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In re Fisher Island Investments, Inc.

United States Court of Appeals, Eleventh Circuit

February 20, 2015

In re: FISHER ISLAND INVESTMENTS, INC., LITTLE REST TWELVE, INC., Debtors. JWL ENTERTAINMENT GROUP, INC., et al., Plaintiffs, FISHER ISLAND LIMITED, GROSVENOR TRADING HOUSE LIMITED, AREAL GROUP, Plaintiff-Appellants,
v.
SOLBY塄錅င PARTNERS, 19 SHC, CORP., AJNA BRANDS, INC., 601/1700 NBC LLC, AXAFINA, INC., OXANA ADLER LLM, Petitioning Creditors, FISHER ISLAND INVESTMENTS, INC., LITTLE REST TWELVE, INC., Defendants-Appellees. In re: FISHER ISLAND INVESTMENTS, INC., MUTUAL BENEFITS OFFSHORE FUND, LTD., LITTLE REST TWELVE, INC., Debtors. SOLBY WESTBRAE PARTNERS, et al., Plaintiffs, FISHER ISLAND INVESTMENTS, INC., MUTUAL BENEFITS OFFSHORE, LTD., LITTLE REST TWELVE, INC., Zeltser Group, Movants-Appellants,
v.
FISHER ISLAND INVESTMENTS, INC., MUTUAL BENEFITS OFFSHORE FUND, LTD., LITTLE REST TWELVE, INC., Redmond Group, Respondents-Appellees. In Re: FISHER ISLAND INVESTMENTS, INC., LITTLE REST TWELVE, INC., Debtors. JWL ENTERTAINMENT GROUP, INC., et al., Plaintiffs, SOLBY塄錅င PARTNERS, 19 SHC, CORP., AJNA BRANDS, INC., 601/1700 NBC LLC, AXAFINA, INC., Petitioning Creditors, et al., Plaintiffs-Appellees,
v.
FISHER ISLAND INVESTMENTS, INC., LITTLE REST TWELVE, INC., Defendants-Appellants. In re: FISHER ISLAND INVESTMENTS, INC., MUTUAL BENEFITS OFFSHORE FUND, LTD., LITTLE REST TWELVE, INC., Debtors. SOLBY WESTBRAE PARTNERS, et al., Plaintiffs, MUTUAL BENEFITS OFFSHORE FUND LTD., Zeltser Group, Movant-Appellant,
v.
FISHER ISLAND INVESTMENTS, INC., MUTUAL BENEFITS OFFSHORE FUND, LTD., LITTLE REST TWELVE, INC., Redmond Group, Respondents-Appellees. In Re: Mutual Benefits Offshore Fund, LTD., Debtor. ZELTSER ALLEGED DEBTOR MUTUAL BENEFITS OFFSHORE FUND LTD, Plaintiff-Appellant,
v.
MUTUAL BENEFITS OFFSHORE FUND, LTD., Defendant-Appellee

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Appeals from the United States District Court for the Southern District of Florida. D.C. Docket Nos. 1:12-cv-20939-KMW, 11-17047-AJC, D.C. Docket Nos. 1:12-cv-20018-PCH, 11-bkc-17047-AJC, D.C. Docket Nos. 1:12-cv-20939-KMW, 11-bkc-17047-AJC, D.C. Docket Nos. 1:12-cv-20018-PCH, 11-bkc-17047-AJC, D.C. Docket Nos. 1:12-cv-20018-PCH, 11-bkc-17047-AJC.

Before HULL, JULIE CARNES, and WALKER,[*] Circuit Judges.

OPINION

Page 1176

HULL, Circuit Judge:

These consolidated bankruptcy appeals arise out of a dispute between two competing groups--appellee the Redmond Group and appellant the Zeltser Group[1]--over ownership of, and control over, three involuntary

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debtors: Fisher Island Investments, Inc. (" Fisher Island" ), Little Rest Twelve, Inc. (" Little Rest" ), and Mutual Benefits Offshore Fund, Ltd. (" Mutual Benefits" ) (collectively, the " Alleged Debtors" ).[2] We refer to this dispute as the " ownership issue."

