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In re S.S. Body Armor I, Inc.

United States District Court, D. Delaware

June 3, 2019

IN RE SS BODY ARMOR I, INC., et al., Debtors.
SS BODY ARMOR I, INC., et al., Appellee. D. DAVID COHEN, Appellant, CARTER LEDYARD & MILBURN LLP, Appellant,
SS BODY ARMOR I, INC., et al., Appellee.


          Honorable Maryellen Noreika United""States District Judge

         Before the Court are related appeals of D. David Cohen (“Cohen”) and the law firm of Carter Ledyard & Milburn LLP (“CLM, ” and together with Cohen, “Appellants”) from several related decisions entered in the Chapter 11 case of post-confirmation debtor S.S. Body Armor I, Inc. f/k/a Point Blank Solutions, Inc. f/k/a DHB Industries, Inc. (“the Debtor” or “the Company”).[1]Cohen, a Point Blank shareholder, has appealed the Bankruptcy Court's July 9, 2015 Order (B.D.I. 3109) (“Settlement Order”) approving the settlement agreement (“Settlement Agreement”) underlying the Debtor's confirmed plan (“Plan”) (Civ. No. 15-633-MN) (“Settlement Appeal”). Cohen has also appealed the Bankruptcy Court's December 3, 2015 Orders (i) granting Cohen a fee award for his work in preserving a claim under section 304 of the Sarbanes-Oxley Act (“SOX”), 15 U.S.C. § 7243 (“§ 304”), [2] to be paid in the event that funds are received on account of the SOX § 304 Claim, and in an amount to be determined by the Bankruptcy Court (B.D.I. 3624) (“Cohen Fee Order”) (Civ. No. 15-1154-MN), and (ii) approving the payment of fees to counsel appointed in a consolidated derivative action against certain of the Company's officers and directors in the amount of $300, 000 (B.D.I. 3623) (“Derivative Counsel Fee Order”) (together, “the Fee Appeals”). CLM has also appealed (i) the Bankruptcy Court's February 23, 2018 Order (B.D.I. 4049) (“Fee Reserve Order”) granting, in part, CLM's motion to establish a $25 million fee reserve (Civ. No. 18-349-MN) (“Fee Reserve Appeal”), and (ii) the Bankruptcy Court's April 24, 2018 Order (B.D.I. 4100) (“First Stay Order”) denying CLM's motion to stay all distributions of funds that the Debtor has received or will receive under a global settlement between the Debtor, the trust established pursuant to the Debtor's confirmed plan (“Recovery Trust, ” and together with the Debtor, “Appellees”), the Department of Justice (“DOJ”), a class of plaintiff shareholders in a pre-petition securities class action (“Class Plaintiffs”), and the family of the Debtor's former (and now deceased) CEO, David H. Brooks (“Brooks”) (Civ. No. 18-634-MN) (“First Stay Appeal”). For the reasons set forth below, the Court affirms the Settlement Order, the Cohen Fee Order, the Derivative Counsel Fee Order, the Fee Reserve Order, and the First Stay Order.

         I. BACKGROUND[3]

         A. Pre-Petition Litigation and EDNY Stipulation

         In the fall of 2005, DHB Industries, Inc.'s (“DHB”) stock plummeted following revelations that the body armor manufactured by the company contained an inferior material prone to rapid deterioration. Numerous derivative and class action lawsuits were subsequently filed against DHB and its former officers and directors, including Brooks. In January 2006, prior to the commencement of the Chapter 11 cases, the United States District Court for the Eastern District of New York (“EDNY Court”) consolidated the derivative and class actions as follows: (1) a consolidated securities class action filed on behalf of purchasers of Point Blank's publicly traded securities against Point Blank and certain of its officers and directors, including Brooks, In re DHB Industries, Inc. Class Action Litigation, Civ. No. 05-4296 (JS) (“the Class Action”); and (2) a consolidated derivative action filed on behalf of Point Blank against certain of its officers and directors, including Brooks, for (among other things) breach of fiduciary duty, gross mismanagement, and waste of corporate assets, In re DHB Industries, Inc. Derivative Litigation, Civ. No. 05-4345 (JS) (“the Derivative Action”).

