In Re: W.A.R. LLP ( 2012 )

FI§..ED
JAN 2 7 2012
UNITED STATES DISTRICT COURT C!ark, U S Distr~ t
FOR THE DISTRICT OF COLUMBIA Courts far the Dts“t:ricigi rita
)
In re: W.A.R. LLP ) Civil Action No. 11-1574 (RCL)
)
MEMORANDUM AND ORDER
Before the Court is the appeal of the joint-appellants, debtor W.A.R. LLP and insider-
creditor Wade Robertson, from various decisions of the bankruptcy court inter alia overruling
objections to the trustee’s report of "no assets" for distribution and denying appellants’ motion
for sanctions against appellee William C. Cartinhour, Jr. Upon consideration of the parties’
appellate briefs [12] [19] [21], the applicable law, and the entire record herein, the Court will
affirm the decisions of the bankruptcy court.
I. BACKGROUND
The instant bankruptcy case and appeal is in essence a tangent to previous litigation in
this district court between the founding partners of the debtor partnership W.A.R. LLP, Wade
Robertson and William Cartinhour. Judge Ellen Huvelle entered judgment [165] in that
litigation, Robertson v. Cartinhour, Civil No. 09-1642, on April 25, 20ll, and there are still
motions pending in that case. Robertson initiated that litigation on April 28, 2009, filing a
complaint [l] against Cartinhour seeking a declaratory judgment that Cartinhour had agreed to
hold Robertson harmless for any alleged claims the former might have against the latter related
to the partnership Cartinhour filed his answer [2] on October 28, 2009, and included
counterclaims against Robertson. Cartinhour alleged that Robertson had fraudulently induced
him to invest a total of $3.5 million in the partnership, which served as a vehicle for class action
litigation, in return for a fixed percentage of the recovery obtained in that litigation Robertson
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initially invested $l million, and although the litigation stalled and ultimately was dismissed,
Robertson represented to Cartinhour that the merits of the case remained strong and persuaded
Cartinhour to invest first another $l million and then a third payment of $l.5 million. Cartinhour
sought return of those funds from Robertson.
Cartinhour moved to amend his counter-complaint [45] on February 5, 2010. Cartinhour
sought to allege additional facts following a january ll, 2010 hearing, particularly that
Robertson had caused W.A.R. LLP to lend to Robertson at least $3,405,000 of the $3.5 million
invested in the partnership by Cartinhour. Cartinhour thus sought to add a claim for a
constructive trust over the diverted assets, and also sought to add a claim for dissolution of the
partnership and for a receivership against W.A.R. LLP, Cartinhour dropped the latter two
claims, involving the legal status of the partnership, by the time of the filing of the joint pre-trial
statement [121], which does not include W.A.R. LLP as a party; the record further shows that the
partnership did not make an appearance or file any responsive pleadings in the case before Judge
Huvelle. Cartinhour filed the amended counterclaim [61] on February 22, 20l0. On that same
date, Cartinhour filed a motion for a temporary restraining order and preliminary injunction
putting a freeze on the assets lent by W.A.R. LLP to Robertson. Judge Huvelle granted the
motion by order [9()] on March 26, 2010, and required transfer of the remaining funds to the
clerk of the court for imposition of a constructive trust. Those funds ultimately included
$600,074.92 from Robertson’s personal brokerage account, $4,611.66 primarily from W.A.R.
LLP’s bank accounts, $20,713.75 held by counsel for Robertson, and $5,000.00 held by law firm
Sutherland Asbill & Brennan. Robertson appealed that order [91] on March 28, 2010.
On November 9, 2010, Robertson filed suit in the Southem District of New York in
Robertson v. Cartinhour, Civil No. lO-8442. This suit was styled as a civil RICO action but
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involved the same factual dispute as the case before Judge Huvelle. This suit prompted
Cartinhour to file a motion for an injunction [128] against the institution of further suits by
Robertson. Judge Huvelle denied the motion by order [147] on December 30, 2010. Although
Judge Huvelle declined to impose a sweeping anti-filing injunction, Judge Huvelle noted in the
order that between the institution of the instant suit and the date of the order, Robertson had
engaged in a variety of frivolous filings:
Robertson proceeded to file no less than fourteen motions, including a
motion to reconsider an order granting Cartinhour leave to amend his
counter-claims, a motion to quash a subpoena for documents that
Robertson had already agreed to produce, and a motion to recuse. Two of
those motions were sufficiently meritless, and were considered by the
Court to have been filed recklessly and in bad faith, so as to justify the
award of attomey’s fees against Robertson under 28 U.S.C. § 1927, which
permits the award of fees "against an attorney who frustrates the progress
of judicial proceedings."
