Kravitz v. Summersett (In re Great Lakes Comnet, Inc.)

• Decision Date: 19 June 2018
• Docket Number: Case No. GL 16–00290–jtg (Jointly Administered),Adv. Proc. No. 17–80180–jtg
• Citation: 586 B.R. 718
• Parties: IN RE: GREAT LAKES COMNET, INC., et al., Debtors. Peter Kravitz, Liquidation Trustee, Plaintiff, v. John Summersett, Paul Bowman, Ryan Thelen, Andre Cooks, Randy Fletcher, Janet Beilfuss, Sidney Shank, Todd Roesler, Duane Bronson, David Larocca, Les Jenkins, George Orphan, David Schroeder, John Lodden, Michigan Network Services, Local Exchange Carriers of Michigan Inc., IBDC Telecom Corporation, Nuleef Communications LLC, and John Does, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Michigan

586 B.R. 718

IN RE: GREAT LAKES COMNET, INC., et al.,¹ Debtors.

Peter Kravitz, Liquidation Trustee, Plaintiff,

v.John Summersett, Paul Bowman, Ryan Thelen, Andre Cooks, Randy Fletcher, Janet Beilfuss, Sidney Shank, Todd Roesler, Duane Bronson, David Larocca, Les Jenkins, George Orphan, David Schroeder, John Lodden, Michigan Network Services, Local Exchange Carriers of Michigan Inc., IBDC Telecom Corporation, Nuleef Communications LLC, and John Does, Defendants.

Case No. GL 16–00290–jtg (Jointly Administered)

Adv. Proc. No. 17–80180–jtg

United States Bankruptcy Court, W.D. Michigan.

Signed: June 19, 2018

Richard C. Kraus, Esq., Scott L. Mandel, Esq. and Scott A. Chernich, Esq., FOSTER SWIFT COLLINS & SMITH, PC, Lansing, Michigan for David LaRocca; Michael C. Hammer, Esq. and Doron Yitzchaki, Esq., DICKINSON WRIGHT PLLC, Ann Arbor, Michigan, Jonathan Bach, Esq., David Bright, Esq., Max Schlan, Esq., Seth Van Aalten, Esq. and Cathy Hershcopf, Esq., COOLEY LLP, New York, New York for Peter Kravitz, Trustee of the GLC Liquidation Trust

OPINION REGARDING MOTION OF DAVID LAROCCA TO DISMISS COMPLAINT PURSUANT TO FED. R. BANKR. P. 7012

John T. Gregg, United States Bankruptcy Judge

David LaRocca ("LaRocca"), a former member of the board of directors of Great Lakes Comnet, Inc. (the "Debtor"), filed a motion to dismiss [Adv. Dkt. No. 28] (the "Motion") in which he argues that Peter Kravitz, the Trustee of the GLC Liquidation Trust (the "Trustee"), has failed to state a claim for breach of fiduciary duty under Michigan law. The Trustee filed a response [Adv. Dkt. No. 56] (the "Response") in which he contends that he has plausibly stated a claim for breach of the duty of care and, in particular, the duty to oversee and monitor the affairs of the Debtor.² For the following reasons, the court shall grant the Motion.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" over all cases under 11 U.S.C. §§ 101 et seq. (the "Bankruptcy Code"), but may refer bankruptcy cases to the bankruptcy courts. 28 U.S.C. § 157(a) ; 28 U.S.C. § 1334(a). Upon referral, bankruptcy courts are authorized to hear, determine, and enter appropriate orders and judgments in core proceedings "arising under" the Bankruptcy Code, or "arising in" a case under the Bankruptcy Code.³

In this adversary proceeding, the relief sought against LaRocca does not arise under the Bankruptcy Code or in a case under the Bankruptcy Code. See 28 U.S.C. § 157(b)(1) ; Mich. Emp't Sec. Comm'n v. Wolverine Radio Co., Inc. (In re Wolverine Radio Co.) , 930 F.2d 1132, 1144 (6th Cir. 1991) (citation omitted). Rather, the Trustee's claim against LaRocca for his alleged breach of fiduciary duty arises under Michigan law. The claim is also not a proceeding that can arise solely in the context of a bankruptcy case, because the claim may be pursued without the prerequisite of a bankruptcy filing. See id. at 1144 (citation omitted). As such, the Trustee's claim against LaRocca does not constitute a core proceeding.

Nonetheless, this court may exercise jurisdiction if the proceeding is "non-core, but related to" the bankruptcy. 28 U.S.C. § 157(c)(1). The Sixth Circuit Court of Appeals has stated that " ‘[t]he usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.’ " In re Wolverine Radio Co. , 930 F.2d at 1142 (quoting Pacor, Inc. v. Higgins (In re Pacor) , 743 F.2d 984, 994 (3d Cir. 1984) ).

