VFI KR SPE I, LLC v. Caldwell (In re ServiCom, LLC)
| Decision Date | 24 February 2021 |
| Docket Number | Case No. 18-31722 (AMN),Case No. 18-31724 (AMN),Case No. 18-31723 (AMN),Adv. Pro. No. 19-3006,Adv. Pro. No. 19-3005 (AMN) |
| Parties | In re: SERVICOM, LLC, JNET COMMUNICATIONS, LLC, VITEL COMMUNICATIONS, LLC, Debtors VFI KR SPE I, LLC, Plaintiff v. EUGENE CALDWELL, DAVID JEFFERSON, and CORAL CAPITAL SOLUTIONS, LLC, Defendants BARBARA H. KATZ, CHAPTER 7 TRUSTEE, Plaintiff v. EUGENE CALDWELL, DAVID JEFFERSON, and CORAL CAPITAL SOLUTIONS, LLC, Defendants |
| Court | U.S. Bankruptcy Court — District of Connecticut |
Jay L. Welford, Esq.
Jaffe Raitt Heuer & Weiss, P.C.
27777 Franklin Road, Suite 2500
Southfield, MI 48034
Douglas S. Skalka, Esq.
Neubert, Pepe, and Monteith
195 Church Street, 13th Floor
New Haven, CT 06510
VFI KR SPE I, LLC
Paul N. Gilmore, Esq.
Updike, Kelly & Spellacy, P.C.
100 Pearl Street
Hartford, CT 06103
Harlan M. Lazarus, Esq.
Lazarus and Lazarus, P.C.
240 Madison Avenue, 8th floor
New York, NY 10016
Craig I. Lifland, Esq.
Coral Capital Solutions, LLC
APPEARANCES IN CASE NO. 19-3006
Robert M. Fleischer, Esq.
Joanna M. Kornafel, Esq.
Jeffrey M. Sklarz, Esq.
Green & Sklarz, LLC
One Audubon Street, 3rd Floor
New Haven, CT 06511
Barbara H. Katz,
Paul N. Gilmore, Esq.
Updike, Kelly & Spellacy, P.C.
100 Pearl Street
Hartford, CT 06103
Harlan M. Lazarus, Esq.
Lazarus and Lazarus, P.C.
240 Madison Avenue, 8th floor
New York, NY 10016
Craig I. Lifland, Esq.
Halloran & Sage
225 Asylum Street
Hartford, CT 06103
To decide the pending Rule 12(c)1 motions in these two adversary proceedings, I must determine whether the plaintiffs adequately pleaded legally sufficient marshaling and recharacterization claims.
The plaintiffs are VFI KR SPE I, LLC (in adversary proceeding number 19-3005), a junior secured creditor holding a lien against the assets of one of the three debtors (the "Junior Creditor"), and, Barbara H. Katz, in her capacity as the Chapter 7 Trustee (in adversary proceeding number 19-3006) for three bankruptcy debtors that are being jointly administered, but have not been substantively consolidated (the "Trustee" and together, the "Plaintiffs").
The defendants include Coral Capital Solutions, LLC (the "Senior Creditor"), a senior secured creditor holding a lien against the assets of all three debtors; David Jefferson ("Jefferson"), the founder and former chief executive officer of debtor JNET Communications, LLC ("JNET"); and, Eugene Caldwell ("Caldwell"), formerly the chief financial officer of JNET (together, the "Defendants").
The parties' dispute centers around a collateralized guaranty Jefferson and Caldwell provided to the Senior Creditor to induce it to loan money to JNET in 2017. Essentially, the Trustee and the Junior Creditor want the court to require the Senior Creditor to apply the collateral provided by Jefferson and Caldwell (which was cash) to pay the Senior Creditor's outstanding loan balance, thereby reducing or eliminating aclaim against the bankruptcy estates. If this happened, the Junior Creditor and other bankruptcy creditors would benefit. Jefferson and Caldwell naturally oppose this result, and, want the Trustee to pay the Senior Creditor's claim from the estate property she is holding so they may recover the collateral they provided to the Senior Creditor.
Alternatively, the Trustee and Junior Creditor request recharacterization of the collateral Jefferson and Caldwell pledged to the Senior Creditor so it is considered equity or a capital contribution to the now-defunct debtor-companies rather than an independent collateral pledge to a lender. If Plaintiffs succeed in either of these claims, there would be more money to distribute to the remaining creditors of the bankruptcy estates.
