In re Inc.

• Decision Date: 05 January 2011
• Docket Number: Adversary No. 09–50469.,Bankruptcy No. 09–10374 CSS.
• Citation: 443 B.R. 22
• Parties: In re USDIGITAL, INC., Debtor.Jeoffrey L. Burtch, Chapter 7 Trustee, Plaintiff,v.Joseph Huston, Steven Lindsley, Kevin Doman, Charles S. McNeil, Mark Ziegler, Brian Humphrey, NexGen Telecom, LLC, Infinidi Media, Inc., and Stonebridge Marketing, LLC., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

443 B.R. 22

In re USDIGITAL, INC., Debtor.Jeoffrey L. Burtch, Chapter 7 Trustee, Plaintiff,

v.Joseph Huston, Steven Lindsley, Kevin Doman, Charles S. McNeil, Mark Ziegler, Brian Humphrey, NexGen Telecom, LLC, Infinidi Media, Inc., and Stonebridge Marketing, LLC., Defendants.

Bankruptcy No. 09–10374 CSS.

Adversary No. 09–50469.

United States Bankruptcy Court, D. Delaware.

Jan. 5, 2011.

Ashby & Geddes, P.A., William P. Bowden, Gregory A. Taylor, Wilmington, DE, Holme Roberts & Owen LLP, Michael J. Hoffman, Denver, CO, for Charles S. McNeil, Mark Ziegler, Brian Humphrey, and NexGen Telecom, LLC.Cooch & Taylor, P.A., Robert W. Pedigo, Wilmington, DE, for Plaintiff.

OPINION ¹

SONTCHI, Bankruptcy Judge.

INTRODUCTION

Before the Court is a motion by the defendants to dismiss the adversary proceeding filed by Jeoffrey L. Burtch, Chapter 7 Trustee (the “Trustee”) for USDigital, Inc. (the “Debtor” or “USDigital”). The adversary action is comprised of seventeen counts. In Counts I–IV, the Trustee seeks recovery of transfers made by the Debtor pursuant to 11 U.S.C. §§ 547, 548 and 550 and pursuant to the Delaware Uniform Transfer Act (the “Delaware UFTA”). In Counts IX, X, XII and XIII, the Trustee asserts claims for breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, corporate waste and unjust enrichment against certain directors, NexGen Telecom, LLC (“NexGen”), and Infinidi Media, Inc. (“Infinidi Media”). In Counts XIV, XV, XVI and XVII, the Trustee seeks to disallow, to equitably subordinate, and to recharacterize claims filed by certain directors, NexGen and Stonebridge Marketing, LLC (“Stonebridge”). For the reasons set forth below, the Court grants the motion to dismiss in part and denies it in part.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).

PROCEDURAL BACKGROUND

On March 26, 2007 (the “Petition Date”), USDigital filed a voluntary Chapter 7 petition. Shortly thereafter, Jeoffrey L. Burtch was appointed as successor interim Chapter 7 Trustee. The Trustee filed a complaint on March 18, 2009 (the “Complaint”) (Docket No. 1), seeking to avoid prepetition transfers and alleging breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, usurping corporate opportunity, corporate waste, unjust enrichment, accounting, disallowance of claims, equitable subordination, and recharacterization against NexGen, Infinidi Media, Stonebridge, and directors ² of USDigital, Inc (collectively, the “Defendants”). On November 12, 2009, the Defendants filed a motion to dismiss (the “Motion to Dismiss”) (Docket No. 31) and, in the alternative, a motion for a more definite statement. The Trustee filed an objection to the Motion to Dismiss on January 14, 2010 (the “Objection”) (Docket No. 34), and the Defendants filed a reply brief in support of the Motion to Dismiss on February 12, 2010 (the “Reply”) (Docket No. 35). Briefing is complete and the matter is ripe for decision.

THE PARTIES

Between 2003 and 2006, four separate, but interconnected, corporations were formed: USDigital, Inc., USDigital Television, LLC (“USDTV”), NexGen and Infinidi Media. As described in more detail below, each of the corporations shared the same source of capital and had many of the same directors and officers. Prior to the Debtor's bankruptcy in 2006, it entered into business transactions with each of these corporations and those transactions form the basis of the Complaint.

USDigital

USDigital was in the business of providing internet digital bundling services to Walmart's customers in select New Mexico, Texas, Nevada and Utah markets. USDigital worked in combination with USDTV to provide a “triple play” of cable television, internet, and Voice Over Internet Protocol (“VOIP”) Services.

NexGen

NexGen provides over-the-air terrestrial digital subscription service in the mid-western area of the United States. The company was founded in 2003 and is headquartered in Draper, Utah. NexGen was formally known as U.S. Digital Television, LLC. NexGen was the cofounder and major shareholder of USDigital.

NexGen was the principle supplier of capital to USDigital. Charles S. McNeil was the chairman of NexGen. Mark Ziegler (“Ziegler”) was the vice president of NexGen. Brian Humphrey (“Humphrey”) served as the general counsel for NexGen.

