In re Air Cargo, Inc.

• Decision Date: 07 February 2008
• Docket Number: Adversary No. 06-2011-JS.,Bankruptcy No. 04-37512-JS.
• Citation: 401 B.R. 178
• Parties: In re AIR CARGO, INC., et al., Debtor. The Air Cargo, Inc. Litigation Trust, by and through its Trustee Martin Fletcher, Plaintiff v. i2 Technologies, Inc. and Mercer Mgt. Consulting, Inc., Defendants.
• Court: U.S. Bankruptcy Court — District of Maryland

Page 178

401 B.R. 178

In re AIR CARGO, INC., et al., Debtor The Air Cargo, Inc. Litigation Trust, by and through its Trustee Martin Fletcher, Plaintiff v. i2 Technologies, Inc. and Mercer Mgt. Consulting, Inc., Defendants.

Bankruptcy No. 04-37512-JS.

Adversary No. 06-2011-JS.

United States Bankruptcy Court, D. Maryland.

February 7, 2008.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Kevin G. Hroblak, Cameron J. MacDonald, Stephen B. Gerald, Whiteford, Taylor et al, Baltimore, MD, Alan M. Grochal, Tydings and Rosenberg, Baltimore, MD, for Plaintiff.

Kell C. Mercer, Austin, TX, Sedica Sawez, Rosenberg Martin Greenberg, LLP, Joel I. Sher, Shapiro Sher Guinot & Sandler, Baltimore, MD, for Defendants.

MEMORANDUM OPINION DENYING MOTIONS TO DISMISS AMENDED COMPLAINT

JAMES F. SCHNEIDER, Bankruptcy Judge.

The instant motions to dismiss came on for hearing before this Court on August 23, 2007. For the following reasons, the motions will be denied.

FINDINGS OF FACT

1. The debtor, Air Cargo, Inc. ("Air Cargo") was in the business of providing

services to various airlines for the movement of cargo, acting as an agent between the airlines and freight forwarders in order to facilitate the transfer of cargo by motor carriers.

2. On December 7, 2004, Air Cargo filed the above-captioned Chapter 11 bankruptcy case in this Court.

3. On December 22, 2004, Air Cargo filed Schedules A-J [P. 43]. The schedules did not list a claim against either i2 Technologies, Inc. ("i2") or Mercer Management Consulting, Inc. ("Mercer").

4. On March 17, 2006, Air Cargo filed a disclosure statement [P. 374]. The disclosure statement did not identify any claim against i2 or Mercer.

5. On May 8, 2006, Air Cargo and the Official Committee of Unsecured Creditors filed a "Modified Joint Plan of Liquidation" (the "Plan") [P. 433]. The Plan did not identify any claim against i2 or Mercer.

6. On May 19, 2006, this Court approved the disclosure statement and confirmed the Plan by order [P. 440]. The effective date of the Plan was June 14, 2006.

7. The Plan provided for the liquidation of Air Cargo by creating a litigation trust, the stated purpose of which was to "liquidate all of the assets of the Estate, including but not limited to prosecution of all claims of the Estate and claims contributed to the Litigation Trust pursuant to the plan." Plan, Art I, § 1.34. The Plan appointed Martin Fletcher, former counsel to the Unsecured Creditors Committee, as litigation trustee, and authorized him to exercise all of the powers of a Chapter 11 trustee, if one had been appointed. Plan, Art IV, § 4.3.¹

8. The four main assets of the litigation trust included 1) the recovery of a tax refund; 2) any remaining tangible assets; 3) accounts receivable; and 4) funds resulting from the anticipated prosecution of avoidance actions, including actions to avoid and recover fraudulent transfers and preferences. Plan, Art IV, § 4.2.

9. The Plan contained a "retention of jurisdiction" clause, Plan, Art IV, § 8.1.²

10. Between November 23, 2006 and December 1, 2006, the litigation trustee filed 161 complaints in this Court to void various alleged preferential transfers (Adv. Proc. Nos. 06-1807 through 06-1918, 06-1939 through 06-1982, 06-1984 and 06-1985, 06-1988, 06-1990, and 06-1997). On December 5, 2006, the litigation trustee filed six additional complaints for the turnover of property (Adv. Proc. Nos. 06-2001 through 06-2006).

11. On December 6, 2006, the litigation trustee filed the instant adversary proceeding against i2 and Mercer. On March 9, 2007, the litigation trustee filed a first amended complaint [P. 6].

12. The instant adversary proceeding is unique among the 168 adversary proceedings because it alone seeks to recover fraudulent conveyances and also asserts a variety of other state law causes of actions against the defendants.

