In Re Maxwell Newspapers, Inc.
DECISION ON DEBTOR’S MOTION FOR SUMMARY JUDGMENT EXPUNGING CLAIMS OF MIRROR GROUP NEWSPAPERS, PLC, MGN LIMITED AND RTI HOLDINGS, INC.
At a time when the Daily News’ extinction was but days away, in early 1991, there appeared Robert Maxwell, the seeming savior who was paid over $60,000,000 to take the newspaper off the hands of its former owner. It was through this debtor, Maxwell Newspapers, Inc. (which did business as and, for ease of reference, will be called in this opinion the “Daily News”), that Maxwell acquired the Daily News. From the facts brought out in the Daily News’ summary judgment motion, a good many of which are uncontested, the late Mr. Maxwell appears to have moved countless millions of dollars among his various enterprises without regard to the propriety of his actions and the consequences which he was causing, thereby exposing this relatively small business to potential claims of affiliated entities in the hundreds of millions of dollars. This decision deals with the claims of Mirror Group Newspapers, pic (“Mirror”) and of its two subsidiaries, MGN Limited and RTI Holdings, Inc. (collectively the three will be called “MGN”), which aggregate some $110,000,000.
I.
Maxwell’s empire comprised two components, the “private side” companies owned by the Maxwell family and believed to be headed by Headington Investments, Ltd., (“Headington”) and the “public side” companies headed by Maxwell Communication Corporation pic (“MCC”), which is owned publicly and in minority part by Heading-ton.
See In re Brierley,
Through the newspaper which it owned until very recently, this debtor had strong local ties. Yet its chapter 11 case is but a small part of a large transnational bankruptcy, implicating three chapter 11 cases in this court and scores of administrations and windings-up in London. As this decision illustrates, many of the Maxwell-related entities have claims one against the other which need be sorted out through, one hopes, negotiation or, failing that, extensive litigation.
It was on March 14, 1991 that Robert Maxwell acquired ultimate ownership and control of the tabloid from the Tribune Company. Virtually immediately, he installed himself as chairman of its board of directors. From that time until a month or so after his death in November 1991, Maxwell and members of his immediate family dominated the Daily News’ board of directors and, according to the debtor, exercised complete control over it.
Once ensconced, Maxwell instructed the Daily News’ comptroller, Marshall Genger, to set up several bank accounts for its operational use. With the help of Kathleen Guinessey, treasurer of Macmillan, Inc. (the well-known publishing company which is a subsidiary of MCC), Genger set up accounts at Chase Manhattan Bank, N.A. (“Chase”) as well as at Nebanco, Continental and Mellon Banks. At Chase, Genger set up operating, payroll and disbursement accounts. Guinessey also opened an account in the Daily News’ name at National Westminster Bank (“NatWest”). The Daily News claims that none of its employees, save Robert Maxwell and his son Kevin, as well as people with a prior affiliation to the Maxwell companies, even knew of the Nat-West account until late May or early June 1991.
On the heels of these activities, Maxwell, who at all times had authority to transfer funds into or out of any of the Daily News’ accounts, began using the bank accounts for the numerous transfers that, over the next eight or nine months, would make up what the Daily News itself now describes as the “fraudulent scheme” through which Robert and Kevin misappropriated funds of various Maxwell-controlled entities. See Debtor’s Local Rule 13(h) Statement at ¶¶ 16-18. Between March and November 1991, some $238 million was transferred into the Daily News’ accounts and most was promptly transferred out. Cogan Aff., Exh. D. The Daily News does not dispute that it was cash-starved and looked to Maxwell for money. Sherman Deck, Ex. F at 60. Nor does the Daily News dispute that, as a result of the Maxwells’ fraudulent scheme, the Daily News retained a benefit in the form of a net balance of nearly $7,000,000. Cogan Aff., Exh. D. What the Daily News does say is that this apparent benefit is irrelevant to MGN’s claims because if one looks to the four-day period during which funds of MGN, rather than funds of other Maxwell-related entities, were received and disbursed by the Daily News, the Daily News was left short by some $377,000, a factual point which MGN does not dispute. Thus, the Daily News says, it too sustained a loss from Maxwell’s actions and ought not be held accountable to MGN for the $110,000,000 siphoned from it; the Daily News and MGN are either both victims of Maxwell, or, if they cannot divorce themselves from him, equally culpable for his actions and, therefore, not chargeable with intercompany claims of one another.
