Heard v. Perkins

• Decision Date: 12 October 2010
• Docket Number: No. CV 10-PT-1194-NE,CV 10-PT-1194-NE
• Citation: 441 B.R. 701
• Parties: William T. HEARD, Jr., et al., Appellants/Defendants, v. William F. PERKINS, etc., Appellee/Plaintiff.
• Court: U.S. District Court — Northern District of Alabama

441 B.R. 701

William T. HEARD, Jr., et al., Appellants/Defendants,

v.William F. PERKINS, etc., Appellee/Plaintiff.

No. CV 10-PT-1194-NE.

United States District Court,

N.D. Alabama,

Northeastern Division.

Oct. 12, 2010.

Jackson R Sharman, III, John Stewart Baker, IV, Samuel H. Franklin, Lightfoot Franklin & White LLC, Birmingham, AL, David O'Neal, Jessica P. Corley, Todd R. David, Alston & Bird, Atlanta, GA, for Appellants/Defendants.

Corin M. McCarthy, Jason D. McLarry, Jeffrey P. Fuller, Mark A. Fink, Kilpatrick Stockton LLP, Atlanta, GA, Mark D. Taylor, Kilpatrick Stockton LLP, Washington, DC, for Appellee/Plaintiff.

MEMORANDUM OPINION

ROBERT B. PROPST, Senior District Judge.

This cause comes before the court on the defendants' appeal from an order of the Bankruptcy Court of the Northern District of Alabama, Northern Division as established by the Motion for Leave to Appeal filed on May 7, 2010; Stipulation and Joint Motion for an Order Granting Motion for Leave to Appeal and Setting Appellate Briefing Schedule filed on May 20, 2010; and this court's order dated May 21, 2010.

The court has considered the Amended Complaint filed by the trustee(or plaintiff); the Motion to Dismiss filed by the defendants; the Order of the bankruptcy court dated April 19, 2010; a partial transcript of a hearing before the bankruptcy court attached to a Submission Sheet filed in this court on May 7, 2010; the Recommendation of the bankruptcy court dated May 4, 2010 and filed in this court on May 7, 2010; a hearing before this court on August 23, 2010; ¹ the briefs and special submissions of the parties; and other data before the court.²

The parties agree that Georgia law provides the applicable substantive law.³The parties have not agreed as to what that law is.The parties also agree that the Supreme Court of Georgia would find Delaware law to be persuasive if there is no previously established law on the matters at issue here.⁴

Claims & Issues Before This Court

There are some claims pending before the bankruptcy court which are not before this court.⁵The appellants have stated that the issues are the following:

1.Do the claims in the Amended Complaint that are based on Defendants' business strategy assert an impermissible "deepening insolvency" cause of action?

2.In light of recent Supreme Court authority in Bell Atl. Corp. v. Twombly,550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929(2007), andAshcroft v. Iqbal,--- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868(2009), is the Amended Complaint required to set forth well-pled allegations sufficient to rebut the presumptions of the Business Judgment Rule in order to avoid dismissal under Federal Rule of Civil Procedure 12(b)(6).

William F. Perkins, Chapter 11Trustee for Bill Heard Enterprises, Inc.("BHE"), is listed as the plaintiff in the Amended Complaint.The named defendants in the Amended Complaint are:

• William T. Heard, Jr.—President, Chief Executive Officer, and Director of BHE.

• Richard M. Young—Corporate Controller, Vice President, and Director of BHE.

• Leigh M. Feldner, as administrator of the estate of Ronald Feldner—Chief Financial Officer, Corporate Secretary, and Director of BHE.

• Edward Heard—An officer and director of Landmark Chevrolet, Ltd. and Bill Heard Chevrolet, Ltd.

• William T. Heard, III—President of the Bill Heard Chevrolet Company.⁶

While nine counts are asserted in plaintiff's Amended Complaint, only three are at issue in this appeal.The following counts are at issue:

• Count I: Breach of Fiduciary Duties, which is asserted against all defendants.(Am.Compl. ¶¶ 102-10).

• Count II: Aiding and Abetting Breach of Fiduciary Duty, which is asserted against defendants Young and Feldner.(Am.Compl. ¶¶ 111-15).

• Count VIII: Waste of Corporate Assets/Ultra Vires Acts, which is asserted against all defendants.(Am.Compl. ¶¶ 147-49).

Plaintiff's subject allegations now before this court all revolve around "defendants' business strategy."Plaintiff claims that Heard, Jr. continued to pursue a faulty business strategy after it proved to be a failure.Further, plaintiff claims thatYoung and Feldner did not stand up against Heard, Jr.'s insistence to follow the failed business strategy.

