In re Marketxt Holdings Corp.

Citation361 B.R. 369
Decision Date02 March 2007
Docket NumberAdversary No. 05-03238 (ALG).,Bankruptcy No. 04-12078 (ALG).
PartiesIn re MARKETXT HOLDINGS CORP., Debtor. Alan Nisselson, as Chapter 11 Trustee of MarketXT Holdings Corp., and the Official Committee of Unsecured Creditors, Plaintiffs, v. Softbank AM Corporation f/k/a Softbank Finance Corporation and Softbank Investment Corporation as Managing Partner of Softbank Contents Fund, Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

Brauner Baron Rosenzweig & Klein, LLP, by Howard L. Simon, Esq., Alison C. Gilbert, Esq., New York, NY, Counsel for Alan Nisselson, the Chapter 11 Trustee.

Kaye Scholer LLP, by Lester M. Kirshenbaum, Esq., Margarita Y. Ginzburg, Esq., Dina S. Rovner, Esq., New York, NY, Counsel for the Official Committee of Unsecured Creditors.

Sullivan & Cromwell LLP, by James H. Carter, Esq., Stephen Ehrenberg, Esq., New York, NY, Counsel for Softbank AM Corporation, f/k/a, Softbank Finance Corporation, and Softbank Investment Corporation.


ALLAN L. GROPPER, United States Bankruptcy Judge.

This is an adversary proceeding brought by the chapter 11 trustee (the "Trustee") and Official Committee of Unsecured Creditors (the "Committee," and together with the Trustee, "Plaintiffs") appointed in the chapter 11 case of MarketXT Holdings Corp. ("MarketXT Holdings," "Tradescape," or the "Debtor"). Defendants are Softbank AM Corporation, f/k/a Softbank Finance Corporation ("Softbank Finance Japan") and Softbank Investment Corporation ("Softbank Investment") as managing partner of Softbank Contents Fund ("Softbank Contents," and together with Softbank Finance Japan and Softbank Investment, "Softbank" or "Defendants"). The complaint (as amended, the "Complaint") complains of a series of transactions between the Defendants and the Debtors between July 1999 and March 2003. The Complaint seeks relief under §§ 510, 547 and 548 of the Bankruptcy Code and §§ 273-276 of the New York Debtor & Creditor Law ("NYDCL"), and on the grounds of breach of fiduciary duty, undue duress, and promissory estoppel. Defendants have moved to dismiss the majority of the claims raised in the Complaint.


The facts set forth hereafter are alleged in the Complaint or appear from the 62 exhibits attached thereto. For purposes of this motion, all well-pleaded facts are assumed to be true.

The Parties

The Debtor (f/k/a, LLC,, Inc., Tradescape Corp. and TCorp) is a Delaware corporation, originally organized, by Omar Arnanat ("Amanat") and members of his family. The Debtor and its affiliates and subsidiaries were providers of electronic trading services and owned and licensed certain market-related proprietary software.

Softbank Finance Japan is a wholly-owned subsidiary of Softbank Corporation ("Softbank Corp."); both were organized under the laws of Japan. At all times relevant to the Complaint, Masayoshi Son ("Son") was the largest shareholder of Softbank Corp. Softbank Holdings, Inc. ("Softbank Holdings") is a Delaware corporation and a wholly-owned subsidiary of Softbank Corp. Softbank Finance America Corporation ("Softbank Finance America") is a U.S. subsidiary of Softbank Finance Japan. Softbank America Inc., a wholly-owned subsidiary of Softbank Holdings, Inc., is organized under the laws of Delaware.

Relationship Between Softbank and E*Trade

At all times relevant to the matters alleged in the Complaint, Softbank Corp. and its subsidiaries (the "Softbank Group" or the "Softbank Companies") were also equity investors in another company in the electronic trading field, E*Trade Financial Corporation, f/k/a E*Trade Group, Inc. ("E*Trade"). On August 20, 1998, Softbank Holdings acquired over 15.6 million shares of E*Trade stock, or approximately 27.2% of its outstanding common stock, for an aggregate purchase price of about $400 million. During the second half of 1998 and thereafter, Ronald Fisher ("Fisher") was a principal officer and director of Softbank Holdings and Softbank America, Inc., as well as a director of Softbank Corp. In or about October 2002, Fisher replaced Son as the Softbank-designated director on the E*Trade board, and he remained an E*Trade director at all times thereafter relevant to the Complaint.

