574 B.R. 446
Bankr. D. Del.2017Background
- Debtors DSI Renal Holdings, DSI Hospitals, and DSI Facility filed Chapter 7 petitions on June 3, 2011; Trustee filed an adversary complaint alleging a multi‑step restructuring and sale that stripped the debtors of the Renal Business and generated >$425 million to defendants.
- Trustee alleges a 2010 restructuring (DSI Restructuring) transferred DSI Holding’s 100% interest in operating subsidiary DSI Renal to new entities largely owned by insiders and new investors, leaving the debtors insolvent shells; later the Renal Business sold to DaVita for ~$700M.
- Complaint relies on internal emails, board minutes, and deposition testimony (including admissions that the restructuring aimed to isolate Renal assets and leave guaranty liabilities behind).
- Trustee asserts claims for (inter alia) actual fraudulent transfer (§ 548(a)(1)(A)), constructive fraudulent transfer (§ 548(a)(1)(B) and Delaware law via § 544), recovery (§ 550), breach of fiduciary duty, aiding and abetting, corporate waste, declaratory relief (veil‑piercing/substantive consolidation), and equitable subordination (withdrawn).
- Court denied motions to dismiss Counts 1 (actual fraud), 5 (fiduciary breach), and 6 (aiding & abetting); granted Count 8 (declaratory/veil‑piercing/substantive consolidation) and dismissed Count 7 as to certain defendants; deferred ruling on Counts 2–3 (constructive fraud/§546(e) safe‑harbor issues) pending Supreme Court guidance.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether transfers were actually fraudulent under 11 U.S.C. § 548(a)(1)(A) | Trustee: internal docs, testimony, and badges of fraud show scheme to hinder/delay/defraud creditors by stripping Renal Business | Defendants: pleading lacks particularity under Rule 9(b); some investors lacked knowledge | Denied motion to dismiss Count 1 — allegations pled with sufficient specificity; badges and collapsed‑transaction theory adequate at pleading stage |
| Whether constructive fraudulent transfer claims and state‑law claims are barred by § 546(e) safe harbor (Counts 2–3) | Trustee: restructuring was one‑sided with little/no consideration; safe harbor shouldn’t shield those transfers | Defendants: transfers are settlement/payments involving financial institutions or securities contracts and fall within § 546(e) protection | Deferred — court reserved ruling pending Supreme Court decision in Merit Management on scope of § 546(e) |
| Recovery under § 550 (Count 4) | Trustee: may recover from initial/mediate transferees if transfers avoided under § 548/§544 | Defendants: same §546(e) safe harbor defense applies to some recovery claims | Denied as to recoveries based on Count 1; deferred as to recoveries tied to Counts 2–3 |
| Whether trustee stated state‑law breach of fiduciary duty claims against directors/officers and controlling shareholders (Count 5) | Trustee: directors/officers/Centre Defendants orchestrated self‑interested restructuring, failed to get value, misled creditors; pled facts to plead around business judgment rule | Defendants: business judgment rule and exculpation clauses bar claims; Centre Defendants not fiduciaries | Denied — claims survive pleading stage; business judgment/exculpation are affirmative defenses not resolved on 12(b)(6); Centre Defendants plausibly alleged to have exerted control |
| Aiding and abetting breach of fiduciary duty (Count 6) | Trustee: non‑fiduciary investors knowingly participated in breaches; discovery evidence supports knowing participation | Defendants: Complaint fails to allege knowing participation by investors (Ares, Apollo, NML) | Denied — factual allegations and discovery citations suffice at pleading stage to infer knowing participation |
| Corporate waste (Count 7) | Trustee: restructuring was so one‑sided that no reasonable businessperson could conclude adequate consideration was received | Defendants: waste claim only against directors; insufficient allegation of complete failure of consideration | Granted in part — Count 7 dismissed as to Centre Defendants and Yalowitz (not directors); otherwise denied as to remaining D&O defendants |
| Declaratory relief / veil‑piercing / substantive consolidation (Count 8) | Trustee: seeks declarations that CDSI entities were alter egos/successors and that Debtor should be liable for related debts (including Bucks County creditors) | Defendants: trustee lacks standing to pursue claims that effectively benefit third‑party creditors and would substantively consolidate or increase estate liabilities; relief goes beyond estate’s interests | Granted — Count 8 dismissed for lack of standing and because requested relief effectively seeks substantive consolidation/veil piercing improperly at this stage |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleadings)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (apply Twombly two‑step plausibility framework)
- Fruehauf Trailer Corp. v. Pension Transfer Corp., 444 F.3d 203 (3d Cir. 2006) (fraudulent transfer and estate property principles)
- Resorts Int’l, Inc. v. Lowenschuss, 181 F.3d 505 (3d Cir. 1999) (collapsing transactions / substance over form)
- Owens Corning v. Credit Suisse First Boston (In re Owens Corning), 419 F.3d 195 (3d Cir. 2005) (standards for substantive consolidation)
- Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972) (trustee standing limits re: claims of individual creditors)
- Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031 (Del. Ch. 2004) (test for direct vs. derivative claims)
- Stone v. Ritter, 911 A.2d 362 (Del. 2006) (duties of loyalty, good faith, and oversight)
- Gantler v. Stephens, 965 A.2d 695 (Del. 2009) (duties of directors and officers)