Antioch Litig. Trust v. Llp

• Decision Date: 27 August 2010
• Docket Number: Case No. 3:09-cv-218
• Citation: 738 F.Supp.2d 758
• Court: U.S. District Court — Southern District of Ohio
• Parties: ANTIOCH LITIGATION TRUST, W. Timothy Miller. Trustee, Plaintiff, v. McDERMOTT WILL & EMERY LLP, Defendant.

738 F.Supp.2d 758

ANTIOCH LITIGATION TRUST, W. Timothy Miller. Trustee, Plaintiff,

v.McDERMOTT WILL & EMERY LLP, Defendant.

Case No. 3:09-cv-218.

United States District Court,

S.D. Ohio,

Western Division.

Aug. 27, 2010.

Marcia Voorhis Andrew, Aaron Mark Herzig, Christina Leigh Fischer, Taft, Stettinius & Hollister LLP, Cincinnati, OH, for Plaintiff.

Charles Joseph Faruki, Jeffrey S. Sharkey, Faruki Ireland & Cox PLL, Dayton, OH, for Defendant.

ORDER THAT DEFENDANT'S MOTION TO DISMISS (Doc. 16) BE DENIED

TIMOTHY S. BLACK, District Judge.

This civil action is currently before the Court on Defendant's motion to dismiss (Doc. 16) and the parties' responsive memoranda (Docs. 18, 19).

Defendant McDermott Will & Emery LLP ("MWE") asserts three grounds for dismissal pursuant to Federal Rules of Civil Procedure 8(a) and 12(b)(6): (1) the Trust's claims are time-barred to the extent they arise out of MWE's representation of Antioch with respect to the Antioch ESOP and related ERISA and tax matters; (2) the transfer of the Debtor's professional negligence claims to the Trust as part of the confirmed plan of reorganization is invalid under Ohio law; and (3) the complaint fails to allege plausible malpractice claims with sufficient particularity, or to state a claim upon which relief can be granted.

I. FACTS ALLEGED BY THE TRUST

For purposes of this motion to dismiss, the Court must: (1) view the complaint in the light most favorable to the Trust and (2) take all well-pleaded factual allegations as true. Tackett v. M & G Polymers, 561 F.3d 478, 488 (6th Cir.2009); Gunasekera v. Irwin, 551 F.3d 461, 466 (6th Cir.2009). And the Plaintiff alleges as follows:

MWE served as company legal counsel for The Antioch Company from May 2003 until June 5.2008. (Doc. 14 at ¶¶ 4, 17-18). One of the purposes for which Antioch retained MWE was to provide legal expertise and advice in connection with ERISA and tax issues related to the Antioch employee stock ownership plan ("ESOP"). Marsha Matthews, a partner at MWE, helped plan and consummate a transaction that resulted in the Antioch ESOP owning 100% of Antioch's shares ("Tender Offer"). ( Id. at ¶¶ 16-17). MWE worked with Antioch and its financial advisors to structure the Tender Offer by which the company offered to purchase all of the Antioch shares held by shareholders (other than the ESOP) for cash or a combination of cash, promissory notes, and warrants. ( Id. at ¶¶ 21, 25). The Tender Offer allowed CEO Lee Morgan and his daughter Asha Morgan Moran (both directors of Antioch) to liquidate their substantial personal holdings of Antioch stock and diversifytheir assets while reaping tax savings and still maintaining control of the company. ( Id.) MWE's advice was directed to ensuring the best way to structure the transaction in order for the Morgans to maintain control and to minimize any effective powers of the ESOP Trustee. ( Id. at ¶ 19).

The Antioch board of directors was led by Lee and Asha Morgan, who, individually, and through Morgan family trusts, owned 46.5% of all Antioch shares, and, therefore, stood to gain the most from the proposed transaction. Four of the remaining seven board members also owned substantial blocks of Antioch stock and consequently benefitted from the transaction. The entire board was subject to a conflict of interest. ( Id. at ¶ 23).

Antioch retained financial advisor Houlihan Lokey to provide an opinion that the transaction was fair to the selling shareholders. Antioch never sought nor obtained an independent opinion as to whether the transaction was fair to the company as purchaser. nor did Antioch obtain an independent opinion regarding whether the underlying business decision to effect the transaction was prudent, and MWE never advised anyone to do so. ( Id. at ¶ 28).

Plaintiff alleges that MWE knew or reasonably should have known that the Tender Offer, as a "prohibited transaction" under ERISA Sections 406 and 408, would result in violations of ERISA and tax law by both the individual directors and Antioch that were likely to result in substantial injury to the corporation and its constituents, including disqualification of the ESOP, loss of 100% S-corporation status, and loss of tax-exempt status, resulting in significant tax liability. ( Id. at ¶ 32). Plaintiff further alleges that MWE knew that the Morgans and a majority of the Board were subject to conflicts of interests with regard to the Tender Offer, but failed to advise the Board that the transaction would be voidable unless it could be shown to be fair to the corporation. ( Id. at ¶ 33).