E*Trade and Softbank were partners in business enterprises in several countries, including the United States and Japan. In or about June 1998, Softbank Corp. and E*Trade entered into a joint venture agreement under which Softbank Finance Japan and E*Trade formed E*Trade Japan, which provided online securities trading to residents of Japan. Softbank Finance Japan originally held a 58% ownership interest in E*Trade Japan and E*Trade held a 42% ownership interest, in which it invested approximately $8 million. Pursuant to the joint venture agreement, E*Trade nominated two of the five directors of E*Trade Japan. Christos Cotsakos ("Cotsakos"), E*Trade's Board Chairman and Chief Executive Officer, and Judy Balint ("Balint"), E*Trade's Chief International Officer, were selected to serve as E*Trade Japan directors. Cotsakos and Balint received warrants to purchase E*Trade Japan common stock in return for serving on the board. In connection with E*Trade Japan's IPO in September 2000, E*Trade and Softbank Finance Japan sold a portion of their investment in E*Trade Japan. In May 2002, E*Trade acquired an additional 31,250 shares of stock in E*Trade Japan, in return for 3.4 million shares of E*Trade common stock. On or about June 2, 2003, E*Trade Japan merged with Softbank Investment, and E*Trade exchanged its ownership interest in E*Trade Japan for a 19.8% ownership interest in Softbank Investment.

Softbank's Relationship With the Debtor

Softbank Finance Japan initially invested in the Debtor through the purchase of 10% of the Debtor's common stock for $8.5 million, pursuant to a Subscription Agreement dated July 1999. Softbank Contents purchased an additional 2.72% of the Debtor's common stock for $3 million under a Subscription Agreement dated August 17, 1999 (collectively, the "Subscription Agreements"). The parties also entered into a Shareholders Agreement in 1999.

Earlier, between December 1998 and March 1999, the Debtor was also involved in negotiations with J.W. Childs Associates, L.P. ("Childs") for an investment by Childs of up to $30 million in Tradescape's common stock. In connection with this investment, Childs advanced $7 million to Tradescape to fund Tradescape's acquisition of Momentum Securities LLC ("Momentum"), an electronic brokerage firm and provider of high-speed direct-access trading technologies. The loan was to convert into a portion of Childs' $30 million investment upon the closing of that transaction. On or about June 20, 1999, the Debtor completed the acquisition of Momentum.

As further discussed below, Amanat ultimately terminated the Childs transaction, allegedly at the behest of E*Trade and Softbank. This resulted in what the Complaint alleges were $14.5 million in termination-related costs (including the repayment of the $7 million loan). Additionally, it is claimed that Tradescape incurred $4 million in professional fees in connection with a planned acquisition of Tradescape by E*Trade, which, as discussed below, was subsequently aborted by E*Trade. It is alleged that Tradescape was forced to borrow funds from Softbank Finance America to cover these expenses. In any event, on October 8, 1999, Softbank Finance America provided Tradescape with a $15 million loan evidenced by a promissory note (the "October 1999 Note"). An additional $3.375 million loan was provided by Softbank Finance America to Tradescape on November 5, 1999 (the "November 1999 Note"). On or about May 12, 2000, Softbank Finance America converted all outstanding principal and interest due on its loans to common stock of the Debtor. Thereafter, Softbank Finance Japan and its affiliates collectively owned 24% of the Debtor's common stock.1

The July 1999 Subscription Agreement gave Softbank Finance Japan the right to designate one member of the Debtor's board of directors, and one or more of Softbank's designated representatives attended each of the Debtor's board of directors meetings between July 1999 and December 2002. Additionally, a Tradescape board resolution of April 14, 2000 provided that at least one Softbank-designated director had to be present at a board meeting in order for a quorum to exist.

On October 12, 2000 the Tradescape Shareholders Agreement was amended to increase the directors designated by Softbank from one to two. Between July 1999 and October 2000, Softbank Finance Japan designated, first Yoshitaka Kitao ("Kitao"), the CEO of Softbank Finance Japan and a director of Softbank Corp., and thereafter Robert Takeuchi ("Takeuchi"), the president of Softbank Finance America, to serve on Tradescape's board. In or about October 2000, Softbank Finance Japan designated Shingi Yamauchi ("Yamauchi") as Softbank's second director. Yamauchi and Takeuchi continued to serve as Softbank's designated directors until they resigned in December 2002.

At the Tradescape board of directors meeting held on. February 19, 2002, the board passed a resolution appointing the members of the board of directors of Tradescape to serve as well on the board of directors of Tradescape's various subsidiaries, including MarketXT, Inc (whose acquisition is discussed below).

The 1999 E*Trade Offer for Tradescape and Alleged Softbank Involvement

The Complaint alleges that in July 1999, soon after Tradescape had acquired Momentum and while the Childs $30 million investment in Tradescape was pending, Cotsakos made an offer on behalf of E*Trade to purchase all of the equity of Tradescape for $300 million (the "Original E*Trade Merger Proposal"). This purchase price was subsequently increased to $326 million. It is alleged that Cotsakos,...

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