Gowan v. Amaranth Advisors LLC et al

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------x 	FOR PUBLICATION
In re: 	:
:
DREIER LLP, 	: 	Chapter 11
: 	Case No. 09-15051 (SMB)
Debtor. 	:
---------------------------------------------------------------x
SHEILA M. GOWAN, Chapter 11 Trustee 	:
of DREIER LLP, 	:
:
Plaintiff, 	:
: 	Adv. Pro. No. 10-03493 (MG)
v. 	:
:
AMARANTH LLC, et al., 	:
:
Defendants. 	:
---------------------------------------------------------------x
MEMORANDUM OPINION AND ORDER: (I) GRANTING IN PART
AND DENYING IN PART DEFENDANTS AMARANTH ADVISORS L.L.C.
AND AMARANTH PARTNERS LLC MOTION TO DISMISS; AND (II) GRANTING
DEFENDANT AMARANTH LLC’S MOTION TO DISMISS
A P P E A R A N C E S:
DIAMOND McCARTHY LLP
Attorneys for Sheila M. Gowan, Chapter 11 Trustee for Dreier LLP
620 Eighth Avenue, 39th Floor
New York, NY 10018
By: 	Howard D. Ressler, Esq.
-and-
1201 Elm Street, 34th Floor
Dallas, TX 75270
By: 	J. Benjamin King, Esq. (argued)
-and-
909 Fannin Street
Suite 1500
Houston, TX 77010
By: 	Stephen T. Loden, Esq.
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DAVIS POLK & WARDWELL LLP
Attorneys for Defendant Amaranth LLC
450 Lexington Avenue
New York, NY 10017
By: 	Amelia T.R. Starr, Esq. (argued)
James I. McClammy, Esq.
WINSTON & STRAWN LLP
Attorneys for Defendants Amaranth Advisors L.L.C. and Amaranth Partners LLC
200 Park Avenue
New York, NY 10166
By: 	Steven M. Schwartz, Esq. (argued)
Samuel S. Kohn, Esq.
UNITED STATES DEPARTMENT OF JUSTICE
United States Attorney’s Office
One St. Andrew’s Place
New York, NY 10007
By: 	Matthew L. Schwartz, Esq. (argued)
KLESTADT & WINTERS, LLP
Attorneys for Official Committee of Unsecured Creditors
570 Seventh Avenue
17th Floor
New York, NY 10018
By: 	Tracy L. Klestadt, Esq. (argued)
Brendan M. Scott, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Before the Court are two motions to dismiss filed by Amaranth Partners LLC (“Amaranth
Partners”) and Amaranth Advisors L.L.C. (“Amaranth Advisors”), on the one hand, and
Amaranth LLC (together with Amaranth Partners and Amaranth Advisors, the “Defendants”), on
the other hand, asserting that the complaint filed against them fails to state a claim upon which
relief can be granted pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6), made
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applicable by Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 7012. Pursuant to the
intentional and constructive fraudulent conveyance provisions of various sections of New York
Debtor and Creditor Law1 (the “NYDCL”), the chapter 11 trustee, Sheila Gowan (“Gowan” or
the “Trustee”) seeks to avoid and recover prepetition transfers by Dreier LLP to the Defendants
in the course of the Ponzi scheme perpetrated by Marc Dreier.2 Because the transfers occurred
outside the two-year look-back provision for fraudulent conveyances under the Bankruptcy
Code, the Trustee brought this action against the Defendants under the NYDCL with its six-year
look-back period. N.Y. C.P.L.R. § 213(8) (McKinney 2011). In total, the Trustee seeks the
avoidance and recovery of $28,150,479 from the Defendants to the Dreier LLP estate for
distribution to creditors.
This opinion is one of three issued today resolving motions to dismiss in similar
adversary proceedings commenced by the Trustee against hedge funds that purchased bogus,
forged promissory notes (the “Solow Note” or “Notes” or “Solow Notes”).3 The motions to
dismiss in all three cases raised many of the same issues; as a result, briefing and argument in the
cases was coordinated. The Court’s opinion in Gowan v. The Patriot Group, LLC (In re Dreier
LLP), Adv. Pro. No. 10-03524 (MG) (Bankr. S.D.N.Y. June 16, 2011) (the “Patriot Group
Opinion”), resolves two potentially case-dispositive issues raised in all three cases. The Patriot
Group Opinion also sets out the principles that apply to the state and federal actual and
1 	N.Y. D EBT. & CRED. LAW § 270 et seq. (McKinney 2011).
2 	The complaint also asserts a claim for equitable subordination against the Defendants pursuant to section
510(c) of the Code. 11 U.S.C. § 510(c) (“ Notwithstanding subsections (a) and (b) of this section, after notice and a
hearing, the court may—(1) under principles of equitable subordination, subordinate for purposes of distribution all
or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of
another allowed interest; or (2) order that any lien securing such a subordinated claim be transferred to the estate.”)
3 	Gowan v. Novator Credit Management (In re Dreier LLP), Adv. Pro. No. 10-04278 (MG), ECF Doc. # 37
(Bankr. S.D.N.Y. June 16, 2011); Gowan v. The Patriot Group, LLC (In re Dreier LLP), Adv. Pro. No. 10-03524
(MG), ECF Doc. # 46 (Bankr. S.D.N.Y. June 16, 2011).
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constructive fraudulent transfer claims. Rather than repeating the lengthy analyses of these
issues in this opinion, the discussion in Patriot Group Opinion is incorporated by reference and
familiarity with the Patriot Group Opinion is assumed. As to the two potentially case-
dispositive issues—(i) whether the Preliminary Forfeiture Order entered in the criminal case
against Marc Dreier divested the Dreier LLP estate of any rights to the funds sought to be
avoided and recovered, and (ii) whether the funds that are the subject of the avoidance actions
were held in trust such that they did not form part of the Dreier LLP bankruptcy estate—the
Court concludes that motions to dismiss are denied.
