William Galvin
William Galvin

RCS Creditor Trust Sues Galvin to Recover $3 Million Settlement

The complaint, filed in late January, alleges that all payments were made during the 90-day preference period before the company’s bankruptcy filing.

The creditor trust formed during RCS Capital Corp.’s bankruptcy three years ago is suing Massachusetts Secretary of the Commonwealth William Galvin to recover a $3 million settlement the firm paid to the state prior to its bankruptcy.

In November 2015, Galvin’s office charged Realty Capital Securities, RCS Capital’s wholesale broker/dealer, with fraudulently casting shareholder proxy votes. The firm settled the charges for $3 million, the first $1 million of which was paid on Dec. 14, 2015 and the remaining $2 million paid on the last business day before the filing for bankruptcy.

The complaint, filed in the U.S. Bankruptcy Court for the District of Delaware in late January, alleges all payments were made during the 90-day preference period before the bankruptcy filing, therefore they met the requirements for a “voidable preference.” This is a section of bankruptcy law intended to prevent debtors from giving favorable treatment to some creditors over others before filing for bankruptcy. If a transfer is made 90 days before filing for bankruptcy, a trustee may be able to recover those assets.

The suit also claims “avoidance of fraudulent conveyances,” which is the transfer of funds with the intention to avoid or defraud creditors.

“The lawsuit itself is not unusual; it’s essentially trying to avoid a payment to one creditor to the detriment of the other creditors,” said Richard Roth, founder and partner of The Roth Law Firm in New York.

What’s unusual, Roth said, is that they’re seeking a payment made to the state.

“I think it’s ironic that money that was paid to a regulator may have to be paid back to the debtor,” he said.

He doesn’t know of any law that would carve out or exclude a regulator or state from not being part of that. “So it looks like it’s a legitimate lawsuit.”

Galvin’s office has hired a lawyer and is contesting the suit, spokeswoman Debra O’Malley said.

The creditor trust’s administrator did not return a request seeking comment.

RCS Capital filed for Chapter 11 bankruptcy in January 2016 in Delaware after reaching agreements with a majority of its creditors.

RCS Capital had less than 50 creditors, according to the bankruptcy filing. The company listed its liabilities as between $100 million and $500 million, while its assets were between $1 billion and $10 billion. 

At the time of the filing, RCS Capital had debts with eight firms for over $1 million. Wilmington Savings Fund Society had the largest unsecured claim, $120 million, while VEREIT Operating Partnership had a $15.3 million claim, according to court documents. Of the 30 companies cited as the largest unsecured creditors in the bankruptcy filing, at least four are well-known law firms such as Proskauer Rose and Winston & Strawn. Court documents said the firm also owed money to Charles Schwab & Co. for just under $1 million, the Ritz-Carlton in California for about $46,000 and the NYC Department of Finance for about $50,000 in taxes.

Cetera Financial Group, the b/d network previously owned by RCS Capital, emerged from bankruptcy and reorganization in May 2016, and now stands as a private company with a healthy balance sheet and a sole focus on Cetera Financial Group as its only operating entity.   

Cetera recently announced the launch of a “capital structure review,” retaining Goldman Sachs to help evaluate its options, including a potential sale. A source close to the firm told Wealthmanagement.com that as of now, private equity player Lightyear Capital has emerged as the most likely buyer. If Lightyear were to buy the firm, it would bring Cetera full circle, as it was previously owned by the private equity firm from 2009 to 2014. The firm is currently majority owned by the first and second lien holders. 

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