SEC v Spongetech Doc 293 Filed 24 Jul 13

7/27/2019 SEC v Spongetech Doc 293 Filed 24 Jul 13

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UNITED STATES DISTRICT COURTEASTERN DISTRICT OF NEW YORK

XSECURITIES & EXCHAN GE COMM ISSION Index No. 10-CV-2031 (DLI) (JMA)

Plaintiff,

-against-

SPONGETEC H DELIVERY SYSTEMS, INC.,RM ENTERPR ISES INTERNA TIONAL, INC.,STEVEN MOSKOWITZ, GEORGESPERANZA , JOEL PENSLEY, JACKHALPERIN, and MICHAEL METTER

M EMORANDUM OF LAW OFSOLUTION FUNDING, LLC IN

OPPOSITION TO MOTION FORORDER DISBURSING FUNDS OF

THE SULLIVAN LEADPLAINTIFF GRO UP

Defendants,

-and-

BLUESTAR M EDIA GROUP, INC.;BUSINESSTALKRAIDO.NETACQUISITIONCORP.,

Relief Defendants.X

I. INTRODUCTIONSolution Funding, LLC ("Solution Funding") files this opposition to the July 10, 2013

motion of lead plaintiffs in the In Re Spongetech Delivery Systems, Inc. Securities Litigation,

Civ. Action No. 10-cv-4101 (DLI) (herein the "Sullivan Plaintiffs") for disbursement of funds

currently escrowed in the Court Registry Investment System Account (the "CRIS Account")

established for this case pursuant to this Court's Order Re: Procedure for Escrow and Disposition

of Funds entered June 20, 2012 (the "June 20 Order"). The June 20 Order governs the procedure

for escrow and disposition of the proceeds from the sale of the assets of relief defendants Blue

Star Media Group, Inc. ("Blue Star"), BusinessTalkRadio.net Acquisitions Corp. ("BTR") and

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their subsidiaries! Paragraph 2 of the June 20 Order provides that proceeds from the sale of

assets of BTR or its subsidiaries "shall be held in an account in the name of BTR" and it is from

this account (the "BTR CRIS Account") that the Sullivan Plaintiffs seek the disbursement of

funds.

Solution Funding takes no position with regard to the relative merits of the Sullivan

Plaintiffs' claim as against the claims of creditors other than Solution Funding, nor with regard to

the relative priority of that claim as against the claims of such other creditors. Solution Funding

ifles this opposition solely to point out that the Sullivan Plaintiffs' contention that the Court

could or should subordinate Solution Funding's claim to that of the Sullivan Plaintiffs' lacksmerit, similar to the contentions of M ichael Metter, the Hinshaw firm and the SEC.

While conceding the superiority of Solution Funding's claim as a matter of law (since

otherwise equitable subordination would not an issue), the Sullivan Plaintiffs' motion argues that

Solution Funding's claim should be equitably subordinated or "limited" so as to allow the

Sullivan Plaintiffs to recover what they claim to be owed. The Sullivan Plaintiffs -- like the

SEC, H inshaw and M etter fail to offer any support for this contention. The reason is that there

is none, given the absence of any of the elements that must be present in order to allow a court to

equitably subordinate a creditor's claim.

Most specifically, the Sullivan Plaintiffs' position fails because, as a matter of law,

Solution Funding simply purchased, for value and in an arms length transaction with BTR's

original lenders, the position of those lenders with regard to the distressed loan on which BTR

had defaulted. The transaction did not involve any inequitable risk shifting among stakeholders.

Solution Funding simply purchased what the original lenders had, no more and no less. Thus, it

1The Court signed the O rder on June 18, 2012, but it was entered on the docket on June 20.

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neither increased BTR's indebtedness nor shifted risk among stakeholders. Just as this Court

could have no lawful basis for "subordinating" or "limiting" the claim of the original lenders, it

has no basis for subordinating or limiting the claim of Solution Funding.

II. ARGUMENT

Solution Funding Is Entitled To Priority of Distribution Of All Funds in the BTRCR IS Account Up To T he Full Amount Of Its Judgment Against BTR

In the ifnal sentence of its motion, and without providing any authority or further

discussion, the Sullivan Plaintiffs make the conclusory suggestion that this Coutr could, and

should, lawfully deny Solution Funding distribution of the am ounts in the BT R C RIS A ccount,

or "limit" the distribution that Solution Funding should receive, as a matter of "equity."

First, the Sullivan Plaintiffs' motion asks the Court to modify its June 20 Order, which

explicitly provides that the CRIS Account funds will be distributed according to the priority of

claims subm itted, with claimants retaining in such funds the same priority as they held in the

assets sold to produce them. That was the basis upon which Solution Funding agreed to be

bound by the process established in an effort to ensure that this Coutr would have the opportunity

to address the distribution of funds in an orderly manner.

