Case 1:10-cv-02031-DLI-JMA Document 298 Filed 08/16/13 Page 1 of 8 PageID #: 8941

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK X 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. X I. INTRODUCTION MEMORANDUM OF LAW IN SUPPORT OF SOLUTION FUNDING, LLC'S SUR REPLY TO THE SULLIVAN PLAINTIFFS' MOTION TO DISTRIBUTE FUNDS FROM THE CRIS ACCOUNT Index No. 10-CV-2031 (DLI) (JMA)

In their Motion for Disbursement, the Sullivan Lead Plaintiffs (the "Sullivan Plaintiffs") asserted that Solution Funding's claim should be equitably subordinated to other claims advanced in this proceeding. In its Response papers, Solution Funding pointed out that the Sullivan Plaintiffs had provided no specific facts or law in support of their contention. In response, the Sullivan Plaintiffs ifled a nine page Reply Brief in which they laid out, for the first time, the specific factual and legal contentions on which they base their equitable subordination argument. Under both this Court's June 20 Order and accepted Federal practice, the Sullivan Plaintiffs were required to include the factual and legal bases of their claim in their initial moving papers--not to introduce them for the ifrst time in a reply brief. See June 20 Order at

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paragraph 4; Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 894-95 (1990). For this reason, nad because the Reply Brief relies upon demonstrably false factual assertions and incorrect characterizations of the applicable law, Solution Funding seeks leave to file this Sur Reply.1 II. A. ARGUMENT

The Sullivan Plaintiffs' ' Contention that Pisani Sr. Controlled or Created Solution Funding is False as a Matter of Undisputed Fact

The Sullivan Plaintiffs' argument that Solution Funding's claim should be "limited" or "subordinated" is premised entirely on the proposition that Mr. Michael Pisani, Sr. ("Pisani Sr." controlled or was a member of Solution Funding. This contention is untrue: There is no competent evidence to support it and the competent record evidence unequivocally refutes it. As a matter of public record, Solution Funding was formed on February 23, 2010, with Charles Lanktree as its only member. See Solution Funding's Certificate of Formation as ifled with the New Jersey Department of Treasury, a true and correct copy of which is attached as Exhibit 1 to the declaration of Michael B. Pisani ("Pisani 8/14/2013 Declaration"). The Delaware Court of Chancery (addressing these same allegations when made by Ms. Fritz purpotredly on behalf of BTR) determined that, as a matter of undisputed fact, Pisani, Sr. had no control over Solution Funding. See Transcript of Hearing, June 20, 2012 at p.45,46, a true and correct copy of which is attached to the Pisani 8/14/2013 Declaration as Exhibit 4. The competent evidence establishes undisputedly that Mr. Lanktree is and has always been the sole member of Solution Funding and that Pisani, Sr. has no interest in and did not patricipate in the creation of the company. See Affidavit of Michael Pisani, Esq. at 3 attached as Exhibit 2 to the Pisani 8/14/2013 Declaration; 1 One solution would be for the Court to strike and ignore the Reply Biref. However, the various pending motions involve the claims of multiple parties, and Solution Funding believes, therefore, that it is appropriate for the Court to consider fully, and dispose of on the merits, all arguments that parties have sought to advance. Accordingly, Solution Funding requests that the Court strike the Reply Brief only in the altenrative to its request that it allow Solution Funding to ensure, through the filing of this sur reply, that the factual and legal contentions of all parties have been fully and properly addressed.
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Afifdavit of Charles Lanktree at 1 and 7 attached as Exhibit 3 to the Pisani 8/14/2013 Declaration.2 The Sullivan Plaintiffs base their contrary contention entirely on the Affidavit of Maranda Fritz, Esq. dated May 14, 2013 (Dkt.# 282) which is incompetent to contradict New Jersey's public record, the swonr statements of Mr. Lanktree and Michael B. Pisani, Esq. and the Delaware Court's determination that Pisani, Sr. had no control over Solution Funding. Ms. Fritz tries to suggest that Pisani, Sr. was, or must have been, a member of Solution Funding because an unsigned dratf of an operating agreement contemplated that he would become one. In fact, as established in the Delaware Action and as Ms. Fritz knew when she made her May 14, 2013 Afifdavit -- the draft operating agreement related to Mr. Lanktree's initial proposal to address BTR's problems. That proposal contemplated a purchase of the loan to be coordinated with all of the individual guarantors of BTR's obligations, all of whom -- including Pisani, Sr., Mr. Metter and Mr. Lazauskas -- would become members of Solution Funding. See Pisani Affidavit at 57 and Lanktree Affidavit at 9, 10 and Exhibit A. When Messrs Metter and Lazauskas rejected this proposal, Mr. Lanktree chose to acquire the loan with Solution Funding as a single member limited liability company and none of the individual guarantors was offered membership. 3 See Pisani Afifdavit at 61 and Lanktree Afifdavit at 12. As the Delaware Coutr

