SPO Networks Inc (SPOI)

[Sparks100]

HLNT/NIR/Humphries/Walters/PWC Lawsuits Part 3:

The Judge ruled on Motion #1, a Motion in which NIR sought to have the Counter Claims and 3rd Party Action dismissed. As was mentioned before, HLNT won part of this Motion, but also lost part of it. This is document #149 on the SCROLL system, at:

http://iapps.courts.state.ny.us/iscroll/SQLData.jsp?IndexNo=600893-2010&Page=1

The Parts of the Motion that HLNT won:

A quick summary of the Claims upheld:
#3 Conversion, specifically Humphries, forging of documents to obtain money for the issuance of stock.
#4 Larceny, specifically Humphries, forging of documents to obtain stock through issuance to himself.
#5 Breach of Fiduciary Duty, specifically Humphries, engaging in misconduct and not acting in loyalty, good faith, honesty, and full disclosure
#6 Aiding and Abetting Humphries Breach of Humphries Fiduciary Duty, specifically NIR, Ribotsky, Walters, Dealers Advance, STI Group, and Monarch Bay, for the transfer of the NIR debt from Dealers Advance to SEVI.
#7 Breach of Fiduciary Duty, specifically, Walters, for misconduct and acting in a contrary manner to SEVI's best interests.
#10 Contribution, specifically STI Group, Concerning the $2.3 Million debt transferred from SEVI to STI.

The Parts of the Motion that NIR lost:

A quick summary of the claims denied:
#1 Fraud, specifically, NIR, Ribotsky, Humphries, Walters, Dealer Advance, STI Group, and Monarch Bay, for the sham transactions.
#2 Fraud, specifically NIR and Humphries, in the purchase of HHHI and HOSS companies.
#8 Aiding and Abetting Walters Breach of Fiduciary Duty, specifically, NIR, Ribotsky, Humphries, Dealer Advance, STI Group, and Monarch Bay, for Walters misconduct.
#9 Breach of Implied convenant of Good Faith and Fair Dealing, specifically NIR, for its part in the transfer of the Dealers Advance notes.

Other Important Points:

1. On page 5 of the ruling in Footnote #3, the Judge "...notes that these transactions occurred when the U.S. and the world economy were sinking into a recession." Yet the Judge failed to note that prior to this period of time, DLAD had not the capability to convert notes, and that the asset was of little value. And December 2008 was almost the bottom of the market slide, in which financial assets were continuously being devalued, yet DLAD's asset increased in value because of additional interest on the notes? The ecomony has no bearing on the case in point, and the judge erred greatly in this issue, unless the Judge wishes to contend that a bad economy makes it okay to commit fraud.

2. The Judge determined that the "in Pari Delicto" defense does not cover the situation in which the agent is defrauding its principal, as was done here with NIR, Walters and Humphries.

Interpretations:

This decision revolves around some very basic issues. The first of these is the doctrine that Courts will uphold the debts by applying the most favorable view of the law. This has been done to protect the note and lien holders from the inappropriate and often times illegal actions of the debtors. That is in effect here, as decided by the Judge. However, this leads to situations where the debtor, such as HLNT, is damaged by those who commit fraud in the transfers of such notes.

In the initial filing, fraud can be alleged without particularity (who did what and when), but must be substantiated in the pleadings, or the restatement of the filing prior to trial. However, it is often times not possible to substantiate the fraud until such discovery that is necessary to fully determine the fraud is completed so that the pleadings can be properly prepared. As Walters (and his companies) and Humphries depositions have yet to be done, and as the discovery with relation to Walters Companies has not been completed, HLNT was required to plead based upon what it had at hand. In her decision, the Judge has indicated that the claims are dismissed, with prejudice, meaning that they cannot be brought up by SEVI(HLNT) again. Yet the Judge has opened the door for suits from HLNT shareholdes, and NIR investors (which will probably happen against Walters and Ribotsky soon enough). But remember, this is for the Counter Claims. NIR's original filing must still be tried in court. HLNT still has the ability to get the notes dismissed in trial, where fraud can still be brought up. This is the same situation in which HLNT found itself when the CC&3PA were initially severed from the original case by NIR. The only real change is that those claims that have been upheld are now a part of the original NIR case.

Another issue has now arisen. HLNT has the ability to Appeal this decision by the Judge (as does Walters, Humphries, and NIR). Where the Judge fails to allow reasonable discovery which can lead to adequate pleadings, the Appeals Court will remand the case (send it back) to the lower court to correct the errors in the case. To do this, the appeals court would have to find that the Judge did not allow for due process, and they would look at the fact that Walters continuously refused to comply with discovery, citing one reason or another, and determine that HLNT was denied due process, discovery. It would be a different matter if HLNT's lawyers had not tried to proceed with discovery, but that is not the case here. So we can anticipate seeing an appeal of the Judges decision.

Another issue is Fraud vs Fiduciary Responsibility. The Judge has downplayed the fraud issues in this case by refering to the Fiduciary Duty. HLNT has specified the particularity of the Fraud and the Fiduciary Duty at the same level. The Judge can see the violations of the Fiduciary Duty, but not the fraud? No, the Judge can see both. But the judge has the discretion to detemine what documents are looked at and to a limited extent, how they are to be interpreted. For example, with the prior motion, the Release that Walters created was not filed with the Motion to Compel arbitration, yet the Judge was able to go back to other filings to get a copy, and even noted it in that decision. So if HLNT had the documentation included with the filing of the Counter Claims or it was available with other filings, the Judge ignored it.

Also, what is Fraud vs Fiduciary duty? Take for example a car salesman selling a car. If he doesn't check under the hood to find that the engine is missing, but sells it as a running car, that is a violation of the Fiduciary Duty, because he should have checked, but didn't know. So it wasn't Fraud. But what if the Salesman knew that there was no engine, and sold the car as a running vehicle. That goes beyond the violation of Fiduciary Duty, good faith, fair dealing and the like, that is Fraud. Did Walters, Humphries, and NIR (through Ribotsky) commit fraud? Yes they did, because they knew that the Asset had no relative value. And this is something that HLNT will have to show in the Jury trial, or the Texas trial, or the arbitration if needed, or at such time the appeal is decided and sent back to the lower court.

Is HLNT going to have to suddenly pay the notes by converting them? PWC would sell the notes if they can, but the notes are still under litigation (the original NIR case has not been resolved yet). The answer is "NO". Essentially what has happened is that by analogy, HLNT has made a critical three point basket towards the end of the game, but did not make the free throw for the foul but is still sitting in a good position. HLNT will not have to do anything with the notes at this time, and next week, there will be negotiations that should lead toward a settlement. Wish I could be there for that. If someone tells people here that HLNT is going to be paying the notes, they are wishfully thinking, or they really just don't know the case.