In re Greater Southeast Community Hosp. Corp. I

• Decision Date: 21 September 2006
• Docket Number: Adversary No. 04-10459.,Bankruptcy No. 02-02250.
• Citation: 353 B.R. 324
• Parties: In re GREATER SOUTHEAST COMMUNITY HOSPITAL CORP. I, et al., Debtors. Sam J. Alberts, Trustee for the DCHC Liquidating Trust, Plaintiff, v. Paul Tuft, et al., Defendants.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

Page 324

353 B.R. 324

In re GREATER SOUTHEAST COMMUNITY HOSPITAL CORP. I, et al., Debtors.

Sam J. Alberts, Trustee for the DCHC Liquidating Trust, Plaintiff, v. Paul Tuft, et al., Defendants.

Bankruptcy No. 02-02250.

Adversary No. 04-10459.

United States Bankruptcy Court, District of Columbia.

September 21, 2006.

As Amended September 26, 2006.

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Ted A. Berkowitz, Farrell Fritz, PC, Uniondale, NY, Joseph R. Damato, Seyfarth Shaw, David Fisher, Assistant Attorney General, Peter D. Isakoff, Cleveland Lawrence, III, Holly E. Loiseau, Weil, Gotshal & Manges LLP, Jeffrey W. Kilduff, O'Melveny & Myers LLP, Washington, DC, Christopher R. Mirick, Andrew M. Troop, Weil, Gotshal & Manges, LLP, Boston, MA, Deryck A. Palmer, New York, NY, for Debtors.

Dana Foster, Douglas Stephen Mintz, White & Case LLP, Washington, DC, for Plaintiff.

Francis A. Vasquez, Jr., Lucius. B. Lau, White & Case, Washington, DC, for trustee.

F. Joseph Warin, Jeffrey A. Wadsworth, Kimberly G. Davis, Gibson, Dunn & Crutcher, Washington, DC, for Defendant Kutak Rock, LLP.

Daniel J. Carrigan, Neil J. Dilloff, DLA Piper Rudnick Gray Cary, Northern Virginia, for Defendant Epstein, Becker & Green, P.C.

John D. Daley, Arnold & Porter, Washington, DC, for Defendants Paul Tuft, Melvin Redman, Steve Dietlin, Erich Mounce, Donna Talbot, and Susan Engelhard.

J. Christian Word, Latham & Watkins, Northern Virginia, for Defendants Rebecca Parrett and George Krauss.

DECISION REGARDING MOTIONS TO DISMISS SECOND AMENDED COMPLAINT

S. MARTIN TEEL, JR., Bankruptcy Judge.

This proceeding relates to the bankruptcy cases of Doctors Community Healthcare Corporation ("DCHC") and affiliated debtors who were its subsidiary hospital corporations.¹ Sam J. Alberts, the trustee for the DCHC Liquidating Trust, seeks to recover $242 million from Paul Tuft, Steve Dietlin, Erich Mounce, Donna Talbot, Susan Engelhard, Rebecca Parrett, and George Krauss, former directors and officers of DCHC (collectively the "D & O Defendants"),² and Epstein Becker & Green P.C. ("Epstein Becker") and Kutak Rock LLP ("Kutak Rock"), who served as former counsel to DCHC and its subsidiary hospital corporations. Alberts alleges that the D & O Defendants worked in tandem with Epstein Becker and Kutak Rock (collectively the "Law Firm Defendants") to further a Ponzi scheme perpetrated by National Century Financial Enterprises ("NCFE"), who, along with its subsidiary entities (the "NCFE Entities"), provided virtually all of the financing for DCHC's acquisitions and the debtors' operations.³

In a lengthy opinion reported as Alberts v. Tuft (In re Greater Southeast Cmty. Hosp. Corp. I), 333 B.R. 506 (Bankr. D.D.C.2005), and accompanying order, the court granted in part and denied in part various motions to dismiss Alberts's First Amended Complaint, but granted Alberts leave to amend his complaint to correct certain technical pleading defects. Alberts's Second Amended Complaint has once again prompted multiple motions to dismiss raising numerous (and occasionally overlapping) arguments concerning a labyrinthine complaint.

I

The court described the pertinent background facts in this case in some detail in its previous opinion regarding the defendants' earlier motions, and will not recapitulate them here. See In re Greater Southeast Cmty . Hosp. Corp. I, 333 B.R. at 514-15. Suffice to say, Alberts is the trustee of the DCHC Liquidating Trust, an entity created pursuant to the debtor's plan of reorganization and charged with prosecuting all causes of action formerly belonging to DCHC or its affiliated debtors.

In the instant proceeding, Alberts alleges that the D & O Defendants breached their fiduciary duties of care and loyalty by allowing DCHC and its subsidiary hospitals to undertake additional debt in a fiscally irresponsible manner and by misusing corporate assets. He further alleges that the Law Firm Defendants either aided and abetted some of these fiduciary breaches or committed malpractice by signing off on various opinion letters that contained factual statements the Law Firm Defendants knew or should have known to be false and that allowed the debtors and the NCFE Entities to close on their transactions.