USDTV

USDTV was an over-the-air pay television service that operated out of Draper, Utah. USDTV was founded in 2003 and started service in Salt Lake City in 2004. In July 2006, USDTV filed a voluntary Chapter 7 petition in the United States Bankruptcy Court in the District of Delaware (the “USDTV Filing”). It ceased operating in March 2007.

USDTV and USDigital shared some of the same directors and officers. Steve Lindsley (“Lindsley”) was the CEO of USDTV prior to its bankruptcy. Kevin Doman (“Doman”) was an original founder of USDTV. NexGen invested at least $9 million in USDTV.

Infinidi Media

Infinidi Media was developed by certain of the directors and management of USDigital and NexGen in the fall of 2006 as an internal sales division of USDigital. Between January and December of 2006, USDigital invested $245,869.25 in the development of software, hardware and startup costs for Infinidi Media (the “Infinidi Media Transfers”). Infinidi was spun-off of USDigital in December 2006.

Infinidi's founders included Jospeh C. Huston (“Huston”), Doman, Lindsley, McNeil, Ziegler, Humphrey (collectively, the “Director Defendants”), and NexGen. In November 2006, USDigital hired Alan Pollard (“Pollard”) to be vice president of business development at Infinidi Media and Matthew Baros (“Baros”) to be vice president of operations at Infinidi Media. As employees of USDigital, Pollard and Baros signed non-compete and confidentiality agreements with USDigital.

Stonebridge

Stonebridge is a limited liability company that was incorporated in 2003 in the state of Arkansas. Huston, USDigital's founder and president, is also the managing member and majority owner of Stonebridge. Stonebridge owns 2.1% of USD Holdings. On August 28, 2006, USDigital borrowed $184,000 from Stonebridge, which was formalized by a promissory note agreement.

FACTUAL BACKGROUND

On June 13, 2006, USDTV executed a promissory note in favor of NexGen in the amount of $104,160.00 secured by set top boxes owned by USDTV (the “USDTV Secured Promissory Note”).³ NexGen and USDTV documented the transaction by entering into a Security Agreement (the “USDTV Security Agreement”) for the set top boxes. In addition to the NexGen Secured Promissory Note, on June 29, 2006, USDTV executed an unsecured promissory note in favor of NexGen in the amount of $104,160.00 (the “USDTV Unsecured Promissory Note”).

Following the USDTV Filing in 2007, USDigital and USDTV entered into an asset purchase agreement (the “APA”) for the sale of substantially all of USDTV's assets to USDigital. The Court approved the sale motion on September 12, 2006.⁴

As part of the APA, USDigital assumed USDTV's liabilities to NexGen. First, USDigital acquired USDTV's set top boxes and executed a Security Agreement (the “USDigital Security Agreement”) and Secured Promissory Note (the “NexGen Secured Promissory Note”) for the principal amount of $100,000 in favor of NexGen for the set top boxes. Second, USDigital assumed NexGen's USDTV Unsecured Promissory Note in the amount of $100,000 (the “NexGen Unsecured Promissory Note” and collectively with the NexGen Secured Promissory Note, the “NexGen Promissory Notes”).

Separately, as part of the APA, the Debtor agreed to pay certain operating and administrative expenses of USDTV. NexGen paid certain operating expenses to the Entertainment and Sports Program Network (“ESPN”) on behalf of ESPN in the amount of $44,421. On August 8, 2008, USDigital transferred $44,421 to NexGen for that debt (the “Expense Reimbursement”).

On approximately September 26, 2006, NexGen perfected its security interest in the set top boxes by filing a financing statement with the Delaware Department of State. The financing statement provided that NexGen held an interest in “all of Debtor's right, title, and interest in and to Debtor's set top boxes, whether now owned or hereafter acquired, and wherever located, including all proceeds associated with the foregoing.” ⁵

On March 26, 2007, USDigital filed for bankruptcy. During the course of the USDigital's bankruptcy case, the set top boxes were sold for $40,953.75. On October 17, 2007, NexGen filed a proof of claim for $104,407.53 comprised of a $40,953.75 secured claim for the proceeds of set top boxes sale and a $63,453.78 unsecured claim.

LEGAL DISCUSSION

A. Motion to Dismiss Standard.

i. The Standard of Review When Evaluating Complaints Asserting Fraud.

Complaints asserting claims for fraud must meet a heightened pleading standard. Federal Rule of Civil Procedure Rule 9(b) ⁶ requires these complaints to set forth facts with sufficient particularity to apprise the defendant of the charges against him so that he may prepare an adequate answer.⁷ To provide fair notice, the complaint must go beyond merely quoting the relevant statute.⁸ The Third Circuit explained the purpose of Rule 9(b)'s particularity requirements as follows:

Rule 9(b) requires plaintiffs to plead with particularity the “circumstances” of the alleged fraud in order to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior. It is certainly true that allegations of “date, place or time” fulfill these functions, but nothing in the rule requires them. Plaintiffs are free to use alternative means of injecting precision and some measure of substantiation into their allegations of fraud.⁹

A trustee is generally afforded greater liberty in pleading fraud, since he...