Hurwitz v. Fung Holdings 1937 Limited

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

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In re: : Chapter 11

:

GBG USA Inc., et al., : Case No. 21-11369 (MEW)

:

Debtors. : Jointly Administered

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PETER HURWITZ, AS LITIGATION TRUSTEE :

OF THE GBG USA LITIGATION TRUST, :

:

Plaintiff, :

:

v. : Adv. Pro. No. 23-01022 (MEW)

:

FUNG HOLDINGS (1937) LIMITED, FUNG :

DISTRIBUTION INTERNATIONAL LIMITED, :

STEP DRAGON ENTERPRISE LIMITED, :

GOLDEN STEP LIMITED, WILLIAM FUNG :

KOWK LUN, KING LUN HOLDINGS LIMITED, :

FIRST ISLAND DEVELOPMENTS LIMITED, :

VICTOR FUNG KWOK KING, SPENCER :

THEODOR FUNG, BRUCE PHILIP :

ROCKOWITZ, HURRICANE MILLENNIUM :

HOLDINGS LIMITED, and HSBC TRUSTEE :

(C.I.) LIMITED, SOLELY IN ITS CAPACITY AS :

TRUSTEE OF THE “VICTOR TRUST,” :

:

Defendants. :

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DECISION ON DEFENDANTS’ MOTION TO DISMISS

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

GRANT & EISENHOFER P.A.

New York, New York and Wilmington, Delaware

Special Counsel for Plaintiff Peter Hurwitz as Trustee of the GBG USA Litigation Trust

By: Gordon Z. Novod, Esq.

Thomas Walsh, Esq.

Frank H. Griffin, Esq.

FRESHFIELDS BRUCKHAUS DERINGER US LLP

New York, New York

Attorneys for Defendants other than HSBC Trustee (C.I.) Limited

By: Timothy P. Harkness, Esq.

Madlyn Gleich Primoff, Esq.

Henry V. Hutten, Esq.

MAYER BROWN LLP

New York, New York

Attorneys for HSBC Trustee (C.I.) Limited

By: Mark G. Hanchet, Esq.

Robert W. Hamburg, Esq.

HONORABLE MICHAEL E. WILES

UNITED STATES BANKRUPTCY JUDGE

Plaintiff Peter Hurwitz is the Litigation Trustee (the “Trustee”) of the GBG USA Litigation

Trust, which was established by the confirmed plan of reorganization of GBG USA, Inc. (“GBG”)

and certain of GBG’s affiliates who were debtors in these chapter 11 cases. The Defendants are

entities who allegedly controlled GBG and/or who allegedly received (either directly or as

subsequent transferees) funds that GBG transferred in March 2019. The challenged transfers are:

(1) transfers of $196 million that GBG made to an indirect parent company, Global Brands Group

Holding Ltd. (“GBGH”), on March 28, and 29, 2019, which GBGH allegedly used in a dividend

that GBGH paid to its owners; and (2) a payment of $100 million that GBG paid on March 26,

2019 directly to Fung Holdings (1937) Limited (Fung Holdings”), an entity that allegedly held

indirect control of GBGH, in repayment of a debt that GBGH owed to Fung Holdings. The Trustee

contends that the transfers were fraudulent on a variety of theories, and seeks recovery from the

defendants as subsequent transferees (in the case of the $196 million transfers to GBGH) or as an

initial transferee (in the case of the $100 million transfer to Fung Holdings).

Defendants contend that this Court lacks personal jurisdiction over them. They also argue

that the Trustee cannot properly seek recovery of the GBG transfers because (a) the $196 million

that GBG transferred to GBGH allegedly was “returned” when GBGH paid down a loan under

which GBG was the borrower and GBGH was the guarantor, and (b) the loan repayment to Fung

Holdings merely “returned” money that Fung Holdings had previously loaned to GBGH and that

GBGH had then transferred to GBG. Defendants further contend that the Amended Complaint

fails to allege an intent to hinder, delay or defraud creditors; that the $196 million transfers that

GBG made to GBGH were protected by section 546(e) of the Bankruptcy Code; and that certain

of the Defendants were not initial or subsequent transferees.

The original Complaint asserted that certain individuals who were officers and directors of

GBG (Richard Nixon Darling, Mark Joseph Caldwell, Ronald Ventricelli, Robert K. Smits,

Stephen Harry Long and Brandon Carrey) had breached fiduciary duties that they owed to GBG.

Those claims were settled and have been omitted from the Amended Complaint, though those

defendants’ names remain in the caption. The Trustee has also agreed to dismiss claims against

HSBC Trustee (C.I.) Limited as trustee of the Victor Trust, and that dismissal was accomplished

through a stipulation filed on August 16, 2024. (ECF No. 63.) The Trustee otherwise has opposed

the motion to dismiss.

Pleading Standards

Rule 7012(b) of the Federal Rules of Bankruptcy Procedure, which incorporates Federal

Rule of Civil Procedure 12(b)(6), provides for the dismissal of an adversary proceeding if a

complaint fails to state a claim upon which relief may be granted. In reviewing a motion to dismiss

a court must accept the factual allegations of the complaint as true and must draw all reasonable

inferences in the plaintiff’s favor. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atlantic Corp.

v. Twombly, 550 U.S. 544, 555–56 (2007); E.E.O.C. v. Staten Island Sav. Bank, 207 F.3d 144, 148

(2d Cir. 2000). However, the factual allegations in a complaint must be supported by more than

mere conclusory statements. Twombly, 550 U.S. at 555. The allegations must be sufficient “to

raise a right to relief above the speculative level” and provide more than a “formulaic recitation of

the elements of a cause of action.” Id. (citations omitted). “[O]nly a complaint that states a

plausible claim for relief survives a motion to dismiss.” Iqbal, 556 U.S. at 679 (citing Twombly,

550 U.S. at 556).

“A claim has facial plausibility when the plaintiff pleads factual content that allows the

court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

at 678 (citing Twombly, 550 U.S. at 556). “The plausibility standard is not akin to a ‘probability

requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.”

Id. “[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility

of misconduct,” a complaint is insufficient under Fed. R. Civ. P. 8(a) because it has merely

“alleged” but not “show[n] . . . that the pleader is entitled to relief.” Id. at 679; see also id. at 682

(allegations in a complaint are insufficient if there is an “obvious alternative explanation” for the

conduct alleged that is more “likely”) (internal quotation marks and citation omitted).

If a complaint refers to agreements or other documents, it is proper for the Court to consider

those documents in ruling on a motion to dismiss. Grant v. Cnty. of Erie, 542 Fed. Appx. 21, 23

(2d Cir. 2013) (“In its review [of a Rule 12(b)(6) motion to dismiss], the court is entitled to consider

facts alleged in the complaint and documents attached to it or incorporated in it by reference,

documents “integral” to the complaint and relied upon in it, and facts of which judicial notice may

properly be taken under Rule 201 of the Federal Rules of Evidence.”); Rothman v. Gregor, 220

F.3d 81, 88–89 (2d. Cir. 2000) (noting that it is proper to consider documents that are quoted in or

attached to the complaint or incorporated in it by reference, or that plaintiffs either possessed or

knew about and upon which they relied in bringing suit); I. Meyer Pincus & Assocs., P.C. v.

Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991) (noting that it is proper to consider a

document upon which allegations are based, whether or not it is attached to the complaint). If an

allegation is belied by the terms of such documents, the documents are controlling. Id.; see also

Alexander v. Bd. of Educ. of City of New York, 648 Fed. Appx. 118 (2d Cir. 2016) (summary order)

(dismissing complaint where documents contradicted allegations).

Rule 7009 of the Federal Rules of Bankruptcy Procedure, which incorporates Rule 9(b) of

the Federal Rules of Civil Procedure, imposes the additional requirement that allegations of fraud

must be stated “with particularity.” Fed. R. Bankr. P. 7009; Fed. R. Civ. P. 9(b). Rule 7009 applies

to claims that allege that transfers were made with the actual intent to hinder, delay or defraud

creditors. Courts often apply a “more liberal view” when an intentional fraudulent transfer claim

is pleaded by a trustee, however, “since a trustee is an outsider to the transaction who must plead

fraud from second-hand knowledge.” Picard v. Cohmad Sec. Corp. et al. (In re Bernard L. Madoff

Inv. Sec. LLC), 454 B.R. 317, 329 (Bankr. S.D.N.Y. 2011).1 In addition, while “the fraud alleged

must be stated with particularity . . . the requisite intent of the alleged [perpetrator] of the fraud

need not be alleged with great specificity.” Chill v. Gen. Elec. Co., 101 F.3d 263, 267 (2d Cir.

1996) (citations omitted); see also Fed. R. Civ. P. 9(b) (“Malice, intent, knowledge, and other

conditions of a person's mind may be alleged generally.”). Nevertheless, a plaintiff “must allege

facts that give rise to a strong inference of fraudulent intent” in order to state a “plausible” fraud

claim. Lerner, 459 F.3d at 290 (quoting Acito v. IMCERA Grp., Inc., 47 F.3d 47, 52 (2d Cir. 1995)).

As explained below, Defendants seek to dismiss some claims pursuant to section 546(e) of

the Bankruptcy Code. Defenses based on section 546(e) are affirmative defenses. Kirschner v.

1 Defendants have argued that the Trustee had access to extensive pre-Complaint discovery.

However, other proceedings in this Court have made clear that the Trustee’s access to

documents was not complete, and certain discovery remains in process.

Robeco Cap. Growth Funds – Robeco BP US Premium Equities (In re Nine West LBO Sec. Litig.),

87 F.4th 130, 144 (2d Cir. 2022) (hereafter referred to as “Nine West”) (holding that defenses

based on section 546(e) are affirmative defenses). Defendants have also argued that they

“returned” certain funds to GBGH and that these were used to pay down debts that GBG owed;

these also are properly regarded as affirmative defenses. Defendants bear the burden of

demonstrating that affirmative defenses apply, and “[p]laintiffs are under no obligation to plead

facts supporting or negating” the affirmative defenses. Nine West, 87 F.4th at 144. A motion to

dismiss, based on affirmative defenses, can only be granted if facts that establish the defense as a

matter of law appear on the face of the complaint or appear in materials that the Court may consider

because they have been incorporated into the complaint. Id. at 142 (citations omitted); see also

Michael Grecco Prods., Inc. v. RADesign, Inc., 112 F.4th 144, 154 (2d Cir. 2024) (holding it is

permissible to consider whether the allegations of a complaint are by themselves sufficient to

establish an affirmative defense as a matter of law); Clark v. Hanley, 89 F.4th 78, 93–94 (2d Cir.

2023) (same).

The GBG Transfers

The relevant facts regarding the March 2019 transfers, as alleged in the Amended

Complaint (ECF No. 55), are as follows:

1. GBG is a Delaware company that operated the North American portions of the

wholesale footwear and apparel businesses that operated under the “Global Brands” umbrella.

GBG’s portfolio included licensed brands owned by third parties, brands owned by GBG, and

brands owned by certain direct and indirect subsidiaries of GBG. Am. Compl. at ¶¶ 4, 34, 39.

