Giuliano v. Schnabel (In re Dsi Renal Holdings, LLC)

• Decision Date: 30 March 2020
• Docket Number: Case No. 11-11722 (KBO),Adv. Proc. No. 14-50356 (KBO)
• Citation: 617 B.R. 496
• Parties: IN RE: DSI RENAL HOLDINGS, LLC, et al., Debtors. Alfred T. Giuliano, Chapter 7 Trustee, Plaintiff, v. Michael Schnabel, et al., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

617 B.R. 496

IN RE: DSI RENAL HOLDINGS, LLC, et al., Debtors.Alfred T. Giuliano, Chapter 7 Trustee, Plaintiff,

v.Michael Schnabel, et al., Defendants.

Case No. 11-11722 (KBO)

Adv. Proc. No. 14-50356 (KBO)

United States Bankruptcy Court, D. Delaware.

Signed March 30, 2020

OPINION ¹

Karen B. Owens, United States Bankruptcy Judge Before the Court are the following motions for partial summary judgment filed by one or more of the Defendants in the above-captioned adversary proceeding commenced by Plaintiff Alfred T. Giuliano (the "Trustee"), as the chapter 7 trustee for the estates of DSI Renal Holdings, LLC, DSI Hospitals, Inc., and DSI Facility Development, LLC (each a "Debtor" and together the "Debtors"): (1) Defendants' Motion For Partial Summary Judgment Excluding Proceeds Of Non-Debtor Property From Plaintiff's Potential Recovery² (the "Stock Motion"); (2) Motion Of Defendants Apollo Investment Corporation, Ares Capital Corporation, And Northwestern Mutual Life Insurance Company For Summary Judgment Excluding Debt Repayments From Plaintiffs' Recovery³ (the "Debt Motion", and together with the Stock Motion, the "Damages Motions"); and (3) The Northwestern Mutual Life Insurance Company's Motion For Summary Judgment On Certain Of Plaintiff's Fraudulent Transfer Claims Pursuant To 11 U.S.C. § 546(e)⁴ (the "Safe Harbor Motion", and together with the Damages Motions, the "Motions"). For the reasons set forth herein, the Court will grant the Motions.

I. JURISDICTION

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334 and 157(a). Certain Counts of the Complaint are core proceedings while others are non-core. The Trustee demands a jury trial for all Counts of the Complaint. Neither the Trustee nor the Defendants consent to the entry of a final judgment or adjudication by this Court. Nonetheless, the Court has the authority to hear and enter an order on the Motions.⁵

II. RELEVANT BACKGROUND⁶

A. The Prepetition Restructuring and Sale of the Renal Business

The claims asserted in the Trustee's Complaint spring from a complex prepetition restructuring of Debtor DSI Renal Holdings, LLC ("DSI Renal Holdings") and certain of its subsidiaries (the "Restructuring"). Prior to the Restructuring, non-Debtor DSI Holding Company, Inc. ("DSI Parent") wholly owned the Debtors. DSI Parent's indirect subsidiaries owned substantially all of the operating assets of the enterprise, including kidney dialysis clinics throughout the United States (the "Renal Business"). The Renal Business was owned by non-Debtor DSI Renal, Inc. ("DSI Renal"), a wholly owned subsidiary of Debtor DSI Renal Holdings.

On January 11, 2010, the Restructuring was effectuated through a series of transactions as contemplated by, and set forth in, a Global Restructuring Agreement ("GRA") entered into by, among others, DSI Parent, DSI Parent's equity holders (including Defendants The Northwestern Mutual Life Insurance Company ("NML"), Apollo Investment Corp. ("AIC"), and certain Centre Defendants⁷ ),⁸ DSI Renal Holdings, DSI Renal, and the lenders under DSI Renal's credit facilities (including certain Centre Defendants, NML, Ares Capital Corp. ("ARCC"), and AIC).⁹ In sum, the following relevant events occurred to effectuate the Restructuring:

• DSI Renal Holdings formed CDSI I Holding Company, Inc. ("CDSI I"), which formed a wholly owned subsidiary, CDSI II Holding Company Inc. ("CDSI II");

• Certain Centre Defendants, AIC, NML, and ARCC converted (the "Creditors") an aggregate of approximately $55 million of their DSI Renal subordinated debt holdings into, among other things, 55,000 DSI Renal shares (the "Debt-for-Equity Exchange") and contributed those DSI Renal shares to CDSI I in return for, among other things, approximately 55,000 CDSI I shares;

• DSI Renal Holdings contributed all of its 1,000 DSI Renal shares (the "Renal Shares") to CDSI I and received, among other things, one CDSI I share;

• Certain Centre Defendants and NML invested (the "Investors") $71 million (the "New Money Investment") into CDSI I for, among other things, approximately 77,000 CDSI I shares;

• CDSI I contributed the Investment Proceeds and 56,000 DSI Renal shares to CDSI II;

• Certain shareholders of DSI Parent received equity interests in CDSI I from the Investors and Creditors; and

• DSI Parent merged with and into DSI Renal Holdings, with DSI Renal Holdings surviving, and the former shareholders of DSI Parent receiving ownership interests in DSI Renal Holdings in the same numbers and series or classes as they held in DSI Parent prior to the Restructuring.

