Friedman v. Wellspring Capital Management, LLC

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

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:

In re: : Chapter 11

:

SPORTCO HOLDINGS, INC., et al.,1 : Case No. 19-11299 (JKS)

:

Debtors. : (Jointly Administered)

:

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RONALD FRIEDMAN, as trustee for the :

SportCo Creditors’ Liquidation Trust, :

:

Plaintiff, : Adv. Proc. No. 20-50554 (JKS)

:

v. : Reference D.I. Nos. 1, 15, 16, 17, 18, 19,

: 20, 24, 26, 27

WELLSPRING CAPITAL :

MANAGEMENT, LLC, WELLSPRING :

CAPITAL PARTNERS IV, L.P., WCM :

GENPAR IV, L.P., WCM GENPAR IV GP, :

LLC, ALEXANDER E. CARLES, :

WILLIAM F. DAWSON, JR., JOHN E. :

MORNINGSTAR, and BRADLEY :

JOHNSON, :

:

Defendants. :

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MEMORANDUM OPINION

Before the Court are two motions to dismiss (the “Motions to Dismiss”) claims for breach

of fiduciary duties, aiding and abetting breach of fiduciary duties, fraudulent transfer under

1 The Debtors, together with the last four digits of each Debtor’s federal tax identification number, are: Bonitz

Brothers, Inc. (4441); Ellett Brothers, LLC (7069); Evans Sports, Inc. (2654); Jerry’s Sports, Inc. (4289); Outdoor

Sports Headquarters, Inc. (4548); Quality Boxes, Inc. (0287); Simmons Guns Specialties, Inc. (4364); SportCo

Holdings, Inc. (0355); and United Sporting Companies, Inc. (5758). The location of the Debtors’ corporate

headquarters and the service address for all Debtors is 267 Columbia Ave., Chapin, South Carolina 29036.

federal and state law and corporate waste. For the reasons stated below, the Motions to Dismiss

are granted in part and denied in part.

Background2

SportCo Holdings, Inc. and various affiliates (“SportCo” or the “Debtors”) filed for relief

under chapter 11 of the Bankruptcy Code on June 10, 2019. On November 6, 2019, the Court

confirmed the Debtors’ Fourth Amended Combined Disclosure Statement and Joint Chapter 11

Plan of Liquidation (the “Plan”). On November 21, 2019, the Plan went effective, establishing

the SportCo Creditors’ Liquidation Trust (the “Trust”).

On April 2, 2020, Ronald Friedman, as trustee for the Trust (the “Trustee”), commenced

this adversary proceeding against the Debtors’ former private equity sponsor and certain of its

affiliates, Wellspring Capital Management, LLC, Wellspring Capital Partners IV, L.P., WCM

GenPar IV, L.P. and WCM GenPar IV GP, LLC (collectively, “Wellspring Capital”), and certain

of the Debtors’ former directors and officers, Alexander E. Carles, William F. Dawson, Jr., John

E. Morningstar (collectively the “Wellspring Directors” and, together with Wellspring Capital,

the “Wellspring Defendants”) and Bradley Johnson (together with the Wellspring Directors, the

“D&O Defendants”) (collectively, the “Defendants”). The Complaint alleges that the Wellspring

Directors served as directors or officers of both Wellspring Capital and SportCo.3

On July 6, 2020, Defendant Johnson and the Wellspring Defendants separately moved to

dismiss the complaint [D.I. 1] (the “Complaint”) in its entirety for failure to state a claim under

Rule 12(b)(6) of the Federal Rules of Civil Procedure, incorporated by Rule 7012(b) of the

2 D.I. references are to the docket in this adversary proceeding, Friedman v. Wellspring Capital Management, LLC,

et al., Case No. 20-50554 (JKS).

3 Compl. ¶¶ 28–30. The Complaint does not state with which Wellspring Capital entities each of the Wellspring

Directors was associated.

2

Federal Rules of Bankruptcy Procedure [D.I. 15, 18]. On August 17, 2020, the Trustee filed a

response to the Motions to Dismiss [D.I. 24]. The Defendants filed replies on September 11,

2020 [D.I. 24, 26]. Oral argument (the “Hearing”) was held on July 22, 2021 [D.I. 37].

Factual Allegations

The Complaint concerns four prepetition activities of the Defendants: (1) the 2018

acquisition of the assets of one of SportCo’s competitors, AcuSport Corporation (the “AcuSport

Acquisition”); (2) a failed out of court restructuring preceding the Debtors’ bankruptcy filing

(the “Failed Out of Court Restructuring”); (3) increases in the total compensation of the Debtors’

then president and CEO, Defendant Johnson (the “Johnson Compensation”); and (4) the Debtors’

payment of travel expenses (the “Travel Expenses”). For the purposes of the Motions to

Dismiss, the Court accepts all the Complaint’s well-pleaded facts as true and disregards its legal

conclusions.4

1. AcuSport Acquisition

In late 2017, the D&O Defendants considered merging SportCo with AcuSport

Corporation (“AcuSport”). The D&O Defendants discussed the potential merger in emails

expressing varying levels of skepticism.5 While the D&O Defendants were investigating

merging with AcuSport, they also discussed the potential transaction with SportCo’s secured

lenders, urging them to permit the AcuSport Acquisition.6 Ultimately, a merger with AcuSport

never occurred.

4 See Fowler v. UPMC Shadyside, 578 F.3d 203, 210–11 (3d Cir. 2009).

5 Compl. ¶¶ 82–86.

6 Id. ¶¶ 87–89.

3

Subsequently, the D&O Defendants sought to acquire AcuSport’s assets through the

AcuSport Acquisition. In preparation, the D&O Defendants pitched the AcuSport Acquisition to

the Debtors’ board of directors (the “Board”) and secured lenders in or around late 2017.7 In the

pitch, the D&O Defendants indicated “that, as part of the AcuSport Acquisition, the Debtors

would acquire $14 million worth of AcuSport inventory and would immediately realize a $7

million profit on such inventory.”8 In early 2018, Wellspring Capital notified SportCo’s secured

lenders that SportCo would default on a $4.7 million interest payment due in the second quarter

of 2018.9 On May 3, 2018, SportCo agreed to acquire AcuSport’s assets in bankruptcy for $7

million.10 A May 19, 2018 presentation to SportCo’s vendors stated that SportCo was planning

to pick up 30% of AcuSport’s revenue following the acquisition, amounting to $150 million

annually.11

The AcuSport Acquisition was not a success. AcuSport’s inventory, which the D&O

Defendants thought would sell for $14 million, sold for $139,000.12 Additionally, it cost

SportCo $970,000 to build out servers acquired from AcuSport.13 To use software acquired from

AcuSport, SportCo needed to pay $220,000 for a license extension.14 Starting and integrating an

inventory management system SportCo acquired from AcuSport required an investment of $1.5

million over twelve months.15 Following the acquisition, vendors withheld shipments to

7 Id. ¶ 79.

8 Id. ¶ 80.

9 Id. ¶ 76.

10 Id. ¶¶ 8, 78 n.4, 100.

11 Id. ¶ 81.

12 Id. ¶ 12.

13 Id. ¶ 106.

14 Id. ¶¶ 110–11.

15 Id. ¶ 109.

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SportCo and refused to ship without insurance or payment in advance, and two of SportCo’s

trade insurers dropped coverage.16

2. Failed Out of Court Restructuring

The Complaint alleges that, as a result of the AcuSport Acquisition, in the fall of 2018 the

Debtors found themselves potentially in breach of their obligations under SportCo’s secured loan

agreements—2012 first and second lien secured loans of $280 million and a 2013 supplemental

loan of $60 million under an amendment to the Debtors’ 2012 second lien agreement.17 On

September 8, 2018, Defendant Johnson told Prospect Capital Corporation, the administrative

agent on its second lien loan, that the Debtors may be in breach of their current fixed asset

coverage ratio.18 On October 27, 2018, Defendant Johnson determined it was necessary to

obtain a waiver or forbearance.19 The same day, Defendant Johnson reported that certain of

SportCo’s secured lenders were willing to waive a portion of the principal and interest owed to

them in exchange for a majority equity interest in SportCo.20 In late 2018, the D&O Defendants

considered restructuring SportCo’s debt out of court.21

On November 9, 2018, the Debtors exchanged a term sheet with various second lien

lenders for a proposed restructuring of SportCo’s second lien debt.22 Internally, the D&O

Defendants discussed the need for broad releases from SportCo’s secured lenders in connection

16 Id. ¶¶ 102–05.

17 Id. ¶¶ 43, 46, 125; Declaration of M. Paige Valeski in Support of the Wellspring Defendants’ Motion to Dismiss

Ex. 5 [D.I. 20] (the “Valeski Declaration”). The Complaint does not specify which lenders were in restructuring

negotiations with SportCo but indicates that both first lien and second lien lenders were involved. Compl. ¶ 128.

