Yucaipa Am. Alliance Fund I, L.P. v. Ehrlich

• Decision Date: 02 September 2016
• Docket Number: Civ. No. 15-373 (SLR)
• Citation: 204 F.Supp.3d 765
• Court: U.S. District Court — District of Delaware
• Parties: YUCAIPA AMERICAN ALLIANCE FUND I, L.P., and Yucaipa American Alliance (Parallel) Fund I, L.P., Plaintiffs, v. Richard A. EHRLICH, Stephen H. Deckoff, Leslie A. Meier, Jeffrey A. Schaffer, BDCM Opportunity Fund II, L.P., Black Diamond CLO 2005-1 Ltd., and Spectrum Investment Partners, L.P., Defendants.

204 F.Supp.3d 765

YUCAIPA AMERICAN ALLIANCE FUND I, L.P., and Yucaipa American Alliance (Parallel) Fund I, L.P., Plaintiffs,

v.Richard A. EHRLICH, Stephen H. Deckoff, Leslie A. Meier, Jeffrey A. Schaffer, BDCM Opportunity Fund II, L.P., Black Diamond CLO 2005-1 Ltd., and Spectrum Investment Partners, L.P., Defendants.

Civ. No. 15-373 (SLR)

United States District Court, D. Delaware.

Signed September 2, 2016

John T. Dorsey, Esquire, Michael R. Nestor, Esquire, Sharon M. Zieg, Esquire, and Michael S. Neiburg, Esquire, of Young Conaway Stargatt & Taylor LLP, Wilmington, Delaware; Robert A. Klyman, Esquire, Maurice M. Suh, Esquire, and Kahn Scolnick, Esquire, of Gibson, Dunn & Crutcher, LLP, Los Angeles, California. Counsel for Yucaipa American Alliance Fund I, L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P.

Adam G. Landis, Esquire and Kerri K. Mumford, Esquire, of Landis Rath & Cobb, L.L.P., Wilmington, Delaware; Robert J. Ward, Esquire, of Schulte Roth & Zabel L.L.P., New York, New York. Counsel for Richard A. Ehrlich, Stephen H. Deckoff, Leslie A. Meier, Jeffrey A. Schaffer, BDCM Opportunity Fund II, L.P., Black Diamond CLO 2005-1 Ltd., and Spectrum Investment Partners, L.P.

MEMORANDUM OPINION

ROBINSON, District Judge

I. INTRODUCTION

This action arises from the bankruptcy cases of Allied Systems Holdings, Inc., et al. ("Allied").¹ Plaintiffs Yucaipa American Alliance Fund I, L.P., and Yucaipa American Alliance (Parallel) Fund I, L.P. (together, "plaintiffs") filed a complaint against BDCM Opportunity Fund II, L.P. and Black Diamond CLO 2005-1 Ltd. (together, "Black Diamond"), Spectrum Investment Partners, L.P. ("Spectrum" and together with Black Diamond, "BD/S"), and certain members of Allied's board of directors (Richard A. Ehrlich, Stephen H. Deckoff, Leslie A. Meier, and Jeffrey A. Schaffer) (collectively, "defendants") asserting violation of the Racketeer Influenced and Corrupt Organizations ("RICO") Act,² as well as state law claims for fraud and tortious interference with business relations. (D.I. 1 ("complaint"))³ Defendants move to dismiss on the bases that: the complaint fails to state a claim under §§ 1962(c) and (d) of the RICO Act; the complaint fails to state claims for tortious interference or fraud; the complaint is barred by the Noerr-Pennington doctrine;⁴ and plaintiffs' claims are barred by a covenant not to sue. (D.I. 17) Alternatively, defendants move to stay the action pending resolution of related actions pending in the bankruptcy cases. (Id. ) Because the complaint fails to state a claim under RICO, and the court declines to exercise supplemental jurisdiction over the state law claims, the motion to dismiss will be granted.

II. BACKGROUND

A. The Bankruptcy Cases

Allied was a provider of distribution and transportation services to the automotive industry. Allied emerged from its first bankruptcy in May 2007, and plaintiffs became Allied's majority shareholder under the plan of reorganization, with control over its board of directors. To finance its emergence from bankruptcy, Allied borrowed $265 million of first lien debt (the "First Lien Debt" or "First Lien Claims") from numerous lenders ("Lenders") pursuant to a Credit Agreement.⁵ As defined in the Credit Agreement, one or more Lenders holding more than 50% of the total First Lien Debt can act as the "Requisite Lenders," and the Requisite Lenders are vested with authority to exercise—or refrain from exercising—certain rights and remedies on behalf of all Lenders, such as declaring events of default, demanding immediate payment by Allied of any and all amounts due, or commencing foreclosure. (Id. , §§ 1.1, 8.1, 9.8)

Under the Credit Agreement, the only parties eligible to act as Requisite Lenders were "Lenders," which consisted only of the original Lender signatories to the Credit Agreement, and "Eligible Assignees" that subsequently become Lenders pursuant to an Assignment Agreement.

(Id. , § 1.1) Plaintiffs were not original Lender signatories to the Credit Agreement, and the definition of Eligible Assignee provided that "no ... Sponsor shall be an Eligible Assignee." (Id. ,) "Sponsor" is a defined term applicable only to plaintiffs. This prohibition recognized the manifest conflict of interest between plaintiffs (as Allied's controlling shareholders) and the Lenders (as creditors of Allied).