         In 2006, the parties to the Class Action and Derivative Action entered into a settlement (“EDNY Stipulation”). The monetary terms of the EDNY Stipulation were as follows: the Class Action would be settled for $34, 900, 000 in cash, plus 3, 184, 713 shares of Point Blank common stock; and the Derivative Action would be settled through Point Blank's adoption of certain corporate governance policies and a payment of $300, 000 for the fees and expenses of counsel appointed in the Derivative Action (“Derivative Counsel”). (B.D.I. 2865). The cash portions of the settlements, in the total combined amount of $35, 200, 000, were placed in escrow with Class Counsel in 2006 (“the Escrowed Funds”). (Id. ¶¶ 2.1-2.2). Additionally, the EDNY Stipulation contained a provision in which the Company agreed to release Brooks from any liability arising under the Sarbanes-Oxley Act and indemnify him from any liability he may incur under § 304. Cohen, a shareholder, opted out of the Class Action but intervened in the Derivative Action to object to the EDNY Stipulation - specifically, to the SOX § 304 indemnification provisions and the payment of $300, 000 fees and expenses to Derivative Counsel.

         On October 1, 2007, prior to the approval of the EDNY Stipulation, the Company filed restated financial reports for 2003, 2004, and the first quarter of 2005. On October 25, 2007, the SEC brought a civil action against Brooks in the Southern District of Florida seeking disgorgement of the bonuses and trading profits Brooks received during the restatement period (“the SOX § 304 Claim”). See SEC v. Brooks, No. 07-61526-cv, 2017 WL 3315137 (S.D. Fla. Aug. 3, 2017) (“the SEC Action”). The Complaint alleged that Brooks' trading profits totaled approximately $186 million. See Cohen, 622 F.3d at 192. On October 24, 2007, Brooks was indicted in the EDNY on various charges of fraud, insider trading, and other related offenses. See United States v. Schlegel, et al., No. 06-cr-00550 (E.D.N.Y.) (“the Criminal Action”). The SEC Action was administratively closed pending the outcome of Criminal Action against Brooks. See Cohen, 622 F.3d at 192, n.6 (citing Brooks, No. 07-61526-cv, D.I. 16 (Dec. 12, 2007)).

         On July 8, 2008, the EDNY Court approved the EDNY Stipulation over Cohen's objections, and entered judgments in the Class and Derivative Actions. (B.D.I. 2941, Ex. D; B.D.I. 3030, Ex. 10). The EDNY Court subsequently entered an order denying Cohen's application for attorneys' fees and expenses and approving provisional payment of Derivative Counsel's fees in the discounted amount of $300, 000 over Cohen's objection. Derivative Counsel's fee award was provisionally paid in 2008 following entry of judgment in the Derivative Action. Cohen appealed those rulings to the Second Circuit. With respect to the SOX § 304 issue, the DOJ and SEC supported his appeal as amicus curiae.[4]

         In 2010, the U.S. Attorney's Office for the Eastern District of New York (“USAO”) commenced a civil forfeiture proceeding (“the Civil Forfeiture Proceeding”)[5] against a multitude of Brooks-related assets. Approximately $168 million of cash and non-cash assets were restrained in connection with the Civil Forfeiture Proceeding. Brooks' ex-wife and family, individually and/or on behalf of various entities, filed verified claims to approximately $85 million of the restrained assets.[6] The Debtor and Class Plaintiffs each submitted petitions for remission to the DOJ requesting that the Attorney General use the restrained assets to compensate the Debtor and Class Plaintiffs (respectively) for the losses suffered as a result of Brooks' misconduct. The Attorney General is authorized by statute to use assets forfeited in a civil forfeiture proceeding to compensate victims[7] and “is authorized to decide petitions for remission or mitigation.”[8] As amended, the Debtor's final petition requested remission of approximately $87.7 million, and the Class Plaintiffs' final petition requested remission of approximately $81.5 million.

