William F. Nicklin

UNITED STATES BANKRUPTCY COURT NOT FOR PUBLICATION

SOUTHERN DISTRICT OF NEW YORK

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In re:

:

: Chapter 7

William F. Nicklin,

: Case No. 19-35092

:

Debtor

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MEMORANDUM DECISION

A P P E A R A N C E S :

Special Counsel to Daniel J. Ventricelli, as Trustee of the Estate of William F. Nicklin, Debtor

BECKER, GLYNN, MUFFLY, CHASSIN & HOSINSKI LLP

299 Park Avenue

New York, New York 10171

By: Alec P. Ostrow

Attorneys for C.L. King and Associates, Inc.

SEYFARTH SHAW LLP

620 Eighth Avenue

New York, New York 10018

By: Edward M. Fox

Utility Service Holding Co., Inc

ZEISLER & ZEISLER

10 Middle Street, 15th Floor

By: Aaron A. Romney

CECELIA G. MORRIS

UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is the Chapter 7 Trustee’s (the “Trustee”) Motion for Summary

Judgment Disallowing the Claim of Utility Services Holding Co., Inc. Claim No. 3 (the

“Motion”). On November of 2023, the Chapter 7 Trustee and Utility Services Holding Co., Inc.

(the “Creditor”) entered into a stipulation establishing a procedure for objecting to the claim of

the Creditor. The procedure provided that the claim objection would come in the form of a

motion for summary judgment pursuant to the Federal Rules of Bankruptcy Procedure 3007,

7056, and 9014. The Trustee argues that he is entitled to summary judgment for several reasons.

The Trustee contends that the post-bar date amendment of the claim improperly adds new legal

theories and cannot contradict Rule 2004 testimony that was taken prior to the amendment; that

Claim No. 3 (the “Claim”) is barred by the statute of limitations; and that the events that gave

rise to the claim do not entitle USHC relief. USHC argues that the Claim relates back to the

original proof of claim filing; that the Claim is not barred by the statute of limitations, and that

the events that gave rise to the Claim constitute a common law breach of fiduciary duty. For the

reasons set forth below, the Motion for Summary Judgment is granted.

Jurisdiction

This Court has jurisdiction over this contested matter under 28 U.S.C. § 157, 28 U.S.C. §

1334 and the Amended Standing Order of Reference signed by Chief Judge Loretta A. Preska

dated January 31, 2012. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and one over

which this Court has authority to enter a final judgment.

Background

William F. Nicklin (“Debtor”) filed a Chapter 7 petition with this Court on January 18,

2019. Voluntary Pet., ECF No. 1. Debtor is a highly sophisticated investment advisor and

securities trader, currently employe by Circle N. Advisors, LLC. He was the manager of NSB

Advisors LLC (“NSB”), who has a confirmed chapter 11 case1 in this Court. NSB was a closely

held investment advisory business managed by Debtor. C.L. King & Associates, Inc. (“C.L.

King”) was the custodian and broker of NSB. C.L. King also served as the margin lender to

NSB’s customers. Prior to joining NSB, Debtor was a broker at Brown Advisory Securities,

LLC (“Brown”). Trustee’s Statement ¶ 7, ECF No. 269. In June of 2008, USHC became a

customer of Brown with an initial investment of $100 million. USHC Statement ¶ 7, ECF No.

1 Case No. 15-35009 (CGM) was filed on January 5, 2015, and the Chapter 11 Plan was confirmed on December 4,

2015. The Final Decree was issued on August 2, 2021.

297. When NSB was established in 2009 and retained Debtor for employment, USHC moved its

account to NSB. Id. ¶ 8.

USHC signed investment advisory agreements with NSB on June 30, 2009 and January

30, 2011. Id. ¶ 9. Disclosure brochures accompanied the agreements which outlined NSB’s

investment strategy (the “Strategy”). USHC Statement ¶ 11, ECF No. 297. The brochure

explains that the Strategy involves holding concentrated positions in illiquid securities that carry

the additional risk of being difficult to sell in a thinly traded market. The brochure describes the

risks associated with trading options. Specifically, it explained that the Strategy involves short

call strategies that require the use of a margin account and the possibility that clients, such as

USHC, will be subjected to house or Federal Reserve calls as the result of the investment

activities of NSB.

