JLL Consultants, Inc. v. Gothner (In re AgFeed USA, LLC)

• Decision Date: 13 September 2016
• Docket Number: Case No. 13-11761 (BLS) Jointly Administered,Adv. No. 15-50210 (BLS)
• Citation: 558 B.R. 116
• Parties: In re: AgFeed USA, LLC, et al,Debtors. JLL Consultants, Inc., as Trustee of the AgFeed Liquidating Trust, Plaintiff, v. K. Ivan F. Gothner, Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

558 B.R. 116

In re: AgFeed USA, LLC, et al,¹ Debtors.JLL Consultants, Inc., as Trustee of the AgFeed Liquidating Trust, Plaintiff,

v.K. Ivan F. Gothner, Defendant.

Case No. 13-11761 (BLS) Jointly Administered

Adv. No. 15-50210 (BLS)

United States Bankruptcy Court, D. Delaware.

Signed September 13, 2016

ELLIOTT GREENLEAF, Eric M. Sutty, Bar No. 4007, Rafael X. Zahralddin-Aravena, Bar No. 4166, 1105 North Market Street, Suite 1700, Wilmington, DE 19801—and—SUGAR FELSENTHAL, GRAIS & HAMMER LLP, Aaron L. Hammer, Mark Melickian, Leland H. Chait, 30 N. LaSalle St., Ste. 3000, Chicago, IL 60602, Counsel to JLL Consultants, Inc., as Liquidating Trustee of the AgFeed Liquidating Trust

ASHBY & GEDDES, P.A., William P. Bowden, Bar No. 2553, Andrew D. Cordo, Bar No. 4534, Stacy L. Newman, Bar No. 5044, F. Troupe Mickler IV, Bar No. 5361, 500 Delaware Avenue, 8th Floor, Wilmington, DE 19801, Counsel for Defendant K. Ivan F. Gothner

OPINION

Brendan Linehan Shannon

, Chief United States Bankruptcy Judge

Before the Court is Defendant K. Ivan F. Gothner's (“Gothner”) Motion to Dismiss the Second Amended Complaint (the “Motion”) [Adv. Docket No. 36] filed by JLL Consultants, Inc. (“JLL”) as trustee for the AgFeed Liquidating Trust. JLL initiated this adversary proceeding against Gothner alleging that, during his time as a director, Chair of the Audit Committee, Vice-Chairman and Chairman of the Board of AgFeed Industries, Inc. (“AgFeed”), Gothner (i) breached fiduciary duties; (ii) participated in a series of fraudulent transfers; and (iii) committed intentional misrepresentations by nondisclosure. By the Motion, Gothner has moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure

, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7012. For the following reasons, the Court will grant the Motion in part, and deny the Motion in part.

I. JURISDICTION AND VENUE

The Court has jurisdiction over these matters pursuant to 28 U.S.C. §§ 1334

and 157(a) and (b)(1). Venue is proper in this Court pursuant to 28 U.S.C. § 1409. The Court has the power to enter an order on this Motion to dismiss even if the matter is non-core or it has no authority to enter a final order. See, e.g., In re Nat'l Serv. Indus., Inc., No. AP 14–50377 (MFW), 2015 WL 3827003, at *2 (Bankr.D.Del. June 19, 2015) (“Even if the matter is non-core or the Court lacks authority to enter a final order, however, the Court has the power to enter an order on a motion to dismiss.”) (citations omitted); In re Tropicana Entm't, LLC, 520 B.R. 455, 463 (Bankr.D.Del.2014).

II. BACKGROUND

The Court presumes familiarity with the general background of this case, as it is set forth in a previous published opinion. See JLL Consultants, Inc. v. Gothner (In re AgFeed USA, LLC), 546 B.R. 318 (Bankr.D.Del.2016)

.

On July 15, 2013 (the “Petition Date”), Agfeed USA, LLC and fifteen of its affiliates (the “Debtors”) filed for relief under chapter 11 of the Bankruptcy Code. Following a successful sale process, the Debtors' Revised Second Amended Chapter 11 Plan (the “Plan”) was confirmed on November 4, 2014. Upon the effective date, the Liquidating Trust was created for the purpose of pursuing claims and causes of action, litigating contested claims and interests and ultimately making final distributions to holders of equity interests in the Debtors. JLL was appointed to serve as Liquidating Trustee (the “Trustee”).

On February 23, 2015, the Trustee filed the original complaint (the “Original Complaint”) alleging twelve causes of action against Gothner for conduct alleged to have occurred during his time as an officer and director of the Debtors. Gothner promptly moved to dismiss that complaint under Fed. R. Civ. P. 12(b)(6)

. On February 19, 2016, the Court issued a memorandum opinion and order dismissing the majority of the counts in the Original Complaint without prejudice. See Gothner, 546 B.R. 318. The Court granted the Trustee leave to file an amended complaint.

