Jalbert v. Flanagan (In re F-Squared Inv. Mgmt., LLC)

• Decision Date: 07 May 2019
• Docket Number: Adv. No. 17-50815,Adv. No. 17-50738, Adv. No. 17-50807, Adv. No. 17-50825,Case No. 15-11469 (LSS)
• Citation: 600 B.R. 294
• Parties: IN RE: F-SQUARED INVESTMENT MANAGEMENT, LLC, et al., Debtors. Craig Jalbert, in his Capacity as Trustee for F2 Liquidating Trust, v. Brian Flanagan, Matthew Landon, Patrick Coyle, Scott Kearney.
• Court: U.S. Bankruptcy Court — District of Delaware

600 B.R. 294

IN RE: F-SQUARED INVESTMENT MANAGEMENT, LLC, et al., Debtors.

Craig Jalbert, in his Capacity as Trustee for F2 Liquidating Trust,

v.Brian Flanagan, Matthew Landon, Patrick Coyle, Scott Kearney.

Case No. 15-11469 (LSS)

Adv. No. 17-50738

Adv. No. 17-50807

Adv. No. 17-50815

Adv. No. 17-50825

United States Bankruptcy Court, D. Delaware.

Signed May 7, 2019

Jason A. Gibson, Rosner Law Group LLC, Wilmington, DE, for Plaintiff.

Benjamin W. Keenan, Ashby & Geddes, Wilmington, DE, for Defendant.

The Honorable Laurie Selber Silverstein, United States Bankruptcy Judge

The trustee of the F2 Liquidating Trust (the "Trustee" or "Plaintiff") commenced over one hundred adversary proceedings post-confirmation seeking to avoid as fraudulent conveyances and/or preferential transfers discretionary bonus payments and/or tax distributions made prepetition by F-Squared Management, LLC.In this subset of those proceedings, which with two small exceptions involve only bonus payments, Defendants moved to dismiss the fraudulent conveyance counts on a single ground—that the Trustee failed to sufficiently plead lack of reasonably equivalent value because the sole allegations in the complaint regarding value are that the bonuses were entirely discretionary and that "[n]either the Employee Handbook nor Defendant[s'] employment agreement[s] lists any criteria or targets which, if met, would entitle Defendant[s] to receive a bonus."The Trustee does not dispute this characterization of his complaints; rather, he takes the position that, as a matter of law, the payment of a discretionary bonus not tied to a previously-enunciated metric is a per se fraudulent conveyance if made while a debtor is insolvent.

Simply put, the Trustee argues that such a bonus can never be for reasonably equivalent value because it confers no value whatsoever.Because I disagree with this premise, the motions to dismiss the fraudulent conveyance counts are granted.

With respect to the preference counts against Defendants Flanagan, Landon and Kearney, the Trustee's complaints hinge on Defendants being insiders as none of the transfers occurred within ninety days of the filing of the bankruptcy petitions.Each complaint alleges that the relevant Defendant was an insider based on his title of "Senior Vice President" and was part of the senior management team.While each Defendant disputes this characterization, and I have my doubts, such factual issues cannot be determined on a motion to dismiss.The Trustee's allegations are sufficient for pleading purposes, and as such, the motions to dismiss will be denied as to the preference counts.

Background¹

F-Squared Management, LLC and its subsidiaries²(collectively, "Debtors") were investment management and research firms whose primary business was selling Debtors' portfolio model services to investment advisors in the advisory, institutional, retail and retirement markets.In order to provide products and services, Debtors created and licensed a series of specialty indexes (the "AlphaSector Indexes"), covering a range of asset classes.The AlphaSector Indexes were based on sector rotation strategies that used quantitative models, programmed to measure the volatility and price movements of exchange-traded funds as criteria for inclusion and weighting in the indexes.As of June 30, 2014, there were approximately $ 28.5 billion in assets under advisement invested by Debtors' clients pursuant to the AlphaSector Indexes, including $ 13 billion in mutual fund assets sub-advised by Debtors.

In 2013, the Securities & Exchange Commission(the "SEC") began an investigation into potential violations of federal securities laws related to Debtors' advertising of the AlphaSector Indexes' performance track record between April 2001 and September 2008.On December 22, 2014, Debtors agreed to a settlement of an administrative cease-and-desist proceeding with the SEC that required Debtors to admit to false advertising during the relevant time period, pay a $ 5 million penalty to the SEC and disgorge $ 30 million in related profits.The Trustee contends that, as a result of Debtors' admitted securities law violations, Debtors were insolvent "since their inception."

