stettin v. rothstein, emergency injunction motion

8/14/2019 Stettin v. Rothstein, Emergency Injunction Motion

1/108

UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF FLORIDA

(FORT LAUDERDALE DIVISION)

In re CASE NO. 09-34791-BKC-RBR

CHAPTER 11ROTHSTEIN ROSENFELDT ADLER, P.A.,

Debtor./

HERBERT STETTIN, not individually but as ADV. NO. 09-02478-BKC-RBR-AChapter 11 Trustee of the estate of the Debtor,Rothstein Rosenfeldt Adler, P.A.,

Plaintiff,

v.

SCOTT WALTER ROTHSTEIN; 29 BAHIA, LLC;235 GC, LLC; 350 LOP # 2840, LLC; 353BR, LLC;708 SPANGLER, LLC; 1012 BROWARD, LLC;1198 DIXIE, LLC; 1299 FEDERAL, LLC; 2133 IP,LLC; 10630 # 110, LLC; 15158, LLC; AAMG, LLC;AAMG1, LLC; AAMM HOLDINGS, LLC; ABTINVESTMENTS, LLC; ADVANCED SOLUTIONS,LLC; BAHIA PROPERTY MANAGEMENT, LLC;BOAT ANAGEMENT, LLC; BOSM HOLDINGS,LLC; BOVA PRIME, LLC; BOVA RESTAURANTGROUP, LLC; THE BOVA GROUP, LLC; BOVASMOKE, LLC; BOVCU, LLC; BOVRI, LLC; CI 07,LLC; CI 08, LLC; CI 16, LLC; CI 27, LLC; CSU,LLC; D & D MANAGEMENT & INVESTMENT,LLC; D & S MANAGEMENT AND INVESTMENT,LLC; DJB FINANCIAL HOLDINGS, LLC;DYMMU, LLC; FIFTH COURT FINANCIAL, LLC;FULL CIRCLE FT. LAUDERDALE, LLC; GHW1,LLC; IDNLGEAH, LLC; ILK3, LLC; ISMANAGEMENT, LLC; JUDAH, LLC; NFSERVICING, LLC; NRI 11, LLC; NRI 15, LLC; NSHOLDINGS, LLC; BFHI, LLC; PK ADVENTURES,LLC; PKS WILD RIDE, LTD; ROTHSTEINFAMILY FOUNDATION, INC.; RRACONSULTING, INC.; RRA GOAL LINEMANAGEMENT, LLC; RRA SPORTS &ENTERTAINMENT, LLC; RSA 11

THST, LLC; RW

Case 09-02478-RBR Doc 2 Filed 12/02/09 Page 1 of 30


2/108

2

COLLECTIONS, LLC; S&KEA, LLC; SCORH,LLC; TIPP, LLC; VGS, LLC; THE WALTERFAMILY, LLC; WALTER INDUSTRIES, LLC;WPBRS, LLC; REN GROUP, LLC; CCCN, LLC;TB22N, LLC; TLBN, LLC; UG, LLC; SPAC

INVESTMENTS, LLC; GBPT, LLC; RET GROUP,LLC; REP GROUP, LLC; REC GROUP, LLC; REVGROUP, LLC; VGSI, LLC; QT, LLC; WAWW,LLC; WAWW 2, LLC; WAWW 3, LLC; WAWW 4,LLC; WAWW 5, LLC; WAWW 6, LLC;WAWW 7, LLC; WAWW 8, LLC; WAWW 9, LLC;WAWW 10, LLC; WAWW 11, LLC; WAWW 12,LLC; WAWW 13, LLC; WAWW 14, LLC; WAWW15, LLC; WAWW 16, LLC; WAWW 17, LLC;WAWW 18, LLC; WAWW 19, LLC; WAWW 20,LLC; WAWW 21, LLC; WAWW 22, LLC; MRISC,

LLC; RES GROUP, LLC; JJ FINANCEHOLDINGS, LLC; MLC 350, LLC; and JB BOCAM HOLDINGS, LLC,

Defendants./

EMERGENCY MOTION AND SUPPORTING MEMORANDUM OF LAW

OF THE PLAINTIFF, CHAPTER 11 TRUSTEE HERBERT STETTIN, FOR

ENTRY OF PRELIMINARY INJUNCTION AND FOR OTHER RELIEF

AND

REQUEST FOR JUDUCIAL NOTICE

[EMERGENCY HEARING REQUESTED

ON OR BEFORE DECEMBER 4, 2009]

Herbert Stettin, not individually but as Chapter 11 Trustee for the estate of Rothstein

Rosenfeldt Adler P.A. (RRA or the Debtor), files this Emergency Motion For Entry of a

Preliminary Injunction and for Other Relief and Request for Judicial Notice, pursuant to Rule 65

of the Federal Rules of Civil Procedure, as incorporated into Rule 7065 of the Federal Rules of

Bankruptcy Procedure, Section 105(a) of Title 11 of the United States Code (hereinafter the

Bankruptcy Code) and Fed. R. Evid. 201, and says



3/108

3

I. PRELIMINARY STATEMENT AND LOCAL RULE 9075-1

CERTIFICATION OF BASIS FOR EMERGENCY HEARING

By this Motion, the Trustee seeks the entry of a preliminary injunction with notice to be

established at a hearing to be scheduled by the Court. In his nine-count Verified Adversary

Complaint for Damages and Other Relief (the Rothstein Complaint) filed December 1, 2009,

the Trustee is asserting claims against Scott W. Rothstein (Rothstein) and his affiliated alter

ego business entities (collectively referred to herein as the Rothstein Entities) seeking, among

other relief, substantive consolidation of Rothstein and the Rothstein Entities with and into the

estate of the Debtor, an alter ego liability determination, for turnover of property of the estate, to

avoid and recover fraudulent transfers from RRA to Rothstein and the Rothstein Entities (the

Avoidable Transfers and for the entry of an order granting preliminary and permanent

injunctive relief. [DE # 1].

