Designline United States, LLC v. Combs (In re Designline Corp.)
| Decision Date | 15 February 2017 |
| Docket Number | Case No. 13-31944,Adversary Proceeding No. 15-03139,Jointly Administered: Case No. 13-31943 |
| Court | U.S. Bankruptcy Court — Western District of North Carolina |
| Parties | In Re: DESIGNLINE CORPORATION, debtor In Re: DESIGNLINE USA, LLC, debtor ELAINE T. RUDISILL, as Liquidating Trustee, plaintiff v. DR. LINDA M. COMBS, JOSEPH M. COX, JAMES G. MARTIN, BILL R. TILLET, DARREN C. WALLIS and EDWARD I. WEISIGER, defendants. |
In this matter, General Arnold L. Punaro seeks dismissal of third-party claims for indemnification and contribution stemming from his role as a director of the DesignLine Corporation. Bankruptcy subject matter jurisdiction is lacking over the claims against Punaro. The United States District Court would appear to possess subject matter jurisdiction over these claims under 28 U.S.C. § 1367; conceivably, this bankruptcy court may as well. However, the undersigned declines to exercise any such power and would recommend that the District Court decline to do so as well. It is recommended that the third-party complaints be dismissed.1
The claims against Punaro represent the latest volley in the ever-growing litigation flowing from the DesignLine bankruptcy. This decision requires consideration of not only the substantive claims asserted against Punaro but of the overall scope and context of the related adversary proceedings. Those proceedings are the subject of numerous orders from this bankruptcy court and will be summarized as necessary below.
Approximately ten years ago, DesignLine and related entities began operations and preparations to build hybrid buses in Charlotte, North Carolina. The venture was not successful and ultimately culminated in a bankruptcy filing in Delaware in August 2013. An unsecured creditors committee (the Committee) was formed with Punaro as the chair of the Committee. The Delaware Bankruptcy Court transferred venue of the case to this Court in September 2013.
Thereafter, the Committee, represented by Benesch, Friedlander, Coplan & Aronoff, LLP and Moon Wright & Houston, PLLC (together, the firms), proposed a liquidating Chapter 11 Plan. On March 17, 2014, this Court confirmed the Committee's Plan wherein DesignLine's assets, consisting primarily of un-asserted causes of action, were transferred to a trust. Elaine Rudisill was appointed liquidating trustee. She retained the firms to assist her in liquidating the trust assets.
Since the effective date of the Plan, the trustee has initiated approximately 115 adversary proceedings. Only a handful remain unresolved. The remaining adversary proceedings relevantto Punaro's motion involve claims asserted against some, but not all, of the officers and directors of the DesignLine companies.
During DesignLine's brief lifetime, in addition to Punaro, various individuals served as officers and/or directors including Buster and Brad Glosson, Eyad and Fouad Alaeddin, Michael Floyd, Daniel Keating, Michael Burns, Linda Combs, Joseph Cox, James Martin, Bill Tillett, Darren Wallis, and Edward Weisiger. With the exception of Punaro, the trustee has sued all of these former officers/directors in interrelated adversary proceedings.
The action against the Glossons, et al. (the Glosson Defendants), Adv. Pro. 15-3138 (the Glosson Action), drives the trustee's claims against many of the other defendants. In that adversary proceeding, the trustee's 131 separate causes of action range from claims of breach of fiduciary duty and unjust enrichment to bribery and RICO violations. She accuses the Glosson Defendants of working in concert for years to pilfer assets, and usurp opportunities, of the debtors for their personal benefit. In no less than 1003 numbered paragraphs, the trustee outlines how, in her opinion, the Glosson Defendants defrauded the debtors (including their creditors and equity investors), converted funds designated for the debtors' businesses, and diverted millions of dollars of the debtors' business opportunities to themselves.
In the current adversary proceeding, a companion proceeding to the Glosson Action, the trustee brings claims against Linda Combs, Joseph Cox, James Martin, Bill Tillett, Darren Wallis, and Edward Weisiger (the Third-Party Plaintiffs). Here, the trustee accuses the Third-Party Plaintiffs of breaches of fiduciary duty in that they allegedly permitted the Glosson Defendants to pilfer the debtors' assets and business opportunities (the Director Actions).