Pursuant to the investment strategy, USHC was required to post cash or securities to be

held as collateral by C.L. King., the custodian of the account and margin lender. C.L. King

determined the amount of value it would attribute to stocks held by USHC as collateral for the

options. In the event the value C.L. King attributed to the collateral was less than an unrealized

loss on a short call option, C.L. King had the right to issue a call for the account holder to add

cash or securities to bring the value of the account up to the amount required by C.L. King. This

is known as a “House Call.” Making a House Call is within the discretion of the broker-dealer.

Similarly, the Financial Industry Regulatory Authority (“FINRA”) imposes its own margin

requirements that are typically lower than broker-dealer requirements. When FINRA makes a

call, it must be satisfied within a specific amount of time, without exception. This is known as an

“Exchange Call.”

The USHC account’s largest holding was that of APCO Oil & Gas International, Inc.

(“APCO”), an Argentinian oil company. USHC Statement ¶ 22, ECF No. 297. Between

December 31, 2011 and April 30, 2012, the share price of APCO fell and resulted in the decline

of the value of the APCO position from $11,104,877.60 to $57,621,681. Id. The share price of

PMFG, another position held by the USHC account, also fell and resulted in the decline of the

value of the position from $31,181,038.08 to $21,118,940.08. Id. On March 7, 2012, in an

email to Mr. Cummings, Debtor asked “[i]s there any chance you can get the $18 million back

into the account soon (more if possible).” Ostrow Decl., Ex. 12, ECF No. 266.

The losses realized between December 2011 and April 2012 and trades made thereafter

resulted in a House Call in the USHC account. USHC contends that Debtor concealed the

existence of the House Call and misrepresented the health of the account, beginning on February

9, 2012. USHC Statement ¶ 42, ECF No. 297. USHC argues that the concealment of the

consequences of the trade lost it the opportunity to liquidate its positions in its account before

more damage was realized. Id.

USHC initiated arbitration with Debtor, NSB, and C.L. King on or around February 3,

2014. Trustee’s Mem. 12, ECF No. 268. The arbitration was ultimately withdrawn because

USHC had no arbitration agreement with Debtor nor NSB. In an agreement (the “Tolling

Agreement”), Debtor and USHC agreed to toll the applicable statute of limitations so that the

issues between them could be address at a later time. The effective date of the Tolling

Agreement was February 3, 2014 and ran through December 13, 2016, a period of two years, ten

months, and eleven days. Ostrow Decl., Ex. 8, ECF No. 266.

On January 18, 2019, Debtor filed this voluntary petition. Vol. Pet., ECF No. 1. On May

6, 2019, USHC filed Proof of Claim No. 3 in the amount of $42,617,804. The basis for the claim

provided:

is the debtor’s breach of his fiduciary duties to USHC which include,

but are not limited to, such dishonest, intentional, or improper

conduct as the debtor’s failure to disclose material facts to USHC,

the debtor’s breach of his duty of loyalty to USHC, the debtor’s

breach of his duty to act with the utmost good faith in his dealings

with USHC, and the mishandling of USHC’s investment account.

Claim 3-1. Exhibit B of the claim provided that the figure was based on complete liquidation of

the USHC Account beginning on February 10, 2012. Following a Fed. R. Bankr. P. Rule 2004

investigation and an informal examination of the Debtor, USHC filed an amended claim which

expanded the basis of the claim to seventeen paragraphs, adding specific facts and allegations.

See Proof of Claim 3-2.

The Trustee argues that summary judgment must be granted and the Claim disallowed for

several reasons: the post-bar date amendment of the claim improperly adds new legal theories

and cannot contradict Rule 2004 testimony that was taken prior to the amendment; that the claim

itself is barred by the statute of limitations of the state of New York; and that the events that gave

rise to the claim do not entitle USHC relief. USHC argues that the Claim relates back to the

original proof of claim filing; that the claim is not barred by the statute of limitations as the

Georgia statute of limitations applies, and that the events that gave rise to the claim constitute a

common law breach of fiduciary duty.