13. The amended complaint contains the following allegations: In 2002, Air Cargo began implementing a business plan requiring the deployment and installation of a new information technology platform. In March 2002, Air Cargo met with i2 to discuss a contract for installation of this platform. i2 proposed certain "information technology architecture" and submitted the proposal to Air Cargo. On July 18, 2002, Mercer provided a report to Air Cargo and the Carlyle Group which approved the platform. On August 12, 2002, Air Cargo entered into a written contract with i2. The information technology which i2 provided was insufficient to meet the needs of Air Cargo. It is alleged that i2 knew what information technology Air Cargo needed to carry out its new business strategy, and that i2 and Mercer knew from the beginning that the platform provided by i2 was insufficient for those purposes.

14. Air Cargo paid i2 an initial fee of $3.2 million. Additional payments brought the total amount paid to $5.7 million.

15. The amended complaint contains seven counts, for breach of contract against i2 (Count I), breach of contract against Mercer (Count II), intentional misrepresentation and fraud against i2 (Count III), negligent misrepresentation against i2 and Mercer (Count IV), negligence and malpractice against i2 and Mercer (Count V), avoidance and recovery of fraudulent conveyances from Air Cargo to i2, totaling "no less than $5.7 million" (Count VI), and the avoidance and recovery of fraudulent conveyances from Air Cargo to Mercer, totaling "no less than $100,000" (Count VII).

16. On May 4, 2007, i2 filed a motion to dismiss, or in the alternative, to abstain [P. 24], in which it alleged that the bankruptcy court lacks subject matter jurisdiction because the complaint does not concern "core" matters or matters "related to" the bankruptcy; that the District of Maryland is not the proper venue for the complaint; and that the causes of action are barred by judicial estoppel and res judicata.

17. On June 11, 2007 Mercer filed a motion to dismiss [P.41]. Mercer argued that the litigation trustee's claims for breach of contract and negligence must be dismissed for lack of subject matter jurisdiction. Additionally, Mercer argued that the litigation trustee's fraudulent conveyance claim failed as a matter of law, on the grounds that it lacked a good faith basis, failed to identify an actual creditor that could bring such a claim under state law, failed to establish the absence of fair consideration, and failed to allege the fraudulent conveyance with particularity. Mercer also argued that all the claims against it should be dismissed under the doctrines of judicial estoppel and res judicata because Air Cargo failed to disclose any claims against Mercer in its schedules and disclosure statement. Mercer also argued that the claim for breach of contract must fail because of the failure to allege the existence of a contractual agreement, any breach thereof, and any damages incurred thereby. Mercer argued that the negligent misrepresentation claim must fail because the complaint did not plead it with particularity, that Mercer's statements were only its expression of an opinion, that Mercer and Air Cargo were equally sophisticated parties, that Mercer did not make any false statements, that the amended complaint does not allege facts demonstrating justifiable reliance, that the amended complaint does not allege facts showing proximate causation, that the negligence claim is a replication of its negligent misrepresentation claim, that the amended complaint alleges economic losses not recoverable at law and that it does not properly allege proximate causation of damages.

CONCLUSIONS OF LAW

Subject Matter Jurisdiction

1. Bankruptcy subject matter jurisdiction is conferred by statute. 28 U.S.C. § 1334(a) provides that the United States district courts "shall have original and exclusive jurisdiction of all cases under title 11." 28 U.S.C. § 1334(b) provides that the United States district courts "shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11."³ Therefore, in order to be able to hear and determine the instant complaint, this Court must first determine whether the complaint states causes of action "arising under," "arising in," or "related to" the underlying bankruptcy case.

2. Controversies "arise in" title 11 when they "have no existence outside of the bankruptcy." United States Trustee v. Gryphon at Stone Mansion, Inc., 166 F.3d 552, 555 (3rd Cir.1999). Claims "arise under" title 11 if the claims "clearly invoke substantive rights created by bankruptcy law." Glinka v. Murad (In re Housecraft Indus. USA, Inc.), 310 F.3d 64, 70 (2d Cir.2002).

3. The bankruptcy court has "arising under" jurisdiction over claims for the avoidance and recovery of fraudulent conveyances. See Huffman v. Perkinson (In re Harbour), 840 F.2d 1165, 1167-68 (4th Cir.1988). The question remains whether the Court also has "related to" jurisdiction over state law contract, negligence, negligent misrepresentation and fraud claims. Alternatively, a question also exists whether this Court has "related to" jurisdiction over the fraudulent conveyance claims.

4. The Fourth Circuit has adopted the same test for determining "related to" jurisdiction as has the Third Circuit, stating that "the test for determining whether a civil proceeding is "related to" bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the "estate being administered in bankruptcy." Owens-Ill., Inc. v. Rapid Am. Corp. (In re Celotex Corp.), 124 F.3d 619, 625 (4th Cir.1997) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir.1984)).

5. However, after a Chapter 11 plan has been confirmed, both the Third and Fourth Circuits have narrowed the expansive reach of bankruptcy jurisdiction. In the recent case of Valley Historic Ltd. Partnership v. Bank of New York, 486 F.3d 831 (4th Cir.2007), the Fourth Circuit expounded on the extent of the subject matter...