Specifically, the Adversary Complaint seeks the following relief against Rothstein and

the Rothstein Entities:

Count I - Action Seeking to Substantively Consolidate Non-Debtor Rothstein and

the Non-Debtor Rothstein Entities with and into the Bankruptcy Estate of the

Debtor.

Count II Action to Impose Alter Ego Liability upon Rothstein and the Rothstein

Entities for the Debts and Liabilities of the Debtor, and to Pierce the Corporate

Veil of the Rothstein Entities for the Benefit of the Debtor.

Count III - Action Requesting the Entry of a Preliminary and Permanent

Injunction against Rothstein and the Rothstein Entities as Alter Egos of the

Debtor.



4/108

4

Count IV - To the Extent the Court Grants the Relief Demanded in Counts I

and/or II Above, Action Seeking Turnover of Property of the Debtors

Bankruptcy Estate Pursuant to Section 542 of the Bankruptcy Code, as Well as an

Accounting in Connection therewith.

Count V - Action to Avoid and Recover Fraudulent Transfers from RRA to

Rothstein and the Rothstein Entities (Defined Herein as the Avoidable Transfers).

Count VI - Action for Conversion against Rothstein and the Rothstein Entities

Count VII - Action for Unjust Enrichment against Rothstein and the Rothstein

Entities.

Count VIII - Action for an Accounting against Rothstein and the Rothstein

Entities.

Count IX - Action for Breach of Fiduciary Duty against Rothstein.

Rothstein, a disbarred attorney who was arrested by the U.S. government yesterday and

charged with a federal criminal information, caused significant funds to be transferred out of the

Debtors financial institution accounts and utilized those funds to acquire contractual rights and

property interests for Rothstein and the Rothstein Entities. After the revelation of Rothsteins

fraud, Rothstein has failed to protect and preserve his assets and the assets of the Rothstein

Entities or even respond to correspondence from creditors stating their intent to declare a

forfeiture of the contractual rights and property interests of Rothstein and/or the Rothstein

Entities.

An emergency hearing is requested because there is a significant likelihood that the

Debtors estate will suffer irreparable harm if the assets of Rothstein and Rothstein Entities are

not protected and preserved by the entry of preliminary injunction. Specifically, an emergency



5/108

5

hearing is necessary and appropriate based upon, among other things: (i) the magnitude of

Rothsteins fraud in terms of the significant number of creditors, substantial dollar amounts,

international scope, and the significant number of yet to be identified individuals who likely

acted in concert with him and who likely continue to have possession, custody or control of

assets belonging to Rothstein and/or the Rothstein Entities; and (ii) the assertion and/or exercise

of rights by creditors who continue to declare forfeitures of contractual rights and property

interests belonging to Rothstein and the Rothstein Entities without a defense being interposed

thereto.

A preliminary injunction would serve to maintain the status quo and preserve this Courts

ability to award equitable relief and provide for a fair distribution to the Debtors creditors. The

Trustee likewise satisfies all of the necessary elements to obtain injunctive relief: (1) given the

substantial, undisputed proof establishing the fraudulent nature of Rothsteins Ponzi scheme

activities and the use of RRA bank accounts and or the alter ego Rothstein Entities in

perpetrating the scheme, the Trustee has a substantial likelihood of the success on the merits; (2)

because the assets of Rothstein and the Rothstein Entities are comprised of funds transferred to

them from RRA, the bankruptcy estate will suffer substantial harm if an injunction is not

imposed because cash and other assets will continue to be further transferred and/or dissipated;

(3) the harm, if any, to be suffered by Rothstein or the Rothstein Entities will be outweighed by

the substantial harm that will befall the estate if an injunction is not imposed; and (4) the public

interest will best be served if an injunction is imposed to protect, among other things, the estate,

creditors and other parties in interest to the recovery of funds that are the subject of Rothsteins

fraudulent scheme. The entry of a preliminary injunction is necessary and appropriate to assist

the Trustee in the recovery of property of the estate totaling in excess of $500 million that was



6/108

6

wrongfully diverted to Rothstein and Rothstein Entities as part of a fraudulent scheme to hinder,

delay or defraud creditors.

II. FACTS SUPPORTING RELIEF REQUESTED1

A. The Parties, Jurisdiction & Venue

1. RRA was a law firm that was incorporated in the State of Florida on February 7,2002. RRA maintained a principal office at 401 East Las Olas Boulevard, Suite 1650, Fort

Lauderdale, Florida, with satellite offices in Miami, Boca Raton, West Palm Beach and New

York City.

2.

Rothstein is an individual who resides in Broward County, Florida.

3. Until he was permanently disbarred by Order of the Florida Supreme Court datedNovember 25, 2009, Rothstein had been a member of the Florida Bar since 1988 and, prior to

November 2, 2009, was RRAs Chief Executive Officer and fifty percent shareholder.

4. The Rothstein Entities are limited liability companies, limited partnerships, and/orcorporations organized and existing under the laws of the States of Florida, Delaware and New

York and/or other domestic or foreign jurisdictions. The Rothstein Entities were not separate and

distinct legal entities from RRA because their existence was directly attributable to, and entirely

dependent upon, the operations of RRA. At all times material hereto, the Rothstein Entities,

among other things, conducted business from RRAs offices, were funded with monies provided

by RRA, and utilized RRAs personnel and office equipment to conduct business.

5. At all times material hereto, Rothstein caused RRA to transfer funds to, betweenand/or among RRA, Rothstein and the Rothstein Entities, while RRA, through Rothstein,

1The facts supporting this Motion are numbered herein as Paragraph Nos. 1-30 in Paragraphs A

and B below with the same paragraph numbers as referenced in the Rothstein Complaint, and arequoted in their entirety herein.



7/108

7

continued to exercise dominion and control of and over such funds, which were thereafter used to

acquire real and personal property of substantial value for Rothstein and the Rothstein Entities.

