Case: 17-14849 Doc: 28 Filed: 02/21/18 Page: 1 of 5
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`IN THE UNITED STATES BANKRUPTCY COURT
`FOR THE WESTERN DISTRICT OF OKLAHOMA
`
`
`
`
`In re
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`Youtoo Technologies, LLC
`
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`
`
`
`
`
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`Debtor.
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`
`
`Case No. 17-14849-JDL
`Chapter 7
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`TWITTER, INC.’S REPLY IN SUPPORT OF ITS MOTION FOR ORDER
`(I) HOLDING THAT THE AUTOMATIC STAY DOES NOT APPLY PURSUANT
`TO 11 U.S.C. § 362(b)(4), OR ALTERNATIVELY
`(II) LIFTING THE AUTOMATIC STAY FOR CAUSE UNDER § 362(d)(1) AND
`WAIVING THE 14-DAY STAY UNDER BANKRUPTCY RULE 4001(a)(3),
`AND BRIEF IN SUPPORT
`
`Twitter, Inc. (“Twitter”), a party-in-interest in the above referenced bankruptcy
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`case, by and through its undersigned counsel, hereby files its reply in support of its
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`Motion for Order (I) Holding That the Automatic Stay Does Not Apply Pursuant to 11
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`U.S.C. § 362(b)(4), or Alternatively, (II) Lifting the Automatic Stay for Cause Under 11
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`U.S.C. § 362(d)(1) and Waiving the 14-Day Stay Under Bankruptcy Rule 4001(a)(3)
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`[Docket No. 21] (the “Motion”). This reply will focus only on new issues raised in the
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`Response and Objection to Twitter, Inc.’s Motion to Lift the Automatic Stay [Docket No.
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`25] (the “Response”) filed by Youtoo Technologies, LLC (the “Debtor”).1
`
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`1 Douglas N. Gould, as Trustee for the Debtor’s bankruptcy estate, (the “Trustee”) also filed an
`objection to the Motion, incorporating the Debtor’s arguments in the Response [Docket No. 27].
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`Case: 17-14849 Doc: 28 Filed: 02/21/18 Page: 2 of 5
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`1. While Twitter strongly believes that the automatic stay does not apply to
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`the IPR Proceedings, the purpose of this reply is to address the Debtor’s affirmative
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`arguments that the bankruptcy estate will be prejudiced by lifting the automatic stay to
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`allow the IPR Proceedings to continue.
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`2.
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`As an initial matter, the Debtor has limited, if any, standing to complain
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`about the relief sought by Twitter. The Debtor filed this case under Chapter 7, thereby
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`surrendering possession and control over all property of the bankruptcy estate, including
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`the Challenged Patents, to the Trustee. Nevertheless, the Debtor objects to the Motion
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`solely in an effort to protect one subset of constituents in this case – a group of
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`“investors” who are indirect creditors and equity owners in the Debtor. By adopting the
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`Debtor’s Response as his own, the Trustee seems to take up this fight for the Debtor’s
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`equity owners rather than independently assessing what is in the best interest of the estate
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`and all creditors.
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`3.
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`The Debtor asserts that a motion for the approval of “an 11 U.S.C. § 363
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`sale” will be filed soon. However, neither the Trustee nor the Debtor provides any details
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`on this alleged sale, including (a) whether the Challenged Patents will be included in that
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`sale; (b) what consideration, if any, a third party would be willing to provide for the
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`purchase of the Challenged Patents (which will still be subject to the IPR Proceedings as
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`detailed in the Motion); and (c) when the motion to approve such a sale would be filed.
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`As set forth in the Motion, the PTAB instituted the IPR Proceedings based on its
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`determination that Twitter is likely to prevail on the challenges it has raised to the
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`validity of the Challenged Patents. It is unclear to Twitter why a third party would be
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`Case: 17-14849 Doc: 28 Filed: 02/21/18 Page: 3 of 5
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`willing to provide significant value for patents that are likely to be declared invalid by the
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`PTAB, and have already been found to be invalid by a district court.2 If the sale of the
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`Challenged Patents is simply a sale to the Debtor’s parent, as an insider, in exchange for a
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`credit-bid of their alleged secured claim, there is no real value to the estate and no real
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`reason to further delay the IPR Proceedings. If the anticipated sale is only of the
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`Additional Patents not currently subject to Pending IPR Proceedings, there is no reason to
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`delay the Pending IPR Proceedings while that sale proceeds.
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`4.
