Chapter 11 Trustee aims to rebuff AFX’s efforts to move case to Cyprus

Maria Nikolova

The Bankruptcy Trustee assigned to Gallant Capital Markets case aims to stop “AFX’s game of catch me if you can”.

Further to FinanceFeeds’ exclusive report about the proceedings launched by Esther DuVal, the Chapter 11 Trustee of the jointly-administered estates of Avenica, Inc. and Gallant Capital Markets, Ltd, against AFX Capital Markets Ltd., STO Super Trading Online (“STO”) and AFX Capital U.S. Corp., the plaintiff is now seeking to rebut the efforts of the defendants to shift the US case to another jurisdiction.

On Monday, July 30th, Esther DuVal submitted Memorandum in Opposition to AFX’s Motion to Dismiss the Complaint. In the documents, seen by FinanceFeeds, Gallant’s bankruptcy trustee who accuses AFX of wiping out the remaining balance of Gallant’s account on the date when the broker filed for Chapter 11 bankruptcy, argues against AFX’s claims that New York is not the right forum to adjudicate the dispute.

The Trustee says AFX’s Motion is the defendants’ latest delay tactic to keep improper withdrawals of Gallant Funds—the estate’s assets—which continues to cause harm to the Gallant estate and all parties-in-interest in this bankruptcy case. These claims are born under the Bankruptcy Code and entails core issue claims i.e. turnover of property of the Gallant estate, Chapter 5 avoidance claims and a violation of the automatic stay.

Yet, AFX and STO seek to avoid the New York Eastern Bankruptcy Court jurisdiction and the consequences of their conduct by attempting to recast this dispute as a contract claims that should be adjudicated abroad. That argument is said to be a red herring in an attempt to avoid the substance of the Trustee’s claims.

Let’s recall that, under the Complaint against AFX, throughout 2015 and 2016, Gallant deposited approximately $2.35 million (for its benefit) into a Gallant account maintained at AFX. Within the two-week period prior to Gallant’s commencement of its bankruptcy case, there was a balance of approximately $2.4 million in the Gallant account at AFX. Around that time, Gallant made multiple demands upon Defendants for the turnover of Gallant’s funds—all of which were disregarded.

Notwithstanding, AFX withdrew the remaining balance, without authorization and without basis, on the Filing Date—in violation of the automatic stay. This case involves core issues whereby the Trustee is seeking a turnover of Gallant property, avoidance and recovery of assets of the Gallant estate, and enforcement of the automatic stay. Accordingly, the Bankruptcy Court is the proper, and most effective, forum for such claims to be adjudicated, the Trustee argues.

However, “in an effort to play a game of catch me if you can, Defendants allege that the Trustee does not meet the requirements of minimum contacts to retain specific jurisdiction because Defendants have no contact with New York”.

The Trustee says that AFX’s statements are simply untrue. At all times relevant, it was public knowledge that the defendants, including AFX, had an office and were doing business in New York. STO’s website states that STO is a “division of AFX Group established in 2009 and . . . is the trading name of AFX Capital Markets Ltd. and AFX Markets Ltd.” The STO website also references “offices in many of the world’s major financial centres [including] New York”. Furthermore, on October 29, 2015, a media article was released announcing the opening of the AFX Capital’s NYC Office and the hiring of Thomas O’Reilly as Senior VP of Sales. Thomas O’Reilly confirmed this in a declaration whereby he swore, under the penalty of perjury, that while employed by AFX Group and AFX Capital he worked out of the New York office located at 370 Lexington Avenue, Office 2001, New York, New York.

Mario Persichino, AFX’ authorized representative, however, declared, under the penalty of perjury, that “AFX does not have an office or any employees in the United States and no AFX personnel visit New York or the United States to discuss the same.”

But this, Esther DuVal says, is also contradicted by the declaration of Thomas O’Reilly whereby he stated he had met with Mr. Persichino multiple times during Mr. Perischino’s visits to New York.

O’Reilly declared, under the penalty of perjury:

