Burtch v. Opus, LLC (In re Opus E., LLC)

• Decision Date: 23 March 2015
• Docket Number: Adv. No. 11–52423 MFW,Case No. 09–12261 MFW Jointly Administered
• Citation: Burtch v. Opus, LLC (In re Opus E., LLC), 528 B.R. 30 (Bankr. Del. 2015)
• Parties: In re: Opus East, LLC et al., Debtor. Jeoffrey L. Burtch, Chapter 7 Trustee for the Estate of Opus East, LLC, Plaintiff, v. Opus, LLC, a Minnesota limited liability company; Opus Corporation, A Minnesota Corporation; Gerald Rauenhorst 1982 Irrevocable Trust f/b/o Grandchildren and the Gerald Rauenhorst 1982 Irrevocable Trust f/b/o Children; Keith P. Bednarowski and Luz Campa, as Trustees thereof ; Opus Real Estate VII, L.P.; Opus Real Estate VIII, L.P. ; Mark Rauenhorst, individually; Keith P. Bednarowski, individually, Luz Campa, individually, Adler Management, LLC; Marshall M. Burton, individually; Opus Property Services, LLC ; Opus 2, LLC; Opus Architects & Engineers, P.C.; Opus Architects & Engineers, Inc.; Opus Core, LLC; Opus Northwest, LLC; Opus Design Build, LLC; Opus Development Corporation; Opus Holding, LLC; Opus Holding, Inc. ; Opus AE Group, Inc., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

528 B.R. 30

In re: Opus East, LLC et al., Debtor.

Jeoffrey L. Burtch, Chapter 7 Trustee for the Estate of Opus East, LLC, Plaintiff

v.Opus, LLC, a Minnesota limited liability company; Opus Corporation, A Minnesota Corporation; Gerald Rauenhorst 1982 Irrevocable Trust f/b/o Grandchildren and the Gerald Rauenhorst 1982 Irrevocable Trust f/b/o Children; Keith P. Bednarowski and Luz Campa, as Trusteesthereof ; Opus Real Estate VII, L.P.; Opus Real Estate VIII, L.P. ; Mark Rauenhorst, individually; Keith P. Bednarowski, individually, Luz Campa, individually, Adler Management, LLC; Marshall M. Burton, individually; Opus Property Services, LLC ; Opus 2, LLC; Opus Architects & Engineers, P.C.; Opus Architects & Engineers, Inc.; Opus Core, LLC; Opus Northwest, LLC; Opus Design Build, LLC; Opus Development Corporation; Opus Holding, LLC; Opus Holding, Inc. ; Opus AE Group, Inc., Defendants.

Case No. 09–12261 MFW Jointly Administered

Adv. No. 11–52423 MFW

United States Bankruptcy Court, D. Delaware.

Signed March 23, 2015

Wesley J. Bailey, Patrick J. Coffin, Vickie L. Driver, Coffin & Driver, PLLC, M. Ross Cunningham, Michael R. Cunningham, Christopher M. McDowell, Martin E. Rose, Steve Sanfelippo, Rose Walker L.L.P., Dallas, TX, Dale R. Dube, Robert W. Pedigo, Cooch and Taylor, P.A., Wilmington, DE, for Plaintiff.

William Pierce Bowden, Amanda Winfree Herrmann, Leigh–Anne M. Raport, Ashby & Geddes, P.A. Wilmington, DE, Theresa H. Dycoschak, Peter J. Goss, Lariss Jude, Jane E. Maschka, Woodrow T. Roberts, Dennis M. Ryan, Zachary L. Stephenson, Wahl, Faegre & Benson LLP, Minneapolis, MN, for Defendants.