         On April 14, 2010, the Debtor filed its Chapter 11 bankruptcy case. On September 14, 2010, after an 8-month jury trial, Brooks was convicted of securities fraud, wire fraud, insider trading, and material misstatements to auditors. The EDNY Court recognized in its criminal restitution order:

In 2003, Defendants [David Brooks and his co-defendants] began a No. of schemes to reap millions in personal profit at the expense of the Company and its shareholders. The sheer No. and diversity of these fraudulent schemes strains belief. It is no stretch to say that Defendants ransacked that Company for their own gain, and their conduct was devastating to both the Company and its shareholders.

See Criminal Action, D.I. 1869 at 4-5.[9]

         On September 30, 2010, the Second Circuit issued a decision vacating and remanding the judgment in the Derivative Action on the grounds that the EDNY Stipulation impermissibly released and indemnified Brooks against liability under SOX § 304. Cohen v. Viray, 622 F.3d 188, 195-96 (2d Cir. 2010). The Second Circuit noted that Cohen's appeal had raised “novel issues of law.” Id. at 193. The Second Circuit further stated:

Because we conclude that the indemnification and release provisions of the Settlement violate § 304 of the Sarbanes-Oxley Act, 15 U.S.C. § 7243, we do not reach the question of whether the Settlement is substantively and procedurally fair, reasonable, and adequate. Nor do we reach the issues pertaining to attorneys' fees. The district court will need to reexamine those issues in any event, either in the context of a revised settlement or the outcome of further litigation.

Id. at 196. Cohen's appeal and the Second Circuit's decision established a significant precedent.[10]

         B. Post-Petition Settlement Order and Plan Confirmation

         Following the Second Circuit's reversal of the judgment approving the EDNY Stipulation, Debtor, Class Plaintiffs, Class Counsel, and Derivative Counsel (collectively, “Settling Parties”) engaged in settlement negotiations with Brooks and his family members. According to Debtor, those negotiations sought to resolve: (1) the Class and Derivative Actions in the EDNY Court, (2) related litigation, claims, and appeals in this Court and the Bankruptcy Court, and (3) competing claims asserted by Point Blank and the Class Plaintiffs to approximately $180 million of assets restrained in connection with the Criminal Action against Brooks in the EDNY Court. Over 2 ½ years, the parties worked to finalize a global settlement with Brooks. In late 2013, Brooks advised the parties that he was no longer interested in pursuing a global settlement.

         In November 2014, the Settling Parties executed a term sheet underlying a proposed global settlement. On February 6, 2015, the first iteration of the settlement agreement was executed (A88-108) (as later amended, “the Settlement Agreement”).[11] The Settlement Agreement was supported by both the Creditors' Committee and the Equity Committee. The Settlement Agreement provided for the dismissal of the Class Action and Derivative Action (A128 ¶ 6), and the release of the Escrowed Funds to the Class Plaintiffs, Class Counsel, and Derivative Counsel, as contemplated under the EDNY Stipulation (A121 ¶ 2(a); A129 ¶ 8). It further provided that, of the Escrowed Funds released to the Class Plaintiffs, $20 million would be loaned to Point Blank on an interest-free, non-recourse basis to fund the Plan and permit the Debtor to exit Chapter 11. (A121-22 ¶¶ 2(b)-(d)). It further provided that $1.5 million of the amount loaned would be paid as an administrative expense to Class Counsel and Lowenstein Sandler LLP, as bankruptcy counsel to the Class Plaintiffs (A129 ¶ 8). Finally, the Settlement Agreement provided for the dismissal of various litigation matters and appeals pending among the Settling Parties in this Court and the Bankruptcy Court (A128 ¶ 6), and for the allocation of future litigation recoveries between the Class Plaintiffs and Debtor, including any recoveries received in connection with the Criminal Action (A138-39).

