Little v. Speyside Fund (In re Pac. Steel Casting Co.)
| Decision Date | 17 August 2022 |
| Docket Number | 19-40193-RLE,Adversary Proceeding 19-4057-RLE |
| Parties | In re PACIFIC STEEL CASTING COMPANY LLC Debtor, v. SPEYSIDE FUND, LLC, a Delaware limited liability company, et al., Defendants. SARAH L. LITTLE, Chapter 7 Trustee Plaintiff, |
| Court | U.S. Bankruptcy Court — Northern District of California |
In 2014, Second Street Properties, f/k/a Pacific Steel Casting Company ("Second Street") and its wholly owned subsidiary Berkeley Properties, LLC ("Berkeley Properties") filed chapter 11 cases. At the time, Second Street had a collective bargaining agreement (the "CBA") with its union employees and participated in a multiemployer pension plan ("Local 164B" and the "MEP"). The court approved Second Street's sale of its steel foundry business to a new entity referred to here as Pacific Steel or the Debtor.
The sale was documented by an asset purchase agreement (the "APA") which was structured to comply with ERISA §4204 so that Second Street could avoid paying the large withdrawal liability to the MEP that it otherwise faced, then estimated to be between $20 million and $27 million (the "Contingent Withdrawal Liability"). To take advantage of this special treatment, ERISA required both parties to the transaction to do certain things. As buyer Pacific Steel had to post and maintain a bond payable upon default to the MEP and perform in a certain manner for the five pension plan years following the sale - the contingency period. As seller, Second Street had to provide a deed of trust on the real property owned by its wholly owned subsidiary. Second Street's chapter 11 plan was also structured to comply with these provisions and to satisfy the concerns of the trustees of the MEP (the "MEP Trustees").
Before the contingency period had elapsed, Pacific Steel failed to maintain the conditions for eliminating the Contingent Withdrawal Liability. Pacific Steel later stopped contributing to the MEP and then filed this chapter 7 case.
The chapter 7 trustee for Pacific Steel's estate (the "Trustee") has sued the Speyside Defendants - former owners and managers of Pacific Steel - alleging, in brief, that (1) under the APA, Pacific Steel agreed to either assume the Contingent Withdrawal Liability or to indemnify Second Street for it; and (2) Pacific Steel's financial statements failed to properly account for the Contingent Withdrawal Liability, in effect concealing the fact that it was insolvent from inception, and inflated the value of its inventory. These theories are the factual premise for each of the Trustee's fraudulent transfer and breach of fiduciary duty claims.
Before the court are competing motions for summary judgment that turn on the interpretation of the APA.
The Speyside Fund LLC ("Speyside"), the Alcast Company, Krishnan Venkatesan, Jeffrey Stone, Eric Wiklendt, Jerry Johnson, Brian Holt, Steve Wessels, RataxasCo LLC, Speyside Equity LLC, Kevin Daugherty, individually and as Trustee of the TD 2011 Trust and the PD 2011 Trust, and Robert C. Sylvester (collectively, the "Speyside Defendants") have filed their Motion for Partial Summary Judgment as to Fact of Liability (the "Speyside Motion"). Docket Nos. 176-183.
The Speyside Motion is directed at the following claims alleged in the First Amended Complaint. Docket No. 70 (the "FAC"):
The second claim for breach of the fiduciary duty owed to Pacific Steel against Krishnan Venkatesan, Jeffrey Stone, Jerry Johnson, Brian Holt, Steve Wessels, and Kevin Daugherty (identified in the FAC as the Management Defendants).
The seventh claim for avoidance of four-year intentionally fraudulent transfers against Speyside, the Alcast Company, Krishnan Venkatesan, Jeffrey Stone, Eric Wiklendt, RataxasCo LLC, Speyside Equity LLC, Kevin Daugherty, the TD 2011 Trust, the PD 2011 Trust, and Robert C. Sylvester (identified in the FAC as the Owner Defendants).
The eighth claim for avoidance of four-year constructively fraudulent transfers against the Owner Defendants.
The ninth claim for avoidance of seven-year intentionally fraudulent transfers against the Owner Defendants.
The eleventh claim for recovery of the four-year and seven-year avoided transfers against the Owner Defendants.
The fourteenth claim for aiding and abetting breach of fiduciary duty by the Management Defendants against the Owner Defendants.
