Baldiga v. Moog, Inc. (In re Comprehensive Power, Inc.)

• Decision Date: 08 December 2017
• Docket Number: AP No. 16–04023–CJP,Case No. 14–40824–CJP
• Citation: 578 B.R. 14
• Parties: IN RE: COMPREHENSIVE POWER, INC., Debtor Joseph H. Baldiga, as Trustee for the Bankruptcy Estate of Comprehensive Power, Inc., and Becana Capital, Plaintiffs v. Moog, Inc., Sean Gartland, Cormac Creaven, Franklin B. Jones, Francis S. Jones, Stuart A. Jones, and Charles N. Grichar, Defendants
• Court: U.S. Bankruptcy Court — District of Massachusetts

578 B.R. 14

IN RE: COMPREHENSIVE POWER, INC., Debtor

Joseph H. Baldiga, as Trustee for the Bankruptcy Estate of Comprehensive Power, Inc., and Becana Capital, Plaintiffs

v.Moog, Inc., Sean Gartland, Cormac Creaven, Franklin B. Jones, Francis S. Jones, Stuart A. Jones, and Charles N. Grichar, Defendants

Case No. 14–40824–CJP

AP No. 16–04023–CJP

United States Bankruptcy Court, D. Massachusetts, Central Division.

Signed December 8, 2017

Paul E. Chronis, Duane Morris LLP, Chicago, IL, Jeffrey D. Sternklar, Jeffrey D. Sternklar LLC, Boston, MA, for Plaintiffs.

James C. Thoman, Hodgson Russ LLP, Buffalo, NY, Robert L. Ciociola, Litchfield Cavo LLP, Lynnfield, MA, Kevin C. McGee, Worcester, MA, for Defendants.

MEMORANDUM OF DECISION

Christopher J. Panos, United States Bankruptcy Judge

Before the Court is the Motion to Dismiss (the "Motion") filed by Moog, Inc. (the "Defendant" or "Moog"), pursuant to which Moog seeks to dismiss Counts I through XII of a seventeen-count complaint (the "Complaint") brought by Joseph H. Baldiga (the "Trustee"), as Chapter 7 Trustee for the bankruptcy estate of Comprehensive Power, Inc. (the "Debtor"), and Becana Capital ("Becana," together with the Trustee, the "Plaintiffs"). In the Complaint, the Plaintiffs seek, among other things, to: (i) re-characterize as equity "any" of Moog's claims; (ii) equitably subordinate any such claims pursuant to 11 U.S.C. § 510(c)¹ ; (iii) avoid and recover transfers of property and money of the Debtor to Moog pursuant to §§ 544(b), 548, and 550 of the Bankruptcy Code and §§ 5–6 and 8–9 of Massachusetts General Law ("M.G.L.") ch. 109A, the Massachusetts Uniform Fraudulent Transfer Act (the "UFTA"); (iv) impose successor liability for the Debtor's existing debts on Moog on the basis of de facto merger and alter ego theories; (v) recover damages for violation of the commercial reasonableness requirement for a secured party sale under Article 9 of the Uniform Commercial Code ("UCC"); and (vi) recover damages for violation of M.G.L. ch. 93A.² All counts against Moog are brought solely by the Trustee except Count X, which seeks to impose successor liability, with respect to which Becana is a co-plaintiff with the Trustee.

Moog contends that dismissal of Counts I through XII is warranted because the Plaintiffs have failed to plead sufficient facts that state facially plausible claims for relief with respect to each of the counts. Moog argues that it is merely a non-insider creditor that extended a loan to the Debtor after the parties executed financing documents memorializing the transaction, which included a security agreement granting Moog a security interest in substantially all assets of the Debtor. Moog asserts that it later enforced its rights as a secured creditor after the Debtor's default in accordance with the transaction documents and applicable law.

The Plaintiffs assert that the allegations contained in the Complaint, if taken as true, would demonstrate that the transaction was not a "loan," but rather a mechanism by which Moog improperly acquired the Debtor's business for substantially less than fair value at the expense of the Debtor's creditors. According to the Plaintiffs, the Debtor was undercapitalized, if not insolvent, at the time of the loan; the transaction was "atypical" of both a traditional lender-borrower financing transaction and the types of transactions in which Moog was usually involved; and the loan was part of a larger scheme by Moog to acquire the business of the Debtor for significantly less than it was worth.

After a hearing on the Motion and consideration of the written and oral arguments of the parties, including the supplemental briefing regarding equitable subordination submitted at the Court's direction, and for the reasons set forth below, the Court grants the Motion in part, dismissing Count II, and denies the Motion in part as to Counts I and III—XII because the Plaintiffs allege sufficient facts in their Complaint to demonstrate plausible claims for relief with respect to those counts.

I. Facts and Procedural History

The following facts are taken as alleged in the Complaint and from associated exhibits,³ and must be accepted as true and construed in Plaintiffs' favor by the Court in considering the Motion.

The Debtor, a Delaware corporation, at all relevant times had its principal place of business in Marlborough, Massachusetts. Compl. ¶ 18. Among other things, it designed and manufactured high-performance permanent magnet motors, generators, controls, and drives. Id. ¶ 19.

