Mukamal v. Bakes, 07-20793-CIV.

• Decision Date: 05 November 2007
• Docket Number: No. 07-20793-CIV.,07-20793-CIV.
• Court: U.S. District Court — Southern District of Florida
• Parties: Barry E. MUKAMAL, as Liquidating Trustee and Director and Officer Trustee of Far & Wide Corp., et al., Plaintiff, v. Phil BAKES, Andrew C. McKey, Craig Toll, George Gremse, Wellspring Capital Management LLC, Loan Capital Funding LLC, Carl M. Stanton, Greg S. Feldman, David C. Mariano, Jason B. Fortin, and Ernst & Young, LLP., Defendants.

383 B.R. 798

Barry E. MUKAMAL, as Liquidating Trustee and Director and Officer Trustee of Far & Wide Corp., et al., Plaintiff, v. Phil BAKES, Andrew C. McKey, Craig Toll, George Gremse, Wellspring Capital Management LLC, Loan Capital Funding LLC, Carl M. Stanton, Greg S. Feldman, David C. Mariano, Jason B. Fortin, and Ernst & Young, LLP., Defendants.

No. 07-20793-CIV.

United States District Court, S.D. Florida.

November 5, 2007.

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Alexander Rundlet, Esq., and Robert C. Josefsberg, Esq., Miami, FL, for Barry Mukamal.

Damien J. Marshall, Esq., Ft. Lauderdale, FL, for Phil Bakes and all other defendants except Ernst & Young.

David A. Coulson, Esq., Miami, FL, for Ernst & Young, LLP.

ORDER ON DEFENDANTS' MOTIONS TO DISMISS

ALAN S. GOLD, District Judge.

THIS CAUSE is before the Court on two motions: Defendant Ernst & Young's Motion to Dismiss and to Compel Arbitration [DE 3], and the remaining Defendants' Motion to Dismiss [DE 4]. Since Ernst & Young's Motion to Compel Arbitration was filed, the Plaintiff has stipulated that Count XI of the Complaint should be subject to arbitration as it relates to the claim of breach of duty of care to the Debtors. The Plaintiff also has withdrawn Count XI as it relates to the Debtors' creditors. All other counts of the Complaint remain pending and subject the to various motions to dismiss.

The case arises from an adversary bankruptcy proceeding involving the Far & Wide enterprise ("Far and Wide"), a conglomeration of travel companies consisting of Far & Wide Corporation, Far & Wide Travel Corporation, Adventure Center, Inc., African Travel, Inc., Far & Wide International, Inc., and Travel Media Services Corporation (collectively, the "Debtors"). The Plaintiff, Barry Mukamal, has filed the Complaint against the directors and officers of Far & Wide¹, Wellspring Capital Management, LLC, Loan Capital Funding, LLC, and Ernst & Young, LLP, in connection with events that took place before Far & Wide declared bankruptcy.

In his Complaint, the Plaintiff brings eleven claims for relief and alleges the following: (1) the named directors and officers of Far & Wide (collectively, the "Individual Defendants") breached their fiduciary duties to the Debtors; (2) the Individual Defendants breached their fiduciary duties to the Debtors' creditors; (3) the Individual Defendants aided and abetted the breach of fiduciary duties to the Debtors; (4) the Individual Defendants aided and abetted the breach of fiduciary duties to the Debtors' creditors; (5) Wellspring Capital Management, LLC and Loan Capital Funding, LLC (the "Wellspring Defendants") aided and abetted the breach of fiduciary duties to Debtors; (6) the Wellspring Defendants aided and abetted the breach of fiduciary duties to Debtors' creditors; (7) the Individual Defendants' claims against the bankruptcy estate of Far & Wide should be equitably subordinated; (8) the Wellspring Defendants misstates their purported debt claims against the bankruptcy estate; (9) the Wellspring Defendants' claims against the bankruptcy estate should be equitably subordinated (10) Ernst & Young aided and abetted the breach of fiduciary duties to Debtors' creditors; and (11) Ernst & Young committed professional malpractice and breached its duty of care to Debtors and creditors.

Defendants have moved to dismiss all eleven counts of the Complaint. Defendant Ernst & Young moves to dismiss Count X and Count XI and to compel arbitration on Count XI. The remaining Individual Defendants' Motion seek to dismiss Counts I though IX.² Oral argument on the motions was held on Friday, September 7, 2007. At the Court's request, the parties filed supplemental briefing on the affect of recent Delaware Supreme Court decisions [DE 33, 35, 39]. After reviewing the arguments raised, I conclude that the Defendants motions should be granted in part and denied in part, as set forth below.

I. STANDARD OF REVIEW

On a motion to dismiss; the court accepts a complaint's well-pleaded allegations ,as true. Hoffend v. Villa (In re Villa), 261 F.3d 1148, 1150 (11th Cir.2001). The court construes the pleadings broadly and views the allegations in the complaint in the light most favorable to the plaintiff. Watts v. Fla. Int'l Univ., et al., 495 F.3d 1289, 1295 (11th Cir.2007).

In order to survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a plaintiff must plead "more than mere labels and conclusions." Bell Atlantic Corp. v. Twombly, ___ U.S. ___, ___-___, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007). Indeed, "a formulaic recitation of the elements of a cause of action I will not do." Watts, 495 F.3d at 1295 (quoting Bell Atlantic, 127 S.Ct. at 1965).

