OPINION
Re D.I. Nos. 22, 43, 45, 76, 77, 78, 79, 80 & 173
Defendants CapitalSource Finance, LLC (“CapSource”), Seaport Capital, LLC and its affiliated defendants (collectively, “Seaport”), James Collis, Robert Tamashunas, Andrew Meyers, On Target Media Holdings, Inc. (“OTMH”), Innovation Ads, Inc. (“Innovation”), Michael Lastoria, Iain Grae a/k/a Michael Sickenius, Maria B. Eden, and Richard Stewart have brought motions to dismiss (the “Motions to Dismiss”) (D.I. 43, 45 77, 78, 79, 80,) the Chapter 7 Trustee’s Amended Complaint (D.I. 22). The Chapter 7 Trustee (the “Trustee”) has included in the Amended Complaint claims for Avoidance and Recovery of Fraudulent Transfers under 11 U.S.C. § 548 and 544, Avoidance of Preferential Transfers under 11 U.S.C. § 547, Recovery of Fraudulent and Preferential Transfers under 11 U.S.C. § 550 and 551, Turnover of Assets
I. JURISDICTION
The Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 157 and 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. § 1409. Although jurisdiction is proper and this is a core proceeding, as a result of Stern v. Marshall, — U.S.-,
II. FACTS
Direct Response Media, Inc. (“Pennsylvania Direct Response”) was incorporated as a Pennsylvania corporation in 1990 by Maria Eden and Cary Scottoline. Amended Complaint (D.I. 22) “Am. Compl.” ¶ 36. OTMH and its wholly-owned subsidiary On Target Media, Inc. (which later became Direct Response Media, Inc., (“Direct Response” or “Debtor”)) were incorporated in Delaware. Am. Compl. ¶ 37-38. Additionally, Defendant Seaport Capital, LLC (“Seaport”)
On February 26, 2006, Seaport, through OTMH, acquired Pennsylvania Direct Response for a purchase price of $11 million. Am. Compl. ¶ 41. As a result of the sale, On Target Media Inc., the successor company to Pennsylvania Direct Response, was reincorporated in Delaware as Direct Response Media Inc. To finance the acquisition of Pennsylvania Direct Response, OTMH obtained a $7.5 million loan from CapitalSource Finance, LLC (“Cap-Source”). Am. Compl. ¶ 61-67. The $7.5 million loan was co-guaranteed and secured by the newly acquired Direct Response’s assets. Am. Compl. ¶ 62-63.
Later, on September 29, 2006, Seaport, through OTMH, purchased Innovation from owners Iain Grae a/k/a Michael Sick-enius (“Grae/Sickenius”) and Michael Las-toria
A portion of the proceeds from the Amended CapSource Loan was used to pay the Innovation sellers Lastoria and Grae/Sickenius. Am. Compl. ¶ 105. The Trustee alleges Lastoria received $8,279,781.17 and Grae/Sickenius received $10,119,732.54. Am. Compl. ¶ 105. Pursuant to the terms of the Innovation Transaction, Lastoria became Chief Executive Officer and Secretary of the acquired Innovation and was appointed to the Board of Directors of OTMH effective September 29, 2006. Am. Compl. ¶ 88. Similarly, Grae/Sickenius was appointed Chairman of the Board of Directors and President of the acquired Innovation, effective September 29, 2006. Am. Compl. ¶¶ 33(d), 113.
In November 2007, OTMH, through Innovation invested $2.5 million in Big Picture Media Inc. (“Big Picture”) for 1,592,357 shares of Series B Convertible Preferred Stock which represented a 31.7% ownership interest of Big Picture on a fully diluted basis. Am. Compl. ¶ 124-25. The Trustee alleges that at this juncture Innovation was experiencing financial difficulties, but nonetheless Seaport, OTMH, Grae/Sickenius, Lastoria, and CapSource made the Big Picture investment, using Direct Response’s monies by modifying the Amended CapSource Loan. Am. Compl. ¶ 126. The Trustee further alleges that to induce CapSource to approve and amend the Amended Cap-Source Loan, the Defendants made a prepayment on the Amended CapSource Loan using a Direct Response asset. Am. Compl. ¶ 128-29.
Innovation began experiencing financial difficulties in 2009, and OTMH (controlled by Seaport) directed that Direct Response pay $7.6 million of Innovation’s obligations on the outstanding Amended CapSource Loan. Am. Compl. ¶ 139-70. The Trustee alleges that Stewart as CFO directed the $7.6 million in transfers from Direct Response on behalf of Innovation. Am. Compl. ¶ 144. On September 30, 2009, OTMH, Innovation, and Direct Response defaulted on the Amended CapSource Loan. Am. Compl. ¶ 171. On December 14, 2009, CapSource enforced its rights under a deposit control agreement contained in the Innovation Transaction and executed a cash sweep of $5.6 million from Direct Response’s bank accounts. Am. Compl. ¶ 194-95.
On January 8, 2010, Direct Response filed a voluntary petition fоr relief under chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”). Jeoffrey Burteh (the “Trustee”) was appointed as the interim Chapter 7 Trustee. On March 31, 2010, the Trustee filed this adversary proceeding against Seaport, OTMH, Innovation, Lastoria, Grae/Sickenius, Eden, Collis, Tamashunas, Meyers, Stewart and CapSource (collectively, the “Defendants”) challenging the Debtor’s $13.2 million in payments for Innovation’s obligations. The Trustee’s Amended Complaint seeks from the Defendants the avoidance, recovery and turnover of certain transfers under sections § 544, 547, 548 and actual and constructive fraud to recover transferred property under § 542, 550, and 551, breach of fiduciary duty, aiding and abetting, negligence, conversion, corporate
The Trustee alleges that through its control over the Debtor, Seaport used OTMH to cause Debtor to co-guarantee the loan to acquire Innovation. Additionally, the Trustee alleges that Seaport, using the interlocking directorates of OTMH and the Debtor, directed the Debtor to pay $7.6 million to satisfy Innovation’s obligations without any reimbursement, benefit, or fair consideration to the Debtor and unjustly benefitting Innovation, and using Direct Response’s moneys to fund the Big Picture acquisition (the “Challenged Transactions”). Below is a brief description of the Claims and the parties they are brought against.
