New Bankruptcy Opinion: IN RE SHERWOOD INVESTMENTS OVERSEAS LIMITED, INC. – Bankr. Court, MD Florida, 2015

In re SHERWOOD INVESTMENTS OVERSEAS LIMITED, INC., Chapter 7, Debtor.

SHERWOOD INVESTMENTS OVERSEAS LIMITED, INC., Plaintiff,

v.

THE ROYAL BANK OF SCOTLAND N.V., f/k/a ABN AMRO BANK N.V., Defendant.

Case No. 6:10-bk-00584-KSJ, Adversary No. 6:10-ap-00158-KSJ.

United States Bankruptcy Court, M.D. Florida, Orlando Division.

July 22, 2015.

PROPOSED [1] MEMORANDUM OPINION GRANTING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT

KAREN S. JENNEMANN, Bankruptcy Judge.

Defendant, The Royal Bank of Scotland N.V. (“RBS”), [2] financed complex derivatives trading for the Plaintiff and Debtor, Sherwood Investments Overseas Limited, Inc. (“Sherwood”) from 2006, until the onset of the stock market meltdown in September 2008. Sherwood seeks lost profit damages of up to $209 million due to RBS’s alleged misconduct at the end of their trading relationship. RBS now seeks summary judgment on all of the Plaintiff’s 13 legal theories. Finding no disputed material fact, summary judgment is entered in favor of RBS and against Sherwood.

Sherwood’s Complaint raises 13 counts against RBS. [3] Counts I through IV assert RBS’ breach of an alleged implied contract between the parties. Counts V through X assert various tort causes of action directed at RBS’s conduct during September 2008. Counts XI through XIII focus on a two transfers Sherwood made to RBS that Sherwood alleges is fraudulent, unjustly enriched RBS, or was converted by RBS. RBS asserts it is entitled to summary judgment on all these counts and also challenges Sherwood’s lost damages calculation and its expert reports, arguing they used the wrong methodology and are too speculative.

RBS moves for summary judgment [4] under Federal Rule of Civil Procedure 56. [5] Rule 56(a) provides that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” [6] The moving party has the burden of establishing the right to summary judgment. [7] A “material” fact is one that “might affect the outcome of the suit under the governing law.” [8] A “genuine” dispute means that “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” [9] Once the moving party has met its burden, the nonmovant must set forth facts showing there is a genuine issue for trial. [10] In determining entitlement to summary judgment, “facts must be viewed in the light most favorable to the nonmoving party only if there is a `genuine’ dispute as to those facts.” [11]

The Parties’ Relationship Before September 2008

Sherwood’s claims arise out of the abrupt end of its trading relationship with RBS that had started over two years prior to September 2008. Sherwood would speculate on stocks through risky derivative instruments crafted by RBS. Sherwood also owned a subsidiary, Sherwood Farms, which operated as a commercial orchid farm in Central Florida. [12]

RBS created these derivative instruments, called Mini-Long Certificates (“Certificates”), [13] and pegged the price of each Certificate to the value of other stocks (the “Underlying Stock”), usually a U.S. small-cap stock (“Single Stock Certificates”) or a bundle of different stocks (“Dynamic Basket Certificates”). Sherwood’s authorized representative, Julian Benscher, directed all of Sherwood’s trading and selected the stocks Sherwood included in each purchase. The Certificates provided a mechanism for Sherwood to borrow money from RBS to speculate on securities with great leverage, similar to margin trading. But, in practice, the Certificates’ features are even more complicated.

For every Certificate, RBS financed 75%-80% of the Underlying Stock’s price (the “Financing Level”), and Sherwood paid RBS the remaining 20%-25%. Each Certificate had a stop-loss level [14] set above the Financing Level. A stop-loss is a common feature in securities trading to limit risk: when a security’s price falls below the stop-loss level, the broker, here RBS, sells the security. Here, when the Underlying Stock’s market price fell below the stop-loss level, a Certificate was said to have “knocked out” or terminated. [15] RBS, which had purchased shares of the Underlying Stock to hedge its loan to Sherwood, would sell these shares, recoup its financing costs plus interest, and pay Sherwood the difference between the stop-loss level and the Financing Level, if any. An example may help explain this complicated trading relationship.

Assume Stock A’s price is $4.90/share. Sherwood paid $1.00/share and borrowed $3.90/share from RBS to f

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