2. GBGH was a holding company. It was the indirect parent company of GBG, there

having been four other layers of intermediate but wholly-owned holding companies between

GBGH and GBG. Id., ¶¶ Ex. A. GBGH is a Bermuda company that had its headquarters in Hong

Kong. Id. at ¶¶ 2, 4, 35, 43, 45-50 and Ex. A. GBGH owned other companies that operated other

international parts of the overall Global Brands business. Id. at ¶¶ 2, 50.

3. William Fung Kwon Lun (“William Fung”) and his brother, Victor Fung Kwok

Fung (“Victor Fung”), allegedly dominated and controlled GBGH and GBG through their own

holdings and through the holdings of the other entities that the Fung brothers directly or indirectly

owned or controlled. Id. at ¶¶ 2, 6, 20-21, 51, 108, 188-189, 193, 269.

4. GBG’s directors and officers wore dual hats, as they were also officers and directors

of GBGH. GBG’s Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and

General Counsel held the same titles at GBGH. Id. at ¶¶ 9, 14-19, 245. During the relevant years

(2018 and 2019) GBG did not have any independent directors and did not have its own independent

legal or financial advisors, and its directors did not meet separately from the meetings of the GBGH

board of directors. Id. at ¶ 248. During the relevant times GBG did not prepare stand-alone

financial statements; instead, GBGH prepared consolidated financial statements for itself and its

subsidiaries. Id. at ¶ 241.

5. On June 27, 2018, GBG and GBGH agreed to sell certain businesses to Centric

Brands, Inc. (“Centric”). The “Base Purchase Price” was to be $1.38 billion, subject to

adjustments. Id. at ¶ 59.

6. GBGH announced a special general meeting of its shareholders to obtain approval

of the Centric transaction. The letter that announced the special meeting stated that GBGH

intended to use the proceeds of the sale to pay down some existing debt, to pay a special dividend

to GBGH’s shareholders, and for general working capital purposes. GBGH’s shareholders

approved both the sale and the special dividend, in separate resolutions, at a meeting in August

2018. The resolution that approved the special dividend authorized a dividend in such amount as

the directors deemed appropriate, subject to and conditioned upon the closing of the Centric sale.

Id. at ¶¶ 59, 61-62, 64, 66-67.

7. The Centric sale closed on October 29, 2018. The assets associated with the

businesses being purchased by Centric were put into a new subsidiary of GBG, and GBG then sold

the equity of that new subsidiary to Centric. GBG received $1.2 billion (less than the originally

agreed Base Purchase Price), and it used the entire proceeds to repay an outstanding debt that GBG

owed under a prior credit facility, for which GBGH had been a guarantor. Id. at ¶¶ 4-5, 55-57, 70-

71. The Complaint alleges that as a result there were no funds remaining from the Centric sale.

Id. at ¶¶ 5, 71, 90, 94, 104, 106, 112, 208, 309, 338, 342, 373. GBG retained some business lines

following the completion of the sale. Id. at ¶ 72.

8. Also on October 29, 2018, GBG and GBGH entered into a new credit agreement

(the “RCF Facility”) pursuant to which the lenders provided a line of credit up to $375 million.

GBG was the borrower under that facility and GBGH was a guarantor. The credit documents

included financial covenants with which GBGH was required to comply. Id. at ¶¶ 76-78.

9. GBGH allegedly faced financial difficulties in late 2018. Members of the Audit

Committee of GBGH’s board of directors were advised in November 2018 that GBGH likely

would default under the covenants in the RCF Facility on or before March 31, 2019. On November

28, 2018, however, a Special Dividend Committee of the GBGH board of directors approved a

resolution under which a special dividend of approximately $305 million would be paid by GBGH

to its shareholders. The precise amount of the dividend was to be calculated after post-closing

adjustments for the Centric transaction had been completed. The dividend purportedly was to be

paid from the proceeds of the Centric sale, although those proceeds had all been paid to prior

lenders in October 2018. The directors allegedly approved the dividend despite internal concerns

about the operations, cash flows and business performance of GBGH. Id. at ¶¶ 90-95, 127.

10. GBGH needed additional liquidity in late 2018, so Fung Holdings agreed on

December 18, 2018 to make a $100 million loan to GBGH. Pursuant to that loan agreement Fung

Holdings transferred $100 million to GBGH’s Hong Kong bank account on December 20, 2018.

Id. at ¶¶ 96, 101, 102-103. GBG was not a party to the loan agreement. See ECF No. 58-11.

GBGH then transferred $100 million to GBG in four transfers of $25 million each. The Amended

Complaint alleges that no loan agreement was executed between GBGH and GBG, and the Trustee

has contended that GBGH’s transfers to GBG were capital contributions, though neither party was

able (at oral argument) to say how these transfers were treated on the companies’ internal

accounting records. On December 19, 2018, GBG wired $100 million (plus an additional $60

million) to Millwork Pte Ltd. (“Millwork”), another indirect subsidiary of GBGH that acted as a

sourcing agent for GBG and to which GBG allegedly owed money. Id. at ¶ 103 and Ex. A.

11. On January 31, 2019, the GBGH board of directors formally authorized the

payment of a special dividend in the amount of HK$2.4 billion. Id. at ¶ 104. GBG’s Chief

Financial Officer, Mark Caldwell, attended the board meeting. Id. On February 14, 2019, GBGH

publicized an offering of Scrip Shares that its shareholders could elect to receive in lieu of

receiving cash as part of the special dividend. The Scrip Shares were to represent a way of

reinvesting the cash that otherwise would have been paid to the shareholders who made the

elections to take the Scrip Shares. Elections had to be made by March 28, 2019, and the special

dividend was scheduled for payment on April 4, 2019. Id. at 104-107.

12. The GBGH board of directors intended that the GBGH special dividend would be

funded by GBG, and that GBG would borrow additional funds for that purpose. Id. at ¶ 107. There

was significant overlap among the boards of directors of GBGH and GBG, id. at ¶¶ 15-18), and in

connection with the proposed dividend and other matters the GBG board of directors held no

meetings separate from the GBGH directors’ meetings. Id. at ¶ 248.

13. On March 1, 2019, a group identified as the “Controlling Shareholders” advised

GBGH that they would not be taking up the offering of scrip shares but that they intended to make

a loan to GBGH in the amount of the special dividend that would be payable to them. Id. at ¶ 108.

14. In advance of the planned payment of the special dividend, on March 11, 2019,

GBG drew down the remaining $253 million that was then available under the RCF Facility. Id.

at ¶¶ 111-112. GBGH caused GBG to make this draw. Id. at ¶¶ 7, 309, 373, 411.

15. GBGH had been engaged in discussions with the RCF Facility lenders in an effort

to resolve issues regarding GBGH’s compliance with financial covenants, but those discussions

had not resulted in any agreements by mid-March 2019 and GBGH’s auditors predicted that

GBGH would be out of compliance with the covenants on March 31, 2019. Id. at ¶¶ 131-133.

16. By March 14, 2019, the RCF lenders had become aware that GBGH intended to

pay the special dividend, and they were aware that GBG had drawn the remaining balance on the

RCF Facility. The lenders initially sought to obtain a commitment by GBGH that the special

dividend would not be paid. Id. at ¶¶ 134-138.

17. On March 26, 2019, GBG was directed to pay $100 million directly to Fung

Holdings in repayment of the loan that Fung Holdings had made to GBGH in December 2018,

with the payment to be made prior to March 31, 2019. Id. at ¶¶ 123-125. The transfer instructions

were given by GBG’s Treasurer (a US citizen) and approved by Mr. Caldwell as GBG’s Chief

Financial Officer. The transfer was made from GBG’s bank account in the United States. Id. The

transfer was made without any loan agreement and without any resolution or written consent from

GBG’s directors. Id. at ¶ 125. GBGH was the borrower of funds from Fung Holdings, and GBG

had no obligation to repay that amount. Id. at ¶ 394. The transfer allegedly was made with

fraudulent intent, to an insider, without reasonably equivalent value, and shortly before substantial

other debts were incurred. Id. at ¶¶ 183, 185-198. 202, 207-211. The Amended Complaint alleges

that certain defendants (including William Fung) “were aware” that GBG was going to repay the

loan that had previously been made to GBGH. Id. at ¶ 124.

18. On March 28 and 29, 2019, GBG transferred $196 million from its bank accounts

to GBGH’s bank accounts in New York. The amount was calculated to cover the net cash dividend

to GBGH’s shareholders that was to be paid in early April and to provide an additional “buffer” to

ensure that adequate funds were available. Id. at ¶¶ 115-119. The $196 million transfer was made

directly from GBG to GBGH, skipping all four of the intermediate holding companies between

GBG and GBGH. Id. at ¶¶ 116-117. The transfers were directed by the Controlling Shareholders

and were made upon the instructions of GBG’s Treasurer (a citizen of the United States) and with

notice to Mr. Caldwell, who was the Chief Financial Officer of both GBG and GBGH. The

transfers were made from GBG’s bank accounts in the United States to GBGH through a

correspondent bank account in New York. Id. at ¶¶ 118-119, 245, 269. Certain officers and

directors of GBG, who were also officers and directors of GBGH, allegedly permitted the transfers

without appropriate corporate action on behalf of GBG and without regard to the interests of GBG.

Id. at ¶¶ 9, 245-249. The transfers allegedly were made with fraudulent intent, to an insider,

without reasonably equivalent value, and shortly before a substantial debt was incurred. The

transfers by GBG to GBGH also were allegedly concealed from the RCF Lenders. Id. at ¶¶ 184-

201, 203-211.

19. GBG allegedly was insolvent and allegedly had unreasonably small capital at the

times that it made the March 2019 transfers to GBGH and to Fung Holdings. Id. at ¶¶ 212-240.

No separate action ever was taken by the GBG board of directors to approve the March 2019

transfers. Id. at ¶¶ 12, 122, 125.

20. On March 31, 2019, GBG drew down $75 million under other credit facilities. Id.

at ¶¶ 84, 85, 87, 88, 113. GBGH caused GBG to make these draws. Id. at ¶¶ 7, 309, 373, 411.

21. At the time GBG made its transfers to GBGH and to Fung Holdings, the RCF

Lenders had asserted that GBGH was not in compliance with the financial covenants in the RCF

credit documents. Id. at ¶¶ 142-147. On April 3, 2019, the RCF Lenders executed a waiver

agreement with GBG and GBGH to permit GBGH to pay the special dividend. The waiver had

the following conditions:

 Fung Holdings was to provide GBGH with an interest-free, subordinated loan in the

amount of $94,181,882.20 (the New Shareholder Loan”). GBGH was to draw down

the full amount of that New Shareholder Loan on April 3, 2019 and was to use the

proceeds to pay down $94,181,882.90 of the obligations that were owed to the RCF

Lenders.

 Fung Holdings was to execute another shareholder loan agreement (the “Dividend

Shareholder Loan”) under which Fung Holdings would provide GBGH with an

interest-free, unsecured and subordinated loan of $92,169,046.02, which equaled the

amount of the cash that the controlling shareholders of GBGH were to receive as part

of the Special Dividend. GBGH was to draw down the amounts available under that

loan in a single drawdown on April 4, 2019.