Separately, the Complaint states that the Debtors exchanged a term sheet with their second lien lenders. Compl.

¶ 129. The exhibits to the Valeski Declaration are not relied on in any ruling herein.

18 Compl. ¶ 126; Valeski Decl. Ex. 3.

19 Compl. ¶ 126. The Complaint does not indicate what sort of waiver or forbearance Defendant Johnson

determined was necessary. Ultimately, the Debtors obtained a waiver of interest payments. Compl. ¶ 99.

20 Id. ¶ 127.

21 Id. ¶ 15.

22 Id. ¶¶ 15–16, 129.

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with any proposed restructuring.23 On December 26, 2018, the Debtors sent the secured lenders

a revised term sheet including releases and indemnification language.24 In turn, the secured

lenders stated the releases were an issue.25 The D&O Defendants refused to agree to any

restructuring that did not contain releases for the benefit of the Defendants, and an out of court

restructuring did not occur.26 On December 31, 2018, the Debtors defaulted on the 2012 and

2013 loans.27 The Debtors filed for bankruptcy the following June.28

3. The Johnson Compensation

Defendant Johnson’s compensation increased in the years leading up to the bankruptcy.

In December 2016, SportCo paid Defendant Johnson a bonus of at least $112,500 (the “Johnson

Crosman Bonus”).29 A December 19, 2016 email from SportCo’s CFO indicated that the bonus

was paid on account of services Defendant Johnson performed for another Wellspring Capital

entity, Crosman Corporation (“Crosman”), and was unrelated to his work for SportCo.30 The

following year, in December 2017, Defendant Johnson’s base salary was increased from

$600,000 to $1 million per year (the “Johnson Salary Increase”).31 At that time, Defendant

Johnson was also awarded a bonus of $100,000 per quarter through December 31, 2019, subject

to his remaining at SportCo through December 31, 2019, and barring a change of control (the

“Johnson Quarterly Bonuses”).32

23 Id. ¶ 135.

24 Id. ¶ 137.

25 Id. ¶ 138.

26 Id. ¶ 19.

27 Id. ¶ 144.

28 Id. ¶¶ 21, 144.

29 Id. ¶ 56.

30 Id. ¶ 56.

31 Id. ¶ 91.

32 Id. ¶ 92.

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4. Travel Expenses

In 2017 and 2018, SportCo funds were used to pay for four trips. In April 2017, the

D&O Defendants and other individuals attended the 2017 Masters Tournament (the “Masters

Trip”).33 SportCo paid for the attendees’ tickets, lodging and meals at the Champions Retreat for

at least three days.34 In December 2017, SportCo paid the expenses (excluding air

transportation) of 10 people, including the D&O Defendants, to travel to Argentina for four days

(the “Argentina Trip”).35 The Argentina Trip cost approximately $40,000.36 In February 2018,

SportCo paid for Defendant Johnson and five guests to visit the Ice Hotel in Jukkasjärvi, Sweden

for three nights (the “Ice Hotel Trip”).37 The Ice Hotel Trip cost approximately $18,138.38 Later

in 2018, the Debtors paid for 20 people, including SportCo employees, to travel to Bermuda for

three nights (the “Bermuda Trip”).39 The purported purpose of the Bermuda Trip was to

celebrate the AcuSport Acquisition.40 The Complaint alleges SportCo incurred a total of

$165,813 in expenses related to the AcuSport Acquisition, including the Bermuda Trip.41

Jurisdiction

The Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C.

§ 1334(b). This action involves both core and non-core proceedings under 28 U.S.C.

§ 157(b)(2). The Fraudulent Transfer Counts are core proceedings, and the Fiduciary Duty

Counts and the Corporate Waste Count are non-core proceedings. The parties consent to entry of

33 Id. ¶¶ 63–64.

34 Id. ¶¶ 64–65.

35 Id. ¶¶ 66–69.

36 Id. ¶ 67.

37 Id. ¶¶ 69–70.

38 Id. ¶ 70.

39 Id. ¶ 121.

40 Id.

41 Id. ¶ 122.

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a final order or judgment by the Court on the Motions to Dismiss.42 Venue is proper in this

District under 28 U.S.C. § 1409(a).

Standard of Review

Rule 12(b)(6) provides for dismissal for “failure to state a claim upon which relief can be

granted.”43 Rule 12(b)(6) is related to Rule 8(a)(2), which requires that a pleading contain “a

short and plain statement of the claim showing that the pleader is entitled to relief.”44 When a

complaint is challenged by a motion to dismiss under Rule 12(b)(6), the complaint “does not

need detailed factual allegations, [but] a plaintiff’s obligation to provide the grounds of his

entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the

elements of a cause of action will not do.”45 Two “working principles” underly this pleading

standard:

First, the tenet that a court must accept a complaint’s allegations as

true is inapplicable to threadbare recitals of a cause of action’s

elements, supported by mere conclusory statements. Second,

determining whether a complaint states a plausible claim is

context-specific, requiring the reviewing court to draw on its

experience and common sense. 46

Under this pleading standard, a complaint must nudge claims “across the line from conceivable

to plausible.”47 The movant carries the burden of showing that dismissal is appropriate.48

Interpreting this pleading standard, the Third Circuit instructs courts to follow a three-

part analysis. “First, the court must ‘tak[e] note of the elements a plaintiff must plead to state a

42 Hr’g Tr. 7:6–7; 47:19–20.

43 Fed. R. Civ. P. 12(b)(6).

44 Id. 8(a)(2).

45 Bell Atl. Corp. v. Twombly, 550 U.S. 554, 555 (2007) (cleaned up).

46 Ashcroft v. Iqbal, 556 U.S. 662, 663–64 (2009) (citation omitted).

47 Twombly, 550 U.S. at 570.

48 Paul v. Intel Corp. (In re Intel Corp. Microprocessor Antitrust Litig.), 496 F. Supp. 2d 404, 408 (D. Del. 2007).

8

claim.’”49 Second, the court must separate the factual and legal elements of the claim, accepting

all of the complaint’s well-pleaded facts as true and disregarding any legal conclusions.50 Third,

the court must determine whether the facts alleged in the complaint are sufficient to show that

the plaintiff has a plausible claim for relief.51 After conducting this analysis, the court may

conclude that a claim has facial plausibility when the pleaded factual content allows the court to

draw the reasonable inference that the defendant is liable for the alleged misconduct.52

Moreover, a heightened pleading standard is applicable to allegations of fraudulent

transfer.53 Rule 9(b), made applicable by Bankruptcy Rule 7009, supplies this heightened

standard:

In alleging fraud or mistake, a party must state with particularity

the circumstances constituting fraud or mistake. Malice, intent,

knowledge, and other conditions of a person’s mind may be

alleged generally.54

Rule 9(b) requires plaintiffs to plead the “who, what, where, when, how, and why” of a

fraudulent transfer claim.55 The Third Circuit has explained that the purpose of Rule 9(b)’s

requirement that plaintiffs plead the “circumstances” of the alleged fraud with particularity is to

“place the defendants on notice of the precise misconduct with which they are charged, and to

safeguard defendants against spurious charges of immoral and fraudulent behavior.”56 However,

49 Santiago v. Warminster Twp., 629 F.3d 121, 130 (3d Cir. 2010) (quoting Iqbal, 556 U.S. at 675).

50 Id. See also Fowler, 578 F.3d at 210 (citing Iqbal, 556 U.S. at 679).

51 Santiago, 629 F.3d at 130.

52 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).