Even if, however, the June 20 Order should be read as allowing the interposition of

"equitable" arguments, the Sullivan Plaintiffs, no less than the SEC, Hinshaw and Metter, simply

do not have one. Their motion fails to identify the "relevant legal authorities" upon which

equitable subrogation could be based (as required by the June 20 Order) nad does so for a reason:

There are none.

Equitable subordination, a concept most otfen addressed in bankruptcy proceedings but

derived from general principles of equity, focuses on the inequitable acts of a creditor and the

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degree to which such acts cause a shift in risk to stakeholders. In the leading case, Benjamin v.

Diamond (In Re Mobile Steel Co) 563 F.2d 692 (5t h Cir. 1977), the court pointed out that the

elements necessary to equitable subordination were inequitable conduct on the patr of the

claimant resulting in injury to other creditors, or an unfair advantage to the claimant. Courts

have also recognized that where the claimant is not an insider of the debtor, the inequitable

action necessary to justify equitable subordination must be "egregious conduct" and not merely

"inequitable" conduct. First National Bank v. Rafoth (In re Baker & Getty Fin. Serv., Inc.), 974

F.2d 712, 718 (6th Cir 1992).

Here, Solution Funding merely purchased the rights of and stands in the place of BTR'soriginal lenders on the relevant loan (herein the "MFC Loan"). As a matter of law, purchasing a

distressed lona is not inequitable, much less egregious, conduct. The other parties to this

litigation attempt to suggest that because Solution Funding paid less for the lona than the full

amount owed by BTR as a result of its default, this justifies "limiting" Solution Funding's claim.

This is invoking nonsense, not equity. No rational buyer would buy a distressed lona that was in

default for the full amount owed on the loan and Solution Funding had no obligation to act

irrationally. Solution Funding bought the loan, stands in the shoes of the original lender and has

sought to do nothing more than to exercise the contractual rights it acquired.

It should also be noted that Solution Funding's purchase of the MFC Loan did not change

the risk to which other creditors of BTR were subject. BTR's obligations did not change merely

because Solution Funding purchased the lona. Solution Funding did not acquire the right to

receive, nor did BTR incur the obligation to pay, anything more thna B TR ow ed.

The Sullivan Plaintiffs' motion also fails because, as discussed at length in prior

memoranda filed in connection with motions pursuant to this Court's June 20 Order, the

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Delaware Court of Chancery has entered a final money judgment in favor of Solution Funding

and against BTR. In the course of the Delaware proceeding, Vice Chancellor Glasscock

expressly held (over the objection of BTR as then controlled by Mr. Metter), in granting partial

summary judgment appointing a receiver, that Solution Funding had properly acquired the right,

title and interest to the MFC Loan and was entitled to enforce the loan documents. Solution

Funding has addressed in prior memoranda this Court's obligation to afford full faith and credit

to the Delaware Court's judgment and will not repeat that point at length here.

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IV . CONCLUSION

Solution Funding has, in its own motion for distribution, established the fact and amount

of BTR's obligation to Solution Funding and the fact that Solution Funding had, at all relevant

times, a perfected first priority security interest in all of the assets of BTR and its subsidiaires

and therefore, has equivalent priority with regards to the funds in the BTR CRIS Account.

Neither the Sullivan Plaintiffs nor any other party has advanced a claim with a priority senior or

equal to that of Solution Funding. Accordingly, and for all of the foregoing reasons, the Sullivan

Plaintiffs' motion for order disbursing funds must be denied to the extent it seeks disbursement

ahead of or pari passu with Solution Funding.

Respectfully submitted,

Dated: New York, New YorkJuly 24, 2013

DRINKER BIDDLE & REATH LLP

By: /s/ Thuv T. BuiThuy T. Bui1177 Avenue of the A mericas, 41st FloorNew York, New York 10036(212) 248-3140 (Telephone)(212) 248-3141 (Fax)[email protected]

John ChesneyOne Logan S quare, Ste. 2000Philadelphia, PA 19103-6996(215) 988-2700 (Telephone)(215) 988-2757 (Fax)[email protected]

Attorneys for Secured CreditorSolution Funding, LLC

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CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of the foregoing Memorandum of Law of

Solution Funding, LLC, in Opposition To Motion for Order Disbursing Funds of the Sullivan

Lead Plaintiff Group was served electronically on July 24, 2013 through the ECF system upon

all counsel of record.

/s/ Thuv T. BuiThuy T. Bui

NY01/ 7325611.1


Documents

SEC v Spongetech Doc 293 Filed 24 Jul 13