 Fung Holdings was to execute a legally binding undertaking to pay an additional

$94,181,882.90 to the RCF Lenders on May 31, 2019 unless the amounts owed to those

lenders had previously been reduced below $175 million. Id. at ¶¶ 152-156, 158.

22. The New Shareholder Loan was memorialized in a Shareholder Loan Agreement

dated April 3, 2019. Id. at ¶ 160. GBGH drew down the entire available amount

($94,181,882.90) on April 3, 2019. Id. GBGH immediately applied those funds in payment of

amounts due to the RCF lenders. Id. at ¶ 177.

23. The special dividend was paid on April 4, 2024. The total cash payments (to those

who had not elected to reinvest funds) was $280,526,000. Of that amount, $87,679,258.89 was

withheld by GBGH and treated as having been disbursed by Fung Holdings to GBGH pursuant to

the Dividend Shareholder Loan. Another $4,489,787.13 was transferred that day by Fung

Holdings to GBGH, equaling the cash dividends paid to William Fung and certain other defendants

as part of the special dividend. Id. at ¶¶ 156-159, 164-165.

24. As noted above, the waiver agreement with the RCF lenders required Fung

Holdings to make an additional payment to RCF if the amount of the outstanding obligations had

not been reduced below $175 million. In May 2019, GBGH and Fung Holdings entered into a

Third Shareholder Loan Agreement under which Fung Holdings loaned $105,818,117 to GBGH.

GBGH used the proceeds of that loan to repay some of the outstanding obligations under the RCF

Facility, which brought the balance below the $175 million target. Id. at ¶¶ 178-181.

25. GBG filed its voluntary chapter 11 petition in this Court on July 29, 2021.

The Defendants and the Entities They Allegedly Owned or Controlled

26. The relationships of the various defendants to GBGH is depicted in a chart that was

set forth at paragraph 33 of the Amended Complaint:

Victor Fung

Kwok King

Kwon Lun (C.1) itd.

— 1503 083,786» + 41503.953:787

400% 100% 4apes 100%

Limited Enferorise Ltd. Holdings Lid. Developments Ltd. Rockowitz

100%

216,255,642 | 26,114,400 50,284,200 3,187,907,573 209,925,290 2,814,444

108,800

C937} Ltd | Millennium Rockowitz Rockowitz

1 Holdings Ltd. (Personal) fin Trust}

253,340,780 128,765,408 «= 24,518,625

International Lid.

295,727,908 200,000,000 792,179,665

Holding Lid.

27. William Fung is an individual who directly owned some shares in GBGH and who

indirectly (through other entities) owned or controlled other shares of GBGH. William Fung is the

former Chairman of GBGH and at the relevant times he was the Vice Chairman of Fung Holdings.

William Fung was a member of the GBGH board of directors and he attended a meeting of the

Audit Committee of the GBGH board of directors in November 2018 at which time GBGH’s

financial troubles allegedly were discussed. /d. at § 91. He also was a member of the special

committee of the GBGH board of directors that was established to determine and finalize the

details of the special dividend. /d. at ¢ 92. William Fung and his brother, Victor Fung, allegedly

dominated and controlled GBGH and GBG through their own holdings and through the holdings

of the other entities that the Fung brothers owned. /d. at J§ 2, 6, 20-21, 51, 108, 188-189, 193,

269. William Fung also allegedly controlled GBG through his position as chairman of GBGH. Jd.

at § 187. William Fung approved and authorized the payment of the GBGH special dividend and

he voted in favor of the special dividend at the shareholders meeting in August 2018 on his own

14

behalf and as a proxy for others. William Fung also approved the shareholder loan that Fung

Holdings made to GBGH in December 2018. Id. at ¶¶ 63, 65-68, 91-92, 95, 104. He was also part

of the group identified as the “Controlling Shareholders” in March 2019. Id. at ¶¶ 6, 108, 187-

188, 297, 355. The Controlling Shareholders allegedly dictated the terms of the GBG dividend

transfer. Id. at ¶ 269. William Fung also allegedly “dictated’ the terms of the special dividend

transfer that GBG made to GBGH and knew that GBG was repaying the loan that had been made

by Fung Holdings to GBGH in December 2018. Id. at ¶¶ 121, 124, 265, 267, 269, 338. William

Fung, his family members and affiliates collectively received $41,952,504 as part of the special

dividend. Id. at ¶ 168. The Amended Complaint alleges that William Fung “purposefully directed”

his actions and the actions of GBGH at the United States of America by dictating the terms of the

special dividend transfer that was made by GBG and by participating directly in the decisions

under which the transfers were approved. Id. at ¶¶ 265-268.

28. Victor Fung is the brother of William Fung. At the relevant times he was the

Chairman of Fung Holdings. Id. at ¶¶ 2, 21. Victor Fung owned some shares of GBGH directly,

and indirectly owned others through his ownership interest in various entities. Id. at ¶¶ 27, 173.

Victor Fung was a member of the group identified as the “Controlling Shareholders” in March

2019. Id. at ¶ 108. The Controlling Shareholders allegedly dictated the terms of the GBG dividend

transfer. Id. at ¶ 269. In addition, William Fung and Victor Fung allegedly controlled Fung

Holdings and thereby allegedly dominated and controlled GBGH and GBG. Id. at ¶¶ 2, 188-189,

193, 269. Victor Fung allegedly used his control of Fung Holdings and GBGH to cause GBG to

transfer funds to GBGH for purposes of the special dividend, and he allegedly knew that GBG was

repaying the loan that Fung Holdings had previously made to GBGH. Id. at ¶ 271-72, 342. Victor

Fung and his entities received $50,314,460 as part of the special dividend. Id. at ¶ 173. The

Trustee alleges that Victor Fung “purposefully directed” his actions, and the actions of GBGH, at

the United States of America by using control of GBGH (together with the other Controlling

Shareholders) to cause GBG to make the dividend transfer and by participating directly in the

decisions under which the transfers were approved. Id. at ¶¶ 271-72.

29. The Victor Trust is a Channel Islands trust for which HSBC Trustee (C.I.) Limited

acts as trustee. It appears that the Victor Trust itself is no longer a defendant, as the parties have

stipulated to the dismissal of claims against the Trustee of that trust and the Amended Complaint

does not otherwise identify the Victor Trust as a party. The beneficiaries of the Victor Trust are

members of Victor Fung’s family. The Amended Complaint alleges that the Victor Trust “directly

or indirectly” owned shares in GBGH at the relevant times, though a chart that is set forth in

paragraph 33 of the Amended Complaint appears to show that the Victor Trust just held interests

in other entities that held shares. Id. at ¶¶ 28, 33, 51. The Victor Trust was part of the group that

was identified as the “Controlling Shareholders” in March 2019. Id. at ¶ 108. The Victor Trust

allegedly had the ability, with other Controlling Shareholders, to dictate the terms of the special

dividend, and the Controlling Shareholders allegedly did dictate the terms of the GBG dividend

transfer. Id. at ¶¶ 269, 273. The Victor Trust received (through a subsidiary) received a cash

distribution of $7,487,771 as part of the special dividend. Id. at ¶ 171. The Trustee alleges that

the Victor Trust “purposefully directed” its actions, and the actions of GBGH, at the United States

of America by using control of GBGH (together with the other Controlling Shareholders) to cause

GBG to make the dividend transfer and by participating directly in the decisions under which the

transfers were approved. Id. at ¶ 273.

30. King Lun Holdings Limited (“King Lun”) is a BVI company that was owned 50%

by William Fung and 50% by HSBC Trustee (C.I.) Ltd. as trustee of the Victor Trust. King Lun

was the 100% owner of Fung Holdings. Id. at ¶¶ 23, 33. King Lun did not own shares of GBGH,

but through other entities it indirectly owned more than 30% of GBGH’s outstanding shares. Id.

at ¶¶ 23, 33, 51. King Lun was part of the group that was identified as the “Controlling

Shareholders” of GBGH in March 2019. Id. at ¶ 108. The Controlling Shareholders allegedly

dictated the terms of the GBG dividend transfer. Id. at ¶ 269. King Lun, through its

representatives, approved the GBGH special dividend, and knew that the funds would originate

with GBG. Id. at ¶ 278. King Lun received a distribution of $74,235,959 as part of the special

dividend. Id. at ¶ 167. The Trustee alleges that King Lun “purposefully directed” its actions, and

the actions of GBGH, at the United States of America by using control of GBGH (together with

the other Controlling Shareholders) to cause GBG to make the dividend transfer and by

participating directly in the decisions under which the transfers were approved. Id. at ¶ 278.

31. Fung Holdings is incorporated in Hong Kong and was the largest shareholder of

GBGH. Fung Holdings was a direct owner of some GBGH shares and an indirect owner through

its subsidiary, Fung Distribution International Limited (“Fung Distribution”). Victor Fung was

the chairman of Fung Holdings, and Fung Holdings was controlled at the relevant times by William

Fung, Victor Fung and other members of their families. Id. at ¶¶ 2, 21, 27, 33. Fung Holdings

was part of the group that was identified as the “Controlling Shareholders” in March 2019. Id. at

¶¶ 108, 269. The Controlling Shareholders allegedly dictated the terms of the GBG dividend

transfer. Id. at ¶ 269. Fung Holdings also directly or indirectly controlled GBG through the actions

of William Fung and other directors of GBGH, as well as Victor Fung. Id. at ¶ 188. Fung Holdings

was the direct recipient of the $100 million transfer that GBG made in March 2019 from GBG’s

US bank account. Id. at ¶ 123. It also received (directly or indirectly) $74,235,959 pursuant to

the special dividend, and another 792,179,665 of “scrip shares.” Id. at ¶ 166. The Amended

Complaint alleges that Fung Holdings “purposefully directed” its actions, and the actions of

GBGH, at the United States of America by dictating the terms of the transfer that GBG made to

GBGH and by participating in and by participating directly in the decisions under which the

transfers were approved. Id. at ¶¶ 269-70. Curiously, the Amended Complaint alleges that Fung

Holdings “received’ the repayment, by GBG, of the loan that Fung Holdings had previously made

to GBGH, but it does not allege that Fung Holdings directed or caused that repayment to be made

by GBG. Id.

32. Fung Distribution was a wholly-owned subsidiary of Fung Holdings. Fung

Distribution owned 200 million shares of GBGH at the relevant times. Fung Distribution is a BVI

entity. Id. at ¶¶ 24, 33. The Trustee alleges generally that Fung Distribution had sufficient

minimum contacts with the United States to establish personal jurisdiction (id. at ¶ 264), but part

VI of the Amended Complaint does not contain a separate paragraph summarizing the

jurisdictional allegations regarding Fung Distribution. However, the Amended Complaint alleges

that Fung Distribution was part of the group identified as the “Controlling Shareholders” in March

2019, id. at ¶ 108, and it alleges that the Controlling Shareholders collectively dictated the terms

of the GBG dividend transfer. Id. at ¶ 269. Fung Distribution allegedly received $7,133,749 in

connection with the special dividend. Id. at ¶ 170.