53 Pa. Emp. Benefit Tr. Fund v. Zeneca, Inc., 710 F. Supp. 2d 458, 478 (D. Del. 2010).

54 Fed. R. Civ. P. 9(b); Fed. R. Bankr. P. 7009.

55 See Gerbitz v. ING Bank, 967 F. Supp. 2d 1072, 1078 (D. Del. 2013). But see Seville Indus. Mach. Corp. v.

Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984) (“Plaintiffs are free to use alternative means of injecting

precision and some measure of substantiation into their allegations of fraud”).

56 Seville Indus. Mach. Corp., 742 F.2d at 791.

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Rule 9’s “requirements . . . are relaxed in the bankruptcy context, particularly in cases . . . in

which a trustee has been appointed.”57

Choice of Law

Before evaluating the state law claims, the Court must decide what state law governs

those claims.58 The Complaint does not allege what state law applies.59 The Wellspring

Defendants argue that Delaware law applies, and Defendant Johnson argues that South Carolina

law applies but asserts that dismissal of the state law claims is appropriate under either South

Carolina or Delaware law.60

The choice-of-law rules of Delaware apply.61 The first step in Delaware’s choice-of-law

analysis is to determine whether a conflict of laws exists at all. If the various state laws that

might apply are not materially different, then there is a false conflict, and the forum state’s law

applies.62 If there is a material difference, the Court applies the “most significant relationship”

test to determine what law should apply.63

There is no conflict between South Carolina and Delaware fraudulent transfer law

because both Delaware and South Carolina have enacted the Uniform Fraudulent Transfers Act

57 Zazzali v. Mott (In re DBSI, Inc.), 445 B.R. 344, 347–348 (Bankr. D. Del. 2011).

58 Counts 1 through 4 involve state law claims for breach of fiduciary duties and the aiding and abetting thereof;

Counts 5, 6, 9, 10, 13 and 14 involve state law claims for actual or constructive fraudulent conveyance; and Count

17 involves a state law claim for corporate waste.

59 Although failure to allege which state law applies to state law claims may be an independent basis for dismissal,

the Court considers the merits of the Trustee’s allegations. See In re Global Link Telecom Corp., 327 B.R. at 718.

60 Hr’g Tr. 7:11–16; Defendant Bradley Johnson’s Opening Brief in Support of His Motion to Dismiss Plaintiff’s

Complaint 10 n.9 [D.I. 16].

61 See LaSala v. Bordier et Cie, 519 F.3d 121, 140 (3d Cir. 2008). See also PHP Liquidating, LLC v. Robbins (In re

PHP Healthcare Corp.), 128 F. App’x 839, 843 (3d Cir. 2005).

62 Teamsters Local 237 Welfare Fund v. AstraZeneca Pharms. LP, C.A. No. N04C-11-191 VLM, 2015 WL

4111826, at *5, 2015 Del. Super. LEXIS 327, at *12 (Del. Super. Ct. July 8, 2015).

63 Id.

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and the Uniform Voidable Transfers Act.64 The Court thus applies Delaware law to the

Trustee’s state law claims for actual and constructive fraudulent conveyance.

The “internal affairs” doctrine governs the Fiduciary Duty Counts and the Corporate

Waste Count (defined below).65 Under the internal affairs doctrine, matters unique to

relationships among the corporation and officers, directors and shareholders are governed by the

law of the state of incorporation.66 The entities at which the alleged misconduct took place are

incorporated in Delaware. Consequently, Delaware law applies to the Trustee’s claims for

breach of fiduciary duties and corporate waste.67

Discussion

The 17-count Complaint alleges breach of fiduciary duties and aiding and abetting breach

of fiduciary duties (Counts 1 through 4, the “Fiduciary Duty Counts”), fraudulent transfer under

federal and state law (Counts 5 through 16, the “Fraudulent Transfer Counts”) and corporate

waste (Count 17, the “Corporate Waste Count”). The bases for the Fiduciary Duty Counts are

the AcuSport Acquisition and the Failed Out of Court Restructuring. The basis for the

Fraudulent Transfer Counts is the Johnson Compensation. The basis for the Corporate Waste

Count is the payment of the Travel Expenses.

64 The Trustee has pleaded no difference in the Delaware and South Carolina statutes. See generally Compl.

65 See NHB Assignments LLC v. Gen. Atl. LLC (In re PMTS Liquidity Corp.), 452 B.R. 498, 507 (Bankr. D. Del.

2011).

66 NHB Assignments LLC, 452 B.R. at 507; Official Comm. of Unsecured Creditors of Fedders N. Am., Inc. v.

Goldman Sachs Credit Partners L.P. (In Re Fedders N. Am., Inc.), 405 B.R. 527, 539 (Bankr. D. Del. 2009) (citing

Edgar v. MITE Corp., 457 U.S. 624, 645 (1982)) (“Under the internal affairs doctrine, only one state has the

authority to regulate a corporation’s internal affairs.”).

67 Further, the Trustee acknowledges that Delaware law applies to the claims for breach of fiduciary duties. Hr’g Tr.

47:22–23.

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1. The Fiduciary Duty Counts

Counts 1 and 3 allege that the D&O Defendants breached their fiduciary duties of care

and loyalty by entering into the AcuSport Acquisition and failing to enter into an out of court

restructuring.

a. The Fiduciary Duties of Care and Loyalty

Under Delaware law, corporate officers and directors owe the corporations they serve

duties of care and loyalty to “strive in good faith and on an informed basis to maximize the value

of the corporation for the benefit of its residual claimants, the ultimate beneficiaries of the firm’s

value.”68 When alleging breach of fiduciary duties, “to survive a motion to dismiss under Rule

12(b)(6), the Trustee must ‘plead around the business judgment rule.’”69 When assessing claims

for breach of fiduciary duties, the Court bears in mind that a director does not become “a

guarantor of success” by choosing to continue a firm’s operations when it may be insolvent.70

i. The Duty of Care

The duty of care “requires that directors of a Delaware corporation both: (1) ‘use that

amount of care which ordinarily careful and prudent men would use in similar circumstances’;

and (2) ‘consider all material information reasonably available.’”71 “The duty of care has been

68 Quadrant Structured Prods. Co., v. Vertin, 102 A.3d 155, 172 (Del. Ch. 2014).

69 Joseph v. Frank (In Re Troll Commc’ns, LLC), 385 B.R. 110, 118 (Bankr. D. Del. 2008) (quoting Stanziale v.

Nachtomi (In Re Tower Air, Inc.), 416 F.3d 229, 238 (3d Cir. 2005)). Furthermore, “Under Delaware law, the

business judgment rule presumes that in making a business decision the directors of a corporation acted on an

informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.”

Liquidation Trust of Solutions Liquidation LLC v. Stienes (In re Solutions Liquidation LLC), 608 B.R. 384, 402

(Bankr. D. Del. 2019) (quoting Brehm v. Eisner (In re Walt Disney Co. Derivative Litig.), 906 A.2d 27, 52 (Del.

2006)) (cleaned up).

70 Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 174 (Del. Ch. 2006), aff’d, 931 A.2d 438 (Del.

2007).

