Lipscomb v. Clairvest Equity Partners Ltd. P'ship (In re LMI Legacy Holdings, Inc.)

• Decision Date: 14 December 2020
• Docket Number: Adv. No. 15-51069 (KBO),Bankr. No. 13-12098 (KBO) (Jointly Administered),Civ. No. 19-887-CFC
• Parties: IN RE LMI LEGACY HOLDINGS, INC., et al., Reorganized Debtors. Edward L. Lipscomb, as Special Trustee of the LMI GUC Trust, Appellant, v. Clairvest Equity Partners Limited Partnership, et al., Appellee.
• Court: U.S. District Court — District of Delaware

625 B.R. 268

IN RE LMI LEGACY HOLDINGS, INC., et al., Reorganized Debtors.

Edward L. Lipscomb, as Special Trustee of the LMI GUC Trust, Appellant,

v.Clairvest Equity Partners Limited Partnership, et al., Appellee.

Bankr. No. 13-12098 (KBO) (Jointly Administered)

Adv. No. 15-51069 (KBO)

Civ. No. 19-887-CFC

United States District Court, D. Delaware.

Signed December 14, 2020

James S. Green, Jr., Matthew R. Pierce, Nicolas E. Jenner, LANDIS RATH & COBB LLP, Wilmington, Delaware Counsel for Appellant.

Steven M. Miller, MORRIS JAMES LLP, Wilmington, Delaware; David T.B. Audley, Michael T. Benz, CHAPMAN AND CUTLER LLP, Chicago, Illinois Counsel for Clairvest Appellees.

Art C. Aranilla, MARSHALL DENNEHEY WARNER COLEMAN & GOGGIN, Wilmington, Delaware; Gregory W. Fox, Carol A. VanderWoude, MARSHALL DENNEHEY WARNER COLEMAN & GOGGIN, Philadelphia, Pennsylvania Counsel for Appellees Louis P. Rocco and Saverio Burdi.

MEMORANDUM OPINION

CONNOLLY, UNITED STAGES DISTRICT JUDGE

I. INTRODUCTION

Appellant Edward L. Lipscomb, as special trustee ("Trustee") of the LMI GUC Trust created in the Chapter 11 cases of the above-captioned reorganized debtors, and plaintiff in the above-captioned adversary proceeding, appeals the Decision, In re LMI Legacy Holdings, Inc. , 2017 WL 1508606 (Bankr. D. Del. Apr. 27, 2017) (Adv. D.I. 188)¹ and Order (Adv. D.I. 189) dismissing with prejudice the Trustee's breach of fiduciary duty claims set forth in Counts I, II, and III of Trustee's complaint (Adv. D.I. 4; Appx. Ex. 3) ("Complaint") against defendants: (i) Clairvest Equity Partners Limited Partnership, Clairvest Group, Inc., Clairvest Acquisition LLC, and Clairvest GP Manageco, Inc. (together, the "Clairvest Entities"); (ii) David Sturdee; Kenneth Rotman, Aly Champsi, Sidney Horn, and Alan Torrie (together, the "Clairvest Directors," and together with the Clairvest Entities, "Clairvest Appellees"); and (iii) defendants Louis Rocco ("Rocco") and Saverio Burdi ("Burdi"). For the reasons set forth herein, the Court affirms the dismissal of Counts I, II, and III of the Complaint.

II. BACKGROUND

A. The Debtors and the Parties to the Appeal

Alan Landauer ("Landauer") formed Landauer Metropolitan, Inc. ("LMI" and, together with its affiliates, the "Debtors") in 1999 upon merging his family business with another home health care services and products company. (D.I. 10 at 4). Before filing for bankruptcy in 2013, LMI operated as a regional home medical equipment supplier in the northern United States. (Complaint ¶ 36). The majority of LMI's sales and rentals were historically paid for through third-party payor groups, such as Medicare. (Id. ¶ 37). In 2003, Congress enacted legislation requiring a competitive bidding process for many of the items sold and rented by LMI ("Competitive Bidding"). (Id. ¶ 38). As a supplier, LMI was compelled to take part in the process to secure Medicare contracts. (Id. ) The Competitive Bidding process is run by the Center for Medicare Services ("CMS"), and bids are evaluated based on the bidder's eligibility, financial stability, and the bid price. (Id. ) Approximately 35% of LMI's historical revenues were derived directly from Medicare and Medicaid programs. (Id. ¶¶ 37-39).

Clairvest is a Toronto-based equity firm and was LMI's controlling shareholder prior to the bankruptcy. (Id. ¶ 2, 40). Clairvest began investing in LMI through its private equity funds in December 2002 and quickly obtained a controlling position in LMI. (Id. ¶ 42). On the petition date, Clairvest owned a 62.5% equity interest in LMI. (Id. ¶ 40). Clairvest also controlled LMI's Board through its power to nominate five of the nine members of LMI's Board (the "Clairvest Directors" and "Board," respectively). Clairvest Directors Sturdee, Rotman, and Champsi were members of the nine-person LMI Board of Directors and were also employed at Clairvest.² (Id. ¶¶ 19-21). Clairvest Directors Torrie and Horn were also members of the LMI Board, having been nominated by Clairvest. (Id. ¶¶ 27-28). Defendant Rocco was a Board Member, President and CEO of LMI. (Id. ¶¶ 6, 22). Defendant Burdi was LMI's Executive Vice President of Sales and was not a Director. (Id. ¶ 23).

