Opinion ID: 2780845
Heading Depth: 2
Heading Rank: 3

Heading: Discovery and Examiner’s Report

Text: On March 31, 2011, the bankruptcy court granted in part the Petitioning Creditors’ motion to jointly administer the three cases. Although the bankruptcy court doubted how the “three widely disparate business operations” were affiliates, it granted the motion “for the sole purpose of conducting one trial regarding the validity of the . . . Note, the assignment of the Note and determination of who are the legitimate representatives and attorneys for the three alleged involuntary debtors.” The bankruptcy court also appointed a Chapter 11 Examiner to investigate the ownership issue, among other things.3 3 The bankruptcy court remarked that the involuntary petitions raised a smell, pointing to irregularities such as the timing of the involuntary petitions in relation to the state court litigation, the timing of the answers consenting to the relief sought in the petitions, the questionable authenticity of the Note, and the highly unusual situation of two groups vying to represent alleged debtors. 12 Case: 12-15595 Date Filed: 02/20/2015 Page: 13 of 57 At the bankruptcy court’s direction, the parties conferred regarding discovery and pre-trial procedures and agreed to a case management order. On June 7, 2011, the bankruptcy court issued the agreed “Case Management and Schedule Order in Contested Matter Setting Filing and Disclosure Requirements for Pre-Trial and Trial” (the “Schedule Order”) (emphasis added). Notably, the Schedule Order provided for extensive discovery, including mandatory disclosures of witnesses and documents, interrogatories, requests for admission, document requests, depositions, and expert reports. The Schedule Order directed the parties to submit findings of fact rather than jury instructions, and noted that the bankruptcy court would set a trial date for “this contested matter” at the pre-trial conference. On November 18, 2011, the Examiner issued a 96-page report addressing the ownership of the Alleged Debtors and the claims of the Petitioning Creditors. The Examiner found that the Valmore Trust was the ultimate owner of both Fisher Island and Little Rest. As to Mutual Benefits, the Examiner found that Kayley was ultimately owned by the Test Trust. Accordingly, the attorneys for the Redmond Group (not the Zeltser Group) were authorized to represent the Alleged Debtors. The Examiner explained that the ownership dispute with respect to Mutual Benefits was different from Fisher Island and Little Rest in that Mutual Benefits was never held within the Valmore Trust. The Examiner’s review indicated that 13 Case: 12-15595 Date Filed: 02/20/2015 Page: 14 of 57 W. Shaun Davis, through his management company, Triangle International Management Limited (“Triangle”), owned 100% of Mutual Benefits’ voting shares. All of Mutual Benefits’ other shareholders, including Kayley, held nonvoting shares. Mutual Benefits was therefore controlled by its voting shareholder, Triangle. The Examiner generally found the Zeltser Group’s story with respect to ownership to be inconsistent and irreconcilable with, or unsupported by, the record. For instance, the Zeltser Group provided little extrinsic evidence to prove the existence of Imedinvest. In fact, Joseph Kay and his sister testified in connection with the Gibraltar proceeding in 2009 that they were unfamiliar with Imedinvest. The Examiner also determined that the Zeltser Group had submitted certain documentation in “an intentional effort to mislead or misrepresent material facts to a court.” After several months of extensive discovery in accordance with the Schedule Order (as well as extensions), which produced more than 200,000 pages of documents, the record was closed on November 30, 2011. D. Summary Judgment in Fisher Island and Little Rest Cases
Notwithstanding the Examiner’s unfavorable report, on November 21, 2011, the Zeltser Group moved for partial summary judgment on the ownership issue in 14 Case: 12-15595 Date Filed: 02/20/2015 Page: 15 of 57 the Fisher Island and Little Rest cases.4 The Zeltser Group sought a determination that: (1) the Valmore Trust was invalid; (2) neither Gibraltar law nor United Kingdom law applied to the proceedings; and (3) JWL Entertainment Group, Inc. (“JWL”), a Delaware corporation, was the equitable owner of Fisher Island and Little Rest. The Zeltser Group’s ownership theory was twofold. First, the Valmore Trust 5 was a “sham” and invalid because Kay, and not Badri, was the settlor and beneficiary. Alternatively, Fisher Island Limited (“Fisher Limited”) and Grosvenor Trading Holding Limited (“Grosvenor”), which the Zeltser Group acknowledged were the respective parent companies of Fisher Island and Little Rest, were transferred from trustee Miselva to JWL. JWL was then transferred out of the Valmore Trust to Imedinvest. The Zeltser Group argued that, pursuant to these transactions, JWL held equitable ownership of Fisher Island and Little Rest. Paradoxically, the Zeltser Group maintained that the bankruptcy court lacked jurisdiction to resolve any issue regarding the JWL transactions. In opposition to the partial summary judgment motion, the Redmond Group argued that the Gibraltar Court’s judgment precluded the bankruptcy court from 4 As discussed below, see infra Part III.A, the Zeltser Group also moved to withdraw reference of the bankruptcy proceedings to the district court for adjudication of the ownership issue. 5 In the motion, the Zeltser Group acknowledged the Redmond Group’s assertion that SP Trustees Gmbh (“SP Trustees”) was the successor to Miselva, the then-trustee of the Valmore Trust. 15 Case: 12-15595 Date Filed: 02/20/2015 Page: 16 of 57 determining the validity of the Valmore Trust. The Gibraltar Court’s factual findings, including its implicit finding that the Valmore Trust was valid, were entitled to comity, and a New York state court specifically declined to find that the Valmore Trust was a sham. Furthermore, the JWL transaction was abandoned. Even assuming the transaction was completed, Miselva was still the legal and beneficial owner of Fisher Limited and Grosvenor, as indicated in an unrebutted expert opinion submitted by the Redmond Group. The Zeltser Group did not file a reply.
