In re E2 Communications, Inc.

• Decision Date: 20 November 2006
• Docket Number: No. 05-03542-BJH.,No. 02-30574-BJH11.,02-30574-BJH11.,05-03542-BJH.
• Citation: 354 B.R. 368
• Parties: In re e2 COMMUNICATIONS, INC., Debtor. e2 Creditors Trust and e2 Litigation Trust, by and through their trustee, Steven C. Metzger, Plaintiffs, v. Stephens, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Texas

354 B.R. 368

In re e2 COMMUNICATIONS, INC., Debtor.

e2 Creditors Trust and e2 Litigation Trust, by and through their trustee, Steven C. Metzger, Plaintiffs, v. Stephens, Inc., Defendant.

No. 02-30574-BJH11.

No. 05-03542-BJH.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

November 20, 2006.

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Dean W. Ferguson, Munsch, Hardt, Kopf, Harr and Dinan, Dallas, TX, for Debtor.

MEMORANDUM OPINION AND ORDER

BARBARA J. HOUSER, Bankruptcy Judge.

The Court tried this adversary proceeding (the "Adversary") over 8 days, commencing on August 14, 2006 and concluding on September 14, 2006. At the conclusion of the trial, the Court asked the parties to file revised proposed findings of fact and conclusions of law (the "Revised Findings") in light of the actual evidentiary record made at trial. Due to other competing commitments, the parties asked to have until October 20, 2006 within which to file the Revised Findings. The Revised Findings were filed on that date, at which time the Court took the Adversary under advisement. The Court has core jurisdiction over the parties and the issues raised in the Adversary in accordance with 28 U.S.C. § § 1334 and 157(b). This Memorandum Opinion and Order contains the Court's findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.

I. FACTUAL AND PROCEDURAL BACKGROUND

Briefly, this dispute centers around a failed merger transaction that closed in November, 2001 between e2 Communications, Inc. ("e2" or the "Debtor") and e-Synergies, Inc. ("e-Synergies"). The plaintiffs are the e2 Creditors Trust and the e2 Litigation Trust (collectively, the "Trusts"), acting through their trustee, Steven C. Metzger ("Metzger"). (PTO, p. 15, ¶¶ 36 & 37).¹ The Trusts were created pursuant to an amended plan of reorganization for the Debtor, which was confirmed on February 10, 2003 (the "Plan"). (PTO, p. 14, ¶ 34). Pursuant to Section 6.1 of the Plan, the e2 Creditors Trust was designated as the representative of the Debtor, to prosecute claim objections and to seek the recovery of preferential transfers, pursuant to § 1123(b)(3)(B) of the Bankruptcy Code. (PTO, p. 15, ¶ 38). The Plan further provided that all "claims, rights and causes of action that have been or could have been brought by or on behalf of the Debtor arising before, on, or after the Petition Date ..." are "preserved and retained for enforcement by the Litigation Trustee." (PTO, p. 15, ¶ 39). There is no dispute that the Plaintiffs own, and are legally entitled to assert, the claims stated against Defendant Stephens, Inc. ("Stephens") in the Adversary, which was filed against Stephens on July 7, 2005. (PTO, p. 15, ¶ 42).

Returning to the failed merger transaction and its history, on or about June 15, 2001, e2 and Stephens entered into an agreement (the "Contract") pursuant to which Stephens was retained by e2 to act as its "exclusive financial advisor." (P-66, p. 1). e2 considered other financial advisory firms, but ultimately decided to retain Stephens because Stephens was well qualified to provide the desired services and because Stephens had represented MessageMedia, another e-commerce business, in connection with its transaction with DoubleClick. (Tr. 1043/3-13; Tr. 1383/8-17; Tr. 1727/7-15).² The Contract was drafted by Stephens from a form commonly used in the financial advisory industry. (PTO, p. 12, ¶ 8). At the time it entered into the Contract, Stephens was one of the leading financial advisory firms in the country, (PTO, p. 12, ¶ 9), particularly with respect to the e-commerce industry. (Tr. 140/16-22). Stephens had no prior relationship with e2 or any member of e2's board of directors (the "Board") when it entered into the Contract. (Tr. 1382/17-1383/7). Under the terms of the Contract, Stephens was to advise e2 regarding "strategic alternatives" that might be available to e2. (66, p. 1). The services Stephens was to provide under the Contract included (i) identifying the possible strategic alternatives, (ii) evaluating the possible alternatives, (iii) presenting the possible alternatives to e2, (iv) assisting e2 in narrowing down the scope of the possible alternatives, and (v) assisting in the execution of whatever alternative e2 decided to pursue. (P-66). The "strategic alternatives" that Stephens was to consider for e2 included attempting to find a purchaser/business combination partner and/or new debt or equity financing. (P-66).