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`Further, the asserted “prejudice” to the Debtor’s equity owners was created
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`by those investors themselves. The “Funds” described by the Debtor purchased the
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`majority interest in the Debtor in April of 2016, one month after the Debtor filed suit
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`against Twitter, thus providing the Debtor with the funds necessary to finance the
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`litigation. See Exhibit 1 at 14, ¶ 48. Following this purchase, the managing member of
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`the Debtor’s parent, Stephen Shafer, became the CEO of the Debtor. See, e.g., Exhibit 2.
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`After the Funds’ management was replaced by a new Delaware limited liability company
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`controlled by the Funds’ investors, those investors remained in control of Youtoo’s
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`operation. Indeed, the Debtor’s representative in this bankruptcy proceeding, Marsh
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`Pitman, is the manager of the Funds. See Docket No. 1 at 4. The group of investors that
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`Youtoo seeks to protect here are the same investors that funded and controlled the
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`litigation against Twitter for nearly the last two years. It is disingenuous for the Debtor
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`2 As noted in the Motion, on November 10, 2016, Judge Godbey in the Northern District of
`Texas issued an order finding that the ’304 Patent and ’506 Patent were invalid under 35 U.S.C.
`§ 101 for claiming patent-ineligible subject matter.
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`and the Trustee to now state that these “investors” will be prejudiced by the continuation
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`of proceedings that are the direct result of their own investments.
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`5.
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`Finally, prejudice to the Debtor’s estate is but one of the factors to consider
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`in determining whether to lift the automatic stay. The Debtor ignores the prejudice
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`caused by allowing an invalid patent monopoly to continue, especially in light of the
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`PTAB’s determination that the Challenged Patents are likely invalid. Twitter and other
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`citizens should not be limited in their ability to conduct business and innovate
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`indefinitely while the Debtor tries to organize the sale of the Challenged Patents to a yet
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`unidentified (and likely insider) party, for what may be no more than a reduction in their
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`secured claim.
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`6.
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`The PTAB is a specialized tribunal established specifically to regulate
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`patent monopolies. This Court should not prevent the PTAB from fulfilling its statutory
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`duties based on the bare assertion that a sale of patents, which have already been found to
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`be invalid, may happen in the future.
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`For all of the above-stated reasons and the reasons set forth in the Motion, Twitter
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`requests that the Court enter an order (a)(i) holding that pursuant to Bankruptcy Code
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`§ 362(b)(4), the automatic stay under § 362(a) does not apply to IPR Proceedings by the
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`PTAB, or alternatively, (ii) lifting the stay for cause under § 362(d)(1) and waiving the
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`stay under Bankruptcy Rule 4001(a)(3), and (b) granting such other and further relief to
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`which Twitter may be entitled.
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`Case: 17-14849 Doc: 28 Filed: 02/21/18 Page: 5 of 5
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`DATED: February 21, 2018
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`
`
`Respectfully submitted,
`
`
`
`
`
`
`By: /s/ Tami J. Hines
`Tami J. Hines, OBA #32014
`HALL, ESTILL, HARDWICK, GABLE,
`GOLDEN & NELSON, P.C.
`100 North Broadway, Suite 2900
`Oklahoma City, OK 73102-8865
`Telephone: (405) 533-2828
`Facsimile: (405) 533-2855
`Email thines@hallestill.com
`
`Steven W. Soule, OBA #13781
`William W. O’Conner, OBA #13200
`HALL, ESTILL, HARDWICK, GABLE,
`GOLDEN & NELSON, P.C.
`320 South Boston Avenue, Suite 200
`Tulsa, OK 74103-3706
`Telephone: (918) 594-0400
`Facsimile: (918) 594-0505
`Email ssoule@hallestill.com
`Email boconnor@hallestill.com
`
`and
`
`
`
`By: /s/ Stephen M. Pezanosky
`Stephen M. Pezanosky (admitted pro hac vice)
`Autumn D. Highsmith (admitted pro hac vice)
`HAYNES AND BOONE, LLP
`2323 Victory Avenue, Suite 700
`Dallas, TX 75219
`Telephone: (214) 651-5000
`Facsimile: (214) 651-5904
`Email stephen.pezanosky@haynesboone.com
`Email autumn.highsmith@haynesboone.com
`
`COUNSEL FOR TWITTER, INC.
`
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`1644447.1:812982:00351
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 1 of 38
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`CJ~-\L0/4q37
`SlAJ\\'\roY7
`
`31
`
`Case NoCJ~ 2016 - 4 9 3 7 ,
`
`IN THE DISTRICT COURT of OKLAHOMA COUNTY
`STATE OF OKLAHOMA
`- - - - - - - - - - - - - - -~ - - - - - · - · · - · · - - - - -
`FILED IN ~! ,\ couNTY
`'J'RlCT coURT
`ROBERT F. BROWNE FAMILY LLC,
`ROBERT F. BROWNE REVOCABLE
`oKLAl'k · ·
`TRUST, KAREN A. BROWNE
`SEP 2 7 20\6
`REVOCABLE TRUST, ROBERT F.
