470 B.R. 759
Bankr. E.D. Va.2012Background
- LFG and LES were affiliated entities under the LandAmerica plan; Matson served as LFG Trustee overseeing a liquidating trust for LFG and LES assets.
- LES was a wholly-owned subsidiary of LFG, acting as a qualified intermediary for §1031 exchanges; its ARS investments created liquidity stress.
- LES’s ARS portfolio froze in Feb 2008, with about half of its commingled Exchange Funds illiquid, impairing ability to meet 1031 obligations.
- In Oct–Nov 2008, LFG/LES executives transferred approximately $65 million from LFG to LES without compliant board or officer approvals under Authority Guidelines.
- The LFG Trust, through the LFG Trustee, asserts prepetition D&O claims against LES and LFG directors/officers, which were transferred to the LFG Trust under the Joint Chapter 11 Plan; Defendants move to dismiss under Rule 12(b)(6).
- The Plan expressly preserved defenses and restricted claims against former directors/officers, while the Trustee seeks to pursue direct and/or equitable remedies, including subordination and fraudulent conveyance theories.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to sue on D&O claims | LFG Trustee has standing to pursue LFG/LES D&O claims under §1123(a)(5) transfer. | Virginia/Maryland limits on assignment bar direct standing; claims belong to corporation. | Trustee has standing to pursue prepetition D&O claims under the Plan. |
| Exculpation applicability to willful misconduct | Virginia exculpation applies but willful misconduct defeats it. | Exculpation should bar claims if not willful misconduct. | Exculpation may be raised as defense, but willful misconduct defeats exculpation; claims may proceed. |
| Direct vs derivative fiduciary duty under Maryland law | LES as wholly owned subsidiary imposes direct duties to LFG; Maryland law permits direct actions. | Fiduciary duties owed to corporation; no direct action unless statutory/direct harm. | Maryland allows direct fiduciary-duty claims by a parent against subsidiary officers/directors under applicable theory. |
| Business Judgment Rule applicability | LFG Board failed to exercise independent judgment; JD rule does not bar claims. | If proper process followed, BJR should shield directors. | Virginia and Maryland BJR not a bar as alleged failure to act constituted improper decision-making. |
| Equitable subordination and fraudulent conveyance claims | Breach of fiduciary duty and mismanagement caused injury; subordination warranted; Change of Control agreements may be avoidance targets. | Requests for subordination/avoidance should fail absent egregious conduct. | Equitable subordination and §548(a)(1)(B) avoidance claims survive; damages and related relief may proceed. |
Key Cases Cited
- Twombly, Bell Atl. Corp. v., 550 U.S. 544 (U.S. 2007) (plausibility standard for pleading states claims must be plausible)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (clarifies plausibility standard for facial sufficiency of pleadings)
- Shenker v. Laureate Educ., 411 Md.317 (Md. 2009) (Maryland recognizes direct fiduciary-duty claims under certain circumstances)
- Waller v. Waller, 187 Md. 185 (Md. 1946) (general rule: directors owe duties to corporation, not directly to shareholders; exceptions in wholly-owned contexts)
- Kann v. Kann, 690 A.2d 1179 (Md. 1997) (recognizes tailored fiduciary-duty claims tied to discrete harms, not an omnibus tort)