71 Bridgeport Holdings Inc. Liquidating Trust v. Boyer (In re Bridgeport Holdings, Inc.), 388 B.R. 548, 568 (Bankr.

D. Del. 2008) (quoting In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 749 (Del. Ch. 2005)).

12

described as the duty to act on an informed basis.”72 “[D]uty of care violations are actionable

only if the directors acted with gross negligence,” which is “rarely found.”73 Gross negligence is

“conduct that constitutes reckless indifference or actions that are without the bounds of

reason.”74

ii. The Duty of Loyalty

“The duty of loyalty mandates that the best interest of the corporation and its

shareholders takes precedence over any interest possessed by a director, officer or controlling

shareholders and not shared by the stockholders generally.”75 “A director is interested in a

transaction if ‘he or she will receive a personal financial benefit from a transaction that is not

equally shared by the stockholders’ or if ‘a corporate decision will have a material detrimental

impact on a director, but not on the corporation and the stockholders.’”76 The private benefit to

the director must be “of a sufficiently material importance, in the context of the director’s

economic circumstances, as to have made it improbable that the director could perform her

fiduciary duties . . . without being influenced by her overriding personal interest.”77

Additionally, “[a]cts taken in bad faith breach the duty of loyalty.”78

To state a bad-faith claim, a plaintiff must show either an extreme

set of facts to establish that disinterested directors were

intentionally disregarding their duties, or that the decision under

attack is so far beyond the bounds of reasonable judgment that it

seems essentially inexplicable on any ground other than bad

faith.79

72 Burtch v. Huston (In re USDigital, Inc.), 443 B.R. 22, 41 (Bankr. D. Del. 2011).

73 In re Walt Disney, 907 A.2d at 750.

74 McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008).

75 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (cleaned up).

76 In re Trados Inc. S’holder Litig., C.A. 1512-CC, 2009 WL 2225958, at *6, 2009 Del. Ch. LEXIS 128, at *22 (Del.

Ch. July 24, 2009) (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993)).

77 In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617 (Del. Ch. 1999).

78 Ryan v. Gifford, 918 A.2d 341, 357 (Del. Ch. 2007).

79 In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., No. 9640-VCG, 2016 WL 3044721, at *7, 2016 Del. Ch.

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A complaint for breach of duty of loyalty may be dismissed where it “is devoid entirely of

factual support to establish that the transaction was self-interested.”80

b. Count 1: The AcuSport Acquisition

Count 1 alleges that the D&O Defendants breached their fiduciary duties of care and

loyalty in connection with the AcuSport Acquisition.

i. Count 1’s Duty of Care Allegations

The Trustee alleges that the D&O Defendants breached their fiduciary duty of care owed

to the Debtors by “failing to conduct adequate diligence and mis-valuing (or intentionally

misrepresenting the value of) the AcuSport Acquisition and approving the AcuSport Acquisition

on the basis of the incorrect or misrepresented value thereof.”81

In support of the duty of care allegations, the Complaint states that in early 2018,

Wellspring Capital notified SportCo’s secured lenders that SportCo would default on a

$4.7 million interest payment due in the second quarter of 2018.82 Faced with a potential

default, the D&O Defendants pitched the AcuSport Acquisition to the Board and SportCo’s

secured lenders.83 On May 3, 2018, SportCo agreed to acquire AcuSport’s assets in bankruptcy

for $7 million, spending “effectively, the Debtors’ last available cash.”84 The D&O Defendants

represented to their secured lenders that, as part of the acquisition, the Debtors would acquire

LEXIS 79, at *22 (Del. Ch. May 20, 2016) (cleaned up).

80 Stienes, 608 B.R. at 402.

81 The Court need not address the Defendants’ arguments concerning the exculpation clause because affirmative

defenses, such as exculpation, may not be considered at the motion to dismiss stage. Guiliano v. Schnabel (In re

DSI Renal HC), 574 B.R. 446, 471 (Bankr. D. Del. 2017) (citing Miller v. McCown De Leeuw & Co. (In re The

Brown Sch.), 368 B.R. 394, 401 (Bankr. D. Del. 2007)).

82 Compl. ¶ 76.

83 Id. ¶¶ 77, 79.

84 Id. ¶¶ 8, 100.

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$14 million worth of AcuSport inventory and realize $7 million in profits, but the inventory

actually sold for $139,000.85

The Complaint further alleges that following the acquisition, vendors withheld shipments

to SportCo and refused to ship without insurance or payment in advance, and two of SportCo’s

trade insurers dropped coverage.86 The acquisition resulted in unanticipated additional

operational expenses: $970,000 to build out servers,87 $220,000 for a license extension to use

software,88 and $1.5 million over 12 months to start and integrate an inventory management

system.89 According to the Complaint, a SportCo financial advisor described the AcuSport

Acquisition in retrospect as a “marginal investment” that resulted in no incremental increase in

sales but a $2.3 million increase in costs to pay the SportCo’s sales force.90

The D&O Defendants argue that the Trustee fails to plead a breach of the duty of care

adequately. The D&O Defendants contend, among other things, that the pitch of the AcuSport

Acquisition to the Board and secured lenders demonstrates that the D&O Defendants conducted

due diligence, and the Board’s approval of the transaction implies that the AcuSport Acquisition

was undertaken in the best interests of the Debtors. They also claim the secured lenders’

independent approval of the AcuSport Acquisition and willingness to waive interest suggests the

transaction was undertaken with due care.

Despite the Board’s approval of the transaction and the secured lenders’ waiver of

interest payments, the Complaint states a plausible claim for a breach of the duty of care. The

85 Id. ¶ 12.

86 Id. ¶¶ 102–05.

87 Id. ¶ 106.

88 Id. ¶¶ 110–11.

89 Id. ¶ 109.

90 Id. ¶¶ 13, 114.

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disparity between the D&O Defendants’ expectations and the actual economic gain from the

AcuSport Acquisition is considerable, as were the acquisition’s unanticipated negative business

implications. These facts, when viewed in the light most favorable to the Trustee, give rise to the

reasonable inference that the D&O Defendants may have failed to inform themselves fully in

undertaking the AcuSport Acquisition.

ii. Count 1’s Duty of Loyalty Allegations

The Complaint alleges that the D&O Defendants promoted the AcuSport Acquisition

“because each D&O Defendant individually stood to receive substantial additional value if the

Debtors’ lenders waived the Debtors’ interest payments, and in doing so, the D&O Defendants

breached their duty of loyalty owed to the Debtors.”91 The Trustee seems to suggest that the

D&O Defendants’ private motive for promoting the AcuSport Acquisition was “to induce the

Debtors’ lenders to forbear on interest payments they were owed.”92 By inducing the Debtors’

secured lenders to forbear, the Trustee essentially argues, the D&O Defendants had more time to

continue to compensate their president and CEO, Defendant Johnson, and direct the Debtors to

pay for the D&O Defendants’ Travel Expenses.

The Trustee has not alleged any fact that tends to show the D&O Defendants were self-

interested. The Complaint’s allegation that the D&O Defendants undertook the AcuSport

Acquisition because the D&O Defendants wanted SportCo to continue operating does not on its

face describe a private interest that would support a claim for breach of the duty of loyalty. The

D&O Defendants did not stand on both sides of the AcuSport Acquisition, and the Trustee has

not alleged any fact that would show that the D&O Defendants personally benefited from the

91 Id. ¶ 152.

92 Id. ¶ 77 (cleaned up).

16

transaction to an extent not shared with SportCo’s stakeholders or that the transaction was

undertaken in bad faith. The facts alleged in the Complaint, when viewed in the light most

favorable to the Trustee, do not give rise to the reasonable inference that the D&O Defendants

breached their duty of loyalty in approving the AcuSport Acquisition.

Therefore, the Motions to Dismiss Count 1 are denied as to the allegation of the breach of

the duty of care and granted as to the allegation of the breach of the duty of loyalty. The Trustee

is granted leave to amend the Complaint to replead Count 1.

c. Count 3: The Failed Out of Court Restructuring

Count 3 alleges that the D&O Defendants breached their fiduciary duties of care and

loyalty by failing to restructure SportCo’s debt out of court.

i. Count 3’s Duty of Care Allegations

Turning to the breach of the duty of care, it is not immediately clear what allegations in

the Complaint support this claim.93 The Trustee explained the duty of care claim regarding the

Failed Out of Court Restructuring at the Hearing:

93 At the Hearing, the Court requested that the Trustee clarify what allegations in the Complaint establish gross

negligence, as to the duty of care allegations, and self-interestedness, as to the duty of loyalty allegations. Hr’g Tr.

64:25, 65:1–4, 7–9. The Trustee responded that paragraphs 151 through 153 and 166 to 170 of the Complaint

establish gross negligence, and paragraphs 166 through 168 establish self-interestedness. Hr’g Tr. 76:8–10, 12–13.