The precise nature, extent and whereabouts of all of the assets of Rothstein and the Rothstein

Entities are not yet fully known, except that certain valuable assets of Rothstein and the Rothstein

Entities were seized by the U.S. government during November, 2009.

6. On November 2, 2009, Stettin was appointed as RRAs Receiver. On November11, 2009, Stettin was appointed as RRAs Chief Restructuring Officer, and thereafter by Order

dated November 20, 2009, was appointed Chapter 11 Trustee of RRA.

7.

The Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.

157(a), 1334(b), 2201 and 2202.

8. This is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(A), (B), (C), (E),(H) and (O), and the Trustee consents to the entry of final orders and judgment by the Bankruptcy

Court.

9. Venue is proper in this Court pursuant to 28 U.S.C. 1408 and 1409.B. The Common Factual Allegations for Each Count

10. On November 10, 2009 (the Petition Date), a group of petitioning creditors filedan involuntary petition for reorganization under Chapter 11 of Title 11 of the United States Code

... against RRA in the wake of allegations, which have proven to be true, that Rothstein had

perpetrated a massive Ponzi scheme.

11. The involuntary petition was filed after RRA learned that Rothstein utilizedRRAs business to fraudulently secure investments in fictitious structured settlements and that

Rothstein funneled those investments funds through accounts labeled as trust accounts titled in



8/108


9/108

9

17. As part of his scheme, Rothstein utilized his position as an attorney and as anowner and officer of RRA, his relationship with existing clients of RRA and RRAs financial

institution accounts in order to effectuate the fraudulent sale of fictitious structured settlements.

18. In sum, Rothstein utilized the RRA law firm to perpetrate a fraudulent scheme byengaging in the sale of non-existent structured settlements.

19. Rothstein used the staff and premises of the RRA law firm as his command centerfor his fraudulent scheme to benefit himself and the Rothstein Entities.

20. Indeed, while the scheme was ongoing, RRA rapidly grew from a 7 attorney [lawfirm] in 2002, to 70 attorneys and 80 support staff in 2009. Prior to 2005, Rothstein was a virtual

unknown in legal, political, and charitable circles. Subsequent to 2005, Rothstein and RRA

gained the reputation of being a premier law firm with significant political and charitable

connections. Rothsteins Ponzi scheme provided the monies necessary for RRAs operations and

growth. Moreover, substantially all funds flowed to and through RRAs bank accounts to

Rothstein and the Rothstein Entities.

21. Upon information and belief, Rothstein bilked investors out of more than fivehundred million dollars. A recently published article quoted an F.B.I. source as saying the actual

figure could be as high as $1 Billion.

22. RRA filed a Complaint against Rothstein in Broward County Circuit Court onNovember 2, 2009, and Stettin was appointed as RRAs Receiver on November 4, 2009.

23. The Order Appointing Receiver found that Rothstein had relinquished hisauthority with respect to the firms management by virtue of, inter alia, his failure to appear at the

duly noticed hearings.



10/108

10

24. On or about November 4, 2009, federal authorities executed a search warrant andseized various records from RRAs offices.

25. On November 9, 2009, the United States filed a Verified Complaint for ForfeitureIn Rem against eight real properties purchased by, with, or on behalf of Rothstein or through the

Rothstein Entities (the Forfeiture Complaint), followed by an Amended Verified Complaint for

ForfeitureIn Rem filed on November 23, 2009, against various other real properties, vehicles, and

vessels, tangibles, bank accounts, business interests, and contributions (the Amended Forfeiture

Complaint).

26.

On or about November 9, 2009, federal authorities seized other assets, including

motor vehicles, yachts, watches, jewelry and other personal property titled in the name of

Rothstein and the Rothstein Entities.

27. The Amended Forfeiture Complaint alleges that:(a) Rothstein operated a Ponzi scheme since approximately 2005 and

acquired the subject properties in connection with such Ponzi scheme;

(b) investor monies generated through the Ponzi scheme were deposited into

RRAs trust account;

(c) these types of fraudulent investments had been offered by Rothstein to a

variety of persons and entities throughout the United States for at least

four years in a scheme involving hundreds of millions of dollars; and

(d) Rothstein purchased many properties in the names of nominee

corporations including C1 07 LLC, C1 08 LLC, C1 16 LLC, 29

Bahia LLC, MLC 350 LLC, 350 LOP # 2840 LLC, and JB Boca M

Holdings LLC, each of which are named Defendants in this action.



11/108

11

28. At all times material hereto, Rothstein formed, operated or otherwise treated RRAand the Rothstein Entities as his alter egos and as his mere instrumentality in committing the

fraud described hereinabove.

29. For all purposes, Rothstein, the Rothstein Entities, and RRA were singleeconomic entities and RRA and the Rothstein Entities simply functioned as a faade for Rothstein

as their dominant shareholder.

30. By notice filed November 25, 2009, RRA, by and through the Trustee, consentedto the entry of an Order for Relief under Chapter 11 of the Bankruptcy Code. As such, the

Trustee is the duly authorized fiduciary on behalf of the Debtor.

C. Other Facts Supporting the Relief Requested (the Co-Conspirators)

The recent events surrounding Rothstein and the Debtor have been widely publicized in

local and national media account. As set forth in the Rothstein Complaint, Rothstein utilized the

Debtor and the Debtors financial institution accounts to fraudulently secure investments in

fictitious structured settlements. The funds obtained through Rothsteins Ponzi scheme were

initially deposited into the Debtors financial institution accounts, and subsequently transferred

to Rothstein and the Rothstein Entities. Rothstein then utilized those funds to obtain contractual

rights and property interests of substantial value for himself and the Rothstein Entities. It has

been reported that Rothstein allegedly bilked creditors out of more than $1 billion. It is believed

that Rothstein acted in concert with other individuals in perpetrating the fraud and that such other

individuals held contractual rights or property interests as nominees for Rothstein (hereinafter the

co-conspirators). The identities of the co-conspirators have not yet been determined. The co-

conspirators continue to maintain possession, custody, and/or control over contractual rights



12/108

12

and/or property interests of Rothstein and the Rothstein Entities including, but not limited to, the

ability to transfer, conceal, dissipate, and/or destroy such assets.

