Buchwald Capital Advisors LLC v. Schoen (In re OPP Liquidating Co.)
| Decision Date | 14 March 2022 |
| Docket Number | 19-10729 (MFW),Adv. Proc. 21-50431 (MFW) |
| Court | U.S. Bankruptcy Court — District of Delaware |
| Parties | In re: OPP LIQUIDATING COMPANY, INC (f/k/a Orchids Paper Product Company), et al., Debtors. v. JEFFREY S. SCHOEN, et al., Defendants. BUCHWALD CAPITAL ADVISORS LLC, As Liquidating Trustee of the Orchids Paper Products Liquidating Trust, Plaintiffs, |
Rel Docs. 17, 18, 19, 21, 26, 27, 29 & 30
Before the Court are two motions to dismiss ("the Motions to Dismiss") claims for breach of fiduciary duties, aiding and abetting breach of fiduciary duties, and avoidance of fraudulent transfers under federal and state law. For the reasons stated below, the Motions to Dismiss will be granted in part and denied in part.
OPP Liquidating Company, Inc. (the "Debtor") was formed in 1998. The Debtor was a public company that operated as a low-cost, value manufacturer of tissue products serving "extreme value" retail establishments such as Dollar General and Family Dollar.[2] After expansion efforts failed and its financial condition deteriorated, the Debtor and its affiliates, filed for relief under chapter 11 of the Bankruptcy Code on April 1, 2019 (the "Petition Date"). On February 24, 2020, the Court confirmed the Debtors' Combined Disclosure Statement and Chapter 11 Plan (the "Plan").[3] Under the Plan, a creditors' Trust was established, to which was assigned various causes of action belonging to the estate, and Buchwald Capital Advisors LLC, was named as Liquidating Trustee (the "Liquidating Trustee").
On May 4, 2021, the Liquidating Trustee commenced an adversary proceeding against the Debtor's former Chief Financial Officers - Keith Schroeder, Rodney D. Gloss, and Mindy Bartel (collectively, the "Former CFO Defendants"), the Debtor's former Chief Executive Officer, Jeffrey S. Schoen ("Schoen"), [4] and members of the Debtor's Board of Directors ("BOD") - Steven R. Berlin, John C. Guttilla, Douglas E. Hailey, Elaine MacDonald, and Mark Ravich (the "BOD Defendants").
On August 13, 2021, the CEO and BOD Defendants and, separately, the Former CFO Defendants filed the Motions to Dismiss the Liquidating Trustee's First Amended Complaint (the "Amended Complaint") in its entirety for failure to state a claim under Rule 12(b)(6).[5] On September 24, 2021, the Liquidating Trustee filed responses to the Motions to Dismiss.[6] The Defendants filed replies on October 15, 2021.[7] The Motions are ripe for decision.
The Liquidating Trustee's Amended Complaint asserts claims for breach of fiduciary duties against Schoen and the former CFO Defendants (Count I), breach of fiduciary duties against the BOD Defendants (Count II), aiding and abetting the breach of fiduciary duties against the BOD Defendants (Count III), and avoidance of fraudulent transfers under federal and state law against all Defendants (Count IV). Those claims are premised on pre-petition activities related to the Debtor's expansion plans on the East and West Coasts, the Debtor's internal operations, and the Debtor's payment of compensation, stipends, and other benefits to the Defendants.
In essence, the Amended Complaint contends that Schoen pushed the BOD to approve a simultaneous, ill-advised, and poorly implemented expansion on the East and West Coasts. It alleges that the BOD Defendants did not adequately inform themselves of the advisability of those plans and allowed Schoen free rein instead of fulfilling their fiduciary role. As a result, the Debtor exceeded the expansion budget by more than $50 million, was unable to operate any of its three plants efficiently, incurred significant operational losses, violated the covenants of its loans, and ultimately was forced to file bankruptcy. In addition, the Debtor experienced substantial turnover of its CFO, who failed to maintain accurate records or to restate financial statements when it became apparent they were inaccurate. Notwithstanding those problems and the breach of their fiduciary duties by the Defendants, the Amended Complaint alleges that the Debtor continued to make substantial payments to the Defendants, for which it did not receive equivalent value.
