Securities and Exchange Commisison v. Pentagon Capital Management PLC et al, No. 1:2008cv03324 - Document 251 (S.D.N.Y. 2013)
Court Description: AMENDED OPINION re: 245 MOTION for Attorney Fees and expenses or, in the alternative, to withdraw as counsel for defendant Lewis Chester filed by Lewis Chester. 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 and payment of Seyfarth Shaw's fee is approved. (Signed by Judge Robert W. Sweet on 10/29/2013) (rsh)
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1'\ USDCSDNY DOCUMENT UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ELEC1'RONKJJ t'!, -X 08 C . 3324 (RWS) -againstAMENDED OPINION PENTAGON CAPITAL MANAGEMENT PLC and LEWIS CHESTER, Defendants, -andPENTAGON SPECIAL PURPOSE FUND, LTD., Relief De ----------X A P PEA RAN C E S: SECURITIES AND EXCHANGE COMMISSION New York Regional fice 3 World Financial Center, Suite 400 New York, NY 10281 By: Paul G. Gizzi, Christopher J. Dunnigan, E John C. Lehmann Jr., Esq. PEPPER HAMILTON LLP lton Square 600 Fourteenth Street, N.W. Washington, DC 20005-20004 Frank C. Razzano, Esq. Ivan B. Knauer, Esq. Matthew D. Foster, Esq. 1 r ALLD .. DOC IF: I. Dl~fE FILEV:-'-(),'7:-f SECURITIES AND EXCHANGE COMMISSION, Plaintiff, I \3 Sweet, D.J. Pepper Hamilton LLP (" De Pentagon r Hamilton"), counsel for tal Management PLC ("PCM"), and Seyfarth Shaw LLP ("Seyfarth Shaw"), counsel Lewis Chester, have moved to modify the restraining notice issued by the Securities and Exchange Commiss re ("SEC") to allow for the alternat ive fees and expenses or, withdraw. Based on the conclusions set forth motion to modify Shaw's motion for aintiff restraining notice is , to low, PCM's and Seyfarth yment of outstanding legal s is grant Prior Proceedings Prior proceedings and the facts in this action are cribed in opinions of February 10, 2009 grant is court, February 14, 2012 judgment in r of the SEC. See SEC v. F. Supp. 2d 2012 WL 479576 (S.D.N.Y. ry 14, 2012); SEC v. Penta 612 F. Supp. 2d 241 (S.D.N.Y. 2009). summary of t procedural A brief ckground relevant to the instant motion follows: 2 On March 28, 2012, this Court entered a Final Judgment of over $98.6 million against Defendant. appeal. Defendants and Relief ril 25, 2012, Defendants filed a notice of On This Court denied a subsequent motion by the Defendant s Chester ("Chester"), PCM, and Pentagon Special Purpose Fund, Ltd. ("PSP supers ) for a stay of execution without posting a s bond in accordance with of Civil Procedure. e 62 of t Federal Rules ster and PCM, but not PSPF, made a motion to the Second Circu 2012, the Second Circuit deni for same reI the motion. On May 23, f. (Dunnigan Decl., Ex. 1) . On June 7, 2012, the SEC served a restraining notice pursuant to New York C il Practice Law and Rules § 5222 on Chester, PCM and PSPF, as well as post-judgment document sts. On June 12, 2012, to PCM and PSPF. On June 13, 2012, the SEC propounded interrogatories to Chester. served on SEC propounded interrogatories These discovery re sts were r Hamilton, counsel for PCM, Chester, and PSPF. On June 28, 2012, after service of the restra interrogatories, PCM filed ng notice and administration in the Uni Kingdom (Def. Memo at 3). 3 On y 5, 2012, Squire Sanders (UK) LLP, the U.K. counsel for the Administrators, sent letters to both Pepper Letter"), the Admi "Pepper the first letter lton and the SEC. lton strators agreed to let Pepper Hamilton ke a flat fee paid to it on February 17, 2012, and agreed to underwrite However, the Admi the Second Circu Pepper sts. es for Chester and PCM's appeal to tional strator instructed lton not to respond to the pending discovery (Knauer Decl., Ex. 1, pgs. 2-3). In Administrators' second letter ( "SEC Letter"), the Administrators informed the SEC that "Pentagon has entered administration because is insolvent and there are limited in the administration estate to enable the Company to be invo in the Post-Judgment Proceedings." ve (Dunnigan Decl. Ex. 5, pg. 3). the SEC that The Administrators also informed viewed the SEC's States sed judgment as unenforceable outside the United States unless it was domesticat in the U.K. On July 5, 2012, Pepper Hamilton sent a letter to this Court asking to be rei as counsel for PCM 4 PSPF. On July 9, 2012, counsel for letter to Administrators sent a furt r Hamilton, stat 25, 2012, Pepper that PCM would no longer (Knauer Decl. Ex. 1). for any of PSPF's legal costs. ef ct of cont y On July lton's request to withdraw was denied. After the