Discussion

A claim filed in accordance with Fed. R. Bankr. P. 3001(f) constitute prima facie

evidence of the claim and the claim is deemed allowed unless an objection is filed. Fed. R.

Bankr. P. 3001(f). Once a Trustee files an objection to a creditor's proof of claim, the validity of

the claim becomes a contested matter. In re Gilbreath, 395 B.R. 356, 364 (Bankr. S.D. Tex.

2008) (citations omitted).

Summary judgment is appropriate when “the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party is entitled to a judgment as a

matter of law.” Fed. R. Civ. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106

S.Ct. 2548, 91 L.Ed.2d 265 (1986). “[A] party seeking summary judgment always bears the

initial responsibility of informing the ... court of the basis for its motion, and identifying those

portions of the pleadings, depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue

of material fact.” Celotex, 477 U.S. at 323, 106 S.Ct. 2548 (internal quotations omitted). Once

the moving party has properly supported its motion with such evidence, the party opposing the

motion “may not rest upon the mere allegations or denials of his pleading, but . . . must set forth

specific facts showing that there is a genuine issue for trial.” Anderson v. Liberty Lobby. Inc.,

477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); First Nat'l Bank of Arizona v. Cities

Servs. Co., 391 U.S. 253, 288–89, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968); Fed. R. Civ. P. 56(e).

“In determining whether the movant has met its burden, the reviewing court must examine the

evidence in a light most favorable to the opponent of the motion. All reasonable doubts and

inferences should be resolved in favor of the opponent.” Amey, Inc. v. Gulf Abstract & Title, Inc.,

758 F.2d 1486, 1502 (11th Cir.1985) (citations omitted).

The Post Bar Date Amendment

The Trustee argues in his papers that the new legal theories set forth in the amendment of

Claim No. 3 should not be allowed, and the facts presented that contradict the USHC principal’s

Rule 2004 testimony should not be permitted. Trustee’s Mem. 18, ECF No. 268. The Trustee

states that the new theory of recovery set forth in the amendment cannot avail itself as a new

theory of recovery because there are no facts set forth in the original claim, only “accusations

with labels and conclusions.” Id. The Trustee argues that it would be inequitable to allow the

amended claim when facts set forth in that amendment contradict the deposition testimony of

USHC’s principal as it would “greatly diminish and make a sham out of an important

investigative tool that assists the Trustee in the administration of the bankruptcy case.” Id.

USHC argues that the Trustee’s objection to the timing of the amendment is baseless as

the amendment clearly relates back to the originally filed proof of claim and simply describes the

claim in greater particularity. USHC argues that its original claim met the requirements to

establish a prima facie proof of claim under Fed. R. Bankr. P. 3001(a) as it provided the basic

facts.

In the Second Circuit, amendments to claim following the bar-date are subject to a two-

part inquiry. First, Courts consider “whether there was a timely assertion of a similar claim or

demand evidencing an intention to hold the estate liable.” In re Enron Corp., 419 F.3d 115, 133

(2d Cir. 2005). The claim is considered to be sufficiently similar when the amendment “corrects

a defect of form in the original claim, describes the original claim with greater particularity, or

pleads a new theory of recovery on the facts set forth in the original claim.” Id. (citing In re

McLean Indus., Inc., 121 B.R. 704, 707 (Bankr. S.D.N.Y. 1990). Second, Courts determine

whether it would be equitable to allow the amendment. Courts consider whether debtor or other

creditors would be unduly prejudiced by the amendment, whether other creditors would receive a

windfall from the disallowance of the amendment, and whether the late claimant acted in good

faith and the delay was justified. Id.

