In re Avado Brands, Inc.

Decision Date28 December 2006
Docket NumberBankruptcy No. 04-31555HDH-11.,Adversary No. 05-3823.
Citation358 B.R. 868
PartiesIn re AVADO BRANDS, INC., f/k/a Apple South, Inc., et al., debtors. William Kaye, Trustee of Avado Brands, Inc. Litigation Trust, Plaintiff, v. Thomas E. Dupree, Jr., Louis J. Profumo, Margaret E. Waldrep, Erich J. Booth, Jerome A. Atkinson, William V. Lapham, Emilio Alverez-Recio and Robert Sroka, Defendants.
CourtU.S. Bankruptcy Court — Northern District of Texas

John P. Freeman, McCutchen Blanton Johnson & Barnette, LLP, Columbia, SC, Gilreath Law Firm, P.A, James R. Gilreath, Gravessieffert, PA, Jennings L. Graves, Jr., Greenville, SC, Patrick L. Huffstickler, Carol E. Jendrzey, Cox & Smith, San Antonio, TX, John L. Latham, Atlanta, GA, Timothy P. Olson, Skadden, Arps, Slate, et al, Chicago, IL, Thomas Rice, Deborah D. Williamson, Cox & Smith Incorporated, San Antonio, TX; for Debtor.

E. Lee. Morris, Deborah Perry, Munsch Hardt Kopf & Harr, P.C., Dallas, TX, Andrea Pincus, Stanley A. Bowker, Anderson Kill & Olick, P.C., New York City, for Plaintiff.

Jeffrey R. Fine, Thomas W. Paxton, Hughes & Luce, LLP, Dallas, TX, for Thomas E. DuPree, Jr.

John D. Despriet, Laura E. Woods, Rachel D. King, Smith, Gambrell & Russell, LLP, Atlanta, GA, Michael L. Jones, Henry & Jones, Dallas, TX, for Louis J. Profumo.

Michelle A. Mendez, Jenkens & Gilchrist, Dallas, TX, for Margaret E. Waldrep.

Michael L. Scanlon, Kane, Russell, Coleman & Logan, P.C., Dallas, TX, for Erich J. Booth.

Michael L. Jones, Henry & Jones, Dallas, TX, for Jerome A. Atkinson, William V. Lapham, Emilio. Alvarez-Recio, and Robert Sroka.

MEMORANDUM OPINION ON MOTIONS TO DISMISS AND MOTION FOR SUMMARY JUDGMENT

HARLIN DEWAYNE HALE, Bankruptcy Judge.

In the instant adversary, proceeding, William Kaye, Trustee of the Avado Brands, Inc. Litigation Trust ("Trustee") has filed a Complaint against several of the former officers and directors of the Debtors ("Complaint"). In his Complaint, the Trustee refers to the Defendants who were members of the board of directors, other than Thomas E. DuPree, Jr. ("DuPree"), as the "Directors" or "Director Defendants" and refers to the former officers (DuPree, Waldrep, Profumo and Booth) as "Officer Defendants." DuPree and Waldrep were both officers and directors of Avado, and the other Director Defendants (Atkinson, Lapham, Alvarez-Recio and Sroka) are sometimes referred to as the "Outside Directors" or "Outside Director Defendants." The Court has tried to use the same terminology throughout this opinion.

Causes of Action

The Original Complaint filed by the Trustee asserts various causes of action against the Defendants on the following nine counts: (1) Avoidance and recovery of Preferences from DuPree; (2) Avoidance and recovery of Preferences from. Waldrep; (3) Avoidance of the Release Agreement, against DuPree and the Director Defendants; (4) Breach of Fiduciary Duty — Dupree Loans and Refinancing, against DuPree; (5) Breach of Fiduciary Duty — Dupree Loans and Refinancing, against the Director Defendants (6) Breach of Fiduciary Duty — Release Agreement, against the Director Defendants; (7) Breach of Fiduciary Duty — Corporate Waste, against all Defendants; (8) Deepening Insolvency — against all Defendants; and (9) Common Law Fraud — against DuPree.

The Motions Before the Court

Defendants William V. Lapham ("Lapham"), Jerome A. Atkinson ("Atkinson"), Emilio Alvarez-Recio ("Alverez-Recio") and Robert Sorka ("Sorka"), collectively referred to herein as the "Outside. Director Defendants," filed a motion to dismiss counts 3 and 5-8 of the Complaint ("Outside Director Defendants' Motion to Dismiss"), Defendant Margaret E. Waldrep ("Waldrep") filed a motion to dismiss counts 3, 5 and 7-8 of the Complaint ("Waldrep's, Motion to Dismiss"). DuPree filed a motion to dismiss all counts asserted against him ("DuPree Motion to Dismiss"). Defendant Louis J. Profumo ("Profumo") filed a motion to dismiss counts 7 and 8 ("Profumo Motion to Dismiss"). Defendant Erich J. Booth ("Booth") filed a combined motion to dismiss counts 7 and 8, and alternatively, a motion for summary judgment on count 7 ("Booth Motion").