Litigation of the ownership issue in three bankruptcy cases has yielded five consolidated appeals of four orders: (1) the district court's order denying the Zeltser Group's motion to withdraw reference of the ownership issue; (2) the district court's affirmance of the bankruptcy court's summary judgment order in favor of the Redmond Group in the Fisher Island and Little Rest cases; (3) the district court's order dismissing, for lack of standing, certain non-party appeals from the bankruptcy court's summary judgment order; and (4) the district court's affirmance of the bankruptcy court's final judgment in favor of the Redmond Group in the Mutual Benefits case.

After careful review of the record and the parties' briefs, and with the benefit of oral argument, we affirm all orders on appeal.

I. BACKGROUND

These bankruptcy proceedings are but a small part of global litigation that began with the unexpected death of Arkadi (" Badri" ) Patarkatsishvili in February 2008. Badri was an extremely wealthy businessman and one-time presidential candidate from the Republic of Georgia. The resulting contest between two factions over the ownership and control of Badri's assets, purportedly worth billions of dollars, has spawned litigation in the Republic of Georgia, the United Kingdom, Liechtenstein, the British territory of Gibraltar, and both state and federal courts in the United States. On one side of this protracted legal battle is the Redmond Group, consisting of Badri's immediate family and led bye Badri's widow, Inna Gudavadze. The other side--the Zeltser Group--is led by Joseph Kay, Badri's distant relative and former employee.

Though complicated by " an ever-shifting labyrinth of corporations, trusts, partnerships, holding companies, and interested individuals," the parties' competing positions on the ownership issue are essentially as follows. According to the Redmond Group, Fisher Island and Little Rest are owned by the Valmore Trust and Mutual Benefits is owned by the Test Trust--both Gibraltar trusts that were set up for the benefit of Badri and his family. According to the Zeltser Group, Imedinvest Partners (" Imedinvest" ), a partnership formed in the Republic of Georgia, owns Fisher Island, Little Rest, and Mutual Benefits.

The dispute over ownership and control did not begin in the bankruptcy court. In a lawsuit filed by the then-trustee of the Valmore Trust, the Supreme Court of Gibraltar considered whether Badri or Kay was the beneficiary of the Valmore Trust. In 2009, after a nearly two-year proceeding, the Gibraltar Court concluded that the vast majority of the assets in the Valmore Trust were funded by Badri and held for the benefit of Badri's immediate family. After Kay abandoned his appeal of that judgment, the Gibraltar Court declared that Kay had no interest in the assets of the Valmore Trust, which belonged solely to Badri. The Gibraltar Court's decision

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entailed an implicit finding that the Valmore Trust was valid.

Before the filing of the involuntary petitions in March 2011, the Zeltser Group advanced its theory of ownership in state courts in New York and Florida. In the New York action, attorney Emanuel Zeltser claimed, on behalf of Imedinvest and Joseph Kay, that the Valmore Trust was a " sham" and that Imedinvest, of which Kay was allegedly the managing partner, was the owner of Little Rest. On July 22, 2011, the New York court issued a decision rejecting the sham trust argument on multiple grounds, determining that Zeltser had no authority to represent Little Rest, and substituting attorneys for the Redmond Group as counsel for Little Rest. See Little Rest Twelve, Inc. v. Visan, No. 600676/2007 (N.Y. S.Ct. N.Y. Cnty. July 22, 2011) (order substituting counsel). Similarly, attorney Darin DiBello represented Kay in litigating the ownership and representation of Fisher Island in the Florida action. See Motion to Strike Complaint, Fisher Island Invs., Inc. v. Baker, No. 10-14866 (11th Jud. Cir. of Miami-Dade Cnty., Fla. Mar. 15, 2010).