COUNT NATURE OF CLAIM DEFENDANTS
First Actual Fraudulent Transfer Seaport, OTMH, Innovation, Collis, § 548(a)(1)(A) Tamashunas, Lastoria, Grae/ _Sickenius, Stewart_
Second Cоnstructive Fraudulent Transfer Seaport, OTMH, Innovation, Collis, § 548(a)(1)(B) Tamashunas, Lastoria, Grae/ _Sickenius, Stewart_
Third Fraudulent Transfer § 544 Seaport, OTMH, Innovation, Collis, Tamashunas, Lastoria, Grae/ _Sickenius, Stewart, Meyers_
Fourth Constructive Fraudulent Transfer Seaport, OTMH, Innovation, Collis, § 544(b); UFTA §
Fifth Constructive Fraudulent Transfer Seaport, OTMH, Innovation, Collis, § 544(b); UFTA § (4)(a)(2); UFCA Tamashunas, Lastoria, Grae/ _§ (5) & (6)_Sickenius, Stewart, Meyers_
Sixth_Preference § 547_Innovation_
Seventh Preference §§ 550, 551 Seaport, OTMH, Innovation, Collis, Tamashunas, Lastoria, Grae/ _Sickenius, Stewart, Meyers_
Eight_Turnover § 542_Innovation_
Ninth_Accounting_Innovation_
Tenth Breach of Fiduciary Duty OTMH, Collis, Tamashunas, Meyers, _Eden, Lastoria_
Eleventh Aiding and Abetting Breach of Fidu- Innovation, Grae/Sickenius, Stewart _ciary Duty_
Twelfth Negligence OTMH, Collis, Tamashunas, Meyers, _Eden, Lastoria_
Thirteenth Corporate Waste or Mismanage- Collis, Tamashunas _ment_
Fourteenth_Conversion_Collis, Tamashunas
Fifteenth Unjust Enrichment/Constructive Trust/Equitable Liens Seaport, OTMH, Innovation, Collis, Tamashunas, Grae/Sickenius, Lastoria
Sixteenth Actual and Constructive Fraudulent CapSource Transfers § 548(a)(1)(A) & (B)
Seventeenth Fraudulent Transfer § 544 CapSource
Eighteenth Constructive Fraudulent Transfer § 544(b); UFTA § (5)(a); UFCA §(4) CapSource
Nineteenth Turnover § 542 CapSource
Twentieth Preference §§ 550, 551 CapSource
Twenty-First Accounting CapSource
Twenty-Second Disallowance of Claims § 502(D) CapSource
Twenty-Third Equitable Subordination CapSource
Twenty-Fourth Unjust Enrichment/Constructive CapSource Trust/Equitable Liens
III. DISCUSSION
Defendants seek dismissal of all claims (“Claims”) for relief in the Amended Complaint pursuant to F.R.Civ.P. 12(b)(6) and F.R.Bankr.P. 7012, for failure to state a claim upon which relief can be granted. The question, therefore, is whether the Trustee has sufficiently stated facts which, if proven, entitle him to relief. If so, the Trustee will have the opportunity to prove the Claims after discovery.
A. Rule 12(b)(6) Standard of Review
A motion to dismiss pursuant to Rule 12(b)(6) serves to test the sufficiency of the factual allegations in a plaintiffs complaint. Bell All. Corp. v. Twombly,
As discussed above, the Court must accept as true all allegations in the Amended Complaint and draw reasonable inferences in a light most favorable to the plaintiff. Phillips v. County of Allegheny, 515 F.3d
B. Impact of Stern v. Marshall, on this Court’s authority to enter a final orders
Subsequent to the parties’ briefing and the April 2011 oral argument on the Motions, the Supreme Court issued its decision in Stem. The Supreme Court’s opinion in that case endeavors to delineate the bankruptcy court’s authority to enter final orders on certain core matters.
There are two views as to the effect and holding of Stem. The broad interpretation, espoused by defendants of preference and fraudulent transfer actions, is that Stem strips bankruptcy courts of authority to enter a final judgment in any case where the debtor is bringing any action which seeks to augment the estate because they are legal actions that seek to take another’s property and can only be finally adjudicated by an Article III judge (the “Broad Interpretation”).
Conversely, Stem also has been narrowly interpretеd by debtors and bankruptcy trustees. They argue that by its express language, the opinion stands for a narrow proposition of law based on the unique set of facts that was before the Supreme Court in Stem and that the Supreme Court did not divest bankruptcy courts of authority to enter final orders on core matters, other than a Debtor’s state law counterclaim. Further, the Supreme Court did not intend to alter the division of labor between the district courts and bankruptcy courts. The narrow interpretation argues that Stem does not (1) limit bankruptcy courts’ authority to enter final orders in preference or fraudulent conveyance actions (even if those actions seek to augment the estate), or (2) prohibit bankruptcy courts from ruling on a debtor’s or trustee’s state law counterclaims when determining a proof of claim in the bankruptcy, or when deciding a matter that is directly and conclusively related to the bankruptcy (the “Narrow Interpretation”). Complicating the holding is Justice Scalia’s partial concurrence which undermines the rationale set forth by Chief Justice Roberts and the argument that Stem is a majority opinion standing for the Broad Interpretation. In the face of confusion, the Court as have many others throughout the nation, will attempt to present a reasoned analysis of the issues before it, based on this Court’s interpretation of Stern.
1. The Case
The facts of the case and ruling by the Supreme Court have been the subject of many opinions and commentary. The extensive writing and discussion result from the potential serious impact of the decision on the authority of bankruptcy courts. Accordingly, the Court will provide a brief summary of the salient facts and holding.
The death of J. Howard Marshall (“Mr. Marshall”) resulted in protracted litigation over his estate between the estates of Vickie Lynn Marshall, better known as sex symbol Anna Nicole Smith, the wife of Mr. Marshall (“Wife”), and E. Pierce Marshall, Mr. Marshall’s son (“Son”). The litigation took place in two courts, a Texas state probate court and a federal bankruptcy court. The courts rendered opposite rulings.
Son appealed from the bankruptcy court ruling in Wife’s favor. The Ninth Circuit held that the bankruptcy court lacked authority to enter judgment on Wife’s counterclaim. The Ninth Circuit found that the counterclaim, based solely on state law, was not a core proceeding.
The Supreme Court affirmed the Ninth Circuit’s ruling, but on different grounds, concluding that the bankruptcy court did have statutory jurisdiction under 28 U.S.C. § 157(b) to issue a final judgment on Wife’s counterclaim because it was a “core” proceeding. However, the Supreme Court, in a five-to four decision, ruled that the bankruptcy court lacked the constitutional authority to decide the state law counterclaim to the extent it was not resolved in the process of ruling on Son’s proof of claim. The Supreme Court stressed the differences between Article III and Article I judges, relying on its decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co.,
2. The Broad Interpretation
Initially, the Supreme Court’s opinion in Stem distinguishes between Article III judgеs, who hold a lifetime appointment and guaranteed salary, and non-Article III judges, who do not hold a lifetime appointment, and may have a diminution of salary. Stern,
This protection prevents Congress from withdrawing “from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.” Id. (quoting Murray’s Lessee v. Hoboken Land & Improvement Co.,
The сonstitutionality of the statutory authority granted to bankruptcy courts in Section 157(b)(2) to hear core proceedings was unchallenged until the Court decided Stem. In Stern, the Court held that although the bankruptcy court had statutory authority under 157(b)(2) to enter a final order on a debtor’s state law tort counterclaim, it did not have constitutional authority to do so. Stern,
The Stem Court also revisited its analysis in an earlier case, Granfinanciera, S.A. v. Nordberg,
Prior to Stem, and established by Gran-financiera, the Supreme Court had carved out an exception allowing bankruptcy courts to enter final orders on avoidance actions provided that the avoidance action defendant had filed a proof of claim against the estate. Granfinanciera,
The Broad Interpretation argues that Stem’s guidance on the bankruptcy courts’ authority to enter final judgments is threefold: (1) the adjudication of a debtor’s state law counterclaim against a defendant who had filed a proof of claim in the bankruptcy case, did not fall within the public rights exception; (2) thе Stem Court reaffirmed the Granfinanciera Court’s distinction between the two types of actions that the estate might assert against a defendant; and (3) the Supreme Court held that actions which seek to augment the estate, which presumably would include avoidance actions, require adjudication by an Article III court because those legal actions seek through a money judgment to take the defendant’s property and that adjudication can only be made by a member of the independent Article III judiciary. If this Court were to agree with the Broad Interpretation of Stem, it would thereby hold that it no longer has authority to make final adjudications on a bankruptcy estate’s avoidance action claims against defendants, even if those defendants filed proofs of claim against the estate, and where the bankruptcy estate’s claims seek to “augment the bankruptcy estate” by obtaining a money judgment and taking the defendant’s property.
