In re Nm Holdings Company, LLC

• Decision Date: 16 October 2008
• Docket Number: Bankruptcy No. 03-48939.,Adversary No. 06-4615.
• Citation: 405 B.R. 830
• Parties: In re NM HOLDINGS COMPANY, LLC, et al., Debtors. Stuart A. Gold, Trustee, Plaintiff, v. Deloitte & Touche, LLP, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

405 B.R. 830

In re NM HOLDINGS COMPANY, LLC, et al., Debtors.

Stuart A. Gold, Trustee, Plaintiff, v. Deloitte & Touche, LLP, Defendant.

Bankruptcy No. 03-48939.

Adversary No. 06-4615.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

October 16, 2008.

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Charles D. Bullock, Stevenson & Bullock, P.L.C., Southfield, MI, Erin Lindsay Toomey, Detroit, MI, Judy A. O'Neill, Detroit, MI, Julie Beth Teicher, Southfield, MI, for Debtors.

Mark H. Shapiro, Southfield, MI, Rachel E. Wisley, Royal Oak, MI, Timothy McMahon, Royal Oak, MI, for Plaintiff.

Matthew Wilkins, Paula A. Hall, Butzel Long, P.C., Detroit, MI, for Defendant.

OPINION REGARDING DEFENDANT'S MOTION TO DISMISS PLAINTIFF'S FIRST AMENDED COMPLAINT

THOMAS J. TUCKER, Bankruptcy Judge.

In this adversary proceeding, the Chapter 7 trustee in eleven jointly-administered bankruptcy cases seeks damages from Defendant Deloitte and Touche, LLP ("Deloitte") of more than $300 million.¹ The trustee claims that Deloitte committed malpractice in its pre-petition work as the Debtors' independent auditor; that Deloitte aided and abetted multiple breaches of fiduciary duty by the Debtors' sole shareholder; and that pre-petition fees that Debtors paid for Deloitte's services are avoidable fraudulent transfers.

The case is before the Court on Deloitte's motion to dismiss all counts in Plaintiff's First Amended Complaint.² Plaintiff's First Amended Complaint contains four counts: "Count I—Professional Negligence"; "Count II—Aiding and Abetting Breach of Fiduciary Duty"; "Count III—Disgorgement of Fees"; and "Count IV—Fraudulent Transfers."³

The Court held a hearing on the motion, and then received and reviewed supplemental briefs.⁴ The Court concludes that Deloitte's motion to dismiss should be granted as to all counts, because: (1) Plaintiff's claims for aiding and abetting breach of fiduciary duty (Count II), and for avoidance of fraudulent transfers (Count IV) are barred by the applicable statutes of limitations; (2) Plaintiff's claim for disgorgement of fees (Count III) is not a separate cause of action, but rather is only a possible remedy for the claims in Count I or Count II; and (3) Plaintiff cannot establish the causation element of his professional negligence claim (Count I).

I. Background

A. The Venture Holdings bankruptcy cases

This adversary proceeding arises out of the chapter 11 bankruptcy cases filed by Venture Holdings Company, LLC and ten related entities.⁵ Those eleven cases are jointly administered under Case No. 03-48939. (The eleven Debtors in those cases are referred to in the opinion collectively as "Venture.")

The Court denied confirmation of Venture's second amended joint chapter 11 plan, on January 21, 2005, and later approved the sale of substantially all of Venture's assets. The sale closed on May 2, 2005.⁶ On January 11, 2006, the Chapter 11 cases were converted to Chapter 7. Stuart A. Gold ("Gold") was appointed the Chapter 7 Trustee on January 19, 2006.

B. This adversary proceeding

On March 31, 2006, Gold filed a complaint alleging professional negligence against Deloitte in the Wayne County, Michigan Circuit Court. Deloitte removed the case to this Court, and filed a motion to dismiss the complaint.⁷ Gold later filed his first Amended Complaint, and Deloitte filed its present motion to dismiss the amended complaint.

Gold's First Amended Complaint retained the professional negligence count, and added counts for aiding and abetting breach of fiduciary duty; disgorgement of fees; and for the avoidance and recovery of fraudulent transfers.

