Gallant Capital Markets bankruptcy trustee accuses AFX of strategic games to delay proceedings

Maria Nikolova

The recent havoc involving AFX’s legal counsel is said to be another tactic to delay the proceedings and avoid turning over $1.4 million to Gallant.

The recent motion by Douglas E Spelfogel, a member of the law firm of Foley & Lardner LLP, counsel for defendants AFX Capital Markets Ltd., AFX Capital U.S. Corp. and STO Super Trading Online, in a lawsuit which is related to the bankruptcy of Gallant Capital Markets, has attracted the opposition of the counsel for the bankruptcy trustee.

Let’s recall that, Douglas E Spelfogel has asked to withdraw as counsel for AFX, because “the AFX Parties have not paid for significant legal services rendered to them and Foley has received no response to numerous requests over the last two months with respect to the same and with respect to matters arising in the Adversary Proceeding generally”.

In addition, Spelfogel has requested that that “all proceedings in this Adversary Proceeding be stayed pending the hearing of this Application and for a period of thirty (30) days thereafter in order to permit the AFX Parties to obtain new counsel”. It is this point that has sparked the concerns of the counsel for the bankruptcy trustee.

On Wednesday, October 31, 2018, Joseph S. Maniscalco, a member of the law firm of LaMonica Herbst & Maniscalco, LLP (LHM), counsel for Esther DuVal, in her capacity as the Chapter 11 Trustee of the Gallant Capital Markets, Ltd. Bankruptcy estate, filed an affirmation in opposition to Spelfogel’s request with the New York Eastern Bankruptcy Court.

In this document, Maniscalco insists that there can be no doubt that AFX is engaging in a systematic delay of the proceeding so that it can continue to obtain the benefit of money improperly taken from Gallant’s account. The trustee’s counsel alleges that AFX is playing games with different counsels, including White and Williams, LLP (WW), who are said to have been retained to represent the AFX Parties in this proceeding.

“It appears that the AFX Parties are seemingly playing games with their different counsels, the Trustee and this Court. This systematic patterned delay by the AFX Parties appears to be intentional”, the counsel for the trustee argues.

The only rational explanation, according to Maniscalco, is that AFX is stalling so as to avoid the turnover of $1.4 million that it improperly took from Gallant Capital Markets’ account.

“In fact, the AFX Parties were merely delaying at the time when the Debtors demanded their funds to be wired”, the counsel for the trustee explains.

First, AFX claimed it did not recognize the wire instructions. Then, AFX did not recognize the beneficiary of the wire transfer. And finally, after weeks of delay and cash flow liquidity issues, Gallant Capital Markets filed for bankruptcy and AFX then used that as a reason for not turning over the funds.

Now AFX is said to be continuing to delay even though the Filing Date (of the bankruptcy case) was 20 months ago. By changing counsel because of the purported lack of communication and failure to pay basis, AFX is said to be forecasting its strategy, and if allowed, may do the same thing with WW. This behavior by the AFX Parties should not be rewarded without an appropriate inquiry under the abusive circumstances of this case, the counsel for the bankruptcy trustee argues.

Accordingly, the Trustee respectfully requests that the Court (i) deny the Application to Withdraw until the relevant facts are fully disclosed by Foley and AFX, and (ii) require that AFX have a representative at any final hearing on the Motion to Withdraw to (a) explain AFX’s refusal to date to participate in or even discuss mediation despite its counsel’s representations to the Court, and (b) confirm that AFX’s action in this case going forward will be good faith participation in the process as opposed to more delay tactics and cat and mouse game strategy that costs the Debtors’ estates and their creditors.

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.

Nevertheless, 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 and recovery of assets of the Gallant estate, and enforcement of the automatic stay.

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

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