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In re Arctic Glacier International, Inc.

United States District Court, D. Delaware

June 14, 2017

In re Arctic Glacier International, Inc., Debtors in a Foreign Proceeding.
v.
Arctic Glacier Income Fund, James E. Clark, Gary A. Filmon, David R. Swaine, and Hugh A. Adams, Appellees. Eldar Brodski Zardinovsky a/k/a Eldar Brodski a/k/a Eldar Brodski Zardinovsky, EB Books, Inc., EB Design, Inc., EB Online, Inc., EB Imports, Inc., Lazdar Inc., Eldar Brodski Inc., Y Capital Advisors Inc., Valley West Realty Inc., Ruben Brodski, Ruben Brodski Inc., Ester Brodski, and Yehonathan Brodski, Appellants, Adv. Proc. No. 15-51732 (KG) Bank. No. 12-10605 (KG),

          Kevin S. Mann, Esquire, of Cross & Simon, LLC, Wilmington, Delaware. Counsel for Eldar Brodski Zardinovsky a/k/a Eldar Brodski a/k/a Eldar Brodski (Zardinovsky), EB Books, Inc., EB Design, Inc., EB Online, Inc., EB Imports, Inc., Lazdar Inc., Eldar Brodski Inc., Y Capital Advisors Inc., Valley West Realty Inc., Ruben Brodski, Ruben Brodski Inc., Ester Brodski, and Yehonathan Brodski.

          Paul N. Heath, Esquire, Marcos A. Ramos, Esquire, and Brendan J. Schlauch, Esquire, of Richards Layton & Finger, P.A., Wilmington, Delaware; David Woodcock, Esquire, Mark W. Rasmussen, Esquire, Arielle S. Tobin, Esquire, and Allison L. Fuller, Esquire, of Jones Day, Dallas, Texas. Counsel for Arctic Glacier Income Fund, James E. Clark, Gary A. Filmon, David R. Swaine, and Hugh A. Adams.

          MEMORANDUM OPINION

          ROBINSON Senior District Judge.

         I. INTRODUCTION

         Appellants Eldar Brodski Zardinovsky and others (collectively "plaintiffs")[1] filed this appeal on July 19, 2016. (D.I. 1) The appeal arises from an opinion and order entered by the bankruptcy court on July 13, 2016 dismissing a post-petition adversary proceeding complaint filed by plaintiffs against debtor Arctic Glacier Income Fund ("AGIF") and defendants James E. Clark, Gary A. Filmon, David R. Swaine, and Hugh A. Adams (collectively, the "individual defendants, "[2] and together with AGIF, the "defendants"). Zardinovsky, et al. v. Arctic Glacier Income Fund, et al. (In re Arctic Glacier Int'l, Inc.), 2016 WL 3920855, No. 15-51732 (KG) (Bankr. D. Del. July 13, 2016).

         Following confirmation of AGIF's Plan of Arrangement ("Plan") under Canada's Companies' Creditors Arrangement Act (the "CCAA"), plaintiffs purchased units in AGIF between December 16, 2014 and January 22, 2015. On January 22, 2015, pursuant to the Plan's distribution procedure, defendants made distributions to those who held units as of December 15, 2014- in other words, to those who sold their units to plaintiffs. The complaint alleges that under U.S. securities law, defendants should have made distributions to plaintiffs, rather than to the selling unit holders.[3] Defendants moved to dismiss the complaint on the bases that: (i) various releases contained in the confirmed Plan and confirmation orders insulate defendants from liability, and (ii) under the doctrine of res judicata, defendants were only obligated to make distributions pursuant to the Plan, not U.S. securities law and, therefore, defendants violated no law in making the distributions. The bankruptcy court agreed with defendants and dismissed the complaint. See Arctic, 2016 WL 3920855, at *1. For the reasons set forth herein, the court will affirm.

