Official Comm. Unsecured Creditors of HH Liquidation, LLC v. Comvest Grp. Holdings, LLC (In re HH Liquidation, LLC)

• Decision Date: 26 January 2018
• Docket Number: Adv. No. 16-51204 (KG),Case No.: 15-11874 (KG) (Jointly Administered)
• Citation: 590 B.R. 211
• Parties: IN RE: HH LIQUIDATION, LLC, et al., Debtors. Official Committee of Unsecured Creditors of HH Liquidation, LLC, et al., Plaintiffs, v. Comvest Group Holdings, LLC, Comvest Investment Partners III, L.P., Comvest Investment Partners IV, L.P., Comvest Haggen Holdings III, LLC, Comvest Haggen Holdings IV, LLC, Comvest Advisors, LLC, Haggen Property Holdings, LLC, Haggen Property South, LLC, Haggen Property North, LLC, Haggen Property Holdings II, LLC, Haggen SLB, LLC, John Caple, Cecilio Rodriguez, Michael Niegsch, John Clougher, Blake Barnett, William Shaner and Derrick Anderson, Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

590 B.R. 211

IN RE: HH LIQUIDATION, LLC, et al., Debtors.Official Committee of Unsecured Creditors of HH Liquidation, LLC, et al., Plaintiffs,

v.Comvest Group Holdings, LLC, Comvest Investment Partners III, L.P., Comvest Investment Partners IV, L.P., Comvest Haggen Holdings III, LLC, Comvest Haggen Holdings IV, LLC, Comvest Advisors, LLC, Haggen Property Holdings, LLC, Haggen Property South, LLC, Haggen Property North, LLC, Haggen Property Holdings II, LLC, Haggen SLB, LLC, John Caple, Cecilio Rodriguez, Michael Niegsch, John Clougher, Blake Barnett, William Shaner and Derrick Anderson, Defendants.

Case No.: 15-11874 (KG) (Jointly Administered)

Adv. No. 16-51204 (KG)

United States Bankruptcy Court, D. Delaware.

Signed January 26, 2018

Ian J. Bambrick, Robert F. Poppiti, Jr., Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, for Debtors.

Alan J. Kornfeld, Pachulski Stang Ziehl & Jones LLP, Los Angeles, CA, Beth E. Levine, Pachulski Stang Ziehl & Jones LLP, New York, NY, Colin R. Robinson, Bradford J. Sandler, Pachulski Stang Ziehl & Jones LLP, Wilmington, DE, for Plaintiffs.

Mark L. Desgrosseilliers, Ericka Fredricks Johnson, Kevin J. Mangan, Womble Bond Dickinson (US) LLP, Wilmington, DE, Yates M. French, Stephen C. Hackney, Richard U.S. Howell, Jeffery Lula, Brendan Ryan, Kirkland & Ellis LLP, Chicago, IL, Philip J. Mohr, Womble Carlyle Sandridge & Rice, PLLC, Greensboro, NC, for Defendants.

Re: D.I. 142

CORRECTED ¹ FINDINGS OF FACT AND CONCLUSIONS OF LAW ²

KEVIN GROSS, U.S.B.J.

INTRODUCTION

On September 8, 2015, Haggen filed for bankruptcy under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101, et seq. The filing took place a few months after Haggen, an 18 grocery store operation, purchased 146 stores from Albertsons and Safeway (the "Project"). The bankruptcy resulted in the loss of thousands of jobs and creditors losing tens of millions of dollars. The Committee filed an adversary proceeding with a 78 count Complaint alleging fraudulent transfers, breach of fiduciary duties, unjust enrichment and more.

The Court conducted a five day trial and received hundreds of exhibits, numerous deposition transcripts and over 300 pages of the parties' proposed findings of fact and conclusions of law. The parties involved in the adversary proceeding are: the Plaintiffs, which is the Committee acting on behalf of the Debtors; and the Defendants, Comvest Group Holdings, LLC; Comvest Investment Partners III, L.P; Comvest Haggen Holdings III, LLC; Comvest Haggen Holdings IV, LLC; Comvest Advisors, LLC; Haggen Property Holdings, LLC; Haggen Property South, LLC; Haggen Property North, LLC; Haggen Property Holdings, LLC; Haggen Property Holdings II, LLC; Haggen SLB, LLC; and individual defendants John Caple, Michael Niegsch, Cecilio Rodriquez, John Clougher, William Shaner, Blake Barnett and Derrick Anderson.

The Committee and the Defendants litigated the adversary proceeding earnestly and thoroughly, but civilly and courteously. Both sides were very well represented by their lawyers, whose advocacy was outstanding. The Court nonetheless must name the winner and the loser based upon the evidence presented and applicable law.

The Defendants argue that the Individual Defendants made every effort to make the Project a success and that the risk they took is what a capitalist society encourages and its legal system protects. The Defendants also argue that the Committee's legal theories shifted and that the Committee did not bring a single creditor to the trial to support its case.

The Committee argues that there is nothing wrong with risk-taking but here the Defendants structured the Project to place all of the risk on the OpCo creditors while, at the same time, protecting their investment. The Defendants did so by structuring the Project using OpCo's and PropCo's. The OpCo's were the operating stores which filed for bankruptcy, and the PropCo's held the real estate assets and they did not file. As a result, the OpCo's sustained all of the injuries and their creditors will be unpaid, while the PropCo's were left largely unscathed.