         On February 6, 2015, Debtor moved for approval of the Settlement Agreement in the Bankruptcy Court pursuant to Federal Rule of Bankruptcy Procedure 9019. On June 4, 2015, the hearing on the Settlement Agreement commenced; it continued on June 12, 2015; and concluded on July 6, 2015.[12] Cohen objected to various fee-related provisions of the Settlement Agreement. In particular, Cohen objected to the $1.5 million payment (from the loan proceeds) to Class Counsel, and to the $300, 000 payment (paid in 2008 from the Escrowed Funds) to Derivative Counsel. Cohen also argued that Point Blank should have been required to seek approval of the Settlement Agreement from the EDNY Court. The Bankruptcy Court overruled the objection to Class Counsel's fees and approved them as part of the Settlement Agreement. On July 9, 2015, the Bankruptcy Court entered the Settlement Order approving the Settlement Agreement. The Bankruptcy Court set a separate deadline for submissions regarding the remaining fee disputes and a November 10, 2015 hearing date on same, so that fee disputes could be heard at the same time as the plan confirmation hearing. (A182-85, 7/6/15 Hr'g Tr. at 156:14-15). On July 22, 2015, Cohen appealed the Settlement Order. (Civ. No. 15-633-MN, D.I. 1).[13]

         Following entry of the Settlement Order, on July 10, 2015, Debtor moved the EDNY Court to dismiss the Derivative Action with prejudice pursuant to Federal Rule of Civil Procedure 41(a)(2). On August 18, 2015, the motion was heard together with the Class Plaintiffs' motion for approval of the Settlement Agreement in the Class Action. Cohen argued that the EDNY Court could not dismiss the Derivative Action (or approve the settlement in the Class Action) without ruling on Cohen's fee issues in the Derivative Action. These arguments were rejected. On August 18, 2015, the EDNY Court entered orders approving the Settlement Agreement in the Class Action and dismissing the Derivative Action. Cohen appealed, and both orders were upheld by the Second Circuit.[14] November 10, 2015, an order confirming the plan (B.D.I. 3261) (“Plan”) was entered following the hearing on Cohen's Fee Claim (discussed below). (B.D.I. 3526).

         C. Cohen Fee Order

         Cohen and CLM's joint application sought the immediate payment of $1.86 million (“the Fee Claim”) on account of their work in the Derivative Action.[15] (B.D.I. 3300; BB31-78). Appellants claimed to have incurred actual fees and expenses of $1, 509, 213.42 ($1, 388, 556.66 of fees and $120, 656.76 of expenses). (B.D.I. 3300 at 31; BB56). In support of the Fee Claim, Appellants cited a litany of common fund cases awarding fees and expenses to successful objectors in class action settlements. (B.D.I. 3300 at 23-25). Under the common fund doctrine, “a private plaintiff, or plaintiff's attorney, whose efforts create, discover, increase, or preserve a fund to which others have a claim, is entitled to recover from the fund the costs of his litigation, including attorney's fees.” In re Cendant Corp. Sec. Litig., 404 F.3d 173, 187 (3d Cir. 2005) (internal citations omitted). Appellants argued that their successful appeal in the Derivative Action eliminated the SOX indemnification provision thereby preserving for the bankruptcy estate the benefit of a $186 million SOX § 304 Claim in the SEC Action, and Appellants' $1.86 million Fee Claim represented only 1% of that claim. (See Id. at 27). As the SEC Action was stayed, and any recovery on the SOX § 304 Claim uncertain, Appellants further argued that objectors to settlements are entitled to fees and expenses, not just where their objections result in an increase to the common fund, but also where their objection “otherwise provides benefits;” here, Appellants argued that their successful appeal was important as a matter of public policy. (See Id. at 25). Appellants argued in the alternative that they had a right to fees as a “substantial contribution” award under § 503(b)(3) of the Bankruptcy Code.

