Buchwald Capital Advisors LLC v. Schoen

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

In re: ) Chapter 11

)

OPP LIQUIDATING COMPANY, INC. ) Case No. 19-10729 (MFW)

(f/k/a Orchids Paper Products )

Company), et al., ) Jointly Administered

)

Debtors. )

)

BUCHWALD CAPITAL ADVISORS LLC,)

As Liquidating Trustee of the )

Orchids Paper Products )

Liquidating Trust, )

) Adv. Proc. No. 21-50431 (MFW)

Plaintiff , )

s

) Rel. Docs. 17, 18, 19, 21,

v. ) 26, 27, 29 & 30

)

JEFFREY S. SCHOEN, et al., )

)

Defendants. )

______________________________)

MEMORANDUM OPINION1

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, and avoidance of fraudulent

transfers under federal and state law. For the reasons stated

below, the Motions to Dismiss will be granted in part and denied

in part.

1 The Court is not required to state findings of fact or

conclusions of law pursuant to Rule 7052 of the Federal Rules of

Bankruptcy Procedure. Instead, the facts recited are those

averred in the Amended Complaint, which must be accepted as true

for the purposes of these Motions to Dismiss. Ashcroft v. Iqbal,

556 U.S. 662, 678 (2009).

I. PROCEDURAL BACKGROUND

OPP Liquidating Company, Inc. (the “Debtor”) was formed in

1998. The Debtor was a public company that operated as a low-

cost, value manufacturer of tissue products serving “extreme

value” retail establishments such as Dollar General and Family

Dollar.2 After expansion efforts failed and its financial

condition deteriorated, the Debtor, and its affiliates, filed for

relief under chapter 11 of the Bankruptcy Code on April 1, 2019

(the “Petition Date”). On February 24, 2020, the Court confirmed

the Debtors’ Combined Disclosure Statement and Chapter 11 Plan

(the “Plan”).3 Under the Plan, a creditors’ Trust was

established, to which was assigned various causes of action

belonging to the estate, and Buchwald Capital Advisors LLC, was

named as Liquidating Trustee (the “Liquidating Trustee”).

On May 4, 2021, the Liquidating Trustee commenced an

adversary proceeding against the Debtor’s former Chief Financial

Officers — Keith Schroeder, Rodney D. Gloss, and Mindy Bartel

(collectively, the “Former CFO Defendants”), the Debtor’s former

Chief Executive Officer, Jeffrey S. Schoen (“Schoen”),4 and

2 Adv. D.I. 17 ¶ 22. References to the docket in this

adversary proceeding are to “Adv. D.I. #” while references to the

docket in the main case are to “D.I. #.”

3 D.I. 714.

4 From 2007 to the Petition Date, Schoen was a member of the

Debtor’s BOD; beginning in 2013, Schoen was CEO. At all times

relevant to the Amended Complaint, Schoen and the CFO Defendants

were officers of the Debtor (the “Officer Defendants”).

2

members of the Debtor’s Board of Directors (“BOD”) — Steven R.

Berlin, John C. Guttilla, Douglas E. Hailey, Elaine MacDonald,

and Mark Ravich (the “BOD Defendants”).

On August 13, 2021, the CEO and BOD Defendants and,

separately, the Former CFO Defendants filed the Motions to

Dismiss the Liquidating Trustee’s First Amended Complaint (the

“Amended Complaint”) in its entirety for failure to state a claim

under Rule 12(b)(6).5 On September 24, 2021, the Liquidating

Trustee filed responses to the Motions to Dismiss.6 The

Defendants filed replies on October 15, 2021.7 The Motions are

ripe for decision.

II. FACTUAL ALLEGATIONS

The Liquidating Trustee’s Amended Complaint asserts claims

for breach of fiduciary duties against Schoen and the former CFO

Defendants (Count I), breach of fiduciary duties against the BOD

Defendants (Count II), aiding and abetting the breach of

fiduciary duties against the BOD Defendants (Count III), and

avoidance of fraudulent transfers under federal and state law

against all Defendants (Count IV). Those claims are premised on

pre-petition activities related to the Debtor’s expansion plans

5 Adv. D.I. 18, 19.

6 Id. 26, 27.

7 Id. 29, 30.

3

on the East and West Coasts, the Debtor’s internal operations,

and the Debtor’s payment of compensation, stipends, and other

benefits to the Defendants.