Specific to the Defendants here, the Court concludes that as to Amaranth Partners, the
motion to dismiss is granted with prejudice as to the constructive fraudulent transfer claims
brought under NYDCL §§ 273, 274 and 275 solely with respect to the repayment of principal,
and denied as to the payments received in excess of principal. Amaranth Partners’ motion to
dismiss is denied as to the actual fraudulent transfer claims brought under NYDCL §§ 276 and
276-a. The claim for equitable subordination is dismissed without prejudice.
With regard to the claims against Amaranth Advisors as the entity for whose benefit the
transfers were made, the complaint is dismissed with leave to amend the complaint within thirty
days. With regard to the claims against Amaranth LLC as a subsequent transferee, the complaint
is likewise dismissed with leave to amend the complaint within thirty days.
I. 	BACKGROUND
The Trustee filed this adversary proceeding against the Defendants seeking avoidance
and recovery of certain transfers made from Dreier LLP to the Defendants during the course of
Marc Dreier’s Ponzi scheme. The Trustee seeks avoidance of the transfers from each defendant
on different theories of liability: as to Amaranth Partners, the Trustee seeks to avoid and recover
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the transfers as the initial transferee; as to Amaranth Advisors, the Trustee seeks to avoid and
recover the transfers as the entity for whose benefit the transfers were made; and as to Amaranth
LLC, the Trustee seeks to avoid and recover the transfers as the subsequent transferee of the
transfers. See 11 U.S.C. § 550(a).4
A. 	Allegations Against Defendants
The Trustee filed the First Amended Complaint against all Defendants on October 19,
2010 (the “Complaint”) seeking avoidance and recovery of the transfers made by Dreier LLP to
Amaranth Partners totaling $28,150,479 in the course of Dreier’s Ponzi scheme to become
available for distribution to creditors under the actual and constructive fraudulent conveyance
provisions of the NYDCL.5 The Defendants filed two separate motions to dismiss the
Complaint—one motion on behalf of Amaranth LLC, and one motion on behalf of Amaranth
Partners and Amaranth Advisors. (ECF Doc. #s 18, 19, 21, 22.). This opinion resolves both
motions.
1. 	First Amended Complaint
The Complaint asserts the following claims against all of the Defendants:
4 	Section 550 of the Bankruptcy Code, entitled “Liability of transferee of avoided transfer” provides as
follows:
(a) Except as otherwise provided in this section, to the extent that a transfer is
avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the
trustee may recover, for the benefit of the estate, the property transferred, or, if
the court so orders, the value of such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit
such transfer was made; or
(2) any immediate or mediate transferee of such initial transferee.
11 U.S.C. § 550.
5 	The Trustee filed an initial complaint against Defendants on August 9, 2010, and Defendants filed initial
motions to dismiss on September 28, 2010. (ECF Doc. #s 1, 7–9, 12, 13.)
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Count No. 	Allegation
I 	New York Law Fraudulent Conveyance – 11 U.S.C. §§ 544 and 550 and NYDCL §§
276, 276-a, 278 and 279
II 	New York Law Fraudulent Conveyance – 11 U.S.C. §§ 544 and 550 and NYDCL §§
273, 278 and 279
III 	New York Law Fraudulent Conveyance – 11 U.S.C. §§ 544 and 550 and NYDCL §§
274, 278 and 279
IV 	New York Law Fraudulent Conveyance – 11 U.S.C. §§ 544 and 550 and NYDCL §§
275, 278 and 279
V 	Unjust Enrichment
VI 	Equitable Subordination – 11 U.S.C. § 510(c)
At the hearing on the motions to dismiss on April 5, 2011 (the “Hearing”), counsel for the
Trustee withdrew Count V, unjust enrichment, against the Defendants. Transcript of H’rg
149:17–21, Apr. 5, 2011, ECF Doc. # 52 (“Your Honor had asked before the break whether or
not we were going to withdraw the unjust enrichment claim against Amaranth, and we’ve
decided that we will withdraw that claim, so that will not be up before Your Honor today, which
may help shorten the proceedings a smidge.”).
2. 	Amaranth’s Involvement in the Fraud
On November 16, 2004, Amaranth Partners executed documents to invest $25 million in
a Solow Note paying interest to Amaranth Partners at 8% on a quarterly basis. (Compl. ¶ 35.)
Amaranth Partners received four separate interest payments in 2005 of approximately $500,000
each, totaling $2,005,497. (Id. ¶ 38–41.) On November 16, 2005, Amaranth Partners agreed to
extend the term of the Solow Note for ninety days, with an increased interest rate of 9%. (Id. ¶
46.) Thereafter, on February 16, 2006, Amaranth Partners further extended the Note for an
additional forty-five days at an increased interest rate of 12%. (Id. ¶ 48, 50.) Also on February
16, 2006, Amaranth Partners received a transfer of $750,000 from the 5966 Account,
representing the first payment of interest due under the Note that matured in November 2005, as
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modified by the February 2006 extension. (Id. ¶ 51.) On April 1, 2006, Amaranth Partners
received transfers of $395,000 from the 5966 Account, representing interest due under the terms
of the February 2006 Note and $25,000,000, representing the return of principal initially invested
on November 16, 2004. (Id. ¶ 52.) In addition to the repayment of all principal, Amaranth
Partners received a total of $3,150,479 of interest, alleged to be “profit” to Amaranth Partners.
(Id. ¶ 58.) 	Accordingly, Amaranth Partners is a “net winner,” having received repayment in full
of its principal investment plus interest.