The four days on which the Daily News focuses begin on October 21, 1991 and end on October 24. But the prelude to what happened during those days was on October 18. On that date, Larry Bloom, the senior vice president of the Daily News, was attending a conference in Washington when he received a telephone call from Maxwell. Maxwell informed Bloom that Maxwell would soon be transferring approximately $86 million into the Daily News’ accounts, and that although the majority of that money would be promptly transferred out, some money would remain for the Daily News’ operating needs. Co-gan Aff., Exh. A at 111. Maxwell indicated that the monies deposited were funds derived from the sale of shares of Scitex Corporation, a company in which Bloom
Three days later, on October 21, Genger received a telephone call from Kevin Maxwell. Consistent with the conversation between Bloom and Robert Maxwell, Kevin told Genger that the Scitex funds were to be transferred into and right out of the
Daily News’ operating accounts, but that some funds would remain in the Daily News’ accounts for its operating use. Gen-ger believed that the Daily News would be left with some $9 or $10 million from the transactions, an amount which he later characterized as “barely adequate” to pay past due Daily News obligations. Cogan Aff., Exh. B at 60. Over the next three days, following orders given by Robert and Kevin, Genger transferred the following amounts into and out of the Daily News’ accounts:
Transfers In:
Date Amount
10/21 $ 86,105,000.00
10/22 $ 22,000,000.00
10/23 $ 2,200,000.00
10/23 $ 1,700,000.00
10/24 $ 1,000,000.00
Total Amount $113,005,000.00
Transfers Out:
10/21 $ 55,786,352.25
10/21 $ 8,818,673.21
10/22 $ 6,246.56
10/22 $ 21,000,000.00
10/22 $ 17,770,560.00
10/23 $ 9,000,000.00
10/24 $ 1,000,000.00
Total Amount $113,381,832.02
Bloom and Genger both believed that the $86,105,000 transferred into the Daily News’ accounts on October 21 represented the proceeds of the Scitex sale, but the funds were actually the proceeds of a loan made by Bankers Trust to MGN Limited at the behest of Robert and Kevin Maxwell and Mirror director Michael Stoney. Shortly after Genger transferred the loan proceeds into the Daily News’ accounts, Kevin directed him to transfer them out to Bankers Trust (to repay an earlier loan Bankers Trust had made to Mirror Group, PLC (now Robert Maxwell Group, PLC)).
MGN attributes its losses to collusion among a group of individuals but has publicly acknowledged weaknesses which may have played a part in the diversion of MGN’s funds. They include: internal controls and operating procedures which failed to identify related party transactions and bring them to the attention of the independent directors for their approval; funds transfers permitted on the authority of Robert Maxwell alone or of other directors who were also directors of other Maxwell-controlled companies without the Audit Committee (consisting of non-executive directors) having been convened; inadequate authority of the finance department to verify and record the activities carried out by the treasury department; and the resultant lack of proper documentation relating to these activities which would have enabled
With Robert Maxwell’s death and the collapse of his finances, the Daily News filed for relief under chapter 11 of the Bankruptcy Code. MGN filed proofs of claim totaling $110,000,000 based on, among other grounds, Maxwell’s fraudulent misappropriation and conversion of its funds and the Daily News’ alleged aiding and abetting of a breach of fiduciary duty by MGN’s directors. The Daily News, along with its Official Committee of Unsecured Creditors, objected to MGN’s claims and sought to expunge them. The Daily News has moved for summary judgment which MGN opposes because of asserted material factual disputes centering primarily on those facts necessary to determine whether the acts of the Maxwells, father and son, ought be imputed to the Daily News. 1 MGN accuses the Daily News of turning a blind eye to the actions of Robert and Kevin Maxwell because of the Daily News’ expressed need for cash to operate; the Daily News, for its part, accuses MGN of failing to prevent a fraudulent disposition of its own funds.
II.
Federal Rule of Civil Procedure 56(c), made applicable to these proceedings by Federal Rules of Bankruptcy Procedure 9014 and 7056, provides that summary judgment is appropriate if the court determines that the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.
Celotex Corp. v. Catrett,
The moving party initially bears the burden of establishing the absence of a genuine issue as to any material fact.
Celotex Corp. v. Catrett,
The debtor seeks to expunge MGN’s claims by summary judgment because: (i) MGN’s funds were transferred into and out
MGN’S PROOFS OF CLAIM: NOT A MODEL OF CLARITY
MGN’s proofs of claim offer little insight into the causes of action upon which it seeks recovery. Although separate proofs of claim were filed for Mirror, MGN Limited and RTI Holdings, Inc., common threads run through each: allegations of conversion, fraud, aiding and abetting a conspiracy to defraud, aiding and abetting a breach of fiduciary duty and breach of contract. Sherman Deck at Exh. A-E. What MGN has failed to do, however, is provide any guidance in the documents that accompany the proofs of claim as to why those causes of action should stand. By way of example, MGN asserts a cause of action for breach of contract. Yet nowhere in its papers does MGN describe what contracts), if any, the debtor entered into with MGN and thereafter breached. With respect to its fraud claim, MGN not only fails to particularize its claim with the specificity required under Federal Rule of Civil Procedure 9(b), but does not address what misrepresentations the Daily News may have made and, assuming that the debtor made some misrepresentation, exactly how MGN relied on that misrepresentation. 2
Given that MGN has not fleshed out its claims and that the debtor has painted its asserted defenses to the claims with what certainly may be characterized as an extremely broad brush, the record is not clear enough for me to conclude that this motion is ripe. However, Federal Rule of Bankruptcy Procedure 9014 grants me the discretion to direct parties to bring what would otherwise be considered a contested matter in the form of an adversary proceeding.
See In re Reveley,
MAY MGN ASSERT THESE CLAIMS?
