In re Hechinger Inv. Co. of Del.

Citation327 B.R. 537
Decision Date19 July 2005
Docket NumberBankruptcy No. 99-02263(PJW).,Bankruptcy No. 99-02273(PJW).,Bankruptcy No. 99-02269(PJW).,Bankruptcy No. 99-02268(PJW).,Bankruptcy No. 99-002283(PJW).,Bankruptcy No. 99-02261(PJW).,Bankruptcy No. 99-02265(PJW).,Bankruptcy No. 99-02276(PJW).,Bankruptcy No. 99-02274(PJW).,Bankruptcy No. 99-02271(PJW).,Bankruptcy No. 99-02262(PJW).,Bankruptcy No. 99-02266(PJW).,Bankruptcy No. 99-02282(PJW).,Bankruptcy No. 99-02270(PJW).,Bankruptcy No. 99-02272(PJW).,Bankruptcy No. 99-02280(PJW).,Bankruptcy No. 99-02264(PJW).,Bankruptcy No. 99-02277(PJW).,Bankruptcy No. 99-02267(PJW).,Bankruptcy No. 99-02275(PJW).,Bankruptcy No. 99-02281(PJW).,No. CIV. 00-840-SLR.,Bankruptcy No. 99-02279(PJW).,Bankruptcy No. 99-02278(PJW).,CIV. 00-840-SLR.
PartiesIn re HECHINGER INVESTMENT COMPANY OF DELAWARE, et al., Debtors. The Liquidation Trust of Hechinger Investment Company of Delaware, Inc., Plaintiff, v. Fleet Retail Finance Group, et al., Defendants.
CourtU.S. District Court — District of Delaware

Michael Bonkowski, Esquire and Mark Minuti, Esquire of Saul Ewing LLP, Wilmington, Delaware, Of Counsel: David M. Friedman, Esquire, David E. Ross, Esquire, Howard W. Schub, Esquire, Andrew K. Glenn, Esquire, Ian D. Katz, Esquire and Marvin C. Peguese, Esquire of Kasowitz, Benson, Torres & Friedman LLP, New York, New York, Counsel for Plaintiff.

John L. Reed, Esquire, Matt Neiderman, Esquire, Duane Morris LLP, Wilmington, Delaware, Of Counsel: Richard W. Clary, Esquire and Elizabeth Grayer, Esquire of Cravath, Swaine & Moore LLP, New York, New York, Counsel for Defendant Chase.

Kenneth J. Nachbar, Esquire, Morris Nichols Arsht & Tunnell, Wilmington Delaware, Of Counsel: Gibson, Dunn & Crutcher LLP, New York, New York, Counsel for Individual Defendants.

Regina A. Torii, Esquire, Ashby & Geddes, Wilmington, Delaware, Of Counsel: Tony Castanares, Esquire, Stephan M. Ray, Esquire, Pamala J. King, Esquire, Gina M. Najolia, Esquire of Stutman, Treister & Glatt, Los Angeles, California, Counsel for Defendant Leonard Green & Partners L.P.

Stephen M. Miller, Esquire, Carl N. Kunz, III, Esquire, Morris, James, Hitchens & Williams LLP, Wilmington, Delaware, Teresa K.D. Currier, Esquire, Peter J. Duhig, Esquire, Klett, Rooney, Lieber & Schorling, P.C., Wilmington, Delaware, Counsel for Defendant Fleet Retail and General Electric Capital Corporation.

MEMORANDUM OPINION

SUE L. ROBINSON, Chief Judge.

I. INTRODUCTION

This case is an adversary proceeding initiated in connection with the bankruptcy petition filed in June 1999 by Hechinger Company and its affiliates ("Hechinger") under Chapter 11 of the Bankruptcy Code. The court has jurisdiction to hear the matter pursuant to 28 U.S.C. § 1334(b).

Pending before the court are motions for summary judgment filed at the close of discovery by each of the remaining defendant groups sued by plaintiff,1 the Liquidation Trust of Hechinger Investment Company of Delaware, Inc. Plaintiff's claims arise out of the acquisition and subsequent combination of the assets of Builders Square, Inc. ("Builders Square") with Hechinger by defendant Leonard Green & Partners, L.P. ("Leonard Green") in September 1997 ("the Transaction"). Defendant The Chase Manhattan Bank ("Chase") represents a group of 22 lenders (the "Chase Lenders Group") which provided interim financing as part of the Transaction and established a $600 million secured credit facility for the combined entity. In March 1999, the Chase Lenders Group assigned its entire interest in the credit facility to a syndicate led by defendant Fleet Retail Finance Group ("Fleet"). The individual defendants2 were all nine members of the Hechinger Board of Directors at the time the Transaction was consummated in September 1997 (collectively, the "Director Defendants").