The Complaint alleges that certain elements of these transactions should have raised “red
flags” with each of the defendants that are the subject of the Trustee’s avoidance actions. The
Trustee alleges the following suspicious circumstances: (1) Solow’s use of outside litigation
counsel, Marc Dreier, to raise capital; (2) Solow’s robust financial condition at the time of the
purported investments; (3) the comparatively high interest rates associated with the Solow Notes;
(4) the “amateurish” financial statements of Solow provided to the Note investors by Dreier; (5)
certain provisions of the “Term Loan Agreements” prohibiting Note investors from contacting
Solow; and (6) the use of a Dreier LLP attorney trust account to complete the transaction. (Id. ¶
16–25.)
Specific to the Defendants, the Complaint alleges they should have known that something
was amiss based on their dealing with a “known” fraudster, Kosta Kovachev (“Kovachev”), who
was brokering the deal with Amaranth. (Id. ¶ 26–30.) At the same time that Kovachev was
brokering the Notes to Amaranth, Kovachev was also defending a securities fraud complaint
brought by the Securities Exchange Commission (the “SEC”). (Id. ¶ 28.) According to the SEC
complaint, Kovachev was accused of participating in a $28 million “boiler room” Ponzi scheme
that marketed fake timeshares to the elderly. (Id.) Also according to the SEC complaint,
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Kovachev prepared forged documents, but invoked his Fifth Amendment right against self-
incrimination and refused to answer the SEC’s questions. (Id.) The information about Kovachev
was public, available on the SEC’s website and Amaranth had actual notice of the Kovachev
SEC action upon receipt of a November 5, 2004 memorandum from Kroll Associates to
Amaranth Advisors that stated that Kovachev was a former client of Dreier’s who had “been
named in a civil complaint by the SEC for his role in a $28 million Ponzi scheme.” (Id. ¶ 29–
30.)
The Complaint alleges additional evidence should have put Amaranth on notice of the
fraud, including the frequency of contact between Amaranth and Kovachev. Kovachev
contacted Adrian Kingshott (“Kingshott”), an employee of Amaranth Advisors, ten times over
the two-day period from November 3-4, 2004 regarding Defendants’ participation in the Note
Fraud. (Id. ¶ 32.) Indeed, Kingshott wrote to another employee that he detected a “certain
urgency” on the part of Dreier to get the deal done because Kovachev called him “5 times a day
for the last 2 days.” (Id. ¶ 34.)
The Trustee also points to certain internal statements regarding the financial condition of
Solow and the commercial unreasonableness of the transaction from Solow’s perspective. (Id. ¶
33–37.) For example, the Trustee points to statements made by the head of Amaranth Advisors
and another group of hedge funds stating that it was unlikely that Solow would issue notes with
such high interest rates. (Id. ¶ 36.) The Trustee asserts that Defendants failed to make
reasonable inquiries about Solow’s financial condition that would have revealed the fraudulent
nature of the transaction. (Id. ¶ 37.) Finally, the Trustee points to several internal emails and
conversations between Defendants’ employees that, according to the Trustee, suggest that
Defendants’ employees were concerned with the legality of the transaction, including comments
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regarding a request for another extension and whether Defendants were still on schedule to get
paid. (Id. ¶ 54–57.)
3. 	Relationship Between Amaranth Entities
The Trustee asserts liability of each Defendant on a different theory. Amaranth Advisors
is an investment manager that manages Amaranth LLC’s investment portfolio and Amaranth
Partners’ trading activity. (Id. ¶ 7.) Amaranth Partners is a “feeder fund”; it raised capital,
substantially all of it invested in Amaranth LLC. (Id. ¶ 8, 64.) Amaranth LLC is the “master
fund” of the Amaranth group. (Id. ¶ 9.)
Amaranth Partners received the transfers from Dreier LLP that the Trustee seeks to avoid
as the initial transferee. (Id. ¶ 8.) According to the Trustee, Amaranth Advisors directed
Amaranth Partners’ participation in the transactions with Solow and benefited from the transfers
from Dreier LLP to Amaranth Partners. (Id. ¶ 10.) As further evidence of the relationship
between Amaranth Partners and Amaranth Advisors, the Complaint states that:
Amaranth Advisors was the agent of Amaranth Partners and
Amaranth LLC pursuant to “Advisory Agreement” that broadly
gave Amaranth Advisors the authority to make trading and
investment decisions on behalf of Amaranth Partners and
Amaranth LLC . . . . Amaranth Advisors directed the “passive
pool’s” trading and investments, including Amaranth Partners’
investments in the Note Fraud.
(Id. ¶ 66.) Amaranth Advisors signed the transaction documents on Amaranth Partners’ behalf,
and wire instructions were addressed to “Amaranth Partners LLC, c/o Amaranth Advisors,
L.L.C.” (Id. ¶ 64.) Amaranth Advisors also purported to benefit from the transfers to Amaranth
Partners because in previous litigation, Amaranth Partners and Amaranth LLC stated that their
businesses were so intertwined that misconduct harming LLC “directly interfered with Amaranth
Advisors’ business.” (Id. ¶ 65.) The crux of the Trustee’s argument is that Amaranth Advisors
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“arranged for the transfers to happen” and directly benefited from the transfers from Dreier LLP
to Amaranth Partners.
The Trustee asserts liability of Amaranth LLC as a subsequent transferee. The Complaint
alleges that “[o]n information and belief, Amaranth Partners, at Amaranth Advisors’ direction,
transferred the proceeds of its transfers from [Dreier LLP] to Amaranth LLC” and “it is likely
that Amaranth Partners invested the money DLLP transferred to it pursuant to the Note Fraud to
Amaranth LLC.” (Id. ¶¶ 10, 67.)