33. Step Dragon Enterprise Ltd. (“Step Dragon”) is an entity organized under the laws

of the British Virgin Islands that is “beneficially owned” by William Fung. Step Dragon “directly

or indirectly” owned more than 50 million shares of GBGH at the relevant times. Id. at ¶¶ 25, 33.

Step Dragon was part of the group identified as the “Controlling Shareholders” of GBGH in March

2019. Id. at ¶ 108. The Controlling Shareholders allegedly dictated the terms of the GBG dividend

transfer. Id. at ¶ 269. Step Dragon allegedly received $1,793,931 as part of the special dividend.

Id. at ¶ 169. The Amended Complaint alleges that Step Dragon “purposefully directed” its actions,

and the actions of GBGH, at the United States of America by dictating the terms of the transfer

that GBG made to GBGH and by participating in and by participating directly in the decisions

under which the transfers were approved. Id. at ¶ 274.

34. Golden Step Limited (“Golden Step”) is an entity “beneficially” owned by William

Fung. Golden Step “directly or indirectly” owned more than 26 million shares of GBGH at the

relevant times. Id., at ¶¶ 26, 33. Golden Step was part of the group identified as the “Controlling

Shareholders” of GBGH in March 2019. Id. at ¶ 108. The Controlling Shareholders allegedly

dictated the terms of the GBG dividend transfer. Id. at ¶ 269. Golden Step received $931,468 as

part of the special dividend. Id. at ¶ 169. The Amended Complaint alleges that Golden Step

“purposefully directed” its actions, and the actions of GBGH, at the United States of America by

dictating the terms of the transfer that GBG made to GBGH and by participating in and by

participating directly in the decisions under which the transfers were approved. Id. at ¶ 275.

35. First Island Developments Limited (“First Island”) is a BVI entity that is wholly

owned by the Victor Trust. First Island “directly or indirectly” owned shares in GBGH at the

relevant times. Id. at ¶¶ 29, 33. The Trustee alleges generally that First Island had sufficient

minimum contacts with the United States to establish personal jurisdiction (id. at ¶ 264), but part

VI of the Amended Complaint does not contain a separate paragraph summarizing the

jurisdictional allegations regarding First Island. The Amended Complaint also does not explicitly

list First Island as having been part of the group identified as the “Controlling Shareholders” in

March 2019, Id. at ¶ 108. However, in paragraph 108 of the Amended Complaint alleges that the

Controlling Shareholders included entities through which Fung Holdings, William Fung and Victor

Fung held GBGH shares, and that description includes First Island. Id. at ¶¶ 23, 33, 108. The

Controlling Shareholders allegedly dictated the terms of the GBG dividend transfer. Id. at ¶ 269.

First Island received $7,487,771 in connection with the special dividend. Id. at ¶ 171.

36. Spencer Theodore Fung is the son of Victor Fung and the nephew of William Fung.

Spencer Fung “directly or indirectly” owned shares in GBGH at the relevant times. He is a resident

of Hong Kong. Id. at ¶¶ 30, 174. He received $59,222 as part of the special dividend. Id. at ¶ 174.

He is not alleged to have been part of the Controlling Shareholders’ group and is not otherwise

alleged to have controlled the actions of GBG, though there are vague references to his having

attended a meeting by proxy. Id. at ¶¶ 63, 110, 279. The Amended Complaint alleges that Spencer

Fung “purposefully directed” his actions at the United States of America because he allegedly

knew, as a “close relative” of Victor and William Fung, that GBGH was dictating the terms of the

special dividend to GBG. Id. at ¶ 279. Spencer Fung also allegedly voted in favor of GBGH’s

payment of a dividend and allegedly “understood” when he received the dividend that funds had

originated from GBG. Id.

37. Bruce Philip Rockowitz was Vice-Chairman of GBGH at the relevant times and

had formerly been the Chief Executive Officer of GBGH. He owned GBGH shares. He resides

in Hong Kong. Id. at ¶ 31. He was a member of the board of directors of GBGH and of the special

dividend committee of that board that finalized the details for the special dividend, and he knew

that GBG was providing the funds that would enable the special dividend to be paid. Id. at ¶¶ 92,

121, 276. In those capacities he allegedly approved the direction that GBG transfer $196 million

to GBGH. Id. at 276.

38. Hurricane Millennium Holdings Limited (“Hurricane Millennium”) is a BVI

entity that is beneficially owned by a trust established for the benefit of Mr. Rockowitz’s family.

Hurricane Millennium “directly or indirectly” owned shares of GBGH at the relevant times. Id. at

¶¶ 32, 33, 277. Hurricane Millennium allegedly knew, through Mr. Rockowitz, that GBGH was

dictating the terms of the transfer made by GBG to GBGH. Id. at ¶ 277. However, there is no

allegation that Hurricane Millennium was a member of the “Controlling Shareholders” group or

that Hurricane Millennium itself controlled any of the actions of GBG. The Amended Complaint

alleges that Hurricane Millennium “purposefully directed” its actions at the United States of

America because it allegedly knew, by its association with Mr. Rockowitz, that the monies

originated from GBG and that GBGH was dictating the terms of the dividend transfer. Id. at ¶

277. Hurricane Millennium also allegedly approved GBGH’s payment of a dividend at a GBGH

shareholder meeting.

Discussion

I. Personal Jurisdiction

Rule 7004(f) of the Federal Rules of Bankruptcy Procedure provides that if the exercise of

jurisdiction is consistent with the Constitution and laws of the United States then the service of a

summons in accordance with the provisions of Rule 4004, or in accordance with the provisions of

Rule 4 of the Federal Rules of Civil Procedure, is effective to establish personal jurisdiction over

the person of any defendant with respect to a case under the Code or a civil proceeding arising

under the Code, or arising in or related to a case under the Code. Fed. R. Bank. P. 7004(f).

Defendants have raised no issues as to the manner in which service of process was effected and

they have not disputed that the claims asserted in this adversary proceeding either arise under, arise

in or are related to a case under chapter 11 of the Bankruptcy Code. However, the Defendants

dispute whether the exercise of personal jurisdiction would be consistent with Constitutional

limitations.

Jurisdiction must be assessed individually as to each defendant. Calder v. Jones, 465 U.S.

783, 790 (1984). Personal jurisdiction also must be established as to each claim that is asserted.

Charles Schwab Corp. v. Bank of Am. Corp., 883 F.3d 68, 82-84 (2d Cir. 2018).

The Supreme Court has distinguished between the exercise of “specific jurisdiction,”

which is an exercise of personal jurisdiction over claims that arise out of a defendant’s contacts

with a forum, and the exercise of “general jurisdiction,” which is the exercise of personal

jurisdiction over a defendant whose contacts with a forum are so continuous and systematic that

the defendant is determined to be “at home” in that forum for the purpose of any and all claims

that may be asserted against it. Daimler AG v. Bauman, 571 U.S. 117, 126-127 (2014). The

Trustee does not assert that “general jurisdiction” exists over any of the Defendants, and instead

has argued that it is proper for this Court to exercise specific jurisdiction over the Defendants.

Due process of law requires that specific jurisdiction be exercised only where a defendant

has had sufficient contacts with the form so that the exercise of jurisdiction comports with fair play

and substantial justice. International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). In this

bankruptcy case the sovereign authority whose jurisdiction is invoked is the United States (not a

particular state), and so minimum contacts with the United States as a whole are sufficient to satisfy

due process. See Owens-Illinois, Inc. v. Rapid Am. Corp. (In re Celotex Corp.), 124 F.3d 619, 630

(4th Cir. 1997) (holding that the sovereign exercising bankruptcy jurisdiction is the United States,

so that minimum contacts with the United States (not a particular state) are all that is required);

Enron Corp. v. Arora (In re Enron Corp.), 316 B.R. 434, 444 (Bankr. S.D.N.Y. 2004) (holding that

only a federal “minimum contacts” standard is applicable in federal question cases).

In their initial papers the Defendants argued that the “minimum contacts” standard requires

a physical presence or physical conduct within a jurisdiction, and they argued that personal

jurisdiction was lacking because the only actions they allegedly took were at shareholder meetings

or at board of director meetings that were held outside the United States. See Dfs. Mem., ECF No.

57, at 20-21. However, the parties have since agreed in their supplemental submissions that the

“minimum contacts” standard may be satisfied, and that personal jurisdiction may be based on

conduct that occurred entirely outside the United States, so long as the conduct had effects in the

United States and so long as the defendant “expressly aimed” its conduct at the United States.

Licci v. Lebanese Canadian Bank, 732 F.3d 161, 173 (2d Cir. 2013); Alfandary v. Nikko Asset

Mgmt. Co., Ltd., 337 F.Supp.3d 343, 365 (S.D.N.Y. 2018). Incidental effects within the United

States are not enough; instead, the defendant must have intentionally caused – i.e., expressly aimed

to cause – an effect in the United States through its foreign actions. Gordon v. Invisible Children,

Inc., 14 Civ. 4122, 2015 U.S. Dist. LEXIS 129047, at *16-17 (S.D.N.Y. Sep. 24, 2015) (citing

Tarsavage v. Citic Trust Co. Ltd., 3 F. Supp. 3d 137, 145 (S.D.N.Y. 2014).

Many prior decisions have held that the knowing receipt of a fraudulent transfer is itself a

“participation” in an intentional tort, so that a non-resident defendant who receives a fraudulent

transfer may be subject to personal jurisdiction in the forum from which the transfer was made and

where the effects of the transfer were targeted. See, e.g., Gambone v. Lite Rock Drywall, 288 Fed.

Appx. 9, 14 (3d Cir. 2008) (holding that a transferee “participated in a fraudulent conveyance,

which is a species of the intentional tort of fraud,” and that the transferee therefor expressly aimed

its conduct at the forum); Darien Rowayton Bank v. McGregor, 668 F. Supp. 3d 324, 334 (M.D.

Pa. 2023) (transferee’s receipt of funds that was intended to defeat the transferor’s creditors was

conduct aimed at the forum where a lawsuit was pending and gave rise to personal jurisdiction

over the transferee); Montoya v. Akbari-Shahmirzadi (In re Akbari-Shahmirzadi), No. 11-15351,

Adv. P. No. 13-01035, 2016 Bankr. LEXIS 3957, at *7 (Bankr. D.N.M. Nov. 14, 2016) (describing

the exercise of personal jurisdiction based on the knowing receipt of a fraudulent transfer as a

nearly uniform outcome in prior cases); DCK/TTEC, LLC v. Postel, No. 14-1739, 2015 U.S. Dist.

LEXIS 63279, at *11-14 (W.D. Pa. 2015) (transferee’s receipt of a fraudulent transfer with intent

to defraud the transferor’s Pennsylvania creditors was conduct aimed at the forum and supported

personal jurisdiction over the transferee in Pennsylvania); Ezra v. Wilton Group Inc., 2018 N.Y.

