Torch Liquidating Trust v. Stockstill

• Decision Date: 23 February 2009
• Docket Number: No. 08-30404.,08-30404.
• Citation: 561 F.3d 377
• Parties: The TORCH LIQUIDATING TRUST, by and through BRIDGE ASSOCIATES L.L.C. as trustee, Plaintiff-Appellant, v. Lyle STOCKSTILL; Lana J. Hingle Stockstill; Andrew L. Michel; R. Jere Shopf; Ken Wallace; Curtis Lemons; Robert E. Fulton; XL Specialty Insurance Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

561 F.3d 377

The TORCH LIQUIDATING TRUST, by and through BRIDGE ASSOCIATES L.L.C. as trustee, Plaintiff-Appellant, v. Lyle STOCKSTILL; Lana J. Hingle Stockstill; Andrew L. Michel; R. Jere Shopf; Ken Wallace; Curtis Lemons; Robert E. Fulton; XL Specialty Insurance Company, Defendants-Appellees.

No. 08-30404.

United States Court of Appeals, Fifth Circuit.

February 23, 2009.

Alan H. Goodman, (argued), William R. Forrester, Jr. (argued), Lemle & Kelleher, LLP, New Orleans, LA, for Torch Liquidating Trust.

Harry A. Rosenberg (argued), David L. Patron, Christopher Kent Ralston, Phelps Dunbar, New Orleans, LA, for Lyle Stockstill, Lana Stockstill, Michel, Shopf, Wallace, Lemons, Fulton.

Robert Joseph Burns, Jr., Perry, Atkinson, Balhoff, Mengis & Burns, Baton Rouge, LA, for XL Specialty Ins. Co.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before KING, DENNIS and ELROD, Circuit Judges.

KING, Circuit Judge:

Torch Liquidating Trust, through its trustee Bridge Associates L.L.C., brings this suit alleging breach of fiduciary duties by the officers and directors of Torch Offshore, Inc.; Torch Offshore, L.L.C.; and Torch Express, L.L.C. The district court dismissed plaintiff's amended complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure on the ground that the amended complaint's allegations of injury to the creditors of Torch Offshore, Inc.; Torch Offshore, L.L.C.; and Torch Express, L.L.C. failed to state a claim on behalf of Torch Liquidating Trust and on the ground that Delaware's business judgment rule applied to preclude liability of the officers and directors. We affirm because the amended complaint fails to allege injury to Torch Offshore, Inc.; Torch Offshore, L.L.C.; and Torch Express, L.L.C. and thus fails to state a claim on behalf of the Torch Liquidating Trust.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Factual Background

Torch Offshore, Inc.; Torch Offshore, L.L.C.; and Torch Express, L.L.C. (collectively, "Torch" or "debtor") operated a fleet of specialized vessels used in offshore underwater construction and in laying submerged oil and gas pipelines. Although Torch historically operated on the Gulf of Mexico's outer continental shelf, a slump in offshore oil and gas facility development led Torch to undertake deep-water operations in 2002. For this new business model, Torch raised capital by completing an initial public offering and borrowing additional sums of money from creditors to upgrade its fleet with new or overhauled vessels—including the MIDNIGHT RIDER, MIDNIGHT EXPRESS, and MIDNIGHT WRANGLER.

Starting in 2003, Torch's business deteriorated. By the end of 2003, it may have been insolvent, although it continued to incur trade debt. By December 2004, its loans were in default, leading the company to stop paying its vendors. On January 7, 2005, it filed a voluntary petition for relief under c Chapter 11 of the Bankruptcy Code in the Eastern District of Louisiana. The bankruptcy court confirmed Torch's proposed First Amended Joint Chapter 11 Plan of Reorganization (the "Plan") on April 28, 2006. Pursuant to the Plan, debtor executed an agreement creating the Torch Liquidating Trust (the "Trust"). The Trust was comprised of "all property of the Debtors' Estates which has not previously been transferred." The confirmation order and trust agreement appointed Bridge Associates L.L.C. ("Bridge Associates") as the Trust's administrator and trustee. The Plan, confirmation order, and trust agreement preserved and transferred, inter alia, certain claims against Torch's directors and officers ("D&O claims") to the Trust, authorized Bridge Associates to retain and prosecute those claims, and empowered it to distribute to creditors any recovery of claims proceeds.¹ The Plan defined D&O claims as "any claims arising prior to January 7, 2005 [the date Torch filed its chapter 11 petition] and recoveries against the Debtors' directors, officers, and other principals which are related to the Debtors' D&O insurance." The parties do not dispute that the breach of fiduciary duty claims at issue on appeal are D&O claims.