Between December 2014 and March 2015, F-Squared Investments Inc. paid each Defendant a bonus (each, a "Bonus Payment").Debtors contemplated giving bonuses to their employees as provided for in their employee handbook, which provides that:

Bonus

The Company has a discretionary annual cash bonus for all employees in good standing.This discretionary bonus, when given, is generally paid following the year end.Cash bonuses are payable in accordance with the Company's payroll practices in effect at the time, and the Company will deduct from any bonus all amounts required to be deducted or withheld under applicable laws or under any employee benefit plan in which you may participate.

The Company reserves a binding right to remit payment of bonuses to certain individuals in installments ("rolling bonus"), or at other such times as the company [sic] deems prudent, in its sole discretion.The rolling bonus is generally paid in two installments, with 75% of the eligible target bonus on or around February 15^th and the remaining 25% on or around May 15^th.³

The opportunity for a bonus was also contemplated in Defendants' respective Offer Letters.⁴Minutes of Debtors' April 6, 2015 meeting of the Board of Managers reflect that it was unlikely that bonuses for 2015 would be paid due to Debtors' poor performance.

Procedural Background

On July 8, 2015, Debtors filed voluntary petitions under chapter 11 of title 11 of the United States Bankruptcy Code.⁵PlaintiffCraig Jalbert was appointed the trustee for the F2 Liquidating Trust effective January 22, 2016 pursuant to Debtors' Joint Plan of Liquidation.⁶

On July 7, 2017, the Trustee filed complaints against each Defendant seeking the recovery of the Bonus Payments as fraudulent transfers.⁷On September 7, 2017, Defendants jointly filed their Motion to Dismiss⁸ together with their opening brief.⁹

Subsequently, on October 19, 2017, the Trustee filed amended complaints (each a "First Amended Complaint") against Defendants Flanagan, Landon and Kearny (and, together with the complaint filed against Defendant Coyle, the "Complaints").The First Amended Complaint against Defendants Flanagan and Landon included an additional, alternative claim that the Bonus Payments constituted preferential transfers.¹⁰The First Amended Complaint against Defendant Kearny removed the claim of fraudulent transfer and added a claim of preferential transfer.¹¹On November 2, 2017, Defendants Flanagan, Landon and Kearny jointly filed their motion to dismiss the First Amended Complaints¹² together with their opening brief in support,¹³ which incorporated the opening brief on their original motion to dismiss and made further argument seeking to dismiss the new counts.

The Trustee filed an answering brief on November 16, 2017.¹⁴Defendants' reply brief was filed on November 22, 2017.¹⁵And, on November 28, 2017the Trustee filed a motion for leave to file a sur-reply accompanied by his sur-reply brief.¹⁶

I heard oral argument on March 12, 2019 and took the matter under advisement.¹⁷

Jurisdiction

Subject matter jurisdiction exists over this adversary proceeding pursuant to 28 U.S.C. § 1334(b).Further, adversary proceedings seeking to recover fraudulent conveyances and preferences are statutorily core matters.¹⁸And, in each of these adversary proceedings, both Plaintiff and each Defendant have expressly consented to my entry of final orders.¹⁹Accordingly, I may enter any final judgments in these adversary proceedings consistent with the United States Constitution.

The Parties' Positions

Defendants moved to dismiss the Complaints for failure to sufficiently allege both reasonably equivalent value as to the fraudulent conveyance counts and insider status as to the preference count.

As for the fraudulent conveyance counts, Defendants assert that Plaintiff has not sufficiently pled reasonably equivalent value because the Complaints are devoid of any allegations with respect to the value Debtors received in exchange for the transfers.Defendants assert that the allegations in the Complaints are simply a formulaic recitation of the statute and that the sole allegations are not sufficient to permit the court to draw a reasonable inference that the Bonus Payments did not confer any value on Debtors.Defendants contend that the natural inference in awarding a discretionary bonus, and the only rational use of that discretion, is to pay a bonus only if it brings value to the employer.²⁰Finally, Defendants argue that the Trustee makes no allegations that Defendants did not honestly, competently and diligently perform their jobs.

As for the preference count, Defendants assert that simply setting forth each Defendants' title is not sufficient to infer that they are an officer for purposes of the longer preference period in § 547.They contend that their Offer Letters show that they had no managerial responsibilities and that this is confirmed by Debtors' filed Statements of Financial Affairs which do not list them as officers and directors.

Plaintiff asserts that the allegations in the Complaints provide Defendants with fair notice of his claims and are not simply a formulaic recitation of the statutory elements of § 548.He claims that "courts have consistently found that where a bonus is entirely discretionary, the debtor has no obligation to pay it, and the bonus is thus gratuitous."²¹He further takes the legal position that an employer receives no value for a discretionary bonus because the employer has no obligation to pay it.Finally, the Trustee contends that whether Defendants honestly, competently and diligently performed their jobs is "irrelevant" because, ultimately, Debtors could choose to make the Bonus Payments or not.²²

As for the preference counts, the Trustee argues contends...