Duke & King Mo., LLC v. Nath Cos. (In re Duke & King Acquisition Corp.)

Citation508 B.R. 107
Decision Date31 March 2014
Docket NumberAdversary No. 12–3319.,10–38653 (GFK), 10–38654(GFK), 10–38655(GFK), 10–38656(GFK).,Bankruptcy Nos. 10–38652
CourtUnited States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota
PartiesIn re DUKE AND KING ACQUISITION CORP., Debtors. (includes: Duke and King Missouri, LLC; Duke and King Missouri Holdings, Inc.; Duke and King Real Estate, LLC; DK Florida Holdings, Inc.) William Kaye, not individually but solely in his capacity as Liquidating Trustee of the Duke & King Acquisition Corp. Liquidating Trust, Plaintiff, v. Nath Companies, Inc., Nath Minnesota Franchise Group, Inc., Nath Illinois Franchise Group, Inc., Nath Florida Franchise Group, Inc., Nath Miami Franchise Group, Inc., Nath Minnesota Operating Group, LLC, Nath Illinois Operating Group, LLC, Kinderhook Industries, LLC, Kinderhook Capital SBIC Fund I, LP, Kinderhook Capital Fund I, LP, Robert Michalik, Louis Aurelio, Christian Michalik, Paul G. Cifelli, and Rodger Head, Defendants.

OPINION TEXT STARTS HERE

Aaron L. Hammer, Sugar Felsenthal Grais & Hammer LLP, Chicago, IL, Amy J. Swedberg, Maslon Edelman et al., LLP, Minneapolis, MN, for Plaintiff.

Lara O. Glaesman, Jennifer L. Olson, Bryant D. Tchida, Leonard Street and Deinard, Adine S. Momoh, Stinson Leonard Street, LLP, S. Steven Prince, Grell & Feist LLC, Minneapolis, MN, for Defendants.

ORDER RE: MOTIONS FOR DISMISSAL

GREGORY F. KISHEL, Chief Judge.

This adversary proceeding came before the court on separate motions for dismissal brought by two groups of defendants. The group of defendant-movants headed by Nath Companies, Inc.1 appeared by their attorneys, Lara O. Glaesman and Jennifer L. Olson. The group headed by Kinderhook Industries, LLC 2 appeared by their attorney, S. Steven Prince. Mark S. Melickian and Leland H. Chait appeared on behalf of Plaintiff Kaye. The following decision takes account of the text of the Plaintiff's complaint [Dkt. No. 1], the two motions, the multiple layers of follow-up filings, and the oral argument.

PROCEDURAL HISTORY

Collectively, the Debtors operated a group of more than 90 franchised Burger King restaurants in several Midwestern states and Florida, from late 2006 until mid–2011. On December 4, 2010, the Debtors filed petitions for relief under Chapter 11 in this district. Early on, the court ordered joint administration of the cases.

Over the ensuing months, the court authorized the Debtors to use a sale process under 11 U.S.C. § 363, through which all of their operating locations were to be liquidated for the benefit of creditors. After an auction procedure was completed and the results were court-approved, nearly all of the locations were sold in several groups; there were four buyers in total. The Debtors' going-concern operations ceased when the sales were closed on May 26, 2011.

The Debtors and the Committee of Unsecured Creditors jointly proposed a liquidating plan after that. The plan provided for the creation of a trust through which remaining assets were to be liquidated; causes of action for avoidance and other recovery were to be pursued; and ultimately the net resultant value would be distributed to the Debtors' creditors. The plan provided for the substantive consolidation of the Debtors, for the post-confirmation administration. William Kaye, who as nominee of the Coca Cola Company had been the chair of the Unsecured Creditors' Committee, was proposed as liquidating trustee.

The plan was confirmed on October 21, 2011. The trust was created, and Kaye was seated as liquidating trustee.

During his administration Kaye resolved potential disputes over the allowance and amount of claims. He addressed insurance-related issues; he evaluated preference causes of action and pursued some of them; and he made a first, small-percentage distribution from the residuum of the sale proceeds and the results of his post-confirmation activity.

The litigation at bar is Kaye's last significant undertaking. It is also the only one that could enable any significant additional distribution to unsecured creditors.3 He filed the complaint for this adversary proceeding on December 3, 2012.

