Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 1 of 10 PageID #: 9723

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

SECURITIES & EXCHANGE COMMISSION

Plaintiff,
-againstSPONGETECH DELIVERY SYSTEMS, INC.,
RM ENTERPRISES INTERNATIONAL, INC.,
STEVEN MOSKOWITZ, GEORGE
SPERANZA, JOEL PENSLEY, JACK
HALPERIN, and MICHAEL METTER
Defendants,
-andBLUESTAR MEDIA GROUP, INC.;
BUSINESSTALKRAIDO.NET ACQUISITION
CORP.,
Relief Defendants.

I.

X
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
:
X

Index No. 10-CV-2031 (DLI) (RML)

ECF CASE

SOLUTION FUNDING, LLCS

RESPONSE TO THE
OBJECTIONS OF
MICHAEL METTER AND TO
THE OBJECTIONS OF THE
SECURITIES
AND EXCHANGE COMMISSION
TO THE REPORT AND
RECOMMENDATION OF THE
MAGISTRATE JUDGE
REGARDING THE
DISTRIBUTION OF ASSETS OF
BUSINESS TALK RADIO

INTRODUCTION

Solution Funding, LLC (Solution Funding) submits memorandum of law in support of

the December 18, 2014 Report and Recommendation of Magistrate Judge Azrack in the above
matter, which was filed on December 24, 2014 (the Report and Recommendation), and in
opposition to the Objections to that Report filed by the United States Securities and Exchange
Commission (the SEC) and Michael Metter (Metter).
The SECs and Metters Objections do not raise anything that has not been fully and
properly dealt with in the Report and Recommendation, and they do not offer a substantial basis
upon which to depart from Judge Azracks well-reasoned Report and Recommendation. This

78525460.1

Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 2 of 10 PageID #: 9724

brief will, therefore, focus primarily on the fact that (1) the SECs Objections, to the extent they
purport to be founded upon the Securities Exchange Act, are based upon demonstrably wrong
representations concerning the statutory and applicable case law, and (2) Metters Objections (in
which the SEC somewhat cursorily joins) merely regurgitate contentions that have now properly
been found to lack merit by a Delaware Court, by BTRs court-appointed Receiver, and by Judge
Azrack.
II.
A.

THE SECS OBJECTIONS

To the Extent Solution Funding Has a Valid Security Interest, It

Has Priority Over the SEC and Other Creditors as a Matter of Law

The SECs argument is largely premised upon the untrue and wholly unsupported
contention that Section 21(d)(5) of the Securities Exchange Act authorizes the Court in a
disgorgement action to ignore constitutional limitations on the adjustment of third-party creditor
claims that apply even to a court operating under the Bankruptcy Act. See SEC Objections at 3,
ECF No. 334.
In fact, the Bankruptcy Act is authorized by a specific constitutional provision that gives
the federal government broad authority to address situations of insolvency. Yet even in
bankruptcy situations, the courts have recognized that a courts ability to impair the rights of
secured creditors is limited by constitutional provisions, most particularly the Fifth Amendment.
See, e.g., 36 Wright v. Union Cent. Life Ins. Co., 304 U.S. 502 (1938); Louisville Joint Stock
Land Bank v. Radford, 295 U.S. 555 (1935); In re Phillips, 13 Bankr. 82 (Bankr. C.D. Ill. 1981).
These limitations require that, where a debtor is to be liquidated, secured creditors are entitled to
their security -- period! Even in the context of a Chapter 11 reorganization, a cramdown can
occur over a secured creditors objection only where that creditor receives the indubitable

Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 3 of 10 PageID #: 9725

equivalent of its security. See United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assoc.,
Ltd., 484 U.S. 365, 378 (1988), citing In re Murel Holding Corp., 75 F.2d 941 (2d Cir. 1935).
Constitutional limitations are precisely that constitutional limitations. Accordingly,
they apply to any federal statutory scheme. To the extent they apply even to a statute authorized
by the broad powers given to federal government in the Constitution to address insolvencies and
bankruptcies, it is hardly surprising that the SEC cannot cite a single case for its claim that they
do not apply to the Securities Exchange Act. In fact, the SECs effort to rely on the Exchange
Act and cases decided under it is not only meritless but disingenuous. Thus, the SEC
misrepresents both (1) the nature, purpose and scope of Section 21(d)(5) of the Securities
Exchange Act, the statutory provision upon which it purports to rely, and (2) the holdings of the
decisions that it claims support its contention that the Court may disregard Solution Fundings
rights as a secured creditor.
With regard to the statute: Section 21 of the Securities Exchange Act is expressly
addressed to the SECs enforcement powers against persons violating the securities laws, and
the authority granted to the Courts in Subsection (d)(5) is to be understood in that context. The
SEC, indeed, acknowledges this in footnote 3 of its Objections, where it touts Section 21 as a
necessary tool in combatting the sophisticated misconduct of securities fraudsters.
The purpose of the statute is also reflected in both the language and legislative history of
Subsection (d)(5), which was enacted in 2002 as part of Section 305 of the Sarbanes-Oxley Act
of 2002. Section 305 came into being in the aftermath of such scandals as Enron and Arthur
Anderson LLC. By its express terms, it addresses Officer Bars and Penalties, and the SEC is
fully aware that the relevant statutory provision is intended to address the question of what relief

Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 4 of 10 PageID #: 9726

that should be available against corporate insiders.1 Thus, in its own 2003 release titled
Summary of SEC Actions and SEC Related Provisions Pursuant to the Sarbanes-Oxley Act of
2002, the SEC acknowledged that the purpose of Section 305 of Sarbanes-Oxley is to set[]
standards for imposing officer and director bars and penalties.2
Given its misrepresentation of the scope of the relevant statute, it should not be surprising
that the SEC does not cite a single case in which a court has asserted that it is entitled to interfere
with a secured third partys rights in its collateral in the context of an SEC disgorgement
proceeding. To the contrary, the only relevant case that the SEC cites supports the opposite
proposition. The SEC cites SEC v. Byers, 637 F. Supp. 2d 166 (S.D.N.Y. 2009) for the
unexceptionable proposition that, once a disgorgement fund has been established, a distribution
plan can limit the unsecured deficiency claims of secured creditors, but it willfully ignores the
important point. That point is that the Byers court did not purport to make the secured creditors
collateral part of the disgorgement fund, or to limit the secured portion of the secured creditors
claims.
Not one of the cases the SEC cites so much as suggests, let alone reflects, a contrary
conclusion, and in fact most of its cases address irrelevant issues. For example, SEC v.
Enterprise Trust Co. No. 08-1260, 2008 WL 4534154 *3 (N.D. Ill. Oct. 7, 2008) and SEC v.
Quan, No. 11-723, 2013 WL 1703499 *5 (D. Minn. April 19, 2013) merely confirm that courts
have discretion in distributing funds that a wrongdoer is required to disgorge, and SEC v.

1
Indeed, the version of Section 305 ultimately enacted into law followed a mandate that the SEC analyze the question of
whether, and under what conditions, any officer or director of an issuer should be required to disgorge profits gained, or
losses avoided, in the sale of the securities of such issuer during the six month period immediately preceding the filing of a
restated financial statement on the part of such issuer. The SEC mandate was given in Section 12 of the fourth of six
versions of H.R.3763 that ultimately became Sarbanes-Oxley. (Section 12 is headed DISGORGING INSIDERS PROFITS
FROM TRADES PRIOR TO CORRECTION OF ERRONEOUS FINANCIAL STATEMENTS).
2
While it cannot be argued that there is great significance to the fact that Congress did not attempt to enact a provision
that would have been unconstitutional if enacted, it is perhaps worth noting that Section 308 of Sarbanes-Oxley -- the
section that actually deals with various aspects of the reach of SEC disgorgement contains nothing that would suggest
that Congress intended the Exchange Act to impair the rights of third-party secured creditors.

Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 5 of 10 PageID #: 9727

Musella, 818 F. Supp. 600 (S.D.N.Y. 1993) merely holds that a wrongdoer obliged to disgorge
funds cannot defeat that obligation by claiming the funds are subject to a state law exemption.
SEC v. Huffman, 996 F.2d 800, 802-03 (5th Cir. 1993), SEC v. AMX Intl Inc, 872 F. Supp. 1541,
1544-45 (N.D. Tex. 1994), FTC v. Neiswonger, 580 F.3d 769 (8th Cir. 2009) and Steffen v.
Graly, Harris & Robinson, P.A., 283 F. Supp. 2d 1272, 1282 (M.D. Fl. 2003) are all essentially
to the same effect. SEC v. Manor Nursing Ctrs., Inc. 458 F.2d 1082, 1102 (2d Cir. 1972) simply
advances the straightforward proposition that a court of equity has broad power to fashion
appropriate remedies. Not one of these cases says anything at all to suggest that a court in an
SEC disgorgement proceeding has authority to disregard the rights of a third-party secured
creditor or to appropriate such a creditors collateral as part of a disgorgement fund.
Simply stated, Judge Azrack was entirely correct in determining that these cases are not
persuasive. (Report and Recommendation at 14-15, ECF No. 333). To the contrary, the law is
clear that as the SECs sister agency the IRS has been sufficiently candid to admit that
Solution Fundings security interest is first in terms of priority to the extent it is valid.
It is, perhaps, also worth mentioning that, in asking the Court to ignore Solution
Fundings priority, the SEC is asking the Court (as is Metter) to disregard the very Order
governing distribution of funds that SEC and Metter (in his then capacity as chief executive
officer of BTR and Blue Star Media Group, Inc.) jointly asked the Court to enter. In reliance on
that Order, Solution Funding agreed to forego any self-help and, instead, in deference to this
Court having joined BTR as a relief defendant in the SECs action, acceded to the process for
determining claims priority and distribution reflected in the Order.
That order, this Courts Order of June 20, 2012 (the June 20 Order), established a
detailed and comprehensive process for the determination of priority of claims to the proceeds of

Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 6 of 10 PageID #: 9728

BTRs liquidation. (Report and Recommendation at 19). In reliance on the Courts

establishment of that process as the definitive method by which distribution of the proceeds of
sale would be determined, Solution Funding consented to the joint motion of the SEC and Metter
to establish the claims process specified in the June 20 Order, agreed to take no steps to execute
on the collateral underlying its security interest, agreed to cooperate in the sale of that security,
and agreed to forego other remedies available to it to protect its collateral.
Central to the June 20 Order and to Solution Fundings consent to the sale of its
collateral and the deposit of the proceeds of such sale in this Courts CRIS account was the
provision that all parties would retain, as part of the claims process, the priority they had in
BTRs assets prior to BTRs liquidation.
Solution Fundings priority is based upon perfected first priority security interests that
attached to all of the assets of BTR and its subsidiaries as of November 13, 2006. (Solution
Fundings Mot. for Disbursement at 3, ECF No. 280). Recognizing that their claims are inferior
to those of Solution Funding, the SEC and Metter now seek to circumvent the very claims
process they asked for, that this Court established, and upon which Solution Funding has relied.
As shown above, the SECs contentions regarding its right to interfere with Solution
Fundings collateral and priority on the basis of the Securities Exchange Act is frivolous. Even
if that were not the case, its attempt to circumvent the very claims process that it sought to
establish in return for Solution Fundings agreement to forego self-help could not be considered
an attempt to invoke equity, but would, instead, be barred by equitable estoppel. This is, of
course, equally true of Metter who makes the same argument

Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 7 of 10 PageID #: 9729

III.
A.

METTERS OBJECTIONS, JOINED IN BY THE SEC

Neither Metter nor the SEC Has Established a Basis for Invalidating Solution
Fundings Claims and Priority

Metters essential argument (in which the SEC joins without having any independent
basis to support its position) is that a purported breach of fiduciary duty by Michael B. Pisani, Sr.
(Pisani, Sr.) to BTR should be imputed to Solution Funding, with the result that Solution
Funding should be denied the rights and entitlements flowing from its purchase of the BTR loan.
This is the argument Metter already advanced, purportedly on behalf of BTR, and lost, in
Delaware. It is premised on two contentions for which the record provides no support and that
are in fact fully refuted by the record. The first is that Pisani, Sr. had power over Solution
Funding, but did not make Solution Funding pay off BTRs loan instead of purchasing it. The
second is that Pisani, Sr. somehow acted improperly in agreeing to waive his rights of avoidance
with respect to monies levied by the initial lender prior to Solution Fundings purchase of the
loan -- in the context of Pisani, Sr.s bankruptcy proceeding.
As the Chancery Court of Delaware, the court-appointed receiver, and most recently
Judge Azrack, have all recognized, these arguments do not hold water.
First, there is no evidence that Pisani, Sr. could control Solution Funding. To the
contrary, the only evidence of record is that he had no such power. (July 18, 2012 Transcript at
45 and 46, 2013 Decl. of Michael B. Pisani (Pisani Decl.) Ex. 3, ECF No. 280-2; Mem.of Law
in Support of Solution Funding, LLCs Mot. to Distribute Funds from the CRIS Account Ex. 1,
ECF No. 280-1; Order Approving Consent to Judgment at 5, Pisani Decl. Ex. 8, ECF No. 28010.)
Second, Metters shopworn argument that Pisani, Sr. was precluded from negotiating his
personal finances as a guarantor and that his concession of avoidance rights regarding levied
7

Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 8 of 10 PageID #: 9730

monies was unfaithful to BTR is both (1) wrong as a matter of law and (2) irrelevant to Solution
Fundings rights, particularly as that there is no evidence that Pisani, Sr. could control Solution
Funding. The Chancery Court of Delaware, the court-appointed receiver, and Judge Azrack have
all recognized that Pisani, Sr. was not limited, simply because he was a director of BTR, in
compromising claims against him by a third party, in this case claims that BTRs initial lender
had against him by virtue of his having signed on as a guarantor of BTRs obligations to the
initial lender.
It is basic Delaware law that a directors fiduciary duties do not extend to the
management of his personal finances. E.g., In re CNX Gas Corp. S'holders Litig., 4 A.3d 397,
409 (Del. Ch. 2010). When a [fiduciary] exercises contractual or statutory rights as a thirdparty lender, its actions are not subject to fiduciary review. Id. See also July 18, 2012
Transcript at 45. Moreover, Pisani, Sr.s waiver of his avoidance rights in connection with
Solution Fundings loan purchase was precisely the same concession he had agreed to make
(without objection from anyone) in each of the two settlement agreements that Metter had BTR
enter into prior to Solution Fundings purchase of the loan and that BTR then breached. (Aff. In
Opp to Mot. of Solution Funding for Disbursement of CRIS Funds, Ex. 5 at 6 and Ex. 9 at 2,
ECF Nos. 282-5 and 282-9). And, of course, Pisani, Sr.s duties as a guarantor were a
contractual obligation owed to the lender, not to BTR.
Finally, Solution Fundings purchase of the loan resulted in no inequity to BTR or any
constituent of BTR. BTR had defaulted on the loan prior to Solution Fundings purchase. The
revised (or second) settlement agreement had terminated by its terms upon BTRs default and the
initial lender had resumed collection activities because the covenant to suspend its collection
activities had terminated with BTRs breach. Solution Fundings requirement of a written

Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 9 of 10 PageID #: 9731

termination served as a confirmation that the settlement had terminated and, as Judge Azrack
observed, could not be invoked against Solution Funding once it purchased the loan for an
amount in excess of the unpaid settlement amount. BTRs default, not Solution Fundings
requirement of written confirmation of termination, terminated the settlement and the original
lenders obligations thereunder, thus triggering restoration of the actual loan balance. Solution
Funding simply purchased the loan, as it stood, from the initial lender on March 3, 2010, a full
month after BTRs breach of the settlement.
IV.

CONCLUSION

For the foregoing reasons, Solution Funding, LLC respectfully requests that the Court
adopt the Report and Recommendation of Magistrate Judge Azrack filed on December 24, 2014
as the opinion of the Court and enter an order (1) granting Solution Fundings Motion for
Disbursement and awarding Solution Funding all of the funds in the CRIS Account; and (2)
denying the Motions for Disbursement filed by the other claimants.
Respectfully submitted,
Dated: New York, New York
January 21, 2015

DRINKER BIDDLE & REATH LLP

By:

/s/ Thuy T. Bui

Thuy T. Bui
1177 Avenue of the Americas, 41st Floor
New York, New York 10036
(212) 248-3140 (Telephone)
(212) 248-3141 (Fax)
thuy.bui@dbr.com

John Chesney (admitted pro hac vice)

One Logan Square, Ste. 2000
Philadelphia, PA 19103-6996
(215) 988-2700 (Telephone)
(215) 988-2757 (Fax)
john.chesney@dbr.com
Attorneys for Secured Creditor
Solution Funding, LLC
9

Case 1:10-cv-02031-DLI-RML Document 337 Filed 01/21/15 Page 10 of 10 PageID #: 9732

CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing Solution Funding, LLCS
Response to the Objections of Michael Metter and to the Objections of the Securities and
Exchange Commission the Report and Recommendation of the Magistrate Judge Regarding the
Distribution of Assets of Business Talk Radio were served upon the attorneys of record via ECF
on January 21, 2015.

Dated: January 21, 2015

By:

78525460.1

s/ Thuy T. Bui
Thuy T. Bui