SLF Holdings, LLC v. Uniti Fiber Holdings, Inc.

• Decision Date: 04 November 2020
• Docket Number: C.A. No. 19-1813-LPS
• Citation: 499 F.Supp.3d 49
• Parties: SLF HOLDINGS, LLC, Plaintiff, v. UNITI FIBER HOLDINGS, INC., Uniti Group, Inc., Kenneth Gunderman, and John P. Fletcher, Defendants.
• Court: U.S. District Court — District of Delaware

499 F.Supp.3d 49

SLF HOLDINGS, LLC, Plaintiff,

v.UNITI FIBER HOLDINGS, INC., Uniti Group, Inc., Kenneth Gunderman, and John P. Fletcher, Defendants.

C.A. No. 19-1813-LPS

United States District Court, D. Delaware.

Filed November 4, 2020

Stephen B. Brauerman and Emily A. Letcher, BAYARD, P.A., Wilmington, DE, Edward S. Sledge IV, Dylan C. Black, Zachary A. Madonia, Emily M. Ruzic, and Stanley E. Blackmon, BRADLEY ARANT BOULT CUMMINGS LLP, Birmingham, AL, Attorneys for Plaintiff.

John P. DiTomo and Sabrina M. Hendershot, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, DE, Jerome E. Speegle and Anthony M. Hoffman, SPEEGLE, HOFFMAN, HOLMAN & HOLIFIELD, LLC, Mobile, AL, Attorneys for Defendant John P. Fletcher.

Blake Rohrbacher and Kelly E. Farnan, RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE, Edmund Polubinski III and Brian M. Burnovski, DAVIS POLK & WARDWELL LLP, New York, NY, Attorneys for Defendants Uniti Group Inc., Uniti Fiber Holdings Inc., and Kenneth Gunderman.

MEMORANDUM OPINION

STARK, U.S. District Judge:

I. INTRODUCTION

On December 18, 2019, Defendants Uniti Group Inc. ("Uniti Group"), Uniti Fiber Holdings Inc. ("Uniti Fiber," and with Uniti Group, "Uniti"), and Kenneth Gunderman (together with Uniti, "Defendants") moved to dismiss the claims asserted against them in the Amended Complaint (D.I. 71) ("Cmplt.") filed by Plaintiff SLF Holdings, LLC ("SLF" or "Plaintiff"), pursuant to Federal Rule of Civil Procedure 12(b)(6). (D.I. 76) On the same date, Defendant John P. Fletcher ("Fletcher") separately moved to dismiss the claims asserted against him, also pursuant to Rule 12(b)(6). (D.I. 74)

SLF's Amended Complaint alleges a "complex and multifaceted financial fraud" arising out of Uniti's spinoff from Windstream Services, LLC and Windstream Holdings, Inc. (together, "Windstream"). (Cmplt. ¶ 9; see also, e.g. , id. ¶¶ 13-15, 17-18, 21-23, 28, 42, 46, 56-58, 64-66, 69-73, 76, 81, 84, 92-94, 96-104, 109-10, 125, 128-33) SLF asserts 11 fraud-based claims, principally under federal securities law and Alabama law, as follows:

Count 1 : Fraud in the Inducement against Uniti Group, Uniti Fiber, and Gunderman

Count 2 : Conspiracy against Uniti Group, Uniti Fiber, Gunderman, and Fletcher

Count 3 : Violation of Alabama Securities Act ("ASA") § 8-6-17(a)(1) against Uniti Group, Uniti Fiber, and Gunderman

Count 4 : Violation of ASA § 8-6-17(a)(2) against Uniti Group, Uniti Fiber, and Gunderman

Count 5 : Violation of ASA § 8-6-17(a)(3) against Uniti Group, Uniti Fiber, and Gunderman

Count 6 : Violation of ASA § 8-6-19(c) against Gunderman and Fletcher

Count 7 : Violation of Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b) and SEC Rule 10b-5(a) promulgated thereunder, 17 C.F.R. § 240.10b-5(a), against Uniti Group, Uniti Fiber, and Gunderman

Count 8: Violation of Exchange Act, including Rule 10b-5(b), against Uniti Group, Uniti Fiber, and Gunderman

Count 9 : Violation of Exchange Act, including Rule 10b-5(c), against Uniti Group, Uniti Fiber, and Gunderman

Count 10 : Violation of Exchange Act, 15 U.S.C. § 78t, against Gunderman

Count 11 : Declaratory Judgment for Indemnification against Uniti Group

The Court has carefully considered the parties’ briefing (see D.I. 75, 77, 79-82) as well as the Amended Complaint and exhibits (D.I. 71). The Court also heard argument on both motions on May 12, 2020. (D.I. 92) ("Tr.") Based on its review,¹ and for the reasons stated below, the Court will grant the motions to dismiss.

II. BACKGROUND²

Uniti was created in April 2015 when its former parent, Windstream Holdings, Inc. ("Windstream Holdings"), spun it off into a separate, publicly-traded real estate investment trust ("REIT"). (Cmplt. ¶¶ 2, 9, 66) Windstream Services, LLC ("Windstream Services" and, together with Windstream Holdings, "Windstream"), a subsidiary of Windstream Holdings, caused its operating subsidiaries to convey fiber and copper network assets to Uniti. (Id. ¶¶ 9-10, 25, 76, 81) Uniti entered into a master lease with Windstream Holdings (the "Master Lease"), pursuant to which Windstream Holdings leased those assets from Uniti. (Id. ¶¶ 10, 93)

