Case 1:10-cv-02031-DLI-JMA Document 293 Filed 07/24/13 Page 1 of 7 PageID #: 8799

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 OF SOLUTION FUNDING, LLC IN OPPOSITION TO MOTION FOR ORDER DISBURSING FUNDS OF THE SULLIVAN LEAD PLAINTIFF GROUP Index No. 10-CV-2031 (DLI) (JMA)

Solution Funding, LLC ("Solution Funding") files this opposition to the July 10, 2013 motion of lead plaintiffs in the In Re Spongetech Delivery Systems, Inc. Securities Litigation, Civ. Action No. 10-cv-4101 (DLI) (herein the "Sullivan Plaintiffs") for disbursement of funds currently escrowed in the Court Registry Investment System Account (the "CRIS Account") established for this case pursuant to this Court's Order Re: Procedure for Escrow and Disposition of Funds entered June 20, 2012 (the "June 20 Order"). The June 20 Order governs the procedure for escrow and disposition of the proceeds from the sale of the assets of relief defendants Blue Star Media Group, Inc. ("Blue Star"), BusinessTalkRadio.net Acquisitions Corp. ("BTR") and

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their subsidiaries! Paragraph 2 of the June 20 Order provides that proceeds from the sale of assets of BTR or its subsidiaries "shall be held in an account in the name of BTR" and it is from this account (the "BTR CRIS Account") that the Sullivan Plaintiffs seek the disbursement of funds. Solution Funding takes no position with regard to the relative merits of the Sullivan Plaintiffs' claim as against the claims of creditors other than Solution Funding, nor with regard to the relative priority of that claim as against the claims of such other creditors. Solution Funding ifles this opposition solely to point out that the Sullivan Plaintiffs' contention that the Court could or should subordinate Solution Funding's claim to that of the Sullivan Plaintiffs' lacks merit, similar to the contentions of Michael Metter, the Hinshaw firm and the SEC. While conceding the superiority of Solution Funding's claim as a matter of law (since otherwise equitable subordination would not an issue), the Sullivan Plaintiffs' motion argues that Solution Funding's claim should be equitably subordinated or "limited" so as to allow the Sullivan Plaintiffs to recover what they claim to be owed. The Sullivan Plaintiffs -- like the SEC, Hinshaw and Metter fail to offer any support for this contention. The reason is that there is none, given the absence of any of the elements that must be present in order to allow a court to equitably subordinate a creditor's claim. Most specifically, the Sullivan Plaintiffs' position fails because, as a matter of law, ' length transaction with BTR's Solution Funding simply purchased, for value and in an arms original lenders, the position of those lenders with regard to the distressed loan on which BTR had defaulted. The transaction did not involve any inequitable risk shifting among stakeholders. Solution Funding simply purchased what the original lenders had, no more and no less. Thus, it
1

The Court signed the Order on June 18, 2012, but it was entered on the docket on June 20.

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neither increased BTR's indebtedness nor shifted risk among stakeholders. Just as this Court could have no lawful basis for "subordinating" or "limiting" the claim of the original lenders, it has no basis for subordinating or limiting the claim of Solution Funding. II. ARGUMENT

Solution Funding Is Entitled To Priority of Distribution Of All Funds in the BTR CRIS Account Up To The Full Amount Of Its Judgment Against BTR In the ifnal sentence of its motion, and without providing any authority or further discussion, the Sullivan Plaintiffs make the conclusory suggestion that this Coutr could, and should, lawfully deny Solution Funding distribution of the amounts in the BTR CRIS Account, or "limit" the distribution that Solution Funding should receive, as a matter of "equity." First, the Sullivan Plaintiffs' motion asks the Court to modify its June 20 Order, which explicitly provides that the CRIS Account funds will be distributed according to the priority of claims submitted, with claimants retaining in such funds the same priority as they held in the assets sold to produce them. That was the basis upon which Solution Funding agreed to be bound by the process established in an effort to ensure that this Coutr would have the opportunity to address the distribution of funds in an orderly manner. Even if, however, the June 20 Order should be read as allowing the interposition of "equitable" arguments, the Sullivan Plaintiffs, no less than the SEC, Hinshaw and Metter, simply do not have one. Their motion fails to identify the "relevant legal authorities" upon which equitable subrogation could be based (as required by the June 20 Order) nad does so for a reason: There are none. Equitable subordination, a concept most otfen addressed in bankruptcy proceedings but derived from general principles of equity, focuses on the inequitable acts of a creditor and the