B. Procedural Background

On January 5, 2007, Bridge Associates filed a complaint on behalf of the Trust against Torch's former directors and officers (the "Directors").² The complaint alleged that the Directors breached fiduciary duties owed to Torch's creditors when Torch entered the zone of insolvency and after it became insolvent. Defendants moved to dismiss the complaint or for a more definite statement. They sought the latter in part because the complaint appeared to allege fraud, which under Rule 9(b) of the Federal Rules of Civil Procedure requires plaintiff to state with particularity the circumstances constituting fraud. After Bridge Associates clarified that it was not alleging fraud but instead only breach of fiduciary duties,³ the court denied defendants' motion.

In the intervening period, the Delaware Supreme Court issued its opinion in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del.2007). In Gheewalla, the court held that "the creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against the corporation's directors." Id. at 94 (emphasis added). The court reasoned that "the general rule is that directors do not owe creditors duties beyond the relevant contractual terms." 930 A.2d at 99 (quotation marks and footnotes omitted). Gheewalla, thereby, rendered meritless plaintiff's claim that the Directors breached fiduciary duties owed to Torch's creditors. Nonetheless, "the creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties." Id. at 101 (second emphasis added).⁴

In the aftermath of Gheewalla, plaintiff moved for leave to amend its complaint; Defendants opposed the motion on the grounds of futility and undue delay. The district court granted the motion to amend, and plaintiff then filed its amended complaint. In the amended complaint, plaintiff replaced nearly all of its prior references to "creditors" with new references to "creditors and shareholders" and sought damages on behalf of creditors and shareholders. (See, e.g., Am. Compl. ¶ 46 ("[T]he Torch creditors and shareholders have suffered damage in the amount of not less than $35,800,000, and in an amount to be proven at trial, and plaintiff is entitled to recover such damages from the defendants herein on behalf of the Torch creditors and shareholders.").) It also alleged that "[t]his matter is in the nature of a derivative suit in that plaintiff sues on behalf of the shareholders and creditors alike of [Torch]." (Id. at ¶ 2(d).)⁵ As such, any recovery was to become property of the Trust for distribution according to the Plan. (See id. at ¶ 2(d) ("All net recoveries, if any, shall go to the Trust for distribution in accordance with the Plan, all as ordered by the Court.").)⁶

Substantively, plaintiff alleged that the Directors: (1) "inflat[ed] the estimated fair market value of the [Torch] fleet in order to portray in published financial statements that [it was] solvent," (id. at ¶ 28; see also id. at ¶ 39); (2) "deferr[ed] paying unsecured creditors to the maximum extent possible while at the same time entering into an intensive campaign to mislead Torch's unsecured creditors as to its true financial condition and cajole Torch's unsecured creditors into continuing to supply goods and services to Torch on credit," (id. at ¶ 29); (3) delayed for as long as possible admitting "that Torch would be unable to fund its ongoing operations without new capital," (id. at ¶ 30); (4) postponed admitting that the delayed delivery of the MIDNIGHT EXPRESS "would probably destroy the company," (id. at ¶ 31); and (5) "orchestrated a public relations campaign to obscure and minimize the market impact of the financial data Torch was compelled to release in public reporting," (id. at 31). The Directors' public relations campaign allegedly included interviews and articles that misrepresented Torch's financial condition and the progress on MIDNIGHT EXPRESS in order to "mislead Torch creditors and shareholders and to permit Torch to continue to purchase essential supplies and services on credit." (Id. at ¶¶ 33-36.)

The Directors filed a motion to dismiss under Rule 12(b)(6), asserting that Bridge Associates lacked standing to bring the suit, that Delaware's business judgment rule applied to preclude the Directors' liability, and that exculpatory provisions in Torch's certificate of incorporation shielded the Directors from liability for certain alleged breaches of their fiduciary duties.

The district court granted the motion, holding that plaintiff lacked standing to assert many of its claims, which the district court interpreted as continuing to allege direct creditor claims barred by Gheewalla, and, to the extent any of the claims were properly derivative, that Delaware's business judgment rule defeated those claims. The district court concluded that plaintiff failed to state a claim that it had standing to bring because "the Amended Complaint ... does not allege that the creditors are bringing the derivative action on behalf of the corporation, but rather states that the Trust is `entitled to recover damages from the defendants herein on behalf of the Torch creditors and shareholders.'" Torch Liquidating Trust ex rel. Bridge Assocs., L.L.C. v. Stockstill, No. 07-133, 2008 WL 696233, at *5 (E.D.La. Mar. 13, 2008). The court determined that "[t]he Gheewalla court was specific in its findings that such direct claims as these by creditors are not actionable," id. at *5, and held that:

Plaintiff's arguments and its Amended Complaint blur[] the distinction made by the Gheewalla court between creditors and...