Rothstein and the co-conspirators have also failed to take the necessary actions to protect

and preserve the contractual rights and property interests of Rothstein and the Rothstein Entities.

By way of example, on November 2, 2009 Iron Street Management, LLC (hereinafter Iron

Street) forwarded a correspondence to WAWW9, LLC (hereinafter WAWW9), (a Rothstein

entity and named Defendant in the Rothstein Complaint), notifying WAWW9 of its failure to

make payments owed under a separation agreement and consequent default under an operating

agreement (hereinafter the Default Notice). The Default Notice states that WAWW9

membership interests in Iron Street would be forfeited within thirty days if the default is not

cured within such time period. Upon information and belief, Iron Street owns an interest in a

highly valuable health benefits consulting company known as Edify. A copy of the notice will

be presented to the Court at the hearing on this Motion.

Upon information and belief, Rothstein and the co-conspirators have failed to respond to

Iron Streets correspondence or to otherwise protect and preserve WAWW9s contractual rights

in Iron Street. Moreover, the Trustee has asserted claims that Rothstein and the Rothstein

Entities are the alter egos of the Debtor, that the corporate veil of the Rothstein Entities should be

pierced, and that the assets and liabilities of Rothstein and the Rothstein Entities should be

consolidated with and into the Debtors estate.

D. The Trustees Request for Judicial Notice

The Trustee requests the Court take judicial notice pursuant to Rule 201 of the Federal

Rules of Evidence of the dockets, pleadings and all papers filed in two related cases pending in

the United States District Court for the Southern District of Florida. SeeUniversal Foam v. Kohr



13/108


14/108

14

A plaintiff is entitled to preliminary injunctive relief upon showing (1) there is a

substantial likelihood that the moving party will prevail on the merits; (2) the moving party will

suffer irreparable injury if the injunction is not granted; (3) the threatened injury to the moving

party outweighs the threatened harm the proposed injunction may cause the opposing party; and,

(4) the injunction, if issued, would not be adverse to the public interest. Johnson v U.S.

Department of Agriculture, 734 F.2d 774, 781 (11th Cir. 1984);McDonalds Corp. v. Robertson,

147 F. 3d 1301 (11th Cir. 1998). Moreover, pursuant to Fla. Stat. 726.108 referenced as

Remedies of creditors in regard to the avoidance of a fraudulent transfer, subject to

applicable principles of equity and in accordance with applicable rules of civil procedure ...

[the court may issue] [a]n injunction against further disposition by the debtor or a transferee,

or both, of the asset transferred or of other property... (emphasis added).

Further, where, such as here, a particular fund or piece of property is at issue (i.e., the

funds of the Debtor that were fraudulently transferred and diverted to Rothstein and the

Rothstein Entities), and where the final equitable relief sought is of the same character as the

preliminary injunction (i.e., to establish an equitable lien/constructive trust against the funds and

assets that are the subject of the Avoidable Transfers to Rothstein and the Rothstein Entities), the

entry of a pre-judgment asset freeze is appropriate to preserve the status quo order in order to

provide security for performance of a future order which may be entered by the court. Indeed, in

cases such as this, even when money damages are sought in conjunction with equitable relief, it

has been held that the entry of a freeze order is appropriate. See S.E.C. v. ETS Payphones, Inc.,

___ F.3d ___, 2005 WL 1039650 (11th Cir. May 5, 2005) citing United States v. Oncology

Assoc's, P.C., 198 F.3d 489, 498 (4th

Cir. 1999) (holding that where equitable relief

(disgorgement) and money damages are sought in the same action, an asset freeze is justified as a



15/108

15

means of preserving funds for the equitable remedy of disgorgement; inclusion of a claim for

civil penalty damages does not make the remedies sought wholly legal and not equitable);Rosen

v. Cascade Intern., Inc., 21 F.3d 1520 (11th Cir. 1994) (where money damages and the funds

encumbered by the preliminary injunction are worth no more than the amount reasonably in

controversy, the injunction does involve "a fund or property which could [be] the subject of the

provisions of [a] final decree in the cause," rather than "a matter wholly outside the issues in the

suit."); De Beers Consolidated Mines v. United States, 325 U.S. 212, 65 S.Ct. 1130, 89 L.Ed.

1566 (1945) (reversing entry of injunction as to property which in no circumstances [could] be

dealt with in any final injunction that [might] be entered.).

B. The Entry of a Preliminary Injunction is Necessary and Appropriate

Applying the above factors and legal authorities to the instant case, the Trustee is entitled

to the entry of an order granting preliminary injunctive relief against Rothstein and the Rothstein

Entities.

(1) The Trustee has a substantial likelihood he will prevail on the merits

In the Rothstein Complaint, the Trustee seeks to substantively consolidate Rothstein and

the Rothstein Entities with and into the estate of the Debtor as the alter egos of the Debtor,

thereby warranting a piercing of the corporate veil of such entities. (See Complaint at Counts I &

II). The Rothstein Complaint also seeks turnover or property of the estate and recovery of the

Avoidable Transfers as fraudulent transfers in accordance with Section 544 of the Bankruptcy

Code and Sections 726.105(1)(a), 726.105(1)(b) and/or 726.106(1) of the Florida Statutes and/or

other applicable law. (See Complaint at Counts IV & V).

a. The Substantive Consolidation and Alter Ego Claims



16/108

16

Although the Bankruptcy Code does not specifically authorize bankruptcy courts to

substantive consolidate entities and individuals, the broad equitable power detailed in Section

105(a) of the Bankruptcy Code has been recognized as the basis. See In re Munford, Inc., 115

B.R. 390, 397 (Bankr. N.D. Ga. 1990); In re Tureaud, 45 B.R. 658, 662 (Bankr. N.D. Okla.