Because the Trustee's claim against LaRocca could form the basis for increased payments to creditors under the Debtor's confirmed plan of liquidation, this proceeding is non-core, but related to the Debtor's bankruptcy. See , e.g. , Morris v. Zelch (In re Reg'l Diagnostics, LLC) , 372 B.R. 3, 22–25 (Bankr. N.D. Ohio 2007) (related to jurisdiction because potential recovery from breach of fiduciary duty claim would augment creditor recovery); see also Browning v. Levy , 283 F.3d 761, 773 (6th Cir. 2002) (related to jurisdiction because potential recovery from legal malpractice claim would represent asset available for distribution to creditors).⁴

BACKGROUND ⁵

The Debtor was a corporation formed under the laws of the State of Michigan that provided fiber optic telecommunication services to third party carriers such as AT & T, Verizon and Sprint throughout Michigan, Ohio, Wisconsin, Illinois and Minnesota. (Compl. ¶¶ 21, 22) Prior to May 1, 2014, LaRocca was a member of the Debtor's board of directors. (Compl. ¶ 15; Mot., Ex. C, pp. 3–4) Beginning in 2010, the officers of the Debtor concocted and implemented four schemes that enabled the Debtor to charge national exchange carriers with illegal tariffs. (Compl. ¶¶ 34–70) In 2012 and in response to these tariffs, the carriers began to withhold payments from the Debtor. (Compl. ¶ 71)

The officers first disclosed to the board that the carriers were disputing the tariffs levied by the Debtor in January 2013. (Compl. ¶ 73) However, the officers did not reveal the true nature of these disputes. (Compl. ¶ 73) Instead, the officers described them as "billing disputes" that were mere "collection issues." (Compl. ¶¶ 73, 105)

On February 26, 2014, certain carriers filed an informal complaint against the Debtor and its alleged third party co-conspirators with the Federal Communications Commission (the "FCC"). (Compl. ¶ 75) The officers provided the board with a copy of the informal complaint in early March 2014, but did not disclose the true nature of the disputes or the risks associated with them. (Compl. ¶ 75; Mot., Ex. A, p. 3) Instead, the officers informed the board at a board meeting on March 6, 2014 that the informal complaint was an "opportunity that would ‘hopefully bring negotiations to a head’ " and continued to refer to the carriers' complaints simply as billing disputes. (Compl. ¶ 75 (emphasis in original); Mot., Ex. A, pp. 3–4) During the board meeting, the officers disclosed to the board that the carriers were withholding $25 million from the Debtor as a result of the billing disputes. (Compl. ¶ 75; Mot., Ex. A, p. 2)

At no time between 2010 and April 2014 did the officers mention to the board their schemes or the carriers' specific complaints, many of which had been communicated to the officers in writing. (Compl. ¶¶ 74, 121) The officers' concealment of their schemes "began to crumble as of April 2014" when another carrier filed a second informal complaint with the FCC that actually detailed the officers' schemes. (Compl. ¶ 79) The board was informed for the first time in April 2014 that the Debtor was losing money and that cash flow was "extremely tight." (Compl. ¶ 79) According to the minutes from the board meeting on April 28, 2014, "the total amount due from the [carriers was] between $50 and $60 million." (Mot., Ex. B, p. 2) The officers apprised the board that the Debtor would need to seek capital infusions or new loans to "cover growth" while it sought to resolve the billing disputes. (Compl. ¶ 79; Mot., Ex. B, p. 2) Three days later, LaRocca's term on the board expired.⁶ (Mot., Ex. C, pp. 3–4)

The facts underlying the officers' schemes were "likely" unknown to the board until a formal complaint was filed with the FCC by one of the carriers in October 2014, approximately five months after LaRocca had left the board. (Compl. ¶ 121) Even after disclosure to the board, the officers' schemes continued until April 2015. (Compl. ¶ 149) With its financial condition imperiled as a result of the schemes, the Debtor filed a voluntary petition for relief under chapter 11 on January 25, 2016. (Compl. ¶ 2)

On March 27, 2017, the court confirmed the Debtor's plan of liquidation [Dkt. No. 737], which established the GLC Liquidation Trust. (Compl. ¶ 11) Upon the effective date of the plan [Dkt. No. 742], the Debtor's assets, including the cause of the action against LaRocca, vested in the GLC Liquidation Trust. (Compl. ¶ 11)

The Trustee commenced this adversary proceeding by filing a Complaint against the Debtor's officers and directors, among others, on November 10, 2017 [Adv. Dkt. No. 1]. The Complaint is comprised of fifteen causes of action. With respect to LaRocca, the Complaint alleges only that he breached his fiduciary duties to the Debtor.

In lieu of answering the Complaint, LaRocca filed the Motion. After the matter was fully briefed, the court held a hearing and took the matter under advisement.

LEGAL STANDARD

Rule 12 is incorporated by Fed. R. Bankr. P. 7008 and provides, in pertinent part, that a party may seek dismissal of a complaint for the "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). To survive a motion to dismiss, the complaint "must contain either direct or inferential allegations with respect to all material elements necessary to sustain a recovery under some viable legal theory." Bickerstaff v. Lucarelli , 830 F.3d 388, 396 (6th Cir. 2016) (quotation omitted). In determining a motion to dismiss under Fed. R. Civ. P. 12(b)(6), a court must accept all factual allegations as true and construe all inferences from those allegations in favor of the plaintiff. Gavitt v. Born , 835 F.3d 623, 639–40 (6th Cir. 2016) (citation omitted).

A court must determine whether a complaint contains "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; Handy–Clay v. City of Memphis , 695 F.3d 531, 538 (6th Cir. 2012). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The plausibility standard is not akin to a "probability requirement," but instead requires more than a "sheer possibility" that the defendant has...