Securities and Exchange Commisison v. Pentagon Capital Management PLC et al, No. 1:2008cv03324 - Document 250 (S.D.N.Y. 2013)
Court Description: OPINION re: 243 MOTION for Fees and Expenses or, in the Alternative, to Withdraw as Counsel for Pentagon Capital Management PLC filed by Pentagon Capital Management PLC. Based upon the conclusions set forth above, the Pepper Hamilton's motion to modify the restraining notice with respect to the relevant fees is granted. (Signed by Judge Robert W. Sweet on 10/18/2013) (cd)
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK -------------------------------------------X SECURITIES AND EXCHANGE COMMISSION, Plaintiff, 08 Civ. 3324(RWS) -against- OPINION PENTAGON CAPITAL MANAGEMENT PLC and LEWIS CHESTER, Defendants, -andPENTAGON SPECIAL PURPOSE FUND, LTD., Relief Defendant. ------------------------------------------X A P PEA RAN C E S: Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION New York Regional Office 3 World Financial Center, Suite 400 New York, NY 10281 By: Paul G. Gizzi, Esq. Christopher J. Dunnigan, Esq. John C. Lehmann Jr., Esq. Attorneys for Defendants PEPPER HAMILTON LLP Hamilton Square 600 Fourteenth Street, N.W. Washington, DC 20005-20004 By: Frank C. Razzano, Esq. Ivan B. Knauer, Esq. Matthew D. Foster, Esq. 1 Sweet, D.J. Pepper Defendant Pent lton LLP (" Hamilton"), counsel for Capital Management PLC ("PCM"), has moved to modify the restraining notice issued by the Plaintiff Securities and Exchange Commission ("SEC") to allow for fees and expenses or, in the alternative, to withdraw. Ba set forth below, the motion to modi the restrain on the conclusions notice is ed. Prior Proceedings Prior proceedings and the desc s in this action are in the opinions of this court, dated and February 10, 2009 granting judgment in See SEC v. Pent PLC, ry 14, 2012 r of the SEC. F. Supp. 2012 WL 479576 (S.D.N.Y. February 14, 2012) i Capital Mgmt. PLC, 612 F. Supp. 2d 241 (S.D.N.Y. 2009). summary of the procedural background relevant to t A brief instant motion follows: On March 28, 2012, this Court entered a Final Judgment of over $98.6 mill Defendant. against the Defendants and Relief On April 25, 2012, Defendants fi 2 a notice of appeal. nt motion by the Defendant ied a subs s Court Lewis Chester ("Chester"), PCM, and Pent , Ltd. (" supers of P for a s s bond se of execution without posting a accordance with Rule 62 of the Federal Rules 1 Procedure. Chester and PCM, but not PSPF, motion to the Second Circu 2012, Special Second Ci for the same relief. t denied motion. a On May 23, (Dunnigan Decl., Ex. 1) . On June 7, 2012, the SEC served a restraining notice pursuant to New York Civil Practice Law Chester, requests. PCM and PSPF, as well as On June 12, 2012, t to PCM and PSPF. 5222 on t-judgment document SEC propounded interrogatories These discovery sts were on Pepper Hamilton, counsel for PCM, Chester, On June 28, 2012, after se inte § On June 13, 2012, the SEC propounded interrogatories to Chester. se Rules ories, PCM ce of led for PSPF. restraining notice and stration in the Un Kingdom (Def. Memo at 3). On July 5, 2012, Squire Sanders (UK) LLP, the U.K. counsel for the Administrators, sent letters to both Pepper Hamilton and the SEC. In the first letter (the "Pepper Hamilton 3 Letter"), the Administrators agreed to let Pepper Hamilton keep a flat fee paid to it on February 17, 2012, and agreed to underwrite additional expenses for Chester and PCM's appeal to the Second Circuit. However, the Administrator instructed Pepper Hamilton not to respond to the pending discovery requests. (Knauer Declo, Ex. 1, pgs. 2-3). In the Administrators' second letter (the "SEC Letter"), the Administrators informed the SEC that "Pentagon has entered administration because it is insolvent and there are very limited funds in the administration estate to enable the Company to be involved in the Post-Judgment Proceedings." (Dunnigan Decl. Ex. 5, pg. 3). The Administrators also informed the SEC that they viewed the SEC's United States based judgment as unenforceable outside the United States unless it was domesticated in the U.K. On July 5, 2012, Pepper Hamilton sent a letter to this Court asking to be relieved as counsel for PCM and PSPF. On July 9, 2012, counsel for the Administrators sent a further letter to Pepper Hamilton, stating that PCM would no longer pay 4 for any of PSPF's 1 1 costs. 