Burtch v. Seaport Capital, LLC (In re Direct Response Media, Inc.)

• Decision Date: 12 January 2012
• Docket Number: Adversary No. 10–50855 (KG).,Bankruptcy No. 10–10058 (KG).
• Citation: 466 B.R. 626
• Parties: In re DIRECT RESPONSE MEDIA, INC. a/k/a On Target Media, Inc., Debtor.Jeoffrey L. Burtch, Chapter 7 Trustee, Plaintiff, v. 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, Seaport Investment Partners III, L.P., On Target Media Holdings, Inc., James J. Collis, Robert R. Tamashunas, Andrew Meyers, Maria B. Eden, Innovation Ads, Inc., Michael Lastoria, Michael Sickenius a/k/a Iain Grae, Richard Stewart, and CapitalSource Finance LLC, Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

466 B.R. 626

In re DIRECT RESPONSE MEDIA, INC. a/k/a On Target Media, Inc., Debtor.Jeoffrey L. Burtch, Chapter 7 Trustee, Plaintiff,
v.
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, Seaport Investment Partners III, L.P., On Target Media Holdings, Inc., James J. Collis, Robert R. Tamashunas, Andrew Meyers, Maria B. Eden, Innovation Ads, Inc., Michael Lastoria, Michael Sickenius a/k/a Iain Grae, Richard Stewart, and CapitalSource Finance LLC, Defendants.

Bankruptcy No. 10–10058 (KG).

Adversary No. 10–50855 (KG).

United States Bankruptcy Court, D. Delaware.

Jan. 12, 2012.

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

[466 B.R. 633]

Gregory F. Fischer, Henry A. Heiman, M. Claire McCudden, Robert W. Pedigo, Cooch and Taylor, P.A., Wilmington, DE, for Plaintiff.

J.R. Julian, J.R. Julian, P.A., Edwards Angell Palmer & Dodge, LLP, Timothy P. Cairns, Pachulski Stang Young & Jones LLP, Gary H. Kaplan, Marshall, Dennehey, Warner, Coleman, James S. Yoder, White and Williams LLP, Jeffrey C. Wisler, Marc J. Phillips, Connolly Bove Lodge & Hutz LLP, Wilmington, DE, for Defendants.OPINION ¹ Re D.I. Nos. 22, 43, 45, 76, 77, 78, 79, 80 & 173 KEVIN GROSS, Bankruptcy Judge.

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

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of the Estate under 11 U.S.C. § 542, Accounting, Aiding and Abetting, and Unjust Enrichment/Imposition of a Constructive Trust or Equitable Lien. For the reasons discussed below the Court will deny, in part, and grant, in part, the Defendants' Motions to Dismiss.

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. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (hereinafter “ Stern ”), this Court's authority to enter final orders is at issue and is discussed infra.

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”) ² held 83% of the OTMH stock. Am. Compl. ¶ 51. Seaport's directors, Defendants James Collis, Robert Tamashunas, and Andrew Meyers, were majority members on the OTMH board of directors and later controlled the Innovation Ads, Inc. (“Innovation”) board of directors. Am. Compl. ¶ 56–57. Maria Eden served as President of Direct Response and as a director of both OTMH and Direct Response. Am. Compl. ¶ ¶ 56, 59.

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 (“CapSource”). 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 Sickenius (“Grae/Sickenius”) and Michael Lastoria ³ (“Lastoria”) for $36.5 million (the “Innovation Transaction”). Am. Compl. ¶ 74. The Innovation Transaction was composed of $18.4 million in cash, $9 million in promissory notes, and 55,000 shares of OTMH. Am. Compl. ¶ 79–82. As a result of the Innovation Transaction, the Debtor and Innovation became wholly-owned subsidiaries of OTMH. Am. Compl. ¶ 83–89. To complete the Innovation Transaction, the Debtor became a co-borrower and co-guarantor, jointly and severally liable with Innovation for an additional $19 million from CapSource (the “Amended CapSource Loan”). Am. Compl. ¶ 94.

[466 B.R. 635]

OTMH also served as a guarantor on the Amended CapSource Loan. Am. Compl. ¶ 96. After both transactions, the total secured debt of CapSource was $26.5 million. Am. Compl. ¶ 95.

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 CapSource Loan, the Defendants made a prepayment on the Amended CapSource Loan using a Direct Response asset. Am. Compl. ¶ 128–29.⁴

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 for relief under chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”). Jeoffrey Burtch (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

[466 B.R. 636]

waste, unjust enrichment, to avoid a lien, an accounting, disallowance of claims, and equitable subordination. On April 21, 2011, the Court heard argument on the Motions to Dismiss. On October 3, 2011, this Court directed the parties to submit supplemental briefing to address the applicability, if any, of Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) on this Court's authority to enter a final order with regard to the claims in the Amended Complaint.

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 ¦
                +---------------------------------------+
                

 Actual Fraudulent Transfer § 548 Seaport, OTMH, Innovation
                First (a)(1)(A) Collis, Tamashunas, Lastoria
                 Grae/ Sickenius, Stewart
                 Constructive Fraudulent Transfer Seaport, OTMH, Innovation
                Second § 548(a)(1)(B) Collis, Tamashunas, Lastoria
                 Grae/ Sickenius, Stewart
                 Seaport, OTMH, Innovation,
                Third Fraudulent Transfer § 544 Collis, Tamashunas, Lastoria,
                 Grae/ Sickenius, Stewart, Meyers
                 Constructive Fraudulent Transfer Seaport, OTMH, Innovation,
                Fourth § 544(b); UFTA § 5

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