The Court has subject matter jurisdiction over this adversary proceeding.[8] This action involves both core and non- core claims.[9] The fraudulent transfer claims are core claims, as they rely on sections 544 and 548 of the Bankruptcy Code.[10] The fiduciary duty claims are non-core "related to" claims, as they are claims arising under state law, not arising "in" or "under" the Bankruptcy Code. The Defendants have consented to entry of a final order or judgment by the Court on the Motions to Dismiss.[11]
Rule 12(b)(6) provides for dismissal for "failure to state a claim upon which relief can be granted."[13] Rule 12(b)(6) is related to Rule 8(a)(2), which requires that a pleading contain “a short and plain statement of the claim showing that the pleader is entitled to relief.”[14] When a complaint is challenged by a motion to dismiss under Rule 12(b)(6), the complaint "does not need detailed factual allegations, [but] a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do."[15] Two "working principles" underlie this pleading standard:
First, the tenet that a court must accept a complaint's allegations as true is inapplicable to threadbare recitals of a cause of action's elements, supported by mere conclusory statements. Second, determining whether a complaint states a plausible claim is context-specific, requiring the reviewing court to draw on its experience and common sense.[16]
Under this standard, a complaint must nudge claims "across the line from conceivable to plausible."[17] The movant carries the burden of showing that dismissal is appropriate.[18]
Interpreting this pleading standard, the Third Circuit instructs courts to follow a three-part analysis. "First, the court must 'tak[e] note of the elements a plaintiff must plead to state a claim.'"[19] Second, the court must separate the factual and legal elements of the claim, accepting all of the complaint's well-pleaded facts as true and disregarding any legal conclusions.[20] Third, the court must determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a plausible claim for relief.[21] After conducting this analysis, the court may conclude that a claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the alleged misconduct.[22]
In addition, there is a heightened pleading standard for allegations of fraud, including actions to avoid fraudulent transfers.[23] Rule 9(b) provides:
In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.[24]
Rule 9(b) requires that plaintiffs plead the "who, what, where, when, how, and why" of a fraudulent transfer claim.[25] The Third Circuit has stated that the purpose of Rule 9(b) is 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."[26]
Rule 9's "requirements . . . are relaxed in the bankruptcy context, particularly in cases . . . in which a trustee has been appointed" because generally the trustee is an outsider without access to the facts necessary to articulate the details of a fraud.[27]
The Defendants seek to dismiss Counts I and II of the Amended Complaint which allege that the Defendants breached their fiduciary duties of care and loyalty. The Defendants argue that the Liquidating Trustee fails to state a claim for breach of fiduciary duty against them for multiple reasons.
The Defendants initially contend that the fiduciary duty claims asserted in the Amended Complaint are barred by the applicable statute of limitations. Under Delaware law, claims for breach of fiduciary duty are subject to a three-year statute of limitations.[28] The Defendants assert that the Liquidating Trustee's claims are premised on events that occurred before April 1, 2016, which is more than three years before the Amended Complaint was filed. Even if the statute of limitations were tolled by the filing of the bankruptcy case under section 108, the Defendants contend that the claims are barred because the events in question were more than three years before the Petition Date.[29]
The Liquidating Trustee contends, however, that the statute of limitations has been tolled under Delaware law, which provides three bases for tolling: (1) inherently unknowable injuries, (2) equitable tolling, and (3) fraudulent concealment.[30] Because the Amended Complaint on its face asserts claims outside the statute of limitations, the Liquidating Trustee bears the burden of pleading facts to support the tolling exception.[31] The Liquidating Trustee relies principally on the third basis, asserting that the Defendants fraudulently concealed the relevant facts.[32]
The Liquidating Trustee argues that fraudulent concealment is properly alleged in the Amended Complaint as to Schoen. Specifically, the Amended Complaint alleges that, between 2014 and 2017, Schoen had a fiduciary duty to disclose information regarding the full...
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