25, 2012, Pepper Hamilton's After effect of cont . 1). On st to withdraw was Court deni withdraw, counsel for the (Knauer Decl. ly ed. Pepper Hamilton's motion to rties corresponded rega the SEC's restraining notice on Pepper Hamilton's ing representation of its clients. On August 21, 2012, counsel proposed the following: ¢ Pepper Hamilton can cont to draw down the flat fee while senting the administrators for PCM Chester in the appeal to the Second Circuit; ¢ Pepper Hamilton can cha the administrators for PCM the reasonable expenses incurred incident to the appeal; and ¢ Pepper Hamilton can cha administrators for an hourly basis for the fees and expenses incurred in representing the administrators PCM in the post judgment discovery ss in Southern st ct of New York. This amount is initially capped at $25,000 and, if necessa [Pepper Iton wou J be in contact with [the SEC] when the bills reach[ed] s amount so t [they could] agree on another amount. (Pepper Hamilton's Exh t A (nEx. AU), E-mail from M. Foster to SEC responded the same day, C. Dunnigan (Aug. 27, 2012).) indicating that it agreed to SEC's ri " three requests, n rese to take afferent pos (Ex. B, E-mail C. Dunni ng the ion at a later time to M. Foster (Aug. 27, 5 2012).) The parties' agreement allowed Pepper Hamilton to continue to receive payment for its work the appeal and for PCM r PCM and Chester on post-judgment proceedings in this Court, without any substantive limitation on the legal on the sentation aside from the monetary st-judgment representation. Following this Court's decis notice and the part Iton with Sey s' agreement, Chester aced Pepper rth Shaw LLP ("Seyfarth Shaw"). to incur legal fees agreed to allow Seyfarth If of Chester to deal wi on s, the restraining The SEC to $25,000 post-judgment discovery thout violating the restraining notice. On August 8, 2013, t cision, affi Second Circuit issued its ng in part and vacating and remandi in part the Court's ruling. al. 725 F.3d 279, 287 (2d Cir. 2013) (Vacating penalty award in light of the Supreme Court's decision in Gabelli v. Ct. 1216 (2013) and wi regard to t imposition of joint and several liability of the penalty upon Defendants). Hamilton sought the SEC's 133 S Pepper rmission to receive a new retainer from PCM from which the attorneys would draw down 6 r payment of s incurred in prepa ling a petition on PCM and ng and nc, and to charge PCM's Chester's behalf for rehearing en administrators for reasonable nses incurred in the preparation and filing of such ition. requests as violating the restraini The SEC denied both notice. The SEC stated tit, woulq] view any pa s r attorneys' fees other than the reasonable costs to p the pending requested discovery as lat the restraining notice. For the pending scovery, [the SEC requested that Pepper Hamilton] please de an estimate of what it [would] cost to p discovery. [The Sec also stated it would] need to ew the statement(s) before any payment [wa]s made. And to be clear, [the SEC] note[d] that t of any possible objection to the pending requests not be rmitted - only the costs of p t requested discovery [would the SEC] view as olating the restraining notice. (Ex. E., E-mail from P. Gizzi to M. Foster (S . 6, 2013).) On September 4, 2013, the SEC again requested an est r Hamilton of how much in fees would be necessary to respond to the 9 discovery requests. To date, has not an estimate of its post-j r Hamilton fees. rth Shaw, counsel for Chester, has accumulated $32,000 in 1 1 s to date, which is $7,000 in excess of SEC's allotted amount, and seeks an additional $3,000 to with outstanding production issues. 