The Tender Offer, among other things, burdened Antioch with a massive increase in debt, from less than $11 million as of December 31, 2002 to more than $200 million as of December 31, 2003. ( Id. at ¶ 44). Subsequently, a predictable surge in employee resignations aggravated the company's repurchase obligations, which were dictated by the ESOP and ERISA law, and drove the company deeper into debt. ( Id. at ¶ 46).

Antioch attempted to satisfy its repurchase obligations by providing departing employees promissory notes ("ESOP Notes") guaranteed by insurance bonds issued by Condor Guaranty, Inc., an unrated offshore company. These bonds failed to provide adequate security for the company's repurchase obligations, as required by ERISA. MWE provided legal advice to Antioch regarding these efforts. ( Id. at ¶ 53).

By early 2007, Antioch was in severe financial distress. As Antioch's financial problems mounted, rooted in the burdensome debt created by the Tender Offer. MWE failed to reevaluate the prudence of the Tender Offer, or advise the Antioch Board of potential claims against its financial advisors and conflicted directors prior to December 2007, when negligence claims and fiduciary claims against these entities could be found to have run. ( Id. at ¶¶ 47-51). MWE's inaction may have precluded the company from recovering damages from these entities.

Antioch hired Houlihan Lokey to help it find a purchaser for the company, and it looked to MWE to provide legal advice and representation in connection with its efforts to either sell substantially all of the company's assets or refinance the company's debt. ( Id. ¶ at 54). The alternativesavailable to Antioch were complicated by the 100% ESOP S-corp structure established by the 2003 transaction, as well as by the ESOP Notes. Subordinated Notes, and Warrants, that partially funded that transaction. MWE continued to advise Antioch on complications related to the Tender Offer right up until Antioch terminated MWE on June 5, 2008. ( Id. at ¶ 55).

The Morgans, however, did not favor a sale to an independent outside buyer because they did not want to lose control of the company. The Morgans separately hired their own financial advisor, Candlewood Partners, to explore refinancing options that might allow the Morgans to maintain their control of Antioch. ( Id. at ¶ 56). MWE advised the Morgans with respect to their retention of Candlewood. ( Id. at ¶ 57). The Antioch Board, lacking objective guidance from MWE, remained ambivalent and undecided about a clear direction for Antioch's future, continuing to allow the Morgans to pursue recapitalization alternatives while re-engaging Houlihan to explore a sale of Antioch. ( Id. at ¶ 58).

Jim Shein of MWE participated in a meeting in Chicago in February 2008 with the Morgans, Antioch Board members, and financial advisors. The participants at the meeting agreed to permit the Morgans to work toward a consensual transaction that would leave the Morgans in control, over any transaction where independent buyers or investors would acquire a controlling interest in the company. The Morgans pursued deal structures that would have given themselves, as Subordinated Noteholders, preferential treatment over other unsecured creditors such as the holders of the ESOP Notes. ( Id. at ¶ 59).

The preference given by Antioch to a deal designed by and for the Morgans had the effect of discouraging potential purchasers who were interested in acquiring control of Antioch. Potential purchasers knew that two directors, including the CEO and COO. who effectively controlled the ESOP and also were the largest unsecured creditors of Antioch. disfavored the sale to such an extent that they were pursuing, with the Board's blessing, alternative transactions so as to maintain their own control of the business. ( Id. at ¶ 60). The Antioch Board, advised by MWE, continued to allow the Morgans' efforts to interfere with the Board's/Houlihan's efforts. ( Id. at ¶ 61).

In early June 2008. the company was in the late stages of an auction process run by Houlihan, working to close on a sale of the company's assets to J.H. Whitney pursuant to a signed Letter of Intent, to be achieved through a bankruptcy sale. MWE was actively involved in the process, exchanging drafts of an Asset Purchase Agreement with counsel for J.H. Whitney, preparing bankruptcy petitions and first day motions, and otherwise advising the company in connection with the sale and ongoing matters. ( Id. at ¶ 63).

On June 4, 2008, the ESOP Trustee exercised its right to replace Antioch's Board of Directors in order to bring the Whitney sales process to a halt and allow more time for the Morgans to accomplish their own deal. ( Id. at ¶ 65). The Board was dismissed and replaced with Lee Morgan, Asha Morgan Moran, and an acquaintance of the Trustee, Robert Morris. ( Id.) At a meeting the next day, on June 5, 2008, the newly constituted Board fired MWE. ( Id. at ¶ 66).

No sale or refinancing was achieved. Antioch filed for bankruptcy protection on November 13, 2008. ( Id. at ¶¶ 1, 68).

II. STANDARD OF REVIEW

A motion to dismiss pursuant to Rule 12(b)(6) operates to test the sufficiency of the complaint. Rule 12(b)(6) permits dismissal of a complaint for "failure to state aclaim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). The complaint must contain a "short and plain statement of the claim...