On May 27, 2016, the Trustee timely filed the second amended complaint (hereinafter the “Amended Complaint”) alleging the following ten counts against Gothner: (I) Breach of Fiduciary Duty (Duty of Care); (II) Breach of Fiduciary Duty (Duty of Loyalty); (III)—(V) Fraudulent Transfers; (VI) Recovery of Avoidable Transfers (11 U.S.C. § 550

); (VII) Disallowance of Claims ( 11 U.S.C. § 502(d) ); (VIII) Recoupment; (IX) Setoff; and (X) Intentional Misrepresentation.² Counts (I)—(V) relate to counts previously dismissed by this Court. As a result, with regard to these Counts, the Court will primarily focus on new allegations made in the Amended Complaint (if any) to determine whether the Trustee has now alleged sufficient facts to survive the Motion. Counts (VIII)—(X) were not alleged in the Original Complaint.

III. STANDARD OF REVIEW

To decide a motion to dismiss under Rule 12(b)(6)

, the Court must “accept all well-pleaded allegations in the complaint as true, and view them in the light most favorable to the plaintiff.” Carino v. Stefan, 376 F.3d 156, 159 (3d Cir.2004) ; see also Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir.2008) (stating that the Supreme Court has reaffirmed that, on a Rule 12(b)(6) motion, the facts alleged must be taken as true and a complaint may not be dismissed merely because it appears unlikely that the plaintiff can prove those facts or will ultimately prevail on the merits”). In addition, all reasonable inferences are drawn in favor of the plaintiff. Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993). Legal conclusions, however, are not entitled to a presumption of truth. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1946, 173 L.Ed.2d 868 (2009). Federal Rule of Civil Procedure 8(a)(2) “requires a ‘showing’ rather than a blanket assertion of an entitlement to relief ... [because] without some factual allegation in the complaint, a claimant cannot satisfy the requirement that he or she provide not only ‘fair notice,’ but also the ‘grounds' on which the claim rests.” Phillips, 515 F.3d at 232 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 at n. 3, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ).

The Trustee has alleged actual fraud in several Counts, which must meet the elevated pleading standard of Federal Rule of Civil Procedure 9(b)

. Rule 9(b), made applicable here by Federal Rule of Bankruptcy Procedure 7009, states:

In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.

Fed. R. Civ. P. 9(b)

(emphasis added). The Third Circuit has explained that the purpose of Rule 9(b)'s requirement that plaintiffs particularly plead the “circumstances” of the alleged fraud is to “place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior.” Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985). It is not a defendant's fraudulent intent that must be pled with particularity, but the circumstances constituting fraud. The Third Circuit has indicated that, “allegations of ‘date, place or time’ fulfill these functions, but nothing in the rule requires them. Plaintiffs are free to use alternative means of injecting precision and some measure of substantiation into their allegation of fraud.” Seville Indus., 742 F.2d at 791

.

IV. DISCUSSION

All parties have agreed that (i) Nevada law governs Counts I and II.³ The Court will address each count in turn.

(I) Breach of Fiduciary Duty (Duty of Care)

Count I alleges that Gothner breached his fiduciary duty of care. The Amended Complaint alleges to theories as to why Gothner breached his fiduciary duty of care. First, Gothner breached his fiduciary duty of care by causing AFI to fail to fully disclose accurate information related to the accounting fraud in China before September 2011. Second, Gothner breached his fiduciary duty of care by “failing to properly supervise and monitor the adequacy of AgFeed's internal controls ....”⁴

(i) Causing AFI to Fail to Fully Disclose Accurate Information Related to the Accounting Fraud in China Before September 2011

The Amended Complaint alleges that Gothner breached his fiduciary duties because the Company made false or misleading public statements in public filings and press releases that were not seeking stockholder action. See Answer at 11-12 (“These false and misleading statements also constitute breaches of fiduciary duty by Mr. Gothner.... Directors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be held accountable ....”).⁵ A director may be liable for breach of fiduciary duty if he “knowingly” or “deliberately” disseminates false information. Malone v. Brincat, 722 A.2d 5, 10 (Del.1998)

). The required “level of proof is similar to, but even more stringent than, the level of scienter required for common law fraud.” Metro Commc'n, 854 A.2d at 158. Thus, the Trustee must plead that Gothner (i) had actual knowledge of the falsity of the Company's statements (ii) that he allegedly made and (iii) acted with scienter in making the statements.

Here, the Amended Complaint does not allege any of the three components. The Complaint does not allege that Gothner made any of the statements at issue. It instead says that the Audit Committee “revised and approved” the disclosures in question. See Am. Compl. at ¶ 203; see also id. at ¶ 191 (alleging that management, of which Gothner was not a member at the time, made “overly optimistic” projections in a presentation in 2011). These allegations say nothing about Gothner's actual role in the preparation of the disclosures at issue. Nor do the allegations...