1985); In re New Center Hosp., 179 B.R. 848, 853 (Bankr. E.D. Mich. 1994). Substantive

consolidation may be limited to certain classes of claims, specific property, or may be

appropriately conditioned. See In re Continental Vending Machine Corp., 517 F.2d 997, 1001

(2d Cir. 1975);In re Cooper, 147 B.R. 678, 682 (Bankr. D.N.J. 1992);In re Steury, 94 B.R. 553,

557 (Bankr. N.D. Ind. 1988). Courts have also authorized substantive consolidation of debtors

and non-debtors. See Sampsell v. Imperial Paper Corp., 313 U.S. 215 (1941); In re United

Stairs Corp., 176 B.R. 359 (Bankr. D. N.J. 1995); In re Crabtree, 39 B.R. 718 (Bankr. E.D.

Tenn. 1984);In re 1438 Meridian Place N.W., Inc., 15 B.R. 89 (Bankr. D. D.C. 1981).

Practically, substantive consolidation is similar to the state law remedy of piercing the

corporate veil based on a finding that the entities are alter egos. See Cooper, 147 B.R. at 683-84.

Piercing the corporate veil, however, is not a prerequisite to the utilization of the bankruptcy law

remedy of substantive consolidation. Munford, 115 B.R. at 394 citing Tureaud, 59 B.R. at 975-

76; In re Snider, Inc., 18 B.R. 230, 234 (Bankr. D. Mass 1982). The bankruptcy remedy of

substantive consolidation ensures the equitable distribution of property to all creditors, while on

the other hand, piercing the corporate veil is a limited merger for the benefit of a particular

creditor. Cooper, 147 B.R. at 683-84.

Indeed, substantive consolidation of a non-debtor with a debtor has been deemed

appropriate where a non-debtor is an alter ego of the debtor. See Sampsell, 313 U.S. at 218-19.

An entity which is the alter ego of a debtor is not entitled to the safeguards to which a true



17/108

17

independent non-debtor would be entitled. See United Stairs, 176 B.R. at 369-70; 1438

Meridian Place, 15 B.R. at 97. Where non-debtor entities are alter egos of the debtor, the

creditors have the right to move for extension and consolidation independent from the right to

force those entities into bankruptcy pursuant to 11 U.S.C. 303. See United Stairs, 176 B.R. at

370 ([i]n a case involving alter egos where the non-debtor entities are not entitled to procedural

safeguards and creditors will not be harmed by the lack of these protections, the court need not

address the requirements of Section 303(b) to order substantive consolidation); see also

Crabtree, 39 B.R. at 721-22;Munford, 115 B.R. at 397.

The court in Munford recognized that the substantive consolidation of a non-debtors

assets with those of a debtor is substantially different from the involuntary petition remedy of

Section 303 of the Bankruptcy Code and therefore does not circumvent the requirements of that

provision. See id. The entire purpose of substantive consolidation is to recover assets from a

financially sound affiliated entity in order to facilitate the debtors own reorganization or

maximize value of the estate. The non-debtor is not an insolvent entity whose financial affairs

need to be managed by the court. Therefore, substantive consolidation is a remedy separate and

distinct from Section 303 of the Bankruptcy Code. See id. at 397-98.

Under its general equitable powers, a bankruptcy court may substantively consolidate

affiliate corporations within a pending case when the assets and liabilities of different entities are

dealt with as if the assets were held by, and the liabilities were incurred by a single entity.

Tureaud, 45 B.R. at 661 ([i]t is clear, based on the inability of the Court and the creditors to

reconcile and separate the financial affairs of the debtor and affiliate corporations, that

consolidation will not work an injustice on the secured or unsecured creditors); In re Creditors

Svc. Corp., 195 B.R. 680, 691 (Bankr. S.D. Ohio 1987) ([i]n view of the state of the financial



18/108

18

records and the complex relationships, the cost of recovery proceedings in bankruptcy would

substantially reduce or eliminate any possible return to creditors); In re Baker & Getty Fin.

Svcs., Inc., 78 B.R. 139, 142 (Bankr. N.D. Ohio 1987) ([t]he extensive and unrestricted

commingling of corporate and personal assets, combined with the inadequate substantiation of

certain transfers, would compromise the accuracy of any segregation of the assets); New Center

Hosp., 179 B.R. at 855 (equities of the case required substantive consolidation of debtor with

non-debtor entities as a sufficient indicia of unity and entanglement are present, making the

affairs is either impossible or so costly as to consume the assets of the estate).

In the Eleventh Circuit, substantive consolidation of non-debtor affiliates is a remedy

permitted under Section 105 of the Bankruptcy Code. See Eastgroup Props. v. Southern Motel

Assoc., Ltd., 935 F.2d 245 (11th Cir. 1991) (adopting the substantive consolidation test

articulated by the District of Columbia Circuit in In re Auto-Train Corp., Inc., 810 F.2d 270

(D.C. Cir. 1997)). Applying a three party analysis, a movant seeking substantive consolidation

must establish the following:

(i) The proponent must show a substantial identity between the entities to be

consolidated;

(ii) The proponent must show that consolidation is necessary to avoid some harm or

to realize some benefit; and

(iii) If a creditor objects and demonstrates that it relied upon the separate credit of one

of the entities and that it will be prejudiced by the consolidation, then the court

may order consolidation only if it determines that the demonstrated benefits of

consolidation heavily outweigh the harm.