The Trustee also indicated that paragraphs 45, 53 through 60, 61 through 74, 76 through 80, 86 through 96, and 90

through 93 are “mixed allegations.” Hr’g Tr. 76:12–16. The Court considered each of the Trustee’s responses, but

the responses ultimately did not change the Court’s ruling. Paragraphs 151 through 153 and 166 through 170 are

essentially recitations of the elements of the breach of the duty of care loosely placed in the context of the facts of

this case, or conclusory statements, rather than allegations of facts that would show gross negligence or the breach

of the duty of care. Paragraphs 166 through 168, as allegations of self-interestedness, also fail as threadbare

conclusory statements and recitations of the elements of the breach of the duty of loyalty in the context of the facts

of this case. Paragraph 45 of the Complaint is irrelevant to either claim because the use of the 2012 and 2013 loans

is “not the subject of the claims raised” in the Complaint. Compl. ¶ 41 n.2. Paragraphs 53 through 60 contain

allegations relating to the Johnson Compensation and do not relate to the AcuSport Acquisition or the Failed Out of

Court Restructuring. Paragraphs 61 through 74 contain allegations relating to the Travel Expenses and not the

AcuSport Acquisition or the Failed Out of Court Restructuring. Paragraphs 76 through 80 and 86 through 96

contain a mix of allegations relating to the AcuSport Acquisition and conclusory statements but, for the reasons

explained herein, the allegations are insufficient to support a claim of breach of the duties of care or loyalty. The

17

Our duty of care claims arising from [the Failed Out of Court

Restructuring] allege that [the D&O Defendants] failed to take any

action in the face of insolvency. Now, there’s an argument that

they were taking action, but in reality, they only wanted to take

actions that benefited themselves.

So, specifically, in a case with SportCo’s impending default on the

2012 loan and the 2013 loan, they rejected . . . [an] option to save

the company in an attempt to evade personal liability that they and

Wellspring faced and they plunged us into bankruptcy.94

The Trustee thus acknowledges that the Complaint describes actions the D&O Defendants took

to address SportCo’s alleged insolvency: The Complaint states that the D&O Defendants

engaged in discussions with the Debtors’ secured lenders regarding a potential restructuring

beginning in September 2018, including the exchange of the term sheet, months before the

Debtors’ bankruptcy filing in June 2019.95 The assertion that the D&O Defendants took actions

to respond to SportCo’s alleged insolvency because “they only wanted to take actions that

benefited themselves” would not on its face establish a breach of the fiduciary duty of care.96

Read as a whole, the Complaint does not allege facts that would support the conclusion

that the D&O Defendants failed to inform themselves adequately in rejecting the proposed out of

court restructuring or that such action amounted to gross negligence.97

ii. Count 3’s Duty of Loyalty Allegations

Count 3 also alleges that the D&O Defendants breached their fiduciary duty of loyalty by

failing to restructure SportCo’s debt out of court:

Court acknowledges that each count “repeats and re-alleges each of the allegations set forth above and below as if

full set forth [t]herein.” See, e.g., Compl. ¶¶ 147, 157.

94 Hr’g Tr. 71:9–19.

95 Compl. ¶¶ 128–129.

96 Hr’g Tr. 71:12–13.

97 See Trenwick, 906 A.2d at 205 (“If a plaintiff cannot state a claim that the directors of an insolvent corporation

acted disloyally or without due care in implementing a business strategy, it may not cure that deficiency simply by

alleging that the corporation became more insolvent as a result of the failed strategy.”).

18

The D&O Defendants refused, at the last minute, to execute any

debt restructuring agreement that did not include broad release and

indemnification language in favor of the D&O Defendants and

Wellspring Capital because they, and not the Debtors’ creditors,

stood to receive substantial value if the Debtors’ debt restructuring

agreement included such provisions.98

In doing so, the D&O Defendants, the Complaint alleges, “placed their own self-interests above

those of their fiduciaries—specifically, the Debtors—and permitted the Debtors to breach their

loan covenants instead of entering into a restructuring agreement that did not provide the D&O

Defendants or Wellspring Capital with releases and the benefit of indemnification.”99

In response, the D&O Defendants argue that under Delaware law it is not necessarily a

breach of a director’s fiduciary duty of care or loyalty to negotiate for release or indemnification

by a creditor due to fear of subsequent litigation.100 Under the circumstances, the D&O

Defendants assert, individual releases would not have been a “private interest” because the

benefit would have been shared with restructured SportCo: Individual releases may have saved

the post-restructuring company the expense of indemnifying the D&O Defendants in connection

with any litigation that would arise following a change of control in connection with a

restructuring.101

Ultimately, however, the extent to which individual releases might have benefitted

SportCo is a partly factual question because it involves the nature and extent of the D&O

Defendants’ entitlements to indemnification and other matters this Court cannot now resolve.

Drawing all inferences in favor of the Trustee, the Complaint contains sufficient allegations

98 Compl. ¶ 166.

99 Id. ¶ 168.

100 See Edgewater Growth Cap. Partners LP v. H.I.G. Cap., Inc., 68 A.3d 197, 231–32 (Del. Ch. 2013).

101 Hr’g Tr. 81:9–18.

19

reasonably to infer that the D&O Defendants breached their duty of loyalty regarding the Failed

Out of Court Restructuring.

Therefore, the Motions to Dismiss Count 3 are granted as to the breach of the duty of care

allegations and denied as to the breach of the duty of loyalty allegations. The Trustee is granted

leave to amend the Complaint to replead Count 3.

d. The Resignation of Defendants Dawson and Morningstar

Defendants Dawson and Morningstar seek to dismiss all counts against them involving

any action taken after their April 26, 2018 resignation from the Board pursuant to a written

stockholder consent (the “Stockholder Consent”).102 Both the AcuSport Acquisition and the

Failed Out of Court Restructuring occurred after that date:103 The AcuSport asset purchase

agreement was executed on May 3, 2018, a week after the Wellspring Directors’ departure from

the Board, and it was not until September 8, 2018, that Defendant Johnson informed SportCo’s

secured lenders of the potential breach of a covenant, catalyzing the Failed Out of Court

Restructuring.104

The Complaint does not allege that Defendants Dawson or Morningstar were on the

Board when either the AcuSport Acquisition or the Failed Out of Court Restructuring occurred:

Defendant William F. Dawson, Jr. (“Dawson”) is an individual

who at all relevant times was the Chief Executive Officer of

Wellspring Capital. Dawson also served as a director of SportCo

and its subsidiaries.105

Defendants John E. Morningstar (“Morningstar”) is an individual

who at all relevant times was a Managing Partner of Wellspring

102 Memorandum of Law in Support of the Wellspring Defendants’ Motion to Dismiss the Complaint 11 [D.I. 19].

103 The Bermuda Trip, part of the Corporate Waste Count, also took place following the departure of Defendants

Dawson and Morningstar from the Board. As explained below, the Corporate Waste Count is dismissed as against

all Defendants. See infra pp. 33–34.