3. The Narrow Interpretation
The Narrow Interpretation argues that Stem was by the express language in the opinion intended to be very narrowly construed. Additionally, the Narrow Interpretation argues that the holding only specifically removed a debtor’s state law counterclaims under § 157(b)(2)(C), as a subset of core proceedings under § 157(b)(2), from final adjudicatory authority of the bankruptcy court. The holding was not intended to remove all core proceedings under 28 U.S.C. § 157(b)(2) from final adjudicatory authority of the bankruptcy courts. Indeed, such a holding would turn the bankruptcy process on its head and would “meaningfully change the division of labor” between the bankruptcy courts and the district courts, in essence making the bankruptcy court an adjunct or magistrate of the district courts for all core proceedings as defined in 28 U.S.C. § 157(b)(2).
Chief Justice Roberts’ majority opinion repeatedly emphasizes the narrowness of the Court’s decision and repeats the Supreme Court’s insistence that the decision is limited. The Court attempted to make it clear that it was invalidating one aspect of the bankruptcy court’s authority over core proceedings — where a debtor asserts a state law counterclaim against a creditor who filed a proof of claim in the bankruptcy case. Stern,
Moreover, assuming, arguendo, that the Broad Interpretation is correct, it did not receive a majority of the votes on the Supreme Court. Justice Scalia’s partial concurrence in the judgment, while disavowing the majority’s rationale, requires that even if the opinion is broadly interpreted to hold that bankruptcy courts no longer have authority to make a final adjudication on core matters that seek to “augment the estate” such as fraudulent transfer and preference actions, that proposition of law only received plurality support of four justices, and is not a binding holding on this Court.
This variation of the Narrow Interpretation argues that Justice Scalia’s partial concurrence in the judgment requires Stem to be narrowly interpreted as a 4-4-1 plurality. In his partial concurrencе, Justice Scalia joined in the judgment, but he did not adopt the reasoning of the Chief Justice’s opinion. Stern,
After concurring in the judgment, Justice Scalia scrutinized the rationale of the Roberts opinion. Id. Justice Scalia noted that the Roberts opinion’s analysis that balances the benefits and harms of seven factors to conclude that an Article III judge was required to adjudicate the lawsuit, indicated that “something is seriously amiss with our jurisprudence in this area.” Id. at 2621. Critiquing the seven factors approach, Justice Scalia asserted that the tests cited in the Roberts opinion’s analysis are flawed because of (1) the numerosity of the tests, and (2) the tests have nothing to do with “the text or tradition of Article III.” Id. In effect, Justice Scalia completely disavowed the Roberts opinion’s rationale. Instead, Justice Scalia presented his own rationale that starts with an overarching premise that “an Article III judge is required in all federal adjudications.” Id. He then adopted several exceptions to the general rule which include (I) “certain adjudications by federal administrative agencies,” and (ii) federal adjudications with “a firmly established historical practice[.]” Id. Finally, he suggested that historical practice might “permit non-Article III judges to process claims[.]” Id. However, because the issue was not briefed, Justice Scalia declined to take a position. Id.
Narrow Interpretation proponents argue that because Justice Scalia disagreed with the Chief Justice’s rationale and underpin
If this Court were to grant thе Defendants’ Motions to Dismiss and deny the Trustee’s request, it would dramatically restructure the division of labor between district courts and bankruptcy courts by requiring that district courts hear most adversary proceedings. See Walker, Truesdell, Roth & Assoc.’s v. The Blackstone Group LP (In re Extended Stay Inc.), S.D.N.Y., No. 11-Civ. 5394(SAS), Adv. Pro. No. 11-2398,
4. The Court’s Adopted View
This Court disagrees that the Stem decision stands for the Broad Interpretation and proposition that a non-Article III court does not have authority to enter a final judgment on a preference or fraudulent conveyance claim brought by the Debtor to augment the estate, or any other core claim (as defined in 28 U.S.C. § 157(b)(2)) that is not a state law counterclaim. The Broad Interpretation is based on a holding that the Supreme Court has never made, namely, that restructuring of the debtor-creditor relationship is not a public right, nor falls within any other exception that would permit a non-Article III court to finally adjudicate those matters. As previously stated, the Supreme Court expressly took measures to limit the reach and breadth of its opinion and its interpretatiоn by lower courts.
The Court adopts the Narrow Interpretation and holds that Stem only removed a non-Article III court’s authority to finally adjudicate one type of core matter, a debt- or’s state law counterclaim asserted under § 157(b)(2)(C). By extension, the Court concludes that Stem does not remove the bankruptcy courts’ authority to enter final judgments on other core matters, including the authority to finally adjudicate preference and fraudulent conveyance actions like those at issue before this Court.
Other courts have adopted the Narrow Interpretation of Stern.
First the Court in In re USDigital, Inc., determined whether a claim for equitable subordination was a “core proceeding” under the statute. The USDigital Court noted that equitable subordination did not fall within one of Congress’ specifically enumerated core proceedings in 157(b). Id. at 637-38. Nonetheless, the USDigital Court noted that 157(b) is not an exhaustive list of core proceedings and then turned to Third Circuit precedent to inform its decision on whether it was a core proceeding. Id. at 639-40. Relying on Schubert v. Lucent Techs. (In re Winstar Communs., Inc.),
Relying on the repeatedly and explicitly stated references to the narrow and limited impact of the opinion, the USDigital Court held that the plain language required that Stem be interpreted narrowly and stands for the sole proposition that the bankruptcy court “lacked constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.” Id. at 643 (citing Stern,
Similarly, in thе present case the Trustee seeks to recover alleged preferences and fraudulent transfers as property of the estate, and, thus, are within the Court’s core jurisdiction. Additionally, the alleged transfers that the Trustee complains of arguably may have led to the filing of the Chapter 7 petition. Without the bankruptcy filing, there would not have been state law causes of action. The preference and fraudulent transfer claims arise both under Title 11 and in a case under Title 11 and are by definition “core” issues under § 157(b)(2)(F) & (H) for which a bankruptcy court has authority to enter final adjudications.
