MSGI Liquidation Tr. v. Modell (In re Modell's Sporting Goods, Inc.)

• Decision Date: 14 April 2023
• Docket Number: 20-14179 (VFP),Adv. Pro. 22-1076 (VFP)
• Parties: In Re: MODELL'S SPORTING GOODS, INC. et al., Liquidating Debtors. v. MITCHELL B. MODELL, individually, ERIC SPIEL, individually, HENRY MODELL AND CO., INC., M&M SERVICE CENTER, LLC, M&M OF BRUCKNER, LLC; M&M OF JAMAICA, LLC, M&M FLUSHING, LLC, and M&M MT. KISCO, LLC, Defendants. MSGI LIQUIDATION TRUST, by and through its Liquidation Trustee, Steven Balasiano, Plaintiff,
• Court: U.S. Bankruptcy Court — District of New Jersey

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In Re: MODELL'S SPORTING GOODS, INC. et al., Liquidating Debtors.

MSGI LIQUIDATION TRUST, by and through its Liquidation Trustee, Steven Balasiano, Plaintiff,
v.
MITCHELL B. MODELL, individually, ERIC SPIEL, individually, HENRY MODELL AND CO., INC., M&M SERVICE CENTER, LLC, M&M OF BRUCKNER, LLC; M&M OF JAMAICA, LLC, M&M FLUSHING, LLC, and M&M MT. KISCO, LLC, Defendants.

No. 20-14179 (VFP)

Adv. Pro. No. 22-1076 (VFP)

United States Bankruptcy Court, D. New Jersey

April 14, 2023

Hearing Date: February 8, 2023

Chapter: 11

Michael A. Kaplan, Esq. Michael Papandrea, Esq. Lowenstein Sandler LLP One Lowenstein Drive Roseland, N.J. 07068 Counsel for MSGI Liquidation Trust

Paul S. Hollander, Esq. Margreta Morgulas, Esq. Okin Hollander LLC Glenpointe Centre West, 2nd Floor 500 Frank W. Burr Blvd., Suite 40 Teaneck, N.J. 07666 Counsel for Mitchell B. Modell

Carlos Luis De Zayas, Esq. Erin M. Hoskins, Esq. Lydecker LLP 1221 Brickell Avenue, Suite 19th Floor Miami, FL 33131 Counsel for Eric Spiel

Eric R. Perkins Bercker LC 354 Eisenhower Parkway Livingston, N.J. 07039 Counsel for Henry Modell & Co., Inc.

Henry Longmire, Esq. James H. Burbage, Esq. 787 Seventh Avenue New York, NY 10019 Counsel to Henry Modell & Co., Inc.

Joseph L. Schwartz, Esq. Tod S. Chasin, Esq. Ryan M. Dunn, Esq. Riker, Danzig LLP Headquarter Plaza, One Speedwell Avenue Morristown, N.J. 07962-1981 Counsel for M&M Service Center, LLC; M&M of Bruckner, LLC; M&M Mt. Kisco, LLC

Andrew H. Sherman, Esq. Lucas F. Hammonds, Esq. Sills Cummis & Gross P.C. One Riverfront Plaza Newark, N 07102 Counsel for M&M of Jamaica, LLC and M&M Flushing, LLC

OPINION

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Vincent F. Papalia Bankruptcy Judge

I. INTRODUCTION

These matters are before the Court on six (6) motions filed by all eight named (8) Defendants (collectively, the "Defendants") to dismiss all (or the applicable Counts) of the twelve-count Complaint filed by Steven Balasiano, Liquidation Trustee to the MSGI Liquidation Trust (the "Trustee" or "Plaintiff"). The Trustee's Complaint against the Defendants includes claims for avoidance of transfers, business torts, including particularly breach of fiduciary duty and aiding and abetting that breach, as well as breach of contract. Several Defendants have moved for a more definite statement as alternative relief. The Trustee has filed two (2) separate objections to the Defendants' motions. The first is as to the two (2) individual Defendants, Mitchell B. Modell and Eric Spiel. The second is as to the six (6) Entity Defendants (as defined below). Every Defendant has filed a reply according to the schedule set by the parties' November 9, 2022 Order Establishing Briefing and Hearing Schedule.^[1] Oral argument on these motions was conducted at a hearing held on February 8, 2023.

On February 1, 2023, one week prior to the February 8, 2023 hearing, the Trustee filed a motion to approve his compromise with Defendant Eric Spiel ("Mr. Spiel").^[2] On February 3, 2023, Mr. Spiel withdrew his Motion to Dismiss.^[3] Accordingly, the Court is not directly addressing Mr. Spiel's Motion.

II. JURISDICTIONAL STATEMENT

The Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and the Standing Orders of Reference entered by the United States District Court on July 10, 1984 and amended on September 18, 2012. Certain aspects of Plaintiff's claims are core proceedings,

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particularly as they relate to avoidance actions under the Bankruptcy Code, under 28 U.S.C. § 157(b)(2)(A), (F), (H), (O), while others are non-core, related to proceedings to the extent they are based on prepetition causes of action under state law, under 28 U.S.C. § 157(b) and (c). Venue is proper in this Court under 28 U.S.C. § 1408. The Court issues the following findings of fact (based on the allegations of the Complaint for purposes of these Motions only) and conclusions of law pursuant to Fed.R.Bankr.P. 7052. To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as such. Conversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as such.