19/108

19

The first component of the test is similar to a state court alter ego analysis and the second

and third components require a balancing of equities or benefits and harms of the substantive

consolidation. New Center Hosp., 179 B.R. at 854. The Second Circuit also adopted a two-part

test for substantive consolidation in Union Sav. Bank v. Augie/Restivo Baking Co., Ltd., (In re

Augie/Restivo Banking Co., Ltd.) 860 F.2d 515, 518 (2d Cir. 1988) to determine:

(i) Whether creditors dealt with the entities as a single economic unit and did not rely

on their separate identity in extending credit; or

(ii) Whether the affairs of the debtors are so entangled that consolidation will benefit

all creditors. Treatment of the entities by creditors, or alternatively, the

complexity of the interrelationship of the entities.

Both the Eleventh and the Second Circuits have adopted a seven-part objective inquiry

into the inter-relationship of the debtor and non-debtor entities set forth inIn re Vecco Constr., 4

B.R. 407 (Bankr. E.D. Va. 1980). The seven factors are:

(i) presence of absence of consolidated business or financial records;

(ii) unity of interest and ownership between the debtors;

(iii) the existence of parent and intercorporate guarantees on loans;

(iv) degree of difficulty in segregating and ascertaining separate assets and liabilities;

(v) existence of transfers of assets without observance of corporate or other legal

formalities;

(vi) commingling of assets and business functions; and

(vii) the profitability of consolidation at a single physical location.



20/108

20

When applying the above authorities to the allegations contained in the Complaint, it is

clear that the Complaint sufficiently pleads the elements of the claim for substantive

consolidation.

b. The Fraudulent Transfer and Turnover Claims

Pursuant to 11 U.S.C. 544(b), the Trustee may avoid any transfer of an interest of the

Debtor in property to Rothstein and the Rothstein Entities or any obligation incurred by the

Debtor that is voidable under applicable law by a creditor holding an unsecured claim. Pursuant

to 11 U.S.C. 550, to the extent that a transfer is avoided under Section 544(b) of the

Bankruptcy Code, then the Trustee may recover the property transferred or the value of the

property from the initial transferee or any immediate or mediate transferee. In addition, pursuant

to Section 542 of the Bankruptcy Code, the Trustee has the ability to obtain turnover of property

of the estate as broadly defined under Section 541 of the Bankruptcy Code.

The Trustee alleges that the funds that are the subject of Avoidable Transfers to Rothstein

and the Rothstein Entities constituted transfers of an interest in property of the Debtor within

four (4) years prior to the Petition Date (the time limitation as permitted under Chapter 726 of

the Florida Statutes), and that the Debtor made the Avoidable Transfers to the Rothstein and the

Rothstein Entities with the actual intent to hinder, delay or defraud creditors of the Debtor in

violation of Chapter 726 and Section 548 of the Bankruptcy Code.

The Eleventh Circuit has recognized that direct proof of actual fraud is often very

difficult to establish. See, e.g., Dionne v. Keating (In re XYZ Options, Inc.), 154 F.3d 1262, 1271

(11th Cir. 1998). Recognizing that direct evidence of fraud does not always exist, courts also

allow fraudulent intent to be proven through circumstantial evidence and the surrounding



21/108

21

circumstances of the transactions, including the badges of fraud. Id. at 1271-72. These badges

include:

(1) The transfer was to an insider;

(2) The debtor retained possession or control of the property transferred after thetransfer;

(3) The transfer was disclosed or concealed;

(4) Before the transfer was made the debtor had been sued or threatened with suit;

(5) The transfer was of substantially all of the debtors assets;

(6) The debtor absconded;

(7) The debtor removed or concealed assets;

(8) The value of the consideration received by the debtor was not reasonablyequivalent to the value of the asset transferred;

(9) The debtor was insolvent or became insolvent shortly after the transfer was made;

(10) The transfer occurred shortly before or shortly after a substantial debt wasincurred; and

(11) The debtor transferred the essential assets of the business to a lienor whotransferred the assets to an insider of the debtor.

Id.

In addition, the first indication that a debtor is experiencing financial difficulties is a

delay in paying its normal creditors and vendors as their debts come due. A dishonest debtor,

seeing financial trouble on the horizon as reflected in its inability to pay normal and ordinary

debts as they come due, may begin to make fraudulent conveyances. Thus, a twelfth badge of

fraud to be considered in determining the intent of a debtor is whether the debtor is paying its

normal and ordinary debts as they come due when the alleged fraudulent conveyances occur.In

re Model Imperial, Inc., 250 B.R. 776 (Bankr. S.D. Fla. 2000) (Judge Hyman).



22/108

22

The Eleventh Circuit found that when using the badges of fraud to determine the

existence of actual fraudulent intent, courts should consider the totality of the circumstances.

Citing In re Sherman, 67 F.3d 1348 (8th Cir. 1995), the court in XYZ Options stated that

[a]lthough the presence of one specific badge will not be sufficient to establish fraudulent

intent, the confluence of several can constitute conclusive evidence of an actual intent to

defraud. XYZ Options, 154 F.3d at 1271 n.17; see also General Trading Inc. v. Yale Materials

Handling Corp., 119 F.3d 1485, 1498 (11th Cir. 1997); Harman v. First American Bank of

Maryland (In re Jeffrey Bigelow Design Group, Inc.), 956 F.2d 479, 483-84 (4th Cir. 1992)

(While each fact does not have to demonstrate actual fraud, the facts taken together must lead to

the conclusion that actual fraud existed); In re Young, 235 B.R. 666, 669 (Bankr. M.D. Fla.

1999) (While a single badge of fraud may create a suspicion but not the requisite fraud to set

aside a conveyance, several considered together may afford a basis to infer fraud).

According to the Fourth Circuit, a determination of actual fraudulent intent must include

a subjective evaluation of the debtors motive. Harman, 956 F.2d at 484 (discussing also that

an objective determination has bearing on whether constructive fraudulent intent exists, but is

not conclusive for actual fraudulent intent); see also Thompson v. Jonovich (In re Food & Fibre

Protection, Ltd.), 168 B.R. 408, 418 (Bankr. D. Ariz. 1994) (stating that 548(a)(1) sets out a

subjective test for actual fraudulent intent).

