In re Buckhead America Corp., Civ. A. No. 93-392-SLR. Bankruptcy No. 91-979 to 91-986. Adv. No. A92-84.

CourtUnited States District Courts. 3th Circuit. United States District Court (Delaware)
Citation178 BR 956
Docket NumberCiv. A. No. 93-392-SLR. Bankruptcy No. 91-979 to 91-986. Adv. No. A92-84.
PartiesIn re BUCKHEAD AMERICA CORP., et al., Debtors. The OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF BUCKHEAD AMERICA CORPORATION, et al. f/k/a Days Inns of America, Inc., et al., Plaintiffs, v. RELIANCE CAPITAL GROUP, INC., Reliance Group Holdings, Inc., Michael A. Levin, Frederick B. Beilstein, George E. Bello, Lowell C. Freiberg, Donald G. Raider, Howard E. Steinberg, Saul P. Steinberg, and Reliance Insurance Company, Defendants.
Decision Date28 January 1994


Edward M. McNally, John D. Demmy and Henry J. DeWerth-Jaffe of Morris, James, Hitchens & Williams, Wilmington, DE (Martin S. Siegel, Andrew Dash, Kevin S. Miller of Berlack, Israels & Liberman, New York City, of counsel), for plaintiff.

R. Franklin Balotti, Matthew J. Ferretti, Todd V. Jones and David L. Renauld of Richards, Layton & Finger, Wilmington, DE (Peter J. Kahn, R. Hackney Wiegman and Paul A. Murphy of Williams & Connolly, Washington, DC, Andrew B. Donnellan, Jr. and Richard B. Friedman of Reliance Group Holdings, Inc., of counsel), for defendants.


SUE L. ROBINSON, District Judge.

This matter is before the Court on defendants' motion to dismiss plaintiff's nineteencount amended complaint for failure to state a claim upon which relief can be granted. For reasons discussed below, the motion will be denied. Certain duplicative counts included in the amended complaint will, however, be dismissed.


Debtors (Buckhead America Corporation, et al., ("Buckhead") f/k/a Days Inn of America, Inc., et al.) filed petitions for reorganization under Chapter 11 of the Bankruptcy Code in 1991. In June, 1992, the Official Committee of Unsecured Creditors of Buckhead (the "Committee" or plaintiff) and Debtors filed a joint motion with the Bankruptcy Court seeking permission for the Committee to prosecute certain claims on Debtors' behalf and for the benefit of Debtors' creditors. The Bankruptcy Court granted the joint motion on July 18, 1992, thereby authorizing the Committee to commence this lawsuit. On July 28, 1992, the Committee filed its $250 million complaint asserting myriad claims in connection with two lever-aged buyout ("LBO") transactions involving Buckhead's predecessor, Days Inn of America, Inc.

On October 5, 1992, defendants moved to dismiss the complaint on the ground that plaintiff failed to comply with the requirement established by Bankruptcy Rule 7008(a) that all claims filed in an adversary proceeding "contain a statement that the proceeding is core or non-core." On October 22, 1992, plaintiff filed an amended complaint designating counts I-IV, VIII, and X-XIII as core proceedings, and counts V-VII, IX, and XIV-XIX as non-core proceedings.

The time for defendants to respond to the amended complaint was extended by stipulation until after resolution of a dispute regarding whether plaintiff could maintain this action as against certain defendants originally named in the complaint in light of certain release and injunction provisions contained in a plan of reorganization confirmed in a bankruptcy case filed in the Southern District of New York.1 On June 17, 1993, the Committee filed a notice of dismissal with the Bankruptcy Court voluntarily dismissing said defendants from this action. On June 18, 1993, the Bankruptcy Court "so ordered" the notice of dismissal.2

Defendants moved to dismiss the amended complaint on June 30, 1993. In addition, defendants demanded a jury trial on all counts of the amended complaint and filed a motion to withdraw the reference. On September 30, 1993, this Court granted defendants' motion to withdraw the reference.


In 1988, when certain of the defendants and others "directly or indirectly owned 49½% of the common stock" of Days Inn of America Corp. ("DIC"), defendants (and others originally named in the amended complaint) "caused" DIC to "go private" by having Days Inn of America, Inc. ("DIA"), DIC's wholly-owned subsidiary, pay for the acquisition of the outstanding shares of its parent company's stock. Although DIA financed the purchase of its parent's outstanding stock by incurring $175 million in long-term debt, plaintiff alleges that ownership of DIC's outstanding shares was obtained by Reliance Capital Group, L.P.4 Of the $175 million in debt incurred by DIA, at least $57 million was used to purchase DIC shares from public stockholders as well as from certain defendants to this lawsuit and their affiliates. Plaintiff claims this transaction, referred to as the "Reliance Capital LBO," amounted to a fraudulent conveyance because (1) DIA received no consideration from the change in ownership of its parent's stock, and (2) the transaction resulted in DIA's insolvency or left DIA undercapitalized and unable to pay its debts.