Misc. LEXIS 4380, at *4-6 (N.Y. Cty. 2018) (transferee’s receipt of a payment meant to frustrate

collection of a potential judgment against the transferor in a New York lawsuit constituted conduct

that was aimed at New York and gave rise to personal jurisdiction over the transferee). I understand

the application of this rule with respect to persons and entities who are the “initial transferees” of

a fraudulent transfer and who, in that capacity, are alleged to have knowingly participated in a

transaction (a transfer) that occurred in the United States and that was a fraudulent act under US

law. Those rulings lend support to the exercise of personal jurisdiction with respect to the $100

million transfer that Fung Holdings received directly from GBG, as discussed further below.

With respect to the $196 million of payments that GBG made to GBGH, however, the

Defendants in this action are alleged to have been subsequent transferees of the funds that GBGH

received. They are not alleged to have received those funds directly from GBG, and there is no

allegation that the transfers that GBGH made to its shareholders were made from or through the

United States. The alleged fraudulent transfer from GBG to GBGH may have been akin to a tort,

but the Second Circuit Court of Appeals has held that an action against a subsequent transferee is

not itself an independent action in tort or even an independent conduct-regulating claim at all;

instead, “[o]nly the initial transfer involves fraudulent conduct,” and a recovery from subsequent

transferees is merely a remedy that the statute provides based on that initial wrongful transfer. In

re Picard, 917 F.3d 85, 98-99 (2d Cir. 2019) (holding that the Court did not need to consider

whether section 550 represented an intent by Congress to regulate transfers occurring abroad

because the only wrongful “conduct” that is regulated is the initial transfer from the United States,

and an action against subsequent transferees is merely a remedy for that initial transfer).

I agree that in the case of a foreign subsequent transferee something more than knowledge

of the allegedly fraudulent origin of the funds is required in order to give rise to personal

jurisdiction in the United States. The Supreme Court has emphasized that personal jurisdiction

over a defendant, based on the “effects” test, must be based on contacts with a forum that the

defendant itself has created. Walden v. Fiore, 571 U.S. 277, 284 (2014). If (as the Second Circuit

Court of Appeals has held) the receipt of the subsequent transfer is not itself akin to a tort and is

not itself conduct that the fraudulent transfer statutes seek to regulate, then the receipt of the

subsequent transfer should not be regarded, standing alone, as a participation in an intentional tort.

A subsequent transferee’s “knowledge” that that a subsequent transfer involves funds that

originated in a separate fraudulent transfer from a US forum, without more, also is not a “contact”

with the US forum that the defendant has created through its own activities, as required by Walden.

If jurisdiction is to be based on the alleged intentional wrong (the initial transfer), then the

defendants must have engaged in some conduct in relation to that initial transfer.

In this case, many (but not all) of the Defendants are alleged to have exercised control over

GBG and to have used their control to direct and cause GBG to make the alleged fraudulent

transfers. A transferee (including a subsequent transferee) who has controlled the initial US

transferor, and who has directed and caused a fraudulent transfer to be made by that controlled US

entity, has itself sufficiently directed its conduct (i.e., its exercise of control) at the United States

to support an exercise of personal jurisdiction. See Universitas Educ., LLC v. Nova Grp., Inc., 11-

CV-1590, 2021 U.S. Dist. LEXIS 185733, at *24-25 (S.D.N.Y. Sept. 28, 2021) (defendants who

directed that fraudulent transfers be made by a company that was a party to a New York arbitration

committed tortious activity that was targeted at New York and were subject to personal jurisdiction

in New York); Dontos v. Vendomation NZ Ltd., 582 Fed. Appx. 338, 344-45 (5th Cir. 2014) (noting

that the passive recipient of funds by a subsequent transferee may not be sufficient to establish

minimum contacts, but that a subsequent transferee who precipitates and directs the underlying

transfer is subject to personal jurisdiction); Mullins v. TestAmerica, Inc., 564 F.3d 386, 402 (5th

Cir. 2009) (holding that a defendant “should reasonably have anticipated being haled into a Texas

court for precipitating and directing an alleged fraudulent transfer at the expense of a known, major

creditor in Texas”); Coastal Commerce Bank v. Scully, Civ. No. 6:17-1011, 2018 U.S. Dist. LEXIS

124155, at *14-15 (W.D. La. 2018) (dismissing claims against subsequent transferees for lack of

personal jurisdiction in the absence of allegations that they took specific actions aimed at the

completion of the underlying fraudulent transfer). How this standard applies to the various

Defendants is discussed further below.

If minimum contacts have been established, then a court should consider whether an

exercise of jurisdiction is reasonable. Relevant factors include (1) the burden that the exercise of

jurisdiction would impose on the defendant, (2) the interests of the forum state in adjudicating the

case, and (3) the plaintiff’s interest in obtaining convenient and effective relief. World-Wide

Volkswagen Corp. v. Woodson, 444 U.S. 286, 292 (1980). Where a defendant resides in a foreign

country, a court should also consider the procedural and substantive policies of other nations whose

interests are affected by the assertion of jurisdiction, and the federal government’s interest in its

foreign relations policies. Asahi Metal Ind. Co., Ltd. v. Superior Court, 480 U.S. 102, 113 (1987).

If a defendant has purposefully directed its activities at a forum, however, that defendant must

present a “compelling case” if it seeks to defeat personal jurisdiction on the ground that the exercise

of jurisdiction would be unreasonable. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477 (1985).

A court has the discretion to hold a preliminary evidentiary hearing where personal

jurisdiction is challenged, but it may instead defer the issue to trial. Dorchester Fin. Sec., Inc. v.

Banco BRJ, S.A., 722 F.3d 81, 84 (2d Cir. 2013) (court has considerable procedural leeway in

deciding a motion to dismiss for lack of personal jurisdiction); CutCo Indus. Inc. v. Naughton, 806

F.2d 361, 364 (2d Cir. 1986) (court has discretion to decide the proper procedure to follow). In

this case, the Trustee initially responded to the motion to dismiss by seeking permission to conduct

further discovery on jurisdictional issues. ECF No. 62. However, the Defendants responded by

contending, among other things, that they sought no factual hearing and that in connection with

the motion to dismiss they did not dispute “any facts that Plaintiff has alleged in support of

jurisdiction.” ECF No. 66, at pp. 7-8. The motion to dismiss for lack of personal jurisdiction

therefore is directed solely at the sufficiency of the pleadings. In that context, the well-pleaded

allegations of the Amended Complaint are taken as true, Robinson v. Overseas Mil. Sales Corp.,

21 F.3d 502, 507 (2d Cir. 1994), and they are sufficient if they make out a prima facie case that

jurisdiction exists. Penguin Grp. (USA) Inc. v. Am. Buddha, 609 F.3d 30, 34-35 (2d Cir. 2010);

DiStefano v. Carozzi N. Am., Inc., 286 F.3d 81, 84 (2d Cir. 2001).

A. Claims Based on the $196 Million Transfer by GBG to GBGH

One of the named Defendants (Spencer Theodore Fung) was not identified as a

“Controlling Shareholder” of GBGH. He allegedly voted in favor of a dividend payment by

GBGH, and he allegedly knew that the dividend paid by GBGH had originated with GBG.

However, there are no allegations that he personally exercised any control over GBGH or GBG,

or that he played any role in deciding how GBGH would fund a dividend payment, or that he

personally participated in any action that caused GBG to make the transfer that it made to GBGH.

He allegedly appeared by proxy at a shareholders’ meeting of GBGH and his shares allegedly were

voted in favor of GBGH’s payment of a dividend (granting discretion to GBGH’s directors and to

what funds were available for that purpose) but that shareholder vote at most just removed a

potential obstacle to GBGH’s payment of a dividend; it did not force GBGH to obtain funds from

GBG and did not compel GBG to make an allegedly fraudulent transfer. There also are no

allegations that Spencer Fung conspired with others, or that the purposeful conduct of other parties

should be attributed to him for jurisdictional purposes. I agree that the allegations of the Amended

Complaint are not sufficient to support an exercise of personal jurisdiction as to Spencer Fung.

The Amended Complaint therefore will be dismissed insofar as it relates to Spencer Fung, but with

leave to replead.

Hurricane Millennium is owned by a trust, the beneficiaries of which are members of Mr.

Rockowitz’s family. The Amended Complaint alleges that Mr. Rockowitz, in his capacity as a

director of GBGH, exercised control over GBG’s actions and participated in causing GBG to make

the $196 million of dividend-related transfers to GBGH. However, Hurricane Millennium is not

itself identified as a Controlling Shareholder, and there are no allegations in the Amended

Complaint that Hurricane Millennium itself exercised any control over GBGH or GBG or their

respective actions. Nor is there any allegation that Mr. Rockowitz was acting as an agent for

Hurricane Millennium (as opposed to acting in his individual capacity) when he allegedly

approved and directed transfers by GBG, or that there was any other basis on which other parties’

actions in control of GBGH and GBG should be attributed to Hurricane Millennium. The fact that

Mr. Rockowitz’s family members are beneficiaries of the trust also is not enough, standing alone,

to support a finding that Hurricane Millennium itself engaged in conduct that was directed at the

United States. I agree that the allegations of the Amended Complaint are not sufficient to support

an exercise of personal jurisdiction as to Hurricane Millennium. The Amended Complaint will be

dismissed as to Hurricane Millennium, but with leave to replead.

The other named Defendants are affiliated with (or allegedly under the direct or indirect

control of) William Fung and Victor Fung. They collectively are identified as “Controlling

Shareholders” or (in the case of Mr. Rockowitz) as a director of GBGH. The Amended Complaint

alleges that they collectively exercised their corporate control of GBGH and GBG to cause GBG

to make the challenged transfers. GBGH’s control of GBG is not contested, as GBG was indirectly

wholly-owned by GBGH. The alleged conduct unquestionably was directed at the United States

(the whole point was to transfer funds from the New York bank account of a US company, GBG,

to the detriment of GBG’s US creditors), the effects of the conduct were experienced in the United

States (the alleged fraudulent transfers happened here to the alleged detriment of creditors located

here), and the Defendants are alleged to have been aware that the transfers were being made at a

time, and under circumstances, that made them fraudulent as to GBG’s creditors. This is sufficient

to support an exercise of personal jurisdiction.

Defendants argue that they were merely “minority” shareholders of GBGH because they

owned less than 50% of the outstanding GBGH shares, and that as a matter of law this somehow

negates the contention that they “controlled” GBGH and GBG. However, the Amended Complaint

alleges that the Controlling Shareholders were in actual control of GBGH, and the Defendants

previously represented that for purposes of the motion to dismiss they were not contesting any of

the factual allegations of the Amended Complaint with respect to jurisdictional issues. The

admitted collective ownership share of the “Controlling Shareholders” exceeded 40%, and

holdings of that size (or less) often are sufficient to confer actual “control” over a public

corporation such as GBGH, and indirectly over the subsidiaries that were directly or indirectly

wholly owned by GBGH. See, e.g., Perlman v. Feldmann, 219 F.2d 173, 174 n.1 (2d Cir. 1955)

(holding that a 33% share ownership “gave working control” of a corporation to the holders of the

shares). GBGH’s own annual report for the year 2019 also describes the relevant Defendants as

the “controlling shareholders” of GBGH. See Annual Report, ECF No. 74, Ex. J.2

Defendants also argue that they merely approved shareholder resolutions and left it to

GBGH’s directors to decide whether (and how) to effect a dividend, or that that the Defendants

merely approved board resolutions that permitted GBGH itself to pay dividends. However, the

Amended Complaint alleges that the controlling shareholders did more than that: i.e., that the

controlling shareholders used their collective control of GBGH and GBG to direct and to cause

GBG to make the $196 million transfers to GBGH in March 2019. Am. Compl. at ¶¶ 265, 269,

271, 273-276. Defendants may contest those allegations, but factual disputes do not detract from

the fact that the pleadings (if taken as true) state a prima facie case for the exercise of personal

jurisdiction.