On November 30, 2011, the Zeltser Group filed a motion for clarification and/or reconsideration of the June 7, 2011 Schedule Order. The Zeltser Group argued, for the first time in the proceedings, that the bankruptcy court could not adjudicate the ownership issue (1) without joinder of all indispensable parties, and (2) without violating due process because the ownership issue was raised as a contested matter in the Redmond Group’s motion to strike rather than as an adversary proceeding. The motion listed a string of individuals and entities that were allegedly involved in the ownership chain and therefore “indispensable,” including the Valmore Trust, Miselva, JWL, Fisher Limited, Grosvenor, Badri’s widow, and Imedinvest. 16 Case: 12-15595 Date Filed: 02/20/2015 Page: 17 of 57 The bankruptcy court denied the motion for clarification/reconsideration, finding that any objection should have been raised contemporaneously with entry of the agreed-upon Schedule Order, not several months after-the-fact.
On December 29, 2011, the bankruptcy court denied the Zeltser Group’s motion for partial summary judgment. In the “Procedural History” section of the order, the bankruptcy court discussed the appointment of the Examiner and the production of the Examiner’s report. The bankruptcy court then set forth the material facts concerning the formation and operation of the Valmore Trust, as well as the Gibraltar and New York litigations. The “Material Facts” section made no mention of the Examiner or his report. Based on these material facts, the bankruptcy court rejected the argument that the Valmore Trust was a sham and declined to reverse any findings made by the Gibraltar Court. Furthermore, the bankruptcy court determined that the JWL transaction was abandoned and that pursuant to the unrebutted expert opinion submitted by the Redmond Group, neither legal nor beneficial ownership of Fisher Limited or Grosvenor passed to JWL. The bankruptcy court stated that, pursuant to Federal Rule of Bankruptcy Procedure 7056(f), it was “inclined to determine as a matter of law” that Miselva (then trustee of the Valmore Trust) owned Fisher Limited and Grosvenor. The 17 Case: 12-15595 Date Filed: 02/20/2015 Page: 18 of 57 parties did not dispute that Fisher Limited owned Fisher Island and Grosvenor owned Little Rest. Thus, the bankruptcy court was in effect notifying the parties that it intended to rule that the Valmore Trust owned Alleged Debtors Fisher Island and Little Rest. Nevertheless, the bankruptcy court gave the Zeltser Group an additional 21 days to file a legal memorandum, “based on the existing record,” to persuade the court not to enter summary judgment as indicated. Despite this invitation by the bankruptcy court, the Zeltser Group declined to file any additional memorandum addressing the ownership issue. Instead, the Zeltser Group objected to the “confines imposed” with respect to the permitted memorandum and advised the bankruptcy court that it would “rely on the existing record.” The Zeltser Group did not explain what additional discovery it believed was necessary or what it would prove if given the opportunity to expand the record. During a hearing on January 5, 2012, the bankruptcy court granted the Redmond Group’s oral motion to prepare a proposed memorandum opinion regarding the entry of summary judgment and instructed both the Redmond Group and the Zeltser Group to do so within five days. The Petitioning Creditors (joined by the Zeltser Group) moved for reconsideration of this ruling, arguing that the Redmond Group intended to include in its proposed opinion new findings and 18 Case: 12-15595 Date Filed: 02/20/2015 Page: 19 of 57 conclusions not present in the bankruptcy court’s December 29, 2011 denial of partial summary judgment. On January 10, 2012, the bankruptcy court denied the Petitioning Creditors’ motion for reconsideration as without merit. The bankruptcy court stated that it had no intention of entering an order that supplemented the record. Summary judgment would not be entered on allegedly “new or different” grounds but “rather on the very same undisputed facts and legal grounds” on which the bankruptcy court denied the Zeltser Group’s motion for partial summary judgment.