Defendants (i) Mitchell B. Modell; (ii) M&M Service Center, LLC; (iii) M&M of Jamaica, LLC; (iv) M&M Flushing, LLC; (v) M&M Mt. Kisco, LLC; and (vi) M&M of Bruckner, LLC; state in the Conclusion of their Briefs that they do not consent to entry of final judgment by the Bankruptcy Court and reserve their rights as to whether the Bankruptcy Court may conduct a jury trial. The Court acknowledges those reservations of rights, but also confirms its authority to determine these Motions.^[4]

III. STATEMENT OF RELEVANT FACTS

This Statement of Relevant Facts is taken mostly from the Trustee's Complaint. Certain other alleged facts and information are taken from the parties' submissions on these Motions and the record of the Debtors' bankruptcy cases. On these Motions to Dismiss, the Court is required to accept the well-pleaded allegations of the Complaint as true, with proof of the allegations left to a later date.

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A. The Bankruptcy Case

The fourteen (14) liquidating debtors (collectively, the "Debtors") filed voluntary Chapter 11 petitions on March 11, 2020.^[5] Because the Debtors filed at the onset of the global pandemic in 2020, the Debtors barely operated postpetition except under the authority of a March 13, 2020 Interim Order that approved procedures for store closing sales and a subsequent March 27, 2020 Order that temporarily suspended the Debtors' cases under 11 U.S.C. §§ 105(a) and 305 due to the Debtors' limited ability to operate during the pandemic.^[6] The March 27, 2020 Order was amended and extended by Orders of April 30, 2020 and June 5, 2020 with a Final Order entered on June 24, 2020.^[7] The Debtors filed an October 8, 2020 First Modified Disclosure Statement and Joint Plan of Liquidation, which the Court confirmed by Order entered on November 13, 2020.^[8] The Effective Date of the First Modified Plan was December 1, 2020.^[9] The Confirmed Plan established a Liquidation Trust to which the Debtors assigned their retained causes of action.^[10] The November 13, 2020 Confirmation Order also approved the Liquidation Trust Agreement and Steven Balasiano's appointment as Liquidation Trustee.^[11]

B. The Adversary Proceeding

On March 10, 2022, the Trustee filed the instant twelve-count Complaint for avoidance of certain transfers as preferences and/or constructive fraudulent conveyances under the laws of

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various states and the Bankruptcy Code; business torts (breach of fiduciary duty; aiding and abetting that breach; unlawful dividends); and breach of contract. The Defendants filed the instant Motions in lieu of Answer on October 7, 2022. The Court held an October 27, 2022 scheduling conference that generated the November 9, 2022 Scheduling Order referenced above.^[12]

The Complaint characterizes the Debtors, the Defendants and their relationships among themselves in the following manner. In 1889, Morris Modell, great-grandfather of Defendant Mitchell B. Modell, began the retail business formerly operated by Debtors, Henry Modell & Company, Inc. (now Defendant "HMC").^[13] In 1986, the common stock of HMC was passed to Defendant Mitchell B. Modell ("Mitchell") and to his brother, the now-deceased Michael S. Modell ("Michael"). Mitchell and Michael also formed the Debtor, Modell's Sporting Goods, Inc. ("MSGI"), and its thirteen wholly-owned Debtor-Subsidiaries (collectively and previously defined as the "Debtors"), in 1986 (or later).^[14] Mitchell and Michael shared in MSGI's ownership equally until Michael died in 2001.^[15]

None of the affected parties seems to dispute that a December 24, 1999 document entitled Certificate of Incorporation of Modell's Holding Corp., Inc. (the "Certificate of Incorporation"), filed with the Delaware Secretary of State on December 27, 1999, is actually MSGI's controlling Certificate of Incorporation.^[16] The three-page Certificate includes a one-paragraph liability-exculpation clause that states in full:

SEVENTH: No director shall be liable to the corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except with respect to

(1) a breach of the director's duty of loyalty to the corporation or its stockholders,

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(2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law,

(3) liability under Section 174 of the Delaware General Corporation Law or

(4) a transaction from which the director derived an improper personal benefit,

it being the intention of the foregoing provision to eliminate the liability of the corporation's directors to the corporation or its stockholders to the fullest extent permitted by Section 102(b)(7) of the Delaware General Corporation Law, as amended from time to time. The corporation shall indemnify to the fullest extent permitted by Sections 102(b)(7) and 145 of the Delaware General Corporation Law, as amended from time to time, each person that such Sections grant the corporation the power to indemnify (paragraphing added).^[17]

After formation of the Debtors and at a date or dates unstated, Mitchell and Michael also formed the following five (5) entities which are defendants here (collectively, the "M&M PropCos"):

M&M Service Center, LLC ("Service Center")

M&M of Bruckner, LLC ("Bruckner")

M&M of Jamaica, LLC ("Jamaica")

M&M Flushing, LLC ("Flushing")

M&M Mt. Kisco, LLC ("Mt. Kisco").^[18]

The Complaint describes each of the M&M PropCos as a New York limited liability company having its principal place of business at the Debtor's former corporate headquarters, 498 Seventh Avenue, 20^th Floor, New York, New York 10018. The Complaint also identifies these five (5) defendants as "special purpose real estate-owning entities" and refers to them collectively as the M&M...