In essence, the Amended Complaint contends that Schoen

pushed the BOD to approve a simultaneous, ill-advised, and poorly

implemented expansion on the East and West Coasts. It alleges

that the BOD Defendants did not adequately inform themselves of

the advisability of those plans and allowed Schoen free rein

instead of fulfilling their fiduciary role. As a result, the

Debtor exceeded the expansion budget by more than $50 million,

was unable to operate any of its three plants efficiently,

incurred significant operational losses, violated the covenants

of its loans, and ultimately was forced to file bankruptcy. In

addition, the Debtor experienced substantial turnover of its CFO,

who failed to maintain accurate records or to restate financial

statements when it became apparent they were inaccurate.

Notwithstanding those problems and the breach of their fiduciary

duties by the Defendants, the Amended Complaint alleges that the

Debtor continued to make substantial payments to the Defendants,

for which it did not receive equivalent value.

III. JURISDICTION

The Court has subject matter jurisdiction over this

adversary proceeding.8 This action involves both core and non-

8 28 U.S.C. § 1334(b).

core claims.9 The fraudulent transfer claims are core claims, as

they rely on sections 544 and 548 of the Bankruptcy Code.10 The

fiduciary duty claims are non-core “related to” claims, as they

are claims arising under state law, not arising “in” or “under”

the Bankruptcy Code. The Defendants have consented to entry of a

final order or judgment by the Court on the Motions to Dismiss.11

IV. DISCUSSION

A. Standard of Review

1. Rule 12(b)(6)12

Rule 12(b)(6) provides for dismissal for “failure to state a

claim upon which relief can be granted.”13 Rule 12(b)(6) is

9 Id. § 157(b)(2).

10 Id. at § 157(b)(2)(H); 11 U.S.C. §§ 544(b) & 548. The

Liquidating Trustee invokes its power under section 544 to assert

claims under the Uniform Fraudulent Transfer Act (the “UFTA”).

Under section 157(b)(2)(H), these claims are core, as they seek

to “determine, avoid, or recover fraudulent conveyances.” See

also Maxus Liquidating Trust v. YPF S.A. (In re Maxus Energy

Corp.), 597 B.R. 235, 243 (Bankr. D. Del. 2019) (holding that

section 544 claims are core because “though state law supplies

the substance of the claim, the power to bring the claim in the

first place arises under federal law.”).

11 Adv. D.I. 13, 18, 20.

12 Rule 12(b)(6) of the Federal Rules of Civil Procedure is

incorporated by Rule 7012(b) of the Federal Rules of Bankruptcy

Procedure. Similarly, Rules 8 and 9 of the Federal Rules of

Civil Procedure are incorporated by the Federal Rules of

Bankruptcy Procedure. Therefore, citations herein are to the

Federal Rules of Civil Procedure.

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

5

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.”14 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.”15 Two “working principles” underlie 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.16

Under this standard, a complaint must nudge claims “across the

line from conceivable to plausible.”17 The movant carries the

burden of showing that dismissal is appropriate.18

Interpreting this pleading standard, the Third Circuit

instructs courts to follow a three-part analysis. “First, the

14 Id. 8(a)(2).

15 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

16 Iqbal, 556 U.S. at 663–64 (citation omitted).

17 Twombly, 550 U.S. at 570.

18 Paul v. Intel Corp. (In re Intel Corp. Microprocessor

Antitrust Litig.), 496 F. Supp. 2d 404, 408 (D. Del. 2007).

6

court must ‘tak[e] note of the elements a plaintiff must plead to

state a claim.’”'® 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.*° 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.*' 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.’

2. Rule 9(b)

In addition, there is a heightened pleading standard for

allegations of fraud, including actions to avoid fraudulent

transfers.** Rule 9(b) provides:

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.”

18 Santiago v. Warminster Twp., 629 F.3d 121, 130 (3d Cir.

2010) (quoting Igbal, 556 U.S. at 675).

20 Santiago, 629 F.3d at 130. See also Fowler v. UPMC

Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009) (citing Igbal, 556

U.S. at 679).

21 Santiago, 629 F.3d at 130.

ae Igbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).

28 Pa. Emp. Benefit Tr. Fund v. Zeneca, Inc., 710 F. Supp. 2d

458, 478 (D. Del. 2010).

Fed. R. Civ. P. 9(b).

