SLS Capital v. CRT Capital Grp.

2020 NY Slip Op 30696(U)

SLS CAPITAL, S.A.Through Maître Yann Baden, Liquidator, Plaintiff, v. CRT CAPITAL GROUP LLC, Defendant.

Index No.: 652595/2015

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: COMMERCIAL DIVISION PART 49

RECEIVED: March 3, 2020

March 2, 2020

NYSCEF DOC. NO. 94

DECISION AND ORDER

Motion Sequence No.: 002

O. PETER SHERWOOD, J.:

The Liquidator (Liquidator) of plaintiff SLS Capital, S.A. (SLS) brings this action on behalf of SLS's investors/bondholders, who are creditors of its bankrupt estate. SLS alleges that the bondholders lost over $100 million due to fraud in which defendant CRT Capital Group LLC (CRT) played a pivotal role. CRT moves to dismiss the complaint pursuant to CPLR 3211, based on lack of legal capacity to sue, collateral estoppel, statute of limitations, failure to state a cause of action, and lack of jurisdiction.

SLS is a Luxembourg société anonyme (the equivalent of a corporation in the United States) formed in 2004 by nonparty David Elias for the purpose of raising capital by selling bonds to investors. CRT is a Delaware brokerage and investment advisor firm. In March 2005, CRT purchased 55% of the shares in SLS. Nonparty BWT, a Malaysian company controlled by Elias, owned the rest of the shares in SLS. In March 2005, CRT and SLS entered into an engagement letter, in which SLS retained CRT to act as advisor. CRT, "in conjunction with [BWT] as the Arranger, has structured this transaction and is responsible for all structural matters" (Letter, at 1). The letter stated that disputes would be settled by arbitration in the City of New York.

The directors of SLS were companies that, under Luxembourg law, exist for the purpose of acting as independent corporate directors. These companies were owned by a professional trust company, MeesPierson Intertrust (MPI). MPI provided directors for and administered SLS.

SLS issued and sold bonds and used the proceeds to buy life insurance policies. CRT chose the insurance models used to decide which policies to buy. The life insurance policies were the principal collateral securing the bonds. The business plan was that SLS would collect the life insurance proceeds as the policies matured, that is, as the insureds died. Upon maturity, the bondholders would redeem their bonds. Until the bonds matured, SLS would pay interest on the bonds to the bondholders. One of CRT's responsibilities was to obtain a liquidity facility for SLS. A liquidity facility is a standby line of credit and "the backstop in the event cash flow was insufficient" (complaint ¶ 7). CRT approached several banks, but was never able to secure a liquidity facility.

According to their terms, the bonds had to maintain at all times a Required Asset Cover (RAC) at or above a 2:1 ratio. The RAC "is a commonly used financial metric . . . expressed as ratio of total assets to debt" (complaint at 4, n 1). The higher the RAC the more times a company can cover its debt, and a company with a high RAC is a better investment risk than a company with a low RAC. SLS's RAC was supposed to reflect that its assets were twice the size of its debt. A RAC that was not certified at 2:1 was a default according to the terms of the bonds. In the event of that default, the bondholders would not be paid interest and SLS would call a meeting of all the bondholders. At the meeting, the bondholders had the option of voting to redeem their bonds and receiving all the interest that was due to them. This action, according to the Liquidator, would effectively liquidate SLS.

CRT was responsible for calculating and certifying the RAC every quarter. Beginning in the second quarter 2006, SLS failed to meet the 2:1 ratio for the RAC. CRT knew this from at least July 2006, but concealed it from SLS's directors and only disclosed the nonconforming RAC in October 2006. Then MPI threatened to not pay the interest that was due on the bonds, to notify the bondholders that there was a default, and to seek a bondholder vote to require return of all principal and interest. Elias put pressure on CRT to "somehow produce a conforming RAC" (complaint, ¶ 61).

In January 2007, CRT falsely certified the RAC as 2:1. MPI wanted to verify this RAC. CRT responded that it was the sole arbiter of the RAC. MPI "backed down" and paid theoverdue interest to the bondholders (complaint, ¶ 70). By issuing a false RAC, CRT and BWT/Elias avoided an event of default, an early liquidation of SLS, and a loss of their investment in SLS.

