Lawsuit targeting AFX Capital continues in NY Court as proposed agreement falls through

Maria Nikolova

After a hearing held earlier this week, a pre-trial conference is scheduled for July 18, 2019.

Shortly after it became clear that AFX Capital is not complying with the terms of proposed settlement in the case brought against it by Esther DuVal, the Chapter 11 Trustee of the jointly administered estates of Avenica, Inc. and Gallant Capital Markets, Ltd, a hearing was held.

A minute entry by Judge Elizabeth S Stong of the New York Eastern Bankruptcy Court shows that a hearing was held on Tuesday, July 2, 2019. A Pre-Trial Conference has been set for July 18, 2019.

Last week, the Chapter 11 Trustee said the defendants in the case – AFX Capital Markets Ltd., AFX Capital U.S. Corp. and STO Super Trading Online, are in default under the stipulation of the settlement.

In May 2019, the Trustee and the AFX Defendants entered into a Stipulation of Settlement resolving the Adversary Proceeding. Under the terms of the settlement, the defendants agreed to pay the sum of $830,000 in full and final satisfaction of any and all claims the Trustee and the Debtors’ estates have or may have.

In accordance with paragraph 1(a) of the Stipulation, the Deposit in the amount of $230,000 was due to be paid into the attorney escrow account of the AFX Defendants by May 30, 2019, which, at the request of the AFX Defendants, was later extended to June 20, 2019 by the Trustee.

When the Deposit was not paid by the extended date, on June 25, 2019, the Trustee sent another demand to the AFX Defendants and asserted that the AFX Defendants were in default of the Stipulation. Despite the default, the Trustee allowed the AFX Defendants until June 26, 2019 at 4:00 pm to provide to Deposit to their attorney’s escrow account. In fact, days before that, counsel for the AFX Defendants provided a written email representing that the “We were told by the client the money was coming and we are waiting for confirmation.”

As of June 27, 2019, the AFX Defendants are in default under the Stipulation as they have failed to pay the Deposit and their counsel has been unable to provide written confirmation that the Deposit is in their escrow account for the benefit of the Trustee.

Accordingly, the Trustee said last week that, at the Hearing scheduled for July 2, 2019, she would seek to withdraw the Motion seeking approval of the Stipulation and would seek immediate discovery in the case.

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.

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.

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