Several of plaintiff's claims are based on the assertion that Hechinger was insolvent at the time of the Transaction or was rendered insolvent as a result of the Transaction, and that certain of the defendants knew or should have known of Hechinger's insolvency. In claim one, plaintiff asserts that, by virtue of Hechinger's insolvency, the Director Defendants owed to Hechinger and its creditors a duty of undivided loyalty in managing and supervising the business affairs of Hechinger, including the duty to preserve and maximize the value of Hechinger's assets for the benefit of such creditors.3 In claim four, plaintiff asserts that Leonard Green aided and abetted the Director Defendants' breach because it knew or should have known that approving the Transaction would be a violation of the Director Defendants' fiduciary duties to the corporation and its creditors.

Claims six through twelve are fraudulent conveyance claims asserted against the Director Defendants, Leonard Green and Chase and Fleet (collectively, the "Bank Defendants").4 The underlying factual contention for these claims is that Hechinger received less than reasonably equivalent value in exchange for the Builders Square acquisition, the payments to Hechinger's stockholders and the payment of transaction fees to Leonard Green and the Bank Defendants. In claim thirteen, plaintiff seeks the equitable subordination of the Bank Defendants' claims.5

II. STANDARD OF REVIEW

A court shall grant summary judgment only if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the burden of proving that no genuine issue of material fact exists. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 n. 10, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). "Facts that could alter the outcome are `material,' and disputes are `genuine' if evidence exists from which a rational person could conclude that the position of the person with the burden of proof on the disputed issue is correct." Horowitz v. Fed. Kemper Life Assurance Co., 57 F.3d 300, 302 n. 1 (3d Cir.1995) (internal citations omitted). If the moving party has demonstrated an absence of material fact, the nonmoving party then "must come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita, 475 U.S. at 587, 106 S.Ct. 1348 (quoting Fed.R.Civ.P. 56(e)). The court will "view the underlying facts and all reasonable inferences therefrom in the light most favorable to the party opposing the motion." Pa. Coal Ass'n v. Babbitt, 63 F.3d 231, 236 (3d Cir.1995). The mere existence of some evidence in support of the nonmoving party, however, will not be sufficient for denial of a motion for summary judgment; there must be enough evidence to enable a jury reasonably to find for the nonmoving party on that issue. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). If the nonmoving party fails to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof, the moving party is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

III. RIGHT TO JURY TRIAL

The Seventh Amendment of the United States Constitution6 provides that "[i]n Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved." Suits in common law are those in which legal rights are to be determined, as opposed to suits where equitable rights alone are recognized and equitable remedies are administered. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). "Maintenance of the jury as a fact-finding body is of such importance and occupies so firm a place in our history and jurisprudence that any seeming curtailment of the right to a jury trial should be scrutinized with the utmost care." Chauffeurs, Teamsters & Helpers, Local 391 v. Terry, 494 U.S. 558, 565, 110 S.Ct. 1339, 108 L.Ed.2d 519 (1990). Federal law determines whether a suit is legal or equitable, even when the cause of action is created by state law. Simler v. Conner, 372 U.S. 221, 222, 83 S.Ct. 609, 9 L.Ed.2d 691 (1963).

The Supreme Court has identified a three-step analysis for determining whether a particular action is a "Suit at common law[.]" First, courts must compare the statutory action to 18th-century actions brought in English courts prior to the merger of courts of law and equity. Granfinanciera, 492 U.S. at 42, 109 S.Ct. 2782. Second, a court must examine the remedy sought and determine whether it is legal or equitable in nature. Id. This second step of the analysis is more important than the first. Id. Third, if, on balance, the first two factors indicate a claim is entitled to a jury trial, courts must decide whether Congress may assign and has assigned resolution of the claim "to a non-Article III adjudicative body that does not use a jury as a factfinder." Id. Under this step, "[t]he filing of a proof of claim in [a] bankruptcy case may convert the action from one that is essentially a plenary action at law to one that is part of the claims allowance and disallowance process, which is purely equitable in nature." 5 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy § 548.11 (15th ed.2004); see also Billing v. Ravin, Greenberg & Zackin, PA, 22 F.3d 1242, 1247 (3d Cir.1994).

A. Breach of fiduciary duty

"Actions for breach of fiduciary duty, historically speaking, are almost uniformly actions `in equity' — carrying with them no right to trial by jury."7 In re Evangelist, 760 F.2d 27, 29, 31 (1st Cir. 1985) (Breyer, J.); see also Terry, 494 U.S. at 567, 110 S.Ct. 1339; In re Hutchinson, 5 F.3d 750, 757 (4th Cir.1993); In re Jensen, 946 F.2d 369, 371 (5th Cir.1991), abrogated on other grounds by Conn. Nat'l Bank v. Germain, 503 U.S. 249, 112...

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