7 1 Seyfarth Shaw is currently ing paid by ster personally. September 6, 2013, the that rth Shaw may an additional $3,000 to complete document represent ster at his deposition. agree to the Bye-mail on paid scovery and to The has refused to yment of $7,000 in excess of the previously agreed-upon $25,000.1 On September 13, 2013, motion before the Court see restraining not to allow Pepper Hamilton filed this an order ei r modifying r Hamilton to certiora en banc and potential subse resent PCM in petitions and without limitation in the post judgment discovery requests, or counsel for PCM. thdraw as lton leave to alternatively granting Pepper and mar Its motion was fully submitted on October 16, 2013. The Applicable Standard A. CPLR § 40 Under CPLR § 5240, a Court "may at any t own itiative or motion of any interested , on its rson, and upon 1 It is unclear which, i any, counsel will represent Chester in the District Court. No memorandum motion on behalf of Chester with to the instant motion has been submitted. 8 such notice as it may ire, make an order denying, limiting, conditioning, regulating, extending or modifying the use of any enforcement procedure." NY CPLR § 5240. omnibus section empowering t court to exercise broad powers over the use of enforcement R.R. 661 N.Y.S.2d 20, 22 s." (N.Y. This section r "CPLR 5240 is an Paz v. Long Island . 2d Dep't 1997). rizes modification or " lusion of any enforcement otherwise provided for Article 52," including CPLR 5222 restraining notice. lin v. Altman See No. 92 Civ. 8106, 1997 U.S. Dist. LEXIS 11413, *9-10 (S.D.N.Y. Aug. 7, 1997); see also Cruz v. TO Bank, N.A. 711 F.3d 261, 269-70 (2d Cir. 2013) (CPLR 5240 is a "broad ism for relief"). B. Local Civil Rule 1.4 Local Civil Rule 1.4, an "attorney who attorney of record for a party may be rel by Court granted by order." an order may otherwise satis and or aced only Court and may not withdraw from a case of leave of t s appeared as thout Local Civ. R. 1.4. " granted only upon a showing by affidavit or ctory reasons for withdrawal or displacement posture of case. " 9 Id. Thus, a court considers two issues in determining a motion to withdraw as counsel, "t wit I reasons withdrawal on the t of the the impact eding." the Karimian v. T No 10-3773 (AKH) (JCF) , 2012 WL 1900092, at *2 ( S . D. N ¢ Y ¢ May 11, 2011). In making its determination, it is well-settl that a court has "considerable discretion in deciding a motion for withdrawal of counsel." Id.; No. 00-3262, 2002 WL 59423, at *1 (S.D.N.Y. Jan. 16, 2002). a motion consider leave to withdraw, a court may cons "protracted history of or not to In I r igation" when deciding whether rmit counsel to withdraw. SEC v. Great American No. 07-10694, 2009 WL 4885153, at *5 (S.D.N.Y. Dec. 15, 2009). In addition, courts have all withdrawal based on non-payment. v. Johnson Grossfie See Promotica America, Inc. ----------------------~------ , Inc., No. 98-7414, 2000 WL 424184, at *1 (S.D.N.Y. April 18, 2000) ("It is well sett that nonpayment of fees is a valid basis for the Court to grant counsel's motion to thdraw. .ff); Emile v. Browner, No. 95-3836, 1996 WL 724715, at *1 (S.D.N.Y. Dec. 17, 1996) pay 1 fees, attorney, ("When a client ils to fails to communicate or cooperate with the and the client relationship has broken 10 down, se are more than sufficient reasons for counsel to be relieved. If) ¢ The Motion to Modify the Restraining Notice to Allow Specified Counsel Fees is Granted Pepper Hamilton has sought the modificat restrain CPLR notice § of the 5240 with respect to attorney fees to rmit representing PCM in any further appellate lit , including filing an en bane rehearing fil a petition judgment proceedings these fees, acco Supreme Court ew, and fore this court. payment of Pepper Hamilton, unjustly allows the SEC s and best prevents PCM from having a opportunity to pursue appellate in the post- Prevent to use the restraining notice to dictate the ri rests of PCM, ition, 1 and fair and to its ri s post-judgment proceedings. that its pos The SEC does not ude PCM from pursuing adequately responding to SEC insists that (1) s ion seeks to r appellate review or t-judgment document review would futile; 5222 does not create a statutory exemption for atto (3) CPLR § 5240 does not create any substantive r 11 sts. (2) CPLR s; s for § judgment debtor or any third rty and as such cannot used to modify the restraining notice. (SEC Memorandum in Opposition, "Sec. Opp."; at 3-5.) that CPLR The SEC is correct create substantive rights statutory exemption that CPLR attorney fees. § 5240 s not 5222 does not allow a § This s not, however, prevent district courts from modifying restraining notices uant to CPLR While CPLR Ru § § 5240 to prevent harsh or unjust results. 