Friedman v. Wellspring Capital Mgmt., LLC
| Decision Date | 27 August 2020 |
| Docket Number | Adversary Proceeding No. 19-80071-DD |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina |
| Parties | Ronald J. Friedman, as the trustee for the SportCo Creditors' Liquidation Trust, Plaintiff, v. Wellspring Capital Management, LLC, Wellspring Capital Partners IV, L.P., WCM Genpar IV, L.P., WCM Genpar IV GP, LLC, Alexander E. Carles, Bradley Johnson, F. Hewitt Grant, Charles E. Walker, Jr., Todd Boehly, Bernard Ziomek, and Andrew Kupchik, Defendants. |
This matter is before the Court on motions to dismiss filed by the defendants Wellspring Capital Management, LLC ("Wellspring Capital"), Wellspring Capital Partners IV, L.P. ("Wellspring Capital Partners"), WCM Genpar IV, L.P., WCM Genpar IV GP, LLC (collectively, the "Wellspring Defendants") [Docket No. 91], F. Hewitt Grant [Docket No. 89], Charles E. Walker, Jr. [Docket No. 90], Alexander E. Carles [Docket No. 91], Andrew Kupchik [Docket No. 92], Todd Boehly [Docket No. 93], and Bradley Johnson [Docket No. 85].1 The plaintiff, Ronald J.Friedman, the trustee for the SportCo Creditors' Liquidation Trust, filed an omnibus response to the motions to dismiss [Docket No. 112]. After the defendants filed replies, the Court held a hearing on June 18, 2020. At the conclusion of the hearing, the Court took the motions under advisement. The Court now issues this order, granting the motions to dismiss for the reasons set forth below.2
Ellett Brothers LLC ("Ellett"), a South Carolina limited liability company, was a sporting goods distributor. In 2008, Wellspring Capital, through its fund Wellspring Capital Partners, acquired Ellett. Wellspring Capital formed SportCo Holdings, Inc. ("SportCo") to serve as a holding company for United Sporting Company, Inc. ("United Sporting"), Ellett's direct parent; Ellett; and its subsidiaries. Ellett achieved high sales and revenues and had significant operations until sometime in 2016, when its profits began to decrease. In June 2019, SportCo and its subsidiaries4 (the "Debtors") filed chapter 11 bankruptcy cases in the United States Bankruptcy Court for the District of Delaware.
In 2012, the year that the amended complaint alleges Ellett "achieved record sales and earned revenues of approximately $1.2 billion," Ellett and its operating subsidiaries (the "Borrowers") entered into a Third Amended and Restated Loan and Security Agreement and a Second Lien Loan and Security Agreement (collectively, the "Loan Agreements") with lenders including Prospect Capital Corporation ("Prospect"), pursuant to which Prospect and the other lenders loaned $280 million to the Borrowers. Over $134 million of the loan proceeds were used tofund distributions to Wellspring Capital Partners, WCM GenPar IV, L.P., WCM GenPar IV GP, LLC, F. Hewitt Grant, Charles E. Walker, Jr., Todd Boehly, Bernard Ziomek, and Andrew Kupchik (collectively, the "Transferee Defendants"). On March 7, 2013, the Borrowers entered into a First Amendment to the Loan Agreements (the "First Amendment"), pursuant to which Prospect loaned the Borrowers an additional $60 million. Ellett used $54,860,549.74 of the First Amendment loan proceeds to fund distributions to the Transferee Defendants. A second amendment to the Loan Agreements (the "Second Amendment") was executed on September 30, 2014.