II. BANKRUPTCY COURT PROCEEDINGS

A. Involuntary Petitions

On March 17, 2011, a group of six individuals and entities--Solby姫⵮뚞 Partners; 19 SHC, Corp.; Ajna Brands, Inc.; 601/1700 NBC, LLC; Axafina, Inc.; and Oxana Adler (collectively, the " Petitioning Creditors" )--filed three separate involuntary Chapter 11 bankruptcy petitions in the U.S. Bankruptcy Court for the Southern District of Florida against Fisher Island, Little Rest, and Mutual Benefits. The involuntary petitions were filed as the parties anticipated key rulings on the ownership issue in the New York and Florida litigations.

The involuntary petitions asserted claims against the Alleged Debtors for approximately $32.4 million, $28.5 million of which was based on a promissory note (the " Note" ) purportedly executed by the Alleged Debtors and assigned to three of the Petitioning Creditors by a non-party, Areal Plus Group. The Petitioning Creditors, asserting that the Alleged Debtors were " affiliates," moved the bankruptcy court to jointly administer the three cases and to appoint a trustee to take control and possession of the Alleged Debtors' assets.

B. Ownership Issue

Two sets of attorneys--representing the Zeltser Group and the Redmond Group, respectively--entered appearances of record in the bankruptcy court, both purporting to act on behalf of the Alleged Debtors. On March 21, 2011, four days after the involuntary petitions were filed, the Zeltser Group, through attorney DiBello, filed answers on behalf of the Alleged Debtors, immediately admitting to the allegations in the involuntary petitions against the Alleged Debtors and consenting to the relief requested by the Petitioning Creditors.

The next day, the Redmond Group, through attorney Redmond, filed an emergency motion to strike the Zeltser Group's answers. The Redmond Group, claiming to be the actual authorized representatives of the Alleged Debtors, alleged that the involuntary petitions were improperly filed in an attempt to stay the state court litigation in Florida and New York. To adjudicate the underlying debt, the bankruptcy court had to decide who owned the Alleged Debtors, and thus who had the authority to retain counsel.

In response to the motion to strike, the Zeltser Group asked the bankruptcy court to deny the relief sought therein until resolving the question of who had the authority to act on behalf of the Alleged

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Debtors. Notably, the Zeltser Group stated in its response that " the issues of proper ownership and control over the Alleged Debtor[s] should be litigated in due course before this Court."

Faced with these contradictory claims, the bankruptcy court held a hearing on March 25, 2011. The bankruptcy court noted that it was highly unusual that the Alleged Debtors, as represented by the Zeltser Group, immediately consented to the involuntary petitions. As to the ownership issue, attorney Zeltser contended that Imedinvest, a " loose investment partnership" owned all three of the Alleged Debtors. According to Zeltser, Badri had been a partner of Imedinvest, and it was on behalf of Imedinvest and other entities that the Note debt had been incurred.

Counsel for the Redmond Group denied that Imedinvest had any ownership interest in the Alleged Debtors. Instead, the Redmond Group asserted that the Valmore Trust ultimately owned Fisher Island and Little Rest through its trustee, Miselva Establissement (" Miselva" ). The Redmond Group also asserted that Mutual Benefits was comprised of several investors, the largest of which was Kayley Investments, N.V. (" Kayley" ). In turn, Kayley was legally owned by the Test Trust.

During the hearing, the Zeltser Group specifically requested that the bankruptcy court decide the ownership issue. Attorney Zeltser claimed that the New York and Florida state courts could not determine ownership, and informed the bankruptcy court that it, as the " ultimate Court of equity," was the " only court" that could resolve the issue. Furthermore, the bankruptcy court's decision on the issue, presumably after a short " ownership hearing," would be " dispositive."

The Redmond Group later filed answers and motions to dismiss on behalf of the Alleged Debtors, denying the allegations in the involuntary petitions, raising affirmative defenses, and seeking dismissal of the petitions as filed in bad faith. Thus, whether the petitions were contested depended on a threshold determination of which group was authorized to represent the Alleged Debtors in the proceedings.