II. 	DISCUSSION
A. 	Standard on a Motion to Dismiss
To survive a motion to dismiss pursuant to Rule 12(b)(6), “a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Vaughn v. Air Line Pilots Ass’n, Int’l, 604 F.3d 703, 709 (2d Cir. 2010) (quoting Ashcroft v.
Iqbal, 129 S.Ct. 1937, 1949 (2009)). “Where a complaint pleads facts that are merely consistent
with a defendant’s liability, it stops short of the line between possibility and plausibility of
entitlement to relief.” Iqbal, 129 S.Ct. at 1949 (citations and internal quotation marks omitted).
Plausibility “is not akin to a probability requirement,” rather plausibility requires “more than a
sheer possibility that a defendant has acted unlawfully.” Id. (citation omitted). Furthermore, a
complaint that does not “plausibly suggest an illicit accord because it was not only compatible
with, but indeed was more likely explained by, lawful, unchoreographed free-market behavior”
that does not “suggest an unlawful agreement” must be dismissed. Id. at 1950 (citation omitted).
Following the Supreme Court’s decision in Iqbal, courts use a two-prong approach when
considering a motion to dismiss. See, e.g., McHale v. Citibank, N.A. (In re The 1031 Tax
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Group), 420 B.R. 178, 189–90 (Bankr. S.D.N.Y. 2009); Weston v. Optima Commc’ns Sys., Inc.,
No. 09 Civ. 3732(DC), 2009 WL 3200653, at *2 (S.D.N.Y. Oct. 7, 2009) (Chin, J.)
(acknowledging a “two-pronged” approach to deciding motions to dismiss); S. Ill. Laborers’ and
Employers Health and Welfare Fund v. Pfizer, Inc., No. 08 CV 5175(KMW), 2009 WL
3151807, at *3 (S.D.N.Y. Sept. 30, 2009) (Wood, J.) (same); Inst. for Dev. of Earth Awareness v.
People for the Ethical Treatment of Animals, No. 08 Civ. 6195(PKC), 2009 WL 2850230, at *3
(S.D.N.Y. Aug. 28, 2009) (Castel, J.) (same). First, the court must accept all factual allegations
in the complaint as true, discounting legal conclusions clothed in the factual garb. Kiobel v.
Royal Dutch Petroleum Co., 621 F.3d 111, 124 (2d Cir. 2010) (stating that a court must
“assum[e] all well-pleaded, nonconclusory factual allegations in the complaint to be true”)
(citing Iqbal, 129 S.Ct. at 1949–50); Rescuecom Corp. v. Google Inc., 562 F.3d 123, 127 (2d Cir.
2009) (stating that the court must “accept as true all of the factual allegations set out in the
plaintiff’s complaint, draw inferences from those allegations in the light most favorable to the
plaintiff, and construe the complaint liberally”) (quoting Gregory v. Daly, 243 F.3d 687, 691 (2d
Cir. 2001)); Boykin v. Keycorp, 521 F.3d 202, 204 (2d Cir. 2008) (“In reviewing a motion to
dismiss, we accept the allegations in the complaint as true.”) (citation omitted); Spool v. World
Child Int’l Adoption Agency, 520 F.3d 178, 183 (2d Cir. 2008) (“Although we construe the
pleadings liberally, bald assertions and conclusions of law will not suffice.”) (internal quotation
marks omitted). Second, the court must determine if these well-pleaded factual allegations state
a “plausible claim for relief.” Iqbal, 129 S.Ct. at 1951 (citation omitted).
Courts do not make plausibility determinations in a vacuum; it is a “context-specific task
that requires the reviewing court to draw on its judicial experience and common sense.” Id. at
1950 (citation omitted). A claim is plausible when the factual allegations permit “the court to
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draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at
1949 (citation omitted). Meeting the plausibility standard requires a complaint to plead facts that
show “more than a sheer possibility that a defendant has acted unlawfully.” Id. (citation
omitted). A complaint that only pleads facts that are “merely consistent with a defendant’s
liability” does not meet the plausibility requirement. Id. (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 557 (2007) (internal quotation marks omitted)). “A pleading that offers labels and
conclusions or a formulaic recitation of the elements of a cause of action will not do.” Id.
(quoting Twombly, 550 U.S. at 555 (internal quotation marks omitted)). “Threadbare recitals of
the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id.
(citation omitted). “The pleadings must create the possibility of a right to relief that is more than
speculative.” Spool, 520 F.3d at 183 (citation omitted).
Courts deciding motions to dismiss must draw all reasonable inferences in favor of the
nonmoving party and must limit their review to facts and allegations contained in (1) the
complaint, (2) documents either incorporated into the complaint by reference or attached as
exhibits, and (3) matters of which the court may take judicial notice. Blue Tree Hotels Inv.
(Canada), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004)
(citation omitted); Chambers v. Time Warner, Inc., 282 F.3d 147, 152–53 (2d Cir. 2002); DDR
Const. Servs., Inc. v. Siemens Indus., Inc., No. 09 CIV. 09605 RJH, 2011 WL 982049, at *1
(S.D.N.Y. Mar. 22, 2011). Courts also consider documents not attached to the complaint or
incorporated by reference, but “upon which the complaint solely relies and which [are] integral
to the complaint.” Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007) (internal quotation marks
omitted) (quoting Cortec Indus. Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991)); see
also Kalin v. Xanboo, Inc., No. 04 Civ. 5931(RJS), 2009 WL 928279, at *8 (S.D.N.Y. Mar. 30,
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2009) (Sullivan, J.); Grubin v. Rattet (In re Food Mgmt. Grp.), 380 B.R. 677, 690 (Bankr.