         Debtor objected to the Fee Claim (B.D.I. 3367) on multiple bases. Debtor argued that the common fund theory was inapplicable because the $186 million asset Appellants claimed to have preserved is a litigation claim controlled exclusively by the SEC, the pursuit of which was uncertain and may never generate funds for the estate. According to Debtor, it was firmly established under case law that, to recover fees from a common fund, an attorney must first create a common fund, and until there is an actual recovery on the basis of the SOX § 304 Claim, fees cannot be awarded on that basis. Debtor further disputed the amount asserted in the Fee Claim, arguing that nearly 60% of the $1.5 million fees and expenses Appellants claimed were not incurred in objecting to the EDNY Stipulation or the Second Circuit appeal. (See B.D.I. 3367 at 4, ¶ 4; 16, ¶¶ 35-36). Finally, Debtor argued that, to be entitled to a substantial contribution award under the Bankruptcy Code, Appellants must demonstrate that they made a “substantial contribution in a case under chapter . . . 11.” 11 U.S.C. § 503(b)(3). Here, Debtor argued, Appellants' expenses were incurred in prosecuting an appeal that was commenced in July 2008 - over a year and a half prior to the commencement of the Chapter 11 case. Debtor further argued that Cohen's “wasteful litigation tactics throughout the Chapter 11 cases, ” including taking “meritless positions” in the Bankruptcy Court and this Court - “have hindered the administration of the estates and required the needless expenditure by the estates of considerable fees.” (See Id. at 27; BB80). Accordingly, Debtor argued, Appellants cannot show any substantial contribution to the bankruptcy case after it was commenced. (Id.).

         Following a November 10, 2015 hearing on the Fee Claim, the Bankruptcy Court found that:

Mr. Cohen and his counsel are entitled to a fee based on their preservation of the Sarbanes-Oxley claim of approximately $186 million. However, since no funds have been received by the debtors in connection with that claim, I am not going to determine at this time the proper amount of that claim or order that the claim be paid. If and when the debtors receive funds that are derived from a Sarbanes-Oxley award, I will entertain an application at that time for a fee. And the only issue will be the proper amount of that fee.

(A275-76). The Bankruptcy Court entered a corresponding order that provided:

Cohen and CLM are awarded a fee for their efforts in preserving the SOX 304 Claim, in an amount to be determined by this Court, with such award to be paid solely from funds received by the Debtors or their successors-in-interest on account of the SOX 304 Claim, if any. For the avoidance of doubt, if the Debtors do not receive any funds on account of the SOX 304 Claim, no fee shall be payable;
. . . within seven (7) days of receipt by the Debtors or their successors-in-interest of any funds on account of the SOX 304 Claim, the Debtors or their successors-in-interest shall notify Cohen and CLM in writing of the receipt of funds;
. . . this Court will retain jurisdiction to consider and rule on the Application at such time as the Debtors or their successors-in-interest have received funds on account of the SOX 304 Claim, at which time the only matter for consideration will be the amount of the fee to be awarded to Cohen and CLM.

(B.D.I. 3624; A283-85).