104 Compl. ¶ 126.

105 Id. ¶ 29 (emphasis added).

20

Capital. Morningstar also served as a director of SportCo and its

subsidiaries.106

The Complaint alleges that Defendants Dawson and Morningstar were officers of Wellspring

Capital for “all relevant times” but does not make this allegation as to their positions on the

Board.107

Defendants Dawson and Morningstar state that the Trustee possessed the Stockholder

Consent—which establishes the departure of Defendants Dawson and Morningstar from the

Board—since 2019.108 The Complaint was filed on April 2, 2020. The Trustee does not deny

that the Trust had possession of the Stockholder Consent or dispute the underlying assertion that

Defendants Dawson and Morningstar departed the Board on April 26, 2018.109 But the Trustee

argues that it would be improper for the Court to consider the Stockholder Consent on a motion

to dismiss because it is not integral to or relied on in the Complaint.110 Furthermore, the Trustee

argues that he should have the opportunity to conduct discovery on the circumstances

surrounding the departure of Defendants Dawson and Morningstar from the Board.111

“In deciding a motion to dismiss, courts generally only consider the allegations contained

in the complaint, exhibits attached thereto, and matters of public record.”112 However, the Court

may consider documents “‘integral to or explicitly relied upon in the complaint’ . . . ‘without

converting the motion to dismiss into one for summary judgment.’”113 Moreover, “a court may

106 Id. ¶ 30 (emphasis added).

107 Id. ¶¶ 29–30.

108 Hr’g Tr. 37:2–9.

109 Id. 51:9–25.

110 Id. 51:9–18.

111 Id. 51:14–18.

112 Miller v. Bradley (In re W.J. Bradley Mortg. Cap., LLC), 598 B.R. 150, 164 (Bankr. D. Del. 2019).

113 Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014) (quoting In re Burlington Coat Factory Sec. Litig., 114 F.3d

1410, 1426 (3d Cir. 1997)). Furthermore, “what is critical is whether the claims in the complaint are ‘based’ on an

extrinsic document and not merely whether the extrinsic document was explicitly cited.” Id.

21

consider an undisputedly authentic document that a defendant attaches as an exhibit to a motion

to dismiss if the plaintiff’s claims are based on the document.”114 “The rationale underlying this

exception is that the primary problem raised by looking to documents outside the complaint—

lack of notice to the plaintiff—is dissipated ‘where the plaintiff has actual notice . . . and has

relied upon these documents in framing the complaint.’”115 “What the rule seeks to prevent is

the situation in which a plaintiff is able to maintain a claim of fraud by extracting an isolated

statement from a document and placing it in the complaint, even though if the statement were

examined in the full context of the document, it would be clear that the statement was not

fraudulent.”116

The Complaint and the Stockholder Consent are consistent: The Trustee does not allege

that Defendants Dawson and Morningstar were directors of SportCo at “all relevant times,”

despite making that specific and distinct allegation for Defendants Dawson and Morningstar as

officers of Wellspring Capital. Although the Trustee argues he has not had the opportunity to

conduct discovery regarding the circumstances of the departure of Defendants Dawson and

Morningstar, the Trustee has not made any allegations in the Complaint concerning their

departure. The Stockholder Consent notwithstanding, the Complaint does not plead that

Defendants Dawson and Morningstar were on the Board when the AcuSport Acquisition was

approved or the Failed Out of Court Restructuring took place.

“Under established Delaware Law, a breach of fiduciary duty claim must be based on an

actual, existing fiduciary relationship between the plaintiff and the defendants at the time of the

114 Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d 1192, 1196 (3d Cir. 1993).

115 Schmidt, 770 F.3d at 249 (quoting Burlington Coat Factory, 114 F.3d at 1426).

116 Burlington Coat Factory, 114 F.3d at 1426.

22

alleged breach.”117 In general, a former director owes no fiduciary duties to the corporation she

previously served.118 Exceptions to this rule have been recognized where, for example, a

director submitted fraudulent invoices to a corporation and then, after being removed from the

board, attempted to intimidate the remaining directors into paying the invoices through

harassment,119 and where a director used information obtained during the pendency of the

fiduciary relationship to harm the company following the director’s departure from the

company’s board.120

Here, the Trustee seeks to hold Defendants Dawson and Morningstar liable for an action

the Debtors took following their departure from the Board. The Complaint does not adequately

allege that Defendants Dawson and Morningstar were on the Board at the time the asset purchase

agreement was executed, and thus there are not adequate allegations to infer that Defendants

Dawson and Morningstar approved the AcuSport Acquisition. The Complaint does not allege

that Defendants Dawson and Morningstar continued to exercise control over the Board following

their departure or used information gained during their tenure to influence the Board’s decision

to approve the AcuSport Acquisition. The Complaint, furthermore, does not allege facts that

would suggest any other exception to the rule that former directors are not fiduciaries should

apply.

117 Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1169 (Del. Ch. 2002) (cleaned up).

118 In re Walt Disney Derivative Litig., 907 A.2d at 758 (“Just as Delaware law does not require directors-to-be to

comply with their fiduciary duties, former directors owe no fiduciary duties . . . .”).

119 See BelCom, Inc. v. Robb, No. 14663, 1998 WL 229527, at *3, 1998 Del. Ch. LEXIS 58, at *9 (Del. Ch. Apr. 28,

1998).

120 See Neurvana Med., LLC v. Balt USA, LLC, No. 2019-0034-KSJM, 2020 WL 949917, at *12–13, 2020 Del. Ch.

LEXIS 77, at *24–25 (Del. Ch. Feb. 27, 2020) (recognizing exception where former director used information the

director had obtained during the fiduciary relationship to harm the company following his departure).

23

Therefore, the Wellspring Defendants’ Motion to Dismiss Counts 1 and 3 is granted as to

Defendants Dawson and Morningstar. The Trustee is granted leave to amend the Complaint to

replead Counts 1 and 3.121

e. Counts 2 and 4: Allegations that Wellspring Capital Aided and Abetted the D&O

Defendants in their Breach of Fiduciary Duties

In Counts 2 and 4, the Trustee asserts claims of aiding and abetting breach of fiduciary

duties against Wellspring Capital for participating in the AcuSport Acquisition and the Failed

Out of Court Restructuring.

A valid claim for aiding and abetting a breach of fiduciary duty requires the plaintiff to

show that (1) a fiduciary relationship existed; (2) the fiduciary breached its duty; (3) a non-

fiduciary defendant knowingly participated in a breach; and (4) damages to the plaintiff resulted

from the concerted actions of the fiduciary and the nonfiduciary.122 The knowledge of a director

or officer may be imputed to a corporation she serves.123

As explained above, the Trustee has successfully pleaded claims for breach of fiduciary

duties against certain of the D&O Defendants: Count 1 is not dismissed regarding Defendants

Johnson’s and Carles’s alleged breaches of the duty of care as to the AcuSport Acquisition, and

Count 3 is not dismissed regarding Defendant Johnson’s and Carles’s alleged breaches of the

duty of loyalty as to the Failed Out of Court Restructuring. Therefore, the first and second

prongs are satisfied.

It is not immediately clear whether the Trustee has satisfied the third or fourth prongs.

The Complaint does not allege facts that would show knowing participation, damage resulting

121 The Trustee is granted leave to amend Counts 1 and 3 also for the reasons explained above. See supra pp. 17, 20.

122 Fedders, 405 B.R. at 543–44.

123 See Carlson v. Hallinan, 925 A.2d 506, 542 & n.245 (Del. Ch. 2006).

24

from concerted action, or any element of aiding and abetting. The Complaint states, concerning

the Failed Out of Court Restructuring, that “Wellspring Capital (through Defendant Carles)

continued to negotiate the restructuring of Debtors’ [second lien] debt.”124 The Complaint also

states that it was “at the behest of Wellspring Capital and the D&O Defendants” that SportCo

demanded individual releases for the D&O Defendants and Wellspring Capital in connection

with the Failed Out of Court Restructuring.125 But beyond these conclusory statements, the

Complaint does not allege facts that would show Wellspring Capital acted in concert with either

Defendant Carles or Johnson. The Trustee clarified at the Hearing the basis of the aiding and

abetting counts:

The individuals who are running this company are Wellspring

people and they’re pitching asset acquisition, they’re pitching

deals. Obviously, Wellspring is intimately involved with what’s

going on here. How could it not have aided and abetted when its

managing partners and CEO are involved in the transaction, I don’t

understand.126

In response, the Wellspring Defendants argue that the Trustee has not sufficiently pleaded aiding

and abetting because the Complaint fails to differentiate among the companies comprising

Wellspring Capital—four separate and distinct entities.127 Moreover, the Wellspring Defendants

argue that the Complaint fails to allege any fact about knowing participation.128

The Wellspring Defendants are correct. Sufficient facts have not been pleaded for the

Court to ask itself, “How could Wellspring Capital not have aided and abetted?” While

Defendant Carles’s knowledge can be imputed to any Wellspring Capital entity for which he was

124 Compl. ¶ 133.

125 Compl. ¶¶ 19, 137.

126 Hr’g Tr. 72:11–17 (cleaned up).

127 Id. 45:21–25; 46:1–11.

128 Id. 45:16–20.

25

a fiduciary when the alleged breach occurred, the Trustee has not alleged how any Wellspring

Capital entity acted in concert with Defendant Carles to effectuate his alleged breach of fiduciary

duties.129 No fact has been pleaded that would indicate any Wellspring Capital entity acted in

concert with Defendant Johnson. Furthermore, the Trustee has not sufficiently differentiated

among the Wellspring Capital entities in making substantive allegations. Viewing these facts in

the light most favorable to the Trustee, the Complaint does not give rise to the reasonable

inference that Wellspring Capital had knowledge of or participated in any breach of fiduciary

duty.