2 The affidavits of Messrs. Pisani and Lanktree were filed in the matter of Solution Funding, LLC v. BusinessTalkradio.Net Acquisitions Corp., et al. C.A. No 7180-VCG in the Chancery Court of the State of Delaware (herein, the "Delaware Action") on April 4, 2012, and Apirl 24, 2012, respectively. 3 When Ms. Fritz made her May 14, 2013 Affidavit attempting to suggest that Pisani, Sr. was a member of Solution Funding, she was fully aware that the proposal embodied in the term sheet and draft operating agreement had been abandoned. Not only did she include the draft operating agreement and the term sheet to which it corresponds as exhibits to her affidavit (see Dkt 282, Exhibits 14 and 15), but she acknowledged that the proposal they embody was abandoned (see Dkt 282 at 19-21). In short, her attempt to insinuate that Pisani, Sr. was a member of Solution Funding is not only unsupported by any competent evidence but is disingenuous.

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properly determined, the competent evidence establishes beyond any genuine dispute that Pisani, Sr. was never a member of and never had control over Solution Funding. B. The Transaction Between Solution Funding and the Original Lender by which Solution Funding Acquired the BTR Loan Cannot Form the Basis for Equitable Subordination

Notably, the Sullivan Plaintiffs remain unable, even in the Reply Brief, to provide a coherent explanation of their claim that Solution Funding's acquisition of the BTR loan involved "conduct [that] is exactly why equitable subordination exists. " In fact -- nad as the Delaware Coutr found as a pre-requisite to granting Solution Funding's request for patrial summary judgment appointing a receiver -- Solution Funding's transaction with the original lender was entirely arm's length. As a matter of law, it did not change the rights of the lona creditor or the debtor and had no impact on any other party; it merely changed the identity of the loan creditor. Equitable subordination of Solution Funding's claim would require that it had engaged in egregiously inequitable conduct, but as a matter of law, no inequitable conduct took place.4 This is made clear by the event upon which the Sullivan Plaintiffs seek to base their position Solution Funding's conditioning its purchase of the BTR lona on the original lender's formally declaring a default under the settlement agreement. Well before Solution Funding negotiated its March 3rd purchase of the lona, the original lender had, based on BTR's January 31 default, revoked the settlement agreement and its obligations thereunder. As Ms. Fritz herself concedes in her afifdavit, upon BTR's default, the original lender resumed collection efforts 4 The Sullivan Plaintiffs do not dispute the legal standards discussed by Solution Funding in its
Opposition, but suggest that the applicable threshold should not be "egregious" conduct here because Solution Funding should be treated as an "insider." This argument is based on the proposition that Pisani, Sr.'s insider status should be imputed to Solution Funding. As shown above and below, it is meritless because: (1) the Delaware Court found and the record establishes unequivocally that Pisani, Sr.'s conduct cannot be imputed to Solution Funding, and; (2) even if Pisani, Sr. had been involved, which he was not, Solution Funding's purchase of the loan did not give Solution Funding any rights the original lender did not have and did not, therefore, affect BTR's obligations or the irghts of any creditor or other third party.

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against the individual guarantors (the suspension of which was a condition of the settlement agreement), recommencing those efforts in Pisani, Sr.'s bankruptcy proceedings. Dkt #282 at 17. On February 18, 2010, the original lender's bankruptcy counsel informed the bankruptcy court that the original lender would not consent to any further adjournments because the settlement agreement had "not been consummated. " Dkt # 282, Exhibit 13. On February 19, 2010, the individual guarantors, with BTR, filed a motion asking the Court to ignore BTR's default and unilaterally to extend their time to comply with the breached settlement agreement (in which timely payment was stated to be "of the essence"). Dkt # 282, Exhibit 11. The original lender immediately opposed this motion. See the Letter Response of BC Media Funding Company II, dated February 17, 2010, in the matter of BC Media Funding Company II v. Lazauskas et al., S.D.N.Y. 08-cv-06228 (RPP) (Dkt #101) a true and correct copy of which is ifled as Exhibit 5 to the Pisani 8/14/2013 Declaration. In short, the original lender had revoked the revised settlement agreement well before Solution Funding bought the lona. Requiring a formal declaration of default simply conifrmed the status of the lona being conveyed and that the position the initial lender had already taken would be preserved for its buyer, Solution Funding Solution Funding had no obligation to forgo this basic protection, which any purchaser of distressed paper would require as a matter of course, and certainly did not act "inequitably" by requiring it. C. Neither the Court's Equitable Disgorgement Powers Nor The Principles ofE quitable Subordination Permit Interference with Solution Funding's Priority Rights in this Action