On January 20, 2012, the bankruptcy court, sua sponte, entered an order granting summary judgment in favor of the Redmond Group in the Fisher Island and Little Rest cases, as the court had indicated it was inclined to do. The bankruptcy court noted that, despite being given the opportunity to do so, the Zeltser Group chose not to raise any issues of disputed fact or otherwise point to specific record evidence potentially raising a disputed factual issue. The bankruptcy court also noted that SP Trustees had replaced Miselva as trustee of the Valmore Trust. After reviewing the record and drawing all reasonable inferences in favor of the Zeltser Group, the bankruptcy court found, as a matter of law, that Fisher Limited, Grosvenor, and their respective subsidiaries (including Fisher Island and 19 Case: 12-15595 Date Filed: 02/20/2015 Page: 20 of 57 Little Rest) were assets of the Valmore Trust. Final summary judgment was entered as follows: the Valmore Trust, through its trustee (currently SP Trustees) owned (1) 100% of Fisher Limited, which (through an intermediary) owned 100% of Fisher Island, and (2) 100% of Grosvenor, which owned 85% of Little Rest, with the remaining 15% of Little Rest owned by an individual not directly involved in the ownership dispute. Three groups appealed the bankruptcy court’s January 20, 2012 summary judgment order to the district court: (1) the Zeltser Group (still purporting to represent Fisher Island and Little Rest), (2) the Petitioning Creditors, and (3) five non-party entities affiliated with the Zeltser Group, including Fisher Limited, Grosvenor, and Areal Group (“Areal”) 6 (collectively, the “non-party appellants”). These appeals were consolidated by U.S. District Court Judge Kathleen Williams. E. Trial in Mutual Benefits Case 1. Denial of Summary Judgment On February 13, 2012, the Redmond Group moved for summary judgment on the ownership issue in the Mutual Benefits case. The Redmond Group sought a determination that Mutual Benefits was owned by 24 investors, and that the Test Trust was the ultimate owner of Kayley, the largest investor of Mutual Benefits. The Zeltser Group responded, inter alia, that the bankruptcy court lacked authority 6 Areal is apparently a wholly owned subsidiary of Areal Plus Group, the assignor of the Note, as well as a creditor and former partner of Imedinvest. 20 Case: 12-15595 Date Filed: 02/20/2015 Page: 21 of 57 to make a final determination as to ownership, and could not make any such determination without joinder of all the alleged owners of Mutual Benefits (i.e., the investors). On August 28, 2012, the bankruptcy court denied the Redmond Group’s motion, finding that genuine issues of material fact raised by the Zeltser Group’s response precluded summary judgment. The bankruptcy court subsequently set the matter for a two-day bench trial, to begin on April 11, 2013—over two years after the case was filed. 2. Pre-Trial and Motion for Continuance In October 2012, the parties filed their lists of intended witnesses and exhibits. The Zeltser Group named 36 witnesses it intended to call at trial as part of its case-in-chief, including Galina Orlowskaya, Natasha Bransburg, and Petitioning Creditor Oxana Adler, 7 and identified hundreds of exhibits. The bankruptcy court ordered the parties to submit sworn declarations of their intended witnesses’ direct testimony at least 10 days before trial. In response, the Redmond Group filed the declaration of W. Shaun Davis, the president and sole director of Mutual Benefits. The Zeltser Group filed the declaration of Oxana Adler. 7 Adler, who is apparently an attorney licensed in Russia, told the Examiner that she has represented Imedinvest and its affiliates (including Badri and the Alleged Debtors) for more than 14 years. The claims she asserted in the involuntary petitions arose out of legal services allegedly provided to the Alleged Debtors. 21 Case: 12-15595 Date Filed: 02/20/2015 Page: 22 of 57 On April 1, 2013, the Zeltser Group filed a motion for an extension of time to file the direct testimony declarations of Orlowskaya and Bransburg and for a 60day continuance of the trial. According to the Zeltser Group, Orlowskaya and Bransburg did not want to give their testimony at that time because they were concerned for their personal safety in light of the March 23, 2013 death of Russian businessman Boris Berezovsky. The motion did not specify any connection between the witnesses and Berezovsky, or otherwise explain the relevance of his death to the Mutual Benefits bankruptcy proceeding. 8 The bankruptcy court denied the motion for continuance. 