`BROWNE ROTH IRA, KRISTINE P.
`Rt~iRl'ill«f
`BROWNE IRA, CORI E. BROWNE
`REVOCABLE TRUST, CORIE. BROWNE
`40I(K), EDWIN D. ABEL REVOCABLE
`TRUST, EDWIN D. ABEL TRADITIONAL
`IRA, EDWIN D. ABEL SIMPLE IRA,
`CAROL ABEL REVOCABLE TRUST,
`CAROL C. ABEL SEP IRA, T. LUKE ABEL
`TRUST AND LAURA M. ABEL TRUST,
`TIMOTHY LUKE ABEL SIMPLE IRA,
`CONNIE M. BAKER REVOCABLE TRUST,
`CONNIE M. BAKER IRA, THE EA AND
`RUTH M. BALDWIN REVOCABLE
`LIVING TRUST, BEECHER JOINT
`REVOCABLE TRUST, JANIS L.
`BINGAMAN TRUST, JOHN E.
`BINGAMAN, JR. REVOCABLE TRUST,
`JOHN E. BINGAMAN TRADITIONAL IRA,
`JANIS L. BINGAMAN TRADITIONAL
`IRA, JOHN AND JANIS BINGAMAN
`CHARITABLE REMAINDER TRUST,
`MORGAN FAMILY TRUST, AMANDA J.
`BINGAMAN BOA IRA, BARRY C.
`BLADES LEGACY TRUST, BARRY C.
`BLADES REVOCABLE TRUST, JANIS K.
`BLADES REVOCABLE TRUST, BARRY C.
`BLADES TRADITIONAL IRA, JANIS K.
`BLADES 401(K) AND PSP, BARRY C.
`BLADES 401(K) PLAN, JANIS K. BLADES
`TRADITIONAL IRA, DAVID AND
`MARCIA CHRISTOFFERSON JOINT
`TRUST, CHARLOTTE A. EVANS
`TRADITIONAL IRA, GREGORY R.
`GUDENBURR, GREGORY R.
`GUDENBURR IRA, PATRICIA M.
`HASWELL BOA IRA, PARTICIA M.
`HASWELL IRA, DAVID W. HORNBEEK
`IRA, DAVID W. HORNBEEK SIMPLE IRA,
`DAVID W. HORNBEEK 401(K), SKYE N.
`HOUSEMAN
`SKYE N.
`
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 2 of 38
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`- - - - - - - ---------
`
`IN THE DISTRICT COURT of OKLAHOMA COUNTY
`STATE OF OKLAHOMA
`
`Case No.
`
`- - - - - - - - - - - - - - - - -
`
`ROBERT F. BROWNE FAMILY LLC,
`ROBERT F. BROWNE REVOCABLE
`TRUST, KAREN A. BROWNE
`REVOCABLE TRUST, ROBERT F.
`BROWNE ROTH IRA, KRISTINE P.
`BROWNE IRA, CORI E. BROWNE
`REVOCABLE TRUST, CORI E. BROWNE
`401(K), EDWIN D. ABEL REVOCABLE
`TRUST, EDWIN D. ABEL TRADITIONAL
`IRA, EDWIN D. ABEL SIMPLE IRA,
`CAROL ABEL REVOCABLE TRUST,
`CAROL C. ABEL SEP IRA, T. LUKE ABEL
`TRUST AND LAURA M_ ABEL TRUST,
`TIMOTHY LUKE ABEL SIMPLE IRA,
`CONNIE M. BAKER REVOCABLE TRUST,
`CONNIE M. BAKER IRA, THE EA AND
`RUTH M. BALDWIN REVOCABLE
`LIVING TRUST, BEECHER JOINT
`REVOCABLE TRUST, JANIS L.
`BINGAMAN TRUST, JOHN E_
`BINGAMAN, JR. REVOCABLE TRUST,
`JOHN E. BINGAMAN TRADITIONAL IRA,
`JANIS L. BINGAMAN TRADITIONAL
`IRA, JOHN AND JANIS BINGAMAN
`CHARITABLE REMAINDER TRUST,
`MORGAN FAMILY TRUST, AMANDA J.
`BINGAMAN BDA IRA, BARRY C.
`BLADES LEGACY TRUST, BARRY C.
`BLADES REVOCABLE TRUST, JANIS K.