         II. BACKGROUND[4]

         A. Insolvency Proceedings

         AGIF was an income trust based in Canada which owned a group of companies that manufactured and distributed packaged ice.[5] AGIF was listed on the Canadian Securities Exchange ("CSE") under the symbol "AG.UN." AGIF's units traded on the U.S.-based Over-The-Counter ("OTC") market under the symbol "AGUNF." (A7, ¶ 34; A11, ¶ 55) On February 22, 2012, AGIF and its affiliates commenced insolvency proceedings in Canada under the CCAA. (A6, ¶ 26) The same day, the Canadian court appointed a monitor, and the monitor commenced ancillary proceedings in the bankruptcy court under Chapter 15 of the Bankruptcy Code. In the CCAA proceedings, under the supervision of the monitor and the Canadian court, AGIF sold substantially all of its assets, and the proceeds were sufficient to pay AGIF's secured creditors in full. (A5, ¶ 27) The remaining proceeds were held by the monitor pending determination of the amount of creditor claims and the filing of the Plan to govern distribution of the remaining proceeds to unsecured creditors and, to the extent that all creditors could be paid in full, to make distributions to AGIF's unitholders.

         B. Plan, Sanction Order, and Recognition Order

         AGIF held a meeting of unitholders to consider and vote on the Plan, and notice of the meeting was provided to all unitholders. (See A350-401) The Canadian court determined there had been sufficient notice of the meeting to unitholders, as well as sufficient service of documents related to the meeting. (A587, ¶ 3) The Plan was approved by 99.81% of all unitholders who voted, and over 65% of unitholders voted. (A199; A441- 43) The Plan and orders contained provisions that released defendants from liability for any actions or omissions related to, arising out of, or connected with the Plan. Each unitholder was deemed to have consented and agreed to all provisions of the Plan, including the releases. (A592, ¶ 19(a)) The Plan, once approved, was binding not only on unitholders but also on their "successors and assigns." (A161, ¶ 1.3) The Canadian court approved and sanctioned the Plan pursuant to the CCAA on September 5, 2014 (the "Sanction Order"). The plan implementation date occurred on January 22, 2015. (A8-9, ¶¶ 39, 45; A584-604) The Sanction Order declared that the terms of the Plan governed the conduct of AGIF and related parties as of the date of signing, and authorized them "to take all steps and actions necessary or appropriate to implement the Plan":

[T]he Arctic Glacier Parties, [6] the Monitor and the CPS, [7] as the case may be, are hereby authorized and directed to take all steps and actions necessary or appropriate to implement the Plan in accordance with and subject to its terms and conditions, and enter into, adopt, execute, deliver, complete, implement and consummate all of the steps, ... distributions, payments, deliveries, allocations, instruments, agreements and releases contemplated by, and subject to the terms and conditions of, the Plan, and all such steps and actions are hereby approved. Further, to the extent not previously given, all necessary approvals to take such actions shall be and are hereby deemed to have been obtained from the Directors, Officers, or Trustees, as applicable ....

(A589-90, ¶ 12) On September 16, 2014, the bankruptcy court entered an order (A460-66)("Recognition Order")[8] recognizing the Sanction Order and giving "full force and effect in the United States" to its provisions. (A462, ¶ 2) The Recognition Order provided that "due and sufficient notice" of both the motion seeking approval and the Sanction Order itself had been given and that "no other or further notice need be provided." (A461)

         C. Distribution Procedures Under the Plan and Orders

         The Plan provides detailed procedures for the distribution to unitholders. Section 6.2 limits distributions "to each Registered Unitholder, as of the applicable Unitholder Distribution Record Date." (A168, § 6.2) Section 6.2 of the Plan provided that the monitor would declare a record date that would determine which unitholders were eligible to receive the distribution, and that the transfer agent would pay the distribution to each registered unitholder as of the record date. Specifically, the Plan provided:

The Monitor shall declare a Unitholder Distribution Record Date prior to any distribution .... On the Plan Implementation Date or on any Distribution Date, as the case may be, the Monitor shall transfer amounts as determined by the Monitor in accordance with the [Plan] ... to the Transfer Agent.... [I]n no event later than five (5) Business Days following receipt of the Unitholder Distribution, the Transfer Agent shall distribute each Unitholder Distribution ... to each Registered Unitholder, as of the applicable Unitholder Distribution Record Date . . . based on each Registered Unitholder's Pro Rata Share ....