C. Fiduciary Duty Claims
1. Applicable Law
The internal affairs doctrine provides that only the state of incorporation has the authority to regulate a corporation’s internal affairs. Edgar v. MITE Corp.,
2. Breach of Fiduciary Duty Claims Against the Board Defendants
As an initial matter, several of the Defendants have argued that the Trustee’s breach of fiduciary duty claims that arose from entering into the Amended CapSource Loan, are time-barred by the three year statute of limitations. The
The Amended CapSource Loan was entered into and approved on September 29, 2006. In this case, the extension is inapplicable because the limitations period expired prior to the bankruptcy filing on January 8, 2010. Therefore, to be timely filed under Delaware’s three year statute of limitations, the claim would have to have been filed before September 29, 2009. The Trustee’s first Complaint in this adversary proceeding was not filed until March 31, 2010. Consequently, the Trustee’s fiduciary duty claims related to the Amended CapSource Loan are time-barred. As a result, the Trustee is only permitted to bring claims for breach of fiduciary duties for actions that occurred between March 31, 2007, and March 31, 2010. Therefore, the Court will dismiss any breach of fiduciary duty claims that are based on alleged actions or decisions the defendants made prior to March 31, 2007. This will preclude any breaches of fiduciary duty based on the original February 26, 2006, CapSource loan, or the September 29, 2006, Amended CapSource Loan. Any other allegedly wrongful actions or decisions by the defendants post March 31, 2007, including (1) the November 2007, Big Picture acquisition and modification to the Amended CapSource Loan to accomplish that acquisition and (2) the early 2009 transfer of $7.6 million by Direct Response to CapSource to pay Innovation’s obligations, come within the statute of limitations and are properly before this Court.
Directors of a Delaware corporation have a triad of fiduciary duties to uphold: the duties of care, loyalty, and good faith. These fiduciary responsibilities do not operate intermittently and are “one of the most important methods of regulating the internal affairs of corporations, as these cases articulate the equitable boundaries that cabin directors’ exercise of their capacious statutory authority.” In re Topps Co. S’holders Litig.,
The Board Defendants contend that the Trustee’s claim for aiding and abetting a breach of fiduciary duties must be dismissed because the Board Defendants did not owe any fiduciary duty to the Debtor. Moreover, they contend that assuming they owed a fiduciary duty to the Debtor, no breach of those duties occurred and the Amended Complaint lacks sufficient faсts to overcome the presumptions of the business judgment rule. Additionally, the Board Defendants argue that they are exculpated from personal liability because Debtor’s certificate of incorporation contains a provision that, when read in conjunction with the Delaware General Corporation Law, 8 Del. C. § 102(b)(7), requires the Court to dismiss the duty of care claims. Section 102(b)(7) provides:
(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:
(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (I) For any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit....
8 Del. C. § 102(b)(7).
The breach of fiduciary duty claims against the Board Defendants are derivative claims as the Trustee stands in the shoes of the Debtor. The issue, therefore, is how the Challenged Transactions, which further obligated the Debtor on a loan from which it did not benefit, harmed the Debtor. More to the point, what facts does the Trustee advance to demonstrate that the Board Defendants breached duties leading to injury to the Debtor? The Amended Complaint contains the following specific factual allegations:
• Defendant Seaport controlled 83.9% of the shares of OTMH. Am. Compl. ¶ 51.
• Defendant Seapоrt’s principals Collis, Tamashunas, and Meyers were majority members of the OTMH and Direct Response Board. Am. Compl. ¶ 56-60.
• Eden was president and direct of both OTMH and the Debtor. Am. Compl. ¶ ¶ 30, 55-59.
• Seaport as the controlling shareholder of OTMH, through OTMH, purchased Innovation. Am. Compl. ¶ ¶ 69, 77-83.
• Debtor’s corporate formalities were not observed and from September 29, 2006 through December 2009 the Debtor did not hold a single board meeting. Am. Compl. ¶ 146.
• Direct Response, which was under the control of Seaport, its controlling shareholder, became a co-borrower and co-guarantor, jointly and severally liable with Innovation for the $19 million derived from the Amended CapSource Loan. Am. Compl. ¶ ¶ 70, 200-201, 248, 251, 254, 256.
• The proceeds of the $19 million to purchase Innovation, went to Innovation’s founders, Grae/Sickenius and Lastoria. Am. Compl. ¶ 105.
• Debtor received no value or benefit for incurring the $19 million secured debt obligation. Am. Compl. ¶¶ 6, 9,101,105-106,108-109,130,197, 232.
• In 2009 Seaport, through the interlocking directorates of OTMH, Direct Response, and Innovation directed the Debtor to pay $7.6 million of Innovations’ obligations under the Amended Cap-Source Loan. Am. Compl. ¶ ¶ 140-145, 149, 151-155, 159-170, 177-186, 228-235, 253, 258.
• As of January 31, 2009, Debtor had paid in full their obligations under the Amended CapSource Loan, and did not receive any repayment, benefit, or value from the Defendants for payments made to CapSource on Innovation’s behalf. Am. Compl. ¶¶ 138-139, 242(a).
• By May 2009, the Defendants were given notice that the $7.6 million of transfers would result in a cash flow crisis with the Debtor unable to pay their obligations. Am. Compl. ¶ 155.
• On September 30, 2009, Innovation, OTMH, and Direct Response defaulted on the Amended CapSource loan covenants. Am. Compl. ¶¶ 120-123, 156, 171-173,196.
• On December 14, 2009, CapSource executed a cash sweep of $5.6 million from the Debtor’s bank accounts. Am. Compl. ¶¶ 194-198, 202, 242.
• On December 15, 2009, Direct Response’s counsel Edwards, Angelí, who also served as counsel to Seaport, OTMH, and Innovation, informed Direct Response that it could no longer serve as its counsel, indicating that the interests of the four clients were adverse. Id. at ¶ 204.
Under Delaware law, when a wholly-owned subsidiary is insolvent, the officers and directors of that subsidiary owe fiduciary duties to that subsidiary and its creditors. Claybrook v. Morris,
The Trustee asserts that the $7.6 million transfer from Direct Response to pay Innovation’s obligation’s depleted Direct Response’s asset base and rendered it insolvent. Am. Compl. ¶¶ 159-60, 234-35. The directors of a wholly-owned subsidiary cannot allow the subsidiary to be plundered for the parent company’s benefit. RSL COM PRIMECALL, Inc. v. Beckoff,
The factual allegations in the Amended Complaint re-stated above, which are taken as true, establish a plausible ground for a claim that the Defendants breached their fiduciary duties. The factual allegations alleged in the Amended Complaint are sufficient to entitle the Trustee to offer evidence to support the claims. Therefore, the Motions of all of the Defendants are denied as to the post-limitations actions.
3. 102(b)(7) Analysis
Debtor’s certificate of incorporation contains an exculpation clause for breaches of the duty of care in accordance with Section 102(b)(7) of the Delaware General Corporation Law, 8 Del. C. § 102(b)(7). Article “FIFTH” of the Debtor’s Certificate of Incorporation provides:
FIFTH: No Director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director; provided, however, that the foregoing clause shall not apply to any liability of a Director (I) for any breach of the Director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii)under section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the Director derived an improper personal benefit. This Article shall not eliminate or limit the liability of a Director for any act or omission occurring prior to the time this Article became effective. (D.I. 80 Exhibit A, at 2).
