In Re: BRIDGEPORT HOLDINGS, INC., et al., Debtors. BRIDGEPORT HOLDINGS INC. LIQUIDATING TRUST, Plaintiff V. ALFRED D. BOYER, BRADFORD M. FREEMAN, WILLIAM JOHNSON, LAURENCE MIDLER, CHARLES P. RULLMAN, KASHIF F. SHEIK, GARY L. WILSON, JEROME B. YORK and LAWRENCE RAMAEKERS, Defendants
| Decision Date | 30 May 2008 |
| Citation | 388 BR 548 |
| Court | U.S. Bankruptcy Court — District of Delaware |
For Defendants Alfred D. Boyer, Bradford M. Freeman, William Johnson, Laurence Midler, Charles P. Rullman, Kashif F. Sheik, Gary L. Wilson and Jerome B. York: William P. Bowden , Benjamin W. Keenan , Ashby & Geddes, Wilmington, DE; Bennett J. Murphy, Jeanne E. Irving , Caroline Walters, Hennigan, Bennett & Dorman LLP, Los Angeles, CA.
For Lawrence J. Ramaekers: Mark Minuti , Jeremy W. Ryan , Candice Toll Aaron , Saul Ewing, Wilmington, DE; Sheldon S. Toll, Law Office of Sheldon S. Toll PLLC, Southfield, MI.
For Bridgeport Holdings Inc. Liquidating Trust: William H. Sudell, Jr. , Daniel B. Butz , Morris Nichols Arsht & Tunnell, Wilmington, DE; Michael Stamer , Robert Johnson ,Jamie Berger , Elizabeth Raskin, Brian Carney, Akin Gump Strauss Hauer & Feld LLP, New York, New York.
MEMORANDUM OPINION
This opinion is with respect to Defendants' motions (Doc. # # 16 and 17) to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Bankruptcy Procedure 7012. For the reasons set forth below, I will deny the motions in part and will grant them in part. 1
On September 10, 2003, Bridgeport Holdings Inc. and its domestic affiliates (the "Debtors") filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The Debtors traded under the name "Micro Warehouse". 2 On September 24, 2004, this Court entered an order confirming the Plan of Distribution. Pursuant to the terms of the Plan, the Liquidating Trustee, on behalf of all beneficiaries of the Trust (the "Trust"), has been assigned all of the Debtors' causes of action under§§ 542, 543, 544, 547 through 551 and 553 of the Bankruptcy Code.
On September 9, 2003, one day prior to the petition date, the Debtors consummated the sale of a substantial portion of their United States assets (the ") toCDW Corporation ("CDW"), including the majority of the Debtors' inventory and substantially all of their intellectual property, information technology hardware assets and furniture and equipment located at certain of the Company's office locations. The purchase price paid by CDW for the Assets was $ 28,000,000. 3
On March 3, 2005, the Trust commenced an adversary proceeding against CDW in this Court seeking to avoid the sale transaction as a fraudulent transfer under § 548(a)(1) of the Bankruptcy Code and in accordance with the Delaware Uniform Fraudulent Transfer Act, 6 Del. C. § 1301, et seq., made applicable by § 544 of the Bankruptcy Code. After extensive discovery and motion practice, the fraudulent transfer action was settled by an order entered on February 22, 2007, pursuant to which CDW tendered the Trust a lump sum payment of $ 25,000,000. Obviously, this was not a nuisance settlement.
On December 11, 2007 the Trust filed the subject Complaint against officers and directors of Micro Warehouse (the "D&O Defendants") and Lawrence J. Ramaekers ("Ramaekers"). The Complaint alleges that the D&O Defendants and Ramaekers breached their fiduciary duties to the Company, the shareholders and its creditors for acts and omissions which culminated in the rushed "fire sale" of the Assets to CDW on September 9, 2003. Specifically, Count I alleges breach of fiduciary duty of loyalty and lack of good faith against all defendants other than Ramaekers, Count II alleges breach of fiduciary duty of care and lack of good faith against all of the defendants except Ramaekers, Count III alleges breach of fiduciary duty and lack of good faith against four individuals to the extent they served as officers only, Count IV alleges breach of fiduciary duty of care and lack of good faith by defendant Midler to the extent he served as an officer only, Count V alleges breach of fiduciary duty of care, loyalty and lack of good faith by Ramaekers, and Count VI alleges corporate waste by all defendants.
The following facts are distilled from the allegations in the Complaint. (Doc. # 1) (hereinafter the "Complaint").