Therefore, the Wellspring Defendants’ Motion to Dismiss Counts 2 and 4 is granted. The

Trustee is granted leave to amend the Complaint to replead Counts 2 and 4.

2. The Fraudulent Transfer Counts

The Trustee asserts claims for both actual and constructive fraudulent transfer under state

law and the Bankruptcy Code. As explained above, Delaware’s fraudulent transfer statute

governs the state law claims.130 Because Delaware’s Uniform Fraudulent Transfer Act mirrors

Bankruptcy Code section 548(a), the Court considers these claims together.131

a. Actual and Constructive Fraudulent Transfers

For an actual fraudulent transfer claim to survive a motion to dismiss, the plaintiff must

allege facts that, taken as true, establish direct or circumstantial evidence of intent to defraud.

129 Nor has the Trustee alleged which Wellspring Capital entity or entities Defendant Carles served as Managing

Partner. Compl. ¶ 28.

130 See supra p. 10.

131 See PHP Liquidating, LLC, 128 F. App’x at 847 (“We need not discuss the [actual-intent fraudulent transfer]

provisions of the Delaware Fraudulent Transfer Act . . . because they are substantially the same as the relevant parts

of the Bankruptcy Code.”). See also Crystallex Int’l Corp. v. Petróleos de Venezuela, S.A., 879 F.3d 79, 86 (3d Cir.

2018).

26

Direct evidence is seldom available, and circumstantial evidence of intent is pleaded by alleging

one or more “badges of fraud.”132 Badges of fraud include the following:

(i) the relationship between the debtor and the transferee;

(ii) consideration for the conveyance; (iii) insolvency or

indebtedness of the debtors; (iv) how much of the debtor’s estate

was transferred; (v) reservation of benefits; control or dominion by

the debtor over the property transferred; and (vi) secrecy or

concealment of the transaction.133

When analyzing whether badges of fraud have been sufficiently pleaded, the Court looks to the

totality of the circumstances.134 Conclusory statements that badges of fraud are present are

insufficient; the plaintiff must allege facts demonstrating that badges of fraud exist.135

A constructive fraudulent transfer claim does not require allegations of intent to defraud.

For a constructive fraudulent transfer claim to survive a motion to dismiss, the plaintiff must

allege facts showing that the debtor received less than reasonably equivalent value in exchange

for the transfer and the debtor was insolvent at the time of the transfer.136 A constructive

fraudulent transfer claim may be dismissed where a plaintiff does not plead facts regarding the

value of what the debtor received in exchange137 or does not make factual allegations showing

that a debtor was insolvent at the time of the exchange or rendered insolvent by it.138

132 In re Bernier, 282 B.R. 773, 781 (Bank. D. Del. 2002).

133 In re Direct Response Media, Inc., 466 B.R. 626, 653 (Bankr. D. Del. 2012) (citing In re Hechinger Inv. Co., of

Del., 327 B.R. 537, 551 (D. Del. 2005), aff’d on other grounds, 278 F. App’x 125 (3d Cir. 2008)).

134 In re Syntax-Brillian Corp., No. 08-11407 (BLS), 2016 WL 1165634, at *5, 2016 Bankr. LEXIS 988, at * 14

(Bankr. D. Del. Feb. 8, 2016) (“While the badges of fraud provide a basic rubric, courts examine the totality of the

circumstances to determine whether fraudulent intent exists.”).

135 See Zazzali v. Hirschler Fleischer, P.C., 482 B.R. 495, 520 (Bankr. D. Del. 2012).

136 See Burtch v. Harris (In re Harris), No. 02-10938 (MFW), 2003 WL 23096966, at *4, 2003 Bankr. LEXIS 1757,

at *10 (Bankr. D. Del. Dec. 30, 2003).

137 See Global Link Liquidating Trust v. Avantel, S.A. (In re Global Link Telecom Corp.), 327 B.R. 711, 718 (Bankr.

D. Del. 2005).

138 See Huston, 443 B.R. at 39.

27

b. Counts 5 Through 8: The Johnson Crosman Bonus

Counts 5 through 8 allege that the Johnson Crosman Bonus was an actual or constructive

fraudulent transfer under state and bankruptcy law.139 Each count for actual fraudulent transfer

makes conclusory statements that the following badges of fraud were present: lack of

consideration;140 close relationship with the transferee;141 and the Debtors insolvency at the time

of each transfer or that the Debtors were rendered insolvent thereby.142

i. Count 5: State Law Actual Fraudulent Transfer

Beyond conclusory allegations that badges of fraud were present, the Complaint goes on

to allege facts that would only show lack of consideration as to the Johnson Crosman Bonus.

According to the Complaint, SportCo’s CFO indicated in an email that the Johnson Crosman

Bonus was paid on account of Defendant Johnson’s “work on Crosman—not USC” showing a

lack of consideration.143 Crosman was another company owned by Wellspring Capital, but the

Complaint alleges Crosman was not under the same “ownership umbrella as SportCo or any of

the other Debtors.”144

The other alleged badges of fraud, however, do not have adequate support in the

Complaint. Defendant Johnson’s relationship to the Debtors was an employment relationship

entitling him to compensation.145 The facts do not show that the transfers, relatively small sums

compared to the Debtors aggregate liabilities at the time, rendered the Debtors insolvent.

Moreover, the Johnson Crosman Bonus was paid on or around December 2016, and the Debtors

139 Compl. ¶¶ 179, 191, 202, 215.

140 Id. ¶¶ 183, 192, 206, 216, 231, 240, 254, 264, 279, 288, 302, 312.

141 Id. ¶¶ 186, 197, 209, 221, 234, 245, 257, 269, 282, 293, 305, 317.

142 Id. ¶¶ 184–85, 195–96, 207–08, 219–20, 232–33, 243–44, 255–56, 267–68, 280–81, 291–92, 303–04, 315–16.

143 Id. ¶ 56.

144 Id. ¶ 50.

145 Id. ¶ 31.

28

did not notify their secured lenders of an imminent default on their interest payment until “early

2018;” SportCo did not breach a covenant until September 8, 2018, nearly two years later.146

The Trustee thus has pleaded one viable badge of fraud: lack of consideration. While lack of

consideration may suggest that the payment of the Johnson Crosman Bonus was wrongful, the

facts pleaded, considered in their totality, are insufficient as circumstantial evidence of intent to

defraud.

Therefore, the Motions to Dismiss Count 5 are granted. The Trustee is granted leave to

amend the Complaint to replead Count 5.

ii. Count 6: State Law and Constructive Fraudulent Transfer

The Trustee has sufficiently pleaded that there was no consideration for the Johnson

Crosman Bonus because SportCo paid the bonus to Defendant Johnson for work at another

Wellspring Capital company, Crosman. But, as stated above, the Trustee has not demonstrated

that the Johnson Crosman Bonus rendered the Debtors insolvent because it was a relatively small

payment compared to the Debtors’ aggregate liabilities, and the Debtors continued to operate for

nearly two years afterward before breaching a covenant. The Court, however, may accept the

Trustee’s allegation that the Debtors were insolvent at the time of the Johnson Crosman Bonus

because a close analysis of insolvency is not necessary at the motion to dismiss stage.147

Therefore, the Motions to Dismiss Count 6 are denied.