Although the court does not analyze the probability of actual proof of the complaint's allegations on a motion to dismiss, a plaintiff must allege "`enough factual matter (taken as true) to suggest' the required element." Watts, 495 F.3d at 1295. Under the law of this Circuit, the pleading must create "plausible grounds to infer." Id. Thus, a claim will survive a motion to dismiss if it identifies "facts that are suggestive enough to render [the element] plausible." Id. at 1296 (quoting Bell Atlantic, 127 S.Ct. at 1965).

II. ALLEGATIONS IN PLAINTIFF'S COMPLAINT

The relevant facts as alleged in the Complaint are outlined below, and I accept those facts as true for the purpose of considering Defendants' motions to dismiss.

Plaintiff Barry Mukamal brings these claims against Defendants in his capacities as both Liquidating Trustee of the Liquidating Trust and Directors and Officers Trustee (D & O Trustee) of the Directors and Officers Trust of the Debtors and certain of the Debtor's creditors. (Compl. ¶ 1.) Plaintiff was appointed as both Liquidating Trustee and D & O Trustee pursuant to the Third Amended Joint Liquidating Plan of Reorganization of the Debtors ("Plan") that was confirmed on December 19, 2005 in the underlying bankruptcy case, In re Far & Wide Corp., Case No. 03-40415. (Compl. ¶ 1.) The Plan contains within it a D & O Trust Agreement which was also confirmed with the Plan. (Compl. ¶ 4.) Because the Bankruptcy Court consolidated all of the Debtors in its Order on December 19, 2005 ("Confirmation Order") the Debtors are treated as a single, combined entity. (Compl. ¶ 8.)

Plaintiff alleges that his dual trusteeship empowers him to bring claims against the former directors and officers of Debtors on behalf of both (1) Debtors and (2) certain creditors who voted to approve the Plan and assigned their claims to the D & O Trust. (Compl. ¶ 4.) As the D & O Trustee, Plaintiff is authorized by the Plan to investigate, prosecute, and litigate the Debtor's D & O claims and the creditor's D & O claims. (Compl. ¶ 104.) Pursuant to the Plan, Plaintiff is also a representative of the beneficiaries of the D & O Trust, with the authorization to bring claims to monetize both the Debtor D & O Claims and the creditor D & O claims. (Compl. ¶ 105.) As the Liquidating Trustee, Plaintiff is further authorized to bring all other causes of action of the Debtors that were vested in the Liquidating Trust.³ (Compl. ¶ 106.) Pursuant to the Plan, both the Liquidating Trust Agreement and the D & O Trust Agreement are governed by Florida law. DE 3, Ex. C (part 2 of 2) p. 19, 30.

The Individual Defendants were officers of one or more of the Debtors and/or served on their boards of directors and boards of directors' executive committees. (Compl. ¶¶ 10, 19, 27, 36, 57, 66, 75, 84). As such, the Individual Defendants controlled and participated in the policies, operations and business of the Debtors. (Compl. ¶¶ 11, 20, 28, 37, 58, 67, 76, 85). Folk of the Individual Defendants—Stanton, Feldman, Mariano, and Fortin—were also partners in the Wellspring Defendants. (Compl. ¶¶ 56, 65, 74, 83, 111).

Defendant Wellspring Capital Management, LLC ("Wellspring") manages private investment partnerships, including Loan Capital Funding, LLC ("LCF"), which focus on investing in or acquiring companies. (Compl. ¶ 45.) LCF functioned as a conduit between Wellspring and the Debtors. (Compl. ¶ 48.) Wellspring is a Delaware LLC with its principal place of business in New York. (Compl. ¶ 44.) All Defendants committed acts and caused injuries, described in more detail below, which took place within the state of Florida and gave rise to the claims in this case. (Compl. ¶¶ 13-14, 21-22, 30-31, 39-40, 52-53, 59-60, 68-69, 77-78, 86-87, 93-94.)

In 1999, The Wellspring Defendants and the Individual Defendants (collectively, the "Management Defendants") formed the Debtors by consolidating various providers of travel-related products and services. (Compl. ¶ 108.) As part of this process, the Wellspring Defendants invested $45 million in the Debtors and acquired a majority of the Debtors' stock between 1999 and 2000. (Compl. ¶ 110.) The Wellspring Defendants required the Debtors to appoint four Wellspring partners—Stanton, Feldman, Mariano, and Fortinas members of the six-member board of directors of Far & Wide. (Compl. ¶ 111.) With this majority on the board, the Wellspring Defendants controlled the board of directors of Far & Wide. (Compl. ¶ 51.)

Around June 30, 1999, the Debtors entered into a loan agreement with a group of banks which infused $70 million into the Debtors, collateralized by all of the assets of the Debtors. (Compl. ¶ 113.) In 2000, the Debtors obtained an additional $20 million in unsecured financing. (Compl. ¶ 115.)

The Debtors' revenues—derived primarily from sales of travel or travel-related services—were typically realized at least 60 days before a customer's departure because Debtors required payment in advance of travel. (Compl. ¶¶ 118-120.) In contrast, the Debtor's costs associated with providing travel-related services to customers typically accrued 45-60 days after a customer traveled. (Compl. ¶ 121.) Manageme...