In Re Hydrogen, Bankruptcy No. 08-14139 (AJG).

• Decision Date: 20 April 2010
• Docket Number: Bankruptcy No. 08-14139 (AJG).,Adversary No. 09-01142 (AJG).
• Citation: 431 B.R. 337
• Parties: In re HYDROGEN, L.L.C., Debtor.Official Committee of Unsecured Creditors of Hydrogen, L.L.C., Plaintiff,v.Leo Blomen, Blomenco B.V., John Freeh, Joshua Tosteson, Larry Scott Wilshire, Gregory Morris, Christopher Garofalo, Michael Basham, Alton Romig, Jr., Howard Yana-Shapiro, Brian Bailys, Brian McGee, Philip Kranenburg, Andrew Thomas, John And Jane Does 1-10, and ABC Corps. 1-10, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

431 B.R. 337

In re HYDROGEN, L.L.C., Debtor.Official Committee of Unsecured Creditors of Hydrogen, L.L.C., Plaintiff,v.Leo Blomen, Blomenco B.V., John Freeh, Joshua Tosteson, Larry Scott Wilshire, Gregory Morris, Christopher Garofalo, Michael Basham, Alton Romig, Jr., Howard Yana-Shapiro, Brian Bailys, Brian McGee, Philip Kranenburg, Andrew Thomas, John And Jane Does 1-10, and ABC Corps. 1-10, Defendants.

Bankruptcy No. 08-14139 (AJG).

Adversary No. 09-01142 (AJG).

United States Bankruptcy Court,

S.D. New York.

April 20, 2010.

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Arent Fox LLP, Schuyler G. Carroll, Esq., James M. Sullivan, Esq., Adrienne W. Blankley, Esq., of Counsel, New York, NY, for the Official Committee of Unsecured Creditors.

Maria J. DiConza, Esq., Adam C. Dembrow, Esq., of Counsel, Greenberg Traurig LLP, New York, NY, for Defendants Leo Blomen and Blomenco B.V.

Alec P. Ostrow, Esq., Constantine D. Pourakis, Esq., of Counsel, Stevens & Lee, P.C., New York, NY, for Defendant John Freeh.

OPINION CONCERNING DEFENDANTS' MOTIONS TO DISMISS AMENDED COMPLAINT

ARTHUR J. GONZALEZ, Chief Judge.

FACTS

Overview and Procedural History

HydroGen, L.L.C. (the “Debtor”) was a development stage company that manufactured phosphoric acid fuel cells for use in modules and power plants fueled by hydrogen and hydrocarbon gases for application by industrial and chemical industry end-users. The Debtor, an Ohio limited liability company, was a wholly-owned subsidiary of HydroGen Corporation (the “Parent”), an SEC-reporting company. On October 22, 2008 (the “Petition Date”), the Debtor filed a voluntary petition (the “Petition”) under chapter 11 of the Bankruptcy Code (the “Code”). The case before the Court is an adversary proceeding commenced by the Official Committee of Unsecured Creditors (the “Committee”) to avoid pre-petition transfers of certain compensation, including bonus payments, to current and former officers and directors of the Debtor and/or the Parent and to bring certain related claims against such officers and directors and certain unnamed defendants who may be determined to have liability upon further discovery (collectively, “Defendants”). The Committee acquired the standing to pursue the claims asserted in the instant proceeding pursuant to an Opinion and Order, dated May 7, 2009, approving inter alia, assignment nunc pro tunc of estate causes of action from the Debtor to the Committee.

The Committee filed the amended complaint (the “Amended Complaint” or “AC”) on May 12, 2009, setting forth ten causes of action: (1) breach of fiduciary duty, (2) aiding and abetting breach of fiduciary duty, (3) avoidance of constructive fraudulent transfers pursuant to section 548(a)(1)(B) of the Code, (4) avoidance of constructive fraudulent transfers pursuant to section 544(b) of the Code and applicable state law, (5) unjust enrichment, (6) breach of employment agreements, (7) deepening insolvency, (8) equitable subordination, (9) objection to Defendants' claims against the Debtor's estate, and (10) avoidance of preferential transfers pursuant to sections 547 and 550 of the Code.¹ In response, Defendants Dr. Leo Blomen and Blomenco B.V. moved to dismiss the Amended Complaint in its entirety under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief may be granted. Defendant John Freeh moved under Rule 12(b)(6) to dismiss solely the avoidance claims, the unjust enrichment claim and the deepening insolvency claim.²

Factual Allegations Set Forth in the Amended Complaint

The following paragraphs set forth factual allegations found in the Amended Complaint, which the Court must assume to be true on a Rule 12(b)(6) motion. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir.2002). Legal conclusions set forth in the Amended Complaint have been excluded to the extent they are not intertwined with relevant facts, as they should not be presumed to be true or correct and do not bolster the factual sufficiency of a complaint on a motion to dismiss. See Starr v. Sony BMG, 592 F.3d 314, 317 n. 1 (2d Cir.2010) (noting that a court “ ‘considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumptions of truth.’ ”) (quoting Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949-50, 173 L.Ed.2d 868 (2009)).