By mid-2001, the Board was interested in pursuing some form of business combination, sale, or financing transaction because e2 needed access to capital that was otherwise unavailable to it at that time.³ (Tr. 1723/17-22; D-222 (communication to e2 shareholders explaining 2001 performance and events leading up to the merger with e-Synergies, and the strategic rationale for the merger); D-232 (shareholder communication advising that "[g]iven [e2's] current financial condition, without consummating the proposed transaction [the e-Synergies merger], management believes there is no viable alternative for the survival of the Company")). e2's business was in the e-commerce industry. Specifically, e2 "was engaged in the internet or technology business of providing software, hosting, and other email marketing and communications services, which enable its customers to create, deploy, and monitor sophisticated email marketing campaigns and then respond to replies and automatically adapt to results." (PTO, p. 11, ¶¶ 1 & 2). As just noted, Farris was the founder of e2 and, at all times material to the claims asserted in the Adversary,⁴ was its President and Chief Executive Officer. (PTO, p. 11, ¶ 3; P-50, p. 7). Similarly, during at least the Engagement Period, Jeff Cordes ("Cordes") was e2's Chief Operating Officer and Chief Financial Officer. (PTO, p. 12, ¶ 4; P-50, p. 7). Finally, during at least the Engagement Period, the Board was composed of Farris, Cordes, Ian Bonner ("Bonner"),⁵ Bennie Bray ("Bray"),⁶ and Brian McAndrews ("McAndrews").⁷ (PTO, p. 12, ¶ 5; Tr. 1012/12-22; P-50, p. 7). Another person, Wade Browne ("Browne"),⁸ played an important role in connection with the Stephens engagement and the failed e-Synergies transaction. Specifically, from September, 2000 through at least the Engagement Period, Browne was an advisory director of e2, (PTO, p. 12, ¶ 6; Tr. 705/22-24), and was actively involved in the negotiation of the possible merger of e2 with e-Synergies. (Tr. 212/3-7; D-130, p. 2).

At the time of Stephens' engagement, e2 was experiencing serious cash flow shortages. In fact, e2 had never experienced a positive cash flow in any month since its inception. (P-50 (shareholder update dated May 10, 2001 noting that "[c]ash burn drops quarter over quarter from $3.4 million to just under $1 million"); P-52 (investor update stating that "e2 has gone from a dream company that is nearly cash flowing with profitability in sight")). And, during 2001, e2 was continuing to sustain monthly negative cash flow in excess of that which it had projected. (Tr. 181/9-17; P-32; D-115; D-222). The Board was aware of e2's cash flow problem before Stephens was engaged. (D-34; D-222). From almost the inception of its engagement, Stephens knew that e2 had a serious cash flow problem. (Tr. 1393/7-14). e2's cash flow problem was a factor that Stephens considered as it performed its services under the Contract. (PTO, p. 13, ¶ 19). Similarly, e2's cash flow problem was a factor that the Board considered when it evaluated prospective purchasers/business combination partners. (PTO, p. 13, ¶ 20).

e2's cash flow problems were so serious that Farris transferred over $600,000 to e2 during the Engagement Period.⁹ (Tr. 1727/16-21; D-150). If Farris had not transferred these funds to e2, e2 would not have had sufficient cash to continue its operations through November 15, 2001, the date the e-Synergies merger closed. (Tr. 315/24-316/7; Tr. 370/11-22; Tr. 1727/16-21; D-222).

Other factors further complicated Stephens' search for strategic alternatives for e2. During 2001, the stock values of companies in the e-commerce market were declining. (Tr. 732/9-20; Tr. 1009/22-1010/2; Tr. 1389/14-23). From June through August, 2001, the e-commerce market was negative. (Tr. 1339/14-1390/2). By at least August, 2001, e2, as well as most other companies in the e-commerce market, were experiencing revenue slowdowns. (Tr. 181/9-17; 1726/23-25). The e-commerce market use experienced consolidation during the Engagement Period. (Tr. 315/18-20). Finally, the manner in which e2's management operated e2 with respect to its use of cash caused a further diminishment in e2's value during the Engagement Period. (Tr. 1013/6-1315/6).

The combination of these problems made identifying a prospective purchaser/business combination partner for e2 more difficult. (Tr. 1407/20-25; Tr. 1422/21-1423/8; Tr. 1427/20-1428/25; 64; D-70; D-131; D-124). Market conditions that had enabled deals in the e-commerce business sector to close prior to the Engagement Period worsened during the Engagement Period, making it difficult for Stephens to identify potential e2 purchasers/business combination partners. (Tr. 179/11-183/3; 1389/14-1390/17; Tr. 1391/4-1392/2). Finally, the terrorists' acts of September 11, 2001, had a negative impact on e2's revenues and assets, and made identifying a prospective purchaser/business combination partner or other viable strategic alternative more difficult for Stephens. (Tr. 316/22-317/11; Tr. 1389/14-1391/17).

Notwithstanding these problems, during the Engagement Period, Stephens explored both asset and stock transactions for e2, as well as other strategic alternatives. (Tr. 1456/2-19; Tr. 1727/22-728/3; D-101; D-124; D-222; D-252, p. 8). In total, Stephens identified 29 prospective purchasers/business combination partners for e2. (PTO, p. 13, ¶ 21 (e-Synergies ...