The Court of Appeals has been equally frustrated by Robertson’s
vexatious litigation strategy, finding sanctions to be "abundantly justified"
after Robertson filed his fourth motion to stay despite being warned, less
than a week earlier, that the Court "looks with extreme disfavor upon
unnecessary pleadings." . . . Prior to imposing those sanctions, the Circuit
Court had summarily denied Robertson’s motion for disqualification and
sanctions against Cartinhour’s counsel; Robertson’s petition for
mandamus seeking recusal; Robertson’s motion for clarification and
reconsideration, where the Court explicitly wamed him that it "will not
hesitate to impose sanctions" . . .; Robertson’s emergency motion to stay a
preliminary inj unction; and Robertson’s motion for sanctions and a stay,
noting, inter alia, that certain orders of the district court were
unappealable.
ln addition to the flurry of appellate activity and the sanctions imposed to
date, this Court has had to rule on endless motions for recusal, motions to
stay, motions for reconsideration, and motions to quash.
The Court . . . wams Robertson, as did the Court of Appeals, that if he
should continue to pursue his strategy of unnecessarily proliferating this
litigation, this Court will not hesitate to entertain a renewed motion for an
injunction.
(intemal citations and modifications omitted). Less than one week after Cartinhour filed his
motion for an injunction, an outside W.A.R. LLP creditor filed an involuntary Chapter 7
bankruptcy petition in the Westem District of Tennessee against W.A.R. LLP-the genesis of
the suit subject to the instant appeal.
Following institution of the Tennessee bankruptcy proceeding, Judge Huvelle held a
hearing [182] on November 19, 2010 regarding the effect of that proceeding on the suit in light
of the automatic bankruptcy stay, see 18 U.S.C. § 362(a)(l) (providing for an automatic stay
over actions "to obtain possession of or to exercise control over property of the bankruptcy
estate"). Judge Huvelle during the hearing ruled that the case could go forward:
"362 Section (a)(l) does not stay claims against Robertson because he is
not the debtor. Rather, W.A.R. is the debtor and Robertson’s status as a
partner of the partnership does not entitle him to protections of the
automatic stay. . . . But to avoid any interference whatsoever with the
jurisdiction of the Bankruptcy Court, l specifically direct that any ruling
on Mr. Cartinhour’s rescission and dissolution claims will not be binding
on the estate of the partnership in the partnership’s bankruptcy case.
Finally [Cartinhour] has abandoned any claims l should note that might be
subject to the automatic stay including the derivative claims on behalf of
the partnership, constructive trust on the 4,000 in the registry.l
That was the only amount of money that was transferred out of the
partnership account as opposed to all the other amounts that are in the
registry right now, with the exception of this 4,000, came out of his
personal accounts with Schwab, Mr. Robertson’s personal accounts, And
Mr. Cartinhour is giving up the appointment of a receiver against the
partnership so that such appointment would not be subject to the automatic
stay.
l have ruled loud and clear that the automatic stay does not interfere with
us proceeding in this fashion.
l This refers to $4,611.66 placed in the constructive trust that came not from Robertson’s accounts but from the
partnership’s bank account. Cartinhour has abandoned any claim to those specific funds.
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After Judge Huvelle’s ruling, the debtor in the Tennessee case filed a motion on November 22,
2010 for a temporary restraining order and for a preliminary injunction to enforce the automatic
bankruptcy stay and restrain further proceedings in Judge Huvelle’s case; Cartinhour in turn filed
a motion for relief in the Tennessee case from the automatic bankruptcy stay. Judge Paulette J.
