SB Liquidation Trust v. Preferred Bank (In re Syntax-Brillian Corp.)
| Decision Date | 25 July 2011 |
| Docket Number | Related to Adv. Docket No.23,Adv. No. 10-51389,Related to Adv. Docket No. 15,Case No. 08-11407 (BLS),Related to Adv. Docket No.16,Related to Adv. Docket No.21 |
| Parties | In re: SYNTAX-BRILLIAN CORPORATION, et al., Reorganized Debtors. SB LIQUIDATION TRUST, Plaintiff, v. PREFERRED BANK, Defendant. |
| Court | U.S. Bankruptcy Court — District of Delaware |
David M. Fournier
Evelyn J. Meltzer
Pepper Hamilton LLP
Hercules Plaza
Allan B. Diamond
Andrea L. Kim
Eric D. Madden
Michael J. Yoder
Counsel and Special Counsel, respectively, for Plaintiff SB Liquidation Trust
R. Craig Martin
Edwards Angell Palmer & Dodge LLP
Thomas M. Robins III
Kenneth Russak
Frandzel Robins Bloom & Csato, L.C.
Counsel for Defendant Preferred Bank
OPINION1Before the Court is a motion (the "Motion") [Adv. Docket No. 15] filed by Preferred Bank (the "Bank" or "Defendant") to dismiss the complaint (the "Complaint") [Adv. Docket No. 1] filed by the SB Liquidation Trust (the "Trust" or "Plaintiff). The Trust was established pursuant to the plan of liquidation (the "Plan") [Docket No. 1016] filed by Syntax-Brillian Corporation and its affiliated debtors (collectively, "SBC" or the "Debtors") and confirmed by the Court [Docket No. 1529]. Upon the effective date of the Plan, all estate assets and causes of action were transferred to and vested in the Trust. The Trust initiated this adversary proceeding against the Bank to recover damages allegedly owed to the Debtors' estates. By the Complaint, the Trust has alleged that the Bank aided and abetted certain officers and directors of the Debtors in breaching their fiduciary duties and in committing fraud. The Trust also seeks to avoid certain allegedly fraudulent transfers received by the Bank. By the Motion, the Bank has moved to dismiss the Complaint in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7012, on the ground that the Trust has failed to state a claim upon which relief may be granted. For the following reasons, the Court will grant the Motion.
On July 8, 2008 (the "Petition Date"), the Debtors filed for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). Prior to the Petition Date, SBC was a public company engaged in the business of manufacturing and distributing high-definition televisions ("HD TVs"), utilizing a liquid crystal display technology, under the "Olevia" brandname. SBC was the result of a 2005 merger (the "Merger") between Brillian Corporation ("Brillian") and Syntax Groups Corporation ("Syntax"). SBC employed a "virtual manufacturing model" whereby it outsourced components and product assembly to Asian suppliers and manufacturers. SBC's production model allowed SBC to shift the upfront costs of materials and labor to its suppliers and manufacturers because SBC did not pay for completed HD TVs until they were delivered.
In early 2004, before the Merger, Syntax entered into a manufacturing agreement (the "Manufacturing Agreement") with Taiwan Kolin Company, Ltd. ("Kolin"). At least two of the officers and directors (the "Insiders")2 of Syntax served as officers, directors, and/or shareholders of Kolin. In connection with the Manufacturing Agreement, Syntax and Kolin entered into a technology research and development allowance agreement, a volume incentive agreement, and a channel price protection agreement (collectively, the "Price Protection Rebates").3 Additionally, Syntax, Kolin, CIT Commercial Services, Inc. ("CIT"), and Hsin Chu International Bank ("HIB") entered into a four-party factoring agreement in July 2004 under which Syntax assigned the collection of all of its existing and future accounts receivable to CIT. The proceeds collected by CIT, in turn, were assigned to HIB on behalf of Kolin.
To facilitate the Manufacturing Agreement, Syntax entered into a $3.75 million credit agreement (the "Loan Agreement") with the Bank in November 2004. Pursuant to the Loan Agreement, the Bank provided letters of credit and trust receipt loans to finance Syntax's acquisition of imported inventory from Kolin. The Bank required Syntax and Kolin to enter into an agreement pursuant to which the outstanding payables totaling $5 million owed to Kolin in connection with the Manufacturing Agreement would be subordinated to the Bank's note evidencing the Loan Agreement. Accordingly, under the terms of the Loan Agreement, the Bank was repaid with the proceeds that CIT collected from Syntax's domestic accounts receivable.