In April 2007, CRT again falsely certified that the RAC was 2:1 and "desperately tried to unload its interest in SLS and terminate its role as advisor" (complaint, ¶ 36). In September 2007, CRT stopped being SLS's advisor and sold its shares to BWT for $3 million, "an amount far in excess of what CRT had been prepared to accept, let alone" the $72,000 that another company had been prepared to pay a month or two earlier (id.). The Liquidator alleges that this payment by BWT was intended to ensure CRT's silence about the false RACs and other damage done to SLS.

When determining the RACs, CRT included policies ineligible to be included in the calculations. CRT "started to degrade SLS's capital which served as the bondholders' collateral by buying 'high ratio' policies, i.e., that provided more face value with less cost but which were mostly outside the purchase parameters" (complaint, ¶ 34). In addition, CRT engaged in lending and selling policies between SLS and another company "in what amounted to a shell game in which the same policies were used to meet the RAC for both companies" (complaint, ¶ 40). CRT's purpose was to produce a 2:1 RAC by using false data.

After CRT stopped acting as advisor, Elias hired a new advisor which continued to issue false RAC certifications. Elias continued CRT's policy of replacing policies selected in accordance with the purchase parameters with high ratio policies, and the "shell game" was continued after CRT left. By the end of 2008, Elias had sold off the entire SLS portfolio and taken the proceeds. The bondholders were left with valueless bonds and SLS was left without assets. It is also alleged that Elias and BWT controlled SLS until it dissolved and that, while SLS was still operative, they diverted its funds through undisclosed and improper commissions.

In November 2005, a CRT employee reported to CRT that bond marketing materials prepared by CRT and BWT and distributed to potential investors contained several false statements, among them that SLS had a line of credit and that SLS had a cash reserve of $50 million (complaint, ¶ 43). The Liquidator alleges that CRT was thus aware that SLS solicited investments through offering materials containing misrepresentations.

The complaint states that if CRT had not falsely certified the RACs, there would have been a default and SLS's capital would have been preserved for its creditors. That is, the bondholders would have been able to redeem their bonds. The complaint alleges that the bondholders would have received most and possibly all of the principal and interest owed on their bonds. By issuing the RACs, CRT committed a fraud on the bondholders, and aided and abetted BWT and Elias in their fraudulent conduct.

In October 2009, the Luxembourg court ordered the liquidation of SLS and appointed the Liquidator to superintend SLS's bankruptcy. In 2012, The Liquidator commenced a chapter 15 bankruptcy proceeding in the United States District Court, Southern District of New York. The purpose of chapter 15 of the U.S. Bankruptcy Code is to provide "effective mechanisms for dealing with cases of cross-border insolvency" (11 USC § 1501).

In July 2014, the Liquidator commenced an arbitration with the Financial Industry Regulatory Authority ("FINRA") in New York City. The arbitration statement of claim was made on behalf of SLS and the bondholders against CRT and two of its employees who allegedly were the principal instruments by which CRT engaged in the wrongful conduct that injured SLS and the bondholders.

CRT moved to dismiss the arbitration application and, in July 2016, the Arbitration Panel (the Panel) issued its decision, granting part of the motion and denying part. The Panel granted the motion to dismiss as it concerned the two individual employees of CRT, pursuant to FINRA Rule 12206 (a), which sets the statute of limitations. The Panel dismissed the bondholders from the arbitration, pursuant to FINRA Rule 12504 (a) (6) (B), which allows dismissal where the moving party was not associated with the accounts or conduct at issue. The Panel determined that the bondholders were not parties to the engagement letter in which SLS and CRT agreed to arbitrate their disputes and that CRT, the moving party, was not associated with any bondholder accounts. The Panel denied CRT's motion to the extent of refusing to dismiss SLS's claims against CRT.

Subsequently, SLS filed a second amended statement of claim against CRT only. This statement of claim purported to be on behalf of SLS only and not the bondholders. Otherwise, the causes of action in the second amended statement of claim were the same as in the previous statements of claim. The causes of action in the second amended statement of claim sounded infraud, based on the fraudulent RAC certifications, breach of fiduciary duty to SLS, based on fraudulent marketing materials and false statements to SLS directors, negligence based on all of CRT's failures, unjust enrichment based on the $3 million "payoff CRT gained when it sold its SLS shares, breach of the engagement based on failing to competently structure SLS's business, and common law indemnification based on CRT's liability for the bondholders' injuries and for SLS's expenses in the arbitration.

The Panel issued an award after a hearing in March 2018. It denied SLS's claims in their entirety and found SLS liable, under the terms of the engagement letter, to pay CRT indemnification damages, costs, and fees of $4.2 million, and...