The amendment is proper. On May 6, 2019, USHC filed a proof of claim that asserted its

intention to hold the estate liable for Debtor’s breach of fiduciary duty. In the original claim,

USHC generally stated the conduct that gave rise to the claim:

dishonest, intentional, or improper conduct as the debtor’s failure to

disclose material facts to USHC, the debtor’s breach of his duty of

loyalty to USHC, the debtor’s breach of his duty to act with the

utmost good faith in his dealings with USHC, and the mishandling

of USHC’s investment account.

Claim 3-1. The amendment to the claim did not set forth a theory of recovery beyond that

explicitly stated or implied by the original proof of claim, it only provided the particular facts

that the original claim omitted, which is a permissible use of an amendment. See In re Cinecom

Corp., 73 B 40 (Bankr. S.D.N.Y. 1980) (stating that material omissions may be cured by

amendment).

As to the consideration of equity, the Trustee has not argued that any other creditors

would be unduly prejudiced by the amendment or that USHC acted in bad faith. The Trustee’s

concern that the facts set forth in the amended claim contradict the Rule 2004 testimony of

USHC’s principal goes to the substance of the proof of claim. Whether the content of the

amendment contradicts Rule 2004 testimony is not a basis available to this Court to determine

that the amendment was inequitable and thus improper.

Statute of Limitations

“[W]here no significant federal policy, calling for the imposition of a federal conflicts

rule, exists,” Bianco v. Erkins (In re Gaston & Snow), 243 F.3d 599, 607 (2d Cir.2001), a

bankruptcy court must apply the choice of law rules of the forum state. Statek Corp. v. Dev.

Specialists, Inc. (In re Coudert Bros. LLP), 673 F.3d 180, 186 (2d Cir.2012). Under New York

law, “the first step in any case presenting a potential choice of law issue is to determine whether

there is an actual conflict between the laws of the jurisdictions involved.” GlobalNet

Financial.com, Inc v. Frank Crystal & Co., 449 F.3d 377, 382 (2d Cir.2006) (internal quotation

marks omitted). Here, the parties agree that the statute of limitations in Georgia and the statute

of limitations in New York conflict.

New York's borrowing statute, N.Y. C.P.L.R. § 202, guards against forum shopping by

out-of-state plaintiffs by mandating that the cause of action be timely under the limitations

periods of both New York and the jurisdiction where the cause of action accrued, essentially

mandating the use of the shortest statute of limitations available. Global Fin. Corp. v. Triarc

Corp., 93 N.Y.2d 525, 528 (1999). N.Y. C.P.L.R provides:

An action based on a cause of action accruing without the state

cannot be commenced after the expiration of the time limited by

the laws of either the state or the place without the state where the

cause of action accrued, except that where the cause of action

accrued in favor of a resident of the state the time limited by the

laws of the state shall apply.

As provided by the statute, if New York's statute of limitations is shorter than the statute

of limitations of the place where the cause of action accrued, New York courts should apply the

local rule; if the foreign statute of limitations is shorter, then that is what controls.

The statute of limitations in Georgia for fraud or breach of fiduciary duty that causes

economic injury or damage to personalty is four years from the date of accrual. See Ga. Code

Ann. § 9-3-21. The statute of limitations in New York for breach of fiduciary duty is based on

the substantive remedy sought by the Plaintiff. IDT Corp. v. Morgan Stanley Dean Witter &

Co., 12 N.Y. 3d 132, 139. “Where the remedy sought is purely monetary in nature, courts

construe the suit as alleging “injury to property” within the meaning of CPLR 214 (4), which has

a three-year limitations period. Id. (citing Yatter v Morris Agency, 256 AD2d 260, 261 (1998)).

The New York statute of limitations period applies.

“Where an allegation of fraud is essential to a breach of fiduciary duty claim, [New York]

courts have applied a six-year statute of limitations under CPLR 213 (8).” Id. (citing Kaufman v

Cohen, 307 AD2d 113, 119 (2003)). “When a fraud claim is incidental to another asserted claim,

the claim does not sound in fraud for purposes of taking advantage of the longer limitations

period.” Corcoran v. New York Power Authority, 202 F.3d 530, 545 (2d Cir. 1999). “A fraud

action is [essential] only when: (1) the fraud occurred separately from and subsequent to the

injury forming the basis of the alternate claim; and (2) the injuries caused by the fraud are

distinct from the injuries caused by the alternate claim.” Id. (citing Harkin v. Culleton, 156

A.D.2d 19, (1st Dep't 1990)).

