MEMORANDUM AND ORDER OF COURT 1
AND NOW, this 7th day of March, 2003, upon consideration of the issue of whether Fox Drug and Fox Corp. can be combined for purposes of the Trustee’s fraudulent conveyance claims, which claims comprise the remainder of the instant adversary proceeding, and, more particularly, whether such combination can be effected via an application of the doctrine of piercing of the corporate veil, barring which, as the Court held in its November 19, 2002 ruling in the instant matter, such combination will not be permitted, see Nov. 19, 2002 Mem. Op., at 57; and upon consideration of the pre-trial memorandums of the Trustee and the Defendants, as well as their joint pre-trial order and the numerous exhibits produced by both sides both before and during a trial regarding the veil-piercing issue; and subsequent to notice and the trial on the veil-piercing issue held on February 5, 2003, it is hereby ORDERED, ADJUDGED, AND DECREED that Fox Drug and Fox Corp. CANNOT BE COMBINED via a piercing of the corporate veil, which means that the separate corporate forms of Fox Drug and Fox Corp. must be respected for all purposes in the instant adversary proceeding. The Court rules as it does for the reasons set forth below.
I.
The Court, as recounted in its November 19, 2002 decision, understands the Trustee to argue that the Defendants engaged, as transferees, in one integrated transfer of property on June 19, 1996, from, argues the Trustee, both Fox Drug and Fox Corp., which integrated transfer amounted to $773 million in property,
see
Nov. 19, 2002 Mem. Op., at 45, notwithstanding that the Defendants only received $575 million of such property as a result of such transfer,
see Id.
at 6 & 28. The
The $575 million of property that the Defendants received via the June 19, 1996 Transactions was in the form of the Security Interests in property that, as of June 19, 1996, indisputably resided in, that is to say was indisputably titled in, Fox Drug. See Id. at 6-7. As for the $198 million of property that was transferred to Avatex via the Dividend, $190 million thereof was indisputably titled in Fox Corp. as of June 19, 1996, while the remaining $8 million thereof was indisputably titled in Fox Drug as of the same date. See Id. at 7-8. Therefore, if the transfers that comprised the June 19, 1996 Transactions are integrated — which issue presently remains open for resolution — and Fox Drug and Fox Corp. can be combined such that the assets of one were the assets of the other, then it would certainly appear that (a) those combined Debtors received $198 million less in value than that which they transferred out themselves via such transfers, and (b) the Trustee has viable constructive fraudulent conveyance claims against the Defendants predicated on such $198 million shortfall. However, and assuming the applicability of such integration, if Fox Drug and Fox Corp. cannot be combined such that the assets of one were the assets of the other, then the only viable constructive fraudulent conveyance claims which the Trustee would possess against the Defendants would revolve around Fox Drug’s transfer of $583 million in property as compared to an inflow in value to Fox Drug of $575 million, see Id. at 45-46; the Court has yet to resolve (a) whether, by virtue of the $8 million differential in inflow and outflow of value that Fox Drug experienced, Fox Drug failed to receive either reasonably equivalent value or a fair equivalent for that which it transferred, and (b) whether, consequently, Fox Drug engaged in a constructive fraudulent conveyance when viewed in isolation from the rest of the Debtors. 2
The Court, in its November 19, 2002 decision, neglected to apprise the parties as to why, absent a combination of Fox Drug and Fox Corp., the Trustee would only have one viable set of constructive or, for that matter, actual fraudulent conveyance claims against the Defendants, which viable claims would lay for Fox Drug’s transfer of property in the amount of ei
Because the issue of whether Fox Drug and Fox Corp. can be combined constitutes, in the Court’s view, a threshold issue bearing on the resolution of the Trustee’s fraudulent conveyance claims, the Court directed, in its November 19, 2002 ruling, that a trial be held on such issue prior to a trial on other outstanding issues in the instant adversary proceeding. The Court held as well, and as set forth on the first page of the instant Memorandum and Order of Court, that the combination of Fox Drug and Fox Corp. can only be effected via an application of the doctrine of piercing of the corporate veil. The Trustee maintains that such doctrine can be utilized and that Fox Drug and Fox Corp. thus can be combined such that the assets of one were the assets of the other. The Defendants vigorously disagree and argue instead that no basis exists for a piercing of the corporate veil in the instant adversary proceeding. For the reasons set forth below, the Court concludes that Fox Drug and Fox Corp. cannot be combined via a piercing of the corporate veil.
II.