OPINION¹

Mary F. Walrath, United States Bankruptcy Judge

I.PROCEDURAL BACKGROUND ...48

II.JURISDICTION ...48

III.FACTUAL BACKGROUND ...48

IV.DISCUSSION ...50

A.Insolvency ...50

1.Balance Sheet Test ...51

2.Inadequate Capital and Cash Flow Tests ...53

B.Piercing the Corporate Veil ...57

1.Undercapitalization and Insolvency ...59

2.Facade for Shareholder ...60

3.Observance of Corporate Formalities ...62

4.Siphoning of Funds by Shareholder ...63

5.Element of Injustice or Unfairness ...64

C.Breach of Fiduciary Duty ...66

1.Standard of Fiduciary Duty ...66

2.Specific Breaches ...68

a. Transfer of ME to GAMD ...68

b. Management Co Property Transfers ...72

i. Contracts ...72ii. April Management Fees ...––––

iii.Funds Transferred to Northwest Management ...74

c. Transfers Related to ODP Entities ...74

i. Creation of ODP Entities ...75

ii.Fees Owed by ODP Entities ...76

d. $5 Million Transfer ...76

e. Tax Scheme ...78

D.Aiding and Abetting Breach of Fiduciary Duty ...80

E.Successor Liability ...80

F.Avoidance of Fraudulent Transfers ...82

1.Standards for Avoidance ...82

2.Specific Transfers ...83

a. Distributions to LLC and Trusts ...83

b. Transfers to Corp for Shared Services ...84

c. Transfers Related to ODP Entities ...85

d. Transfers to Core ...86

e. Transfers to Northwest ...87

f. Transfers to A&E and A&E PC ...88

g. Transfer of Management Co Property ...88

h. Transfer to TFC ...89

G.Avoidance of Preferential Transfers ...90

1.Insider Preferences ...90

a. Insider Preference Period ...93

b. Proof of Insider Preferences Beyond 90 Days ...94

2.Defenses to Remaining Preferences ...95

a. New Value ...95

i. Corp ...95

ii.A&E ...95

iii.A&E PC ...95

b. Ordinary Course of Business Defense ...95

i. Corp ...97

ii.A&E ...98

iii.A&E PC ...99

c. No Defenses Offered ...100

i. Core ...100

ii.Northwest ...101

H.Unjust Enrichment ...101

1.Standard of Review ...101

2.Specific Transfers ...102

a. Northwest Management Transfers ...102

b. $5 Million Transfer ...102

c. Tax Scheme ...102

d. GAMD, Management Co, and ODP Transfers ...104

I.Disallowance of Claims ...104

J.Equitable Subordination of Claims ...105

K.Revocation of Core's Certification of Dissolution ...105

L.Constructive Trust ...106

M. Tortious Interference with Contract ...107

N. Conversion/Conspiracy to Commit Conversion ...107

O. Pre-judgment Interest ...108

V.CONCLUSION ...109

Ex. A–1 Corp Historical Period

Ex. A–2 Corp Preference Period

Ex. B–1 A&E Historical Period

Ex. B–2 A&E Preference Period

Ex. B–3 A&E New Value Analysis (on or after 4/2/09)

Ex. B–4 A&E New Value Analysis (2/1/09–4/1/09)

Ex. C–1 A&E PC Historical Period

Ex. C–2 A&E PC Preference Period

Ex. C–3 A&E PC New Value Analysis

Before the Court is the Third Amended Complaint filed by Jeoffrey L. Burtch(the “Trustee”), the chapter 7trustee of Opus East LLC(the “Debtor”), which seeks recovery against former fiduciaries of the Debtor and related business entities on theories of piercing the corporate veil, breach of fiduciary duty and aiding and abetting such a breach, successor liability, avoiding fraudulent and preferential transfers, unjust enrichment, disallowance and equitable subordination of claims, revocation of a certificate of dissolution, imposition of a constructive trust, tortious interference with contract, and conversion and conspiracy to commit conversion.²After a trial on the merits and for the reasons set forth below, the Court concludes that the Trustee is entitled to partial judgment (and pre-judgment interest): against Opus Core, LLC, on Counts 31, 32, and 33 for preferences and fraudulent transfers, and on Count 47 for revocation of its certificate of dissolution; against Opus Northwest, LLC, on Counts 35 and 36 for fraudulent transfers; and against Opus Core, LLC, and Opus Northwest, LLC, on Count 39 for disallowance of their claims.Judgment on the remaining counts will be entered in favor of the Defendants.

I.PROCEDURAL BACKGROUND

On July 1, 2009(the “Petition Date”), the Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code.(JPTO at§ IV, ¶ 1.)³The Trustee was appointed the chapter 7trustee of the Debtor's estate shortly thereafter.As of February, 2014, the estate had approximately $5.9 million in a bank account and no other assets except this lawsuit.(Tr.2/4/14at 174–75.)There are $138 million to $500 million in creditor claims against the estate.(Tr.2/4/14at 176–77;Ex. P–1360.)The matter is ripe for decision.