`BLADES REVOCABLE TRUST, BARRY C.
`BLADES TRADITIONAL IRA, JANIS K.
`BLADES 40J(K) AND PSP, BARRY C.
`BLADES 401(K) PLAN, JANIS K. BLADES
`TRADITIONAL IRA, DA YID AND
`MARCIA CHRISTOFFERSON JOINT
`TRUST, CHARLOTTE A. EV ANS
`TRADITIONAL IRA, GREGORY R.
`GUDENBURR, GREGORY R.
`GUDENBURR IRA, PATRICIA M.
`HASWELL BOA IRA, PARTICIA M.
`HASWELL IRA, DAVID W. HORNBEEK
`IRA, DA YID W. HORNBEEK SIMPLE IRA,
`DAVID W. HORNBEEK 40l(K), SKYE N.
`HOUSEMAN TRUST,_ SKY,____:E::___:N:__:_·c__ _ _ _
`
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 3 of 38
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`HOUSEMAN SIMPLE IRA, SKYE N.
`HOUSEMAN IRA, CRESTED BUTTE
`ELECTRICAL INC., ANNALIESE J.
`HOUSEMAN SIMPLE IRA, LESTER
`FAMILY, L.L.C., WARREN G. LOW
`TRADITIONAL IRA, C. STEPHEN LYNN
`REVOCABLE TRUST, MILAH P. LYNN
`REVOCABLE TRUST, JOHN PHILLIP
`LYNN, NANCY L. DA VIS AND KAREN R.
`WILLIAMS TRUST, C. STEPHEN LYNN
`AND MILAH P. LYNN CHARITABLE
`REMAINDER TRUST, C. STEPHEN LYNN
`LAGRANGE COLLEGE CHARITABLE
`REMAINDER TRUST, JANEE. MASSEY
`REVOCABLE TRUST, JANEE. MASSEY
`IRA, JOHN MUNKRES TRADITIONAL
`IRA, SUSAN M. NEWMAN TRUST,
`SUSAN M. NEWMAN BDA IRA, SUSAN
`M. NEWMAN ROTH IRA, SUSAN M.
`NEWMAN TRADITIONAL IRA,
`KENNETH S. PARKER IRA, LINDA H.
`PARKER SEP IRA, FRED SCHOENHALS
`TRADITIONAL IRA, MARY
`SCHOENHALS TRADITIONAL IRA, JEFF
`A. AND RANEE SCHOENHALS, JEFFREY
`A. SCHOENHALS IRA, JOHN F.
`SCHOENHALS AND CHRISTINA L.
`SCHOENHALS LIVING TRUST, JACK H.
`AND BEYERL Y SUE VAUGHN JT TRUST,
`WATSON FAMILY 2002 TRUST,
`ANDREW E. WATSON IRA, STEVEN J.
`ZICHICHI, AND STEVEN J. ZICHICHI IRA 1
`ROLLOVER, for themselves and derivatively
`on behalf of COVENANT GLOBAL ALPHA
`FUND, L.P. f/k/a CFS AGGRESSIVE
`STRATEGY FUND, L.P., COVENANT
`GLOBAL ALPHA FUND, LTD. f/k/a
`COVENANT AGGRESSIVE STRATEGY
`FUND, LTD., COVENANT OPPORTUNITY
`CAPITAL FUND, L.P., and COVENANT
`INCOME APPRECIATION FUND, L.P.,
`
`Plaintiffs,
`
`V.
`
`STEPHEN E. SHAFER, COVENANT
`FINANCIAL SERVICES, LLC d/b/a
`---------------·-
`
`L
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`2
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`· - - - -
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 4 of 38
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`- - - - - - - - - -~ - - - - - - - - - - - - - - - - -
`COVENANT GLOBAL INVESTORS, and
`CARTOGRAPHER LP,
`
`Defendants,
`
`and
`
`COVENANT GLOBAL ALPHA FUND, L.P.
`f/k/a CFS AGGRESSIVE STRATEGY
`FUND, L.P., COVENANT GLOBAL ALPHA
`FUND,LTD.f7k/aCOVENANT
`AGGRESSIVE STRATEGY FUND, LTD.,
`COVENANT OPPORTUNITY CAPITAL
`FUND, L.P., and COVENANT INCOME
`APPRECIATION FUND, L.P.,
`
`Nominal Defendants.