(A168, § 6.2) (emphasis added) The Plan further provided that the unitholder distribution record date must be "at least 21 days prior to a contemplated Unitholder Distribution . . ." (A159, §1.1)

         Section 8.3 of the Plan provides the steps and transactions to be undertaken on the plan implementation Dated:

         The steps, transactions, settlements and releases to be effected in the implementation of the [Plan] shall occur, and be deemed to have occurred, in the following order without any further act of formality . . .

         (a) the Monitor. . . shall use the Available Funds to fund the following reserves and distribution cash pools in the order specified below:

(i) Administrative Costs Reserve;
(ii) Insurance Deductible Reserve;
(iii) Unresolved Claims Reserve;
(iv) Affected Creditors' Distribution Cash Pool; and
(v) Unitholders' Distribution Cash Pool; and administer such reserves and distribution cash pools pursuant to and in accordance with the [Plan];
(d) the steps, assumptions, distributions, transfers, payments, contributions, liquidations, dissolutions, wind-ups, reduction of capital, settlements and releases set out in Schedule "B" of the [Plan] shall be deemed to be completed in the order specified therein . . .

(A174, § 8.3) (emphasis added) Schedule "B" to the Plan provides specific instructions as to steps to be taken on the plan implementation Dated:

In order to effect the wind-up, liquidation and dissolution of certain of the Arctic Glacier Parties to facilitate the satisfaction of Proven Claims and a distribution by the Fund to Unitholders pursuant to and in accordance with the [Plan], the following steps, assumptions, distributions, transfers, payments, contributions, liquidations, dissolutions, wind-ups, reduction of capital, settlements and releases shall be deemed to occur (a) immediately after the completion of the step set out in Section 8.3(c) of the [Plan]; (b) in the order specified in this Schedule "B"; and (c) in the manner specified in this Schedule "B".

(A187, Sch. B) Schedule B of the Plan provides specific instructions as to the last step in the distribution procedures:

[AGIF] shall be deemed to have paid a distribution to each Unitholder in the amount of their Pro Rata Share of the Unitholders' Distribution Cash Pool immediately following the completion of Steps 1 through 29 above and such amount shall be transferred by the Monitor to the Transfer Agent and distributed by the Transfer Agent to the Unitholders in accordance with Section 6.2 of the [Plan].

         (A197, Step 30) Section 8.3 only allows for distributions "in accordance with" the Plan (i.e., § 6.2); Schedule "B" only allows for distributions "in accordance with Section 6.2 of the . . .

         Plan." (A187)

         The Sanction Order provides that distributions shall be made in accordance with the CCAA, the Plan, and court orders, under the exclusive authority of the monitor:

THIS COURT ORDERS AND DECLARES that, in addition to the Monitor's prescribed rights under the CCAA, and the powers granted by this Court to the Monitor and the CPS, as the case may be, the powers granted to the Monitor and the CPS are expanded as may be required, and the Monitor and CPS are empowered and authorized before, on or after the Plan Implementation Date, to take such additional actions and execute such documents ... as the Monitor and the CPS consider necessary or desirable in order to perform their respective functions and fulfill their respective obligations under the Plan, the Sanction Order and any Order of this Court in the CCAA Proceedings and to facilitate the implementation of the Plan and the completion of the CCAA Proceedings, including to . . . (ii) administer and distribute the Available Funds, (iii) establish, hold, administer and distribute ... the Unitholders' Distribution Cash Pool, . . . (v) effect distributions to the Transfer Agent in respect of distributions to be made to Unitholders . . . and, in each case where the Monitor or the CPS, as the case may be, takes such actions or steps, they shall be exclusively authorized and empowered to do so, to the exclusion of all other Persons including the Arctic Glacier Parties, and without interference from any other Person.