C. Discovery and Examiner's Report

On March 31, 2011, the bankruptcy court granted in part the Petitioning Creditors' motion to jointly administer the three cases. Although the bankruptcy court doubted how the " three widely disparate business operations" were affiliates, it granted the motion " for the sole purpose of conducting one trial regarding the validity of the . . . Note, the assignment of the Note and determination of who are the legitimate representatives and attorneys for the three alleged involuntary debtors." The bankruptcy court also appointed a Chapter 11 Examiner to investigate the ownership issue, among other things. [3]

At the bankruptcy court's direction, the parties conferred regarding discovery and pre-trial procedures and agreed to a case management order. On June 7, 2011, the bankruptcy court issued the agreed " Case Management and Schedule Order in Contested Matter Setting Filing and Disclosure Requirements for Pre-Trial and Trial" (the " Schedule Order" ) (emphasis added). Notably, the Schedule Order provided for extensive discovery, including mandatory disclosures of witnesses

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and documents, interrogatories, requests for admission, document requests, depositions, and expert reports. The Schedule Order directed the parties to submit findings of fact rather than jury instructions, and noted that the bankruptcy court would set a trial date for " this contested matter" at the pre-trial conference.

On November 18, 2011, the Examiner issued a 96-page report addressing the ownership of the Alleged Debtors and the claims of the Petitioning Creditors. The Examiner found that the Valmore Trust was the ultimate owner of both Fisher Island and Little Rest. As to Mutual Benefits, the Examiner found that Kayley was ultimately owned by the Test Trust. Accordingly, the attorneys for the Redmond Group (not the Zeltser Group) were authorized to represent the Alleged Debtors.

The Examiner explained that the ownership dispute with respect to Mutual Benefits was different from Fisher Island and Little Rest in that Mutual Benefits was never held within the Valmore Trust. The Examiner's review indicated that W. Shaun Davis, through his management company, Triangle International Management Limited (" Triangle" ), owned 100% of Mutual Benefits' voting shares. All of Mutual Benefits' other shareholders, including Kayley, held nonvoting shares. Mutual Benefits was therefore controlled by its voting shareholder, Triangle.

The Examiner generally found the Zeltser Group's story with respect to ownership to be inconsistent and irreconcilable with, or unsupported by, the record. For instance, the Zeltser Group provided little extrinsic evidence to prove the existence of Imedinvest. In fact, Joseph Kay and his sister testified in connection with the Gibraltar proceeding in 2009 that they were unfamiliar with Imedinvest. The Examiner also determined that the Zeltser Group had submitted certain documentation in " an intentional effort to mislead or misrepresent material facts to a court."

After several months of extensive discovery in accordance with the Schedule Order (as well as extensions), which produced more than 200,000 pages of documents, the record was closed on November 30, 2011.

D. Summary Judgment in Fisher Island and Little Rest Cases

1. Motion for Partial Summary Judgment

Notwithstanding the Examiner's unfavorable report, on November 21, 2011, the Zeltser Group moved for partial summary judgment on the ownership issue in the Fisher Island and Little Rest cases.[4] The Zeltser Group sought a determination that: (1) the Valmore Trust was invalid; (2) neither Gibraltar law nor United Kingdom law applied to the proceedings; and (3) JWL Entertainment Group, Inc. (" JWL" ), a Delaware corporation, was the equitable owner of Fisher Island and Little Rest.

The Zeltser Group's ownership theory was twofold. First, the Valmore Trust[5] was a " sham" and invalid because Kay, and not Badri, was the settlor and beneficiary. Alternatively, Fisher Island Limited (" Fisher Limited" ) and Grosvenor Trading Holding Limited (" Grosvenor" ), which the Zeltser Group acknowledged were the respective parent companies of Fisher Island and Little Rest, were transferred from

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trustee Miselva to JWL. JWL was then transferred out of the Valmore Trust to Imedinvest. The Zeltser Group argued that, pursuant to these transactions, JWL held equitable ownership of Fisher Island and Little Rest. Paradoxically, the Zeltser Group maintained that the bankruptcy court lacked jurisdiction to resolve any issue regarding the JWL transactions.