Rule 9(b) requires that plaintiffs plead the “who, what, where,

when, how, and why” of a fraudulent transfer claim.*? The Third

Circuit has stated that the purpose of Rule 9(b) 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.”*°

Rule 9’s “requirements .. . are relaxed in the bankruptcy

context, particularly in cases . . . in which a trustee has been

appointed” because generally the trustee is an outsider without

access to the facts necessary to articulate the details of a

fraud.?’

B. Breach of Fiduciary Duty Counts

The Defendants seek to dismiss Counts I and II of the Amended

Complaint which allege that the Defendants breached their

fiduciary duties of care and loyalty. The Defendants argue that

the Liquidating Trustee fails to state a claim for breach of

See Gerbitz v. ING Bank, FSB, 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.”).

26 Seville Indus., 742 F.2d at 791.

Zazzali v. Mott (In re DBSI, Inc.), 445 B.R. 344, 347-48

(Bankr. D. Del. 2011). “Greater liberality is afforded in

pleading fraud in the bankruptcy setting because it is often a

trustee, a third party outsider to the transaction, who must

plead fraud based on secondhand knowledge for the benefit of the

estate and its creditors.” Joseph v. Frank (in re Troll

Comme’ns, LLC), 385 B.R. 110, 124 (Bankr. D. Del. 2008) (citation

omitted).

fiduciary duty against them for multiple reasons.

1. Statute of Limitations

The Defendants initially contend that the fiduciary duty

claims asserted in the Amended Complaint are barred by the

applicable statute of limitations. Under Delaware law, claims for

breach of fiduciary duty are subject to a three-year statute of

limitations.28 The Defendants assert that the Liquidating

Trustee’s claims are premised on events that occurred before April

1, 2016, which is more than three years before the Amended

Complaint was filed. Even if the statute of limitations were

tolled by the filing of the bankruptcy case under section 108, the

Defendants contend that the claims are barred because the events

in question were more than three years before the Petition Date.29

The Liquidating Trustee contends, however, that the statute

of limitations has been tolled under Delaware law, which provides

three bases for tolling: (1) inherently unknowable injuries, (2)

28 10 Del. C. § 8106. See also Miller v. Bradley (In re W.J.

Bradley Mortg. Capital, LLC), 598 B.R. 150, 167 (Bankr. D. Del.

2019); Eugenis VI Venture Holdings, Ltd. v. Maplewood Holdings

LLC (In re AMC Investors, LLC), 524 B.R. 62, 80–81 (Bankr. D.

Del. 2015). The limitations period begins to run from the date

of the alleged harm. W.J. Bradley, 598 B.R. at 167. “Alleged

harm means ‘the moment [] the wrongful act [accrues] — not when

the harmful effects are felt — even if the plaintiff is unaware

of the wrong.’” Id. (quoting Carr v. New Enter. Assocs., Inc.,

No. CV 2017-0381-AGB, 2018 WL 1472336, at *8 (Del. Ch. Mar. 26,

2018) (citation omitted)).

29 Under the Bankruptcy Code, statutes of limitations that have

not expired by the petition date are automatically tolled until

the later of the end of such period or two years after the

petition date. 11 U.S.C. § 108(a).

9

equitable tolling, and (3) fraudulent concealment.30 Because the

Amended Complaint on its face asserts claims outside the statute

of limitations, the Liquidating Trustee bears the burden of

pleading facts to support the tolling exception.31 The Liquidating

Trustee relies principally on the third basis, asserting that the

Defendants fraudulently concealed the relevant facts.32

a. Schoen

The Liquidating Trustee argues that fraudulent concealment is

properly alleged in the Amended Complaint as to Schoen.

Specifically, the Amended Complaint alleges that, between 2014 and

2017, Schoen had a fiduciary duty to disclose information

regarding the full details and risks of the expansion plan (and

its disastrous implementation) to the BOD but failed to do so.

This, the Liquidating Trustee contends, constitutes fraudulent

30 W.J. Bradley, 598 B.R. at 168.

31 Winklevoss Capital Fund, LLC v. Shaw, No. CV 2018-0398-JRS,

2019 WL 994534, at *6 (Del. Ch. Mar. 1, 2019) (citations omitted)

(holding that if the complaint asserts a cause of action which on

its face accrued outside the statute of limitations, the

plaintiff has the burden to plead facts “leading to a reasonable

inference that one of the tolling doctrines adopted by Delaware

courts applies”).

