In re W.J. Bradley Mortgage Capital, LLC
| Decision Date | 01 February 2019 |
| Docket Number | Case No. 16-11049 (KG) (Jointly Administered),Adv. Pro. No. 18-50385 (KG) |
| Citation | 598 B.R. 150 |
| Parties | IN RE: W.J. BRADLEY MORTGAGE CAPITAL, LLC, et al., Debtors. George L. Miller, Chapter 7 Trustee for the Jointly Administered Chapter 7 Bankruptcy Estates of W.J. Bradley Company Merchant Partners 2003-SEED, LLC, W.J. Bradley Mortgage Capital, LLC, W.J. Bradley Corporate Services, LLC, W.J. Bradley Financial Services, LLC, and WJB Mortgage Services, LLC, Plaintiff, v. William J. Bradley, Joseph A. Cambi, Arthur S. Demoulas, Gerard Levins, Audrey Kirdar, Daniel Baruch, Howard Michalski, ASD Merchant Partners LLC, Springfield Capital, LLC, Arthur S. Demoulas Continuation Trust, Arthur S. Demoulas 2012 Trust, and Peter Picknelly, Defendants. |
| Court | U.S. Bankruptcy Court — District of Delaware |
GELLERT SCALI BUSENKELL & BROWN LLC, Ronald S. Gellert, Esquire, 1201 N. Orange Street, 3rd Floor, Wilmington, DE 19801, (302)425-5806, KAUFMAN, COREN & RESS, P.C., Stephen M. Coren, Esquire, Benjamin M. Mather, Esquire, Francis X. Lane, Esquire, Two Commerce Square, Suite 3900 2001, Market Street Philadelphia, PA 19103, (215)735-8700, Counsel for George L. Miller, Chapter 7 Trustee
MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Kenneth J. Nachbar, Esquire, Curtis S. Miller, Esquire, Daniel T. Menken, Esquire, Matthew O. Talmo, Esquire, 1201 N. Market St. Wilmington, DE 19801, (302)351-7412, Counsel for Defendants William J. Bradley, Daniel Baruch and Howard Michalski
PEPPER HAMILTON LLP, M. Duncan Grant, Esquire, Henry Jaffe, Esquire, Christopher B. Chuff, Esquire, Ellis Herington, Esquire, 1313 Market Street, PO Box 1709, Wilmington, DE 19899, (302)777-6500, Counsel for Defendants Gerard Levins and Audrey Kirdar
CROSS & SIMON, LLC, Christopher P. Simon, Esquire, Kevin S. Mann, Esquire, 1105 North Market Street, Suite 901, Wilmington, DE 19801, (302)777-4200, Counsel to Defendant, Springfield Capital, LLC and Joseph A. Cambi
George L. Miller, in his capacity as Chapter 7 trustee (the "Plaintiff" or "Trustee"), brought this adversary proceeding against former managers, officers and members of debtors W.J. Bradley Company Merchant Partners 2003-SEED ("WJB SEED"), W.J. Bradley Mortgage Capital, LLC ("WJB Mortgage Capital"), W.J. Bradley Corporate Services, LLC ("WJB Corporate Services"), W.J. Bradley Financial Services, LLC ("WJB Financial Services"), and WJB Mortgage Services, LLC ("WJB Mortgage Services," and collectively, the "Debtors"). The management of the Debtors included William J. Bradley ("Bradley"), Joseph A. Cambi ("Cambi"), Arthur S. Demoulas ("Demoulas"), Gerard Levins ("Levins"), Audrey Kirdar ("Kirdar"), Daniel Baruch ("Baruch"), Howard Michalski ("Michalski"), and Peter Picknelly ("Picknelly"). The Trustee additionally brought this action against several entities affiliated with certain of the former managers and officers, including ASD Merchant Partners, LLC ("ASD"), Springfield Capital, LLC ("Springfield"), Arthur S. Demoulas Continuation Trust ("ASD Continuation Trust"), and Arthur S. Demoulas 2012 Trust ("ASD 2012 Trust," and collectively with all the non-Debtor parties, the "Defendants"). The Trustee claims that through various fraudulent and preferential transfers, the Defendants exhausted the Debtors' assets and drove the company into insolvency for their own benefit and in breach of their fiduciary duties.
Defendants moved to dismiss the nine-count complaint (the "Complaint") pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable by Bankruptcy Rule 7012 (the "Motion" or "Motions"). There are four Motions on behalf of the Defendants.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334. Venue in the District of Delaware is proper pursuant to 28 U.S.C. §§ 1408 and 1409. The avoidance and preference claims are core proceedings under 28 U.S.C. § 157(b)(2)(F) and (H). The claims of breaches of fiduciary duties, aiding and abetting, unjust enrichment and corporate waste are non-core claims. They do not fall within § 157(b)(2). See also Official Comm. of Unsecured Creditors v. Yucaipa American Alliance Fund I, L.P. (In re Allied System Holdings, Inc. ). 524 B.R. 598, 605-06 (Bankr. D. Del. 2015) ().
