In re Alphastar Ins. Group Ltd.

• Decision Date: 19 February 2008
• Docket Number: Bankruptcy No. 03-17903 (SMB).,Adversary No. 06-1524.
• Parties: In re ALPHASTAR INSURANCE GROUP LIMITED, et al., Debtors. Richard E. O'Connell, Trustee of the Estates of AlphaStar Insurance Group Limited, et al., Plaintiff, v. Arthur Andersen LLP, et al., Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

383 B.R. 231

In re ALPHASTAR INSURANCE GROUP LIMITED, et al., Debtors Richard E. O'Connell, Trustee of the Estates of AlphaStar Insurance Group Limited, et al., Plaintiff, v. Arthur Andersen LLP, et al., Defendants.

Bankruptcy No. 03-17903 (SMB).

Adversary No. 06-1524.

United States Bankruptcy Court, S.D. New York.

February 19, 2008.

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Richards Kibbe & Orbe LLP, Arthur S. Greenspan, Esq., H. Rowan Gaither IV, Esq., of Counsel, New York, NY, for Defendants Stephen A. Crane and Anthony J. Del Tufo.

McCullough, Campbell & Lane LLP, Carl D. Liggio, Esq., of Counsel, Chicago, IL, for Defendant Peter S. Christie.

Paul, Weiss, Rifkind, Wharton, Garrison, LLP, Daniel J. Beller, Esq., Stephen J. Shimshak, Esq., Claudia R. Tobler, Esq., of Counsel, New York, NY, for the Goldman Sachs Defendants and Jean de Pourtales.

Howrey, LLP, Gary F. Bendinger, Esq., Nancy M. Trasande, Esq., of Counsel, Salt Lake City, UT, for Defendants David H. Elliott, Hadley C. Ford and Patrick J. McDonough.

Peter Levine, Esq., New York, NY, for Defendant Nicholas Mark Cook.

Gage Spencer & Fleming LLP, William Fleming, Esq., of Counsel, New York, NY, for Defendant George W. Jones.

Sullivan & Cromwell LLP, Gandolfo V. DiBlasi, Esq., William L. Farris, Esq., Patrice A. Rouse, Esq., of Counsel, New York, NY, for Defendant Reuben Jeffery III.

James Lawless IV, Defendant, pro se.

Stevens & Lee, P.C., Neil C. Schur, Esq., Nicholas F. Kajon, Esq., David M. Green, Esq., Alec P. Ostrow, Esq., Constantine D. Pourakis, Esq., of Counsel, New York, NY, for Plaintiff.

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART THE MOTIONS TO DISMISS THE AMENDED COMPLAINT

STUART M. BERNSTEIN, Chief Judge.

This lawsuit arose out of the collapse and eventual bankruptcy of AlphaStar Insurance Group Ltd. ("AlphaStar"), and its numerous subsidiaries. Richard E. O'Connell, the chapter 7 trustee (the "Trustee"), commenced this adversary proceeding, inter alia, against AlphaStar's former officers and directors, Arthur Andersen LLP, and several entities affiliated with Goldman Sachs (as defined below). The thrust of the allegations in the Trustee's 121 page, 656 paragraph Amended Complaint, dated Nov. 8, 2006 (ECF Doc. #81); is one usually associated with the phrase "deepening insolvency." The Trustee contends that the defendants, using fraudulent and other improper means, continued AlphaStar's corporate existence to advance their personal interests to the detriment of AlphaStar. All of the defendants other than Quick moved to dismiss the Amended Complaint with prejudice.¹

The core claims are based on fraud and fraudulent conduct, and include common law fraud, breach of fiduciary duty and aiding, abetting breach of fiduciary duty and equitable subordination. The Trustee also asserts a breach of contract claim against Goldman Sachs, and bankruptcy avoidance claims against some of the defendants. For the reasons that follow, the motions to dismiss the Amended Complaint with prejudice are granted, except that the motions to dismiss the avoidance claims are denied, and the motion to dismiss the contract claim is granted but with leave to replead.

BACKGROUND²

A. Introduction

AlphaStar f/k/a Stirling Cooke Brown, Holdings Ltd. is a Bermuda corporation whose principal place of business was Bermuda until early 2003, when it began operating principally from New York. (¶¶ 31-33, 313.) AlphaStar is the parent company of the following group of debtors (¶ 30): Stirling Cooke North American Holdings, Inc. ("SCNAH"), Employee & Providers Resources Group, Inc., North American Risk, Inc., Stirling Cooke Brown North American Reinsurance Intermediaries, Inc., AlphaStar Insurance Services, Inc., Stirling Cooke New York Insurance Agency Services, Inc., Stirling Cooke Risk Management Services, Inc., Stirling Cooke Southeast, Inc., Stirling Cooke Texas, Inc., World Trade Services (NJ), and World Trade Services (PA) (collectively, the "Debtors"). Other than AlphaStar, all of the Debtors were incorporated in the United States. (¶ 34.)

Prior to bankruptcy, AlphaStar and its subsidiaries provided risk management services and products to small and mid-sized businesses (¶ 42.) They also arranged reinsurance for products offered by AlphaStar and other insurance carriers. (¶ 42.) AlphaStar divided its business into three units: London, Bermuda and the United States. (¶ 43.) In London, AlphaStar's operations consisted of Stirling Cooke Brown Holdings (UK) Limited and its subsidiaries, including Stirling Cooke Brown Insurance Brokers Limited ("SCBIB") and Stirling Cooke Brown Reinsurance Brokers Limited ("SCBRB") (collectively, the "U.K. Subsidiaries"). (¶ 44.) By 1999, AlphaStar was winding down the U.K. Subsidiaries. (¶ 46.)

