In re Southwest Supermarkets, LLC, Bankruptcy No. 01-14805 EDF-RJH to 01-14812-PHX-RJH

• Citation: 315 B.R. 565
• Decision Date: 25 August 2004
• Docket Number: Bankruptcy No. 01-14805 EDF-RJH to 01-14812-PHX-RJH,Adversary No. 03-945.
• Parties: In re SOUTHWEST SUPERMARKETS, L.L.C.; Southwest Holdings, L.L.C., Debtors. Daniel P. Collins, Trustee for the Bankruptcy Estate of Southwest Supermarkets, L.L.C.; Southwest Holdings, L.L.C., Plaintiffs, v. Kohlberg and Company, et al., Defendants.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Arizona

315 B.R. 565

In re SOUTHWEST SUPERMARKETS, L.L.C.; Southwest Holdings, L.L.C., Debtors Daniel P. Collins, Trustee for the Bankruptcy Estate of Southwest Supermarkets, L.L.C.; Southwest Holdings, L.L.C., Plaintiffs, v. Kohlberg and Company, et al., Defendants.

Bankruptcy Nos. 01-14805 EDF-RJH to 01-14812-PHX-RJH, Adversary No. 03-945.

United States Bankruptcy Court, D. Arizona.

August 25, 2004.

COPYRIGHT MATERIAL OMITTED

Craig D. Hansen, Squire, Sanders & Dempsey L.L.P., Curt W. Clausen, Treon, Strick, Lucia & Aguirre, Daniel E. Garrison, Edward M. Zachary, Gallagher & Kennedy, P.A., Phoenix, AZ, Eric Slocum Sparks, Eric Slocum Sparks PC, Tucson, AZ, Joseph E. Cotterman, Gallagher & Kennedy, P.A., Sean T. Cork, Squire, Sanders & Dempsey, L.L.P., Phoenix, AZ, for Debtor.

Curt W. Clausen, Treon, Strick, Lucia & Aguirre, Phoenix, AZ, Daniel P. Collins, Collins, May, Potenza, Baran & Gillespie, Phoenix, AZ, Joel B. Weinberg, Ask Financial, Tarzana, CA, Joseph L. Steinfeld, Jr., Ask Financial, Eagan, MN, Maureen P. Henry, Collins, May, Potenza, Baran & Gillespie, Phoenix, AZ, Molly T. Shields, Abrams & Steinfeld, Tarzana, CA, S. Cary Forrester, Forrester & Worth, PLLC, Phoenix, AZ, for Trustee.

James E. Cross, Osborn Maledon P.A., Phoenix, AZ, for Trustee, Chapter 11.

Paul A. Randolph, Trudy A. Nowak, Phoenix, AZ, for U.S. Trustee.

Dale C. Schian, Mark C. Hudson, Schian Walker, P.L.C., Michael E. Neumann, Hahn, Howard & Greene, L.L.P., Phoenix, AZ, for Creditor Committees.

OPINION RE: DEFENDANTS' MOTION TO DISMISS

RANDOLPH J. HAINES, Bankruptcy Judge.

Kohlberg's Motion to Dismiss the Trustee's First Amended Complaint raises three primary issues: (1) whether a trustee can validly assert claims that were assigned to it by secured creditors; (2) if so, whether the claims are barred by an applicable statute of limitations; and (3) if not, whether a parent company owes a fiduciary duty to its wholly owned subsidiary that is insolvent or nearly so.

The Court concludes that although the Trustee can assert the assigned claims under the present facts, the applicable statutes of limitations were not tolled as to creditors by an adverse domination theory. Consequently the only creditor claims the Trustee may assert are for constructive fraudulent transfers made less than four years prepetition, and actual fraudulent transfers made prior to that time if the Trustee can plead facts showing the creditors had no reason to know of the fraudulent transfers more than one year prepetition.

With one exception, the only debtor claims that the Trustee may assert are for breaches of fiduciary duty, but under applicable Delaware law a parent owes no fiduciary duty to a wholly owned subsidiary. The Court therefore grants Kohlberg's motion to dismiss as to the fiduciary duty counts. The Court denies the motion to dismiss counts pertaining to the tax overpayment.

Background Facts

On July 24, 1995, Kohlberg & Co. ("Kohlberg")¹ purchased Southwest Supermarkets ("Southwest" or the "Debtor"), which became its wholly owned subsidiary. As part of the acquisition, Kohlberg and Southwest entered into a "fee agreement" where Southwest agreed to pay Kohlberg a $1 million fee for its efforts in arranging the acquisition. Southwest also agreed to pay Kohlberg a management fee each year of either $200,000 or five percent of earnings before interest, taxes, depreciation and amortization, whichever was greater, for Kohlberg's management services.

Shortly after the acquisition in 1995, Kohlberg hired Jim Pack to serve as CEO and President of Southwest. Pack purchased a 2% interest in Southwest for $200,000. When Pack resigned as CEO in May of 1997, Southwest purchased his 2% interest for $1.5 million and his vested options for $1,869 million. Also in 1997, Jerome Miller, another Southwest officer, was paid $800,000 by Southwest for his vested options.

