In re Argo Communications Corp.

Citation134 BR 776
Decision Date27 December 1991
Docket NumberBankruptcy No. 87B10020-PBA,Adv. No. 91-5237.
PartiesIn re ARGO COMMUNICATIONS CORPORATION, Debtor. John S. PEREIRA, Trustee, Plaintiff, v. CENTEL CORPORATION, Centel Network Company, Centel Credit Company, and Centel Management Services Company, Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

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J.H. Wilkinson, and A.P. Lubitz, Donovan, Leisure, Newton & Irvine, New York City, for Trustee.

P.M. Fishbein, Kaye, Scholer, Fierman, Hays & Handler, New York City and R.J. Rappaport, Ross & Hardies, Chicago, Ill., for Centel Corp., Centel Network Co., Centel Credit Co., and Centel Management Services Co. (Centel).

MEMORANDUM OF DECISION ON DEFENDANT'S MOTION TO DISMISS AND FOR SUMMARY JUDGMENT

FRANCIS G. CONRAD, Bankruptcy Judge.*

This matter1 came before us on Centel's motions for partial summary judgment and to dismiss Trustee's adversary proceeding brought on behalf of the Debtor, Argo Communications Corporation (Argo).2 Trustee's complaint3 alleges breach of fiduciary duty, corporate waste, breach of contract, and negligent and fraudulent misrepresentation stemming from Centel's4 involvement in the corporate affairs of Argo immediately preceding Argo's application for bankruptcy relief. In addition to these State law causes of action, Trustee requests that we eliminate or equitably subordinate Centel's claims against Argo regarding an alleged lease of communications equipment.

Centel first moves under F.R.Civ.P. 12(b)(6) to dismiss Trustee's first, second, third, and fifth claims for failure to state a claim upon which relief may be granted because Argo's claims are time-barred under New York law. Centel also pleads that, under F.R.Civ.P. 9(b), the fourth count of the complaint should be dismissed for failure to plead fraud with particularity. In the alternative, Centel asks us to grant partial summary judgment to the defendants on portions of the first, fourth, and fifth claims for relief set forth in Trustee's complaint. Finally, Centel moves under F.R.Civ.P. 12(e) for a more definite statement of the seventh claim for relief.

For the reasons expressed below, we deny Centel's 12(b)(6) and summary judgment motions as they pertain to counts one through six. We also deny Centel's motion to dismiss count four under F.R.Civ.P. 9(b), and deny Centel's motion for a more definite statement of claim seven.

FACTS

The bankruptcy case was commenced on January 7, 1987, when Argo filed for reorganization under Chapter 11 of the Bankruptcy Code. By order of this Court, dated February 11, 1987, the Chapter 11 case was converted to Chapter 7. Trustee was appointed on February 14, 1987.

Trustee filed the present complaint on March 7, 1991, for damages under State law arising out of Centel's breach of fiduciary and other duties owed to Argo, as well as breach of contract, fraudulent misrepresentation, and corporate waste. In his complaint, Trustee also requests that we disallow Centel's claims against the estate under § 502 of the Bankruptcy Code, or equitably subordinate these claims under § 510. Trustee requests compensatory damages of at least $300 million per claim for the first five causes of action and punitive damages of at least $300 million with respect to the sixth claim for relief. Trust ee also requests compensatory and punitive damages in the seventh cause of action.

Argo is a Delaware corporation with its principal offices in New Rochelle, New York. Argo developed, constructed, and operated a digitally switched satellite-based communications network that served customers throughout the United States. When it commenced its Chapter 11 reorganization, Argo had installed and operated digital telephone switching systems in ten major cities. Customers in other cities were connected to the Argo network through terrestrial digital facilities provided by other carriers. Argo offered its customers two basic switched service systems that were WATS-like in nature. Argo also offered flat-rate communications services to high volume users.

Centel is a Kansas corporation with its principal offices in Chicago, Illinois. Centel operates local exchange telephone systems involving more than 1.5 million access lines in nine states. Centel also provides cellular telephone service in thirteen states. Centel is a major shareholder in Argo and in several other telecommunications corporations.