146 Id. ¶¶ 56, 126.

147 Mott, 445 B.R. at 349 (“[I]nsolvency is generally a factual determination not appropriate for resolution in a

motion to dismiss.”).

29

iii. Counts 7 and 8: Bankruptcy Code Constructive and Actual Fraudulent

Transfer

Counts 7 and 8 are time barred. Under section 548(a)(1) of the Bankruptcy Code, a

bankruptcy trustee may recover certain transfers “made or incurred on or within 2 years before

the date of the filing of the petition.” The Complaint alleges that the Johnson Crosman Bonus

was paid on or around December 2016. The petition date was June 10, 2019, more than two

years after the alleged transfer.

Therefore, the Motions to Dismiss Counts 7 and 8 are granted.

c. Counts 9 Through 16: The Johnson Compensation

Counts 9 through 16 allege that the Johnson Salary Increase and the Johnson Quarterly

Bonuses were actual or constructive fraudulent transfers under state or bankruptcy law.148

i. Counts 9, 11, 13 and 15: Actual Fraudulent Transfers

Looking past the Complaint’s conclusory statements that badges of fraud are present, the

Court reviews the Complaint for facts that would establish any badge of fraud associated with

the Johnson Salary Increase and the Johnson Quarterly Bonuses. The relationship between

Defendant Johnson and SportCo was an employment relationship, meaning the consideration for

the transfers was plausibly Defendant Johnson’s labor.149 The Johnson Salary Increase and

Johnson Quarterly Bonuses were agreed to on December 12, 2017,150 and the Debtors notified

their secured lenders of an imminent default on an interest payment in “early 2018.”151 The

transfers were insubstantial compared to the Debtors’ other liabilities,152 and the Complaint does

148 Compl. ¶¶ 227, 239, 250, 263, 275, 287, 298, 311.

149 See id. ¶ 31.

150 Compl. ¶¶ 91–92.

151 Id. ¶ 76.

152 See id. ¶ 3 (“Wellspring Capital and the D&O Defendants saddled SportCo and the other Debtors with hundreds

of millions of debt in 2012 and 2013.”).

30

not allege that the transfers were unusual for SportCo or SportCo’s industry. Further, the

Complaint does not allege that the Debtors retained control over the funds that were transferred

to Defendant Johnson or attempted to conceal the payments. These allegations, considered in the

totality of the circumstances, do not constitute sufficient badges of fraud to survive a motion to

dismiss.

Therefore, the Motions to Dismiss Counts 9, 11, 13 and 15 are granted. The Trustee is

granted leave to amend the Complaint to replead these counts.

ii. Counts 10, 12, 14 and 16: Constructive Fraudulent Transfers

While the Trustee has established that the Johnson Salary Increase and the Johnson

Quarterly Bonuses were made shortly before the Debtors notified their secured lenders of the

Debtors’ inability to pay interest on the 2012 and 2013 loans, importantly the Trustee has

pleaded no fact showing that the Debtors received less than reasonably equivalent value in

exchange for the transfers. The Trustee has not alleged facts demonstrating that the Johnson

Salary Increase and the Johnson Quarterly Bonuses were anything other than compensation for

Defendant Johnson’s services to the Debtors as president and CEO.

Instead of addressing the value of Defendant Johnson’s services, the Trustee asks the

Court to infer, without adequate factual allegations, that these transfers lacked consideration

given the contemporaneous failure of the AcuSport Acquisition.153 But often the services of key

officers are most needed in a company’s most challenging times. The Johnson Quarterly

Bonuses, indeed, were explicitly retentive.154 A plausible reading of the facts as alleged in the

Complaint is that the Debtors increased Defendant Johnson’s total compensation in an exercise

153 Hr’g Tr. 55:11–19.

154 Compl. ¶ 92.

31

of their sound business judgment, and Defendant Johnson’s continued services to the Debtors

were consideration for the compensation. No fact has been alleged to support an alternative

reading.

Therefore, the Motions to Dismiss Counts 10, 12, 14 and 16 are granted. The Trustee is

granted leave to amend to replead these counts.

3. The Corporate Waste Count

In Count 17, the Trustee alleges that the D&O Defendants’ travel expenses were

corporate waste.

To support a claim for corporate waste, it must be shown “that the transaction in question

either served no purpose or was so completely bereft of consideration such that the ‘transfer is in

effect a gift.’”155 “To recover on a claim of corporate waste, the plaintiffs must shoulder the

burden of proving that the exchange was ‘so one sided that no business person of ordinary, sound

judgment could conclude that the corporation has received adequate consideration.’”156 “The

standard for adequately pleading corporate waste is high and rarely satisfied.”157 “A corporate

waste claim must fail if the corporation received any benefit from the challenged transaction or if

there is a good faith judgment that the transaction is worthwhile under the circumstances.”158 “In

evaluating a waste claim, courts look to the exchange itself. The exchange must be irrational.”159

155 Criden v. Steinberg, C.A. No. 17082, 2000 WL 354390, at *3, 2000 Del. Ch. LEXIS 50, at *9 (Del. Ch. Mar. 23,

2000) (quoting Lewis v. Vogelstein, 699 A.2d 327, 335 (Del. Ch. 1997)).

156 Eisner, 906 A.2d 27, 74 (Del. 2006) (quoting Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000)).

157 Higher Educ. Mgmt. Grp., Inc. v. Mathews, No. 9110-VCP, 2014 WL 5573325, at *11, 2014 Del. Ch. LEXIS

224, at *39 (Del. Ch. Nov. 3, 2014).

158 Official Comm. of Unsecured Creditors of TEU Holdings v. Kemeny (In re TEU Holdings, Inc.), 287 B.R. 26, 34

(Bankr. D. Del. 2002).

159 Continuing Creditors’ Comm. of Star Telecommuc’ns, Inc. v. Edgecomb, 385 F. Supp. 2d 449, 465 (D. Del.

2004).

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The Trustee alleges in Count 17 that the Defendants wasted the Debtors’ assets by

forcing the Debtors to pay for the Master’s Trip, the Argentina Trip, the Ice Hotel Trip, the

Bermuda Trip and potentially other trips. The Complaint alleges that the trips were “unrelated to

any business purpose” and that SportCo received “zero consideration whatsoever in return” for

the trips.160 This is essentially a recitation of the elements of a claim for corporate waste.

In support of the allegation, the Complaint states that employees or directors of SportCo

attended each of the trips, along with third parties, and that at least one of the trips was

“purportedly to reward certain of the Debtors’ employees and others for their efforts . . . .”161

The Complaint does not state that the trips were unusual considering SportCo’s industry or

historic practices. The Complaint fails to plead facts demonstrating that the Defendants engaged

in transactions in which no reasonable person could conclude made sense for SportCo, a

marketer and distributor of a broad line of products and accessories for hunting and shooting

sports, marine, camping, archery and other outdoor activities. The Court concludes that the

factual allegations, considered in the light most favorable to the Trustee, do not demonstrate

corporate waste.162

Therefore, the Motions to Dismiss Count 17 are granted. The Trustee is granted leave to

amend the Complaint to replead Count 17.

160 Compl. ¶¶ 5, 324, 327, 330, 333.

161 Id. ¶ 121.

162 Additionally, the doctrine of corporate waste has not been applied to a non-director controlling shareholder such

as Wellspring Capital. See Guiliano, 574 B.R. at 475–76 (“[T]he Trustee has not cited to (nor did I uncover) any

cases in which the Delaware courts have determined that officers or controlling shareholders could be liable for

corporate waste. In the absence of precedent from the Delaware courts, I will dismiss [the count].”). See also Sama

v. Mullaney (In re Wonderwork, Inc.), 611 B.R. 169, 207–08 (Bankr. S.D.N.Y. 2020) (“Initially, a claim for waste

will not lie against an officer as only directors may be liable for waste under Delaware law.”) (citing Guiliano, 574

B.R. at 475–76).

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Conclusion

For the reasons set forth above, the Motions to Dismiss will be granted in part and denied

in part, as set forth in the accompanying order.

Dated: September 29, 2021 □□□ i

ae Stickles

nited States Bankruptcy Judge

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