`
`- - - - - - - - - - - ·-·-- - _____ _J__ ________________ _
`
`PETITION
`
`COME NOW the Plaintiffs, Robert F. Browne Family LLC, Robert F. Browne Revocable
`
`Trust, Karen A. Browne Revocable Trust, Robert F. Browne Roth IRA, Kristine P. Browne IRA,
`
`Cori E. Browne Revocable Trust, Cori E. Browne 401 (k), Edwin D. Abel Revocable Trust, Edwin
`
`D. Abel Traditional IRA, Edwin D. Abel Simple IRA, Carol Abel Revocable Trust, Carol C. Abel
`
`Sep IRA, T. Luke Abel Trust and Laura M. Abel Trust, Timothy Luke Abel Simple IRA, Connie
`
`M. Baker Revocable Trust, Connie M. Baker IRA, the EA and Ruth M. Baldwin Revocable Living
`
`Trust, Beecher Joint Revocable Trust, Janis L. Bingaman Trust, J olm E. Bingaman, Jr. Revocable
`
`Trust, Jolm E. Bingaman Traditional IRA, Janis L. Bingaman Traditional IRA, John and Janis
`
`Bingaman Charitable Remainder Trust, Morgan Family Trust, Amanda J. Bingaman Eda IRA,
`
`Barry C. Blades Legacy Trust, Barry C. Blades Revocable Trust, Janis K. Blades Revocable Trust,
`
`Barry C. Blades Traditional IRA, Janis K. Blades 40l(k) and PSP, Barry C. Blades 40l(k) Plan,
`
`Janis K. Blades Traditional IRA, David and Marcia Christofferson Joint Trust, Charlotte A. Evans
`
`Traditional IRA, Gregory R. Gudenburr, Gregory R. Gudenburr IRA, Patricia M. Haswell EDA
`
`3
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 5 of 38
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`IRA, Particia M. Haswell IRA, David W. Hornbeek IRA, David W. Hornbeek Simple IRA, David
`
`W. Hornbeek 40l(k), Skye ).!. Houseman Trust, Skye N. Houseman Simple IRA, Skye N.
`
`Houseman IRA, Crested Butte Electrical Inc., Annaliese J. Houseman Simple IRA, Lester Family,
`
`L.L.C., Warren G. Low Traditional IRA, C. Stephen Lynn Revocable Trust, Milah P. Lynn
`
`Revocable Trust, John Phillip Lynn, Nancy L. Davis and Karen R. Williams Trust, C. Stephen
`
`Lynn and Milah P. Lynn Charitable Remainder Trust, C. Stephen Lynn LaGrange College
`
`Charitable Remainder Trust, Jane E. Massey Revocable Trust, Jane E. Massey IRA, John Munkres
`
`Traditional IRA, Susan \1. Newman Trust, Susan M. Newman Bda IRA, Susan M. Newman Roth
`
`IRA, Susan M. Newman Traditional IRA, Kenneth S. Parker IRA, Linda H. Parker SEP IRA, Fred
`
`Schoenhals Traditional IRA, Mary Schoenhals Traditional IRA, Jeff A. and Ranee Schoenhals,
`
`Jeffrey A. Schoenhals IRA, John F. Schoenhals and Christina L. Schoenhals Living Trust, Jack H.
`
`and Beverly Sue Vaughn Joint Trust, Watson Family 2002 Trust, Andrew E. Watson IRA, Steven
`
`J. Zichichi, and Steven J. Zichichi IRA Rollover, for Themselves and Derivatively on Behalf of
`
`Covenant Global Alpha Fund, L.P. f/k/a/ as CFS Aggressive Strategy Fund, L.P., Covenant Global
`
`Alpha Ltd. Fund, Covenant Opportunity Capital Fund, L.P., and Covenant Income Appreciation
`
`Fund, L.P., (collectively, "Plaintiffs"), on behalf of themselves and the limited partnership funds
`
`Covenant Global Alpha Fund, L.P., f/k/a as CFS Aggressive Strategy Fund, L.P., Covenant
`
`Opportunity Capital Fund, L.P., and Covenant Income Appreciation Fund, L.P., and the fund
`
`Covenant Global Alpha Fund Ltd. f/k/a Covenant Aggressive Strategy Fund, Ltd., (collectively,
`
`the "Covenant Funds"), and for their causes of action against Defendants allege and state as
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`follows:
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`4
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 6 of 38
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`NATURE OF THE ACTION
`
`I.
`
`This case is about breaches of fiduciary duty, self-dealing, and gross abuses by
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`CFS, the Covenant Funds' General Partner, as well as Shafer, CFS' s Managing Member (together,
`
`the "Covenant Defendants").
`
`2.
