Comm. of Unsecured Creditors of Allied Sys. Holding v. Yucaipa Am. Alliance Fund I, L.P. (In re Allied Sys. Holdings, Inc.)
| Decision Date | 28 January 2015 |
| Docket Number | Adv. Proc. No.: 13–50530 (CSS),Case No. 12–11564 (CSS) (Jointly Administered) |
| Citation | 524 B.R. 598 |
| Parties | In re: Allied Systems Holdings, Inc. Debtor. The Official Committee of Unsecured Creditors of Allied Systems Holding, Inc. and Its Affiliated Debtors, Plaintiffs, Black Diamond Opportunity Fund II, LP, Black Diamond CLO 2005-1 Ltd., and Spectrum Investment Partners, L.P., Intervenors, v. Yucaipa American Alliance Fund I, L.P., Yucaipa American Alliance (Parallel Fund Yucaipa American Alliance Fund, II, L.P., and Yucaipa American Alliance (Parallel) Fund II, L.P., Mark J. Gendregske, Jos Opdeweegh, James Frank, Derex Walker, Jeff Pelletier, Ira Tochner, and Joseph Tomczak. Defendants. |
| Court | U.S. Bankruptcy Court — District of Delaware |
OPINION TEXT STARTS HERE
Sullivan Hazeltine, Allinson LLP, William A. Hazeltine, 901 North Market Street, Suite 1300, Wilmington, DE 19801, and Sidley Austin LLP, Michael G. Burke, Brian J. Lohan, Dennis Kao, 787 Seventh Avenue, New York, NY 10019, Counsel for the Official Committee of Unsecured Creditors
Landis Rath & Cobb LLP, Adam G. Landis, Kerri K. Mumford, 919 Market Street, Suite 1800, Wilmington, DE 19801, and Schulte Roth & Zabel LLP, Adam C. Harris, Robert J. Ward, 919 Third Avenue, New York, NY 10022, Counsel to the Intervenors
Morris, Nichols, Arsht & Tunnell LLP, Derek C. Abbott, William M. Alleman, Jr., 1201 North Market Street, Wilmington, DE 19801 and Arnold & Porter LLP, Justin Antonipillai, Ian S. Hoffman, 555 Twelfth Street, NW, Washington, D.C. 20004-1206, Counsel for Defendant Mark Gendregske
Before the Court are several motions that raise two issues:
1. Are plaintiff's claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty against Mark Gendregske, the Debtor's Chief Executive Officer and a member of its board of directors, core proceedings under 28 U.S.C. § 157(b)?
2. Should the Court strike Mr. Gendregske's jury demand?
For the reasons set forth below, the Court concludes that plaintiff's claims asserted against Mr. Gendregske in the Amended Complaint are non-core proceedings because they are not on the list of core proceedings in 28 U.S.C. § 157(b), and the claims do not invoke a substantive right provided by title 11, nor do the claims arise only in the context of a bankruptcy case. In addition, the Court will deny plaintiff's motion to strike Mr. Gendregske's jury demand because the relief sought against Mr. Gendregske in the Amended Complaint is for compensatory monetary damages and is legal in nature, rather than equitable.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409.
On May 17, 2012, involuntary petitions were filed in this Court by BDCM Opportunity Fund II, LP, Black Diamond CLO 2005–1 Ltd., and Spectrum Investment Partners LP (collectively, the “Petitioning Creditors”) against Allied Systems Holdings, Inc. (“Allied”) and its subsidiary Allied Systems, Ltd. (L.P.) (“Systems”) under Chapter 11 of the Bankruptcy Code. On June 10, 2012, the remaining debtors (together with Allied and Systems, the “Debtors”) filed voluntary petitions in this Court and, in connection therewith, Allied and Systems consented to the involuntary petitions filed against them. The Debtors' cases are being jointly administered.
The Office of the United States Trustee has appointed an official committee of unsecured creditors (the “Committee”). On February 1, 2013, the Committee, on behalf of the Debtors, commenced an adversary proceeding by filing a complaint against Mr. Gendregske, among others. On March 21, 2013, the Court entered an order granting the Committee standing to prosecute the claims in this Adversary Proceeding.1 The claims against Mr. Gendregske are for breach of fiduciary duty and aiding and abetting breach of fiduciary duty.
Mr. Gendregske is the chief executive officer and a director of Allied. In May 2007, Allied emerged from its first bankruptcy filed in the Northern District of Georgia and, as a result of certain terms in the plan of reorganization, Yucaipa 3 appointed Mr. Gendregske as CEO of Allied and as a member of its board of directors. In addition, Yucaipa converted its debt under certain unsecured notes for a supermajority of Allied's equity.