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation, by so providing in its certificate of incorporation, to protect its directors from monetary liability for duty of care violations. 5 Balotti & Finkelstein, The Delaware Law of Corporations and Business Organizations, Ch. 4, § 4.19, p. 200.10 (1986); see also John Hancock Capital Growth Management Inc. v. Aris Corp., Del. Ch., C.A. No. 9920, Jacobs, V.C., Mem.Op. at 4,
One of the primary purposes of section 102(b)(7) is to encourage directors to undertake risky, but potentially value-maximizing, business strategies, so long as they do so in good faith. Prod. Res. Group, L.L.C. v. NCT Group, Inc.,
[T]he shield from liability provided by a certificate of incorporation provision adopted pursuant to 8 Del.C. § 102(b)(7) is in the nature of an affirmative defense. Defendants seeking exculpation under such a provision will normally bear the burden of establishing each ofits elements.... Nonetheless, where the factual basis for a claim solely implicates a violation of the duty of care, this Court has indicated that the protections of such a charter provision may properly be invoked and applied.
Emerald, Partners,
Exculpation clauses also constitute affirmative defenses according to the Court and the Third Circuit Court of Appeals. “The exculpation clause is an affirmative defense and the determination of the viability of that defense is not proper at [the dismissal] stage.” In re The Brown Schools,
The court in Caremark defined “a sustained or systematic failure” as either an utter failure to implement reporting or information controls or a conscious failure to monitor, “thus disabling [the fiduciaries] from being in-formed of risks or problems requiring their attention.” Id. at 970.
The Court concludes, based on the Amended Complaint, that the Trustee has pled sufficient facts to create a plausible claim that the Board Defendants violated their fiduciary duty of care. To the extent the Board Defendants violated their fiduciary duty of care, the exculpation clause in the Debtor’s Certificate of Incorporation may shield them as an affirmative defense, however it cannot be raised at the 12(b)(6) motion to dismiss stage, because the Amended Complaint has stated sufficient facts supporting a claim that directors acted in bad faith or conscious disregard of their responsibilities. See In re Tower Air, Inc.,
4. Duty of Loyalty and Duty of Good Faith Analysis
The Court’s inquiry does not end with 102(b)(7) and the duty of care analysis, which is but one of the triad of duties. The Board Defendants also had responsibility to perform their duties with loyalty and good faith.
The duty of loyalty mandates that a corporate fiduciary act with “undivided and unselfish loyalty to the corporation” and that “there shall be no conflict
As a subsidiary element of the duty of loyalty, a successful claim for the breach of the duty of good faith requires a plaintiff to demonstrate one of three actions: “1) where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corpоration; 2) where the fiduciary acts with the intent to violate applicable positive law; or 3) where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.” In re Walt Disney Co. Derivative Litig.,
The Trustee’s claims rest upon the first and third categories, 1) intentionally acting with a purpose other than that of advancing the best interests of the corporation and 2) failure to act, which describes the lack of good faith conduct that the Caremark Court held is “a necessary condition” for finding director oversight liability. The insider directors’ actions that transferred $7.6 million from Direct Response to pay Innovation’s obligations, left Direct Response with an inability to pay its own obligations. Am. Compl. ¶ 184-85.
The Trustee has alleged facts that the Board Defendants failed to assist Direct Response with its financial difficulties and reimburse costs, as the Board Defendants promised they would. Id. at ¶¶ 186, 163. This failure to fund Direct Response, after promising to do so, was a breach of the duty of good faith because it was an intentional act with a purpose other than advancing the best interests of the corporation, and it was an intentional failure to act in the face of a known duty to act. Both, if proven true, constitute breaches of the duty of good faith. In re Walt Disney Co. Derivative Litig.,
D. Aiding and Abetting Claim
The Trustee asserts in the Amended Complaint that the Defendants, including Innovation, knowingly aided and abetted one another in breaches of fiduciary duty to the Debtor by encouraging, participating, and approving the Challenged Transactions, causing damage to the estate. The Trustee bases the aiding and abetting charges on the claims that the Defendants breached fiduciary duties to the Debtor and its creditors. In response, the Defendants argue that they did not owe or breach any duty to the Debtors. To establish an aiding and abetting claim under Delaware law, a plaintiff must demonstrate: “(1) the existence of a fiduciary relationship; (2) a breach of a fiduciary duty; (3) knowing participation in the breach by a defendant who is not a fiduciary; and (4) damages proximately caused by the breach.” In re Transkaryotic Therapies, Inc.,
Based on the Court’s fiduciary duty analysis, because the Trustee has alleged sufficient facts to withstand the Defendants’ Motions to Dismiss, the Court will deny the Motion to Dismiss the aiding and abetting claims (Count XI) as to all of the Defendants.
E. Fraudulent Conveyance Claims
The Trustee complains that the Defendants are guilty of fraudulent and preferential transfers involving the obligations incurred and payments made on Innovation’s behalf that were without benefit to the Debtor. The Trustee advances two theories for relief, actual and constructive fraud and Bankruptcy Code Sections 544 and 548.
1. Actual Fraud
The Trustee claims that under Code Sections 544 and 548 and Delaware law
A plaintiff charging a violation under Section 548(a)(1) must prove that the transferor made the transfer with the “actual intent to hinder, delay or defraud creditors.” In re Pinto Trucking Serv., Inc.,
(I) the relationship between the debtor and the transferee; (ii) consideration for the conveyance; (iii) insolvency or indebtedness of the debtors; (iv) how much of the debtor’s estate was transferred; (v) reservation of benefits; control or dominion by the debtor over the property transferred; and (vi) secrecy or concealment of the transaction.
In re Hechinger Inv. Co., of Del.,
The Trustee has pled sufficient facts to satisfy Iqbal’s plausibility standard to survive a motion to dismiss the actual fraud counts. There are sufficient facts to support a claim that the Defendants were insiders or at a minimum non-statutory insiders because of the interlocking directorates between Seaport, OTMH, Innovation and the Debtor, as well as the cross-pollinated ownership and organizational structure of the companies. Am. Compl. ¶¶ 51, 56-60, 69, 77-83. Similarly, there are no facts to suggest that the Debtor received any consideration from the Defendants for incurring the obligation and then later, making payments on the Amended CapSource Loan on Innovation’s behalf. The incurrence of obligations on Innovation’s behalf and the subsequent payment of those obligations, mаde the Debtor insolvent, or pushed it deeper into insolvency. As previously stated the interlocking directorates between Seaport, OTMH, Innovation and the Debtor, as well as the cross-pollinated ownership and organizational structure, allowed Innovation to control the Debtor and its property. Finally, as alleged, the Challenged Transactions were accomplished with the Debtor’s knowledge, but with Debtor lacking the power to stop them. Therefore, the Trustee has satisfied the Iqbal standard with regard to the actual fraud counts of the Amended Complaint as to Defendants Innovation, OTMH, Lastoria and Grae. The Trustee has alleged sufficient facts to demonstrate that they benefitted from the transfers. OTMH was a guarantor of the loan and didn’t have to pay CapSource as a result of Direct Response’s payment. Innovation’s obligation was paid on its behalf, and Lastoria and Grae received part of the proceeds of the Amended Cap-Source Loan and the Challenged Transactions.