Court denied withdraw, counsel r the r Hami ies corresponded on's motion to rding SEC's restraining notice on Pepper Hamilton's ng representation of its clients. counsel proposed On August 21, 2012, following: ¢ Pepper Hamilton can continue to draw down flat while representing the administrators for PCM and Chester in the 1 to Second rcuit; ¢ r Hami on can the administrators for PCM the reasonable expenses incurred incident to the appeal; and ¢ r Hami on can rge the administrators for an hourly basis the es and expenses incurred in representing the administrators for PCM in the post judgment discovery process in the Southern District of New York. This amount is in ially capped at $25,000 and, if necessary, r Hamilton would] be in contact with [the SEC] when the lIs reach[ed] this amount so that [they cou ] agree on another capped amount. Hamilton's Exhibit A ("Ex. A"), E-mail from M. Foster to C. Dunnigan (Aug. 27, 2012).) indicat that it The SEC responded the same day, ed to three requests, "reserving the 5 SEC's right to take a different position at a later time . ¢ N (Ex. 8, E-mail from C. Dunnigan to M. Foster (Aug. 27, 2012).) The parties' agreement allowed cont to receive payment for its work appeal and for PCM in post-Judgment p Court, without any substantive I r Hamilton to r PCM and Chester on ngs in this tation on the legal representation aside from the monetary cap on the post-Judgment resentation. On July 10, 2012, with Seyfarth Shaw. On ster replaced Pepper Hamilton y 12, 2012, the SEC agreed to allow Seyfarth Shaw to incur legal s up to $25,000 on behalf of Chester to deal with post j discovery without violating the restraining notice. On August 8, 2013, vacating and remanding in part decision, affirming in the Court's ruling. See SEC v. Penta Ct. 1216 (2013) et ------------------~----~------~~--~----~-- al., 725 F.3d 279, 287 (2d light of the Second Circuit issued its r. 2013) Court's decision in Gabelli v. 133 S h regard to the imposition of jo several liability of the penalty upon Defendants) . Hamilton sought the SEC's In (Vacating penalty awa and r rmission to receive a new retainer 6 from PCM from which the attorneys would draw down for payment of s incurred preparing and filing a petition on PCM and Chester's behalf for rehearing en banc, and to cha PCM's administrators for reasonable expenses incurred in the preparation and fili of such ition. The SEC denied both requests as violating the restraining notice. The SEC stated that it, (would] view any payments for attorneys' fees other than t reasonable costs to provide the pending request discovery as violating the restra ing notice. For pending discovery, [ SEC requested that Pepper Hamilton] please provide an estimate of what it [would] cost to provide discovery. [The SEC also stated would] need to review the statement(s) before any payment [wa]s made. And to be clear, [the SEC] note[d] that t cost of any possib objection to pending requests will not permitted - only the costs of providing the requested discovery [would the SEC] view as not violating the restra ing notice. (Ex. E., E-mail from P. Gizzi to M. Foster (Sep. 6, 2013).) On S ember 4, 2013, SEC again requested from Pepper Hamilton an estimate of how much in fees would be necessary to respond to the SEC's August 9 discovery requests. To date, Pepper Hamilton has not provided an estimate of its post-judgment fees. On September 4, 2013, Paul Gizzi ("Gizzi") of t Commission communicated bye-mail that the SEC would object to the payment of any attorneys' fees by Chester other than limited 7 fees to respond to t Commission. 'JI 3.) scovery requests issued by most recent (Seyfarth Shaw, Notice of Motion, "Shaw Mem."; rth Shaw, counsel for Chester, has accumulat Se $32,000 in legal fees to date, which is $7,000 in excess of the SEC's al ted amount, and seeks an additional $3,000 to deal with outstanding document production issues. 2013, Seyfarth Shaw notified it was owed this $7,000 sentation of Chester in connection with t for the and zzi t On September 6, scovery responses. by Chester personally. appeal Seyfarth Shaw is currently being paid Bye-mail on ember 6, 2013, t SEC agreed that Seyfarth Shaw may be paid an additional $3,000 to complete document discovery and to represent Chester at sition. s The SEC has refused to agree to the payment of $7,000 in excess of the previously agreed-upon $25,000. 