other potential sources of recovery covered by the Bankruptcy Settlement. Most importantly, the DOJ's civil forfeiture proceeding ("Civil Forfeiture Proceeding") against approximately $168 million of Brooks-related assets did not abate upon Brooks' death. With all known Brooks-related assets restrained in the Eastern District of New York in connection with the Civil Forfeiture Proceeding, and thus not available to satisfy any recoveries that might be obtained in other Brooks-related litigation, pursuing a successful resolution of the Civil Forfeiture Proceeding and related petitions for remission was the most – if not only – effective means by which the Debtor and Class Plaintiffs could satisfy their obligation to use their best efforts to maximize the "shared recoveries" to the Debtor and Class Plaintiffs.¹⁵ The Debtor and Class Plaintiffs fulfilled their obligations under the Bankruptcy Settlement by (among other things) negotiating with the DOJ and Brooks family to resolve the Brooks family's verified claims to at least approximately $85 million of the restrained assets, and by presenting, supporting and advocating for their respective petitions for remission while not denigrating each other's petitions for remission.

The DOJ's Money Laundering and Asset Recovery Section ("MLARS") – the division of the DOJ with exclusive authority over funds forfeited in civil or criminal proceedings and the adjudication of related petitions for remission – ultimately granted the Debtor's petition in an amount up to $78.8 million and granted the Class Plaintiffs' petition in an amount up to approximately $81.54 million, subject to a pro rata allocation of available forfeited funds.¹⁶ The Debtor received its pro rata remission payment on April 10, 2019, in the amount of $70,625,057.78. The Class Plaintiffs received their pro rata remission payment on or about May 22, 2019 in the amount of $73,067,322.49. The Debtor's remission payment under the DOJ Settlement was almost $20 million more than the amount awarded by the EDNY District Court as restitution to the Debtor ($53.9 million), and the combined remission payments to the Debtor and Class Plaintiffs under the DOJ Settlement exceeded the total criminal restitution award by more than $52 million. The DOJ Settlement also provided for additional payments, including the remission award to Ms. Terry Brooks, which is discussed more fully below.¹⁷

The Equity Group seeks to challenge the distribution of the remission payments under the DOJ Settlement, arguing that the Class Plaintiffs should forfeit at least $37.1 million of their share because the allocation of the Class Plaint...