As an initial matter, the Court holds that the corporate veil which the Trustee formally seeks to pierce is that of Fox Drug and not that of Fox Corp. given that Fox Corp. is the parent corporation of, and thus the shareholder in, Fox Drug.
See Pauley Petroleum Inc. v. Continental Oil Co.,
The parties agree, and the Court sees no reason to disagree, that the law of Delaware governs the question of whether Fox Drug’s corporate veil should be pierced.
See
Joint Pretrial Order, at pt. V, ¶ 2. However, the parties disagree as to the test that is to be applied for determining whether a corporate veil should be pierced under Delaware law. The Trustee cites to several cases, including,
inter alia, Fletcher v. Atex, Inc.,
factors which reveal how the corporation operates and the particular defendant’s relationship to that operation. These factors include whether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder.
Harco,
Furthermore, the fraud or similar injustice that must be demonstrated in order to pierce a corporate veil under Delaware law must, in particular, “be found in the defendants’ use of the corporate form.”
Id.
at 269;
see also Wallace,
Additionally, a court shall only pierce a corporate veil “in order to prevent fraud, illegality, or injustice,” or the adverse effects thereof.
United States v. Del Campo Baking Mfg. Co.,
Finally, the parties disagree as to the appropriate standard of proof by which one must prove a case for a piercing of the corporate veil under Delaware law, with the Trustee understandably lobbying for a preponderance of the evidence standard and, as the Court would expect, the Defendants maintaining that a clear and convincing evidence standard is the rule. As an initial matter, the Court agrees with the Trustee that (a) the sole case upon which the Defendants base their position for a clear and convincing evidence standard, the Third Circuit’s decision in
Kaplan,
is not binding upon the Court in the instant matter given that
Kaplan
dealt with Pennsylvania law rather than Delaware law, (b) there does not appear to be any relevant caselaw that applies Delaware law wherein the clear and convincing evidence standard is utilized, and (c) the
Hillsborough
decision, even though it was rendered by other than a Delaware court, arguably construes Delaware law such that a preponderance of the evidence standard is applicable to veil piercing cases,
see Hillsborough,
III.
For the requisite fraud or similar injustice necessary to pierce the corporate veil of Fox Drug, the Court discerns two theories upon which the Trustee appears to rely in order to satisfy such requirement, namely that (a) the trade creditors of Fox Drug were misled by officers of Fox Corp. into believing that they could rely upon Fox Corp. for payment of their claims against Fox Drug, and (b) the June 19, 1996 Transactions effected a drain of assets from both Fox Drug and Fox Corp. The Court notes that it is not entirely certain that its preceding interpretation of the Trustee’s arguments truly capture their essence. However, by virtue of footnote 1 on page 9 of the Trustee’s Pretrial Memorandum, as well as the language in the last paragraph on page 13 of the same
A. Were Fox Drug’s trade creditors misled by Fox Corp. into relying on Fox Corp. for payment, and, assuming that they were, does such misleading conduct and reliance constitute fraud or similar injustice necessary to pierce Fox Drug’s corporate veil?
The Trustee appears to predicate his “misleading and reliance” theory upon case authority that emanates from state courts in Texas.
See
Trustee’s Pretrial Memo., at p. 9, n. 1 (citing to
Edwards Co., Inc. v. Monogram Industries, Inc.,
Addressing first the latter issue, the Court concludes that, even if the trade
Addressing next whether Fox Drug’s trade creditors took action or refrained from taking action because of Fox Corp.’s alleged misleading conduct — that is, whether they relied upon such conduct — the Court concludes that the Trustee has failed to even preponderantly establish such necessary rebanee. The Trustee argues, in particular, that Fox Drug’s trade creditors extended credit to Fox Drug because they thought they could look to Fox Corp. for payment or, stated differently, that they would not have extended credit to Fox Drug if they had known that they could not look to Fox Corp. for payment. The Court finds such argument by the Trustee to be unavailing for several reasons. First, the evidence estabbshes that (a) the trade debt of Fox Drug in existence as of the bankruptcy petition fikng date arose subsequent to the divi
Finally, with respect to the issue of whether Fox Corp. misled Fox Drug’s trade creditors into believing that Fox Corp. would answer for such creditor’s claims against Fox Drug, the Court holds, as a matter of law, that if there was any such misleading conduct by Fox Corp., the same is actionable such that veil piercing is compelled only if Fox Corp. had an intent, by virtue of such conduct, to induce
In bght of the foregoing, the Trustee’s appbeation of the “misleading and reliance” theory to Fox Drug and Fox Corp. does not operate to supply the Court with the requisite fraud or similar injustice that wih merit a piercing of Fox Drug’s corporate veil.