1 On September 13, 2013, Pepper Hamilton moved for an order either modifying the restra Hamilton to ing notice to allow Pepper sent PCM in the en banc and potential subsequent certiorari petitions and without 1 tat ion in t post-judgment discovery requests, or alternatively granting Pepper lton leave to withdraw as counsel for PCM. On 1 It is unclear which, if any, counsel wi 1 represent Chester ~n the District Court. 8 Sept r 17, 2013, Seyfarth Shaw pa of the outstanding legal allowed to r an order to permit es or in the alternative that thdraw as counsel. Both motions were heard 16, 2013. marked fully submitted on Oct The Applicable Standard A. CPLR § 40 Under CPLR § 5240, a Court "may at any t own initiative or the motion of any interested such notice as it may require, rna conditioning, enforcement omnibus section empowering t an order § 5240. ng, limiting, use of any "CPLR 5240 is an court to exercise broad powers over the use of enforcement procedures." Paz v. This section further "authorizes preclusion of any enforcement procedure ot Island ------~~~~--~~ R.R., 661 N.Y.S.2d 20, 22 (N.Y. App. Div. 2d in Arti rson, and upon ating, extending or modifying edure." NY CLS CPLR , on its 't1997). fication or rwise provi for e 52," including CPLR 5222 restraining notice. in v. Altman No. Civ. 8106, 1997 U.S. Dist. LEXIS 11413, *9 10 (S.D.N.Y. Aug. 7, 1997) ; see also Cruz v. TO Bank, 9 N.A., 711 F.3d 261, 269-70 (2d Cir. 2013) (CPLR 5240 is a "broad sm for relief"). B. Local Civil Rule 1.4 Local Civil Rule 1.4, an "attorney who has appeared as attorney of record for a party may be relieved or displaced only by order of the Court and may not leave of the Court granted by from a case without t r." Local Civ. R. 1.4. an order may be granted only upon a otherwise satisfactory reasons and the posture of t case. considers two issues in te ng of ng by affidavit or withdrawal or displacement " Id. Thus, a court ing a motion to withdraw as counsel, "the reasons for wi withdrawal on the t "Such 1 and the impact of the proceeding." Karimian v. T Equities, Inc., No 10-3773 (AKH) (JCF), 2012 WL 1900092, at *2 (S.D.N.Y. May 11, 2011). In making s dete nation, it is well-settled t discretion in deciding a motion court has "cons withdrawal of counsel." Id.; r a v. N.Y.C. Trans No. 00-3262, 2002 WL 59423, at *1 (S.D.N.Y. Jan. 16, 2002). considering a mot the "protrac a In leave to withdraw, a court may consider history of the litigation" when deciding whether 10 or not to permit counsel to withdraw. Te SEC v. Great American Inc. , No. 07 -1 0 694, 2009 WL 4885153 , at * 5 --------~~~~----- (S.D.N.Y. Dec. 15, 2009). withdrawal bas In add ion, courts on non-payment. ve allowed See Promotica of America, Inc. v. Johnson Grossfield, Inc., No. 98-7414, 2000 WL 424184, at *1 (S.D.N.Y. April 18, 2000) ("It is well-settled t Court to grant counsel's motion of fees is a valid basis for t ."); Emile v. Browner, No. 95-3836, 1996 WL to withdraw. 724715, at *1 (S.D.N.Y. Dec. 17, 1996) pay legal fees, attorney, down, nonpayment ("When a client Is to Is to communicate or cooperate with the and the attorney-client relationship has broken se are more than ficient reasons for counsel to be relieved.") . The Motion to Modify the Restraining Notice to Allow Specified Counsel Fees is Granted r Hamilton has sought the modification of the notice under CPLR restrain ion, 5240 with respect to attorney senting PCM in any further appellate fees to permit lit § luding fil an en banc rehear petition, filing a petition for Supreme Court review, and in the postjudgment proceedi these be this court. Preventing payment of s, according Pepper Hamilton, unjustly allows the SEC 11 to use the restraining not to dictate the rights and best interests of PCM, and prevents PCM from having a opportunity to pursue appellate 1 and fair and to protect its rights in the post judgment proceedings. The SEC does not spute that its position seeks to preclude PCM from pursuing r appellate ew or adequately responding to the post-judgment document requests. SEC (1 ) sists review would 5222 does not create a statuto and (3) CPLR § futile; CPLR § exemption for attorney 40 does not create any substant the judgment debtor or any (2) Si rights rd party and as such cannot be used to modify the restraining notice. (SEC Memorandum Opposition, "Sec. 0pp."i at 3-5.) The SEC is correct both that CPLR § 5240 does not rights and that CPLR create substant statutory exemption attorney fees. § 5222 does not allow a This s not, however, prevent district courts from modifying restraining notices