Jefferson and Caldwell, joined by the Senior Creditor, now seek judgment pursuant to Rule 12(c), arguing in essence that: (1) the Trustee and the Junior Creditor may not require the marshaling of assets under the circumstances here; and, (2) any recharacterization claim fails to plead required facts. The Defendants argue the complaints fail to state a claim pursuant to Fed.R.Civ.P. 12(b)(6) and (c).
For the reasons that follow, the court concludes the Rule 12(c) motions should be granted in part and denied in part. The Trustee and Junior Creditor may replead and address the deficiencies noted in this Memorandum of Decision.
The United States District Court for the District of Connecticut has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). The Bankruptcy Court, in turn, has jurisdiction to hear and determine this matter pursuant to 28 U.S.C. § 157(a) and the Order of Reference of the District Court dated September 21, 1984. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(B) and (O), as relevant to this Memorandum and Decision. This Court has jurisdiction over core proceedings pursuantto 28 U.S.C. §§ 157(b)(1) and 1334, and, may hear and enter a final order in this matter subject to traditional appeal rights. Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409 as this proceeding arises under and in connection with a case under the Bankruptcy Code. Pursuant to Fed.R.Bankr.P. 7012(b), all parties consent to the jurisdiction of the Bankruptcy Court and its authority to enter final orders or judgments. See, 19-3005 AP-ECF Nos. 35, 54, 55, 57; 19-3006 AP-ECF Nos. 30, 47, 48, 49.2
When considering a motion for judgment on the pleadings pursuant to Rule 12(c), a court must "accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiff's favor." Bryan v. Credit Control, LLC, 954 F.3d 576, 580 (2d Cir. 2020). The court is empowered to consider any information cited to it that is present in the complaints, documents attached to the complaints, "or materials of which the Court can take judicial notice, such as the Bankruptcy Court docket." Campos v. Aegis Realty Mgt. Corp., 19 CIV. 2856 (KPF), 2020 WL 433356, at *7 (S.D.N.Y. Jan. 28, 2020); See also, Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir. 2006)("[D]ocket sheets are public records of which the court could take judicial notice."); In re Howard's Exp., Inc., 151 Fed.Appx 46, 48 (2d Cir. 2005)(taking judicial notice of Bankruptcy Court docket); Liberty Mutual Ins. Co. v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388 (2d Cir. 1992)( that court may take judicial notice of the actions taken in related proceedings "to establish the fact of such litigation and related filings"). Nothing requires"the Court to review portions of the record in response to a motion, where the moving and opposition papers do not make specific reference to such portions of the record." D.Conn.L.Civ.R. 7(a)(3).
This consolidated Memorandum of Decision notes and relies on facts from each Plaintiff's complaint as well as the record of the underlying bankruptcy cases which remain pending.
Three limited liability companies registered in Delaware are relevant here including: JNET Communications, LLC ("JNET"), ServiCom, LLC ("ServiCom"), and Vitel Communications ("Vitel" and collectively with JNET and ServiCom, the "Debtors"). Each filed a Chapter 11 bankruptcy petition on the same date, October 19, 2018 (the "Petition Date").3 Importantly, I note the Trustee's complaint defines the term "ServiCom" to mean all three Debtors, while the Junior Creditor's complaint defines the term "Debtors" to mean all three Debtors, and the terms are used throughout each complaint in an almost generic fashion. 19-3005 AP-ECF No. 1, ¶ 4 (AP-ECF No. 1 is the "Junior Creditor's Complaint"); 19-3006 AP-ECF No. 1, fn. 1 (). As will become apparent, the use of these defined terms to refer to multiple entities resulted in a lack of precision throughout the Complaints.4
Before and immediately after the Petition Date, JNET provided overall management and administrative support to ServiCom and Vitel, and, held 100% of their membership interests. 18-31722 ECF Nos. 1, p. 5; 9, p. 3; 108, p. 404; Junior Creditor Complaint, ¶ 5.
Defendant Jefferson was the founder and chief executive officer of JNET. Trustee's Complaint, ¶ 5. Defendant Caldwell was the chief financial officer of JNET. Junior Creditor's Complaint, ¶¶ 4, 7, 9; Trustee's Complaint, ¶ 5. On the Petition Date, the membership interests in JNET were held as follows:
Jefferson, LLC's sole member was Jefferson. Trustee's Complaint, ¶ 7. Despite the requirements of JNET's Second Amended and Restated Limited Liability Company Agreement creating a board of managers to manage the company, it "never" held formal board meetings nor passed formal resolutions after 2013, and placed financial control of the entity with Caldwell. Trustee's Complaint, ¶¶ 10-24. Despite being JNET's chief executive officer, Jefferson deferred to Caldwell for all financial decisions. Trustee's Complaint, ¶ 18.
ServiCom generated revenue by providing call center...
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