Defendants have further argued that the Amended Complaint states that GBG’s Treasurer

directed the transfers to be made, but does not say how any instructions to do so were

communicated to the Treasurer. The Defendants suggest, as a result, that the idea somehow could

have originated with the Treasurer alone and that he may have acted without any suggestion or

direction from others. Dfs. Mem., ECF No. 57, at 22 n.17. However, as noted above the Amended

Complaint alleges that the Defendants directed and caused the transfers to be made by GBG.

2 Some documents originally were filed by the parties under seal. The Court understands that

none of them should remain under seal, but it appears that a copy of Exhibit J has been

omitted from the public docket. The parties should take steps to ensure that full, unredacted

copies of all filings are available on the public docket.

Further specifics as to how this worked, and how the instructions to make transfers were

communicated internally, ought to await discovery and trial. It is sufficient, at this stage, that the

Amended Complaint has alleged facts which (when taken as true) are sufficient to establish a prima

facie case that personal jurisdiction exists.

I therefore agree that the allegations that the Defendants other than Spencer Theodore Fung

and Hurricane Millennium exercised actual control over GBG, and that they directed and caused

GBG to make the challenged dividend transfers, are sufficient to establish personal jurisdiction

under the “effects test.” See Mullin v. TestAmerica Inc., 564 F.3d at 402-03 (defendants who

precipitated and directed an alleged fraudulent transfer were subject to personal jurisdiction);

Alfandary v. Nikko Asset Mgmt. Co., 337 F. Supp. 3d at 364-365 (holding that the court had

personal jurisdiction, under the “effects test,” over foreign entities who allegedly had used their

corporate control to render worthless certain stock acquisition rights that had been granted by the

Defendants’ US subsidiary); AutoOpt Networks, Inc. v. GTL USA, Inc., No. 3:14-CV-1252, 2015

U.S. Dist. LEXIS 11306, at *16-18 (N.D. Tex. Jan. 30, 2015) (foreign company subjected itself to

personal jurisdiction in Texas where its officers directed a Texas subsidiary to make allegedly

fraudulent transfers to the foreign company); Racher v. Lusk, No. CIV-13-665, 2013 U.S. Dist.

LEXIS 162193 (W.D. Okla. Nov. 14, 2013) (personal jurisdiction over fraudulent transfer claim

where defendants operated, managed and controlled the transferor).

Although the Defendants have challenged the sufficiency of their contacts with the United

States, they have not contended that the exercise of personal jurisdiction would be “unreasonable.”

I find, in any event, that the exercise of personal jurisdiction is reasonable. The claims here are

based on the laws of the United States and based on transfers that were originated here, and it is

not clear that those claims could even be pursued in any other forum. The United States has the

predominant interest in enforcing its fraudulent transfer laws. There may be some inconvenience

to the Defendants that will be associated with litigation in the United States, but the Defendants

allegedly directed fraudulent transfers to be made from the United States by a US entity that they

controlled. Any burdens that they might experience are warranted, and are matters that they

reasonably ought to have anticipated. The exercise of personal jurisdiction does not offend any

foreign relations interests of the United States or any identified policies of any foreign country.

B. The $100 Million Repayment of GBGH’s Loan from Fung Holdings

The Amended Complaint alleges that “GBGH” caused GBG to repay the $100 million that

GBGH owed to Fung Holdings. Am. Compl. at ¶¶ 10, 123-125. The Amended Complaint also

alleges that Fung Holdings controlled GBGH. Curiously, it does not explicitly allege that Fung

Holdings used that control to cause GBGH to direct GBG to make the loan repayment. The Trustee

argues that it is “entirely implausible” to think that Fung Holdings had no input into the loan

repayment. See Trustee’s Mem. (ECF No. 74) at p. 25. That may be so, but there is no allegation

in the Amended Complaint as to what that input was.

The Amended Complaint alleges instead that Fung Holdings knew that GBG was going to

make the payment, and knew when it accepted the payment from GBG that it constituted a

fraudulent transfer by GBG. The Amended Complaint therefore alleges that Fung Holdings

participated in a transaction (a funds transfer) with a US entity (GBG) that originated in the United

States and that Fung Holdings knew to be fraudulent. Those allegations show sufficient direct

participation in a wrongful US transaction to support an exercise of personal jurisdiction under the

authorities cited above.

Defendants’ own arguments about the $100 million transfer also support a finding that

Fung Holdings purposely directed its activities at the United States. Defendants argue that I should

“collapse” the December 2018 loan that Fung Holdings made to GBGH, the December 2018

capital contribution that GBGH made to GBG, and the May 2019 transfer that GBG made to Fung

Holdings, and that I should treat them all as though they were a single transaction and as “steps in

a general plan.” Defendants’ Mem. at 33-34. But such a “collapsing” of transactions would only

be proper if the transactions were intended from the start to be connected and if GBG’s creditors

knew of the intended connection. See HBE Leasing Corp. v. Frank, 48 F.3d 623, 635-636 (2d Cir.

1995). Defendants’ own contention that I should “collapse” these transactions therefore is

premised on the notion that Fung Holdings intended from the outset to provide funds for use by a

US entity (GBG), that Fung Holdings did so by lending money to GBGH with the intent that

GBGH would make a capital contribution to GBG, and that Fung Holdings expected (and

ultimately received) repayment of the loan by GBG and not by GBGH. If that is what Fung

Holdings did and what it intended – as Defendants themselves have posited by suggesting that I

should “collapse” the transactions – that sequence would constitute purposeful activity directed at

the United States, and the fraudulent transfer claim arises directly from that activity.

I therefore agree that the allegations of the Complaint suffice to make out a prima facie

case that it is proper to exercise personal jurisdiction over Fung Holdings.

II. Defendants’ Contentions that the Claims are Barred Because the Transferred Funds

Were “Already Returned”

Defendants contend that no relief may be sought by the Trustee because the transferred

funds allegedly were “replenished” or, in the case of the loan repayment, because the transfer

merely undid a set of prior transfers that had been made, and allegedly had no effect on GBG’s

ability to pay its debts.

A. The $100 Million Loan Repayment

Defendants’ argument is easily disposed of as to the loan repayment. The Trustee alleges

that Fung Holdings loaned money to GBGH (not to GBG) in December 2018. The Trustee also

alleges that GBGH then transferred $100 million to GBG as a capital contribution. If those

allegations are correct, then GBG had no legal obligation to transfer funds to Fung Holdings, and

any transfer that it made to Fung Holdings in March 2019 was without fair consideration.

Defendants now wish to focus solely on the amount of the cash that moved between the

entities in these various transactions, and they characterize the sequence as “a round-trip, wash

transaction” that allegedly had no impact on GBG’s ability to satisfy its debts. Defendants’ Mem.

(ECF No. 57) at 3-4. However, the form in which transfers are made makes an important

difference. The Trustee alleges that GBGH transferred funds to GBG as a capital contribution.

The whole point of a capital contribution is that it provides resources to which creditors (not equity

holders) have first rights. Once a capital contribution is made, that contribution has inured to the

benefit of the entity’s creditors, and as equity capital it cannot be reclaimed by the parent (or by an

affiliate of the parent) if doing so would be in violation of creditors’ rights under the fraudulent

transfer laws.

If the Defendants were right, then any parent company that received a dividend payment

at a time when a subsidiary was insolvent could assert, in defense to a fraudulent transfer claim,

that the parent was merely reclaiming some of the capital contributions that it had previously made.

I know of no authority for the proposition that such a defense can be asserted, and the whole notion

defies common sense. It would turn the ordinary priorities on their head, and would treat a parent’s

or an affiliate’s prior capital contribution as giving rise to rights that would be superior to the rights

of creditors.

There is no suggestion in Defendants’ motion or in the Amended Complaint that GBG was

satisfying any legal obligation, to any party, when it made the $100 million payment to Fung

Holdings. If (as alleged) GBGH made a capital contribution to GBG in December 2018, that

contribution inured to the benefit of GBG’s creditors, and the contribution could not be taken back

by GBG’s direct or indirect equity owners at a later date if doing so was in violation of creditors’

rights under the fraudulent transfer laws.

B. The $196 Million Transfers by GBG to GBGH

The Amended Complaint alleges that GBG transferred $196 million to GBGH. Defendants

do not dispute this fact, but they argue that funds were “replenished” or were “returned” to GBG,

and that any further recovery by GBG would violate the rule that a party is only entitled to a “single

recovery” under section 550(a) of the Bankruptcy Code. 11 U.S.C. § 550(d). However, the

suggestion that funds were actually “returned” to GBG is plainly not an accurate description of

what happened. Defendants admit that GBGH received $196 million from GBG, and there is no

allegation in the Amended Complaint, or in Defendants’ papers, to the effect that GBGH ever gave

those funds back to GBG. The cases cited by the Defendants involved situations in which a

transferee actually returned transferred property to the transferor, which never happened here. See

Whitlock v. Lowe (In re Deberry), 945 F.3d 943, 945-46, 948 (5th Cir. 2019) (before bankruptcy,

defendant gained control of $232,000 of debtors’ funds in a bank account, but transferred those

funds back to the debtors); Lassman v. Patts (In re Patts), 470 B.R. 234 (Bankr. D. Mass 2012)

(debtor conveyed a joint tenancy interest to his wife but she transferred it back to the debtor prior

to the bankruptcy filing).

What the Defendants really are claiming is that they should be entitled to some sort of

“offset” to their fraudulent transfer liability, on the theory that Fung Holdings provided funds to

GBGH (through shareholder loans) that were then used to reduce GBG’s (and GBGH’s)

obligations under the RCF facility. Some of the decisions cited by Defendants involved situations

in which transferees were given credit, on “equitable” principles, for payments they had made to

a debtor’s creditors. See, e.g., Bakst v. Wetzel (In re Kingsley), No. 06-12096, Adv. P. No. 06-2109,

2007 WL 1491188, at *3-4 (Bankr. S.D. Fla. May 17, 2007), aff’d, 518 F.3d 874 (11th Cir. 1008)

(debtor fraudulently transferred a tax refund to a relative to keep it out of reach of the debtor’s

creditors, but the relative paid the money back to the debtor or to the debtor’s creditors). However,

courts are not in uniform agreement with this approach. See, e.g., Nostalgia Network, Inc. v.