In or about January 2000, at the height of the dot-com boom, Micro Warehouse was acquired by a group of investors in a leveraged buyout ("LBO"). In the LBO, Micro Warehouse became indebted to a syndicate of eighteen (18) financial institutions (the "Secured Lenders") led by CS First Boston ("CSFB") as agent, pursuant to a Credit Agreement dated as of January 31, 2000 (the "Credit Agreement"). Approximately one year after the LBO, the technology sector suffered a significant downturn due to the bursting of the dot-com bubble and the lull in technology spending following "Y2K" upgrades. There was a further decrease in consumer demand following the terrorist attacks of September 11, 2001. This recession resulted in an erosion in Micro Warehouse's sales. The recession, coupled with Micro Warehouse's debt load, resulted in a degradation of Micro Warehouse's financial outlook. As a result, Micro Warehouse was forced to negotiate amendments to the Credit Agreement at the end of 2000, leading to the execution of an Amended and Restated Credit Agreement dated December 15, 2000 (the "Amended Credit Agreement"). Micro Warehouse's financial problems continued, and in early 2002 Micro Warehouse had defaulted on one or more of its loan covenants. The Company was again forced to renegotiate its credit facility with the Secured Lenders, leading to the execution of Amendment No. 1, Waiver and Agreement to the Amended Credit Agreement, dated January 11, 2002.
Following the amendment of Micro Warehouse's loan agreements, the D&O Defendants were faced with various options that would have improved the financial performance of Micro Warehouse, including (i) a new private equity investment; (ii) a business combination with a competitor; and (iii) a debt restructuring with an asset-based lender. Nevertheless, the D&O Defendants failed to follow through with any of these recognized options to improve the Company's financial condition, so that the Company's financial decline continued throughout 2002. A presentation from an October 29, 2002 shareholder meeting reveals that by that date, the D&O Defendants had identified the following "M&A Alternatives": (i) "Potential Merger," (ii) "Potential Joint Ventures," and (iii) "Potential Asset Sales." At that time, however, the D&O Defendants failed to engage the Company in any of these alternatives identified to improve the Company's financial condition. By the fall of 2002, the Company was suffering from liquidity difficulties, and the D&O Defendants knew that the Company would default on its EBITDA covenant at the coming year end. Around the same time, key vendors began to restrict Micro Warehouse's lines of credit.
During the prosecution of the Trust's fraudulent conveyance action against CDW, Stephen Yankauer ("Yankauer") of CSFB gave testimony that in October 2002, concerns about the Company's liquidity were "severe and significant" and the Secured Lenders were concerned about the possibility of a "free fall" bankruptcy. Yankauer further testified that he considered the loan to be "upside down," meaning that the Company owed more on the loan that the security was worth, from both a going-concern and liquidation perspective. Yankauer described Micro Warehouse's suppliers as "watching [the Company] like a hawk." Canadian Imperial Bank of Commerce ("CIBC"), another of the Secured Lenders, classified Micro Warehouse as having a "very weak financial condition" and its loan as "non-performing." CIBC was "very skeptical" of the Company's ability to survive at that time.
Between December 2002 and March 2003, Micro Warehouse remained in breach of its EBITDA loan covenant, and had also failed to make the required principal payments on its term loans. Accordingly, the D&O Directors were ultimately forced to obtain four separate, short-term covenant waivers from the Secured Lenders through the fourth quarter of 2002 and the first quarter of 2003. Meanwhile, Micro Warehouse and the Secured Lenders negotiated a restructuring of the secured debt facility, which closed on April 11, 2003. Despite the restructuring of its debt, however, Micro Warehouse's downward spiral continued through the spring and mid-summer of 2003, as its key vendors further restricted its lines of credit.
In early June 2003 the Secured Lenders urged Micro Warehouse to hire a restructuring advisor. For approximately two months, however, the D&O Defendants ignored their responsibilities to the Company and its shareholders to act in their best interest, and failed to do so. Meanwhile, Micro Warehouse's financial condition worsened. By July 2003, it was very difficult for Micro Warehouse to obtain products to timely fill customer orders, and key salespeople began leaving Micro Warehouse to join competitors. As they watched key salespeople flee to competitors, the D&O Defendants continued to sit on their hands and disregard their responsibilities to act in the best interest of the Company and its shareholders. Among other things, in the face of the Company's dire financial condition, the D&O Defendants failed to contact the Company's competitors who had previously expressed interest in a transaction with the Company, to discuss whether they would be interested in purchasing the Company's United States business.
On or about July 18, 2003, the Company met with its Secured Lenders to discuss the...
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