Carickhoff v. Cantor (In re Live Well Fin.)
| Docket Number | 19-11317 (LSS),21-50990 (LSS) |
| Decision Date | 14 June 2023 |
| Parties | In re: LIVE WELL FINANCIAL, INC, Debtor. v. STUART H. CANTOR, JAMES P. KARIDES, BRETT J, ROME, LWFVEST, LLC, NORTH HILL VENTURES II, LP, FIVE ELMS EQUITY FUND I, L.P, FIVE ELMS HAAKON, L.P, FIVE ELMS COINVEST, L.P, JAMES BROWN, GANTCHER FAMILY LIMITED PARTNERSHIP, ERIC LEGOFF, and TITLE WORKS OF VIRGINIA, INC, and JOHN DOES 1-10, Defendants. DAVID W. CARICKHOFF, as Chapter 7 Trustee of LIVE WELL FINANCIAL, INC., Plaintiff, |
| Court | U.S. Bankruptcy Court — District of Delaware |
1
In re: LIVE WELL FINANCIAL, INC, Debtor.
DAVID W. CARICKHOFF, as Chapter 7 Trustee of LIVE WELL FINANCIAL, INC., Plaintiff,
v.
STUART H. CANTOR, JAMES P. KARIDES, BRETT J, ROME, LWFVEST, LLC, NORTH HILL VENTURES II, LP, FIVE ELMS EQUITY FUND I, L.P, FIVE ELMS HAAKON, L.P, FIVE ELMS COINVEST, L.P, JAMES BROWN, GANTCHER FAMILY LIMITED PARTNERSHIP, ERIC LEGOFF, and TITLE WORKS OF VIRGINIA, INC, and JOHN DOES 1-10, Defendants.
Nos. 19-11317 (LSS), 21-50990 (LSS)
United States Bankruptcy Court, D. Delaware
June 14, 2023
OPINION
Laurie Selber Silverstein, United States Bankruptcy Judge
In this adversary proceeding, plaintiff sues thirteen of Live Well's former directors and preferred stockholders seeking damages under a variety of theories. Two motions to dismiss were filed, one group of defendants filed an answer and plaintiff voluntarily dismissed this lawsuit as to another defendant.
I have already ruled on the motion to dismiss filed by Brett Rome, James Karides, LWFVEST, LLC, North Hill Ventures II, L.P., Five Elms Equity Fund I, L.P., Five Elms Haakon L.P, and Five Elms Coinvest, L.P. ("First Opinion"). In this opinion, I am ruling on the motion to dismiss filed by Stuart H. Cantor. For the reasons stated below, the motion to dismiss is denied in part and granted in part, with leave to amend.
Background
The First Opinion contains a lengthy Background section, which will not be repeated, but is incorporated herein. Additional allegations made in the Complaint will be set forth in the Discussion section of this Opinion, as appropriate. A copy of the First Opinion is attached as Exhibit A.
Procedural History
On June 10, 2019, Live Well was forced into bankruptcy with an involuntary chapter 7 petition filed against it by three repo lenders.[1] An Order for Relief was entered on July 1, 2019.
On June 29, 2021, Trustee filed this Complaint against Cantor and others. The Complaint contains fourteen counts against the various Defendants.
Cantor filed a Motion to Dismiss[2] together with a Memorandum in Support[3] seeking to dismiss certain Counts of the Complaint. Trustee filed a Response[4] and Cantor filed a
Reply Brief.[5] By the Motion to Dismiss, Cantor seeks to dismiss the following Counts of the Complaint as to him.
-
Count
Cause of Action
Defendant(s)
2
Breach of Fiduciary Duty
Cantor
3
Unlawful Stock Repurchase 8 Del. C. § 174
Cantor, Rome, Karides
7
Constructive Fraudulent Conveyance (Director Fees) 11 U.S.C. § 544(b) 6 Del. C. §1301 et seq. Va. Code Ann, § 55,1-400 et seq.
Cantor
8
Actual Fraudulent Conveyance (Director Fees) 11 U.S.C. § 544(b) 6 Del. C. §1301 et seq. Va. Code Ann. § 55.1-400 et seq.
Cantor
Jurisdiction
The court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). Venue is proper pursuant to 28 U.S.C. § 1409. The Complaint contains both core and non-core claims.[6] Plaintiff consents to entry of final orders by the court if it is determined that, absent the consent of the parties, the court cannot enter final orders consistent with Article III of the United States Constitution. Cantor does not. In any event, because I will allow Trustee to file a motion for leave to amend, the order entered with respect to this Motion to Dismiss will not be a final order.