The Trustee responded to all of the motions and the Court set the matters for hearing, All parties presented argument at the hearing. After reviewing the pleadings and hearing the argument of counsel, the Court took the motions under advisement for further consideration. For "the purpose of the motions to dismiss, the Court will adopt the factual allegations in the Complaint as true and Mg draw all factual inferences in favor of the. Trustee's position and against the Defendants. For the summary judgment motion, the Court will apply the procedural and evidentiary standards required Wider federal law, as set out later in this opinion.

Jurisdiction

This memorandum opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052, The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334 and 151, and the standing order of reference in this district. Counts 1-3 in the Complaint are core proceedings, pursuant to 28 U.S.C. § 157(b)(2). The other counts are non-core claims that the Court may hear, pursuant to 28 U.S.C. § 157(c)(1), and have been referred to this Court by the District Court for determination of all pre-trial matters.

I. BACKGROUND FACTS1

According to the Trustee's Complaint, beginning as early as 1998, Avado, experienced financial difficulties as a result of a burdensome debt level and the resultant debt service requirements. Throughout 2002 and 2003, Avado's financial performance continued to deteriorate, leading to an inability to satisfy debt requirements. On February 4-5, 2004, Avado and its affiliated companies filed Chapter 11 bankruptcy petitions.

The DuPree and Waldrep Loans

In November and December of 1998, Avado made three unsecured loans to DuPree in the total amount of $7,851,500. The original interest rate for these loans was 7 percent per year. As originally drafted, the promissory notes provided for interest to be paid quarterly. However, this provision was later changed to provide that all interest was payable at maturity. The stated maturity dates for these notes were originally in November and December, although Avado had the right to call the notes for repayment on demand at any time prior to their stated due dates.

As the financial condition of Avado deteriorated, the Directors chose not to exercise Avado's right to repayment of the loans, and instead loaned DuPree another $3,000,000 in October of 1999. This fourth note had an interest rate of 8.5 per cent per year and was due and payable in full two months later, December 31, 1999. This fourth note was secured by three parcels of real estate owned by DuPree.

Avado also made three loans to Waldrep in 1998, totaling $41,500 with an interest rate of 5.06 percent per year, payable in October and November 1999. In November 1999, the Directors changed the interest rate on these loans to 8.43 percent and extended them to December 31, 1999. Also in December of 1999, DuPree requested and the Directors agreed to release the lien on one of the parcels of real estate that had been pledged for the fourth loan.

On December 28, 1999, three days before Dupree's fourth loan and the Waldrep Loans were due and payable, the Directors held a Special Telephone Meeting at which DuPree requested further extensions. The Directors once again obliged, extending the loans to the earlier of June 30, 2000, or the consummation of a proposed management buy-out of Avado, The extended interest rate on the DuPree fourth loan was 9.84%.

In June of 2000, DuPree still was not prepared to pay off the loans and requested yet another extension, and the Directors consented to a further extension, this time until June 30, 2002, for all of the loans. The interest rate on all of the loans was increased to 11.5%, but, again, interest was pot payable until maturity. Avado failed to disclose in its filings, with the SEC or otherwise, any, reason for the two-year extension of the maturity date, and also failed, as required by Item 601 of Regulation S-K, to file with, the SEC any of the underlying documentation for the DuPree Loans in connection with its continuing annual and quarterly SEC reporting obligations under the Exchange Act on Forms 10-K and 10-Q.

As of December 31, 2001, the total amount owed to Avado by DuPree under this series of related loan transactions was approximately $10.9 million in principal and $3.0 million in accrued interest, The due date of these notes was June 30, 2002, with only one note secured by certain real estate collateral allegedly valued at $2.8 million. The Waldrep Loans totaled $41,500 in principal plus accrued interest.

The 2002 Refinancing

In 2002, when the DuPree Loans plus accrued interest amounted to more than $14 million, DuPree was unable or unwilling to repay the loans or even to pay interest on the loans. Accordingly, in February 2002, the Outside Directors authorized Avado to refinance the loans by extending the due date for repayment for another seven years, until 2009. In "addition, DuPree demanded that Avado release certain collateral that had been pledged in connection with the loans and the Outside Directors acquiesced. This collateral consisted of real estate valued at less than $3 million. The refinancing entailed the sale of the real estate which yielded $2.8 million. The proceeds from the sale were used to purchase $14 million in face value of Avado's subordinated, debt ("Subordinated Debt") which DuPree purchased for only about twenty cents on the dollar. The Subordinated Debt was then substituted, as collateral with respect to the loans.

In addition, the principal and interest payment terms of the DuPree Loans were changed to mirror the Subordinated Debt that was substituted as collateral. Thus, the...

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