In the instant case, several badges of fraud exist in connection with the Avoidable

Transfers to Rothstein and the Rothstein Entities, (i) the Avoidable Transfers were to an insider

of the Debtor and his affiliated owned and/or controlled alter ego business entities, the Rothstein

Entities; (ii) the Debtor did not receive reasonably equivalent value from Rothstein or the

Rothstein Entities in exchange for the Avoidable Transfers; (iii) the Debtor was insolvent at the



23/108

23

time of the Avoidable Transfers or became insolvent as a result thereof; (iv) the Debtor knew or

should have known that it was going to incur debts beyond its ability to pay at the time of the

Avoidable Transfers; (viii) by and through Rothstein, the Debtor was part of a massive Ponzi

scheme at the time of the Avoidable Transfers; and (ix) the Debtor, by and through Rothstein,

concealed the Avoidable Transfers by informing scammed investors that the investments were

subject to purported confidentiality agreements.

Moreover, the Defendants bear the burden of proving good faith defense to avoid the

Avoidable Transfers under 11 U.S.C. 550(b)(1) which, based upon the facts of record, they

cannot do based upon their involvement in the Ponzi scheme at issue. See, e.g., In re M & L

Business Machine Co., 84 F.3d 1330, 1338 (10th Cir. 1996); In re Agricultural Research &

Tech. Group, 916 F.2d 528, 535 (9th Cir. 1990); In re Nordic Village, Inc., 915 F.2d 1049, 1055

(6th Cir. 1990), rev'd on other grounds, 503 U.S. 30, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992).

Good faith is not defined in the Bankruptcy Code. Accordingly, courts generally evaluate good

faith defenses on a case-by-case basis. See, e.g., In re Sherman, 67 F.3d 1348, 1355 (8th Cir.

1995). To determine whether a transferee acts in good faith for purposes of 548(c), courts

look to what the transferee objectively "knew or should have known," such that a transferee does

not act in good faith when it has sufficient knowledge to place it on inquiry notice of the

voidability of the transfer. Id.; see also M & L Business Machine, 84 F.3d at 1335-36 (quoting

Collier on Bankruptcy and stating that "the presence of any circumstance placing the transferee

on inquiry as to the financial condition of the transferor may be a contributing factor in depriving

the former of any claim to good faith unless investigation actually disclosed no reason to suspect

financial embarrassment"); Agricultural Research, 916 F.2d at 535-36 (stating that "courts look



24/108

24

to what the transferee objectively 'knew or should have known' in questions of good faith, rather

than examining what the transferee actually knew from a subjective standpoint").

Courts also look at whether the transaction "carries the earmarks of an arms-length

bargain." Sherman, 67 F.3d at 1355; see also In re Colonial Realty Co., 210 B.R. 921, 923

(Bankr. D. Conn. 1997) (finding that good faith requires an arm's length transaction as well as:

(i) an honest belief in the propriety of the activities in question; (ii) no intent to take

unconscionable advantage of others; and (iii) no intent to or knowledge of the fact that the

activities will hinder, delay or defraud others).

Fundamental to the concept of good faith is that a transferee may not remain willfully

ignorant of facts which would cause it be on notice of a debtor's fraudulent purpose:

Good faith is to be measured objectively, rather than subjectively.Consequently, a transferee may not put on "blinders" prior toentering into transactions with the debtor and claim the benefit of 548(c), where circumstances would place the transferee on inquirynotice of the debtor's fraudulent purpose or insolvency.

In re Cannon, 230 B.R. 546, 592 (Bankr. W.D. Tenn. 1999).

A similar analysis of both the nature of the transaction and the transferee's lack of

knowledge of facts which would cause a reasonable person to make further investigation is

applied in the context of 550(b)(1) defenses. See, e.g., In re Southmark Corp., 217 B.R. 499,

507 (Bankr. N.D. Tex. 1997), rev'd in part on other grounds, 242 B.R. 330 (N.D. Tex. 1999); In

re Consolidated Capital Equities Corp., 175 B.R. 629, 637-38 (Bankr. N.D. Tex. 1994); In re

Richmond Produce Co., 151 B.R. 1012, 1021-22 (Bankr. N.D. Cal. 1993). The mere failure to

make inquiry in the face of unusual circumstances also is sufficient to preclude a good faith

defense. See Cannon, 230 B.R. at 592 (stating further that "[c]ourts have generally held that it is

not necessary to show that the transferee had actual fraudulent, though fraudulent intent on the



25/108

25

part of the transferee would clearly establish lack of good faith"); see also In re M & L Business

Machine Co., 84 F.3d 1330, 1335-36 (10th Cir. 1996). Finally, as held inModel Imperial by

Judge Hyman, supra, the providing of reasonably equivalent value does not standing alone

negate a finding of actual intent. In re Model Imperial, Inc., 250 B.R. at 793-94. Thus, even if

the Defendants were able to offer material and undisputed proof that reasonably equivalent value

was given for the Avoidable Transfers, if the Court finds that the Debtor acted with actual intent

to hinder, delay or defraud, such transfers must still be avoided.

When the above law is applied to the undisputed material facts of the instant case, given

the relationship between the Defendants and the Debtor described above and the other facts and

circumstances surrounding the Avoidable Transfers, the Defendants will not be able to establish

at trial or on summary judgment that they were good faith recipients of the Avoidable

Transfers.

(2) The Trustee will suffer irreparable injury if the injunction is not granted

Given the nature of the property of estate at issue under Section 541 of the Bankruptcy

Code funds fraudulently transferred to Rothstein and the Rothstein Entities it is imperative

that the Trustee undertake immediate efforts to prevent the further transfer or disposition of such

assets. The failure of the status quo to be maintained pending the conclusion of this proceeding

will result in irreparable injury to the estate if an injunction is not entered. Only through the

imposition of a freeze order can the Trustee ensure that the estates property interest in the

diverted funds will be protected. Moreover, given the pending U.S. criminal and civil actions,

unless immediate action is undertaken to protect the status quo, the estate runs the risk of further

transfers or dissipation of the funds.