S.D.N.Y. 2008) (“A court may even consider a document that has not been incorporated by
reference where the complaint relies heavily upon its terms and effect, which renders the
document integral to the complaint.”) (internal quotation marks omitted) (quoting Buena Vista
Home Entm’t, Inc. v. Wachovia Bank, N.A. (In re Musicland Holding Corp.), 374 B.R. 113, 119
(Bankr. S.D.N.Y. 2007), aff’d, 386 B.R. 428 (S.D.N.Y. 2008), aff’d, 318 Fed. App’x. 36 (2d Cir.
2009)).
When fraud is pleaded, Rule 9(b) requires the plaintiff to plead fraud with particularity.
See Atlanta Shipping Corp., Inc. v. Chem. Bank, 818 F.2d 240, 251 (2d Cir. 1987). Pursuant to
Rule 9(b) “in alleging fraud or mistake, a party must state with particularity the circumstances
constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s
mind may be alleged generally.” FED R. CIV. P. 9(b). The Second Circuit has stated that the
complaint must: “(1) detail the statements (or omissions) that the plaintiff contends were
fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were
made, and (4) explain why the statements (or omissions) were fraudulent.” Harsco Corp. v.
Segui, 91 F.3d 337, 347 (2d Cir. 1996) (citations omitted). Although the second part of Rule
9(b) permits scienter to be pleaded generally, the pleader must “allege facts that give rise to a
strong inference of fraudulent intent.” Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d
Cir. 1994) (citation omitted); see also The Responsible Pers. of Musicland Holding Corp. v. Best
Buy Co., Inc. (In re Musicland Holding Corp.), 398 B.R. 761, 773 (Bankr. S.D.N.Y. 2008).
Plaintiffs may not allege “fraud by hindsight.” See Shields, 25 F.3d at 1129 (quoting Denny v.
Barber, 576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.)). A strong inference of fraudulent intent
“may be established either (a) by alleging facts to show that defendants had both motive and
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opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial
evidence of conscious misbehavior or recklessness.” Id. at 1128; accord ATSI Commc’ns, Inc. v.
The Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007). The purpose of Rule 9(b) is to further
three goals: “(1) providing a defendant fair notice of plaintiff’s claim, to enable preparation of
defense; (2) protecting a defendant from harm to his reputation or goodwill; and (3) reducing the
number of strike suits.” DiVittorio v. Equidyne Extractive Indus. Inc., 822 F.2d 1242, 1247 (2d
Cir. 1987) (citation omitted).
For claims brought by a bankruptcy trustee, “courts take a more liberal view when
examining allegations of actual fraud . . . in the context of a fraudulent conveyance, since a
trustee is an outsider to the transaction who must plead fraud from second-hand knowledge.”
Nisselson v. Softbank AM Corp. (In re MarketXT Holdings Corp.), 361 B.R. 369, 395 (Bankr.
S.D.N.Y. 2007) (internal quotation marks omitted) (quoting Picard v. Taylor (In re Park S. Secs.,
LLC), 326 B.R. 505, 517–18 (S.D.N.Y. 2005)); Secs. Investor Prot. Corp. v. Stratton Oakmont,
Inc., 234 B.R. 293, 310 (Bankr. S.D.N.Y. 1999) (citation omitted). Accordingly, courts have
recognized that “allegations of circumstantial evidence are sufficient to establish fraudulent
intent,” Pereira v. Grecogas Ltd. (In re Saba Enters., Inc.), 421 B.R. 626, 643 (Bankr. S.D.N.Y.
2009), because “the trustee’s lack of personal knowledge is compounded with complicated issues
and transactions which extend over lengthy periods of time.” Stratton Oakmont, 234 B.R. at 310
(citation omitted). However, “relaxing the particularity requirement in bankruptcy cases should
not be construed to eliminate that requirement altogether.” Id. at 311 (citation omitted).
Rule 9(b) imposes additional limitations. First, a pleader cannot allege fraud based upon
information and belief unless the facts are “peculiarly within the opposing party’s knowledge.”
Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974), cert. denied, 421 U.S.
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976 (1975), overruled on other grounds by Virginia Bankshares, Inc. v. Sandberg, 501 U.S.
1083, 1100 n.9 (1991); accord Campaniello Imps., Ltd. v. Saporiti Italia S.p.A., 117 F.3d 655,
664 (2d Cir. 1997) (citation omitted). In those cases, the pleader must nonetheless allege facts
upon which the belief is founded. Campaniello Imps., 117 F.3d at 664. In addition, “group
pleading is generally forbidden because each defendant is entitled to know what he is accused of
doing.” O’Connell v. Arthur Andersen LLP (In re AlphaStar Ins. Grp. Ltd.), 383 B.R. 231, 257–
58 (Bankr. S.D.N.Y. 2008) (citation omitted); see also DiVittorio, 822 F.2d at 1247 (“Where
multiple defendants are asked to respond to allegations of fraud, the complaint should inform
each defendant of the nature of his alleged participation in the fraud.”).
B. 	Claims Brought Against Amaranth Partners
As to Amaranth Partners, the Trustee seeks avoidance and recovery of the transfers from
Dreier LLP to Amaranth Partners as the initial transferee. 11 U.S.C. § 550(a)(1).6 Because the
transfers to Amaranth Partners took place more than two years prior to the petition date,
December 16, 2008, the Trustee seeks avoidance on theories of actual fraud under NYDCL §
276, and seeks recovery of attorneys’ fees under NYDCL § 276-a (Count I), and constructive
fraud under NYDCL §§ 273, 274 and 275 (Counts II – IV). The Trustee also seeks equitable
subordination of any future claim filed by the Defendants under 11 U.S.C. § 510(c) (Count VI).
The Trustee has withdrawn her claim for unjust enrichment (Count V).