32 Although it mentions all three bases, the Liquidating

Trustee does not make any specific arguments that the statute of

limitations is tolled because of inherently unknowable injuries

or equitable reasons. Therefore, the Court cannot conclude that

the Liquidating Trustee has met its burden of establishing that

the statute of limitations has been tolled on either of those

bases.

10

concealment sufficient to toll the statute of limitations.33

In their response, the Defendants present two arguments

against the Liquidating Trustee’s tolling argument.

i. Affirmative Act

First, the Defendants state that the Amended Complaint must

allege an affirmative act of concealment.34 The Defendants claim

that the only affirmative act of concealment alleged in the

Amended Complaint was that Schoen’s ultimate goal was to sell the

company.35 They contend that for the Liquidating Trustee to invoke

the fraudulent concealment tolling exception against Schoen, the

Court must plausibly infer from the allegations of the Amended

Complaint that: (1) Schoen had the goal of selling the company;

(2) Schoen intentionally misrepresented or concealed that goal;

and (3) Schoen’s goal was so material that his failure to disclose

33 End of the Road Trust ex rel. Fruehauf Trailer Corp. v.

Terex Corp. (In re Fruehauf Trailer Corp.), 250 B.R. 168, 186 (D.

Del. 2000) (holding that fraudulent concealment may be stated by

alleging a business fiduciary relationship between defendants and

plaintiffs, including a duty to disclose, which defendants

breached) (citation omitted).

34 See Bridgeport Holdings Inc. Liquidating Trust v. Boyer (In

re Bridgeport Holdings, Inc.), 388 B.R. 548, 563 (Bankr. D. Del.

2008) (“Under the doctrine of fraudulent concealment, the

plaintiff must prove, ‘an affirmative act of concealment by the

defendant — an “actual act of artifice” that prevents a plaintiff

from gaining knowledge of the facts or some misrepresentation

that is intended to put the plaintiff off the trail of

inquiry.’”) (quoting Fruehauf, 250 B.R. at 186).

35 Adv. D.I. 17 ¶¶ 28–33.

11

it constituted an “actual act of artifice.”36 The Defendants argue

that there is not a single allegation in the Amended Complaint

that suggests that in 2014 and 2015 Schoen had the goal of selling

the company. Therefore, they contend that there is no sufficient

allegation of an affirmative act of concealment.

In response, the Liquidating Trustee contends that the

Amended Complaint does allege that Schoen misrepresented the

reason for the recommended expansion. In addition, the

Liquidating Trustee notes that the Amended Complaint alleges that,

regardless of his goal, Schoen intentionally withheld from the BOD

material information necessary for its decision-making.37

The Court finds the allegations of the Amended Complaint

sufficient to meet the fraudulent concealment exception as to

Schoen. To properly invoke fraudulent concealment, the

Liquidating Trustee must show either “[1] the commission of

affirmative acts of misrepresentation or [2] failure to disclose

facts when there is duty to disclose.”38 “Under the second prong,

fraudulent concealment may be established absent any affirmative

act, by alleging a business fiduciary relationship between

36 Bridgeport, 388 B.R. at 563.

37 Adv. D.I. 17 ¶¶ 36-40, 43-46, 148, 152-53.

38 Fruehauf, 250 B.R. at 186 (quoting Litman v. Prudential-

Bache Prop., Inc., No. CIV.A. 12137, 1994 WL 30529, at *4 (Del.

Ch. Jan. 14, 1994)).

12

Defendants and Plaintiffs and a duty to disclose.”39 As the CEO,

Schoen had a fiduciary duty to disclose to the BOD relevant facts

necessary for its decision-making.40 The Court finds that the

Amended Complaint does allege that Schoen failed to disclose

specific material facts to the BOD in contravention of that duty.41

ii. Particularity

The Defendants also contend that the Liquidating Trustee

failed to plead fraudulent concealment with the requisite

particularity.42 The Defendants argue that the Amended Complaint

does not meet this standard because it does not plausibly support

an inference that Schoen intended to defraud the BOD by concealing

his goal of ultimately selling the company. The Defendants assert

that there is no allegation that Schoen stood to receive any

personal benefit from a company sale — particularly to a

competitor which would be unlikely to retain Schoen as CEO. Thus,

the Defendants assert that the Amended Complaint lacks the

39 Fruehauf, 250 B.R. at 186.

40 Id. at 186–87. See also Hampshire Grp., Ltd. v. Kuttner,

No. 3607-VCS, 2010 WL 2739995, at *13 (Del. Ch. July 12, 2010)

(noting that “officers also have other contextual obligations as

fiduciaries. These include the responsibility to disclose to

their superior officer or principal ‘material information

relevant to the affairs of the agency entrusted to them.’”)

