In re MS55, Inc.

• Decision Date: 04 December 2009
• Docket Number: Bankruptcy No. 01-20494 ABC.,Adversary No. 04-1650 ABC.
• Citation: 420 B.R. 806
• Court: U.S. Bankruptcy Court — District of Colorado
• Parties: In re MS55, INC. f/k/a MSHOW.com, Inc., Debtor. Jeffrey L. Hill, Trustee, Plaintiff, v. Gibson Dunn & Crutcher LLP, Defendant.

420 B.R. 806

In re MS55, INC. f/k/a MSHOW.com, Inc., Debtor Jeffrey L. Hill, Trustee, Plaintiff, v. Gibson Dunn & Crutcher LLP, Defendant.

Bankruptcy No. 01-20494 ABC.

Adversary No. 04-1650 ABC.

United States Bankruptcy Court, D. Colorado.

December 4, 2009.

COPYRIGHT MATERIAL OMITTED

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D. Bruce Coles, Denver, CO, for Plaintiff.

Alexander R. Rothrock, Englewood, CO, Gregory J. Kerwin, Jessica B. Lee, Denver, CO, for Defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND RULING

A. BRUCE CAMPBELL, Bankruptcy Judge.

Plaintiff in this adversary proceeding is Jeffrey L. Hill, Chapter 7 Trustee (the "Trustee") of the bankruptcy estate of ms55, Inc. f/k/a MSHOW.COM, INC. ("MSHOW"). Defendant is the law firm of Gibson Dunn & Crutcher LLP ("GD & C").

The Court has jurisdiction of this adversary proceeding pursuant to 28 U.S.C. §§ 1334(a) and (b) and 28 U.S.C. §§ 157(a) and (b)(1). Adjudication of the claims in this adversary proceeding are either core proceedings or proceedings related to a case under title 11. By stipulation filed herein on November 3, 2009, as contemplated by 28 U.S.C. § 157(c)(2), the parties consented to the bankruptcy judge entering final orders and a judgment on the claims that were tried to this Court on September 14 through 18, 2009, subject to review under 28 U.S.C. § 158.

CLAIMS AND DEFENSES

Two claims remain in this litigation.¹ The Trustee contends that in the course of representing MSHOW and one of its largest shareholders and lenders, who was also for a time a director of MSHOW, GD & C(a) aided and abetted and (b) conspired with directors and officers of MSHOW in breaching their fiduciary duties to general creditors of MSHOW. The alleged breach of fiduciary duty at issue was officers and directors causing MSHOW to make a fraudulent and/or preferential transfer in favor of one of their own at a time when MSHOW was insolvent. The Trustee claims that not only did GD & C assist officers and directors in this breach of fiduciary duty to creditors, but thereafter conspired to conceal this wrongdoing from this Court and parties in interest in MSHOW's subsequent Chapter 11 bankruptcy.

In its defense, GD & C maintains that the Trustee's claims must fail on varied legal as well as factual grounds. GD & C first argues that these claims, even if they have merit, are no longer held by the Trustee. They were transferred from the now superseded MSHOW Chapter 11 bankruptcy estate to third parties as part of a valid, court-approved settlement. Furthermore, they were released by the debtor-in-possession as part of that same settlement.

GD & C next argues that, under applicable Delaware law governing the "internal affairs" of MSHOW, a Delaware corporation, there exists no fiduciary duty of officers and directors to general creditors. There can therefore be no aiding and abetting or conspiring in a breach of such duty.

Third, GD & C contends that even if Colorado corporate law is applicable, the limited scope of the fiduciary duty of directors and officers of an insolvent corporation to general creditors under Colorado law does not encompass the conduct in question of MSHOW's officers and directors.

Lastly, GD & C maintains that even if Colorado law governs these claims, and even if the Court were to find MSHOW directors and officers breached their duty to general creditors of MSHOW, the Trustee cannot prove essential elements of aiding and abetting or conspiracy under Colorado law.

BACKGROUND FACTS²

MSHOW was a technology company of the late 1990's that specialized in development of synchronized audio and video communication over the internet and telephone. While this enterprise never achieved profitable operations, it was of substance before its decline in 2000 and 2001, and ultimate unsuccessful attempt to reorganize in Chapter 11. From private investors it had raised in excess of $67 million. Its founders had previously developed and sold a technology company for $24 million. It had an active, sophisticated board. It engaged high profile, well-regarded legal counsel and investment bankers. Its business operations were global in scope. It employed approximately 250 people in offices in five states and Great Britain. Among its customers were some of the world's largest telecommunications and investment banking businesses.