3. Trial Trial began as scheduled on April 11, 2013. The Redmond Group called Davis to testify in person and through his previously filed declaration. Davis testified as follows. He was the owner of Meridian Asset Management Ltd., which owned 99% of Triangle, which in turn owned all of the voting shares in Mutual Benefits. Davis was appointed as the president and sole director of Mutual Benefits in 2002 and continues to serve in that capacity. Kayley and 22 other 8 The Zeltser Group later submitted sworn declarations by Orlowskaya, Bransburg, and Adler, which stated that they had received threats of bodily harm from individuals associated with the Redmond Group. Adler vaguely declared that she believed Berezovsky’s death to be “intrinsically connected to his claims to assets [at issue] in the proceedings.” According to the Zeltser Group’s appellate briefs in this Court, Berezovsky is associated with Badri’s widow, Gudavadze. 22 Case: 12-15595 Date Filed: 02/20/2015 Page: 23 of 57 investors held non-voting shares in Mutual Benefits, which only entitled them to an economic interest in the profits and did not confer any voting power. Davis testified that he retained the Redmond Group attorneys in the bankruptcy case and that the Zeltser Group attorneys were not authorized to represent Mutual Benefits. Davis’s testimony was corroborated by various exhibits, many of which were admitted into evidence without objection. Attorney Zeltser then cross-examined Davis for four hours. Zeltser attempted to establish that Mutual Benefits defrauded its investors and that Davis was merely a “nominee” without any decision making power. Davis denied both propositions. At the close of the Redmond Group’s case-in-chief, the Zeltser Group orally moved for judgment on partial findings under Federal Rule of Civil Procedure 52(c) and for involuntary dismissal under Federal Rule of Civil Procedure 41(b). The Zeltser Group argued that the Redmond Group failed to meet its burden of establishing who owned Mutual Benefits based on Davis’s testimony—the sole evidence presented by the Redmond Group. The bankruptcy court found that the Redmond Group had presented a prima facie case and denied both motions. In doing so, the bankruptcy court reasoned that “a motion on Rule 52(c) or Rule 41 is in some way similar to a summary judgment motion; that is, it is not a time for 23 Case: 12-15595 Date Filed: 02/20/2015 Page: 24 of 57 making credibility choices. It is a time to determine whether there is evidence, if accepted, that . . . can constitute a prima facie case.” The Zeltser Group also renewed its motion for a continuance of the trial, citing the unavailability of Orlowskaya, Bransburg, and Adler. The bankruptcy court ruled that Orlowskaya and Bransburg would be allowed to testify at a continued trial date on April 27, 2013, if they were produced for depositions by April 18, 2013. However, the bankruptcy court refused to extend this limited continuance to Adler. The bankruptcy court stated that Adler’s extensive involvement in the case was a matter of public record and declined to give Adler “any further consideration” if “she chose not to be here today.” The bankruptcy court ordered the Zeltser Group to proceed with its case-inchief. Despite having submitted exhaustive lists of witnesses and exhibits, the Zeltser Group did not call any witnesses or offer any exhibits at trial. Instead, attorney DiBello informed the bankruptcy court that the Zeltser Group had nothing to present except for the testimony of Orlowskaya, Bransburg, and Adler. Because Orlowskaya and Bransburg did not appear for deposition by April 18, 2013, they were barred from testifying at all. The trial record was closed without any evidence proffered by the Zeltser Group. 24 Case: 12-15595 Date Filed: 02/20/2015 Page: 25 of 57 4. Bankruptcy Court’s Final Judgment On April 25, 2013, the bankruptcy court entered its findings of fact and conclusions of law in favor of the Redmond Group. The court found the Redmond Group’s testimonial and documentary evidence to be credible and persuasive, whereas the Zeltser Group failed to submit any evidence to support an alternative theory of ownership. The bankruptcy court found that Triangle owned the controlling “Managers Shares” of Mutual Benefits. As the controlling shareholder, Triangle appointed Davis as president and sole director of Mutual Benefits. Davis had the exclusive authority to retain counsel to represent Mutual Benefits, and, pursuant to that authority, Davis retained the Redmond Group’s attorneys in the involuntary bankruptcy proceeding. Accordingly, the bankruptcy court granted the Redmond Group’s motion to strike the Zeltser Group’s answer and set the Redmond Group’s motion to dismiss the involuntary petition for a hearing. Pursuant to its findings of fact and conclusions of law, the bankruptcy court entered a separate final judgment in favor of the Redmond Group. The final judgment determined that the Zeltser Group was not authorized to represent Mutual Benefits in the bankruptcy proceeding. The Zeltser Group (still purporting to represent Mutual Benefits) timely appealed the April 25, 2013 final judgment to the district court. 25 Case: 12-15595 Date Filed: 02/20/2015 Page: 26 of 57 On appeal, the district court granted the Redmond Group’s motion for leave to supplement the record, which attached deposition testimony from Bransburg in which she admitted that she did not know anything about Mutual Benefits and that she never had any relevant testimony to give at trial.