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degree to which such acts cause a shift in risk to stakeholders. In the leading case, Benjamin v. Diamond (In Re Mobile Steel Co) 563 F.2d 692 (5th Cir. 1977), the court pointed out that the elements necessary to equitable subordination were inequitable conduct on the patr of the claimant resulting in injury to other creditors, or an unfair advantage to the claimant. Courts have also recognized that where the claimant is not an insider of the debtor, the inequitable action necessary to justify equitable subordination must be "egregious conduct" and not merely "inequitable" conduct. First National Bank v. Rafoth (In re Baker & Getty Fin. Serv., Inc.), 974 F.2d 712, 718 (6th Cir 1992). Here, Solution Funding merely purchased the rights of and stands in the place of BTR's original lenders on the relevant loan (herein the "MFC Loan"). As a matter of law, purchasing a distressed lona is not inequitable, much less egregious, conduct. The other parties to this litigation attempt to suggest that because Solution Funding paid less for the lona than the full amount owed by BTR as a result of its default, this justifies "limiting" Solution Funding's claim. This is invoking nonsense, not equity. No rational buyer would buy a distressed lona that was in default for the full amount owed on the loan and Solution Funding had no obligation to act irrationally. Solution Funding bought the loan, stands in the shoes of the original lender and has sought to do nothing more than to exercise the contractual rights it acquired. It should also be noted that Solution Funding's purchase of the MFC Loan did not change the risk to which other creditors of BTR were subject. BTR's obligations did not change merely because Solution Funding purchased the lona. Solution Funding did not acquire the right to receive, nor did BTR incur the obligation to pay, anything more thna BTR owed. The Sullivan Plaintiffs' motion also fails because, as discussed at length in prior memoranda filed in connection with motions pursuant to this Court's June 20 Order, the

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Delaware Court of Chancery has entered a final money judgment in favor of Solution Funding and against BTR. In the course of the Delaware proceeding, Vice Chancellor Glasscock expressly held (over the objection of BTR as then controlled by Mr. Metter), in granting partial summary judgment appointing a receiver, that Solution Funding had properly acquired the right, title and interest to the MFC Loan and was entitled to enforce the loan documents. Solution Funding has addressed in prior memoranda this Court's obligation to afford full faith and credit to the Delaware Court's judgment and will not repeat that point at length here.

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IV.

CONCLUSION

Solution Funding has, in its own motion for distribution, established the fact and amount of BTR's obligation to Solution Funding and the fact that Solution Funding had, at all relevant times, a perfected first priority security interest in all of the assets of BTR and its subsidiaires and therefore, has equivalent priority with regards to the funds in the BTR CRIS Account. Neither the Sullivan Plaintiffs nor any other party has advanced a claim with a priority senior or equal to that of Solution Funding. Accordingly, and for all of the foregoing reasons, the Sullivan Plaintiffs' motion for order disbursing funds must be denied to the extent it seeks disbursement ahead of or pari passu with Solution Funding. Respectfully submitted, Dated: New York, New York July 24, 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 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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CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing Memorandum of Law of Solution Funding, LLC, in Opposition To Motion for Order Disbursing Funds of the Sullivan Lead Plaintiff Group was served electronically on July 24, 2013 through the ECF system upon all counsel of record.

/s/ Thuv T. Bui Thuy T. Bui

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