`
`The Covenant Defendants' actions demonstrate that they lied when they told
`
`Plaintiffs in January 2015 that the Covenant Funds would be liquidated over the next twelve
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`months-after gating those funds to prohibit any investor withdrawals. Specifically, the following
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`acts lay bare the Covenant Defendants' false statements about immediately liquidating the
`
`Covenant Funds' assets:
`
`•
`
`•
`
`•
`
`•
`
`selling Covenant Hospitality for an arbitrary price to another fund
`that Defendant Shafer is trying to launch, and financing the
`transaction with money borrowed from the Covenant Funds (i.e.,
`cash that could immediately have been distributed to Plaintiffs);
`
`failing to put the Covenant Funds' illiquid precious gems on the
`auction market that convenes only several times a year, absent
`which selling them is essentially impossible;
`
`spending millions of dollars on doubling the equity stake in YouToo
`Media and on aspirational litigation, instead of selling that asset and
`distributing the cash to investors; and
`
`using the Covenant Funds' luxury homes as personal vacation
`residences for Defendant Shafer-as well as his family and
`employees-without even paying for
`their use,
`instead of
`meaningfully trying to sell these assets.
`
`3.
`
`Moreover, the Covenant Defendants used liquid assets to purchase oil puts to raise
`
`cash, despite having absolutely no experience investing in oil, let alone oil options. That reckless
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`move-which the Covenant Defendants hid-invariably resulted in at least a $4.5 million loss.
`
`Nor was this so-called attempt to raise cash intended to benefit Plaintiffs as the Covenant
`
`Defendants distributed none of the cash to Plaintiffs.
`
`4.
`
`During this purported liquidation period, the Covenant Defendants also undertook
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`at least one major self-dealing transaction with Cartographer-which is a competing fund that
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`5
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 7 of 38
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`Defendant Shafer controls. The mischief here is that the Covenant Defendants transferred
`
`Covenant Hospitality to Cartographer at an arbitrary price without ever trying to market that asset,
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`even though there was an interested buyer. That inured to Defendants Shafer's and Cartographer's
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`benefit-particularly because Shafer is attempting to get Cartographer off the ground-while
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`plain! y harming Plaintiffs' interests. Defendant Shafer did all this despite Plaintiffs' express
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`instructions to the contrary.
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`5.
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`What is more, the Covenant Defendants have churned their management fees by
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`gating Plaintiffs' fund redemptions and not expeditiously liquidating all Covenant Funds' assets.
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`Because the Covenant Defendants' management fee is based on the value of the fund assets, they
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`are motivated to hold assets prisoner for as long as possible-Plaintiffs' interests be damned. This
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`is particularly so in failed funds such as here, where there is no longer an opportunity for the
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`managing or general partner to earn any success fees.
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`6.
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`As with many misdeeds, there was a cover-up here. The Covenant Defendants tried
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`to conceal their actions by not complying with their books-and-records obligations, which is how
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`Plaintiffs can police precise! y the sort of misconduct that the Covenant Defendants have
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`undertaken. What bits of information the Covenant Defendants have supplied have been at their
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`own pleasure-and not in response to Plaintiffs' books-and-records demands. And the Covenant
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`Defendants' books-and-records productions have been woefully incomplete in any event.
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`7.
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`Plaintiffs went out of their way to avoid litigation, meeting with the Covenant
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`Defendants in April 2016 to propose a compromise and reiterate their demand for books and
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`records. But after that meeting, the Covenant Defendants simply made a perfunctory and
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`inadequate production, which omitted information about expenses or investor distributions
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`predating 2015. The Covenant Defendants also made the data available on what appeared to be
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`newly created spreadsheets (rather than in native format), making it impossible to verify the data
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`6
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 8 of 38
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`and stoking suspicion that they were being deceivingly selective. Moreover, the Covenant
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`Defendants then lied about the self-dealing transactions that they were imminently closing for
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`Covenant Hospitality (a real estate asset).
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`8.
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`This lawsuit is, in part, a derivative action by Plaintiffs on behalf of themselves and
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`all others similarly situated against the Covenant Defendants, seeking to remedy and recover
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`damages for, among other things, the Covenant Defendants' breaches of contract, breaches of
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`fiduciary duties, and other violations of the law, the Agreements, and the Offering Circulars.
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`THE PARTIES. JURISDICTION, AND VENUE
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`9.
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`Plaintiffs arc Legacy Limited Partners and Legacy Shareholders as defined in the
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`Agreements described below and investors in one or more of the Covenant Funds. Plaintiffs arc
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`either residents of Oklahoma or have investment interests in assets located in and/or managed from
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`Oklahoma.
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`JO.
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`Covenant Global Alpha Fund, L.P., f/k/a as CFS Aggressive Strategy Fund, L.P.