(quoting Science Accessories Corp. v. Summagraphics Corp., 425

A.2d 957, 962 (Del. 1980)).

41 Adv. D.I. 17 ¶¶ 3, 29–33, 95–101, 109, 112, 119–22, 167.

42 Byrnes v. DeBolt Transfer, Inc., 741 F.2d 620, 626–27 (3d

Cir. 1984); Ocimum Biosolutions (India) Ltd. v. LG Corp., No. CV

19-2227 (MN), 2021 WL 931094, at *6 (D. Del. Mar. 11, 2021).

13

particularity necessary to plead fraudulent concealment.

As noted above, while a plaintiff must generally plead fraud

with specificity under Rule 9, that rule makes an exception for

matters that are often hard to prove directly, such as a party’s

intent.43 Furthermore, the requirements for pleading fraud are

relaxed for trustees in the bankruptcy context, including

liquidating trustees.44 In the Amended Complaint, the Liquidating

Trustee does have detailed allegations of specific material facts

that Schoen withheld from the BOD relating to the reasons for, and

the implementation of, the expansion.45 Therefore, the Court

concludes that the Liquidating Trustee has met the burden of

pleading fraudulent concealment sufficient to toll the statute of

limitations as to Schoen.

b. CFO Defendants

The Liquidating Trustee also argues that the statute of

limitations should be tolled as to the CFO Defendants because of

their fraudulent concealment of relevant facts about activities of

the Debtor. It relies, in part, on the Amended Complaint’s

allegations that the CFO Defendants made false statements to the

Debtor’s lenders (the “Lenders”) to obtain draws on the Debtor’s

credit facility.46

43 Fed. R. Civ. P. 9(b) (malice, intent, knowledge, and other

conditions of a person’s mind may be alleged generally).

44 See DBSI, 445 B.R. at 347–48.

45 Adv. D.I. 17 ¶¶ 27–33, 42–46, 49–52, 167.

46 Id. ¶ 129.

In response, the CFO Defendants contend that the tolling

exceptions to the statute of limitations do not apply if the

defendant “allegedly conceals facts from a third party.”47 Thus,

they maintain that the Liquidating Trustee’s argument against them

for fraudulently misrepresenting the financial condition of the

Debtor to the Lenders, or failing to correct prior

misrepresentations to the Lenders, does not support a tolling of

the statute of limitations. They contend that any claim for those

false misrepresentations would have to be asserted by the Lenders,

not the Debtor.48

The Liquidating Trustee counters that the CFO Defendants had

a fiduciary duty to maintain accurate financial records of the

Debtor and to provide the BOD with accurate financial information

reflecting the true costs of expansion and the financial

ramifications of the implementation of the expansion.49 The

Liquidating Trustee contends that the Amended Complaint alleges

that the CFO Defendants failed to fulfill their duty to disclose

such accurate financial information to the BOD.50 The Liquidating

Trustee asserts that these allegations establish fraudulent

concealment sufficient to toll the statute of limitations.

47 Bridgeport, 388 B.R. at 563.

48 Id.

49 Albert v. Alex. Brown Mgmt. Serv., Inc., No. CIV.A. 762-N,

2005 WL 1594085, at *16 (Del. Ch. June 29, 2005).

50 Adv. D.I. 17 ¶¶ 59-60, 63, 68-69, 72, 74.

15

The Court agrees with the Defendants that the fraudulent

tolling exception does not apply if the defendant allegedly

conceals facts from a third party.51 Therefore, the Liquidating

Trustee’s allegations that the CFO Defendants fraudulently

concealed facts from the Lenders does not toll the statute of

limitations. However, the Court finds that the Amended Complaint

does contain numerous allegations of concealment of material

financial data by the CFO Defendants from the BOD.52 The Court

concludes that these are sufficient to support the Trustee’s

contention of fraudulent concealment supportive of a tolling of

the statute of limitations against the CFO Defendants.

Consequently, the Court concludes that, taking the

allegations of the Amended Complaint as true, as the Court must at

this stage, the claims of the Liquidating Trustee would not be

time-barred.53 As a result, the Court will deny the Defendants’

Motions to Dismiss the fiduciary duty claims on the basis of the

statute of limitations.