1. 	Claims For Actual Fraudulent Conveyance
Count I seeks avoidance and recovery of the transfers made to Amaranth Partners as
actual fraudulent conveyances under NYDCL § 276. Section 276 of the NYDCL allows the
6 	The parties do not dispute that the initial transfers were made from Dreier LLP to Amaranth Partners.
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Trustee to avoid any “conveyance made . . . with actual intent, as distinguished from intent
presumed in law, to hinder, delay, or defraud either present or future creditors.” NYDCL § 276.
Count I also seeks recovery of attorneys’ fees incurred by the Trustee in seeking recovery of
such transfers under NYDCL § 276-a.
As explained in the Patriot Group Opinion, to establish a claim for actual fraudulent
conveyance under NYDCL § 276, the Trustee must establish the actual fraudulent intent of the
transferor, and need not plead the actual fraudulent intent of the transferee. See Patriot Group
Opinion at section II.D.2. The transferor’s actual fraudulent intent has been established by virtue
of the Ponzi scheme presumption. See Patriot Group Opinion at section II.D.1. Accordingly,
the motion to dismiss as it relates to Count I, actual fraudulent conveyance, is denied as to
Amaranth Partners. The motion to dismiss as it relates to a claim for attorneys’ fees under
NYDCL § 276-a is likewise denied as to Amaranth Partners, but attorneys’ fees can only be
recovered if the Trustee establishes actual fraudulent intent of the transferee.
2. 	Claims For Constructive Fraudulent Conveyance
Counts II, III and IV seek avoidance and recovery of the transfers made to Amaranth
Partners as constructive fraudulent conveyances under NYDCL §§ 273,7 2748 and 275. 9 Like
7 	NYDCL § 273 provides:
Every conveyance made and every obligation incurred by a person who is or
will be thereby rendered insolvent is fraudulent as to creditors without regard to
his actual intent if the conveyance is made or the obligation is incurred without a
fair consideration.
N.Y. D EBT. & CRED. § 273.
8 	NYDCL § 274 provides:
Conveyances by persons in business: Every conveyance made without fair
consideration when the person making it is engaged or is about to engage in a
business or transaction for which the property remaining in his hands after the
conveyance is an unreasonably small capital, is fraudulent as to creditors and as
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The Patriot Group, Amaranth Partners was a “net winner” because it received full repayment of
principal and interest payments. The Trustee concedes that the repayment of principal to
Amaranth Partners discharged an antecedent debt and Amaranth Partners gave “fair equivalent”
value for the return of principal because repayment of principal extinguished a claim for
restitution against Dreier LLP. (Mem. of Law in Opp. to Amaranth Partners LLC and Amaranth
Advisors L.L.C.’s Mot. to Dismiss (ECF Doc. # 24) (“Trustee Mem.”) at 20.) As explained in
the Patriot Group Opinion, the purpose of the NYDCL does not permit the court to “invalidate
transfers that were made for fair consideration, at least where no actual intent to hinder, delay or
defraud creditors has been shown.” HBE Leasing Corp. v. Frank, 48 F.3d 623, 634 (2d Cir.
1995); see also Atlanta Shipping Corp., 818 F.2d at 249–50 (“In general, repayment of an
antecedent debt constitutes fair consideration unless the transferee is an officer, director, or
major shareholder of the transferor.”) (citations omitted). Accordingly, the Court cannot avoid
the transfers to the extent of the repayment of principal which extinguished a valid antecedent
debt in the form of a common law claim that Amaranth Partners may have had against Dreier
LLP.
To the extent of repayments received in excess of principal, at this stage the Trustee need
only allege the absence of one of the elements of “fair consideration” defined in NYDCL § 272
to other persons who become creditors during the continuance of such business
or transaction without regard to his actual intent.
N.Y. D EBT. & CRED. § 274.
9 	NYDCL § 275 provides:
Conveyances by a person about to incur debts: Every conveyance made and
every obligation incurred without fair consideration when the person making the
conveyance or entering into the obligation intends or believes that he will incur
debts beyond his ability to pay as they mature, is fraudulent as to both present
and future creditors.
N.Y. D EBT. & CRED. § 275.
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to state a claim for constructive fraudulent conveyance under NYDCL §§ 273, 274 and/or 275.
See Patriot Group Opinion at section II.E.2. Under NYDCL § 272(a) “fair consideration” is
given for property or an obligation: “[w]hen in exchange for such property, or obligation, as a
fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is
satisfied.” NYDCL § 272(a). The Second Circuit has explained the test as follows:
(1) the transferee must convey property in exchange for the
transfer, or the transfer must discharge an antecedent debt;
(2) what the transferee exchanges for the transfer must be of “fair
equivalent” value to the property transferred by the debtor; and
(3) the transferee must make the exchange in “good faith”
See Sharp Int’l Corp. v. State St. Bank & Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 53–54
(2d Cir. 2005) (emphasis added). Here the Complaint alleges the lack of “fair equivalent,” to the
extent of the transfers received in excess of principal. See Patriot Group Opinion at section
II.E.2. Accordingly, the Trustee has stated a claims under NYDCL §§ 273, 274 and 275 for the
avoidance of transfers received in excess of principal as constructive fraudulent transfers. The
motions to dismiss Counts II, III and IV are granted with prejudice with respect to the repayment
of principal, and denied as to the payments in excess of principal.
3. 	Equitable Subordination
Count VI seeks to preemptively equitably subordinate any claim that Amaranth Partners
may file against the Dreier LLP estate. The Court concludes that this claim is premature. See
Tronox Inc. v. Andarko Petroleum Corp. (In re Tronox, Inc.), 429 B.R. 73, 109 (Bankr. S.D.N.Y.
2010) (stating that “it was premature for Plaintiffs to raise the issue at a time when Defendants
had not yet filed proofs of claim”). The motion to dismiss Count VI is granted without prejudice
to the Trustee’s ability to reassert this claim.