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`("Covenant Global"), is a Delaware limited partnership that is registered to do business in
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`Oklahoma. Its principal place of business is located in Oklahoma City, Oklahoma. The first of
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`the Covenant Funds, it was formed on February 15, 2008.
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`11.
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`Covenant Global Alpha Ltd. Fund f/k/a Covenant Aggressive Strategy Fund, Ltd.
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`("Covenant Global Ltd."), is an investment company formed under the laws of the Cayman Islands.
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`On information and belief, its principal place of business is in Oklahoma City, Oklahoma and it is
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`managed in Oklahoma City.
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`12.
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`Covenant Opportunity Capital Fund, L.P. ("Covenant Opportunity") is a Delaware
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`limited partnership that is registered to do business in Oklahoma. It was formed on October 27,
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`2008.
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 9 of 38
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`13.
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`Covenant Income Appreciation Fund, L.P. ("Covenant Income") is a Delaware
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`limited partnership that is registered to do business in Oklahoma. It was formed on August I 0,
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`2009.
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`14.
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`Plaintiffs collectively represent a majority of the interests in the Covenant Funds
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`and will adequately represent the interests of all the investors in the Covenant Funds in enforcing
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`and prosecuting their rights in this action.
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`15.
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`Defendant Covenant Financial Services, LLC ("CFS"), an Oklahoma limited
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`liability company, is the General Partner of each of the three limited partnership Covenant Funds.
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`CFS is the Investment Adviser and managing officer of Covenant Global Ltd ("Investment
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`Advisor"). Its principal place of business is in Oklahoma City, Oklahoma.
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`16.
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`Defendant Stephen E. Shafer ("Shafer") is the Managing Member and Chief
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`Investment Officer of CFS. Shafer is a resident of Oklahoma City, Oklahoma.
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`17.
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`Defendant Cartographer LP ("Cartographer") is a Delaware limited partnership,
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`and its principal place of business is in Oklahoma City, Oklahoma. Shafer is the Managing
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`Member of Cartographer.
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`18.
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`Certain Plaintiffs with equity in Covenant Global and CFS entered into the Third
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`Amended and Restated Agreement of Limited Partnership of Covenant Global Alpha Fund, L.P.
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`The Plaintiffs with equity in Covenant Opportunity and CFS entered into the First Amended and
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`Restated Agreement of Limited Partnership of Covenant Opportunity Capital Fund, L.P. The
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`Plaintiffs with equity in Covenant Income and CFS entered into the Second Amended and Restated
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`Agreement of Limited Partnership of Covenant Income Appreciation Fund, L.P. Representative
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`versions of the partnership agreements listed above ( collectively referred to as the "Partnership
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`Agreements") are attached to this Petition as Exljibits J 3, respectively. The Partnership
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`Agreements are substantively similar except as to the name of the Fund and investor involved.
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 10 of 38
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`The Plaintiffs with equity in Covenant Global Ltd. entered into substantively identical agreements
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`regarding the investments in that Fund (hereinafter referred to as the "Ltd. Fund Agreements").
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`19.
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`Other investors entered into substantively identical Partnership Agreements and
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`Ltd. Fund Agreements (hereinafter collectively referred to as the "Agreements") on different dates.
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`20.
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`The Partnership Agreements contain forum-selection clauses in which the General
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`Partner and the Limited Partners agree to the exclusive jurisdiction and venue of any state court in
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`the city and county of the partnership's principal place of business at the time the dispute arises,
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`which is Oklahoma City, Oklahoma.
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`21.
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`This Court has subject matter and personal jurisdiction over this matter pursuant to
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`12 OKLA. STAT. § 2001.
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`22.
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`Venue is proper pursuant to the forum-selection clauses and 12 OKLA. STAT.§§ 134
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`and 137.
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`FACTUAL ALLEGATIONS
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`The Covenant Fund.~ exist to invest
`money for Plaintiffs' benefit
`The Agreements require the Covenant Defendants to manage the Covenant Funds'
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`23.
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`various investments for Plaintiffs' benefit.
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`24.
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`Plaintiffs vary in their business acumen and sophistication. And their investments
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`vary in size. Some Plaintiffs have tied up their retirement money. Others invested money that
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`they earned and had hoped to pass on to their children and grandchildren.
`-· ..
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`25.
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`In January 2015, as more fully described below, the Covenant Defendants
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`prevented Plaintiffs from redeeming their investments from the Covenant Funds by gating them.
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`The Covenant Defendants then announced that they would liquidate the Covenant Funds' assets
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`to satisfy Plaintiffs' requests for redemption.