Delk of the Tennessee bankruptcy court entered an order on November 23, 2010 denying the
debtor’s motion and granting Cartinhour’s motion. Judge Delk ruled in accord with Judge
Huvelle that "the automatic stay does not prevent the D.C. lawsuit from going forward, because
neither the debtor nor property of the estate will be affected by the trial." Since the D.C. lawsuit
involved a dispute between Robertson and Cartinhour that did not implicate partnership property,
the automatic stay did not apply to that case. However, "[o]ut of an abundance of caution,"
Judge Delk "expressly" found that "sufficient cause exists under 11 U.S.C. § 362(d)(1) to modify
the stay to permit the D.C. lawsuit to go forward." Thus, even if the D.C. lawsuit did implicate
partnership property, Judge Delk granted Cartinhour relief from the automatic stay to continue
prosecution of the suit in front of Judge Huvelle.
Cartinhour filed a motion to dismiss, or abstain in, the bankruptcy case in Tennessee, or
to transfer venue to the District of Columbia, on December 3, 2010. The Tennessee court
granted the motion and transferred the case to the District of Columbia on January 4, 2011.
Robertson would later file a motion to withdraw the bankruptcy reference. The motion appears
in the bankruptcy court record on January 24, 2011, and was transmitted to this Court as Misc.
No. 11-283 on May 17, 2011; this Court denied that motion by Order [11] on June 6, 2011.
The bankruptcy trustee conducted a meeting of the creditors on March 24, 2011 and filed
a report of no distribution on March 30, 2011, finding that there was "no property available for
distribution from the estate." The debtor and Robertson both filed objections to that report, and
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Cartinhour opposed those objections. Outside creditor Ray Connolly filed several motions on
May 10, 2011 relating to Cartinhour’s alleged violations of the automatic bankruptcy stay, which
bankruptcy court Judge Martin Teel denied by order [165] and memorandum [164] on June 20,
201 l. Judge Teel by preliminary order and memorandumz [171] on June 23, 2011 (amended
[172] that same day) and final order [210] and memorandum [209] on July ll, 2011 overruled
the objections to the trustee’s report of no distribution, and through separate order [213] closed
the bankruptcy case and discharged the trustee.3 lt is these myriad orders that are the subject of
the instant appeal.4
Meanwhile, in the original declaratory judgment action in front of Judge Huvelle, the
Court of Appeals was adjudicating Robertson’s appeal of the constructive trust. The Court of
Appeals issued an order [148] on January 20, 2011 requesting clarification as to why Judge
Huvelle granted the preliminary injunction. Judge Huvelle issued a response [l50] on February
3, 2011 describing in greater particularity the necessity and legal propriety of imposing a
constructive trust over the remaining funds traceable to Cartinhour’s investment in Robertson’s
control. The Court of Appeals would eventually affirm [191] the entrance of the preliminary
injunction post-j udgment.
Trial commenced on Cartinhour’s various claims against Robertson on February 8, 2011.
The jury returned a verdict for Cartinhour on February 18, 2011 in the amount of $3.5 million in
2 The initial order noted the bankruptcy court’s preliminary determination that the trustee was within his authority to
determine that the amount of money remaining in the estate_S4,611.66_was insufficient to warrant distribution,
but provided the parties further opportunity to renew their objections by filing supplemental memoranda. The final
order noted that no party filed a supplemental memorandum, and thus that no party objected to a determination of no
distribution.
3 The bankruptcy court immediately reopened the case by order [214] to resolve sanctions issues, and pending
appeal
4 Creditor Ray Connolly also took an appeal to this Court in Civil No. ll-l349, which was dismissed by this Court
[9] on September 30, 201 1 by the parties’ consent.
compensatory damages and $3.5 million in punitive damages for Robertson’s breach of fiduciary
duty as business partner and for his legal malpractice. Judge Huvelle entered judgment on
February 25, 2011. Cartinhour filed a motion [183] for release of the funds held in the
constructive trust on May 10, 2011. 1n his motion, Cartinhour did not seek release of the
$4,611.66 that was held in a W.A.R. LLP bank account before its transfer into the court’s
registry, pending further action in the bankruptcy case. Following the Court of Appeals’
issuance of its mandate affirming Judge Huvelle’s preliminary injunction, Judge Huvelle on July
19, 2011 granted Cartinhour’s motion for release of funds, save for the $4,611.66. Cartinhour
filed a motion [224] for release of those remaining funds on December 16, 2011, and Robertson
filed a motion on behalf of W.A.R. LLP seeking release of those remaining funds to W.A.R. LLP
on December 30, 2011. Those motions are still pending before Judge Huvelle.