(3) The threatened injury to bankruptcy estate outweighs the threatened harm the

proposed injunction may cause Rothstein and the Rothstein Entities



26/108


27/108

27

assets, trustee was temporarily authorized to monitor corporate defendants' operations by

inspecting their books and records and reviewing their actual and projected cash disbursements).

The standards that should be applied in determining whether the monitoring of the Non-Debtor

Affiliates is appropriate should be the same as those that govern the appointment of receivers

under Florida law. Under Florida law, receivers will be appointed when the appointment is

necessary to prevent fraud or to save the property from injury or threatened loss or destruction.

Apalachicola Northern R. Co. v. Sommers, 85 So. 361 (Fla. 1920). It has also been held that the

appointment of a receiver is appropriate where a party is guilty of waste, misuse of assets, or

misconduct in the management of an entity. Allen v. Allen, 150 So. 237 (Fla. 1933). Receivers

may also be appointed where the property involved is susceptible to deterioration and a receiver

is necessary for preservation of the property. Electro Mechanical Products, Inc. v. Borona, 324

So.2d 638 (Fla. 3d DCA 1976). Each of these factors should be equally applied in authorizing

the Trustee to monitor the business and financial affairs of Rothstein and the Rothstein Entities.

IV. CONCLUSION

For the reasons set forth above, the Trustee requests the entry of a preliminary injunction

against Rothstein and the Rothstein Entities: (i) imposing a preliminary and a permanent

injunction against Rothstein, the Rothstein Entities, and Rothstein Entities members, managers,

partners, joint venturers, officers, directors, agents, attorneys, employees, shareholders, and

affiliates, past or present, and all others in custody, possession or control of funds, documents, or

other property of the Debtor, Rothstein, and the Rothstein Entities and the proceeds or products

thereof (the Enjoined Parties), from, among other things, (a) taking any action, directly or

indirectly, to transfer, conceal, dissipate, destroy, encumber, hypothecate, abandon or otherwise

dispose of any and all income, revenue, funds, contracts, licenses, contract rights, real property,



28/108

28

tangible and intangible personal property and any other legal or equitable asset or property right

(the Assets) of, or received, directly or indirectly, from the Debtor, Rothstein, and/or the

Rothstein Entities without the written consent of the Trustee; (b) restraining and enjoining the

Enjoined Parties from authorizing, causing, effectuating or acquiescing in such acts which might

have the effect of impairing the value of the assets of the Debtor, Rothstein, and/or the Rothstein

Entities; (c) transferring or withdrawing balances on deposit in financial institution accounts of

the Debtor, Rothstein, the Rothstein Entities, and/or any of their affiliates; and (d) enjoining any

and all actions seeking a receivership or commencing an involuntary bankruptcy proceeding

against Rothstein and the Rothstein Entities; and (ii) for such other relief the Court may deem

appropriate. In addition, and to the extent necessary or appropriate, the Trustee requests that he

be appointed monitor of the business and financial affairs of Rothstein and the Rothstein Entities.

WHEREFORE, the Trustee requests the relief herein and for any other relief the Court

deems appropriate.



29/108

29

Dated this 2nd day of December, 2009.

WE HEREBY CERTIFY that we are admitted to the Bar of theU.S. District Court for the Southern District of Florida and that weare in compliance with the additional qualifications to practice in thisCourt set forth in Local Rule 2090-1(A).

GENOVESE JOBLOVE &BATTISTA, P.A.Special Counsel to the TrusteeBank of America Tower at International Place100 S.E. 2nd Street, Suite 4400Miami, Florida 33131Telephone: (305) 349-2300Telecopier: (305) 349-2310

By: /s/ David C. Cimo

David C. Cimo, Esq.Florida Bar No. 775400John H. Genovese, Esq.Florida Bar No. 280852Paul J. Battista, Esq.Florida Bar. No. 884162Theresa Van Vliet, Esq.Florida Bar No. 374040Robert F. Elgidely, Esq.Florida Bar No. 111856



30/108

30

CERTIFICATE OF SERVICE

I HEREBY CERTIFYthat a true and correct copy of the foregoing was served via email

and hand delivery (where denoted with an asterisk) to the below listed parties this 2nd day of

December, 2009.

By: /s/ David C. Cimo.David C. Cimo, Esq.

Marc S. Nurik, Esq.*Law Offices of Marc S. Nurik1 East Broward Boulevard, Suite 700Fort Lauderdale, Florida 33301Email: [email protected]

Michael D. Seese, Esq.*Hinshaw & Culbertson LLP1 East Broward Boulevard, Suite 1010Fort Lauderdale, Florida 33301Email: [email protected]

Steven Schneiderman, Esq.Office of the U.S. Trustee51 Southwest First Avenue, Room 1204Miami, Florida 33130Email: [email protected]



31/108

Case 09-02478-RBR Doc 2-1 Filed 12/02/09 Page 1 of 78


32/108



33/108



34/108



35/108



36/108


37/108



38/108



39/108



40/108



41/108



42/108



43/108


44/108



45/108



46/108



47/108



48/108



49/108



50/108



51/108



52/108



53/108



54/108



55/108



56/108



57/108



58/108



59/108



60/108



61/108



62/108



63/108



64/108



65/108



66/108



67/108



68/108



69/108



70/108



71/108



72/108



73/108



74/108



75/108



76/108



77/108



78/108



79/108



80/108



81/108



82/108



83/108


84/108



85/108



86/108



87/108



88/108



89/108



90/108



91/108



92/108



93/108



94/108



95/108



96/108



97/108



98/108



99/108



100/108



101/108



102/108



103/108



104/108



105/108



106/108



107/108



108/108


stettin v. rothstein, emergency injunction motion

Documents