In its prior opinion, the court dismissed almost all of the counts alleged in the First Amended Complaint against the D & O Defendants because the complaint did not connect those defendants to the decisions made by DCHC's subsidiaries or the allegedly wasteful decisions made by DCHC itself. Id. at 522-27. Only Count II of the First Amended Complaint, in which Alberts alleged that the D & O Defendants breached their fiduciary duties of care and loyalty by allowing Tuft and Redman to use corporate charter jets instead of commercial air lines, survived the defendants' motions to dismiss, and that count survived only with respect to Tuft in his capacity as an officer. Id. at 527.⁴ The court also dismissed all of Alberts's claims against DCHC's former directors because those claims alleged breaches of the fiduciary duty of care and DCHC's directors were shielded from liability for fiduciary breaches of that nature under the terms of the articles of incorporation of DCHC's predecessor. Id. at 527-28.

With respect to the Law Firm Defendants, the court held that Alberts could pursue a cause of action for malpractice based on the Law Firm Defendants' allegedly negligent preparation of opinion letters used by DCHC to secure additional financing from the NCFE Entities, but concluded that he could not pursue a claim against those defendants based on business advice given by the Law Firm Defendants because attorneys owe no special duty of care with respect to financial advice. Id. at 528-31.⁵ Finally, the court preserved Alberts's fraudulent conveyance claims, which are premised on the same underlying facts as his malpractice claim. Id. at 531-32.⁶

Because Alberts filed his First Amended Complaint prior to the filing of the D & O Defendants' motions to dismiss, the court granted him leave to amend his complaint with respect to those defendants. The court also invited the Law Firm Defendants to file a motion for a more definite statement pursuant to Fed.R.Civ.P. 12(e) (as incorporated by Fed.R.Civ.P. 7012) — an invitation the Law Firm Defendants eventually accepted. Following the filing of the Second Amended Complaint, which included Alberts's response to the Law Firm Defendants' Rule 12(e) motions, the defendants filed the instant motions.

II

The legal standard governing the defendants' motions is the same as that in the last go-round. Under Fed.R.Civ.P. 12(b)(6) (as incorporated by Fed. R. Bankr.P. 7012), the court must dismiss the Second Amended Complaint if it "fail[s] to state a claim upon which relief can be granted," but the "complaint need only set forth `a short and plain statement of the claim,' Fed.R.Civ.P. 8(a)(2), giving the defendant fair notice of the claim and the grounds upon which it rests." Kingman Park Civic Ass'n v. Williams, 348 F.3d 1033, 1040 (D.C.Cir.2003). "However, the court need not accept inferences drawn by plaintiffs if such inferences are unsupported by the facts set out in the complaint." Kowal v. MCI Communications Corp., 16 F.3d 1271, 1276 (D.C.Cir.1994). Finally, affirmative defenses "may be raised by pre-answer motion under Rule 12(b) when the facts that give rise to the defense are clear from the face of the complaint." Smith-Haynie v. District of Columbia, 155 F.3d 575, 578 (D.C.Cir.1998).

Because the claims alleged by Alberts against the Law Firm Defendants depend in part on the viability of his claims against the D & O Defendants, the court will look to the propriety of the latter claims before assessing the sufficiency of his claims against Epstein Becker and Kutak Rock. Before proceeding any further, however, the court must address the theory of harm espoused by Alberts (i.e., that the defendants increased the debtors' insolvency) in light of the Third Circuit's recent decision in Seitz v. Detweiler, Hershey & Associates, P.C. (In re CitX Corp.), 448 F.3d 672 (3d Cir.2006).

A. Deepening Insolvency Revisited

Many of the claims raised by Alberts assume that DCHC and its subsidiary companies, were harmed by the progressive increase in the companies' debt during the tenure of the D & O Defendants. Because the debtors were insolvent for much of this time (according to Alberts, some of them were never solvent), the main victim of the defendants' conduct was not DCHC, but its creditors, whose chances of recovering on their claims lessened with each new debt. Alberts lacks standing to pursue causes of action held by the debtors' individual creditors. See In re Greater Southeast Cmty. Hosp. Corp. I, 333 B.R. at 517-21. Thus, he must articulate an injury separate and apart from the mere existence of the debtors' debt to pursue the instant proceeding.

Alberts attempts to resolve this dilemma by resorting to the theory of damages known as "deepening insolvency." This theory holds that the acquisition of debt by an insolvent corporation can harm the corporation as well as its creditors by making it more difficult for the corporation to run a profitable business without resorting to bankruptcy. See Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 349-50 (3d Cir.2001) ("Lafferty").⁷ It also forces companies to expend their resources in the repayment of debt, thereby heightening the risk of corporate dissolution through a chapter 7 or so-called "liquidating chapter 11" bankruptcy case. Id.

The parties argued at length in the previous round of briefing about the validity and nature of the deepening insolvency theory. Ultimately, this court, relying heavily on the Lafferty decision as well as Chief Judge Bernstein's decision in Kittay v. Atlantic Bank of...