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C. 	Claims Brought Against Amaranth LLC
The Trustee seeks avoidance and recovery of the transfers made during the course of the
Note Fraud from Amaranth LLC as a subsequent transferee. The Trustee’s allegations of actual
and constructive fraud under the NYDCL against Amaranth LLC, on a theory of subsequent
liability, are made applicable through § 550(a)(2) of the Bankruptcy Code which provides that a
transfer may be avoided from “any immediate or mediate transferee of such initial transferee.”
11 U.S.C. § 550(a)(2). In order to survive a motion to dismiss, the Complaint must allege
sufficient facts that Amaranth LLC subsequently received the funds from Amaranth Partners.
The Trustee argues that investing in Amaranth LLC was Amaranth Partners’ “raison
d’etre” and there was a substantial likelihood that the transfers occurred based on the fund
structure of the Amaranth entities. (Compl. ¶ 67.) In response, Amaranth LLC argues that the
Complaint does not pass muster in suggesting that Amaranth LLC received the transfers as a
subsequent transferee because the Complaint does not specify any transaction between Amaranth
Partners and Amaranth LLC with regard to the transfers from Dreier LLP. The Court concludes
that the Complaint does not contain facts sufficient to show that Amaranth LLC was a
subsequent transferee of the transfers made to Amaranth Partners from Dreier LLP.
In order to establish an entity as a subsequent transferee, courts have required that the
complaint contain the “necessary vital statistics—the who, when, and how much” of the
purported transfers to establish an entity as a subsequent transferee of the funds. Silverman v.
K.E.R.U. Realty Corp. (In re Allou Distribs., Inc.), 379 B.R. 5, 32 (Bankr. E.D.N.Y. 2007). The
Trustee asserts that similar allegations passed muster in Picard v. Merkin (In re Bernard L.
Madoff Inv. Secs., LLC), 440 B.R. 243, 269–70 (Bankr. S.D.N.Y. 2010). In Merkin, the court
was asked to decide whether the trustee had met its burden of establishing that the defendants
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were subsequent transferees under 11 U.S.C. § 550(a)(2) sufficient to seek avoidance of certain
transfers. The court found that the complaint satisfied the Rule 8(a) pleading requirement
because it provided “fair notice” to the defendants of the claims against them because certain
exhibits attached to the complaint indicated the percentage of fees and commissions that the
defendants purported to receive on account of the transfers to an initial transferee. Id. Thus, the
complaint adequately apprised the defendants—recipients of fees and commissions—of the
claims against them because the complaint specified “which transactions are claimed to be
fraudulent and why, when they took place, how they were executed and by whom.” Id. (citing
Stratton Oakmont, 234 B.R. at 318).
Such is not the case here. The only scintilla of evidence put forth by the Trustee is a bald
assertion that “it is likely that Amaranth Partners invested the money DLLP transferred to it
pursuant to the Note Fraud to Amaranth LLC.” (Compl. ¶ 67.) The Trustee merely asserts that
“[o]n information and belief, Amaranth Partners transferred its Transfers to Amaranth LLC.”
(Id. ¶ 10) (emphasis added). This case is unlike Merkin, where the complaint detailed the
predetermined amounts of fees and commissions that were sent to the subsequent transferees as
described in a “Fund Offering Memoranda,” and attached as an exhibit to the complaint. 440
B.R. at 269–70. The Trustee here makes the assertion that she is seeking to “recover some of the
funds that flowed from DLLP to Partners that subsequently fed into Amaranth LLC” without
substantiating this allegation. There are no specific facts to back up the allegation that Amaranth
LLC received any of the funds that were transferred from Dreier LLP to Amaranth Partners
through the fraud, nor is there evidence suggesting that Amaranth LLC received fees and/or
commissions from the transfers to Amaranth Partners.
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Because the Trustee has not pled facts showing that Amaranth LLC was a subsequent
transferee under § 550 of the Bankruptcy Code, the Complaint is hereby dismissed in its entirety
against Amaranth LLC with leave to amend the Complaint within thirty days.10
D. 	Claims Brought Against Amaranth Advisors
The Trustee seeks to avoid and recover transfers made by Dreier LLP to Amaranth
Partners from Amaranth Advisors as party for whose benefit the transfers were made. (Compl. ¶
74, 81, 88); see 11 U.S.C. § 550(a)(1) (“the trustee may recover, for the benefit of the estate, the
property transferred, . . . — (1) the initial transferee of such transfer or the entity for whose
benefit such transfer was made”). The crux of the Trustee’s argument is that Amaranth Advisors
“arranged for the transfers to happen” and directly benefited from the transfers from Dreier LLP
to Amaranth Partners. Amaranth Advisors disagrees, arguing that the Trustee failed to allege
how any transfer of funds from Dreier LLP to Amaranth Partners was made for the benefit of
Amaranth Advisors.
The Complaint alleges that Amaranth Advisors directed Amaranth Partners’ participation
in the transactions, and Amaranth Advisors, as investment manager of the Amaranth group,
“participated and benefited from each of the transfers from DLLP” to Amaranth Partners.
(Compl. ¶ 10.) As evidence of the purported relationship between Partners and Advisors, the
Complaint states that Amaranth Advisors was the agent of Amaranth Partners pursuant to certain
10 	In light of the Court’s determination below that the Complaint fails to state a claim against Amaranth
Advisors below, the Court need not address the Trustee’s argument that there was an agency/principal relationship
between Amaranth Advisors and Amaranth LLC sufficient to impute Amaranth Advisors’ conduct to Amaranth
LLC. The Court also need not address Amaranth LLC’s argument that the “group pleading” was insufficient to put
each of the Defendants on notice of the claims against them.