The First Amended Complaint is 68 pages long and contains 347 paragraphs. It includes the following allegations. Deloitte served as an "independent auditor" for Venture "from 1987 through at least May 2004."⁸ During this time period, Larry Winget ("Winget"), Venture's sole shareholder, caused Venture to transfer millions of dollars to other, non-debtor entities controlled by Winget in return for little or no value.⁹ Deloitte knew about some of these related-party transactions, and knew that they were "improper," "grossly unfair" to Venture, and "not bona-fide business transactions."¹⁰ Despite this knowledge, Deloitte issued unqualified audit reports on Venture's 1995 through 2001 financial statements, in which it failed to disclose many of these transactions, and in which it reported that many other of the transactions were fair to Venture and "`on terms no less favorable to the company than would be obtained if such transactions or arrangements were arms-length transactions with non-affiliated persons.'"¹¹ "[Deloitte] knew that [the unqualified audit reports] would be relied upon by Venture and by third parties, including Venture's creditors."¹²

The First Amended Complaint also alleged that if Deloitte had properly reported these related-party transactions, "independent third-parties with the power to stop and prevent the continuation of such ongoing transactions would have done so, preventing Winget from further siphoning Venture's assets."¹³ These independent third parties were certain secured creditors, unsecured noteholders, and an independent member of a "Fairness Committee" that was formed under the indentures relating to the notes Venture issued prior to 2000.¹⁴ The credit agreement relating to the secured debt, and the indentures related to the unsecured notes, prohibited Venture from engaging in any unfair related-party transactions or making any distributions to Winget during the term of the loans.¹⁵

Gold alleges that one of the indentures "required the formation of a `Fairness Committee' to review related-party transactions [and] ... required at least one member of the Fairness Committee to be independent of Venture and its principals, which independent member effectively wielded veto power over related-party transactions."¹⁶ Maurice Williams was an independent member of the Fairness Committee, who was innocent and had no knowledge of any misconduct by Winget, and "was empowered to evaluate and approve or disapprove of any related-party transactions undertaken by Winget."¹⁷ "Mr. Williams possessed greater corporate power than an officer or director of Venture, because he had the unilateral and absolute authority to prevent Winget from undertaking or continuing any unfair related-party transactions."¹⁸

This is so, Gold alleges, because Venture's related-party transactions were "`an event of default' under the indentures."¹⁹ "[I]f [Deloitte] had properly and timely disclosed the unfairness of the related-party transactions, or refused to issue a clean audit opinion if Venture refused to make proper disclosures, the noteholders or the Trustees under the governing indentures properly would have declared a default."²⁰ To cure this default, Winget would have had to stop making unfair related-party transactions.²¹ Venture would be in a better financial condition, if Winget had been compelled to stop causing Venture to make unfair related-party transactions.²²

II. Jurisdiction

A. Subject matter jurisdiction

This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local District Court Rule 83.50(a) (E.D.Mich.). At a minimum, the Chapter 7 Trustee's claims are all "related to" the jointly-administered Venture bankruptcy cases.²³ The parties do not dispute this.

B. Core vs. non-core

"[A] bankruptcy court `must examine each cause of action separately to determine if it is core or non-core.'" Bliss Technologies, Inc. v. HMI Industries, Inc. (In re Bliss Technologies, Inc.), 307 B.R. 598, 602 (Bankr.E.D.Mich.2004) (citations omitted). Gold's claim to recover fraudulent transfers (Count IV) is a core proceeding under 28 U.S.C. § 157(b)(2)(H). For the reasons stated below, the Court will enter an order dismissing this claim with prejudice.

The other claims in the First Amended Complaint—Count I (Professional Negligence), Count II (Aiding and Abetting Breach of Fiduciary Duty) and Count III (Disgorgement of Fees)—are non-core, as the parties appear to acknowledge.²⁴ The parties have not consented to the bankruptcy court entering final judgment on these non-core claims, under 29 U.S.C. § 157(c)(2). As to these claims, therefore, this opinion states the Court's proposed findings of facts and conclusions of law, see 28 U.S.C. § 157(c)(1), and the Court will recommend that the United States District Court dismiss these claims.²⁵

III. Applicable legal standards

Deloitte brings its motion to dismiss under Fed.R.Civ.P. 12(b)(6), applicable in this adversary proceeding through Fed. R.Bankr.P. 7012, arguing that Gold's First Amended Complaint fails to state a claim upon which relief can be granted.

A motion under Rule 12(b)(6) tests the "sufficiency of [a] complaint." Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). A court must examine the plaintiff's allegations and determine whether, as a matter of law, "the plaintiff is entitled to legal relief even if everything alleged in the complaint is true." Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir.1993). "[A] court considering a motion to dismiss under Rule 12(b)(6) `must accept all well-pleaded factual allegations of the complaint as true and construe the complaint in the light most favorable to the plaintiff.'" Benzon v. Morgan Stanley Distributors, Inc., 420 F.3d 598, 605 (6th Cir.2005)(quoting Inge v. Rock. Fin. Corp., 281 F.3d 613, 619 (6th Cir.2002)(citing Turker v. Ohio Dep't of Rehab. & Corr., 157 F.3d 453, 456 (6th Cir.1998))).

Recently, in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), the United States Supreme Court revisited the standards that govern Civil Rule 12(b)(6) dismissal motions. In doing so, the Court rejected "`the accepted rule that a complaint should not be dismissed for failure to state a claim unless...