The Committee formulated a strong case that (1) Haggen was unprepared for the Project, (2) the OpCo were undercapitalized, and (3) Comvest structured the Project to provide for all of the risk at OpCo, while PropCo would succeed regardless of the success of the Project.

The Project failed for a number of reasons which the Court discusses below. However, the Court does not share the Committee's view that the Defendants were so cavalier in planning and effecting the Project that they were grossly negligent or that there was anything inherently wrong with the OpCo-PropCo structure. Indeed, no creditor of the OpCo's appeared in court or gave deposition testimony complaining about the debacle. The Project failed but not because the Defendants did not care if it succeeded. Moreover, it is not uncommon for parties who are planning a transaction to make certain that they are protected in the event the transaction fails. Such protection from adverse results is one of the reasons for forming a corporation or other entity – to limit personal liability.

It is unnerving that the Project failed in a matter of months and certainly the Court had questions about how it happened. It turns out that the people in charge, the Individual Defendants, to some degree were not prepared. They were not, however, grossly negligent and they certainly meant for Haggen, Holdings and the OpCo to succeed. The Committee made a strong case but, at the end of the day failed to establish gross negligence or self-dealing or the existence of any fraudulent transfers. The Committee did establish that the leases between Spirit and GIG, and the OpCo's, were above the market rate, but there is no liability. The Committee failed however, to establish the remaining counts of the Complaint.

A brilliant jurist once wrote:

Thus, to allege that a corporation has suffered a loss as a result of a lawful transaction, within the corporation's powers, authorized by a corporate fiduciary acting in a good faith pursuit of corporate purposes, does not state a claim for relief against that fiduciary no matter how foolish the investment may appear in retrospect.

Gagliardi v. TriFoods Int'l, Inc. , 683 A.2d 1049, 1052 (Del. Ch. 1996). The case involved allegations of mismanagement and, as the quoted material makes clear, the Court of Chancery, under the helm of Chancellor William T. Allen, dismissed the complaint. TriFoods stands for the proposition that fiduciaries who enter into "foolish" transactions but who are acting in good faith are protected. The facts in the Haggen's case illustrate managers and companies who in retrospect acted foolishly but who the Court finds are not liable.

FINDINGS OF FACT

I. Jurisdiction And Venue

1. This is an action for avoidance of fraudulent transfers, monetary damages for breach of fiduciary duty and for unjust enrichment, equitable subordination, the transfer of liens and security interests, recharacterization, substantive consolidation, and the disallowance of claims. PTO ¶ A.

2. The jurisdiction of the Court over this action is not disputed. The bases for jurisdiction over this action are 28 U.S.C. §§ 157(a) and 1334 and the Amended Standing Order of Reference from the United States District Court for the District of Delaware, dated February 29, 2012. Venue is proper in the Court pursuant to 28 U.S.C. §§ 1408 and 1409. This action is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). PTO ¶¶ B-C.

II. The Parties

A. The Debtors

3. Holdings, one of the Debtors on whose behalf the Committee brings this proceeding, is a limited liability company formed under the laws of Delaware. Prior to the Petition Date, certain Comvest entities owned an interest in Holdings. Holdings directly or indirectly owned and operated approximately 18 supermarkets and one pharmacy in Oregon and Washington before contracting to purchase 146 stores from Albertson's. PTO ¶ 5.

4. Operations, one of the Debtors on whose behalf the Committee brings these causes of action, is a limited liability company formed under the laws of Delaware. Operations was formed prior to the Albertson's Acquisition. Prior to the Petition Date, Operations was owned and managed by its sole member, Holdings. PTO ¶ 6.

5. OpCo South, one of the Debtors on whose behalf the Committee brings these causes of action, is a limited liability company formed under the laws of Delaware. OpCo South was formed prior to the Albertson's Acquisition. Prior to the Petition Date, OpCo South was owned and managed by its sole member, Operations. PTO ¶ 7.

6. OpCo North, one of the Debtors on whose behalf the Committee brings these causes of action, is a limited liability company formed under the laws of Delaware. OpCo North was formed prior to the Albertson's Acquisition. Prior to the Petition Date, OpCo North was owned and managed by its sole member, Operations. PTO ¶ 8.

7. Acquisition, one of the Debtors on whose behalf the Committee brings these causes of action, is a limited liability company formed under the laws of Delaware. Acquisition was formed prior to the Albertson's Acquisition. Prior to the Petition Date, Acquisition was owned and managed by its sole member, Operations. PTO ¶ 9.

8. Haggen, Inc., one of the Debtors on whose behalf the Committee brings these causes of action, is a corporation formed under the laws of the State of Washington. From 2011 through the Petition Date, Haggen, Inc. was owned by Acquisition. PTO ¶ 10.

B. The Non-Debtor Affiliate and Corporate Defendants ³

9. Defendant CGH is a limited liability company. PTO ¶ 11. Defendant CIP III is a limited partnership and is owned and/or controlled, directly or indirectly, by CGH. PTO ¶ 12. Defendant CIP IV is a limited partnership and is owned and/or controlled, directly or indirectly, by CGH. PTO ¶ 13. Defendant CHH III is a limited liability company and is owned and/or controlled, directly or indirectly, by CGH. CHH III holds...