The Sullivan Plaintiffs conlfate concepts of equitable disgorgement and equitable subordination and seem to argue that an SEC disgorgement claim can provide some sort of independent basis upon which to "equitably subordinate" Solution Funding's secured claim to

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the Sullivan Plaintiffs' claims. This is incorrect. The putative existence of a valid disgorgement claim does not create a basis upon which a court may create a disgorgement fund by impairing a secured creditor's rights in its collateral under some general principle of "equitable subordination. "5 In this regard: "It is well established that disgorgement is remedial rather than punitive, since a fundamental policy underlying disgorgement is to prevent the unjust enrichment of the wrongdoer rather than to punish him. " Securities and Exchange Commission v. Credit Bancorp,
LTD et al. Civ. 11395 p.4 (quoting SEC v. Grossman, No. 87 Civ. 1031, 1997 U.S. Dist. Lexis

6225, *9 (S.D.N.Y. May 6, 1997), aff'd in part, vacated in part on other grounds sub nom, SEC v.
Hirshberg 173 F.3d 846 (2d Cir. 1999). Since disgorgement permits only "remedial" action to

prevent a defendant from being unjustly enriched, it cannot be applied to reach beyond the wrongdoer and any nominal defendants to impair the senior rights of a third-party, non-defendant like Solution Funding. The one authority cited by the Sullivan Plaintiffs that is actually on point, SEC v. Byers, 637 F. Supp. 2d 166, 183 (S.D.N.Y. 2009), conifrms the correctness of Solution Funding's position. In Byers, the coutr recognized the important distinction between, on the one hand, how

s also worth noting that the Sullivan Plaintiffs' argument is particularly anomalous in that they have It i no "irght" even to funds that might lawfully be created through disgorgement. Public entities obtaining a disgorgement award have no obligation to make any particular effort to compensate victims. Fed. Trade Comm'n v. Bronson Partners LLC, 654 F.3d 359, 2011 Trade Cases P 77574 (2d Cir. 2011). See also, Fischbach, supra, 133 F.3d at 176. "While agencies may, as a matter of grace, attempt to return as much of the disgorgement proceeds as possible, the remedy is not, strictly speaking, restitutionary at all, in that the award runs in favor of the Treasury, not of the victims." Bronson at 373. "[T]he primary purpose of disgorgement is not to compensate investors. Unlike damages, it is a method of forcing a defendant to give up the amount by which he was unjustly enriched." SEC. v. Cavanagh, 445 F.3d 105 (2nd Cir., 2006) (citing Judge Firendly in Securities and Exchange Commission v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, (2d Cir. 1978) at 102.). See also, Securities and Exchange Commission v. Cioffi, Case No. 08-CV-2457 (FB)(VVP)(E.D.N.Y., 2012); Securities and Exchange Commission v. Fischbach Corp., 133 F.3d 170 (2d Cir. 1997).

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and from what sources a disgorgement fund may properly be created, and, on the other, how such a fund, once created, may be distributed . Thus, the Byers court recognized the priority of the secured creditors' claims up to the value of their collateral, did not purport to include the collateral in the disgorgement fund, and "limited" the priority of secured creditors only with respect to the unsecured portion of their claims, i.e., that portion of their claims in excess of the value of their collateral. The Byers court, that is, recognized the impropriety of trying to force secured creditors to "disgorge" their security, which is what the Sullivan Plaintiffs would have this Court have Solution Funding do. Solution Funding does not quarrel with a court's right to limit its priority to the value of its collateral. All it seeks here is what it is, as the Byers Court recognized, entitled to priority up to the value of its security or the amount of its judgment against BTR, whichever is less. III. CONCLUSION

For the foregoing reasons, Solution Funding, LLC respectfully requests that the Court deny the Sullivan Plaintiffs' Motion for Disbursement from the CRIS Account. Respectfully submitted, Dated: New York, New York August 16, 2013 DRINKER BIDDLE & REATH LLP

By:

/s/ Thuv 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

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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

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