In Bermuda, AlphaStar's operations consisted of Realm Investments Limited and its subsidiaries, including CIRCL Holdings Limited ("CIRCIP), Raydon Underwriting Management Company Limited ("Raydon"), Realm Underwriting Management Company Limited and JEH Re Underwriting Management (Bermuda) Limited ("JEH Re") (collectively, the "Bermuda Subsidiaries"). (¶ 48.) By 1999, almost all of the Bermuda subsidiaries were in runoff. (¶ 49.)

In the United States, AlphaStar's operations consisted of SCNAH and its subsidiaries, including Realm National Insurance Company ("Realm") (collectively, the "U.S. Subsidiaries"). (¶ 50.) Excluding Realm, all or most of the U.S. Subsidiaries are debtors in this Court. (¶ 51.) All of AlphaStar's subsidiaries have been defunct for many years. (¶ 53.)

B. The Defendants

1. The Goldman Sachs Entities

Goldman Sachs & Co. ("Goldman Sachs") is a global investment banking, securities and investment management firm headquartered in New York. (¶ 11.) Goldman Sachs was affiliated with The Goldman Sachs Group, Inc. and The Goldman Sachs Group, L.P. (collectively, the "Goldman Sachs Group"), as well as GS Capital. Partners II, L.P., GS Capital Partners II Offshore, L.P., Goldman Sachs & Co. Verwaltungs GmbH, Stone Street Fund 1995 L.P., and Bridge Street Fund 1995, L.P. (collectively, the "GS Funds"). (¶ 12-14.) Goldman Sachs, the Goldman Sachs Group and GS Funds (collectively, the "Goldman Sachs Entities") were affiliated with AlphaStar from at least 1997 through 2002. (¶ 102.)

The Goldman Sachs Entities essentially controlled AlphaStar. (¶¶ 107-08.) Prior to AlphaStar's initial public offering in 1997 (the "AlphaStar IPO"), they owned 34% of AlphaStar's ordinary shares, (¶ 99), and appointed two of its six board members. (¶ 105.) Goldman Sachs was a co-managing underwriter of the AlphaStar IPO, and received a total of $5.3 million in underwriting discounts. (¶ 73.) After the AlphaStar IPO, the Goldman Sachs Entities controlled over two million shares of AlphaStar stock, and were the largest AlphaStar stockholder until December 2002. (¶ 104.) In addition, Goldman Sachs provided AlphaStar with investment banking services and served as its financial advisor pursuant to certain contracts (the "Goldman Sachs Contracts"). (¶¶ 81-83.)

2. The Officers and Directors

a. The Goldman Sachs Directors

From January 1996 until January 2003, executives of the Goldman Sachs Entities or their affiliates also served on AlphaStar's Board of Directors (the "Board"), including Defendants Reuben Jeffery III ("Jeffery") and Jean de Pourtales ("de Pourtales"). (¶ 75.) Jeffery was a Managing Director of Goldman. Sachs. (¶ 75.) He served on the Board from prior to the time of the IPO until at least May 23, 2001. (¶ 58.) de Pourtales, a Managing Director of non-party Goldman Sachs International, (¶ 75), was a director of AlphaStar from March 4, 1999 until at least January 16, 2003. (¶ 59.) At various times, both served on the Board's Audit, Compensation and Governance Committees. (¶¶ 58-59.)

b. The Other "Director Defendants"

Nicholas Mark Cooke ("Cooke") was the Chairman, President and Chief Executive Officer ("CEO") of AlphaStar at the time of the AlphaStar IPO. (¶ 55.) He resigned as President and CEO in July 1999, (¶ 184), and was replaced as Chairman in April 2000. (¶ 198.) He fully resigned from the company in November 2001. (¶ 205.)

Stephen A. Crane ("Crane") became a director of AlphaStar and its President and CEO in October or November 1999. (¶¶ 56, 190.) He replaced Cooke as Chairman in April 2000. (¶¶ 56, 198.) His base annual salary was $400,000. (¶ 56.)

David H. Elliott ("Elliott") served as a director from August 2001 until August 2003. (¶ 64.)

George W. Jones ("Jones") served as a director from before the AlphaStar IPO until at least March 12, 2003, and was AlphaStar's Chief Financial Officer until October 2001. His base annual salary was $275,000. (¶ 57.)

Patrick J. McDonough ("McDonough") served as a director from May 1999 to August 2003, and as a member of the Board's Audit and Compensation Committees. McDonough reported/to the Board concerning audit issues. (¶ 60.)

Len Quick ("Quick") served as a director, from July 1999 until after the petition date. Quick also served on the Board's Executive Committee, and reported to the Board concerning operations and restructuring issues. In July 1999, Quick's base salary was increased from $200,000 to $325,000 per annum. (¶ 61.)

Hadley C. Ford served as a director from March 2000 to August 2003. (¶ 62.)

Peter S. Christie ("Christie") served as a director from May 2000 until between August and November 2002. In 2000, Christie also joined the Board of Directors of SCBIB, and had extensive experience in the insurance industry (¶ 63.)

The Defendants Jeffery and, de Pourtales, together with the Defendants Crane Cooke, Elliott, Ford, Jones, McDonough, Christie and Quick, are referred to collectively in the Amended Complaint as the "Director Defendants." (¶ 68.)

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