The Loan Agreements and the First and Second Amendments each contain a choice of law provision, providing that New York law applies. The choice of law provision in the Loan Agreements states:
This Agreement shall be governed by and construed in accordance with the laws of the State of New York; provided, however, that if any of the Collateral shall be located in any jurisdiction other than New York, the laws of such jurisdiction shall govern the method, manner and procedure for foreclosure of Agent's Lien upon such Collateral and the enforcement of Agent's other remedies in respect of such Collateral to the extent that the laws of such jurisdiction are different from or inconsistent with the laws of the State of New York. As part of the consideration for new value received, and regardless of any present or future domicile or principal place of business of Borrowers, any Lender or Agent, each Borrower hereby consents and agrees that the state courts for the State of New York, or, at Agent's option, the United States District Court for the Southern District of New York, shall have jurisdiction to hear and determine any claims or disputes among Borrowers, Agent and Lenders pertaining to this Agreement or to any matter arising out of or related to this Agreement. Each Borrower expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such Court, and each Borrower hereby waives any objection that such Borrower may have based upon lack of personal jurisdiction, improper venue or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such Court. Each Borrower hereby waives personal service of the summons, complaint and other process issued in any such action or suit and agrees that service of such summons, complaint and other process may be made by certified mail addressed to such Borrower at the address set forth in this Agreement and that service so made shall be deemed completed upon the earlier of such Borrower's actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid. Nothing in this Agreement shall be deemed or operate to affect the right of Agent to serve legal process in any other manner permitted by law, or to preclude the enforcement by Agent of any judgment or order obtained in such forum or the taking of any action under this Agreement to enforce same in any other appropriate forum or jurisdiction.
The choice of law provision contained in the First Amendment, executed March 7, 2013, states:
Governing Law; Consent to Jurisdiction; WAIVER OF JURY TRIAL. This Agreement and the rights and obligations of the parties hereunder shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. Sections 14.20 and 14.21 of the Loan Agreement are hereby incorporated by reference as if fully stated herein, mutatis mutandis. THE BORROWERS, THE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
The choice of law provision contained in the Second Amendment, executed September 30, 2014, states:
This Agreement shall be governed by, and construed in accordance with, the law of the State of New York and the validity, interpretation, construction, and performance hereof shall be governed by and construed and enforced in accordance with, and any claim by any party hereto against any other party hereto (including any claims sounding in contract or tort law arising out of the subject matter hereof and any determinations with respect to post-judgment interest) shall be determined in accordance with, the internal laws of the State of New York for contracts made and to be performed wholly within the State of New York (excluding the laws applicable to conflicts or choice of law that would require the application of the law of any other jurisdiction).
In October 2017, Wellspring Capital was contemplating a purchase of AcuSport, a competitor, by Ellett, for $14.8 million. In connection with this contemplated purchase, Alexander Carles, a managing partner of Wellspring Capital and an officer and director of SportCo and its subsidiaries, and Bradley Johnson, the president and chief executive officer of SportCo and its subsidiaries, sought to convince Prospect to forbear from exercising any remedies in the event of a payment default. Specifically, Mr. Carles and Mr. Johnson represented to Prospect that a purchase of AcuSport would result in: (1) Debtors' capturing 20 to 30 percent of AcuSport sales; (2) Acquisition of $14 million worth of AcuSport's inventory at a significant discount; and (3) Realization of an immediate $7 million profit from the sale of the inventory acquired in thepurchase. From October 2017 to April 2018, Mr. Carles and Mr. Johnson sent numerous emails to representatives of Prospect, attempting to induce Prospect to agree to forego exercising its rights in the event of a default. In April 2018, Prospect agreed to defer two quarters of cash interest payments. It had previously received notification, in early 2018, that the Borrowers would default on their obligation under the Loan Agreements and the Amendments in the second quarter of 2018. On December 31, 2018, the Borrowers defaulted on their obligations under the Loan Agreements and the Amendments.
An action with multiple causes of action was commenced by Prospect Capital Corporation in South Carolina state court and was removed to this court on September 6, 2019. Mr. Friedman was substituted as the plaintiff on January 10, 2020. Mr. Friedman filed an amended complaint the same day. The amended complaint asserts three causes of action: (1) avoidance and recovery of fraudulent transfers by Ellett against the Transferee Defendants pursuant to 11 U.S.C. §§ 544 and 550 and S.C. Code § 27-23-10; (2) avoidance and recovery of fraudulent transfers by SportCo against the Transferee Defendants pursuant to 11 U.S.C. §§ 544 and 550 and S.C. Code § 27-23-10; and (3) negligent misrepresentations against Wellspring Capital, Mr. Carles, and Mr. Johnson.
The defendants' motions rely on Federal Rule of Civil Procedure 12(b)(6). Federal Rule of Bankruptcy Procedure 7012(b) provides that Federal Rule of Civil Procedure 12(b) applies in adversary proceedings. Fed. R. Civ. P. 12(b)(6) provides for dismissal of an action if the complaint "fail[s] to state a claim upon which relief can be granted." "To survive a ...
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