As for Punaro, he and the trustee have entered into a tolling agreement whereby Punaro's claim in the case was allowed and the statute of limitations on any claims against Punaro by thetrustee were tolled through December 31, 2016. Additionally, Punaro agreed to cooperate and assist the trustee in prosecuting her actions. The consent order approving the agreement further provides that "each of [the Third-Party Plaintiffs'] rights under Delaware law with respect to the effect of the Tolling and Cooperation Agreement are preserved." At this point, the trustee has chosen not to bring an action against Punaro.
This Court has previously described the scope of the trustee's allegations in these adversary proceedings as breathtaking. The Glosson Action seeks a recovery against eighteen different defendants who reside all across the globe. Most of the defendants have requested that these claims be resolved in United States District Court by juries. A motion to withdraw the reference of the Glosson Action is currently pending in United States District Court (3:16-cv-00609-RJC). Such trials would likely take weeks to conclude.
With discovery barely underway, the cost of this litigation is already monumental. The primary defendants have been able to fund their defense efforts by using proceeds from insurance policies purchased by the debtors—commonly referred to as D&O Policies—that have limits in the millions of dollars. Lacking the funds to fully prosecute these actions, the trustee sought to sell a portion of the proceeds of the actions in exchange for litigation funding. Her request was denied because her proposal constituted champerty under North Carolina law. The "buyer" recently appealed that order to United States District Court (3:17-cv-00048-GCM).
Further entangling the proceedings, the Third-Party Plaintiffs have now filed third-party complaints against the Glosson Defendants and Punaro. According to the Third-Party Plaintiffs, if they are liable for any failure in oversight, every DesignLine director, including Punaro, is liable either under a theory of indemnification or for contribution. The Glosson Defendantsanswered the third-party complaints and have requested jury trials. Punaro filed a motion to dismiss, which is the subject of this order.
Punaro argues that the complaints against him should be dismissed because: (1) this Court lacks subject matter jurisdiction in that the third-party actions have no conceivable effect on the bankruptcy estate; (2) under North Carolina law, indemnity and contribution are not available between directors for breach of fiduciary duty to a corporation; and (3) the complaints fail to meet the pleading standards set out in Iqbal and Twombly.
Relying on Delaware law, the Third-Party Plaintiffs assert that they must bring Punaro into this fray else they lose their rights to offset any recovery made by the trustee. Because Punaro's jurisdictional argument was not asserted until his sur-reply brief, the Third-Party Plaintiffs did not brief that particular issue. At the hearing on this matter, they contended that the claims against Punaro would have an attenuated effect on the estate. In any event, no one has requested an additional opportunity to brief the issue and all appear to be content on a ruling without further argument.
We need only address the subject matter jurisdiction issue.
"The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute." Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995). Title 28 U.S.C. § 1334(b) defines bankruptcy jurisdiction and provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings" arising under, arising in, or related to cases under the Bankruptcy Code. That bankruptcy jurisdiction is exercised by bankruptcycourts pursuant to reference orders. For clarity, in this order, 28 U.S.C. § 1334 jurisdiction will be termed "bankruptcy jurisdiction" irrespective of which court exercises it.
The distinctions between arising under and arising in proceedings can be summarized as follows. "A proceeding is one 'arising under' Title 11 when it invokes a 'substantive right created by the Bankruptcy Code.'" In re Tate, 253 B.R. 653, 661-62 (Bankr. W.D.N.C. 2000) (citations omitted). "Proceedings 'arising in' Title 11 cases are those which are not based on any right expressly created by Title 11, but nevertheless, would have no existence outside of the bankruptcy" such as "administrative matters, orders to turn over estate property, determination of the extent or priority of liens, contempt matters, and actions to recover postpetition accounts." Id. at 662 (citations and quotation marks omitted).
The Bankruptcy Code does not expressly provide a cause of action for either indemnity or contribution, and "[a]ny such cause of action arising under the Code would have to be implied." Edward M. Fox & James Gadsden, Rights of Indemnification and Contribution Among Persons Liable for Fraudulent Conveyances, 23 Seton Hall L. Rev. 1600, 1603 (1993) [hereinafter Fox & Gadsden]. Courts have generally declined to find an implied right to indemnity or contribution under the Code. E.g., Walker v. Cadle Co.(In re Walker), 51 F.3d 562, 566-67 (5th Cir. 1995) ...
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