With respect to Defendants Seaport, Stewart, Collis, Tamashunas and Meyers the Court holds that Counts I-V and VII of the Amended Complaint must be dismissed because those defendants were not initial transferees or entities for whose benefit the transfer was made. Under the Bankruptcy Code and the Delaware Uniform Fraudulent Transfer Act, the Trustee may only recover the value of an avoidable transfer from the initial transferee of such transfer, or an entity for whose benefit the transfer was made. 11 U.S.C. § 550(a); see also 6 Del. C. § 1308(b). The Trustee has not established that Defendants Seaport, Stewart, Collis, Tamashunas and Meyers were initial transferees, or an entity for whose benefit the transfer was made. Therefore, Counts I-V and VII of the Amended Complaint are dismissed as to those Defendants.
2. Constructive Fraud
To survive the Motions to Dismiss on the Trustee’s claim pursuant to Code Section 548(a)(1)(B), the Trustee must allege facts demonstrating that the Debtor, “received less than a reasonably equivalent value in exchange for such transfer or obligation, and was insolvent on the date that such transfer was made or such obligation incurred, or became insol
3. Reasonably Equivalent Value
The Trustee has alleged sufficient facts to demonstrate that the Debtor did not receive reasonably equivalent value from the other Defendants from the Challenged Transactions. As a result of the first CapSource Loan, the Debtor was left with no unencumbered assets. Am. Compl. ¶¶ 230-34, 253. The Debtor served as a co-guarantor for a third party and received no consideration in return for encumbering its assets. Am. Compl. ¶ 98-102. Debtor did not receive any shares of OTMH, Innovation, or Seaport in consideration for co-guaranteeing the loan. Am. Compl. ¶ 106. Furthermore, in the Amended Complaint, the Trustee notes that OTMH and the Debtor’s books reveal that as of January 31, 2009, the Debtor had repaid its entire share of the Amended CapSource Loan which was $7.5 million plus interest. Am. Compl. ¶ 139. Notwithstanding this fact, as of January 1, 2009, when Innovation was no longer able to pay its bills when they became due, the Debtor stepped in and paid over $7.6 million of Innovation’s obligations to third parties. Am. Compl. ¶ 134. In December 2009, the Debtor needed partial reimbursement of the $7.6 million from the OTMH, Seaport, and Innovation Defendants to pay its bills as they became due. None of the Defendants provided the Debtor with any cash to meet its obligations. Am. Compl. ¶ 185-86. Based on these facts, the Court finds that the Tras-tee has satisfied the pleading requirements to show that the Debtor did not receive reasonably equivalent value.
4. Insolvency
Defendants argue that the Trustee failed to allege sufficient facts to establish a claim for insolvency, which is an essential element of avoidance claims. The Amended Complaint states the following facts which, taken as true, support a finding of insolvency:
• As of November 2009, Direct Response was unable to pay its obligations as they became due. Am. Compl. ¶ 178.
• On December 14, 2009, CapSource froze Direct Response’s bank accounts based on covenant defaults that occurred on September 30, 2009. Am. Compl. ¶ 194.
• In December 2009, Direct Response informed the Defendants that Direct Response was running out of cash and in order to pay its bills it would need approximately $2 million as a partial repayment of the $7.6 million or a short term loan from CapSource. Am. Compl. ¶ 183,185-187.
• The Challenged Transactions left the Debtor with an unreasonably small amount of capital to conduct business. Am. Compl. ¶ 276.
• The Debtor’s liabilities еxceeded its assets by September 2006. Am. Compl. ¶ 11.
The Trustee’s factual allegations, taken as true, provide enough detail of insolvency upon which to base the avoidance claims.
Just as with the actual fraud claims, the constructive fraud claims are subject to the § 560 statutory requirement that the defendant was an initial transferee of the transfer, or the entity for whose benefit the transfer was made. The Trustee has satisfied the Iqbal standard with regard to the constructive fraud counts of the Amended Complaint as to Defendants Innovation, OTMH, Lastoria and Grae.
With respect to Defendants Seaport, Stewart, Collis, Tamashunas and Meyers the Court holds that Counts I-V and VII of the Amended Complaint must be dismissed because those defendants were not initial transferees or entities for whose benefit the transfer was made. Under the Bankruptcy Code and the Delaware Uniform Fraudulent Transfer Act, the Trustee may only recover the value of an avoidable transfer from the initial transferee of such transfer, or an entity for whose benefit the transfer was made. 11 U.S.C. § 550(a); see also 6 Del. C. § 1308(b). The Trustee has not established that Defendants Seaport, Stewart, Collis, Tamashunas and Meyers were initial transferees, or an entity for whose benefit the transfer was made. Therefore, Counts I-V and VII of the Amended Complaint are dismissed as to those Defendants.
F.Preferential Transfer Claims
The Court denies dismissal on the Preferential Transfer Counts VI-VII as to Defendants Innovation, OTMH, Lastoria and Grae on the grounds set forth above in the reasonably equivalent value and insolvency discussion. As to Defendants Seaport, Stewart, Collis, Tamashunas and Meyers the Court dismisses the preferential transfer claims.
G.Accounting Claim
Because the Court denies dismissal on the Section 548 and 544 causes of action above, it also denies dismissal of the Accounting claim, Count IX as to Defendant Innovation.
H.Unjust Enrichment
The claim of unjust enrichment requires a showing that: I) Defendants were benefitted; ii) at the expense of the Committee’s constituency; and iii) circumstances exist showing that Defendants’ retention of benefits is unconscionable or equity and good conscience require restitution. See Schock v. Nash,
The facts contained in the Amended Complaint and previously discussed in detail establish that the Trustee has alleged sufficient facts to deny all of the Defendants’ Motions to Dismiss as to the unjust enrichment claim, Count XV.
I.Negligence
The Trustee has asserted claims of negligence against defendants OTMH, Collis, Tamashunas, Meyers, Eden and Lastoria. Am. Compl. ¶ ¶ 381-389. The Trustee’s negligence claims are based on the same facts and asserted against the same defendants as its breach of the duty of care claim. As a result, this count is unnecessary and redundant and is dismissed. To the extent facts give rise to a breach of the duty of care, the claim can be litigated through the fiduciary duty count.
The Trustee has asserted claims of corporate waste and mismanagement against defendants Collis and Tamashunas. Am. Compl. ¶ 390-92. As with the breach of fiduciary duty claims, Delaware has a three-year statute of limitations on corporate waste and mismanagement claims. In re The Brown Schools,
There are two ways for a corporate waste claim to survive а motion to dismiss: (1) the complaint alleges facts showing that Direct Response received no consideration, or (2) the complaint alleges that a transfer of corporate assets served no corporate purpose. See Official Committee of Unsecured Creditors of Integrated Health Services, Inc. v. Elkins,
K.Conversion
The Trustee has voluntarily dismissed Count XIV for Conversion against the defendants.