5240 is a New York state procedural rule, of Civil Procedure 69 1 des that "[tJhe procedure on execution [of a federal judgment money s]-and in proceedings supplementary to and in aid of judgment or execution-must accord with t court is located." procedure of the state where t AXA Versi Ins. Co., 2013 WL 1790719, at *3 Restraining notices relat AG v. New (S.D.N.Y. Apr. 22, 2013). to underlying judgments have been ementary to and in aid of found to be "unquestionabl[yJ s judgment or execution" and as such within t strict Courts. hire Id.; see also Karaha purview of LLC. v. ------------------~--------- ~~~~~~~~~~~~~~~~~~~~~~~~~, (2d r. 2002) (upholding a 313 F. 70 strict order's modification of a restraining notice pursuant to CPLR § 5240). 12 Courts in this Ci have there re ermined that "[jJuris ction to hear ancillary disputes relating to execution and en cement of judgments is an inherent ction over the lying case. rt of a court's juris As the Circuit recently reiterated, '[pJrocess subsequent to judgment is as essent ction as process j power would be ci j 1 to to judgment, else lete and entirely i quate to purposes for which it was conferred by the constitution." =E=M-====-==-=~==~~=====-~-==in-=a, 2012) 695 F.3d 201, 208 v. Johnson Cnt (quoting --~~----------------~Ri Modi (2d Cir. 73 U.S. 166 (1867)). the restraining notice at issue under CPLR § 5240 to ust results is Ii se within this Court's discretion. Second Circuit decision in Assocs. Defined Contribution Pension 666 F.3d 68, 78 (2d Cir. 2011), upon which the SEC relies, is not to the contrary. In Mi --~~- a district court until the judgment paid by a r CPLR § 5240 to set as the defendant moved rty debtor. i The court held that CPLR § 5240 was a "state procedural rule" that rights and re or its judgment. fendant had been had no relevance to the s does not, though, 13 no substantive ral proceeding nt parties like r Hamilton the defendants in AXA ----------------~~-- Karaha Bodas Co., LLC., from usi mechanism through which to vi CPLR and 5240 as a procedural § cate certain rights restrained by supplemental notices issued under NY CPLR § 5222. AXA Versi ----------------~~-- , 2013 WL 1790719, at *3; Karaha Bodas Co. LLC., 313 F.3d at 72. Indeed, in both AXA Versiche Karaha Bodas Co., the district courts used t under CPLR § 5240 to modify restra the ir discretion ing notices, not based on ies constitutional rights or statutorily exempt sm to categories, but as a procedural me resu AG r CPLR s from the notices issued AXA Vers § nt unjust 5222. AG, 2013 WL 1790719, at *3 (modi ----------------~--- See --~----~ ng restraining notice to allow defendant to vindicate its property rights th respect to t interest rate embedded judgment); Karaha Bodas Co., 313 F.3d at 80 notice to account for only a percent a restra amount previously mandat a statut (modi the ing a of the ). The fact that attorney fees are not ly exempted category under CPLR § 5222 or that there is no constitutional to counsel in a civil proceeding does not prevent a district court from modi ng a restraining notice in its discretion under CPLR § 5240 to prevent unjust results. Indeed, CPLR § 5240 exp1ic ly provi s that a Court "may at any time, on its own initiative or the motion of any interested 14 person, and upon such notice as it may require, make an order denying, limiting, conditioning, regulating, extending or modifying the use of any en 5240; see also _ _ _ _ _v. _ _ _ Paz _ _ ~L- cement procedure." NY CLS CPLR § Island R.R. _ _ _ _ _ _ _ _ _ ____ (N.Y. App. Div. 2d Dep't 1997) 661 N.Y.S.2d 20, 22 ("CPLR 5240 is an omnibus section empowering the court to exercise broad powers over the use of enforcement procedures."). The SEC has cited Potter v. MacLean, 904 n.Y.S.2d 551, 553 (App. . 