  • I was the Senior Vice President of Sales (“SVPS”) for AFX Capital U.S. Corp and the AFX Group (collectively, “AFX”) from September, 2015 through April, 2017.
  • During that time, I was based in New York and occupied an AFX Capital office at 370 Lexington Avenue, Office 2001, New York, New York.
  • On or about the spring of 2015, I was approached by Mario Persichino, who I understand to be the owner and/or shareholder of AFX, regarding working for AFX in a sales capacity. I had met Mario Persichino previously and had come across him several times through the years at trade shows or other events involving the foreign currency exchange business. Mario Persichino and I met in New York shortly prior to me joining AFX to discuss my potential employment with AFX in New York.
  • After joining AFX, I met with Mario Persichino upon his visits to New York, which occurred approximately three (3) times per year.
  • While employed by AFX in New York, I also met with Manuela Mazzacco, AFX’s Chief Executive Officer, when she came to New York.
  • While my role as SVPS for AFX was primarily focused on sales, I did take on other responsibilities as AFX’s New York based employee, including, but not limited to (i) opening an AFX U.S. bank account at Bank of America; (ii) communicating with ADP for AFX’s U.S. payroll, workman’s compensation and unemployment insurance needs; and (iii) issuing payments from AFX’s U.S. bank account as necessary for U.S. business operations.
  • If there were insufficient funds in AFX’s Bank of America account to cover U.S. business operations, I would contact AFX’s employees overseas and they would wire the requisite funds from their overseas accounts to AFX’s U.S. bank account at Bank of America.
  • Upon starting my work with AFX, I managed AFX’s relationship with Gallant since its Chief Executive Officer, Salvatore Buccellato (“Mr. Buccellato”), and personnel were also located in New York. My role included meeting with Mr. Buccellato, typically over meal.
  • On or about early spring 2017, I became aware that Gallant was seeking, and may have had a liquidity necessity to, withdraw funds from its AFX account. I also became aware that AFX was not transferring the funds requested by Gallant. Upon becoming aware of this situation, I, as AFX’s representative, encouraged Gallant’s and AFX’s operations personnel and executives to pick up the phone and have a direct dialogue regarding any disagreements with respect to the amount due Gallant. There seemed to have been a significant difference of opinion between AFX and Gallant at that time as to the amount owed by AFX to Gallant, which I recall that difference being approximately a $1,000,000 difference.

Regarding the claim by AFX that their Agreements with Gallant contain a choice of law clause, the Trustee says this is a red herring.

Defendants argue that because the Agreements have a choice of law for Cypriot law that the Agreement and any related contract or transaction shall be governed by Cypriot law and the Court of Cyprus shall have jurisdiction over any related disputes.

However, the defendants are represented by able counsel in the United States; the defendants have the resources to defend themselves in the United States; the United States, and more particularly, the Bankruptcy Court, has a strong interest in the litigation of core issues including Chapter 5 avoidance claims, a stay violation and other claims asserted in the Complaint for the benefit of the estate’s creditors, who have been harmed from the defendants’ unjustified taking of the Gallant Funds; and the most efficient resolution of this controversy will be in the Bankruptcy Court where the Debtors’ bankruptcy cases are pending.

Indeed, the defendants and any other parties that may be in possession of Gallant’s assets will be emboldened to take the assets without justification should they be permitted to play a game of catch me if you can with the Trustee. Forcing the Trustee to litigate theses causes of action based on the Bankruptcy Code in a Cyprus court would be inequitable to all parties in interest in this case who have conducted themselves within the confines of the law.

“The dismissal of the pending Adversary Proceeding and commencement of a new action in Cyprus over claims arising under the Bankruptcy Code would not only cause an odd result, but would also give rise to unnecessary costs and unduly burden the estates to the detriment of all parties-in-interest in the Debtor’s bankruptcy case”, the Trustee argues.

Moreover, the majority, if not all, of the witnesses are located in United States (i.e. Plaintiff, Mr. Buccellato, Reilly and Manuela Mazzacco). In fact, Plaintiff is not aware of any party involved in this litigation or third-party witness, who resides in Cyprus. Mario Persichino, the owner and/or shareholder of AFX Group, is a resident of Dubai. Importantly, Mr. Perischino apparently travels to New York on business including attendance at “trade shows or other events involving the foreign currency exchange business”. Hence, New York is the proper forum for this Adversary Proceeding.

Regarding the suspicious withdrawals that AFX made from Gallant’s account, let’s recall that on April 14, 2017, Gallant filed its voluntary petition for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court, Eastern District of New York. According to AFX’s records, on April 6, 2017 (8 days from the Filing Date), AFX made four withdrawals from the Gallant Account. The Withdrawals, totaling $1,028,766.40, were not authorized by Gallant and did not correlate with the timing of transactions contemplated under the express terms of the Capital Risk Share Agreement. Per Defendants, the Withdrawals purportedly represented four months of positive profit/loss owed by Gallant to AFX under the Capital Risk Share Agreement. On April 14, 2017, the Filing Date, according to the STO AFX Daily Confirmation Report, Defendants, again without authorization, withdrew the remaining balance of Gallant’s funds from the Gallant Account in the amount of $1,443,132.92, leaving a balance of $0.00.

To date, AFX and STO had failed to provide facts, detail or any calculable basis justifying their swiping of all funds in Gallant’s account maintained at AFX.

AFX alleges that the Trustee cannot assert that the removal of the Gallant Funds were preferential transfers because AFX and STO exercised their right to recoup these funds. AFX and STO, however, do not provide a predicate as to why they would be entitled to recoupment, the Trustee argues. Merely stating that they are entitled to recoup the Remaining Balance does not establish a proper basis or any basis whatsoever.

The case is captioned Duval v. AFX Capital Markets Ltd. et al (1:18-ap-01038).

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