Here, USHC is seeking damages in the amount of $42,617,804.00 for losses that are

alleged to have resulted from Debtor breaching his fiduciary duties to USHC when Debtor made

trades that negatively affected the USHC account that were not in USHC’s best interest. In the

amended proof of claim, USHC alleges Debtor concealed and misrepresented information that

led to USHC’s losses. Debtor’s alleged concealments and misrepresentations regarded the

margin call waived by C.L. King, the condition that the USHC account was in, and the status and

expected performance of the underlying stock. Each concealment and misrepresentation alleged

is inextricably entwined with the breach of fiduciary duty claim. USHC, in its papers, even

describes its claim to represent “fraudulent breaches of fiduciary duty.” USHC’s Mem. 44, ECF

No. 296. In essence, USHC alleges that Debtor repeatedly breached his fiduciary duty to USHC,

concealed those breaches, and misrepresented information that might have led to USHC’s

discovery of the breaches. Applying the test provided in Harkin, fraud is incidental to the breach

of fiduciary duty claim as it did not occur separately and subsequently from the injury forming

the basis of the breach of fiduciary duty claim nor were the caused by fraud distinct from the

injuries caused by the breach of fiduciary duty. The three-year New York statute of limitations

for injury to property applies.

USHC argues that “the New York statute of limitations period should not apply when the

defendant chose the forum because a defendant to a state-law claim may not ‘use a device of

federal law to choose both the forum and accompanying choice of law’ in which that claim is

adjudicated.” USHC’s Mem. 28, ECF No. 296 (cleaned up) (citing Statek Corp. v. Dev.

Specialists, Inc. (In re Coudert Bros. LLP), 673 F.3d 180, 190 (2d Cir. 2012). USHC

misunderstands the Second Circuits holding. In Statek, the claimant filed its complaint against

the debtor in Connecticut before the proceeding was stayed due to the debtor’s bankruptcy filing

in the Southern District of New York. The bankruptcy court applied the choice of law rules of

New York and held that the claim was barred by the statute of limitations as it was the shorter of

the two, as we do here. Id. The Second Circuit vacated the bankruptcy court’s holding,

reasoning that it would be “fundamentally unfair . . . to deprive Statek of the state-law

advantages adhering to the exercise of its venue privilege.” Id. USHC did not initiate a lawsuit

against Debtor in Georgia and thus cannot reap the benefit of the exception articulated by the

Second Circuit in Statek.

USHC stated that it suffered losses on “any date selected between February 9, 2012 and

May 14, 2012” and “the cause of action against Debtor accrued no earlier than May 14, 2012.”

USHC’s Statement ¶ 51, ECF No. 297; USHC’s Mem. 33, ECF No. 296. Utilizing the latest

date injury is alleged to have occurred, the New York statute of limitations ran on this cause of

action on May 14, 2015 but for the Tolling Agreement. The parties agree that the Tolling

Agreement extended the statute of limitations for a period of two years, ten months, and eleven

days. USHC’s Mem. 33, ECF No. 296; Trustee’s Mem. 12, ECF No. 268. The statute of

limitations run, with the Tolling Agreement’s extension, on March 25, 2018. Debtor filed this

bankruptcy on January 18, 2019. USHC failed to bring an action outside of this bankruptcy

before the March 25, 2018 date. The cause of action is barred by the statute of limitations.

As the claim is barred, the Court declines to address the remaining arguments for and

against summary judgment, nor the merits of the claim itself.

Conclusion

The Motion is granted and the claim is disallowed. The Trustee shall submit an order consistent

with this opinion.

/s/ Cecelia G. Morris

Poughkeepsie, New York SL) Hon. Cecelia G. Morris

ees U.S. Bankruptcy Judge

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