MGN, in its brief, borrows heavily from
In re Wedtech Securities Litigation,
MGN employs agency principles, arguing that Robert and Kevin Maxwell, as agents of the Daily News, carried out these deceptive transfers on behalf of the Daily News and, therefore, their acts should be imputed to their principal. At the same time, however, MGN suggests that the acts of those same individuals, who were agents of MGN as well, should not be imputed to MGN.
Under general principles of agency law, the liability of a principal to a third person upon a transaction conducted by an agent may be based upon the fact that:
(a) the agent was authorized;
(b) the agent was apparently authorized; or
(c) the agent had a power arising from the agency relation and not dependent upon authority or apparent authority.
Gerrish Corp. v. Universal Underwriters Ins. Co.,
MGN utilizes precisely this analysis to ask me to deny summary judgment on the basis that there are factual questions regarding whether Maxwell was acting, in part, for the benefit of the Daily News. Yet this very same analysis necessarily leads one to question whether MGN may assert its claims, for “a claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors, not to the guilty corporation.”
Shearson Lehman Hutton, Inc. v. Wagoner,
In
Wagoner,
the debtor’s trustee in bankruptcy claimed that the brokerage house aided and abetted the debtor’s sole stockholder and decisionmaker in making bad trades that dissipated corporate funds. The trustee alleged various tort and contract claims. The Second Circuit, noting that the debtor’s stockholder “not only knew of the bad investments, but actively
MAY THE DEBTOR BE ABSOLVED OF LIABILITY IF IT RECEIVED NO BENEFIT FROM THE FUNDS TRANSFERRED TO IT BY MGN OR HAD NO CONTROL OVER THOSE FUNDS?
There is a number of different doctrines by which the recipient of what seems to be a voidable transfer may escape liability to the debtor’s estate when that recipient received no benefit from that transfer. One of these doctrines is the “mere conduit theory,” deriving from Judge Cardozo’s opinion in
Carson v. Federal Reserve Bank of New York,
Where, however, the “mere conduit” remains in possession of some portion of the funds, he will be held liable up to the amount of the funds which he retains.
Commercial Recovery, Inc. v. Mill Street, Inc. (In re Mill Street, Inc.),
Another of these theories for escaping liability is the “earmarking” doctrine, which provides that if property transferred by the debtor in payment of a debt was never truly within the control of the debtor or subject to the debtor’s direction, then a transfer of such property would not be a preference.
Official Bondholders’ Committee v. Eastern Utilities Associates (In re EUA Power Corp.),
Both doctrines are judge-made equitable exceptions to liability for voidable transfers. The Daily News suggests that the first of them, the “mere conduit” theory, ought be imported to this case. MGN urges that the theory can be utilized only in conjunction with avoidance actions. I would suggest that both doctrines may be available here. For although MGN couch
In short, when one looks not at the labels which MGN affixes to its claims but at the relief which it is seeking, recovery of money which it improperly transferred to the Daily News, one realizes that these doctrines cannot be said today, as a matter of law, to be inapplicable. Indeed, once MGN is made to properly plead its claims and once the facts are fully developed, it may well be that the Daily News will be seen to have been correct.
III.
In the end, it is unclear what causes of action MGN is still pursuing and which ones, if any, it has abandoned. There are the potential issues of whether the acts of Robert and Kevin Maxwell can be imputed to both the debtor and MGN, or whether the adverse interest exception precludes imputation to either. Questions exist as to whether MGN is estopped from bringing these claims and whether these causes of action, if valid, could only be properly pursued by MGN’s creditors. Formal pleadings are warranted because one suspects that MGN is trying, with its claims, to make a glove fit on a foot. Further, factual issues need be developed in light of this opinion. Plainly, the complexity and existence of such issues makes these proceedings incapable of resolution on a summary judgment motion.
Accordingly, the debtor’s motion for summary judgment is denied. MGN is directed to replead its claims in a complaint commencing an adversary proceeding. SETTLE ORDER consistent with this opinion.
Notes
. No one has sought to equitably subordinate MGN's claims, if they are allowable, to the claims of the general unsecured creditors. Nothing in this opinion is meant to comment on the propriety or availability of such relief.
. In fact, a review of both the hearing transcript and MGN’s papers suggests that MGN may have abandoned its breach of contract and aiding and abetting claims, choosing to rely primarily upon its claims for conversion and fraud.
. This principle is applied to a debtor-in-possession, because it is subject to all claims and defenses which might have been asserted against the debtor before bankruptcy (except where it is asserting the claims of creditors under the various avoiding powers contained in the Bankruptcy Code).
Miller v. New York Produce Exchange,
. The law of fraudulent transfers is to like effect. The guilty transferor generally cannot recover from his transferee. As between the two, the transfer is valid; it is only when the rights of creditors of the transferor intervene that the transfer may be assailed. See, e.g., 30 N.Y.Jur. 2d, Creditors’ Rights ¶ 320 (1983).
. By a similar analysis, one could ultimately conclude, after imputing Maxwell's acts to MGN, that the Daily News could not have converted MGN’s funds, since the Daily News’ possession was with the permission of MGN, notwithstanding that there may have been damage to creditors of MGN.
See Schwartz v. Capital Liquidators, Inc.,