To finance its emergence, Allied obtained two credit facilities: (i) a $265 million senior secured first priority credit facility (the “First Lien Credit Facility”) as evidenced by the First Lien Credit Agreement,4 and (ii) a $50 million second lien credit facility (the “Second Lien Credit Facility”).5 Shortly after emergence, Allied'sbusiness began faltering. By March 2008, Allied's board was advised that it would likely default under its financial covenants, and its auditors would issue a going concern opinion causing further defaults under the First Lien Credit Facility.
To address these concerns, Yucaipa advised the board it would be willing to acquire certain of the debt outstanding under the First Lien Credit Facility and the Second Lien Credit Facility and to contribute that debt to Allied's capital. However, under the terms of both the First Lien Credit Agreement and the Second Lien Credit Agreement, Yucaipa as the “Sponsor” was prohibited from acquiring any of the debt or becoming a “Lender” as defined in the Agreements. Yucaipa negotiated certain amendments to the First Lien Credit Agreement and the Second Lien Credit Agreement to permit it to acquire the debt.
The Third Amendment, while allowing Yucaipa to purchase loans, imposed restrictions on Yucaipa. These restrictions included, among other things: (i) a cap on the amount of debt Yucaipa could acquire; (ii) a requirement that 50% of any Term Loans acquired be contributed to Allied's capital; and (iii) an absolute prohibition of Yucaipa voting that debt in respect of any matter submitted to the First Lien Lenders for a vote. Allegedly, Yucaipa never acquired any debt under the terms of the Third Amendment.
Instead, Yucaipa planned to purchase more than 50% of the debt under the First Lien Credit Facility and take control of the First Lien Credit Facility as the “Requisite Lender.” 6 Yucaipa launched a tender offer to purchase the debt from the First Lien Lenders conditioned on any selling First Lender executing a form of Fourth Amendment that would remove all of the restrictions under the Third Amendment. The tender offer failed, and ComVest Investment Partners III, L.P. (“ComVest”) acquired enough of the debt under the First Lien Credit Facility to become the Requisite Lender.
ComVest, as the Requisite Lender, insisted Yucaipa and Allied pursue a restructuring or sale of Allied. Yucaipa and the Allied board, including Mr. Gendregske, refused. Yucaipa, with the knowledge and approval of the Allied board, pursued ComVest to purchase its debt. Yucaipa caused the Allied board to default on an interest payment due to the First Lien Lenders, even though Allied had sufficient liquidity to make the interest payment, to increase leverage and prompt ComVest into a sale.
Yucaipa entered into an agreement with ComVest to acquire all of ComVest's obligations. Yucaipa caused Allied to enter into a purported Fourth Amendment with ComVest to remove all of the restrictions imposed on Yucaipa's acquisition, ownership, and voting of obligations under the First Lien Credit Agreement as amended through the Third Amendment. This purported Fourth Amendment arguably made Yucaipa eligible to be the Requisite Lender under the First Lien Credit Agreement. The Purported Fourth Amendment benefitted only Yucaipa, not Allied. No First Lien Lenders, other than ComVest, consentedto the Purported Fourth Amendment or were asked to consent.
Mr. Gendregske, as CEO and an independent director, approved Allied's execution of the purported Fourth Amendment. Yucaipa impermissibly asserted that it was the Requisite Lender and prevented the administrative agent from taking any action on behalf of the First Lien Lenders to accelerate the obligations or exercise remedies. Allied continued to default under the terms of the First Lien Credit Agreement for more than three years, including failing to pay millions of dollars of principal and interest to Allied's other First Lien Lenders.
The Committee alleges that Mr. Gendregske acted at the behest of an in concert with Yucaipa in furtherance of its scheme to take control over the financial structure of the Debtors. He failed to take rudimentary steps necessary to protect Allied's interests as CEO and a member of the board of directors. The Special Committee of independent directors, including Mr. Gendregske, failed to exercise appropriate control over Yucaipa's actions, failed to educate itself in reviewing proposed transactions, and failed to ever seek independent advice when it allegedly reviewed transactions involving Yucaipa.7 The directors, including Mr. Gendregske, failed to consider alternative transactions to save Allied that would potentially adversely affect the interests of Yucaipa. Because Allied became insolvent by at least early 2008, the directors, including Mr. Gendregske owed fiduciary duties of loyalty and care not only to the company, but to its creditors.
On March 21, 2013, Mr. Gendregske filed the Motion Of Defendant Mark J. Gendregske To Dismiss The Claims Asserted Against Him In The Official Committee Of Unsecured Creditors Amended Complaint For (i) Equitable Subordination, (ii) Recharacterization, (iii) Breach Of Contract, (iv) Specific Performance, (v) Breaches Of Fiduciary Duties, (vi) Aiding And Abetting Breaches Of Fiduciary Duties, (vii) Avoidance And Recovery Of Avoidable Transfers, And (viii) Disallowance Of Certain Claims [D.I. 81] (“Motion to Dismiss”).
On April 8, 2013, Mr. Gendregske filed the Motion for Withdrawal...
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