Lockwood, 315 F.3d 717, 720 (7th Cir. 2002) (when a fraudulent transfer has been made, “the fact

that some or for that matter of it may have later seeped back to the debtor does not legitimize the

transfer”). There is no definitive ruling on the point in this Circuit, but the bankruptcy courts in

this district have expressed skepticism as to the concept that an “offset” of the kind asserted by

Defendants may be claimed. See, e.g., 45 John Lofts, LLC v. Meridian Capital Grp. (In re 45 John

Lofts, LLC), 599 B.R. 730, 749 n. 6 (Bankr. S.D.N.Y. 2019); Tronox v. Kerr-McGee Corp. (In re

Tronox Inc.), 503 B.R. 239, 332 n.121 (Bankr. S.D.N.Y. 2013).

I need not resolve this legal issue at this stage of these proceedings, however. The essence

of the Defendants’ argument is that GBGH’s paydowns of the RCF facility fully “restored” the

$196 million to GBG (Dfs. Mem. at 10), and that this somehow completely undid the effects of

the transfers that GBG had made. This defense can be granted on a motion to dismiss only if the

allegations of the Amended Complaint, by themselves, are sufficient to show that the defense is

applicable. However, the Defendants’ argument is contrary to the ordinary rules of subrogation

that govern payments that are made by guarantors. See, e.g., Putnam v. Comm’r., 352 U.S. 82, 85

(1956) (“The familiar rule is that, instanter upon the payment by the guarantor of the debt, the

debtor’s obligation to the creditor becomes an obligation to the guarantor, not a new debt, but, by

subrogation, the result of the shift of the original debt from the creditor to the guarantor who steps

into the creditor’s shoes.”) If GBGH (as guarantor) made payments under the RCF facility, then

GBGH would have been subrogated to the rights of the RCF lenders; at least, the Defendants have

made no suggestion that such rights ever were waived or that they otherwise did not exist, and

there is nothing in the Amended Complaint that suggests that GBGH would not have been entitled

to such subrogation rights.3 GBGH’s payments to the RCF lenders therefore did not reduce GBG’s

outstanding obligations; instead, in the absence of any evidence to the contrary the payments by

GBGH just substituted GBGH in place of the RCF lenders with respect to a portion of those

liabilities.

There are other factual and legal issues that also preclude a dismissal of the asserted claims

based on Defendants’ theory that the dividends were paid to the RCF lenders and thereby were

allegedly “returned” to GBG or for GBG’s benefit.

The underlying documents, which the Defendants submitted to the Court (ECF No. 58, Ex.

F, G, H and J), do not support the Defendants’ contention that the allegedly “returned dividends”

were used to pay down the RCF facility. The loan by Fung Holdings that referenced the dividends

payable to the controlling shareholders was the so-called Dividend Shareholder Loan. The

Amended Complaint alleges, however (and the documents submitted by the Defendants confirm)

that the repayments that GBGH made to the RCF Lenders came from the separate New

3 Fung Holdings executed a Subordination Agreement under which it agreed that Fung

Holdings itself would not exercise subrogation rights until the obligations to the RCF

Lenders were paid in full, but that merely subordinated Fung Holdings’ rights and did not

eliminate them, and in any event that agreement contained no limit on the subrogation rights

that GBGH had as a guarantor of GBG’s obligations. See Subordination Agreement, ECF

No. 58, Ex. F, at § 6 (pdf p. 35).

Shareholder Loan and from another loan that Fung Holdings made a month later, in May 2019.

There is nothing in the record to suggest that the dividend payments, or the proceeds of the

Dividend Shareholder Loan, ever were paid to the RCF Lenders.

The Amended Complaint and the supporting documents also do not support the

Defendants’ contention that the controlling shareholders “returned” the dividends they received.

The Amended Complaint alleges that the controlling shareholders had previously agreed, on

March 1, to re-lend any of the dividends they received in order to avoid legal issues under Hong

Kong law. Am. Compl. at ¶ 159. In doing so the controlling shareholders did not refuse the

dividends, and they did not “return” them in the sense that they disclaimed any legal entitlement

to receive them. Instead, for reasons that remain to be explained at trial, the underlying documents

provided that GBGH would withhold some (but not all) of the dividends payable to the controlling

shareholders, and that the relevant shareholders agreed that all such amounts would be treated as

having been “disbursed by Fung Holdings” (not by any of the other Defendants) pursuant to the

Dividend Shareholder Loan. ECF No. 58, Ex. H, § 4(b).

The upshot of all this is that Fung Holdings made a loan that restored some cash for use by

GBGH. However, that loan imposed separate and new obligations on GBGH, and cannot

necessarily be said to have been a “return” of the dividends that GBGH paid (at least, they cannot

fairly be so characterized as a matter of law on a motion to dismiss). I also know of no legal basis

on which loans that Fung Holdings made to GBGH should be treated as “returns” of dividends that

other parties were entitled to receive, or as “offsets” to the subsequent transferee liabilities that

other Defendants might have. Even as to Fung Holdings the documents make clear that in effect

the “dividend” was deemed to have been paid, and that the new obligation under which cash was

being made available to GBGH was a loan (not a “return” of the dividend).

For each of the foregoing reasons the underlying facts require further development at trial

to determine whether they give rise to any defense of the kind that the Defendants have asserted.

III. Allegations of Fraudulent Intent

Defendants argue that the allegations of fraudulent intent are not sufficient to support the

intentional fraudulent transfer claims that have been asserted.

A. The $196 Million Transferred by GBG to GBGH

The Amended Complaint alleges that that GBG made transfers with actual fraudulent

intent. Am. Compl. at ¶ 184. It also alleges, at length, the existence of various factors that

constitute “badges of fraud” from which a fraudulent intent may be inferred, including the facts

that (1) the transfers were paid to and for the benefits of insiders, (2) GBG did not receive

reasonably equivalent value, (3) the transfers were initially concealed from the RCF lenders and

were concealed from other creditors, (4) GBG had been threatened with lawsuits prior to the

transfers, (5) the transfers were made either shortly after or shortly before GBG incurred significant

liabilities, and (6) the transfers were made at a time when GBG was insolvent or had inadequate

capital or was known to be unlikely to be able to meet its further obligations.. Am. Compl. at ¶¶

184-207, 212-240. Collectively these allegations are sufficient to state a claim that GBG’s

transfers were made with the actual intent to hinder, delay or defraud creditors. See Sharp Int’l

Corp. v. State St. Bank & Trust Co. (In re Sharp Int’l Corp.), 405 F.3d 43, 56 (2d Cir. 2005)

(explaining that badges of fraud may suffice to show fraudulent intent); Silverman v. Actrade

Capital, Inc. (In re Actrade Fin. Techs., Ltd.), 337 B.R. 791, 809 (Bankr. S.D.N.Y. 2005) (holding

that badges of fraud are proper indications of intent); Tronox Inc. v Anadarko Petroleum Corp. (In

re Tronox Inc.), 429 B.R. 73, 95 (Bankr. S.D.N.Y. 2010) (sufficiency of allegations of badges of

fraud to support an allegation of fraudulent intent).

B. The $100 Million Transfer to Fung Holdings

The Amended Complaint also alleges that the transfer of $100 million to Fung Holdings

was made with actual fraudulent intent. Am. Compl. at ¶ 183. It further alleges the presence of

various badges of fraud: i.e., that GBG was insolvent or otherwise in a financial condition that

would make the transfer fraudulent as to GBG’s creditors, that the transfer was made to an insider

(Fung Holdings), that the transfer was without fair consideration, and that the transfer was made

either shortly after or shortly before GBG incurred substantial liabilities. Id. ¶¶ 185-207, 212-240.

Collectively these allegations are sufficient allegations of fraudulent intent.

IV. Section 546(e) Does Not Bar the Fraudulent Transfer Claims.

Defendants argue that the event that first prompted the GBGH directors and controlling

shareholders to contemplate the payment of a dividend was the sale to Centric, which closed in

October 2018. They argue that the Centric sale included a sale of securities, that the amount of the

GBGH dividend was conceived by reference to the expected proceeds of the Centric sale, and that

as a result all of the March 2019 dividend transfers by GBG to GBGH were made “in connection

with” a securities transaction. In their view, this means that the fraudulent transfer claims are

barred by section 546(e) of the Bankruptcy Code, which states:

Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title,

the trustee may not avoid a transfer that is a margin payment, as defined in

section 101, 741, or 761 of this title, or settlement payment as defined in section

101 or 741 of this title, made by or to (or for the benefit of) a commodity broker,

forward contract merchant, stockbroker, financial institution, financial

participant, or securities clearing agency, or that is a transfer made by or to (or

for the benefit of) a commodity broker, forward contract merchant, stockbroker,

financial institution, financial participant, or securities clearing agency, in

connection with a securities contract, as defined in section 741(7), commodity

contract, as defined in section 761(4), or forward contract, that is made before

the commencement of the case, except under section 548(a)(1)(A) of this title.

11 U.S.C. § 546(e).

Determining the proper scope of section 546(e) requires consideration of the Supreme

Court’s decision in Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 583 U.S. 366 (2018). In Merit

Management, a company named Valley View Downs, L.P. agreed to buy all of the stock of Bedford

Downs Management Corp. Valley View arranged financing by Credit Suisse and directed Credit

Suisse to transfer funds to Citizens Bank of Pennsylvania, which acted as a third-party escrow

agent. The shareholders of Bedford Downs (including Merit Management) deposited their shares

with Citizens Bank. Citizens Bank then distributed the cash to the shareholders and delivered the

Bedford Downs shares to Valley View. Valley View later filed for bankruptcy, and its chapter 11

trustee sued to avoid the purchase of the Bedford Downs stock from the selling shareholders.

Section 546(e) only applies if a trustee or debtor in possession seeks to avoid a payment

made by or to a covered financial institution or a financial participant in connection with a

securities contract. The purchase of stock that was at issue in Merit Management plainly was a

securities transaction. However, Merit Management was not a financial institution or any of the

other types of entities that are protected parties under section 546(e). Merit Management

nevertheless argued that the transfer of cash from Credit Suisse to Citizens Bank was a transfer

“by” a financial institution, that the receipt of the cash by Citizens Bank also was a transfer “to”

or “for the benefit of” a financial institution, and that the transfer of cash by Citizens Bank to Merit

Management was a transfer “by” a financial institution, and that all of these occurred “in

connection with” the securities purchase. On that theory, Merit Management argued that section

546(e) was applicable.

The Supreme Court held otherwise. Lower courts had labored with the question of whether

Credit Suisse and Citizens Bank had been mere “conduits” in the transaction, but the Supreme

Court declined to rule on that question. Instead, the Supreme Court held that in applying section

546(e) a court should focus on “the overarching transfer that the trustee seeks to avoid under one

of the substantive avoidance provisions.” Id. at 378. Since the transfer that the trustee actually

sought to avoid (the purchase of shares by Valley Bank from Merit Management in exchange for

cash) did not involve a transfer by or to a protected entity, section 546(e) did not apply.