B. Can the fraud or similar injustice necessary to pierce the corporate veil of Fox Drug be found in the fact that the cumulative effect of the June 19, 1996 Transactions was a drain of assets from both Fox Drug and Fox Corp.?
When discussing the drain of assets from the combined Debtors and appearing to advance the same as an injustice which merits a piercing of Fox Drug’s corporate veil, the Trustee makes reference to and quotes liberally from the decision in
Smoothline Ltd. v. North American Foreign Trading Corp.,
The decision in
Smoothline
can also properly be cited for the broader proposition that fraud or injustice sufficient to pierce the corporate veil of a subsidiary exists if a parent misuses the corporate form/veil of such subsidiary. However, the Trustee fails to demonstrate, even preponderantly, to the Court how Fox Corp. has misused the corporate form/veil of Fox Drug. As set forth in the preceding paragraph, the evidence does not demonstrate that Fox Corp. took— i.e., drained — assets from Fox Drug. As well, and as set forth in the preceding section of the instant ruling, the Court rejects the Trustee’s application of the “misleading and reliance” theory, not only because any injustice that might have been effected by way of misleading conduct and reliance has been remedied, but also because intent to mislead and reliance and, thus, a misuse of Fox Drug’s corporate form/veil, have not been proven. As for the fact that the particular division of assets between Fox Drug and Fox Corp. at the time of the June 19, 1996 Transactions serves to insulate the Defendants from constructive fraudulent conveyance liability under the Bankruptcy Code for the Dividend of Fox Corp. assets to Avatex (i.e., $190 million worth of the total Dividend to Avatex), the Court strains but can find no fraud or similar injustice related thereto that has been perpetrated by Fox Corp.’s misuse of the corporate form/veil of Fox Drug. In particular, the Trustee has produced no evidence, for instance, that Fox Corp. purposefully split up the assets that were involved in the June 19, 1996 Transactions between itself and Fox Drug so as to shield the Defendants from such constructive fraudulent conveyance liability— such evidence that would be indicative of such a purpose but which has not, and the Court expects could not even have
Finally, and in the event that the Court has overlooked an argument by the Trustee to the effect that the effectuation of the Dividend to Avatex constitutes a fraud or injustice that would suffice to merit a piercing only of Fox Drug’s corporate veil while leaving intact that of Fox Corp., the Court holds that, quite simply, such dividend transfer will not suffice to merit such a veil piercing. The Court holds as it does because (a) the fraud or injustice necessary to pierce a corporate veil must, as set forth above, pertain to the misuse of the corporate veil sought to be pierced, (b) the Dividend of the $190 million worth of assets by Fox Corp. to Avatex, rather than relating to or, stated more aptly, arising because of the misuse of the corporate form of Fox Drug, instead relates to or arises because of the misuse of the corporate form of Fox Corp. (thus, it is a reason to pierce corporate veils up to Avatex), and (c) the Dividend of $8 million worth of assets from Fox Drug to Avatex likewise constitutes a reason to pierce the corporate veil up to Avatex rather than just of Fox Drug given that said $8 million Dividend ultimately also wound up in the hands of Avatex rather than Fox Corp. As for the adverse effect of the injustice visited by the effectuation of the Dividend of $8 million worth of Fox Drug assets, such adverse effect can also be prevented entirely without, and thus does not merit, a piercing of Fox Drug’s corporate veil given that (a) the Trustee can and does seek to recover the value of such Dividend from the Defendants via the instant fraudulent conveyance claims, and (b) a combination of the Debtors is unnecessary to the success of such claims as regards such Dividend of Fox Drug’s assets.
In light of the foregoing, the Court concludes that the Trustee has failed to establish the presence of a fraud or similar injustice that will suffice to merit a piercing of Fox Drug’s corporate veil. Because the Trustee cannot point to fraud or similar injustice necessary to pierce the corporate veil of Fox Drug, the Court is constrained to and, thus, does deny the Trustee’s request that such corporate veil be pierced, and notwithstanding whether the Trustee has satisfied the first prong of the test for veil piercing set forth supra at p. 235 (i.e., whether Fox Corp. and Fox Drug operated as a single economic entity, the resolution of which issue calls for a consideration of the various factors set forth supra at p. 235).
IV.