L.In Pari Delicto
The Court will deny dismissal based on the in pari delicto doctrine. This Court has previously held that the in pari delicto doctrine is inapplicable when the action is brought against insiders of a debtor
M.Lack Of Subject Matter Jurisdiction
The Defendants argue that the adversary proceeding must be dismissed
The Court does not accept the Defendants’ argument. First, the Trustee’s Amended Complaint is brought on behalf of the Estate’s unsecured creditors which were not a party named or anticipated when the parties signed the CapSource Loan Agreement. Moreover, because of the interlocking directorates of Direct Response, there was no independent board that authorized the terms of the Cap-Source Loan Agreement that purports to divest this Court of subject matter jurisdiction. Also, the claim that the Cap-Source Loan Agreement’s clause barring suit on the merits of the loan was made at arms-length, and for adequate consideration, is unsubstantiated. Savings clauses that attempt to contract around core provisions of the Bankruptcy Code are invalid. See e.g. In re SemCrude, L.P.,
N. Abstention
Defendants Eden, Lastoria, and Grae/Sickenius have argued that permissive abstention is appropriate in this case. Permissive abstention arises under 28 U.S.C. § 1334(c)(1) which provides that “nothing in this section prevents a district court in the interest of justice, or in the interest of comity with state courts or respect for state law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.” This form of abstеntion occurs, therefore, when a court determines that although mandatory abstention is not applicable and that jurisdiction in the federal court was properly conferred, abstention is, in its discretion, appropriate. However, “abstention is [only] appropriate in a few carefully defined situations.... [It] remains ‘the exception, not the rule ... ’. [It] is an extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy properly before it.... Therefore, ‘abstention rarely should be invoked.’ ” Gwynedd Properties, Inc. v. Lower Gwynedd Twp.,
Matters for which permissive abstention is reserved include: (1) matters in which difficult, uncertain issues of state law or those in which the state has a unique interest are presented, In re Stephen Smith Home for the Aged, Inc.,
Because there is such “a ‘narrow sphere’ of cases in which discretionary abstention should be granted under § 1334(c)(1),” this jurisdiction has set out a multi-factor test for determining which cases are appropriate for the doctrine. Courts must consider: (1) the effect or lack thereof on the efficient administration of the estate; (2) the extent to which state law issues predominate over bankruptcy issues; (3) the difficulty or unsettled nature of applicable state law; (4) the presence of a related proceeding commenced in state court or other non-bankruptcy court; (5) the jurisdictional basis, if any, other than section 1334; (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case; (7) the substancе rather than the form of an asserted “core” proceeding; (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court; (9) the burden of the court’s docket; (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties; (11) the existence of a right to a jury trial; and (12) the presence of “non-debtor parties.” In re LaRoche Industries, Inc.,
This Court will exercise its discretion and deny the Defendants’ request for permissive abstention. The Trustee’s claims do not involve difficult issues of state law to which this Court is unaccustomed. Moreover, no matters have been removed to state court and there is no parallel state court action. Finally this is not a case with particularly novel legal issues. This Court addresses fraudulent transfer and preference claims that arise under the Bankruptcy Code and state law on a regular basis. In conjunction with these determinations and in the context of adversary proceedings, the Court also frequently determines breaches of fiduciary duty and aiding and abetting claims under Delaware law. The issues in this case are not encompassed in the “narrow sphere” of cases where discretionary abstention should be granted under § 1334(c)(1).
Moreover, addressing the specific factors set forth in In re LaRoche Industries, Inc., state law issues do not predominate over the bankruptcy issues; Delaware state law on breaches of fiduciary duties is well settled law; there is no parallel state court proceeding; there is no other jurisdictional basis other than § 1334 for a state court to hear these claims; the claims at issue are core proceedings; any judgment renderеd by the bankruptcy court would be enforced in any state court and there would be no further burden on this Court’s docket. On average, these factors favor this Court retaining jurisdiction and not exercising its discretion to engage in permissive abstention of the issues before it. Therefore, Defendants Eden, Lastoria and Grae/Sickenius’ re
O. Trustee’s Counts Against CapSource
The Trustee has asserted claims against CapSource including Preference, Fraudulent Transfer, Turnover, Accounting, Disallowance of Claims under § 502(D), equitable subordination, and unjust enrichment/constructive trust. The Court will dismiss all of the claims against CapSource and will grant Cap-Source’s Motion to Dismiss.
1.Fraudulent Conveyances Counts XVI, XVII, XVIII
To assert a claim for a constructive fraudulent transfer, the Trustee must allege facts supporting (I) that the debtor did not receive reasonably equivalent value and (ii) the debtor’s insolvency. Mellon Bank, N.A. v. Official Comm. of Unsecured Creditors of R.M.L., Inc. (In re R.M.L., Inc.),
The Trustee admits that the Debtor and Innovation were co-borrowers with OTMH as a guarantor, on the Amended CapSource Loan and that the Debtor was jointly and severally obligated on that indebtedness. Id. at ¶ 92. The Trustee admits that each payment received by CapSource was applied by CapSource to reduce the Debtor’s and Innovation’s joint obligations under the Amended Cap-Source Loan. Id. at ¶ 241-42. The Trustee also admits that events of default existed under the Amended CapSource Loan. Id. at ¶ 171. The Debtor was contractually obligated by the Amended Cap-Source Loan to make payments to Cap-Source and the Debtor received value that was actually equivalent in the reduction of the Debtor’s outstanding debt owed to CapSource.
A transfer made in satisfaction of an antecedent debt or for an obligation for which the debtor was liable presumptively constitutes reasonably equivalent value. See Image Masters,
2. Turnover (Count XIX)
The Court has dismissed the fraudulent transfer causes of action and will therefore dismiss the turnover count.
3. Preference (Count XX)
The Court will dismiss the Preference count based on the reasonably equivalent value discussion above.
Because the fraudulent transfer and preference causes of action have been dismissed, the Trustee’s Accounting count will also be dismissed.
5. Disallowance of Claims (Count XXII)
The Court has dismissed the fraudulent transfer and turnover counts. Section 502(d) is only operative after the trustee has secured an order for turnover of a successfully avoided transfer. Therefore the § 502(d) disallowance of claims count is dismissed.
6. Equitable Subordination (Count XXIII)
The Trustee has not plead facts sufficient to рlausibly show that (I) Cap-Source engaged in some type of inequitable conduct; (ii) the misconduct resulted in injury to the Debtor’s creditors or conferred an unfair advantage on CapSource; and (iii) equitable subordination of Cap-Source’s claim is not inconsistent with the provisions of the Bankruptcy Code. In re Mid-Am. Waste Sys., Inc.,
7.Unjust Enrichment!Constructive Trust/Equitable Liens (Count XXIV)
To prevail on a claim for unjust enrichment or imposition of a constructive trust the Trustee must allege sufficient facts to plausibly show that (I) there was an enrichment; (ii) an impoverishment; (iii) a relation between the enrichment and the impoverishment; (iv) the absence of justification; and (v) the absence of a remedy provided by law. Official Comm. of Unsecured Creditors of Forman Enters., Inc. v. Forman (In re Forman Enters., Inc.),
CONCLUSION
The Court will issue an Order consistent with the foregoing discussion and rulings.
ORDER
The Court has defendants’ motions to dismiss before it. For the reasons stated in its Opinion, the disposition of the motions is as follows:
1.