On June 30, 2011, the Trustee filed a complaint against the above-named Defendants.After the Third Amended Complaint was filed on August 7, 2013, the Defendants' answer was filed on August 30, 2013.(Adv. D.I. 160 & 183.)Trial was held over ten days, commencing on December 16, 2013, and concluding on February 7, 2014.Post-trial briefing, which included proposed findings of fact and conclusions of law, was completed on May 24, 2014.The matter is ripe for decision.

II.JURISDICTION

The Court has core and related to jurisdiction over the counts in this adversary proceeding.28 U.S.C. §§ 1334(b) & 157(a) & (b).The parties have consented to the entry of a final judgment by this Court on all counts.(JPTO at § III.)

III.FACTUAL BACKGROUND

The Debtor is a Delaware limited liability company which was formed on September 14, 1994, to develop and sell commercial real estate projects in the Northeastern and Mid–Atlantic United States.(JPTO at§ IV, ¶¶ 19 & 25.)It was a merchant builder that developed, built, and sold projects as soon as possible rather than holding and renting them.(Tr.12/17/13at 228–29;Tr.2/4/14at 235;Tr.2/7/14at 90–91.)

The Debtor was part of a large network of real estate companies (sometimes referred to as the Opus Group) which grew from a construction company originally founded by Gerald Rauenhorst in 1953.(Tr.12/17/13at 96;Tr.12/16/13at 21–26.)In 1982, Gerald Rauenhorst created two trusts (the “Trusts”) for the benefit of his children and grandchildren.(JPTO at§ IV, ¶¶ 7 & 8;Tr.12/16/13at 21–22;Tr.2/4/14at 8.)The Trusts owned and controlled two holding companies: Opus Corp.(“Corp”) and Opus LLC(“LLC”).(JPTO at§ IV, ¶ 13;Tr.12/16/13at 25–26;Exs. P–169 & P–173.)The holding companies in turn owned five subsidiaries that operated in different geographical areas.(JPTO at§ IV, ¶ 22;Tr.12/16/13at 26–27;Exs. P–169 & P–173.)Separate holding companies and operating entities were established in order to limit liability at the parent level, particularly in the case of a catastrophic loss, and to be able to attract the best CEOs by allowing them to run their own operations.(Tr.12/19/13at 85–86.)The Debtor was an operating subsidiary of LLC.(JPTO at§ IV, ¶ 22.)For each real estate project it developed, the Debtor created a special purpose entity (“SPE”).(Tr.12/17/13at 4;Tr.12/16/13at 22–23, 28.)

The Trusts owned other subsidiaries, including OUS TFC, LLC(“TFC”) and Opus Financial, LLC(“Financial”).(Tr.12/16/13at 25–26;JPTO at§ IV, ¶¶ 27–29.)TFC had a revolving line of credit with U.S. Bank, which was guaranteed by Corp and LLC.(Exs. P–156 & P–1207;Tr.2/6/14at 171, 225.)The credit line was used by TFC to loan money to Corp, LLC, and their five operating subsidiaries.(Ex. P–1207;Tr.2/4/14at 157;Tr.2/6/14at 24.)The Debtor also had a $20 million unsecured line of credit with Bank of America (“BOA”).(JPTO at§ IV, ¶ 51;Tr.12/20/13at 109–10;Tr.2/3/14at 81;Tr.2/4/14at 245–46;Ex. D–2093.)The Debtor and its SPEs also obtained construction financing from outside banks to finance their real estate development projects.(Exs. D–2255 & D–2093;Tr.12/20/13at 109–11;Tr.2/7/14at 83–84.)

The Trusts also owned Opus Core which was a pass-through payroll-services entity which paid the salaries of the senior executives at Corp and the operating companies owned by Corp and LLC.(JPTO at§ IV, ¶ 29.)It was used to keep the compensation of those executives confidential.(Tr.2/5/14at 192.)

Corp owned Opus Architects & Engineers, Inc.(“A & E”) which provided architectural and engineering services to the Debtor and its SPEs.(Tr.2/6/14at 195–196;Ex. D–2169.)A & E would subcontract with Opus Architects & Engineers, P.C.(“A&E PC”) in those states where the architectural firm of record for a project must be owned by a licensed architect as opposed to a corporation.(Tr.2/6/14at 199–200.)A&E PC is owned by individual...