By late 2000, MSHOW began to feel the adverse consequences of what was commonly referred to as the "bursting of the dot-com bubble," MSHOW's business model was in trouble. Investment capital to feed deficit operations pending development of real or imagined promising technology simply was not available. Viable strategic partners became difficult, if not impossible, to locate. At its height, MSHOW was "burning through" $3 million per month of investment capital MSHOW suddenly confronted a shortage of cash and a need to downsize. In December 2000, management laid off approximately fifty people. Also in December 2000, MSHOW entered into a joint undertaking with a foreign competitor, Akamai Technologies, Inc. ("Akamai"). This arrangement, in addition to providing perceived operating advantages to MSHOW, contemplated further investment by Akamai in MSHOW. The Akamai transaction required MSHOW to pay $3,150,000 by January 15, 2001, for a customer list and license fee. In deferring this payment, Akamai was unwilling to rely on the strength of MSHOW's credit. It looked to and received credit support from MSHOW's two largest equity investors, Howard H. Leach and his living trust (collectively "Leach") and the Blue Chip Capital Fund III, Limited Partnership ("Blue Chip"). At the time both Leach and Blue Chip also were represented on MSHOW's board. Leach was a longstanding client of GD & C, who had introduced MSHOW to GD & C.

The credit support from Leach and Blue Chip of MSHOW's deferred payment obligation to Akamai came in two different formats. Leach simply guaranteed one-half of the obligation, to wit, $1,575,000. Leach's guaranty was backed by a letter of credit of like amount that he caused to be issued by his bank in favor of Akamai. MSHOW, in turn, promised to pay Leach $1,575,000 if this letter of credit was drawn on by Akamai or if Leach otherwise paid on his guaranty in favor of Akamai. This contingent reimbursement obligation of MSHOW to Leach was secured by MSHOW in favor of Leach in December 2000, by the grant and perfection of a security interest in MSHOW's intellectual property.

Blue Chip provided credit support for the other half ($1,575,000) of MSHOW's deferred payment obligation to Akamai without giving Akamai a guaranty. Blue Chip was prohibited by its own governing documents from guarantying obligations of the portfolio companies, like MSHOW, in which it had invested. Instead of a guaranty in Akamai's favor, Blue Chip agreed with Akamai to invest in MSHOW in the form of subordinated debt or equity an additional $1,575,000, which in turn, would assure MSHOW's ability to pay one-half of the deferred MSHOW obligation to Akamai. On January 12, 2001 Blue Chip moved $1,575,000 to an MSHOW restricted bank account. With these funds MSHOW was able to obtain a letter of credit from its bank in favor of Akamai. If and when this letter of credit was drawn by Akamai, MSHOW's issuer bank would pay itself from the MSHOW $1,575,000 restricted account. MSHOW in turn would owe Blue Chip $1,575,000 plus interest if Blue Chip elected to take its additional investment in MSHOW in the form of debt. This $1,575,000 contingent obligation of MSHOW to Blue Chip, first incurred by MSHOW in December 2000, was from its inception an unsecured obligation of MSHOW.

With Leach's and Blue Chip's credit support, Akamai agreed to extend the date by which MSHOW was to pay Akamai $3,150,000. MSHOW's management continued what was becoming a desperate effort to find new capital or a business interested in acquiring MSHOW. In late January 2001, MSHOW received both promising and discouraging news. Its investment bankers, Morgan Stanley Dean Witter, reported to the board that its efforts to raise capital or find a strategic partner for MSHOW had failed after approaching more than one hundred strategic, private equity, and venture capital investor candidates. At about the same time MSHOW received a non-binding letter of intent and term sheet from Quest Digital Media ("QDM") proposing acquisition by QDM of MSHOW's assets in exchange for an equity position in QDM. This proposal would have fully provided for MSHOW's creditors and provided a chance for MSHOW's equity investors to recover at least a substantial portion of their investments. MSHOW's CEO, Robert Ogdon, testified that on consulting with MSHOW's investment bankers, QDM's proposal was valued in the $50 million range.

Faced with mounting pressure of a cash shortage, MSHOW's executive management consulted with GD & C for general legal advice concerning the scope of fiduciary duties of officers and directors once a corporation approached or reached insolvency. On or about January 23, 2001, GD & C addressed a memo to MSHOW's CEO and CFO explaining that under Delaware corporate law, as a company became insolvent the fiduciary duties of directors and officers expanded to run to creditors in addition to the corporation and its shareholders.

Unable to locate other sources to meet its immediate cash needs, MSHOW's management again turned to its largest investors. Once again, Blue Chip and Leach took the lead. In February 2001, Blue Chip and Leach agreed to a short term, secured loan facility with MSHOW under which each advanced $125,000 for thirty days. These advances were secured by MSHOW's principal assets with a security interest that was junior to the security interest in favor of Leach that had been granted the previous December.

At this same time MSHOW's management, Leach, and Blue Chip approached a larger group of the company's existing major investors and Akamai with a proposal for a larger secured "bridge loan" for...