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“Advisory Agreements.”11 (Id. ¶ 66.) The Trustee also points to the transaction documents as
evidence of Amaranth Advisors’ involvement in the fraud: Amaranth Advisors signed the
documents on Amaranth Partners’ behalf, and wire instructions were address to “Amaranth
Partners LLC, c/o Amaranth Advisors, L.L.C.” (Id. ¶ 64.)
The quintessential example of an entity for whose benefit a transfer is made is a
guarantor. Bonded Fin. Servs. v. European Am. Bank, 838 F.2d 890, 89–96 (7th Cir. 1988)
(stating that “we think the minimum requirement of status as a ‘transferee’ is dominion over the
money or other asset, the right to put the money to one’s own purposes”). Even though the
guarantor does not receive any payment, the guarantor is “no longer exposed to liability on its
guarantee because the underlying obligation has been satisfied.” Enron Creditors Recovery
Corp. v. J.P. Morgan Secs., Inc. (In re Enron Creditors Recovery Corp.), 407 B.R. 17, 32–
33 (Bankr. S.D.N.Y. 2009), rev’d on other grounds, 422 B.R. 423 (S.D.N.Y. 2009). “The key to
pegging the entity for whose benefit the initial transfer was made has two sides: 1) the entity
must be the intended beneficiary and 2) the intended benefit must originate from the initial
transfer.” Stratton Oakmont, 234 B.R. at 314 (citation omitted). In order to establish liability for
a transferee for whose benefit the transfer was made, “[t]he benefit must be ‘direct, ascertainable
and quantifiable’ and must correspond to, or be commensurate with, the value of the property
that was transferred.” In re Enron Creditors Recovery Corp., 407 B.R. at 33 (citing Reily v.
Kapila (In re Int’l Mgmt. Assoc.), 399 F.3d 1288, 1293 (11th Cir. 2005)). “Incidental,
unquanitifable, or remote” allegations of benefit are not sufficient. Id.12
11 	Amaranth Advisors disputes the existence of an Advisory Agreement and concedes that Amaranth
Advisors was the “Manager” of Amaranth Partners pursuant to Amaranth Partners’ LLC Agreement. (Mem. of Law
in Support of Defs. Amaranth Partners LLC and Amaranth Advisors L.L.C.’s Mot. to Dismiss the First Am. Compl.
(ECF Doc. # 19) at 12.)
12 	Other courts have dismissed fraudulent transfer claims where the defendant is not the entity for whose
benefit the transfer was made. See, e.g., Baker O’Neil Holdings, Inc. v. Ernst & Young LLP, No. 1:03-CV-0132-
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Though it is not inconceivable to think that Amaranth Advisors somehow benefited from
the transfers to Amaranth Partners, the Court concludes that the allegations in the Complaint are
insufficient to show that Amaranth Advisors was the entity for whose benefit the transfers were
made. The fact that Amaranth Advisors was the investment manager of the Amaranth entities
does not, in and of itself, support the conclusion that the transfers were made for its benefit. See
Int’l Mgmt. Assoc., 399 F.3d at 1293 (stating that the fact that recipient of transfers “attained
complete control over the debtors’ assets does not give rise to a quantifiable benefit or one
bearing the ‘necessary correspondence to the value of the property transferred or received’”)
(citation omitted). In addition, that Amaranth Advisors may have received funds in the form of
fees or other later transfers does not establish that the initial transfers were made for their benefit.
See Baker O’Neil Holdings, Inc., 2004 WL 771230, at *13 (holding that entities who “might
have received a remote benefit as a result of the transfer does not mean that the transfer was
made for their benefit” because the benefits would have been “incidental, unquantifiable, and
remote”). The fact that Amaranth Advisors executed the transaction documents on behalf of
Amaranth Partners is likewise unconvincing because it does not establish that Amaranth
Advisors benefited from the underlying transaction.
In sum, the allegations in the Complaint fail to satisfy the requirement that the allegations
against Amaranth Advisors suggest a benefit that is “direct, ascertainable and quantifiable.”13 As
DFH, 2004 WL 771230, at *13–14 (S.D. Ohio 2004) (rejecting plaintiff’s fraudulent transfer claims against
accounting firm and employee of accounting firm under section 550(a)(1) because defendants alleged receipt of fees
and promise of future engagements from transferor did not constitute “benefit” leading to liability); Stratton
Oakmont, 234 B.R. at 314–15 (dismissing fraudulent transfer claims against individual who perpetrated fraud
because trustee failed to indicate how individual benefited from fraudulent conduct).
13 	The Trustee also asserts that Amaranth Advisors may also be subject to liability as subsequent transferee.
11 U.S.C. § 550(a)(2). This argument is belied by the fact that the Complaint makes clear that the Trustee seeks
liability from Amaranth Advisors on a “benefit” theory, rather than as a subsequent transferee. The Court need not
analyze Amaranth Advisors’ status as a subsequent transferee because there are no allegations in the Complaint
supporting that claim.
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was the case with Amaranth LLC, the Court grants Amaranth Advisors’ motion to dismiss the
Complaint with leave to amend the Complaint within thirty days.
III. 	CONCLUSION
For the reasons discussed above, the motion to dismiss is granted with leave to amend
within thirty days against Amaranth LLC and Amaranth Advisors. Consistent with the Court’s
holding in the related adversary proceedings, as to Amaranth Partners the motion to dismiss is
denied with regard to the actual fraudulent conveyance claim under NYDCL §§ 276 and 276-a
(Count I) and granted with prejudice with regard to the constructive fraudulent conveyance
claims under NYDCL §§ 273, 274 and 275 (Counts II – IV) to the extent of the repayment of
principal, but denied as to transfers received in excess of principal. With regard to the claim for
equitable subordination (Count VI), the motion to dismiss is granted and such claim is dismissed
without prejudice.
IT IS SO ORDERED.
DATED: 	June 16, 2011
New York, New York
_____/s/Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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