NATURE OF ADVERSARY PROCEEDING

Through this lawsuit, Kaye basically seeks to undo one side of the 2006 transaction through which the Debtors purchased 88 (perhaps 89) franchised Burger King restaurants from the Nath Defendants. He seeks a money judgment in the liquidating trust's favor to recover the full purchase price paid to the Nath Defendants. Complaint, ¶ 7. He also seeks to recover certain “fees” paid to the Kinderhook Defendants in connection with the sale and after the Debtors commenced operation. Complaint, ¶ 8. He would route this relief by avoiding the payments as fraudulent transfers. He relies on state law as the substantive rule of decision and he invokes 11 U.S.C. § 544 for his empowerment to do so.4

Kaye also pleads a claim for money damages against all of the Kinderhook Defendants and Defendant Head. This separate claim is premised on the allegation that they breached fiduciary duties owed to the Debtors' creditors, in the way they constituted, capitalized, incorporated, and operated the Debtors for and after the purchase of the restaurant locations. As subsidiary relief, Kaye seeks to have the Kinderhook Defendants' claims in the underlying cases (which are premised on further, unpaid “fees” owing) subordinated or recharacterized to the status of equity for their treatment in any further distribution in liquidation.

MOTIONS AT BAR

The Nath Defendants and the Kinderhook Defendants elected to bring motions for dismissal under Rule 12(b)(6) as their first response to Kaye's complaint, in lieu of filing answers.5 Thus this matter is still in a pre-discovery posture. The content of the complaint is the only material to be considered in passing on whether Kaye has a cognizable basis for suit against the movant-defendants, in alleged fact and applicable law.6 In evaluating that, the allegations in Kaye's complaint are to be assumed as true and all reasonable inferences of fact are to be directed in favor of him as plaintiff, for the purposes of analysis on dismissal. E.g., Blankenship v. USA Truck, Inc., 601 F.3d 852, 853 (8th Cir.2010).

That deference is more qualified since the Supreme Court's recent issuance of two major opinions under Rule 12(b)(6). Now, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face, if it is to pass muster in the face of a motion for dismissal. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 547, 127 S.Ct. 1955, 1960, 167 L.Ed.2d 929 (2007)) (emphasis added). To meet this standard, the facts pled must show more than just a “sheer possibility” of proving the claim on its merits. Iqbal, 556 U.S. at 663, 129 S.Ct. 1937. To be plausible, fact-pleading must be enough to support a “reasonable inference that the defendant is liable for the [conduct] alleged.” Id. The pleaded facts must “affirmatively and plausibly suggest that [the plaintiff] has the right [it] claims”; the pleading of “facts that are merely consistent with such a right” will not suffice, if they do not meet all the elements under law. Stalley v. Catholic Health Initiatives, 509 F.3d 517, 521 (8th Cir.2007) (citing Twombly, 550 U.S. at 554–557, 127 S.Ct. 1955). A “formulaic recitation of the elements of a cause of action,” in conclusory legal terminology alone, will not suffice. Braden v. Wal–Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir.2009).

TREATMENT OF MOTIONS
I. Relevant Content of Complaint

The plausibility inquiry under Twombly and Iqbal focuses on pleaded facts. Kaye pleads many, many facts. His recitation of generally-applicable facts runs 21 pages. Then there are the 16 pages setting forth ten substantive counts. They contain additional assertions of fact, or mixed assertions of fact and law.

A. Pleading of Transactional History

Kaye pleads the history, circumstances, and terms of the 2006 sale and the associated post-petition transfers, as follows:

1. At all relevant times, Defendant Nath Companies, Inc. was a holding company that owned 100% of the equity in all of the other Nath Defendants. Complaint, ¶ 31. The remaining Nath Defendants were the operating entities for 97–plus franchised Burger King restaurants located in Minnesota, Wisconsin, Iowa, Illinois, and Florida. Complaint, ¶¶ 30 and 31.

2. The three artificial-entity Kinderhook Defendants are a private equity firm “that specializes in investing and managing middle market companies.” Complaint, ¶ 43. (Apparently, this is meant in a collective sense.) The natural persons among the Kinderhook Defendants were all officers or directors of the Kinderhook entity-defendants, at relevant times. Complaint, ¶¶ 35–38. 7

3. By late 2004, the management of the Nath Defendants wished to sell “almost all of its Burger King franchises.” Complaint, ¶ 41.

4. In 2005, the Kinderhook Defendants went through two separate phases of interest in purchasing the Nath Defendants' Burger King operations. Complaint, ¶¶ 43–46. The second effort came later in the year. In October, 2005, it resulted in the execution of an Asset Purchase Agreement for the Nath Defendants' sale of 89 of their Burger King restaurants (“the APA”). Complaint, ¶ 47.

5. The Kinderhook Defendants formed Duke and King “to pursue the ... purchase” from the Nath Defendants. One or more of the Kinderhook entity-defendants were the “primary investor” in Duke and King. Complaint, ¶¶ 1, 46. 8

6. After three amendments of the APA, the Nath Defendants sold 88 (possibly 89) 9 Burger King restaurant locations to Duke and King. The closing took place on October 31, 2006, a year after the first version of the APA was signed. Complaint, ¶¶ 48 and 71. The base purchase price was $23.5 million. Complaint, ¶¶ 71–72.

7. Compiled data on the restaurants' historical operations and financial posture was extant as of the date of the...

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