The dispute between the parties originates in a failed merger involving Argo and two other telecommunications corporations. Trustee alleges that Centel abused its financial and managerial control over Argo to orchestrate Argo's liquidation prior to the planned merger. According to the complaint, the dispute between the parties began following Centel's initial investment in Argo. After assuring Argo that Centel's goals coincided with Argo's, Centel allegedly induced Argo's founder, Francesco Galesi, to bring Centel in as a shareholder and corporate partner. Trustee alleges that Centel exercised control over Argo from 1983 through 1986 as Argo's dominant shareholder. In the Spring of 1986, Centel proposed a merger of Argo with two other telecommunications companies in which Centel owned an interest: Microtel, Inc. (Microtel) and LCI Communications, Inc. (LCI). Trustee concludes the failure of the proposed merger forced Argo into bankruptcy.

In addition to its investments in Argo, Centel also owned significant percentages of LCI and Microtel. Centel representatives were on the boards of directors of all three of these corporations. Although Centel did not itself hold a majority of the shares of Argo stock, Trustee alleges that it was nonetheless the controlling shareholder of Argo, a private, closely-held corporation that had become financially dependent on Centel. Together with Alltel Corporation, another communications corporation which also held substantial portions of the stock of Argo, LCI, and Microtel, Centel was effectively able to control over 50% of the stock of Argo, LCI, and Microtel.5 Trustee alleges that Centel's significant holdings in all the merging corporations influenced other shareholders of Argo, thus making Centel's block vote even more controlling than its ownership percentage would indicate.

On August 22, 1986, the boards of directors of Argo, LCI, and Microtel approved an agreement to merge the three companies into a single entity. Centel's merger plans, however, involved the systematic dismantling of Argo. In reliance on Centel's representations of what was necessary to facilitate the merger, Argo surrendered customer lists, fired key employees, and disclosed confidential business information all in preparation for the merger. This dismantling plan created a situation such that if the merger did not take place, Argo would be unable to survive on its own.

The merger was subject to approval by holders of each class of stock of Argo, LCI, and Microtel. Centel repeatedly recommended the merger to the shareholders of all three companies and stated its intention to vote in favor of the merger as a shareholder in each of the companies. Centel explicitly stated its pro-merger position in a Prospectus and Joint Proxy Statement, dated November 26, 1986, and in an amendment thereto, dated December 12, 1986. The shareholder votes were held on December 19, 1986, one week after the Proxy Statement was amended. Contrary to these representations, however, Centel voted its shares against the merger. Without Centel's support, the merger was not approved.

From the facts alleged, Trustee questions Centel's allegiance to Argo's best interests in light of Centel's additional investments in Microtel and LCI. Trustee argues that this conflict of interest allegedly prevented Centel from acting in the best business interests of Argo. When Centel withdrew its support for the merger at the eleventh hour, Argo was little more than a shell corporation and could no longer function as an independent business entity. Soon after the merger plans were abandoned, Argo sought protection from creditors in this court.

Trustee also alleges that Centel profited from the failed merger and Argo's collapse. Following its rejection of the merger, Centel earned substantial profits from Argo's client lists and confidential information that but for the planned merger, Centel would not have had the opportunity to use. In addition, Argo was no longer a business competitor whose services would reduce Centel's market share.

Centel denies that its actions caused Argo's financial collapse. First, Centel argues that nearly all actions mentioned in Trustee's complaint were approved by Argo's board of directors. Centel further argues that it had only two directors on the seven-director board and at no time owned more than 26% of Argo's common stock.6 Thus, Centel concludes that it was not the dominant shareholder as Trustee alleges. Second, Centel states that it was financially harmed by the failed merger and reported a pre-tax write-off of its investment in Argo of $41.6 million as of December 31, 1986—the largest loss of any Argo shareholder.

DISCUSSION

Trustee's underlying action is based on the right of a bankruptcy trustee to bring suit against alleged wrongdoers in the name of the debtor and for the benefit of creditors. Once a debtor has filed for bankruptcy relief, a trustee is appointed to maximize the distribution of assets to creditors. The trustee oversees all legal and equitable interests of the debtor as property of the estate. 11 U.S.C. § 541(a)(1). It is a fundamental concept within the Bankruptcy Code that the trustee is empowered to "collect and reduce to money the property of the estate . . . in the best interest of parties in interest." 11 U.S.C. § 704(1). These words constitute the trustee's main duty to both the debtor and the creditors to realize from the estate all that is possible for distribution among the...

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