         D. Derivative Counsel Fee Order

         In a separate dispute, Appellants had objected to the $300, 000 payment to Derivative Counsel. The relief agreed to in the original settlement of the Derivative Action, three and a half years before the petition date, included various corporate governance reforms and the resignation of Brooks and other officers. (B.D.I. 2865, Ex. B ¶¶ 2.12-2.16). In the EDNY Stipulation, Derivative Counsel agreed to a significant discount of its fees, accepting a total of $300, 000 for compensation and expenses. (B.D.I. 3371, Ex. B at 8). That fee award was approved by the EDNY Court, over Cohen's objection, and was provisionally paid from the Escrowed Funds in 2008 pursuant to the EDNY Stipulation. The post-petition Settlement Agreement permitted Derivative Counsel to retain the $300, 000 paid provisionally eight years prior, without compensation for any fees or expenses incurred on appeal or thereafter. Cohen argued that Derivative Counsel should not be paid for negotiating a settlement that ultimately was disapproved by the Second Circuit. The Bankruptcy Court overruled Cohen's Fee Objection, finding in part that Derivative Counsel's compensation was reasonable for services that benefited Debtor by imposing the required corporate governance reforms, however short-lived they turned out to be. (A276; B.D.I. 3623).

         On December 15, 2015, Cohen filed a single notice of appeal with respect to both the Cohen Fee Order and the Derivative Counsel Fee Order. (See B.D.I. 3672).[16]

         E. Post-Confirmation Global Settlement and SOX § 304 Claim

         The SEC Action was stayed for a total of eight years pending the outcome of Criminal Action against Brooks and resulting appeals. SEC v. Jeffrey Brooks, No. 07-61526-CIV (S.D. Fla). In October 2016, Brooks died in prison. The stay of the SEC Action was lifted in January 2017, and the SEC's motion to dismiss all affirmative defenses to the SOX § 304 Claim was granted.

         In May 2017, the Second Circuit heard oral argument and subsequently ruled that the criminal restitution awards against Brooks, upon which the 2015 Settlement Agreement and Plan were predicated, were abated by his death, leading the Debtor to seek to renegotiate a settlement. In December 2017, Debtor, SEC, DOJ, and the Brooks estate, among others, entered into a term sheet for a global settlement (“Global Settlement”). The Global Settlement would resolve multiple claims, including the SOX § 304 Claim, and provides that: (i) the USAO (on behalf of the DOJ and United States), Debtor, Recovery Trust, Class Plaintiffs, and Brooks family will execute a final global settlement agreement (“Global Settlement Agreement”); (ii) the parties to the Global Settlement Agreement will agree to the civil forfeiture of approximately $142 million of the assets restrained in the Civil Forfeiture Proceeding; (iii) the forfeited amount will first be used to pay the costs and expenses incurred by the United States in the Civil Forfeiture Proceeding and Criminal Action; and (iv) the remainder of the forfeited amount will be distributed pro rata by the DOJ to the Debtor and Class Plaintiffs in accordance with the Approval Letters.[17]

         Debtor asserts that it will receive only $70 million under the Global Settlement, while the other approximately $70 million will be distributed to Class Plaintiffs in accordance with the 2015 Settlement Agreement and Plan. Debtor further asserts that the SEC is not party to the Global Settlement, and that the Debtor will receive no recovery on account of the SOX § 304 Claim. “Once the global settlement agreement is executed by the USAO, Debtor, Recovery Trust, Class Plaintiffs, and the Brooks family, the SEC, and the Brooks estate will enter into a consensual final judgment to resolve the SEC Action, which judgment will be deemed satisfied by entry of the forfeiture order in the Civil Forfeiture Proceeding.” (Civ. No. 18-349-MN, D.I. 14 at 16-17). Debtor asserts, therefore, that “[n]o funds will be paid to the Debtor or the SEC (or to any other party) as a result of the consensual final judgment in the SEC Action.” (Id.)

         On March 19, 2018, the SEC filed a status report (“SEC Status Report”) stating: “The Commissioners have now considered and contingently approved the [Brooks] Estate's settlement offer, which provides, in pertinent part, for the following relief: . . . (2) the Estate shall reimburse SS Body Armor I, Inc. f/k/a Point Blank Solutions, Inc. f/k/a DHB Industries Inc. (‘DHB' or the ‘Company') $142, 000, 000 for bonuses and profits David Brooks received from DHB stock sales, pursuant to Section 304(a) of the Sarbanes-Oxley Act . . .” (emphasis ...

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