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Judge Carey Denies Motions of Former Shareholders to Disqualify Trustee of Liquidating Trust and Bring Qui Tam Action

By Charlene D. Davis

On July 13 and July 20, 2016, respectively, Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) issued two decisions in the Syntax-Brillian Corporation, et al. (the “Debtors”) chapter 11 case.  The July 13 decision denied a pro se motion by former shareholder Ahmed Amr (joined by certain other former shareholders of the Debtors) to proceed Qui Tam against a number of parties (including the Debtors’ officers, directors, lenders, professionals and others) under the False Claims Act (the “Qui Tam Motion”).  The July 20 decision denied a pro se motion by former shareholder Frank Waitkus, Jr.  (joined by certain other former shareholders of the Debtors) to disqualify and terminate the Liquidating Trustee and his professionals (the “Disqualification Motion”).   Both motions were opposed by the SB Liquidation Trust and the Qui Tam Motion was also opposed by Greenberg Traurig, LLP.

The contextual background set forth in each decision is virtually identical except with respect to the motions themselves and the objections to them.  The Debtors each filed voluntary petitions under chapter 11 of the Bankruptcy Code on July 8, 2008.  Roughly a year later, on July 6, 2009, the Bankruptcy Court entered an Order confirming the Debtors’ Second Amended Chapter 11 Liquidation Plan (the “Confirmation Order”).  The Plan, which became effective on July 7, 2009, authorized the establishment of a liquidating trust (the “Liquidation Trust”) and appointment of Geoffrey L. Berman as Liquidating Trustee (the “Trustee”).  The Trustee is charged with pursuing certain causes of action and making distributions to the Liquidation Trust beneficiaries, i.e. holders of Allowed General Unsecured Claims.  On the Plan effective date, Class 7 Equity Interests were cancelled and holders of Allowed Equity Interests are to receive no distribution under the Plan unless assets remained to be distributed after payment in full of all Allowed General Unsecured Claims.  As of June 3, 2016, the Trustee reported that he does not anticipate any distribution to Allowed Equity Interests.

The Bankruptcy Court easily denied both the Qui Tam Motion and the Disqualification Motion.  With regard to the Qui Tam Motion, the Bankruptcy Court first found that the movant had no standing to appear or be heard in any matter in the chapter 11 case, including the Qui Tam Motion, by virtue of a prior settlement agreement between the Liquidation Trust and certain shareholders, including the movant, wherein he released all claims against Estate Parties (including the Liquidation Trust) either on his own or someone else’s behalf.  Second, the Bankruptcy Court determined that the joinder parties had failed to establish a prima facie case under the False Claims Act because they did not allege that any party falsely asserted a claim or demand for payment against an agent of the government.  Moreover, a private individual cannot proceed pro se in a Qui Tam action because it is representing the interests of the government.

With regard to the Disqualification Motion, the Bankruptcy Court determined (1) that the movants’ assertion that the Trustee lacked standing was based on claims related to an allegedly fraudulent First Day Affidavit that Judge Shannon had previously dismissed; (2) assertions that the Plan concealed a massive forgery and scam were not supported by evidence; (3) assertions that the Trustee concealed the forgeries or denied access to or destroyed evidence were unsupported.  The Bankruptcy Court determined that the movants’ assertion that they are being denied due process based on a settlement between the Trustee and certain other shareholders who were in litigation with the Trustee was unsustainable since Judge Shannon had likewise previously determined that the Trustee had authority to enter into the settlements without court approval or disclosure to other shareholders and the settlement was entered into to stop litigation costs.  Judge Shannon’s opinion was not appealed and it was too late for a reconsideration motion.

Copies of the Court’s July 13 and July 20 opinions are available here and here, respectively.

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