Regardless of the legal issues relating to defendant Heard, Jr., this court will grant the Motion to Dismiss on the issues before this court as to the remaining defendants who joined in said motion.The court will do so based on the trustee's acknowledgments at this court's August 23, 2010 hearing, and the briefs, etc. of said trustee.⁷

At the August 23, 2010 hearing before this court, the trustee's attorney stated:

Mr. Heard was the controlling member.He was the 99.9 percent shareholder.He was the CEO.He was the chairman of the board, and his word was law.And if he said we're doing something, everybody else said okay, even if they thought it was irrational and stupid; they said we're going to do it because that's what the boss wants.And so the controller, he, in his testimony says, we were spending all this money and we shouldn't have been.

(Emphasis added).⁸

Counsel for the trustee summarized the issues before the court as:

Let me boil it down to you, I mean ultimately, really, the only issue that you need to decide is that the officers and directors breached their fiduciary duty or not by squandering corporate assets pursuing a business strategy that they knew had failed and had no chance of success.

In sum, the trustee explained that the fiduciary duty claims were "[e]ssentially" the only claims before the court, other than "potentially ... one aspect of the waste claim."

And in regards to the trustee's allegations of Heard, Jr.'s insistence on following the failed business strategy, counsel stated:

For example, two of the directors, they realize that the cost of this operational marketing subprime strategy was killing the company.So they wanted to cut costs ....Mr. Heard ... who dominated the company went behind their back ....

....

There was no vote....

....

... Mr. Heard goes behind their back and says to district managers, rise those costs right back to where they were, and he doesn't discuss his plan with Mr. Young and Mr. Feldner.(Emphasis added).

This belies an aiding and abetting theory.Also, the trustee claims that he is "not necessarily challenging the fact that [defendants] decided to go to subprime borrowers.Everybody went to subprime borrowers.That's what happened....[W]hat we are talking about is after the subprime had collapsed, how did [defendants] respond to that crisis?"

Regardless of the law which will otherwise be determined to be applicable to this case, the trustee would have to establish some causal relationship between the alleged actions and/or inactions of the defendants other than William T. Heard, Jr. and the alleged "squandering of corporate assets."⁹The trustee emphasizes that the other directors objected to the approach taken by Heard, Jr., and further emphasizes that the other directors did not have control over how the corporation responded to the subprime "crisis."¹⁰

Further Discussion of Claims Against Defendants

It is clear that Heard, Jr. exercised total control whether "behind the back" or otherwise.It is not clear that he can be held liable under Georgia law based on the claims now before this court.As earlier suggested, the real issues are: (1) whether the squandering of assets claim is, in reality, a deepening insolvency claim not recognized under Georgia law; (2) whether Georgia law allows creditors to bring breach of fiduciary duty claims based upon a failed business strategy; and (3) whether Heard, Jr. is entitled to prevail on a business judgment defense.¹¹

Georgia Law

The trustee argues that Georgia law permits creditors to maintain breach of fiduciary duty claims against corporate directors.¹²The trustee relies upon the following cases to support this argument: Ware v. Rankin,97 Ga.App. 837, 104 S.E.2d 555, 558(1958);Sanders v. Naguszewski(In re Naguszewski),No. 07-04050, 2009 WL 6499348, at *3(Bankr.N.D.Ga.Apr.29, 2009);Smith Drug Co. v. Pharr-Luke(In re Pharr-Luke),259 B.R. 426, 431-32(Bankr.S.D.Ga.2000);Bank Leumi-Le-Israel, B.M. v. Sunbelt Indus., Inc.,485 F.Supp. 556, 558-59(S.D.Ga.1980).The trustee also makes passing references to McEwen v. Kelly,140 Ga. 720, 79 S.E. 777, 779(1913).

The trustee's claim of how the defendants allegedly pursued a failed business strategy and thereby breached their fiduciary duties is summarized by the following conclusory allegation in the amended complaint:

Had [Defendants] properly educated themselves about the financial perils that the Debtors were facing or taken any measures to understand the options available to them to preserve the Debtors' value and assets, the Defendants would have discovered that their only reasonable and viable alternative would have been to hire professional outside assistance or, at the very least, discuss the possibility of reorganizing, liquidating, or shutting down operations.If Defendants had properly executed their fiduciary duties before January 1, 2008, they could have avoided the subsequent ninety-one million dollar loss sustained in 2008—a loss that is nearly identical to the total estimated value of the Debtors' unsecured claims....¹³

(Am.Compl. ¶ 51).Similar allegations are made in paragraphs 56, 63, 67-70, 73-74, 80, 83 and 103.The business strategy the trustee criticizes is Heard Jr.'s decision to continue the previously successful business strategy of high volume sales to low income purchasers.(Am.Compl. ¶ 48).There are no hypothetical alternatives alleged other than, in a conclusory manner, that hired experts could have solved the problem.There are no present claims before this court concerning preferences, embezzlements, fraudulent conveyances or other such specific defalcations.

The trustee's citation of purported Georgia law includes two state courtcases.The remaining cases are non-controlling federal cases.Pl...