In opposition to the partial summary judgment motion, the Redmond Group argued that the Gibraltar Court's judgment precluded the bankruptcy court from determining the validity of the Valmore Trust. The Gibraltar Court's factual findings, including its implicit finding that the Valmore Trust was valid, were entitled to comity, and a New York state court specifically declined to find that the Valmore Trust was a sham. Furthermore, the JWL transaction was abandoned. Even assuming the transaction was completed, Miselva was still the legal and beneficial owner of Fisher Limited and Grosvenor, as indicated in an unrebutted expert opinion submitted by the Redmond Group. The Zeltser Group did not file a reply.

2. Motion for Clarification/Reconsideration

On November 30, 2011, the Zeltser Group filed a motion for clarification and/or reconsideration of the June 7, 2011 Schedule Order. The Zeltser Group argued, for the first time in the proceedings, that the bankruptcy court could not adjudicate the ownership issue (1) without joinder of all indispensable parties, and (2) without violating due process because the ownership issue was raised as a contested matter in the Redmond Group's motion to strike rather than as an adversary proceeding. The motion listed a string of individuals and entities that were allegedly involved in the ownership chain and therefore " indispensable," including the Valmore Trust, Miselva, JWL, Fisher Limited, Grosvenor, Badri's widow, and Imedinvest.

The bankruptcy court denied the motion for clarification/reconsideration, finding that any objection should have been raised contemporaneously with entry of the agreed-upon Schedule Order, not several months after-the-fact.

3. Denial of Partial Summary Judgment

On December 29, 2011, the bankruptcy court denied the Zeltser Group's motion for partial summary judgment. In the " Procedural History" section of the order, the bankruptcy court discussed the appointment of the Examiner and the production of the Examiner's report. The bankruptcy court then set forth the material facts concerning the formation and operation of the Valmore Trust, as well as the Gibraltar and New York litigations. The " Material Facts" section made no mention of the Examiner or his report. Based on these material facts, the bankruptcy court rejected the argument that the Valmore Trust was a sham and declined to reverse any findings made by the Gibraltar Court. Furthermore, the bankruptcy court determined that the JWL transaction was abandoned and that pursuant to the unrebutted expert opinion submitted by the Redmond Group, neither legal nor beneficial ownership of Fisher Limited or Grosvenor passed to JWL.

The bankruptcy court stated that, pursuant to Federal Rule of Bankruptcy Procedure 7056(f), it was " inclined to determine as a matter of law" that Miselva (then trustee of the Valmore Trust) owned Fisher Limited and Grosvenor. The parties did not dispute that Fisher Limited owned Fisher Island and Grosvenor owned Little Rest. Thus, the bankruptcy court was in effect notifying the parties that it intended to rule that the Valmore Trust

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owned Alleged Debtors Fisher Island and Little Rest. Nevertheless, the bankruptcy court gave the Zeltser Group an additional 21 days to file a legal memorandum, " based on the existing record," to persuade the court not to enter summary judgment as indicated.

Despite this invitation by the bankruptcy court, the Zeltser Group declined to file any additional memorandum addressing the ownership issue. Instead, the Zeltser Group objected to the " confines imposed" with respect to the permitted memorandum and advised the bankruptcy court that it would " rely on the existing record." The Zeltser Group did not explain what additional discovery it believed was necessary or what it would prove if given the opportunity to expand the record.

During a hearing on January 5, 2012, the bankruptcy court granted the Redmond Group's oral motion to prepare a proposed memorandum opinion regarding the entry of summary judgment and instructed both the Redmond Group and the Zeltser Group to do so within five days. The Petitioning Creditors (joined by the Zeltser Group) moved for reconsideration of this ruling, arguing that the Redmond Group intended to include in its proposed opinion new findings and conclusions not present in the bankruptcy court's December 29, 2011 denial of partial summary judgment.

On January 10, 2012, the bankruptcy court denied the Petitioning Creditors' motion for reconsideration as without merit. The bankruptcy court stated that it had no intention of entering an order that supplemented the record. Summary judgment would not be entered on allegedly " new or different" grounds but " rather on the very same undisputed facts and legal grounds" on which the ...


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