In 2008, certain events of default occurred under the terms of the Credit Agreement, and Allied stopped making interest payments on the First Lien Debt. Plaintiffs orchestrated the passage of a Third Amendment to the Credit Agreement, which gave plaintiffs limited rights to become a Lender, capping the amount of debt they could purchase, stripping that debt of any voting power, and requiring certain contributions to equity. (D.I. 1, ex. 14, Third Amendment § 2.1(a)) Thus, plaintiffs could never become Requisite Lenders under the Third Amendment. The Third Amendment also contained a covenant not to sue, which limited plaintiffs' rights to sue any Lender. The covenant not to sue provided:

To the fullest extent permitted by applicable law, no Restricted Sponsor Affiliate [plaintiffs] shall assert, and each Restricted Sponsor Affiliate immediately and automatically upon becoming a Lender, hereby irrevocably (i) waives, any claim or cause of action against any Lender, any Agent and their respective Affiliates ... (whether or not the claim therefor is based on contract, tort or duty imposed by any applicable legal requirement or otherwise) arising out of, in connection with, as a result of, or in any way related to, this Agreement or any Credit Document or any agreement or instrument contemplated hereby or thereby or referred to herein or therein, the transactions contemplated hereby or thereby, any Loan or the use of the proceeds thereof or any act or omission or event occurring in connection therewith except to the extent caused by such Lender's or Agent's gross negligence or willful misconduct ... as determined by a court of competent jurisdiction by final and non-appealable judgment, (ii) waives, releases and agrees not to sue upon any such claim or any such cause of action , whether or not accrued and whether or not known or suspected to exist in its favor and (iii) waives any claim or cause of action against any Agent or any Lender ... on any theory of liability for special, indirect, consequential or punitive damages ....

(Id. , § 2.7(e) (emphasis added))

In February 2009, ComVest Investment Partners III, L.P. ("ComVest") became the Requisite Lender. Thereafter, plaintiffs directly negotiated with ComVest to acquire the First Lien Debt. On August 21, 2009, plaintiffs caused Allied to enter into a purported Fourth Amendment to the Credit Agreement which, if effective, would have eliminated the Third Amendment's restrictions on plaintiffs' acquisition of First Lien Debt and would have allowed plaintiffs to become Requisite Lenders. Indeed, that same day, plaintiffs purported to purchase ComVest's debt and declared themselves Requisite Lenders. However, the Fourth Amendment was not approved by unanimous consent of the Lenders as required by the Credit Agreement. CIT Group Business Credit, Inc. ("CIT") —a Lender and the Administrative Agent under the Credit Agreement—challenged plaintiffs' status as Requisite Lenders, which led to a lengthy litigation in Georgia state court among plaintiffs, Allied, and CIT ("Georgia Action"). CIT settled that litigation with plaintiffs and Allied, but the settlement did not resolve the issues between plaintiffs and the other Lenders. In January 2012, BD/S commenced an action in New York state court ("New York Action") against plaintiffs, and successfully obtained a judicial declaration that plaintiffs were not the Requisite Lenders because the Fourth Amendment was not validly enacted and was void ab initio .⁶

On May 17, 2012, while the New York Action was pending, Black Diamond filed involuntary petitions for bankruptcy against Allied in the bankruptcy court, and Allied entered bankruptcy for the second time, five years after its first bankruptcy. (See Bankr. D.I. 1)⁷ Allied shortly thereafter consented to the entry of orders for relief under the Bankruptcy Code. On October 18, 2012, Allied commenced an adversary proceeding seeking a determination as to, among other things, the identity of the Requisite Lenders under the Credit Agreement (Adv. No. 12–50947 (CSS)) (the "Allied Action"). On March 14, 2013, the Official Committee of Unsecured Creditors appointed on behalf of Allied's bankruptcy estates (the "Committee"), together with BD/S (as intervenors), filed an amended complaint in the bankruptcy court seeking, among other things, to equitably subordinate plaintiffs' purported First Lien Debt and to compel plaintiffs to comply with the Third Amendment's requirement that plaintiffs contribute their debt to capital (Adv. No. 13–50530 (CSS)) (the "Committee Action"). On November 19, 2014, BD/S filed an equitable subordination complaint against plaintiffs (Adv. No. 14–50971 (CSS)) (the "BD/S Action"). The Committee Action and the BD/S Action remain pending in the bankruptcy court, and discovery is currently scheduled to be completed by July 17, 2017. (See Committee Action at D.I. 392 (parties' July 12, 2016 status report))

The bankruptcy court issued an oral ruling on February 27, 2013, granting a motion to dismiss plaintiffs' cross-claims in the Allied Action, including their claim for declaratory relief that certain provisions of the Third Amendment should be deemed void. (See Committee Action D.I. 255 at 103-08) On June 19, 2013, the bankruptcy court entered an agreed scheduling order in the Allied Action and Committee Action in which the parties (including plaintiffs) acknowledged that the bankruptcy court may address the issue of "[w]ho, if anyone, is ‘Requisite Lender’ under the Debtors' [Credit Agreement].' " (See Committee Action D.I. 268 ¶¶ 2(a), (b)) Thereafter, BD/S filed a motion for summary judgment in both...