Legal Standard
A Rule 12(b)(6) motion to dismiss tests the sufficiency of a plaintiffs factual allegations.[7] Generally, a plaintiffs complaint must comply with the pleading standard set forth in Rule 8(a)(2) which requires "a short and plain statement of the claim showing that the pleader is entitled to relief."[8] Except for Count 8, Rule 8(a)(2) is the appropriate standard to judge the Complaint. Count 8 is a claim grounded in actual fraud and is subject to the heightened pleading standard of Rule 9(b) which requires a plaintiff to "state with particularity the circumstances constituting the fraud."[9] Even so, malice, intent and knowledge may be alleged generally.[10]
In evaluating a complaint under Rule 12(b)(6), the court is required to accept well-pled allegations as true.[11] The court then determines whether the well-pled facts state a plausible claim for relief.[12] Mere conclusory allegations are insufficient to state a plausible claim for relief.[13] The complaint must contain sufficient facts allowing the court to "draw the reasonable inference that the defendant is liable for the misconduct alleged."[14] The
reviewing court draws on both its judicial experience and common sense.[15] The movant bears the burden of demonstrating that a plaintiffs claims are insufficient to survive a Rule 12(b)(6) motion.[16]
Discussion
I. Count 2
Count 2 of the Complaint alleges Defendant violated fiduciary duties owed to Live Well by: (1) encouraging and approving an increase in Live Well's bond portfolio using an investment strategy he knew or should have known was fraudulent; (2) encouraging and approving a fraudulent investment strategy causing Live Well to incur debts it could not repay; (3) routinely elevating Defendant's own interest and the interest of Hild over that of Live Well; (4) approving the September 2016 guarantee fee without the authorization of Live Well's board; (5) approving the Stock Purchase Agreement and Release while either knowing or being willfully blind to the fact that the stock was worthless, the purpose of the transaction was to free Defendant and Hild from any board oversight, the transaction was procured through breaches of all the Directors' fiduciary duties, and the transaction constituted a self-interested transaction; (6) approving $25 million in compensation to Hild; (7) approving approximately $1.4 million in excessive and unjustified compensation to Cantor as a quid pro quo transaction with Hild; and (8) failing to provide any oversight as the only remaining director on Live Well's board.
The business judgment rule
Cantor's overarching contention is that Count 2 should be dismissed because Trustee must "plead around the business judgment rule"[17] and he has not pled sufficient facts to do so, Trustee does not directly address this contention, but argues that it has met all relevant standards.
The business judgment rule is a powerful "presumption that directors act in good faith, on an informed basis, honestly believing that their action is in the best interests of the company."[18] But, a review of Tower Air, the Third Circuit case on which Cantor relies and which binds this court, reveals that the business judgment rule is an affirmative defense which should not be considered at the motion to dismiss stage unless the plaintiff raises the business judgment rule on the face of the complaint.[19] The Complaint does not mention the
business judgment rule, so I will not employ the presumption at this stage of the case. Rather, as dictated by Tower Air, I will employ the notice standard of Rule 8.
1. Claims Related to the Bond Program
The first fiduciary claim alleged against Cantor is a bad faith claim for breach of the duty of loyalty with respect to the fraudulent bond scheme. Cantor moves to dismiss on two grounds. Cantor first contends that Trustee fails to plead facts raising the reasonable inference that he had knowledge of any red flags indicating fraudulent conduct occurring at Live Well. For the same reasons set forth in the First Opinion with respect to Count 1, Trustee has sufficiently pled facts creating the reasonable inference that Cantor had knowledge of red flags indicating fraud at Live Well.
Cantor's second ground for dismissal is 8 Del. C. § 141(e).[20] Section 141(e) is also an affirmative defense. It provides a safe harbor for directors who reasonably rely in good faith on reports and opinions from expert advisers.[21] Again, unless an affirmative defense is raised on the face of the Complaint, it cannot serve as a basis to dismiss a complaint at the initial stage of the case.[22] The Complaint does not allege Cantor, or any of the other
Directors, reasonably relied on reports issued by expert advisors.[23] Moreover, the Complaint paints a different story of the financial reports Cantor claims to have reasonably relied on. Trustee alleges the Directors knew that the management reports made no sense,[24]the information provided to the Directors clearly demonstrated fraudulent conduct was occurring at Live Well,[25] and the Directors both issued and approved fraudulently misstated financial statements.[26] As such, Section 141(e) cannot act as a mechanism to dismiss the bad faith claims in Count 2.
2. Claims Relating to the Stock Purchase Agreement and thereafter
Trustee also alleges Cantor violated the duty of loyalty through approval of the Stock Purchase Agreement, approving the September 2016 guarantee fee to Hild without board approval, approval of gross overcompensation to himself and Hild, and failure to provide oversight after the Stock Purchase Agreement closed.
Cantor moves to dismiss for two reasons. First, Cantor contends that the Complaint fails to identify any disabling interest in relation to the Stock Purchase Agreement. Second, Cantor contends that Trustee has failed to adequately plead that Cantor lacked independence with respect to approval of Hild's compensation.[27]
A duty of loyalty claim is sufficiently pled by alleging facts demonstrating "that a self-interested transaction occurred and that the transaction was unfair to the plaintiffs."[28] A duty of loyalty claim is also sufficiently pled if a plaintiff pleads facts allowing for the reasonable inference that a director acted in bad faith.[29]
The Complaint alleges that the sole purpose of Live Well's repurchase of the Preferred Stock was to get Rome and Karides off Live Well's board so that Hild could have the unfettered right to loot the...
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