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First Actual Fraudulent Transfer § 548(a)(1)(A) Seaport, OTMH, Innovation, Collis, Tamashunas, Lastoria, Grae/ Sickenius, Stewart
First Count Disposition: Motion to Dismiss GRANTED as to: Seaport, Stewart, Collis, Tamashunas, Meyers Motion to Dismiss DENIED as to: OTMH, Innovation, Lastoria and Grae/Sickenius___
Second Constructive Fraudulent Transfer Seaport, OTMH, Innovation, Collis, § 548(a)(1)(B) Tamashunas, Lastoria, Grae/ _Sickenius. Stewart_
Second Count Disposition: Motion to Dismiss GRANTED as to: Seaport, Collis, Tamashunas and Stewart Motion to Dismiss DENIED as to: OTMH, Innovation. Grae/Sickenius. Lastoria_
Third Fraudulent Transfer § 544 Seaport, OTMH, Innovation, Collis, Tamashunas, Lastoria, Grae/ _Sickenius. Stewart. Meyers_
Third Count Disposition: Motion to Dismiss GRANTED as to: Seaport, Collis, Stewart, Tamashunas, Meyers Motion to Dismiss DENIED as to: OTMH, Innovation, Lastoria, Grae/ Sickenius_
Fourth Constructive Fraudulent Transfer Seaport, OTMH, Innovation, Collis, § 544(b); UFTA1 § (5)(a); UFCA2 Tamashunas, Lastoria, Grae/ _§ (4)___Sickenius. Stewart. Meyers_
Fourth Count Disposition: Motion to Dismiss GRANTED as to: Seaport, Collis, Stewart, Tamashunas, Meyers Motion to Dismiss DENIED as to: OTMH, Innovation, Lastoria, Grae/ Sickenius_
Fifth Constructive Fraudulent Transfer Seaport, OTMH, Innovation, Collis, § 544(b); UFTA § (4)(a)(2); UFCA Tamashunas, Lastoria, Grae/ _§ (5) & (6)___Sickenius, Stewart, Meyers_
Fifth Count Disposition: Motion to Dismiss GRANTED as to: Seaport, Collis, Stewart, Tamashunas, Meyers Motion to Dismiss DENIED as to: OTMH, Innovation, Lastoria, Grae/ Sickenius_
Sixth_Preference § 547_Innovation _
Sixth Count Disposition: Motion to Dismiss DENIED_
Seventh Preference §§ 550, 551 Seaport, OTMH, Innovation, Collis, Tamashunas, Lastoria, Grae/ _Sickenius, Stewart, Meyers_
Seventh Count Disposition: Motion to Dismiss GRANTED as to: Seaport, Collis, Stewart, Tamashunas, Meyers Motion to Dismiss DENIED as to: OTMH, Innovation, Lastoria, Grae/Sick-enius_
Eighth_Turnover § 542_Innovation_
Eighth Count Disposition: Motion to Dismiss DENIED_
Ninth_Accounting_Innovation_
Ninth Count Disposition:
Motion to Dismiss DENIED
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3. The parties shall confer and present a joint scheduling order using the trial date. The scheduling order shall include a provision that the parties will not file motions for summary judgment but shall file pretrial memoranda. The scheduling order shаll also include a pretrial conference which the Court will conduct on July 31, 2012, at 10:00 a.m.
Notes
. "The court is not required to state findings or conclusions when ruling on a motion under Rule 12” Fed. R. Bankr.P. 7052(a)(3). Accordingly, the Court herein makes no findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
. The Seaport Defendants, Seaport Capital, LLC; Seaport Capital Partners III, L.P.; Seaport Capital Partners III/A, L.P.; Seaport Co-Invest III, L.P.; Seaport Associates III, LLC; and Seaport Investment Partners III, L.P. hereinafter shall be referred to as ("Seaport”).
. Defendants Collis, Tamashunas, Meyers, Eden, Grae/Sickenius, Lastoria and Stewart will be referred to collectively as the “Board Defendants”.
. Defendant Richard Stewart was an employee of Innovation, and in September of 2008 was hired as the Chief Financial Officer of OTMH, Direct Response, and Innovation. Am. Compl. ¶ 131. The Amended Complaint alleges that Seaport’s principals, Defendants Collis and Tamashunas, controlled the major corporate decisions of Direct Response through their instructions to Richard Stewart. Am. Compl. ¶ 118.
. Uniform Fraudulent Transfer Act
. Uniform Fraudulent Conveyance Act
. The Court has found in excess of 130 cases in which bankruptcy courts have addressed Stem. The analyses and decisions are not consistent.
. The Granfinanciera Court noted that if the avoidance action defendant had not filed a proof of claim against the estate, the defendant would have been entitled to a jury trial if the bankruptcy trustee was solely seeking legal relief, rather than equitable relief. Gran-
. To the extent that Stem is inconsistent with Granfinanciera, Stem now appears to remove the possibility, left open by Granfinanciera, that the bankruptcy court would have authority to adjudicate a claim to a final order of a defendant who has filed a proof of claim against the estate. In Granfinanciera, the Court made clear that a court deciding a fraudulent conveyance action was exercising Article III judicial power, but relying on 157(b)(2), that the exercise of that рower was constitutional. Granfinanciera,
. Other bankruptcy courts have arrived at the same conclusion. See In re Teleservices Group, Inc.,
. Proponents of the Broad Interpretation disregard the multiple stated references that the impact of the decision was "narrow” was not intended to "meaningfully change the distribution of labor” between the bankruptcy courts and district courts. The Court very expressly and intentionally insisted on the limited intended impact of its decision. Stern,
. See also In re Ambac Fin. Grp., Inc.,
. In In re Washington Mutual, Inc.,
. The discussion does not address the Trustee’s claims against Defendant CapSource. The Claims asserted against Defendant Cap-Source are discussed infra, at page 55.
. Malpiede v. Townson,
. Leading experts on Delaware corporate law make a powerful case for the theory that good faith is at the core of the duty of loyalty and is not a separate duty. The authors conclude that "good faith” is the "state of mind required of a loyal director.” See Leo E. Strine, Jr., Lawrence A. Hammermesh, R. Franklin Balotti & Jeffery M. Gorris, Loyalty's Core Demand: The Defining Role of Good Faith in Corporation Law, at 4. (Widener Law Sch. Legal Studies Research Paper No. 09-13, Harvard Law & Econ. Discussion Paper No. 630, 2009), available at http://ssm.com/ abstract=1349971 ("Harvard ”).
. Delaware law, 6 Del. C. § 1304(b)(1), contains the same standard for fraudulent transfer as the Code, namely, the "actual intent to hinder, delay or defraud.” The Court will therefore consider the applicable Bankruptcy Code provisions as incorporating Delaware law.
. The Bankruptcy Code defines insiders as directors or officers of the debtor corporation; a person in control of the debtor; a partnership in which the debtor is a general partner; a general partner of the debtor; or a relative of a general partner, director, officer, or person in control of the Debtor. 11 U.S.C. § 101(31)(B). Defendants Lastoria, Grae/Sickenius, Eden, Collis, Meyers and Ta-mashunas were directors and officers of the Debtor, and defendants Seaport, OTMH and Innovation were persons in control of the Debtor through the interlocking directorates.
. Uniform Fraudulent Transfer Act
. Uniform Fraudulent Conveyance Act