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 11 of 38
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`On January 1, 2015, the Covenant Defendants gated the
`Covenant Funds and then claimed that they would ,·tart to
`liquidate the assets to di,·tribute proceeds to Plaintiffs.
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`26.
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`Under the terms of the Agreements, Legacy Limited Partners/Legacy Shareholders
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`are entitled to withdraw all or part of their investments with 10 days' business notice and their
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`withdrawals take priority over all others, giving the Legacy Limited Partners/Legacy Shareholders
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`substantially greater liquidity than other limited partners/shareholders. The Covenant Defendants
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`have unilaterally and unlawfully vitiated the rights of the Legacy Limited Partners/Legacy
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`Shareholders.
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`27.
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`In 2013, the Covenant Funds performed poorly. In 2014 the decline became even
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`more precipitous.
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`28.
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`Instead of distributing cash from the Covenant Hospitality sale and otherwise
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`responding to Plaintiffs' requests, effective January I, 2015, the Covenant Defendants stopped all
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`withdrawals from the Covenant Funds, notwithstanding the Plaintiffs' bargained-for withdrawal
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`rights. In industry parlance, the Covenant Defendants "gated" the funds.
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`29.
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`Shortly after they closed the gate, the Covenant Defendants sent a letter to all
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`investors, including Plaintiffs, announcing that they were indefinitely "suspending withdrawals
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`and redemptions for the January withdrawal and redemption date, 1/31/2015, and all subsequent
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`withdrawals and redemptions." That letter (the "Gate Letter") is attached as Exhibit 4.
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`On the eve of getting sued, the Covenant Defendants tried to
`create the impression that they are at last doing .~omething.
`On information and belief, after the Covenant Defendants learned Plaintiffs were
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`30.
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`about to file this Petition, they purportedly signed agreements to auction three (3) gems through
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`Christies. This meaningless and empty gesture to create the impression that they are at last
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`liquidating the Covenant Funds only shows that the Covenant Defendants are not serious.
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 12 of 38
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`31.
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`The Covenant Defendants could and should have put up the gems-all six of
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`them-for auction a year and a half ago when the Covenant Defendants gated the funds and started
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`the promised liquidation. But the Covenant Defendants sat on the gems (collecting management
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`fees for doing nothing), despite Plaintiffs' pleas.
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`I.
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`DEFENDANTS HAVE LIED TO PLAINTIFFS ABOUT CONDUCTING A LIQUIDATION.
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`The Covenant Defendants promised to
`complete the liquidation by the end of 2015.
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`32.
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`In the Gate Letter, the Covenant Defendants announced to Plaintiffsthat the
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`Covenant Defendants would liquidate the Covenant Funds' assets and would begin distributing
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`the assets to investors "in a multi-month distribution process beginning in February [2015]." They
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`also stated that distributions were expected to occur in February, March, and April of 2015 and
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`that the majority of the Covenant Funds' liquid assets would be sold and the cash proceeds
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`distributed by April 2015.
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`33.
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`In that same letter the Covenant Defendants acknowledged that they had
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`"fiduciary" obligations to Plaintiffsand that their "priority [was] to protect and optimize
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`[Plaintiffs'] capital." In fact, CFS' letterhead states "A Commitment to Trust."
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`34.
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`As of January 2015, the Covenant Funds' investments consisted mostly of the
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`following asset classes:
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`a.
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`b.
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`C.
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`d.
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`c.
`f.
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`cash;
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`bonds;
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`stock in various companies;
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`six rare gemstones appraised in the first quarter of 2015 at an
`aggregate value of more than $25 million (held in Covenant Real
`Return Partners LLC);
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`five luxury homes in Florida and Washington States; and
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`equity in operating, non-public companies called YouToo Media,
`Carry On, and Covenant Hospitality LLC, n/k/a Anthology
`Collection LLC ("Covenant Hospitality"), which manages the five
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`Case: 17-14849 Doc: 28-1 Filed: 02/21/18 Page: 13 of 38
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`luxury homes listed above and earns a positive cash flow of
`approximately $500,000 per year.
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`35.
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`As of this lawsuit-more than a year-and-a-half after the announced gating and
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`liquidation-the Covenant Defendants have failed to make any meaningful effort to liquidate the
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`Covenant Funds' assets, have sunk more money into the assets, and have prolonged liquidation
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`indefinitely. In fact, the Covenant Defendants have no concrete or realistic plan to liquidate and
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`distribute the remaining Covenant Fund assets at all, let alone quickly, but instead plan to line their
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`pockets with management and performance fees, and an undisclosed amount of alleged,
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`unverifiable "expense."
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`36.
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`To date, the Covenant Defendants have not even sold and distributed to