The Debtor began operating in November 2001. Because it was a development stage company, it required significant financing in order to sustain operations until it achieved profitability. By December 31, 2007, the Debtor had only $8,100,000 in cash remaining. At such time, Defendants allegedly “knew or should have known that its available cash would not be sufficient to fund its operations after mid-May 2008 absent additional financing.” AC at ¶ 33. Defendants “knew or should have known that [the Debtor] needed immediate, substantial additional capital in the form of debt, equity, or proceeds from the sale of assets in order to maintain and increase the value of the company” and “knew or should have known” that one or more asset sales was necessary given the undercapitalization of the Debtor. AC at ¶ 36.

Despite the lack of prospects for additional significant financing after December 31, 2007, Defendants “permitted [the Debtor] to continue operating as if it had limitless sources of financing.” AC at ¶ 34. Instead of modifying the Debtor's business plan to account for its limited prospects for additional financing, Defendants made unspecified plans to increase the Debtor's spending. AC at ¶ 35. Defendants allegedly authorized, approved and/or entered into certain unspecified transactions that were inappropriate and incurred unspecified obligations that were not in the Debtor's best interest, all of which caused “debilitating financial harm” to the Debtor and rendered it insolvent. AC at ¶ 4. In addition, Defendants “saddled” the Debtor with additional unspecified debts that they “knew or should have known would be beyond the Debtor's ability to pay.” Id.

Within the two-year period prior to the Petition Date, Defendants permitted bonus payments in the aggregate amount of $410,652.92 to six Defendants. ³ AC at ¶ 52, Exh. A. In addition, salary, benefits, payments of expenses, stock and/or stock options-each in unspecified amounts-were also paid to Defendants. AC at ¶ 52. The Committee considers the bonus payments and compensation to be “substantial” and “excessive”. AC at ¶ 37, 52. By making such payments to themselves, Defendants “placed their own self-interests ahead of the interests of [the Debtor] and its creditors and equity holders.” Id. At all relevant times, the Debtor's liabilities allegedly exceeded its assets. AC at ¶ 38. And at all relevant times Defendants allegedly knew of the Debtor's insolvent condition. AC at ¶ 41.

DISCUSSION

Standard of Review for a

Fed.R.Civ.P.

12(b)(6)

Motion to Dismiss

Federal Rule of Civil Procedure 12(b)(6) is incorporated into bankruptcy procedural rules by Federal Rule of Bankruptcy Procedure 7012(b). In reviewing a motion to dismiss pursuant to Rule 12(b)(6), a court must accept as true all factual allegations contained in the complaint and draw all reasonable inferences in the plaintiff's favor. See Chambers, 282 F.3d at 152; In re Bally Total Fitness of Greater New York, Inc., 2009 WL 1684022 at *1 (S.D.N.Y. June 15, 2009) (quoting Ofori-Tenkorang v. American Int'l Group, Inc., 460 F.3d 296, 298 (2d Cir.2006)). In addition to the complaint, the court may also consider (1) any “document incorporated by reference in the complaint,” Campo v. Sears Holdings Corp., 635 F.Supp.2d 323, 328 (S.D.N.Y. July 21, 2009); (2) any document the plaintiff “has in [his] possession or had knowledge of and upon which [he] relied in bringing suit” Chambers, 282 F.3d at 153; accord Campo, 635 F.Supp.2d 323, 328 (indicating that the court may consider inter alia, “documents integral to and relied upon in the complaint, even if not attached or incorporated by reference”) (internal quotation marks omitted); and (3) “facts of which judicial notice may be taken.” Chambers, 282 F.3d at 153.

Federal Rule of Civil Procedure 8(a)(2) on its face requires “a short and plain statement of the claim” in the complaint showing that the plaintiff is “entitled to relief.” Recent Supreme Court jurisprudence has clarified the standard in evaluating pleading sufficiency under Rule 8. See generally Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); accord Iqbal, 129 S.Ct. at 1949-50 (providing guidance on the application of Twombly ). In order to survive a Rule 12(b)(6) motion, the complaint must contain “enough factual matter (taken as true)” to “raise [the] right to relief above the speculative level,” Twombly, 550 U.S. at 555-56, 127 S.Ct. 1955; accord Campo, 635 F.Supp.2d 323, 328 (citing ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007); Iqbal, 129 S.Ct. at 1949). As such, although “detailed factual allegations” are not necessary, “a formulaic recitation of the elements of a cause of action will not do,” Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Rule 8(a) “contemplates the statement of circumstances, occurrences, and events in support of the claim presented and does not authorize a pleader's bare averment that he wants relief and is entitled to it.” Twombly, 550 U.S. at 556, n. 3, 127 S.Ct. 1955 (quoting 5 Wright & Miller § 1202, at 94, 95) (internal quotation marks omitted). Given the foregoing, a complaint that merely contains “ ‘naked assertion[s]’ devoid of ‘further factual enhancement’ ” cannot survive a motion to dismiss. See Iqbal, 129 S.Ct. at 1950 (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955).

Two working principles underlie the standard. See Iqbal, 129 S.Ct. at 1949. First, the court is not...