Although the Court concludes that it need not determine whether the Trustee has satisfied the first prong of the test for veil piercing or, more particularly, whether Fox Corp. and Fox Drug operated as a single economic entity, the Court neverthe
The resolution of whether Fox Corp. and Fox Drug operated as a single economic entity calls for a consideration of the various factors set forth supra at p. 235. Applying such factors to the Debtors, the Court makes the following findings:
(a) The Trustee has utterly failed to produce evidence that would even preponderantly demonstrate that Fox Corp., the dominant shareholder of Fox Drug, siphoned off funds of Fox Drug. As set forth above, it matters not for purposes of determining whether only Fox Drug’s corporate veil should be pierced and Fox Corp.’s veil should be left intact that Avatex may have siphoned off funds of both Fox Drug and Fox Corp. — that Avatex may have siphoned such funds supports piercing Fox Corp.’s veil as well, which veil piercing the Trustee would most certainly resist.
(b) The Trustee has utterly failed to produce evidence that would even preponderantly demonstrate that Fox Drug simply functioned as a facade for Fox Corp. The evidence shows unequivocally that Fox Drug existed in order to carry on Fox Corp.’s pharmaceutical distribution business, while Fox Corp., as a holding company, conducted several discrete, albeit related healthcare businesses, only one of which was that which was conducted by Fox Drug.
(c) With respect to the factors of whether a subsidiary was adequately capitalized and whether the same was solvent, the Court agrees, and does not understand the Trustee to disagree, with the Defendants that such factors are only relevant from a veil piercing standpoint if such subsidiary was inadequately capitalized and/or insolvent from its inception or such adverse status was subsequently caused by acts of the subsidiary’s parent. The Court also does not understand the Trustee to argue that the requisite adverse financial status of Fox Drug existed from its inception. What the Court understands the Trustee to maintain is that such adverse status of Fox Drug was created largely, if not entirely, by the June 19, 1996 Transactions and, in particular, by way of (i) the effectuation of the Dividend, and (ii) the cumulative effect of exchanging unsecured debt (i.e., that which was owed to the Citicorp Lenders and the Noteholders) for secured debt (that which was owed to the Defendants subsequent to June 19, 1996), which exchange apparently resulted in a drying up of Fox Drug’s short term capital (i.e., short term credit supplied by Fox Drug’s trade creditors). However, and as set forth in the first sentence of this paragraph, acts that serve to stress a subsidiary’s capitalization and to impair its solvency are only relevant for purposes of a veil piercing analysis if such acts are those of such subsidiary’s parent. Unfortunately for the Trustee, though, Fox Corp. did not receive the Dividend, Avatex did. As well, the evidence makes clear that Avatex rather than Fox Corp. made the decision to (i) engage in the June 19, 1996 Transactions, and (ii) consequently exchange unsecured debt for secured debt. Therefore, the factors of inadequate capitalization and insolvency, when applied to the instant matter, do not support a finding that Fox Corp. and Fox Drug operated as a single economic entity; rather, they arguablysupport a finding that Fox Corp., Fox Drug, and Avatex comprised a single economic entity, which finding, of course, would support a piercing of Fox Corp.’s corporate veil as well.
(d) As for whether corporate formalities of Fox Drug were observed, the Court finds that the evidence is frankly equivocal at best on the subject. The Trustee points the Court to, and the Defendants do not dispute that there was, a certain overlap in ownership, officers, directors, and personnel between Fox Drug and Fox Corp., and that both entities used common office space, addresses, and telephone numbers. However, the evidence also shows that Fox Drug maintained corporate records, elected directors, held board meetings, and compiled minutes for such meetings. The Court understands the Trustee to essentially question the sincerity of such records, elections, and meetings, and to argue that they were merely a facade to cover the fact that Fox Drug and Fox Corp. were one and the same. Unfortunately for the Trustee, however, he bears a heavy burden to prove such facade, which burden he has not carried, particularly given his own inconsistent assertions to the effect that Fox Drug’s corporate veil should not be pierced, which assertions were made earlier within the context of a separate adversary proceeding involving the Debtors before Judge Sleet of the U.S. District Court, District of Delaware. See Defs.’ Trial Ex. Y, 3/1/02 Brown v. Citicorp Hr’g Tr., at pp. 157-160; Defs.’ Trial Ex. BB, 1/18/02 Trustee’s Br. in Brown v. Citicorp, at pp. 8-10. With respect to such inconsistent assertions of the Trustee, the Court has already spent ample time setting forth its rationale as to why the same constitute evidence against the Trustee’s “facade” position in the instant matter, see Nov. 19, 2002 Mem. Op., at 58-60, and, thus, the Court need say little more on that subject. 4 However, the Court will say that such assertions carry much evidentiary weight in the instant matter, and only in part because they are inconsistent with the “facade” position now put forth by the Trustee in the instant adversary proceeding. The Court also places substantial weight on such assertions because (a) the Court views the Trustee as objective and, after having literally spent years reviewing the records and affairs of the Debtors prior to the time when the aforesaid inconsistent assertions were made, also very knowledgeable if not expert regardingsuch records and affairs, (b) the landscape regarding the knowledge of the Trustee respecting such records and affairs does not appear to have changed at all since such inconsistent assertions were made, and (c) the only thing that has changed since such assertions were made by the Trustee is that he now has an incentive to essentially retract such assertions. 5 Therefore, the Court finds that the Trustee has not sufficiently proven that Fox Drug’s purpose in respecting those corporate formalities to which it accorded respect was only so as to create a facade that it was not, in actuality, just the alter ego of Fox Corp. As well, the Court would expect to see, and thus does not find particularly damning, the aforesaid overlap between the Debtors in the items to which the Trustee points the Court. Therefore, the Court must find that the “corporate formalities” factor also does not point in favor of a conclusion that Fox Drug and Fox Corp. operated as a single economic entity.