II. DISCUSSION
Although a number of orders of the bankruptcy court are presently on appeal, this case
centers on a single issue: Did W.A.R. LLP retain a property interest in the money held in the
court’s registry (save the $4,611.66 transferred from the partnership’s own bank account)? lf so,
Robertson posits, the bankruptcy court erred both in overruling objections to the trustee’s report
of no distribution, and in determining that Cartinhour and his attorneys did not violate the
automatic bankruptcy stay. The Court reviews the bankruptcy court’s determination of this issue
de novo, see Essex Ins. C0. v. Doe, 511 F.3d 198, 200 (D.C. Cir. 2008).
The money placed in the court’s registry in dispute here was money held by Robertson in
his own bank accounts. This money is traceable to unsecured loans made by W.A.R. LLP to
Robertson in exchange for promissory notes in which Robertson agreed to pay back the money
with no interest over an extended period of time. The funds for those loans are in turn directly
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traceable to the investments made by Cartinhour in the partnership. Once Robertson executed
those loans on behalf of the partnership, the following transaction ensued: W.A.R. LLP provided
Robertson in his personal capacity with $3.405 million in cash, in exchange for promissory
notes, signed by Robertson, in which Robertson agreed to repay the principal without interest
over a set time frame. Following that transaction, Robertson had sole ownership over the $3.405
million in cash, and W.A.R. LLP retained ownership of the promissory notes signed by
Robertson.
ln his appellate brief, Cartinhour makes this point, and writes that "[t]he proposition that
an unsecured loan based upon a promissory note does not reserve to the Lender any property
right in the cash defies citation because it is so fundamental." Surprisingly so. lf person A offers
to pay 3500 for person B’s computer, and both parties effectuate that sale, then person A has a
legal interest in the computer but not the $500, and person A has a legal interest in the $500 but
not the computer. So too with negotiable instruments, absent a security interest. If person A
pays person B $3.405 million for unsecured promissory notes signed by person B, person A
relinquishes interest in the cash in exchange for the unsecured notes, and person B binds himself
by the terms of those unsecured notes in exchange for the cash. No longer does person A have a
property interest in the cash. What person A has is a property interest in an unsecured negotiable
instrument. Such is exactly what occurred here. After execution of the loans, the cash fell under
Robertson’s sole ownership, which is fully apparent in Robertson’s possession of those funds
(or, at least, what remained thereof) in his personal bank account. By obtaining Robertson’s
unsecured promissory notes, W.A.R. LLP relinquished its interest in the cash provided in retum.
Cf D.C. Code § 28:9-312(b)(3) ("A security interest in money may be perfected only by the
secured party’s taking possession under § 28:9-313); Bradley Clark, The Law of Secured
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Transactions Under the Uniform Commercial Code jj 7.2 (1980) (discussing Uniforrn
Commercial Code and noting that "it is clear that a security interest in money can be perfected
only by possession").
With this basic understanding of negotiable instruments, it is evident that the bankruptcy
court was correct in determining that the deposits of $600,074.92, $20,713.15, and $5,000-
which derived from these loans to Robertson and were transferred from accounts under
Robertson’s control_were not part of the debtor estate of W.A.R. LLP, The bankruptcy court
was therefore further correct in sustaining the trustee’s report of no distribution, since the only
funds remaining in W.A.R. LLP’s control were the $4,611.66 lef``t in W.A.R. LLP’s own bank
account-a sum the trustee appropriately determined was too small to warrant the expenses of
distribution. See 18 U.S.C. § 554(a) (perrnitting abandomnent of property "that is of
inconsequential value"); see also, e.g., In re Cult Awareness Network, Inc., 205 B.R. 575, 579
(Bankr. N.D. lll. 1997) (noting that "discretion applies when the Trustee makes a determination
that assets of the estate should be abandoned"); In re Fulton, 162 B.R. 539, 540 (Bankr. W.D.
Mo. 1993) (placing only a good faith business judgment restriction on trustee’s authority to
abandon property).
The appellants’ attempt to fabricate some form of legal interest held by W.A.R. LLP in
the non-W.A.R. portion of the assets in the court’s registry fails. First, the appellants assert that
W.A.R. LLP retained a contingent property interest in those funds because the partnership was a
party to the proceedings. But W.A.R. LLP emphatically was not a party to those proceedings.