Early in 2013, the Debtor's investment banker identified Moog as a lender to, investor in, or purchaser of the Debtor. Id. ¶ 20. In April 2013, the Debtor obtained funds in the amount of $6 million from Moog, which transaction the parties memorialized in a series of documents dated April 12, 2013, including a promissory note ("Note"), security agreement ("Security Agreement"), and option agreement ("Option Agreement"). Id. ¶ 21, Exs. A–B; Mot. Ex. 1. Pursuant to the Security Agreement, the Debtor granted Moog a security interest in substantially all of the Debtor's personal property and, upon an event of default under the Note, the right to pursue remedies available at law, including those available under the UCC. Mot. Ex. 1, §§ 2, 6(a).

The Plaintiffs state that Moog "drafted and insisted upon using deal documents that superficially mimic, at least in part, documents that ordinarily appear as part of traditional loan transactions" but allege that their terms belied a typical "true" loan and "laid bare the real ‘M & A’ aspects of the deal" providing, among other things, that: (i) under the Note, the Debtor was only required to make quarterly, rather than monthly, interest payments at 4.5% to Moog and (ii) pursuant to the Option Agreement, (a) Moog retained an option to purchase the Debtor's stock or assets for a base cash payment equal to six times EBITA at any time between April 12, 2014 and April 11, 2016 (the "Option Period"); (b) Moog had the ability to appoint a director to the Debtor's Board of Directors ("Board"); and (c) the Debtor could extend the Note's maturity date for six months to October 12, 2016, if Moog declined to exercise its purchase option by October 12, 2015. Compl. ¶¶ 22–26, Ex. B.

Pursuant to the Option Agreement, if the option was exercised, the parties would negotiate the terms of a definitive acquisition agreement in good faith and Moog would not disrupt the Debtor's business before consummation of the transfer. Id. ¶ 23, Ex. B. The Option Agreement also provides that, within 90 days of its execution and delivery, Moog and the Debtor would execute a separate commercial agreement in a form mutually agreeable to the parties, pursuant to which the Debtor would develop and produce Moog-brand products using the Debtor's technology. Id. Ex. B, §§ E, 2.2.

Moog appointed Sean Gartland ("Gartland"), its employee, to serve as a director on the Debtor's Board, and he served in that capacity until September 2013. Id. ¶ 27. As a member of the Board, Gartland received confidential information about the Debtor's financial affairs, and the Plaintiffs allege that Gartland favored Moog's interests above the Debtor's. Id. ¶¶ 28–31. Specifically, the Plaintiffs allege that, after a May 2013 Board meeting, Gartland prepared and shared with Moog, without disclosing to key members of the Debtor's management or other Board members, personal notes containing confidential information relating to the Debtor's financial condition and strategy. Id. ¶¶ 27–29. Gartland's Board meeting notes included, as a follow up item to the May 2013 meeting, "[g]et[ting] a commercial CPI–Moog agreement in place and begin[ning] to extract value for Moog." Id. ¶¶ 27–29, Ex. C.

The Plaintiffs allege in their Complaint that Gartland and Moog engaged in activities to "extract value" from the Debtor for Moog. Specifically, the Plaintiffs allege that Gartland shared the Debtor's confidential information with Moog executives, without the Debtor's knowledge, and used that information to advance Moog's interests. Id. ¶ 30. Further, the Plaintiffs allege that Gartland injected himself into the Debtor's operations, including reviewing equipment designs and going on at least one customer visit, during which the customer was informed that Moog would be stepping in as the Debtor's successor to "continue the business." Id. ¶ 31.

By August and September 2013, the Debtor's financial condition had worsened and management sought additional capital from Moog. Id. ¶ 32. " Despite Moog [having provided] a substantial capital infusion of $6,000,000 in April 2013, the Debtor [had] depleted those funds within a few short months and was faced with an imminent need for further cash." Id. ¶ 49(c). Ultimately, "[t]he Debtor [ ] defaulted on its obligations to Moog less than ten months after the April 2013 transaction."

Id. ¶ 49(d). The Plaintiffs allege that at this time Moog began to take steps beyond simply liquidating the Debtor's assets for the repayment of its loan in order to assume possession and control of the Debtor's assets consistent with its true intention to leverage its lien position to acquire all of the Debtor's ongoing business and its advantageous relationships for less than fair value without paying the Debtor's creditors. Id. ¶¶ 32–47.

On or about "October 11, 2013[,] Moog and the Debtor executed a Collateral Surrender and Consent to Sale Agreement ("Surrender Agreement")." Id. ¶ 33. Through the Surrender Agreement, the Plaintiffs contend that Moog effectively had assumed control over virtually every aspect of the Debtor's business. In authorizing the execution and delivery of the Surrender Agreement, the Plaintiffs also allege that the Debtor's directors abdicated their responsibilities and breached their duties, thereby ensuring "that Moog would consolidate its control over the Debtor." Id. ¶¶ 33, 34, 36.

Among other things, the Surrender Agreement accelerated all amounts due to Moog...