rsuant to CPLR Whi § 5240 to prevent harsh or unjust results. CPLR § 5240 is a New York state procedural rule, ral Rule of Civil Procedure 69 provides that "[t]he procedure on execution [of a ral judgment for money damages]-and in 12 proceedings supplementary to and in aid of judgment or execution-must accord with the procedure of the state where the court is located." AXA Versiche Ins. Co., 2013 WL 1790719, at *3 (S.D.N.Y. Apr. 22, 2013). Restraining notices relating to underlying judgments have found to be "unquestionabl[y] supplementary to and in aid of judgment or execution" and as such within District Courts. Id.; see also Karaha Bodas Co., LLC. v. Perusahaan ______________________ (2d Cir. 2002) rest purview of ~ ______ ~ k Dan Gas Dumi ______ ~ ra, 313 F.3d 70 _ _ _ _ _ _ _ _ _ _ _ _ __ L_ __ (upholding a district order's modi ning notice pursuant to CPLR § cation of a 5240). held in this Circuit that "[j]uri It has ction to hear ancillary disputes relating to execution and enforcement of judgments is an inherent the underl case. of a court's jurisdiction over As the Second Circuit recently reiterated, '[p]rocess subsequent to judgment is as essential to ju sdict as process antecedent to judgment, else the judicial power would be incomplete and entirely inadequate to the purposes EM Ltd. v. r wh it was conferred by the constitution." --------------~------------~------- 2012) , 695 F.3d 201, 208 (2d Cir. (quoting Riggs v. Johnson Cnty., 73 U.S. 166 (1867)). Modifying the restraining notice at issue under CPLR 13 § 5240 to prevent unjust results is likewise within this Court's discretion. The Second Circuit decision in Assocs. De ned Contribution Pension Plan, 666 F.3d 68, 78 (2d Cir. 2011), upon which the SEC reI In _ _ Mi ~L- s, is not to the contrary. the defendant moved under CPLR __ § 5240 to set aside the judgment of a district court until the defendant had been paid by a third rty debtor. The court held that CPLR § 5240 was a "state procedural rule" that provided no substantive rights and therefore had no relevance to the federal proceeding or its judgment. This does not, though, prevent parties Ii Pepper Hamilton and the defendants in AXA Ve AG and ----------------~~-Karaha Bodas Co., LLC., from using CPLR mechanism § 5240 as a procedural through which to vindicate certa ghts restrained by supplemental notices issued under NY CPLR § 5222. See --~----~ AXA Versicherung AG, 2013 WL 1790719, at *3; Karaha Bodas Co., LLC., 313 F.3d at 72. Indeed, in both AXA Versiche Karaha Bodas Co., the distr under CPLR the part § 5240 to modi s constitutional t courts used their AG and scretion restraining notices, not based on ghts or statutorily exempt categories, but as a procedural mechanism to prevent unjust results from the notices issued under CPLR 14 § 5222. S --.~----~ AXA Versiche ----------------~--- , 2013 WL 1790719, at *3 (modifying restraining notice to allow defendant to ndicate its property to the interest rate embedded in the rights with re Bodas Co., 313 F.3d at 80 judgment); Ka (modifying a to account for only a percentage of t restraining not ously mandated). The fact that attorney amount CPLR a statutorily exempted category § s are not 5222 or t is no constitutional right to counsel in a civil does not a district court from modifying a restraini in s discretion under CPLR § 5240 to prevent unjust results. Indeed, CPLR § 5240 explicitly time, on its own initiat person, modif , regulating, ext the use of any en an order or procedure." NY CLS CPLR ----------~~------------ Div. 2d Dep't 1997) § , 661 N.Y.S.2d 20, 22 ("CPLR 5240 is an omnibus section the court to exercise broad powers over t en at any motion of any interested upon such notice as it may require, rna 5240; see also (N.Y. s that a Court or denying, limiting, condition notice use of rcement procedures.") . The SEC has cit Potter v. MacLean, 904 n.Y.S.2d 551, 553 (App. Div. 3rd Dep't 2010) as holding that New York law does not recognize the of a judgment debtor to use non-exempt 15 (SEC Opp. at 4.) funds to pay counsel. de However, in Potter, the had an outstanding maintenance obligation to his family of $33,000, but was pursuing a divorce action for which an outstanding he collection unit, 11 to his attorneys for $15,000. cause of his owed maintenance See id. s divorce act notices could court held on the se I served representing the defendant a restraining notice on the atto in The t restraining 's attorneys and that held for the purpose