2. Duty of Care

The Defendants assert that the Liquidating Trustee fails to

51 Bridgeport, 388 B.R. at 563.

52 Adv. D.I. 17 ¶¶ 59-60, 63, 68-69, 72, 74.

53 The Defendants did not raise any counter arguments relating

to fraudulent concealment with respect to the BOD Defendants.

However, many of the allegations of the Amended Complaint against

the BOD relate to actions which began in 2016 and continued

through the Petition Date. Adv. D.I. 17 ¶¶ 27–33, 42–45.

16

state a claim for breach of their duty of care for many reasons.

a. Business Judgment Rule

The Defendants initially argue that the Court must dismiss

these claims because the Liquidating Trustee fails to plead how

their actions violated the business judgment rule. “The business

judgment rule is a ‘powerful presumption in favor of actions taken

by the directors in that a decision made by a loyal and informed

board will not be overturned by the courts’ unless there is no

rational business purpose.”** The Defendants assert that the

Liquidating Trustee has to plead sufficient facts to show why that

presumption is not applicable to their actions.

The Liquidating Trustee responds that the business judgment

rule is an affirmative defense and should not be considered at the

motion to dismiss juncture.*? The Liguidating Trustee contends

that, because the Amended Complaint does not raise the business

judgment rule, it should not be considered now.

The Court agrees with the Liquidating Trustee that the

W.J. Bradley, 598 B.R. at 163 (quoting Cede & Co. v.

Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)). Under the

Delaware business judgment rule, there is a presumption “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.’”

In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del.

2006) (Walt Disney II), aff’g, 907 A.2d 693 (Del. Ch. 2005) (Walt

Disney I)) (citation omitted). See also Liquidation Trust of

Solutions Liguidation LLC v. Stienes (In re Solutions Liquidation

LLC), 608 B.R. 384, 402 (Bankr. D. Del. 2019).

88 W.J. Bradley, 598 B.R. at 163.

17

business judgment rule is an affirmative defense and should not be

considered at the motion to dismiss stage.°® Only if the complaint

raises the business judgment rule on its face will courts consider

its applicability at the motion to dismiss stage.°’ Here, the

Amended Complaint does not raise the business judgment rule on its

face, and therefore, the Court will not consider it at this stage.

b. Gross Negligence

The Defendants also argue that the Amended Complaint fails to

allege that they acted grossly negligent, which is the standard

for breach of the fiduciary duty of care.*® The Defendants further

assert that the Amended Complaint is deficient because it relies

on many conclusory statements and uses “group” pleading.°? For

26 Id.

Stanziale v. Nachtomi (In re Tower Air, Inc.), 416 F.3d 229,

238 (3d Cir. 2005). See also Ad Hoc Comm. of Equity Holders of

Tectonic Network, Inc. v. Wolford, 554 F. Supp. 2d 538, 556-57

(D. Del. 2008) (stating that implicitly invoking the business

judgment rule is insufficient; the rule must be explicitly raised

in the complaint); W.J. Bradley, 598 B.R. at 163; Stanziale v.

Versa Capital Mgmt., LLC (In re Simplexity, LLC), Adv. Pro. No.

16-50212 (KG), 2017 WL 65069, at *8 (Bankr. D. Del. Jan. 5, 2017)

(concluding that because trustee did not raise the business

judgment rule in his complaint, the defendants could not raise it

in their motions to dismiss).

Walt Disney I, 907 A.2d at 750 (noting that “duty of care

violations are actionable only if the directors acted with gross

negligence.”). See also W.J. Bradley, 598 B.R. at 163;

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).

See Solutions, 608 B.R. at 402 (stating that the lack of

factual support for the conclusory statements in the complaint

meant they were insufficient to state a claim for breach of the

duty of loyalty).

18

example, the Defendants contend that the Amended Complaint merely

alleges that the financial records of the Debtor were fraught with

problems and largely unreliable, without identifying a single

example of an error in the Debtor’s financial statements that

would render them unreliable.60 Similarly, they assert that the

Amended Complaint does not identify any of the individual

Defendants’ specific duties or failings. Thus, the Defendants

argue, the allegations do not rise to the level of gross

negligence by any of them sufficient to constitute a violation of

their duty of care.