Southwest apparently also agreed to cover certain of the Kohlberg Defendants' tax liabilities arising from their ownership of Southwest. In 1996 and 1997, Kohlberg estimated that distributions of $5,829,664 were necessary to pay the tax liabilities arising from Southwest's expected profits, and Southwest paid this amount to Kohlberg. The tax liabilities that actually accrued for those years turned out to be approximately half of the amount that had been disbursed to Kohlberg, but Southwest never requested a reimbursement of the overpayment and none was ever made.

Southwest filed this Chapter 11² case in November, 2001. While Southwest was still debtor in possession, this Court approved a global settlement agreement among the Debtors, the secured creditors and the Official Unsecured Creditors' Committee. In the agreement, the parties agreed that any proceeds that might be generated from the claims at issue here would be distributed only to the secured creditors.³ Very shortly thereafter, the Court granted the Debtors' motion for appointment of a Chapter 11 Trustee, and Daniel Collins was subsequently appointed Trustee on May 30, 2002. On or about September, 2003, the secured creditors assigned to the Trustee all the claims that had been assigned to them under the global settlement agreement.

The Trustee filed the complaint initiating this adversary proceeding on November 4, 2003, just prior to expiration of the Code's two-year statutes of limitations,⁴ and subsequently filed his First Amended Complaint (the "Complaint"). The Trustee's Complaint alleges that the excessive fees Kohlberg charged, the Pack and Miller buyouts, and the tax overpayment combined with Southwest's other debt led Southwest to insolvency or the brink of insolvency. The Complaint sets forth thirteen claims primarily based on these actions by Kohlberg.⁵

Kohlberg moved to dismiss. Kohlberg argues that all but one of the Trustee's claims are time-barred and that the "adverse domination" doctrine does not apply to toll the applicable statute of limitations. Kohlberg also argues that the Trustee lacks standing to bring this action because the proceeds would only benefit secured creditors. In addition, Kohlberg argues that many of the claims fail to state a claim for which relief can be granted based on the proposition that parent companies do not owe a fiduciary duty to their wholly owned subsidiaries. And finally, Kohlberg argues that the claims fail because the Trustee has not alleged grounds to pierce the corporate veil of Southwest to reach shareholders and other upstream defendants.

Analysis

Williams does not bar the Trustee's pursuit of assigned claims for the benefit of the entire estate when there is no potential for conflict with unassigned claims.

Because the Trustee acquired all of these claims by assignment from the secured creditors, the first threshold question is whether Williams⁶ precludes the Trustee from asserting them. Williams applied the Supreme Court's reasoning in Caplin,⁷ a case under the Bankruptcy Act⁸ holding that bankruptcy trustees cannot assert bondholders' claims against their indenture trustee. Although Caplin did not deal with assigned claims, Williams found in that opinion three reasons why trustees should not be allowed to pursue assigned claims: (1) because there would be no net benefit to the estate, but only to the assignors; (2) because the trustee did not have the ability to assert the claims absent the assignment; and (3) because not all of the claim holders had assigned their claims to the trustee, creating the possibility of conflicting results or liabilities between the trustee and those creditors who retained their claims and might assert them.⁹ The Ninth Circuit opinion did not explain why point number two is a reason to preclude a trustee from pursuing the claim assigned to him, simply because, absent the assignment, he would not have the claim. Consequently the Williams opinion really sets forth only two cogent reasons for its result.¹⁰

None of these concerns applies under the present facts. Here, the Trustee is free to pursue the claims for the benefit of the entire estate. The facts here are not like those in Williams, where the assignors made their assignments only on the condition that the net benefits would be turned over to the assignors.¹¹ Here, the claims are expressly assigned to the Trustee for the benefit of the estate.¹² It is entirely possible, as the Kohlberg defendants argue, that because of their priority claims the secured creditors will nevertheless reap the major benefit from these claims, but that is not a matter that can be decided on this motion to dismiss and, even if that were the case, it nevertheless distinguishes Williams from the present facts. The Trustee will here be pursuing claims that belong to the estate, rather than claims that have been assigned only for purposes of collection. There will be no special priority distribution of the proceeds based on who assigned the claims and the amount of the claims assigned, as in Williams.

Nor is point number three involved here, because here all of the holders of the claims assigned them to the Trustee. The claims that were assigned were those previously held by the Trustee. There is no other holder of a claim of that type that was not re-assigned to the Trustee. Consequently there are no potentially conflicting claims still held by other creditors.

Neither Caplin nor Williams relied on anything in the Bankruptcy Act or the Code that would preclude a trustee from pursuing an assigned claim for the benefit of the estate nor did either case identify any policy reasons why a trustee should be so precluded, other than those discussed above. Because those concerns do not apply on these facts, there is no reason why either Caplin or Williams would preclude the Trustee of pursuing these claims for the benefit of the estate.

The assignment was sufficiently effective to preclude a motion to dismiss.

The second threshold issue is whether the assignment was effective and, if so, whether it took effect...