(A598-99, ¶ 34 (emphasis added)) Thus, the Sanction Order empowers the monitor to administer and distribute funds to unitholders "without interference from any other Person" including the Arctic Glacier Parties. (Id.) Further, the definition of "Person" includes any "Government Authority" or any agency, regulatory body, officer or instrumentality thereof or any entity, wherever situated or domiciled." (A157, §1.1) Government Authority is defined as "any government, regulatory or administrative authority ... or other law, rule or regulation-making or enforcing entity having or purporting to have jurisdiction on behalf of any nation. . . ." (A156, §1.1)

         E. U.S. Securities Laws Governing Distributions

         Plaintiffs do not appear to dispute that defendants made the distribution to unitholders in accordance with the Plan. Rather, plaintiffs contend that defendants did not comply with U.S. securities laws, which required making the distribution to plaintiffs, and this contention is central to each of the claims in the complaint. The bankruptcy court set forth a thorough explanation of the relevant statutes and rules in its opinion, [9] the substance of which the parties do not appear to dispute. For the purposes of this memorandum opinion, the court will briefly summarize the relevant authorities.

         Rule 10b-17 of the Securities and Exchange Act of 1934 establishes an issuer's mandatory set of disclosures if it trades on the OTC market and wishes to make a distribution. (A11, ¶ 56) Notice of a distribution must be given to the Financial Industry Regulatory Authority ("FINRA")[10] no later than ten days prior to the record date of an issuer's offer of dividends.[11] (A11 ¶ 58; 17 C.F.R. § 240.10b-17(a) and (b)(1); In re THCR/LP Corp., 2006 WL 530148 at *4 (Bankr. D.N.J. Feb. 17, 2006)). The SEC gave FINRA power to regulate payment of dividends. FINRA Rule 6490 ("Rule 6490") creates procedures within FINRA for review and determination of the sufficiency of requests to issue dividends. (A12, ¶¶ 63, 66; SEC Release No. 34-62434 (July 1, 2010) at *1)

         FINRA is authorized by the SEC to adopt and administer the Uniform Practice Code ("UPC"), "the rules and regulations governing [OTC] secondary market securities transactions." THCR/LP, 2006 WL 530148 at *4. The UPC sets forth a basic framework of rules governing broker-dealers with respect to the settlement of OTC Securities and governs how distributions by securities issuers must be allocated to the holders of securities. See SEC Release No. 62434 (July 1, 2010), n.8. FINRA lacks privity[12] with issuers of OTC Securities: "FINRA does not impose listing standards for securities and maintains no formal relationship with, or direct jurisdiction over, issuers." Id. at *2-3. UPC 11140 determines which unitholders are entitled to a distribution. See NASD Notice to Members 00-54 (August 2000).[13] The UPC provisions determine which unitholders are entitled to a distribution by setting two dates: the "record date" and the "ex-dividend date" ("ex-date"). See THCR/LP, 2006 WL 530148, at *5.

         The record date refers to "the date fixed by the . . . issuer for the purpose of determining the holders of equity securities . . . entitled to receive dividends ... or any other distributions." Id. (citing UPC Rule 11120(e)). The record date is the date on which one must be registered as a shareholder on the stock book of a company in order to receive a dividend declared by that company. Thus, the record date determines to whom the issuer sends the distribution. "The fact that an individual is the holder of record on the record date, however, does not necessarily mean that such person is entitled to retain the dividend." Id. at *6 (quoting Limbaugh v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 732 F.2d 859, 861 (11th Cir. 1984).

         "In terms of entitlement, the ex-dividend date is the dividing line . . . When stock is sold prior to the ex-dividend date, the right to a dividend goes with the stock to the purchaser, rather than staying with the seller." Id. (citations omitted) (emphasis added). When stock is sold on or after the ex-date, it is "traded without a specific dividend or distribution."[14] (A14-15, ¶ 70; UPC Rule 11120(c); THCR/LP Corp., 2006 WL 530148 at *5) The ex-date can only be set by FINRA and determines which unitholder is ultimately entitled to the distribution. THCR/LP, 2006 WL 530148 at *5. "Taken together, these two dates delimit the timeframe during which a security, when sold, carries with it from the seller to the buyer the right to receive a distribution." Id.; UPC 11140.

         The ex-date generally precedes the record date, in which case the stockholder legally entitled to the dividend is the individual to whom the dividend is sent. THCR/LP, 2006 WL 530148, at *6. On the other hand, if the record date precedes the ex-date, and the security is sold during the period between the two, the seller of the security (who held the security on the record date) will receive the full, unadjusted price for the security, as well as the distribution. However, the purchaser of the security - who is the holder on the ex-date - will be legally entitled to the distribution. Under such circumstances, the seller will be obligated to remit the value of the dividend to the buyer. See e.g., Silco, Inc. v. United States, 779 F.2d 282, 284 (5th Cir. 1986).