of retaining an atto were not luded in the statutory list of money and property exempt from restraint. impact Id. s] court stat that it was not "unmindful of ision [mi retain counsel," but noted have on de a party in a matrimonial proceeding does not have a constitutional ri In so deciding, 's ability to to counsel. court clarified that it reached this conclusion not to vacate the restraining notice "solely upon factual circumstances presented" and the " parent's duty to provide chi Id. support for sis placed upon a s or her chi ren." The court further explained that it reached this conclusion "specifical violated his [based on ct that de hard] will igation to provide financial support for children" and did not cite broader 553-54. 16 ral rule. lly s Id. at The court in Potter chose to exercise its discretion not to alter the restraining notice, and noting that it was not required to do so because the right in question was not a constitutionally protected right does not bar this court's discretion in light of the sented. ffer factual circumstances Here, PCM cannot pursue her appellate review ss it has the ability to appoint and compensate counsel. is well-established that a corporat in a c 1 act See Jones v. N 722 F.2d 20, 22 (2d Cir. 1983) cannot represent It self ., ra Frontier Tran (stating that "it is e ished that a corporation, which is an artificial entity that can only act through agents, cannot proceed pro se."); see also Brandstein v. Wh Inc., 20 F. Supp. 369, 370 (S.D.N.Y. --------------------------~~.----- 1937) (noting that "[wJhile a corporation is a legal entity, it is also an artif ial one, existing only in the contemplation of the law; it can do no act, except through its agents."). counsel is not a constitutionally protected right case, perhaps regrettably (see Sweet, in the Trial Court The Rabbi's Beard (Dec. 1997)), the SEC's posit Though a civil Justice 42 THE RECORD 915, 924 seeks to prevent PCM from pursuing its administrator's wishes in continuing appellate litigation and would deprive Pepper Hami 17 of its independence in its post judgment representation. SEC has Although contended that it would be a "waste" or "needless" r PCM to pursue a continued litigation it is not the arbiter what is in the st interest of the PCM estate, which is the responsibility of PCM's administrators and counsel. CPLR § 5240 provides discretion to modify enforcement procedures to prevent ha unfair results. specific factual circumstances presented here would result in injustice if PCM were pursuing appel and uded from relief and adequately responding to the SEC's post judgment discovery requests. As such, the restraining notice will be modified to allow Pepper Hamilton to represent PCM the en bane rehearing and petitions, and without limitation in the st-judgment discovery issues. 2 As this Court has already determined, the amount and lling arrangements of fees is to be resolved by PCM, administrators and Pepper lton. See SEC v. Pent tal 2012 WL 3065981, at *3 (S.D.N.Y. July 25, 2012). With respect to the $7,000 at issue connection with the resentation of th Seyfarth Shaw in ster, in view of the ior agreements between the SEC and Chester, is appropr te 2 Because Hamilton has requested to withdraw as an alternative to COITcpensation, the issue of withdrawal i rendered moot this opinion and will not be addressed. 18 that the $7,000 in outstanding legal fees Se rth Shaw. paid by Chester to 3 Conclusion Bas upon the conclusions set forth above, the Pepper Hamilton's motion to modify the restraining notice with respect to the relevant s is granted and payment of Seyfarth Shaw's es is approved. It is so ordered. New York, NY October 2012 J.f, U.S.D.J. Shaw's notice of motion has incorporated HaIl'.ilton's memorandum of law but does not address the issue of continuing appellate This Court reodified the litigation with respect to Chester individually. to PCl": in part notice in the interests of justice with because PCM, as a corporation, could not proceed with without an attorney. See 722 F.2d 20, 22 (2d Cir. 1983) (stat that a corporation, which is an artificial entity that can only act through agent , cannot pro se. Chester as an individual faces no such restriction, and may proceed pro se. As such, the Court does not exercise its discretion to modify the restraining notice to allow Chester as an individual to pay counsel fees for further e review at this time. ff ). 19
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