The case was styled Robertson v. Cartinhour. lt involved claims by Robertson against
Cartinhour, and vice versa. Judgment was ultimately rendered against Robertson. Although
Cartinhour initially alleged derivative claims on behalf of W.A.R. LLP, and pressed claims for
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dissolution, Cartinhour either abandoned those claims prior to the institution of the bankruptcy
proceedings in 'l``ennessee, or Judge Huvelle made explicit on the record that she would not rule
with respect to those claims in a way that would affect those proceedings. lt does not appear that
W.A.R. LLP ever entered an appearance or filed a responsive pleading or motion in the action
before Judge Huvelle. W.A.R. LLP was wholly absent from the litigation and certainly was not
represented therein. lt thus could not have developed a contingent interest in those funds solely
because the court established a constructive trust.s
1n addition, the appellants argue that W.A.R. LLP held a direct, non-contingent interest in
the funds in Robertson’s account. The appellants principally cite to ]n re Don/Mark P ’ship, 14
B.R. 830 (D. Colo. l98l), for the proposition that property for which a partner holds legal title
may still be considered partnership property. Elemental partnership law verifies this simple
statement. Under D.C. Code § 29-603.04, "Property shall be presumed to be partnership
property if purchased with partnership assets, even if not acquired in the name of the partnership
. . . ." So, as in In re Don/Mark P ’ship, if a partner or partners purchase real property under his
or their names with partnership funds, a court may still consider that real property to be owned
by the partnership, And so, here, W.A.R. LLP purchased with its assets promissory notes signed
5 Even if W.A.R. LLP were a party to that suit, it would be bizarre to assume that the court’s sequestering of funds
held by Robertson in his bank account would suddenly create for W.A.R. LLP a property interest in those liinds.
The appellants cite B00th v. Clark for the proposition that a receiver "is appointed for the benefit of all parties who
may establish rights in the cause. The money is in [the receiver’s] hands in custodia legis for whoever can make out
a title to it." 58 U.S. 322, 331 (1854). But the appellants fail to assert even a prima facie claim that could be made
on behalf of W.A.R. LLP for those funds. Cf Torres v. $36,256.80 U.S. Currency, 25 F.3d 1154, 1156~57 (2d Cir.
1994) (finding standing on part of wife to challenge forfeiture of husband’s certificate of deposit where wife alleged
she was the beneficial owner of a constructive trust over those funds). Without such a claim to the proceeds of those
funds, W.A.R. LLP cannot allege any basis by which it has a contingent interest in those funds; even assuming its
appearance in the litigation, that alone could not suffice to create such an interest. To further illustrate, imagine that
Cartinhour had requested a pre-judgment attachment of funds from a separate bank account owned by Robertson
handed through sources wholly unrelated to W.A.R. LLP lt would defy logic to assume that the court’s granting of a
pre-judgment attachment of those funds created a contingent property interest on the part of W.A.R. LLP in those
funds.
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by Robertson that are indisputably partnership property. But the assets used to purchase those
notes are no longer partnership property. They are Robertson’s property, and W.A.R. retains in
them no property interest.
At no time following the loan transactions between Robertson and W.A.R. LLP did
W.A.R. LLP enjoy an interest in the funds held personally by Robertson that were transferred by
order of Judge Huvelle into the constructive trust. Judge Teel therefore appropriately determined
that the trustee’s report of no distribution was correct. Further, because W.A.R. LLP lacked any
claim to the funds in the court’s registry-aside from the $4,611.66 that Cartinhour in essence
concedes is property of the estate_Judge Huvelle, Judge Delk, and Judge Teel all appropriately
determined that the proceedings before Judge Huvelle did not violate the automatic stay.
Furthermore, Judge Delk granted in the alternative a modification of the stay for the purposes of
those proceedings. Judge Teel was therefore correct in declining to impose sanctions for a
purported violation of the stay and in taking other related actions complained of in this appeal.
III. CONCLUSION
Notwithstanding the uncontested $4,611.66, W.A.R. LLP lacked any interest in the funds
held in the court’s registry in the case before Judge Huvelle. Accordingly, this Court finds no
legal error in the decisions of the bankruptcy court on appeal here. lt is therefore hereby
ORDERED that the decisions of the bankruptcy court are AFFIRMED.
so oRDERED this Z?Qy ofJanuary 2012.
z c J€ww%€
RoYe»E C. LAMBERTH
Chief Judge
United States District Court
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