On August 16, 2013, the Debtors filed voluntary petitions for bankruptcy relief under chapter 11 of the Bankruptcy Code. (Id. ¶ 32). Clairvest held a claim against the estate for $5.2 million derived from three loans made to LMI between March 2010 and February 2011, which claim accounted for approximately 30% of the Debtors’ estimated general unsecured creditor pool. (Id. ¶ 43). On March 13, 2014, the Debtors filed their joint plan of liquidation (B.D.I. 650) (as amended and modified, the "Plan"). On April 28, 2014, the Bankruptcy Court entered an order confirming the Plan (B.D.I. 761) (the "Confirmation Order"). On May 1, 2014, the Plan became effective. (Complaint ¶ 14). Under the Plan and Confirmation Order, as well as a settlement agreement approved by the Bankruptcy Court (B.D.I. 282), the right to prosecute the claims asserted in the Complaint were transferred to the "GUC Trust" – a trust established for the benefit of the holders of allowed general unsecured claims asserted against the Debtors. Trustee is the Special Trustee of the GUC Trust. (Complaint ¶¶ 15-17).

B. The Complaint

Following a number of years of growth, LMI's revenue peaked in 2011 with reported net revenue of $139,656,000. LMI's net revenue fell slightly in fiscal year 2012 to $137,160,000 and again in fiscal year 2013 to $128,500,000. LMI Legacy , 2017 WL 1508606 at *2. The primary cause of LMI's bankruptcy filing was not its profitability or cashflow in from 2011 to 2013 but rather LMI's failure to win a single services area in Medicare's 2013 Competitive Bidding. ( Id. ; Complaint ¶¶ 35-40). LMI's bids were rejected despite their competitive pricing based on CMS's determination that LMI might not be financially able to provide the services upon which it bid. (B.D.I. 100-6, 8/20/2013 Hr'g Tr. at 6:15-24 (Debtors’ first day hearing)).

The Complaint alleges that in 2011, Clairvest initiated a sale process for LMI and signed an engagement letter with RBC Capital Markets, LLC ("RBC") as its investment banker before involving non-LMI Board Members. (Id. ¶¶ 69-71). RBC was an investor in a separate Clairvest fund, and this preexisting relationship was not disclosed to the Board. (Id. at ¶¶ 69-73). The Trustee concedes that, under the Shareholder Agreement, Clairvest had the right to require LMI to initiate a sale process (D.I. 10 at 36; see also Adv. D.I. 100-7, ¶ 11.1(b) at 4-5 (Shareholders Agreement)), and Clairvest had the right to select LMI's investment advisor. (Adv. D.I. 100-7, ¶ 11.1(b) at 4-5). The Complaint asserts that, notwithstanding these rights, final approval of the investment banker was reserved to Landauer, which Clairvest did not obtain the consent prior to RBC's engagement.

At a November 4, 2011 LMI Board meeting, the Board created a three-person subcommittee, including Sturdee (nominated by Clairvest), Landauer, LMI's founder and chairman, and Rocco, LMI's President, "to oversee the sale process." (Id. ¶ 71). The Complaint alleges that this Committee was a sham and that the LMI Board left the sale process entirely to the Clairvest Appellees. (Id. ¶¶ 2-4).

The initial sale process ended in May of 2012 without a single acceptable bid having been received. (Id. ¶ 78). It is unclear what constituted an acceptable bid," but the Trustee alleges that Clairvest – not LMI – had provided RBC with guidelines for what would be acceptable. The Trustee believes that Clairvest received offers that valued LMI in excess of $70 million. (Id. ¶ 87). Trustee speculates that bids for LMI were received but withheld based on a provision in the Shareholders Agreement which would have required the bids to be accepted. (D.I. 10 at 39-40).

The Complaint alleges that once the sale process yielded no buyers, the Board ignored the potential negative financial impact to LMI of the new Competitive Bidding requirements by not pursuing strategic partnerships with other companies that also had Medicare licenses, thus hedging against the loss of business resulting from Competitive Bidding. The Complaint alleges this strategy, "would have been a strategy to prevent these Chapter 11 cases." (Complaint ¶ 84). Citing a Clairvest internal memorandum of February 2012, the Complaint alleges that LMI's Board, at Clairvest's direction, ignored this option because the Clairvest Appellees were interested only in liquidating Clairvest's investment in LMI. (Id. ¶ 83).

On or about January 30, 2013, LMI learned that it had been disqualified from round two of Competitive Bidding and had not "won any bids." (Id. ¶ 92). As a consequence, as of July 1, 2013, LMI would not have any contracts to supply products to new Medicare patients. (Id. ¶ 92).

Clairvest apparently anticipated the 2013 negative ruling from CMS and had already renewed its effort to sell LMI. See LMI legacy , 2017 WL 1508606 at *2. The Complaint alleges that Clairvest, on its own, commenced new efforts to negotiate a sale of LMI, and that, by the end of January of 2013, Clairvest had negotiated a non-disclosure agreement with a potential suitor. (Complaint ¶ 95). The Complaint alleges that by April 2013, Champsi had "discussed a possible sale or merger" of LMI with at least six companies: Allcare, Bioscript, Lincare, Quadrant, Medstar Surgical, and Community. (Id. ¶ 100).

By March 2013, Clairvest had begun negotiating with Passaic Healthcare Services, LLC d/b/a Allcare Medical ("Allcare"). Notwithstanding these actions by Clairvest, it was not until March 4, 2013 that LMI's Board met to begin discussing, for the first time since CMS's adverse ruling, LMI's sale and merger options. The minutes appear to show that Clairvest and its Board Members did not disclose the negotiations with Allcare, the letter of intent Clairvest had received from Allcare that day, or discuss RBC's involvement in the new sale process. (Id. ...