In light of the foregoing, the Court concludes that the Trustee has failed to establish, even preponderantly, that Fox Corp. and Fox Drug operated as a single economic entity. Therefore, and for that reason as well, the Court is constrained to and, thus, does deny the Trustee’s request that Fox Drug’s corporate veil be pierced.
Y.
IN SUMMARY, the Trustee’s request to combine Fox Drug and Fox Corp. via a piercing of the corporate veil is DENIED, which means that the separate corporate forms of Fox Drug and Fox Corp. must be respected for all purposes in the instant adversary proceeding.
. The Court will utilize herein all of the abbreviations that it utilized in its November 19, 2002 Memorandum Opinion for the instant adversary proceeding without further description or explanation of the same. The Court also draws liberally from its Statement of Facts and findings and conclusions that are set forth in such opinion. Therefore, the reader of the instant Memorandum and Order of Court, for his or her edification, is advised to refer to such earlier opinion of the Court.
Notes
. Of course, even if Fox Drug received a fair equivalent under New York constructive fraudulent conveyance law, the Trustee would still have a viable claim under such law for a constructive fraudulent conveyance if the Defendants failed to act in good faith within the meaning of NYDCL § 272. See Nov. 19, 2002 Mem. Op., at 45 & 60-64.
. The Court frankly would not expect to find that Fox Corp. had taken measures prior to June 19, 1996, to shield the Defendants from potential constructive fraudulent conveyance liability under the Bankruptcy Code because the Court doubts that Fox Corp. cared whether the Defendants might ultimately be held so liable.
. The Trastee, at the trial on February 5, 2003, attempted to explain away the inconsistency of his assertions made during the proceeding before Judge Sleet by arguing that the Trustee’s opposition to veil piercing in such proceeding was predicated upon the failure of his opposition therein to identify fraud or a similar injustice that would have warranted a piercing of Fox Drag’s corporate veil. The Court cannot accept such explanation, however, given that many of such assertions by the Trustee were addressed not to fraud or injustice that would have warranted veil piercing but rather dealt with whether Fox Drag observed corporate formalities. See Defs.’ Trial Ex. Y, 3/1/02 Brown v. Citicorp Hr'g Tr., at p. 157 (Trustee’s statement that the Debtors were different corporations that kept separate records); Defs.' Trial Ex. BB, 1/18/02 Trustee’s Br. in Brown v. Citicorp, at p. 10 n. 8 (Trustee's assertion that "evidence does not show that Fox[] ... [Drag's] corporate form was completely ignored.... Fox[] Corp. paid practical and legal attention to the distinct corporate form of the two companies.”).
. Apparently so great is the Trustee’s incentive in the instant matter to argue contrary to that which he argued before Judge Sleet that the Trustee, in the instant matter, even argues for a different statement of the law from that which he posited before Judge Sleet as to what
must
be shown in
order to
pierce a corporate veil. In particular, the Trustee conspicuously asserts in the instant matter that "[s]ignificantly, under Delaware alter ego theory, 'there is no requirement of a showing of fraud.' " Trustee’s Pretrial Memo., at p. 6. Such statement of the law runs directly counter, however, to the Trustee’s position before Judge Sleet that, before one can veil pierce under Delaware law, ”[t]he corporation [whose veil is to be pierced] must be a sham
and exist for no other purpose than as a vehicle for fraud.”
Defs.’ Trial Ex. BB, 1/18/02 Trustee's Br. in
Brown v. Citicorp,
at p. 9 (citing to
Wallace,