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In re Woodbridge Group of Companies, LLC

United States District Court, D. Delaware

September 11, 2019

IN RE WOODBRIDGE GROUP OF COMPANIES, LLC, et al,, Debtors.
v.
WOODBRIDGE GROUP OF COMPANIES, LLC, et al,, Appellees. CONTRARIAN FUNDS, LLC, Appellant,

          MEMORANDUM

          HONORABLE LEONARD P. STARK, JUDGE

         I. INTRODUCTION

         Pending before the Court is an appeal (D.I. 1) by Contrarian Funds, LLC ("Contrarian") from the Bankruptcy Court's June 20, 2018 Opinion, In re Woodbridge Group of Companies, LLC, 590 B.R. 99 (Bankr. D. Del. 2018), and related Order (B.D.I. 2016)[1] (together, the "Decision"), issued by the Honorable Kevin J. Carey in the above-captioned chapter 11 cases.[2]The Decision sustained the Debtors' objection (B.D.I. 1563) (A161-96) ("Claim Objection") to a proof of claim filed by Contrarian. For the reasons that follow, the Court will affirm the Decision.

         II. BACKGROUND

         A. Chapter 11 Cases

         On December 4, 2017, hundreds of the Debtors filed for bankruptcy under Chapter 11, with additional affiliated Debtors filing in the following months. Prior to bankruptcy, the Debtors were controlled by Robert Shapiro and were used by him to perpetrate a Ponzi scheme. (App. 11, 367) Pursuant to a settlement by and among the Debtors, the Securities and Exchange Commission, the Official Committee of Unsecured Creditors, and two ad hoc investor committees, Shapiro was divested of control over the Debtors and a new, independent board and management team were installed. (See SA7) On October 26, 2018, the Debtors confirmed their Plan of Liquidation. (B.D.I. 2903)

         B. The Notes

         Prior to the bankruptcy, in 2016 and 2017, Debtor Woodbridge Mortgage Investment Fund 3A, LLC (the "Fund") had issued three promissory notes (collectively, the "Notes") to Elissa and Joseph Berlinger in the principal amount of $25, 000 each. (App. 282-92) Each Note stated that it would bear interest at annual rates of between 6.75% and 7.25%. (App. 248, 256, 264) Each Note contains the following anti-assignment clause:

No Assignment. Neither this Note, the Loan Agreement of even date herewith between [the Fund] and [the Berlingers], nor all other instruments executed or to be executed in connection therewith (collectively, the 'Collateral Assignment Documents') are assignable by [the Berlingers] without the [Fund's] written consent and any such attempted assignment without such consent shall be null and void.

         (App. 284, 288, 292) In connection with each Note, the Berlingers and the Fund executed a Loan Agreement (collectively, the "Loan Agreements"). (App. 251-54, 259-62, 267-70) Section 4(d) of each Loan Agreement also contains an anti-assignment clause:

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that the [Berlingers] shall not assign, voluntarily, by operation of law or otherwise, any of [their] rights hereunder without the prior written consent of [the Fund] and any such attempted assignment without such consent shall be null and void[.]

(App. 253, 261, 269) The Notes and Loan Agreements contain materially identical terms and are governed by Delaware law. (App. 250 ¶ 13, 258 ¶ 13, 266 ¶ 13) The Debtors do not contest that they are in breach of their obligations to pay principal and interest on the Notes. (App. 215-17) Notwithstanding the anti-assignment provisions in the Notes and Loan Agreements, on February 13, 2018, the Berlingers and Contrarian executed the Evidence of Transfer of Claim (the "Transfer Notice") pursuant to which the Berlingers purportedly "sold, transferred, and assigned" to Contrarian all of their "right, title and interest in and to the [Berlingers'] claim in the amount of $75, 000 ... against the [Fund]." (App. 281) Contrarian and the Berlingers also entered into a Transfer of Claim Agreement dated as of February 13, 2018 (the "Transfer of Claim Agreement"), pursuant to which the Berlingers purportedly agreed to "sell, convey, transfer and assign" to Contrarian, inter alia, "all causes of action held by [the Berlingers]" in connection with the transferred documents and the transferred claims. (App. 272) The Debtors did not consent and have not consented to the transfer of the Berlingers' Notes to Contrarian. (App. 178)

         C. Contrarian's Claim and Debtors' Claim Objection

         On March 1, 2018, Contrarian filed Proof of Claim No. 1216 (the "Claim"), asserting a secured claim against the Fund in the amount of $75, 000. (App. 277-93) The Claim attached the Transfer Notice, together with copies of the Notes. (Id.) As the basis for its claim Contrarian stated: "PROMISSORY NOTES." (App. 278) On April 16, 2018, the Debtors filed the Claim Objection with respect to Contrarian's Claim. (App. 161) The Debtors asserted, inter alia, that because the Debtors did not consent to the assignment to Contrarian, the putative assignment reflected in the Transfer Notice is unenforceable against the Debtors and, thus, the Claim must be disallowed pursuant to Bankruptcy Code section 502(b)(1). (App. 166) In its response to the Claim Objection, Contrarian argued that the anti-assignment provisions are unenforceable under Delaware law, that the Debtors' breach of the Notes and Loan Agreements renders the clauses unenforceable, and that section 9-408(a) of the UCC overrides the anti-assignment provisions. (App. 227-43).

         D. The Decision

         Following a thorough analysis, the Bankruptcy Court rejected each of Contrarian's arguments and sustained the Claim Objection without prejudice to the right of the Berlingers to file a proof of claim in respect of the Notes. See Woodbridge, 590 B.R. at 109. (B.D.I. 2014, 2016) The Bankruptcy Court determined that, under Delaware law, the anti-assignment provisions had the effect of rendering the Berlingers' purported assignment to Contrarian void and of no effect. See Id. at 102-05. The Bankruptcy Court further concluded that the Debtors' breach of the Notes did not prevent them from enforcing the anti-assignment provisions. See Id. at 105-07. Finally, the Bankruptcy Court rejected Contrarian's argument that the UCC provision cited by Contrarian restricted assignment of the Notes, concluding that the provision prohibits only restrictions on assignments of security interests in promissory notes, not restrictions on assignment of promissory notes themselves. See Id. at 107-09.

         Contrarian timely appealed the Decision. (D.I. 1) The merits of the appeal are fully briefed. (D.I. 13, 14, 16, 17, 18) The Court did not hear oral argument because the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument.

         III. JURISDICTION AND ...


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