Windstream was required to abide by a restrictive covenant in Windstream Services’ debt indentures, which prohibited Windstream Services or its operating subsidiaries from entering into a "Sale and Leaseback Transaction." (Id. ¶¶ 43-48) Moreover, Windstream and Uniti also sought to ensure that the Master Lease would meet the requirements of a "true lease," which was necessary in order for Uniti to meet the requirements of a REIT. (Id. ¶¶ 26, 42, 72)

Windstream's General Counsel, Defendant John Fletcher, was involved in Windstream's legal and regulatory strategy for the proposed REIT spinoff. (Id. ¶ 39) Fletcher drafted, reviewed, and submitted various applications, affidavits, and other regulatory documents to regulators to obtain approval of the sale of Windstream's assets. (Id. ¶¶ 53-55)

Windstream engaged outside legal counsel, Skadden Arps Slate Meagher & Flom ("Skadden"), to provide a legal opinion to Uniti regarding the Master Lease. (Id. ¶¶ 26, 74, 85-86) Ernst & Young, LLP ("E&Y") provided Windstream with an independent appraisal of the "useful life" of the assets being leased, which was a factor in concluding that the Master Lease was a "true lease," and was not financing. (Id. ¶¶ 26, 75) Skadden's opinion noted: "the IRS ‘may argue that the proposed lease is merely a financing arrangement and that the purported lessor [Uniti] is, in substance, a secured creditor but holds no equity interest in the property.’ " (Id. ¶ 85)

Before and after the April 2015 spinoff, Uniti made public disclosures regarding Uniti's business, Master Lease, and spinoff. (Id. ¶ 130) These disclosures included that Windstream Holdings "represented a significant portion of [Uniti's] business and that Uniti's success depended significantly on the viability of Windstream." (Id. ¶ 109)

On March 26, 2015, Uniti filed an initial information statement (the "Information Statement") with the Securities and Exchange Commission ("SEC"), which disclosed the Master Lease. (D.I. 78 Ex. C Ex. 10.1; id. Ex. D Ex. 99.1 at 104) The Information Statement disclosed that "[t]he subsidiaries of Windstream Holdings will have the right to use, occupy and operate the Distribution Systems and discharge any of Windstream Holdings’ obligations under the Master Lease." (Id. ) Moreover, the Information Statement disclosed that "[a]ll of [Windstream Holdings’] operations are conducted by its wholly owned subsidiary," Windstream Services, and by Windstream Services’ own "direct and indirect wholly owned subsidiaries." (Id. at 1)

In July 2017, Plaintiff SLF sold its membership interests in Southern Light, LLC ("Southern Light"), an Alabama fiber optic network provider, to Uniti Fiber. (Cmplt. ¶¶ 11, 19) As described in the April 7, 2017, Membership Interests Purchase Agreement (the "Purchase Agreement") (D.I. 78 Ex. A), in the transaction SLF received $700 million, split into $635 million in cash and $65 million in Uniti stock equivalents (Cmplt. ¶ 132). When Uniti had approached SLF in 2016 about purchasing Southern Light, Gunderman and other Uniti executives advertised the REIT structure, the Master Lease, Windstream's $650 million in annual rental payments, and the "iron-clad" dividend that Uniti would be able to pay. (Id. ¶¶ 115-16) Neither the E&Y analysis nor the Skadden opinion was disclosed to SLF during the negotiations preceding the Southern Light transaction. (Id. ¶¶ 119, 125, 128)

A few months after the Uniti-SLF transaction closed, Windstream was sued by a hedge fund, Aurelius Capital Master, Ltd. ("Aurelius"), which had been buying certain notes issued by Windstream. (Id. ¶¶ 19-20) Aurelius claimed that the spinoff and Master Lease agreement between Windstream and Uniti violated Windstream's debt covenants. (Id. ¶¶ 19-20, 138) Specifically, on October 12, 2017, Aurelius caused the trustee on the Windstream notes to initiate breach of contract litigation against Windstream in the United States District Court for the Southern District of New York, claiming that the spinoff and Master Lease breached the "Sale and Leaseback" covenant in Windstream's debt indentures. (Id. ¶¶ 19, 144) On February 15, 2019, the Southern District of New York ruled against Windstream, finding, among other things, that the spinoff and Master Lease did breach Windstream Services’ debt indenture (D.I. 71 Ex. A at 33-35), and declaring over $300 million of Windstream notes immediately due and payable (Cmplt. ¶ 151; see also U.S. Bank Nat'l Ass'n v. Windstream Servs., LLC , 2019 WL 948120, at *1 (S.D.N.Y. Feb. 15, 2019) ).

On February 25, 2019, Windstream Holdings filed for bankruptcy. (Cmplt. ¶ 154) On July 25, 2019, as part of the bankruptcy proceeding, Windstream sued Uniti, seeking, inter alia , a declaration that the Master Lease was not a "true lease" but, rather, a disguised financing arrangement. (Id. ¶ 159) This contention was based on several factors, including the publicly-disclosed terms of the Master Lease (id. ¶ 71) and an "inflated" projection of the useful life of the leased assets (id. ¶ 74). Windstream also alleged that Uniti failed to obtain Windstream's consent to the Southern Light transaction and certain other transactions, in violation of a provision precluding Uniti from "merg[ing] or consolidat[ing] with or into a Competitor" without such consent. (Id. ¶¶ 120-21)

On July 3, 2019, SLF filed the instant action in the United States District Court for the Southern District of Alabama, which later transferred the case to this Court pursuant to a forum selection provision in the Southern Light agreement. (See D.I. 53)

III. LEGAL STANDARDS

A. Motion to Dismiss for Failure to State a Claim

Evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires the Court to accept as true all material allegations of the complaint. See Spruill v. Gillis , 372 F.3d 218, 223 (3d Cir. 2004). "The issue is not whether ...