         The FINRA Rules and the Plan's distribution procedures differ in two important respects relevant to the appeal. First, with respect to notification requirements, the Plan and orders make no mention of any obligations to notify FINRA, or to otherwise observe any authority beyond the CCAA and the Plan. (A168, § 6.2; A598, ¶ 34) Indeed, under the Sanction Order, compliance with any outside authority falls within the monitor's discretion, and defendants and the monitor are released from liability for disregard of such authority. (See A598, ¶ 34; A601, ¶ 40) The FINRA Rules, on the other hand, require that the issuer notify FINRA ten days prior to the record date, and "further advise FINRA of, inter alia, the date and amount of the dividend payment, and obtain FINRA's approval." (A14, ¶69; Rule 10b-17; Rule 6490)

         Second, under the FINRA Rules, the size of the distribution may lead to a different allocation. A dividend payment of 24% or less of the value of the subject security will invoke UPC 11140(b)(1), which provides that "the date designated as the 'ex dividend' date shall be the second business day preceding the record date if the record date falls on a business day, or the third business day preceding the record date if the record date falls on a day designated by the Committee as a non-delivery date." UPC 11140(b)(1). Where the dividend is 25% or greater of the value of the subject security, UPC 11140(b)(2) applies, requiring that "the ex-dividend date shall be the first business day following the payable date." UPC 11140(b)(2).

         F. Distributions Made Under the Plan

         On November 18, 2014, the monitor issued a report[15] disclosing an "Estimated Unitholders' Distributed Cash on the Plan Implementation Date" of approximately USD $0, 153 per share. (A6, ¶ 30) The report predicted a plan implementation date around January 8, 2015. (Id.) On December 11, 2014, AGIF published legal notices in the Wall Street Journal, the Winnipeg Free Press, and the Globe & Mail, announcing that the unitholder distribution record date would be December 18, 2014. (A553, A555, A557) On December 15, 2014, AGIF issued a press release announcing that "unitholders of the Fund as of December 18, 2014 will be entitled to receive the initial distribution from the Fund pursuant to the [Plan], " but adding that the distribution amount had not yet been established. (A6, ¶ 31) AGIF posted the press release, as well as a material change report, on SEDAR:[16]

[AGIF] (the "Fund") announced on December 11, 2014 that unitholders of the Fund as of December 18, 2014 will be entitled to receive the initial distribution from the Fund pursuant to the Plan of Compromise or Arrangement. . . approved by the unitholders on August 11, 2014 (the "Plan"). The date and value of this distribution will be announced by way of a press release once such information is determined.

(A563) Due to the three-day processing period for securities sales, only purchasers on or before December 15, 2014, would have been registered unitholders as of the December 18, 2014 record date. (A6-7, ¶ 32) AGIF did not notify FINRA of its planned dividend. Asa result, FINRA did not set an ex-date for AGIF units. (A7, ¶¶ 33-34)

         Beginning on December 16, 2014, plaintiffs began purchasing AGIF units on the OTC market from the selling unitholders who had acquired their shares prior to confirmation of the Plan. (A10, ¶ 50; A1400-02, ¶¶ 18-19) Plaintiffs continued to purchase units up to and including January 22, 2015. (A10-11, ¶¶ 50-55) The complaint does not allege that plaintiffs were unaware of AGIF's public disclosures. (A1-25; A39, ¶ 5)

         On January 9, 2015, another press release announced that AGIF would implement the Plan as soon as possible:

As previously announced by the Fund on December 15, 2014, the date and value of the initial distribution to unitholders of the Fund, as contemplated in the Plan, will be announced by way of a press release once such information is determined.

(A569) AGIF issued yet another press release on January 21, 2015, disclosing that the plan implementation date would be the next day, January 22, 2015, and that "unitholders of the Fund as of December 18, 2014 (the 'Record Date') were entitled to receive an initial distribution from the Fund pursuant to the Plan of $0.155570 ...


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