The Trustee seeks compensatory damages of $40 million for the breach of fiduciary duty claims and recovery of $14 million in allegedly fraudulent transfers.
The Speyside Motion is made on the grounds that the Trustee cannot meet her burden of proof with respect to these claims because the underlying premise for each of them is fatally flawed. Each of these claims requires proof that, under the APA, Pacific Steel became obligated to pay the Contingent Withdrawal Liability owed by Second Street to the MEP - either directly, because it was assumed, or by agreeing to indemnify Second Street for it. The Speyside Defendants argue that Pacific Steel has no such obligation to the MEP or to Second Street under the proper interpretation of the APA and this liability belongs to Second Street.
The Speyside Motion is supported by Declarations of Todd Toral, Jeffrey Stone, Kevin Daugherty, and Israel Goldowitz. Docket Nos. 180-183. The Trustee and Second Street have filed a Joint Opposition supported by the Declaration of Jessica Bagdanov. Docket Nos. 195, 199. They have also objected to evidence in the supporting declarations of Jeffrey Stone, Kevin Daugherty, and Israel Goldowitz. Docket Nos. 196-198. The Speyside Defendants have filed a Reply. Docket No. 208.[1]
The Trustee and Second Street have filed their Joint Motion for Partial Summary Judgment Regarding Pacific Steel's Assumption of Second Street's Contingent Withdrawal Liability (the "Joint Motion"). Docket Nos. 172-174.
The Joint Motion argues that the Trustee's and Second Street's interpretation of the APA is the only reasonable one. They claim that the APA obligated Pacific Steel to pay Second Street's Contingent Withdrawal Liability. They contend that this obligation rendered Pacific Steel insolvent at all relevant times and Pacific Steel failed to properly account for this liability on its financial statements. Because of this, the distributions made by Pacific Steel to the Speyside Defendants were fraudulent transfers or the Speyside Defendants breached their fiduciary duties in enabling these transfers to be made. They also urge the court to find that the doctrines of judicial and equitable estoppel bar the Speyside Defendants from claiming that Pacific Steel did not agree to assume or to indemnify Second Street for the Contingent Withdrawal Liability. The Joint Motion is supported by the Declaration of Jason Komorsky. Docket No. 174. The Speyside Defendants have filed Opposition to the Joint Motion. Docket No. 203. The Trustee and Second Street have filed a Reply. Docket No. 205.
The Speyside Defendants, the Trustee and Second Street refer to and rely on the following background events and documents. As necessary for context, the court takes judicial notice of certain documents filed in the Second Street chapter 11 case and the docket in the chapter 7 case of Pacific Steel and this adversary proceeding.
Second Street manufactured steel castings at its plant in Berkeley, California. Berkeley Properties owned the real property on which Second Street operated. Many of Second Street's former employees were represented by Local 164B, operating under the CBA pursuant to which Second Street contributed to the MEP.
In March 2014, Second Street and Berkeley Properties filed their jointly administered chapter 11 cases (Case Nos. 14-41045 and 14-41048). In its list of the twenty largest unsecured creditors, Second Street identified the MEP as having a $27 million contingent and unliquidated claim for Second Street's withdrawal liability. Second Street Docket No. 1 at 4.
Second Street retained an investment banker to help it find a purchaser for its steel foundry business. Second Street Docket No. 157. Speyside was contacted as a potentially interested party. Docket no. 181, Stone Dec., Ex. 5 (). Speyside submitted an initial indication of interest. Id. Ex. 7. The investment banker informed Speyside that participation in the MEP was a condition to purchasing the Second Street foundry business. Id. Ex. 8. After a period of negotiation, Speyside and Second Street signed the APA. Docket No. 180, Toral Dec., Ex. F, APA.
During these negotiations, counsel for the MEP provided a memo to its Trustees and Second Street's chapter 11 counsel regarding Second Street's withdrawal liability as it affected potential purchasers of Second Street's foundry business. Docket No. 180, Toral Dec., Ex. E, 5/1/14 memo re pension plan withdrawal liability issues "helpful to a potential purchaser assessing a potential transaction". This analysis necessarily informed Second Street's understanding of this issue for the drafting of the APA and Second Street's Chapter 11 Plan.
This memo explained the withdrawal liability issue as follows:
First Second Street's share of the MEP's unfunded vested liabilities was approximately $27 million which would become due in installments if Second Street withdrew from the MEP. The actual present value of this was approximately $20 million due to...
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