The Bank and Syntax modified the terms of the Loan Agreement several times. In December 2004, the parties increased the principal amount of the loan to $10 million with a $5 million sub-limit for trust receipt advances. In March 2005, the parties again increased the principal amount to $12 million with a $7 million sub-limit for trust receipt advances and an extended maturity date. In June 2005, the parties further increased the principal amount to $17.5 million with a $15 million sub-limit for trust receipt advances.
In September 2005, the Loan Agreement was modified again, whereby the principal amount was increased to $20 million and the maturity date was extended. Under the 2005 modification, the sub-limit for working capital advances was increased to $10 million and the sub-limit for trust receipt advances was reduced to $5 million. Additionally, the subordination agreement with Kolin was abolished, and the Bank agreed to instead receive a standby letter of credit issued by HIB for $10 million. Factored proceeds were transferred from CIT to the Bank's control account under the following terms: (1) 25% of cash proceeds collected by CIT would pay down existing trust receipt advances on a first in, first out basis; (2) 60% of such cashproceeds would pay down Syntax's working capital line with the Bank, and upon Syntax's request, Syntax's accounts payable to Kolin for the same amount; and (3) the balance of such cash proceeds would go to Syntax's operating account to cover operating expenses.
After the Merger, the Loan Agreement was again modified in December 2005 to increase the total commitment of the facility to $22 million and the sub-limit for trust receipt notes to $7 million. In January 2006, Syntax executed another amendment to the Loan Agreement that extended the maturity date of the loan and increased the total commitment for the facility to $28 million and the sub-limit for trust receipt notes to $9 million. In October 2006, the Bank again extended the maturity date of the loan, increased the maximum credit amount to $33 million, and increased the sub-limits for refinancing and trust receipt notes to $19 million.
In December 2006, Syntax and the Bank again modified the Loan Agreement. SBC became a party to the financing arrangement with the Bank and the trust receipt financing was eliminated. Through February 2007, the maximum credit amount under the Loan Agreement was to be $55 million and the sub-limit for working capital advances was to be $50 million. After that, the maximum credit amount was to be reduced to $22 million and the sub-limit for working capital advances was to be reduced to $20 million.
Beginning in December 2005, the Bank advanced additional funds to SBC (the "Kolin Line") that were immediately transferred to an account maintained by Kolin at the Bank. The initial advance of $3.8 million was secured by a checking account held by Kolin at the Bank. This loan, evidently intended to be temporary, was extended several times. In the process of extending the maturity date and amount of this loan, there were several instances of backdating.The first instance of backdating occurred in connection with the initial advance was dated December 23, 2005 with a maturity date of February 6, 2006. This advance was not signed until January 31, 2006 and was backdated to December 20, 2005. The second instance occurred when the initial advance was extended to January 5, 2007. This extension was associated with a package of loan documents dated April 24, 2006 that may have been backdated.4 The third instance of backdating occurred on January 10, 2008 when an extension agreement to the Kolin Line was dated December 21, 2007.
There were several incidents involving Phanglin Lin, an employee of the Bank, that Plaintiff has suggested demonstrate that the Bank was trying to cultivate the favor of two of the Insiders, Thomas Chow and James Li. The first involved a cash advance to Mr. Chow of $300,000 on November 16, 2007, without any loan advance form. The second was an invitation to Mr. Chow and Mr. Li to attend a VIP party at the Beverly Hills Four Seasons Hotel in early December. The third was a wine cooler purchased from Neiman Marcus that was gifted to Mr. Li.
Beginning in June 2006, Kolin issued approximately $200 million in invoices relating to sales to two of the main distributors of Debtors' HD TVs across China, South China House of Technology, Ltd. ("SCHOT") and Olevia Far East ("OFE"). These invoices led to the recognition on SBC's books of over $300 million in accounts receivable and sales from SCHOT/OFE. In 2007, SBC's sales to SCHOT/OFE grew exponentially because of anticipated demand relating to the 2008 Olympics in Beijing, China. As a result, accounts receivable basedupon sales to SCHOT/OFE dramatically increased, eventually totaling over two-thirds of SBC's unassigned accounts receivable.5 SBC did not insure the SCHOT/OFE accounts receivable as it did its domestic accounts receivable. In addition, the Plaintiff has alleged that the terms of SBC's business relationships with SCHOT/OFE were...
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