In 1989, Reliance Capital sold all of DIC's common stock to Tollman-Hundley Acquisition Corp. for the price of $87.1 million.5 Although THAC and TH Lodging were the purchasers of the DIC stock and Reliance Capital was the seller, plaintiff alleges that DIA financed the transaction, allegedly without receiving any consideration. In particular, DIA allegedly financed this transaction, referred to by plaintiff as the 1989 LBO, by assuming and then paying a promissory note for $38 million to Reliance Capital and by issuing another note for $45 million. Plaintiff claims the 1989 LBO likewise constituted a fraudulent conveyance because (1) DIA received no consideration from the change in ownership of its parent's stock, and (2) the transaction resulted in DIA's insolvency or left DIA undercapitalized and unable to pay its debts.

Plaintiff further alleges that the Reliance Capital LBO and the 1989 LBO, among other things, resulted in DIA's 1991 Chapter 11 filing.6

In addition to its fraudulent conveyance claims, plaintiff asserts claims for breach of fiduciary duty and waste, tortious interference with certain indentures issued by DIA and allegedly breached in connection with the subject LBO transactions, and violation of various provisions of the Delaware General Corporation Law restricting a corporation's payment of dividends to its shareholders and purchase of its own shares of capital stock. The final count of plaintiff's amended pleading seeks relief on an "alter ego" or "piercing the corporate veil" theory of liability. All claims asserted in the amended complaint arise from the two aforementioned LBO transactions.


Defendants seek dismissal of all nineteen counts of plaintiff's amended complaint on grounds that plaintiff failed to state a claim upon which relief can be granted. Fed. R.Civ.P. 12(b)(6); Fed.R.Bankr.P. 7012(b).

A. Dismissal For Failure to State a Claim

On a motion to dismiss for failure to state a claim upon which relief can be granted, the allegations of the complaint must be accepted as true. Cruz v. Beto, 405 U.S. 319, 322, 92 S.Ct. 1079, 1081-82, 31 L.Ed.2d 263 (1972) (per curiam). The court is bound to give the plaintiff the benefit of every reasonable inference to be drawn from the complaint. Retail Clerks International Association v. Schermerhorn, 373 U.S. 746, 83 S.Ct. 1461, 10 L.Ed.2d 678 (1963). Additionally, the court must resolve any ambiguities concerning the sufficiency of the claims in favor of the plaintiff. Hughes v. Rowe, 449 U.S. 5, 10, 101 S.Ct. 173, 176, 66 L.Ed.2d 163 (1980) (per curiam). Essentially, the "court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984).

The amended complaint and defendants' motion to dismiss that pleading raise novel and difficult questions of law. Relevant here is the principle that "courts should be reluctant to grant a motion to dismiss when the claim in question asserts a novel legal theory of recovery. Novel theories of recovery are best tested for legal sufficiency in light of actual, rather than alleged facts."7 It is also relevant in this regard that the amended complaint concerns complex transactions between various tangled entities. And, although the parties' extensive briefing has crystallized certain issues, others were not sufficiently developed to enable their proper disposition.

Due to these circumstances, the Court finds, as discussed herein, that many of the legal issues at bar are better left for adjudication after completion of discovery. Accordingly, defendants' motion will be denied, defendants will be directed to answer plaintiff's amended pleading, and a scheduling conference shall be ordered.

B. Fraudulent Conveyance Claims
1. Counts I, II, III, IV, X, XI, XII and XIII

Bankruptcy Code section 550 provides, in connection with certain transfers by a debtor which are avoidable as a fraudulent conveyance, for recovery of "the property transferred ... or the value of such property from ... the initial transferee of such transfer or the entity for whose benefit such transfer was made." 11 U.S.C. § 550(a)(1). In counts I-IV and counts X-XIII of the amended complaint, plaintiff seeks recovery against all defendants under the law of fraudulent conveyances for transfers made and debts incurred by DIA in the subject LBOs. These claims are challenged on the ground that none of the defendants in this action are "initial transferees" of the subject transfers or "entities for whose benefit the transfers were made."

Plaintiff responds by arguing that "the Amended Complaint unambiguously alleges that ... $9.6 million was paid to DIC Directors and their affiliates to retire options held pursuant to a stock option plan and that shares of DIC stock owned by DIA Directors were purchased in the Reliance Capital LBO." (D.I. 3, item 29 at 11) Defendants concede that "to the extent plaintif...

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