The Court began by holding that section 546(e) is merely a limit on the exercise of the

avoiding powers that are granted to a trustee under sections 544, 545, 547, and 548(a)(1)(B) of the

Bankruptcy Code, and that its scope and meaning has to be interpreted in that context. Id. at 379.

The Court explained:

The very first clause [of section 546(e)] – “Notwithstanding sections 544,

545, 547, 548(a)(1)(B), and 548(b) of this title” – already begins to answer

the question. It indicates that §546(e) operates as an exception to the avoiding

powers afforded to the trustee under the substantive avoidance provisions.

See A. Scalia & B. Garner, Reading Law: The Interpretation of Legal Texts

126 (2012). (“A dependent phrase that begins with notwithstanding indicates

that the main clause that it introduces or follows derogates from the provision

to which it refers”).

Id. Accordingly, the “starting point” in deciding whether section 546(e) applies is “the substantive

avoiding power under the provisions expressly listed in the ‘notwithstanding’ clause and,

consequently, the transfer that the trustee seeks to avoid as an exercise of those powers.” Id. The

Court held that section 546(e) only offers protection if the transfer that a trustee seeks to avoid is

a transfer that “itself” is a payment to a protected party that is a settlement payment, a margin

payment or a payment in connection with a securities transaction:

The transfer that the “trustee may not avoid” is specified to be “a transfer that

is” either a “settlement payment” or made “in connection with a securities

contract.” § 546(e) (emphasis added). Not a transfer that involves. Not a

transfer that comprises. But a transfer that is a securities transaction covered

under § 546(e). The provision explicitly equates the transfer that the trustee

may otherwise avoid with the transfer that, under the safe harbor, the trustee

may not avoid. In other words, to qualify for protection under the securities

safe harbor, § 546(e) provides that the otherwise avoidable transfer itself be

a transfer that meets the safe-harbor criteria.

Id. at 380-81. The Court held, on the basis of this analysis, that “the transfer that the trustee seeks

to avoid” is the “relevant transfer for consideration of the § 546(e) safe-harbor criteria.” Id. at 381.

Of course, a trustee who challenges a transfer on fraudulent transfer or other avoidance

grounds must “establish to the satisfaction of a court that the transfer it seeks to set aside meets the

characteristics” that permit avoidance of the transfer. Id. A trustee therefore “is not free to define

the transfer that it seeks to avoid in any way it chooses.” Id. Instead, the transfer that is identified

and challenged must be one that is avoidable under the particular avoidance powers that the trustee

invokes. Id. at 382. But if a trustee has identified a transfer that may be avoided under an

applicable avoidance power, and if that transfer itself is not one to which section 546(e) applies,

then the trustee may proceed:

Accordingly, after a trustee files an avoidance action identifying the transfer

it seeks to set aside, a defendant in that action is free to argue that the trustee

failed to properly identify an avoidable transfer under the Code, including

any available arguments concerning the role of component parts of the

transfer. If a trustee properly identifies an avoidable transfer, however, the

court has no reason to examine the relevance of component parts when

considering a limit to the avoiding power . . .

Id. at 382.

The decision in Merit Management quite clearly commands that in deciding whether

section 546(e) applies I should look at the transfer that the plaintiff seeks to avoid and whether that

transfer “itself” was a payment to a protected entity of a kind that invoked the protections of section

546(e). The transfers that GBG made to GBGH and to Fung Holdings plainly were not securities

transactions. Defendants want me to look at a prior transaction – the October 1998 Centric sale –

in order to find a “securities transaction” that allegedly is relevant. However, the Trustee does not

challenge the Centric sale and does not seek to avoid it. The Trustee only challenges the March

2019 transfers that GBG made. Defendants do not want to focus on the transfers that are the actual

subjects of the Amended Complaint, and instead they want to re-define the relevant transactions

to try to bring section 546(e) into play, but that is exactly what the Supreme Court said in Merit

Management that I should not do.

The facts in this case also are nothing like the facts in the Boston Generating decisions that

have been cited by the Defendants. See Holliday v. K Road Power Mgmt., LLC (In re Boston

Generating LLC), 617 B.R. 442 (Bankr. S.D.N.Y. 2020); Holliday v. Credit Suisse Sec. (USA) LLC,

et al., No. 20 Civ. 5404, 2021 U.S. Dist. LEXIS 173359 (S.D.N.Y. Sept. 13, 2021); Holliday v.

Credit Suisse Sec. (USA) LLC (In re Bos. Generating, LLC), No. 21-2543-br, 2024 U.S. App.

LEXIS 23800 (2d Cir. Sept. 19, 2024). In the Boston Generating case, a holding company named

EBG Holdings LLC (“EBG”) and its wholly-owned subsidiary, Boston Generating, agreed to make

a tender offer to holders of interests in EBG and to pay a dividend to those interest holders as part

of a planned recapitalization. The transactions were financed in part by funds that Boston

Generating borrowed and then transferred to EBG. EBG transferred the funds it received from

Boston Generating, along with other funds that EBG had borrowed, to Bank of New York

(“BONY”), and BONY used the funds to complete the recapitalization and tender offer. In re

Boston Generating, 617 B.R. at 457. The courts held that the transfer by Boston Generating was

made to complete a securities transaction to which Boston Generating was itself a party and was

protected by section 546(e). In that regard, the transfers are issue were themselves transfers that

were made to complete a securities transaction.

In this case, the $196 million of transfers that GBG made to GBGH were not made to

complete a securities transaction. Defendants’ sole argument is that somehow the motivation for

the transfers was a sale by GBG, six months earlier, of the stock of a subsidiary. But those sale

proceeds were not even used to fund the dividend. The sale proceeds had already been paid to

GBG’s creditors, as noted above.

At least two other recent decisions have rejected efforts to use Merit Management to protect

a transaction from avoidance merely because some or all of the transferred funds had originated

from a prior securities transaction. See Halperin v. Morgan Stanley Inv. Mgmt. (In re Tops Holding

II Corp.), 646 B.R. 617 (Bankr. S.D.N.Y. 2022) (“Tops”); Greektown Litig. Trust v. Papas (In re

Greektown Hldg., LLC), 621 B.R. 797 (Bankr. E.D. Mich. 2020) (“Greektown”). In Tops, a group

of private equity funds caused a company to issue notes and then to pay the proceeds to

shareholders as dividends. When the dividends were later attacked on fraudulent transfer grounds,

the defendants argued that the transfers were protected by section 546(e) because the note offerings

involved protected parties and because the dividend payments were funded by, and thereby were

“related to” and occurred “in connection with,” the note offerings. Id. at 679. Judge Drain rejected

the defendants’ argument that the dividends “were not standalone transfers” and that the dividends

needed to be regarded as “only one element of an integrated transaction” that “started with” a safe-

harbored note issuance. Id. at 681. Judge Drain held that Merit Management required him to focus

on the transfer(s) that the plaintiff sought to avoid, and held that the challenged dividends in Tops

did not involve protected parties or securities transactions. The defendants’ contentions that the

dividends were “related” to the note offerings, or that they arose out of the note offerings, or that

they were funded by the note offerings, or that they were integral parts of a series of transactions

that included the note offerings, were not enough to bring section 546(e) into play. Id. at 685–86.

In Greektown, a debtor agreed to make payments to certain other parties. The debtor sold

notes in order to raise the necessary funds, and Merrill Lynch (as underwriter) purchased the notes.

A liquidation trustee in Greektown’s bankruptcy case alleged that the payments that the debtor

made with the proceeds of the note issuance were fraudulent transfers. The defendants argued that

under Merit Management the transactions should be collapsed and that the relevant transfer should

be deemed to be a transfer “by” Merrill Lynch to the defendants and that the transfer was “in

connection with” the sales of the Notes to a financial institution (Merrill Lynch) because it was

related to those sales. The court rejected that contention. It held that “[p]er Merit Management,

the relevant transfer is the one that is identified by the trustee and is otherwise an avoidable

transfer.” Id. at 820. Since the trustee did not challenge the transaction with Merrill Lynch, and

since the payments that the debtor made to other parties did not involve any financial institution,

section 546(e) did not apply. Id. at 820–21.

The purported link between the October 2018 Centric sale and the March 2019 transfers

from GBG to GBGH is even weaker than the purported links in Tops and in Greektown. In Tops

and in Greektown the transfers that were challenged had actually been funded by a prior securities

transaction. That is not the case here. The Amended Complaint alleges that all of the proceeds of

the Centric sale were immediately applied to the reduction of an outstanding credit facility, and

that no other proceeds were left. No matter how the Defendants purported to explain or to justify

the purported dividend in their communications with GBGH’s shareholders, the transfers that GBG

made in March 2019 were funded by new borrowings, not by the prior Centric sale. The Amended

Complaint alleges explicitly that any purported link between the dividend and the proceeds of the

Centric sale was simply untrue.

The Supreme Court confirmed in Merit Management that in challenging a transfer a trustee

must identify characteristics of a challenged transfer that actually make it subject to avoidance,

and in that sense a trustee is not free to define a “transfer” in any way the trustee chooses. So long

as the Trustee identifies the necessary elements for avoidance, however, a Court has no reason to

look beyond the particular transfer that a Trustee has challenged. In this case the Amended

Complaint alleges all of the necessary elements for the avoidance of the transfers that GBG made

in March 2019, and there is nothing about those particular transfers that would bring the protections

of section 546(e) into play. Merit Management makes clear, under these circumstances, that

section 546(e) is not applicable.

V. Whether Defendants Are Properly Alleged to Have Been Transferees

Defendants argue that the dividend payments by GBGH that were owed to Fung Holdings,

Victor Fung, King Lun, Fund Distribution, Step Dragon and Golden Step were withheld by GBGH

and were treated as having been re-loaned by Fung Holdings to GBGH, and that as a result those

Defendants were not “transferees” as a matter of law. I cannot say, as a matter of law, that this is

correct. The dividend payable to the relevant defendants was never cancelled. The relevant

Defendants may not have taken actual possession of the cash dividends, but there is no basis, from

the allegations of the Amended Complaint, upon which I could conclude that the defendants lacked

dominion and control over the amounts of the dividend that were owed to them, or that they lacked

the power to give directions to GBGH as to how to treat those sums. See Wells Fargo Rail Corp.

v. Black Iron LLC (In re Black Iron LLC), 609 B.R. 390, 417 (Bankr. D. Utah 2019) (holding that

a company exercised “dominion and control” over funds that it had assigned to another party, even

though the company did not actually receive the funds). The Defendants may have used their

dominion and control over the dividends to direct GBGH to hold the funds as a more convenient

way of funding the loan that was to be made by Fung Holdings (and they may otherwise have

settled up with Fung Holdings as to how this would work), but that does not preclude the contention

that the Defendants were transferees. The details are matters that require further evidence at a

trial.

Conclusion

For the foregoing reasons, all claims against Spencer Fung and Hurricane Millennium will

be dismissed for lack of personal jurisdiction, but with leave to replead. The motion to dismiss is

otherwise denied in all respects. A separate Order will be entered to this effect.

Dated: New York, New York

December 16, 2024

/s/ Michael E. Wiles

Honorable Michael E. Wiles

United States Bankruptcy Judge