The Debtors were founded between 1999 and 2003 and operated as residential mortgage lenders and servicing companies. Compl. ¶¶ 8, 21. In 2007 and 2008, as a result of the housing crisis, the Debtors entered a restructuring process, during which ASD, which Defendant Demoulas owned, acquired a 65% controlling interest in the Debtors. Compl. ¶ 21. After ASD's acquisition, Bradley, the President and Chief Executive Officer of the Debtors and a member of the Debtors' Board of Managers (the "Board"), and Cambi, the Chairman of the Board, shared control of the Debtors with Demoulas, a member of the Board and the Manager of ASD. Compl. ¶¶ 9-11, 21. Bradley and Cambi regretted losing control of the Debtors and entering into a partnership with Demoulas. Compl. ¶¶ 23-25.
In 2014, Demoulas decided to sell his interest in the Debtors. Compl. ¶ 26. The Board proposed a transaction in which Demoulas would sell his interest to the Blackstone Group ("Blackstone"). Compl. ¶ 27. Blackstone rejected the deal in January 2015, expressing concerns with the Debtors' high costs, limited growth capabilities and ownership. Compl. ¶ 28. The collapse of the Blackstone deal was of great concern to Bradley and Cambi. Compl. ¶ 29.
Around February 2015, Bradley and Cambi discussed the possibility of Bradley, Cambi or the Debtors buying Demoulas's interest. Compl. ¶¶ 31-32. Demoulas agreed to sell his interest to Cambi for $ 25 million. Compl. ¶ 32. Bradley, Cambi, and Demoulas initially structured the transaction so that Springfield, a limited liability company ("LLC") controlled by Cambi, would purchase ASD's 65% interest in the Debtors for $ 25 million. Compl. ¶ 37. On April 2, 2015, Springfield, ASD, and the Debtors entered into the Membership Interest Purchase Agreement ("MIPA"), which detailed the transaction's terms. Compl. ¶ 37.
During the course of negotiating the MIPA, the Board received legal advice and a presentation from Houlihan Lokey regarding the value of the Debtors. Compl. ¶¶ 40-42. In March 2015, Houlihan Lokey valued the Debtors at about $ 26.6 million. Compl. ¶ 41. Based on this valuation, ASD's 65% interest was worth just over $ 17 million. Compl. ¶ 41. Bradley wrote an email to the Debtors' attorneys on September 3, 2015, which discussed the Debtors' ability to redeem ASD's 65% interest if Springfield failed to secure funding for the transaction:
I don't believe that the ASD stock is worth more than $ 17.55M. [Cambi] agreed to offer $ 25M because he believed [Demoulas] wouldn't take less. There is no way that this [B]oard, based on [Houlihan Lokey's valuation], should approve the [Debtors] signing up for liability on [the] transaction.
Compl. ¶ 42. Bradley shared a similarly worded email with Cambi and his attorneys on September 6, 2015:
In no case could the company's balance sheet support a financing for $ 25M.... If Springfield felt it could come over the top with it's [sic] own contribution ... that is certainly it's [sic] right .... But for the company to represent it could achieve a price that far over market ... is ... an obnoxious proposition.
Compl. ¶ 46. The parties negotiated the deal between Springfield and ASD for eight months, but the deal never closed. Compl. ¶ 44.
After the Springfield-ASD deal collapsed in September 2015, the Debtors decided to redeem ASD's entire membership interest (the "Redemption Transaction").
Compl. ¶¶ 44-46. Despite ongoing negotiations between Bradley, Cambi, and Demoulas, the price for the Redemption Transaction remained set at the $ 25 million purchase price proposed for the Springfield-ASD transaction. Compl. ¶¶ 44-45, 55. Bradley provided updates on the negotiations to all the Board members through email. Compl. ¶ 50. Levins and Kirdar, who ASD appointed to the Board, did not question the redemption price. Compl. ¶ 73. Yet, Cambi remarked on November 10, 2015, that the Debtors were "putting every penny on the line getting ASD" the $ 25 million. Compl. ¶ 48. Baruch and Michalski, the Chief Operating Officer and Executive Managing Director of the Debtors, respectively, did not intervene in the negotiations. Compl. ¶ 70. The Board approved the Redemption Transaction, which closed on December 9, 2015. Compl. ¶¶ 51, 55.
Pursuant to the Redemption Transaction, WJB SEED transferred a total of $ 25 million in five separate transactions to Demoulas, the ASD Continuation Trust, and the ASD 2012 Trust on December 9, 2015. Compl. ¶¶ 55-56. WJB SEED funded the Redemption Transaction by using $ 16 million of the Debtors' capital and a $ 9 million "capital contribution" from Springfield. See Pl.'s Opp'n to Defs.' Mots. 25; Bradley/Baruch/Michalski Br. 20-21. The Redemption Transaction also included a Waiver and Mutual Release, which released various claims in connection with the Redemption Transaction. Compl. ¶¶ 57-58.
Shortly after the Redemption Transaction closed, the Debtors' financial condition rapidly and severely deteriorated. Compl. ¶ 61. The Debtors were thinly capitalized prior to the Redemption Transaction, and the use of corporate assets to fund the redemption left the Debtors with limited cash to operate. Compl. ¶¶ 48, 61. On December 29, 2015, less than one month after the Redemption Transaction, Cambi and Bradley started discussing methods to conceal the Debtors' cash problems. Compl. ¶¶ 62-63. By January 2016, the Debtors had "virtually no cash flow" and were "in the midst of collapsing." Compl. ¶¶ 66-67. Thus, the Debtors filed for Chapter 7 bankruptcy on April 28, 2016 (...
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