There is no dispute that each of the Restructuring transactions were part of an integrated transaction and that the effectiveness of each transaction was conditioned upon the substantially simultaneous consummation of the other transactions.

As a consequence of the Restructuring, DSI Renal Holdings ceased to wholly own DSI Renal. Rather, DSI Renal and its Renal Business became wholly owned by CDSI I, indirectly through its subsidiary CDSI II. DSI Renal Holdings held one share of CDSI I. Defendants Centre Defendants, NML, ARCC, and AIC, along with other non-defendants, held the remainder.

A little over one year later, DaVita, Inc. ("DaVita"), a third-party who is not a Defendant, entered into a merger agreement with CDSI I. DaVita acquired CDSI I for approximately $689 million (the "DaVita Acquisition"). The Defendants received in the aggregate approximately $440 million on account of, among other things, their shares in CDSI I and the outstanding debt obligations owed to them by DSI Renal (the "Debt Repayments").

B. The Bankruptcy Proceedings

On June 3, 2011 (the "Petition Date"), each of the Debtors filed in this Court voluntary petitions for relief under chapter 7 of title 11 of the United States Code (the "Bankruptcy Code"). The Trustee was appointed as the chapter 7 trustee for the Debtors' estates and, on May 20, 2013, commenced this proceeding in the United States District Court for the Eastern District of Pennsylvania. Ultimately, it was transferred to the United States District Court for the District of Delaware and referred to this Court.

The gravamen of the Trustee's Complaint is that the Defendants – Messrs. Schnabel, Murphy, Pollack, Bergmann, and Yalowitz (together, the "D & O Defendants") (former officers and directors of entities affiliated with DSI Renal Holdings) and the Centre Defendants, NML, AIC, and ARCC – effectuated a fraudulent scheme leading up to and through the Restructuring that stripped the Debtors of substantially all of their valuable assets, namely the Renal Business, for little to no consideration and then turned around and sold those assets for over half a billion dollars. According to the Trustee, while the Defendants received hundreds of millions of dollars for their wrongful activity, the Debtors and their creditors were left with little except millions of dollars' worth of non-insider claims. On account of this alleged wrongful activity, the Trustee has asserted claims for the avoidance and recovery of fraudulent transfers as well as claims arising from breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and corporate waste.¹⁰

The Defendants contest the Trustee's claims and allegations. However, the Court need not address issues of ultimate liability at this stage. Rather, the Damages Motions relate only to the extent of damages sought by the Trustee, and the Safe Harbor Motion relates only to the application of section 546(e) of the Bankruptcy Code to the Trustee's constructive fraudulent transfer claims against NML raised in Counts 2, 3, and 4. Briefing on the Motions is complete, oral argument was held on September 13, 2019, and the matters are ripe for decision.

III. LEGAL STANDARD

Rule 56 of the Federal Rules of Civil Procedure, made applicable to this proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure, provides that a court may grant summary judgment on whole or in part of a claim or defense "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."¹¹ A material fact is one that "might affect the outcome of the suit under governing law."¹² A dispute concerning a material fact is present "when reasonable minds could disagree on the result."¹³ The moving party bears the burden of demonstrating an entitlement to summary judgment.¹⁴

Summary judgment serves to "isolate and dispose of factually unsupported claims or defenses" and avoid unnecessary trial where the facts are settled.¹⁵ Thus, at the summary judgment stage, the court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial.¹⁶ A court should view the facts and all permissible inferences from those facts in the light most favorable to the non-moving party.¹⁷ Any doubt must be construed in the non-moving party's favor.¹⁸

A moving party bears the initial burden of demonstrating the absence of a dispute of material fact.¹⁹ "[W]hen the moving party has met its burden ... the nonmoving party must come forward with specific facts showing that there is a genuine issue for trial."²⁰ In other words, "the mere existence of some alleged factual dispute between the parties" cannot defeat a properly supported summary judgment motion.²¹ Rather, the dispute must relate to a genuine issue of material fact.²² Thus, a non-moving party cannot defeat a summary judgment motion based on conclusory allegations and denials, but instead must provide supportive arguments or facts that show the necessity of a trial.²³

Summary judgment should be granted if, after drawing all reasonable inferences from the underlying facts in the light most favorable to the non-moving party, the court concludes that there is no genuine issue of material fact to be resolved at trial and the moving party is entitled to judgment as a matter of law.²⁴

IV. LEGAL DISCUSSION

A. ...