3rd Dep't 2010) as holding that New York law does not recognize the right of a judgment debtor to use non-exempt funds to pay counsel. such restriction. (SEC Opp. at 4.) In Potter, the Potter stands for no fendant had an outstanding maintenance obligation to his family of $33,000, but was pursuing a divorce action to his attorneys for $15,000. which he had an outstanding bill The collection unit, because of his owed maintenance support, served a restraining notice on the attorneys representing the defendant in his divorce action. id. See The court held that restraining notices could be served on the defendant's attorneys and that funds held for the purpose of retaining an attorney were not included t money and property exempt from restra Id. that it was not "unmindful of the impact [its] 15 statutory list of The court stat cision [might] on defendant's ability to retain counsel," but noted that a party in a matrimonial proceeding does not have a constitutional right to counsel. reached ~solely Id. In so dec g, the court clarified s conclusion not to vacate restrai upon the factual circumstances presented" "emphasis placed upon a parent's duty to p his or r children." Id. notice the child support The court further expla that it reached this conclusion "specifically [based on the] fact that defendant ha[d] willfully provide broader ial support ral rule. olated his obligation to his chi " and did not te any Id. at 553-54. court in Potter chose to exercise its scretion not to alter the restraining notice, and nothing that it was not ired to do so because constitutionally prote discretion in Ii sented. right in question was not a ght does not bar this court's of the di factual circumstances Here, PCM cannot pursue further appellate ew unless it has the ability to appoint and compensate counsel. It is well-establis that a corporation cannot represent itself in a civil action. See Jones v. Niagara Frontier Transp. Auth., 722 F.2d 20, 22 t a corporat (2d Cir. 1983) (stating that "it is established , which is an artificial entity that can only 16 act through agents, cannot proceed pro se.") --------------------------~~------ 1937) i , 20 F. see also 369, 370 (S.D.N.Y. (noting that "[w]hile a corporation is a legal entity, it is also an artificial one, existing y t the law; it can do no act, except t its counsel is not a constitutionally case, perhaps regrettably in the Trial Court contemplation of s."). Though ected right in a civil see Sweet, The Rabbi's Bea 1 "Gideon" and Justice 42 THE RECORD 915, 924 (Dec. 1997)), the SEC's position see to prevent PCM from pursuing its administrator's wis s in continuing appellate litigation and would deprive r Hamilton of its independence in its post-judgment resentation. contended that it would pursue a continued liti the best interest of t of PCM's administrators discretion to modi unfair results. here would result a "waste" or "needless" for PCM to ion it is not the arbiter what is PCM estate, which is the responsibility counsel. CPLR § 5240 provides procedures to prevent harsh en The Although the SEC has c ctual circumstances pres justice if PCM were pursuing appellate relief and adequately responding to post-judgment notice will scovery requests. SEC's As such, the restra fied to allow Pepper Hamilton to represent 17 en bane rehearing and petitions, PCM in post-judgment discovery issues. 2 limitat As this has already determi billing ar s of fees is to be reso administrators Pepper Hamilton. Mgmt. without , the amount and by PCM, the See PLC, 2012 WL 3065981, at *3 (S.D.N.Y. July 25, 2012). Because Hamilton has only ed to withdraw as an alternative to the issue of withdrawal is rendered moot by this opinion and will not be addressed. 2 18 Conclusion upon the conclus set forth above, t Pepper Hamilton's mot to modify the restraining notice with respect to the relevant es is granted. It is so ordered. New York, NY October /~, 2012 ROBERT W. SWEET U.S.D.J. 19
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