The Liquidating Trustee responds that the Amended Complaint

does state a claim against the Defendants for failure to exercise

their fiduciary duty of care. It points to the allegations that

the Defendants made numerous decisions regarding operations and

the expansion (i) without properly informing themselves of the

facts or conducting the proper due diligence, (ii) without

retaining expert advisors, and (iii) after holding only a single

board meeting, where the management made a hasty presentation.61

These actions, it asserts, are the quintessential example of gross

negligence giving rise to a breach of the duty of care.62 In

60 Adv. D.I. 17 ¶ 3.

61 Id. ¶¶ 31, 37–38, 43–46, 53, 93, 137, 140, 142, 146, 148–58,

167, 174.

62 See Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906

A.2d 168, 194 (Del. Ch. 2006) (giving as an example of what might

constitute gross negligence: “a board undertook a major

19

addition, the Liquidating Trustee contends that the Amended

Complaint does not employ “group” pleading, noting that it

specifies dates and roles, thus identifying who was responsible

for any actions or inactions during the relevant time period.63

The Defendants counter that they were informed, did conduct

due diligence, had multiple board meetings, and viewed lots of

presentations and documents before making decisions.64 At the

motion to dismiss stage, however, the Court must accept the

allegations in the Amended Complaint as true and not the

“allegations” of the Defendants to the contrary.65

Under Delaware law, the duty of care is the duty to act on an

informed basis.66 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

acquisition without conducting due diligence, without retaining

experienced advisors, and after holding a single meeting at which

management made a cursory presentation.”).

63 Adv. D.I. 17 ¶¶ 63, 72, 81–83.

64 Adv. D.I. 19; Adv. D.I. 21, Exs. A–H; Adv. D.I. 29, 30.

65 See Emerald Capital Advisors Corp. v. Karma Automotive LLC

(In re FAH Liquidation Corp.), 581 B.R. 98, 104 (Bankr. D. Del.

2017).

66 Burtch v. Huston (In re USDigital, Inc.), 443 B.R. 22, 41

(Bankr. D. Del. 2011). See also Cede & Co., 634 A.2d at 361.

20

reasonably available.’”*’ “Duty of care violations are actionable

only if the directors acted with gross negligence.”*® Gross

negligence is “conduct that constitutes reckless indifference ..

. or actions that are without the bounds of reason.”*? Gross

negligence generally requires that “officers, directors, and

managers fail to inform themselves fully and in a deliberate

manner.””°

The Amended Complaint alleges, inter alia, that Schoen did

not gather enough information regarding the cost of equipment and

its maintenance before deciding to purchase foreign equipment

which proved costly to install, operate, and maintain.” It

further alleges that Schoen never bothered to compare the prices

the Debtor was paying to market rates, which resulted in the

Debtor paying a substantial premium on supplies.’ The Amended

Complaint similarly alleges that the CFO Defendants failed to

inform themselves in the appropriate manner about the costs of the

Bridgeport, 388 B.R. at 568 (quoting Walt Disney I, 907 A.2d

at 749).

68 Walt Disney I, 907 A.2d at 750. See also W.J. Bradley, 598

B.R. at 163; Fedders, 405 B.R. at 539.

6° McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008)

(citation omitted).

7 W.J. Bradley, 598 B.R. at 163 (quoting Fedders, 405 B.R. at

539).

Adv. D.I. 17 949 53, 80-84.

re Id. 47 118-25.

21

expansion and the increased operational costs.73 It alleges that

the CFO Defendants failed to update budgets and report accurate

financial data to the BOD and Lenders, resulting in violation of

the Lenders’ covenants and increased costs of debt.74 Finally, the

Amended Complaint alleges that the BOD Defendants failed to (a)

properly monitor the Debtor’s management, (b) educate themselves

about the paper industry, (c) recognize the numerous

irregularities in the Debtor’s financial reports and budgets, (d)

insist on the replacement of incompetent management, (e) object to

the extensions of the Debtor’s credit facility which increased

costs, and (f) prohibit the Debtor from continuing to operate

while insolvent.75

The Court concludes, based on these allegations of the

Amended Complaint, that the Liquidating Trustee has pleaded

sufficient facts to state a claim against the Defendants for

breach of the fiduciary duty of care. The Court also rejects the

Defendants’ contention that the Amended Complaint “group” pleads

the breach of fiduciary duty claims. The Amended Complaint

identifies dates, parties, and actions or inactions of the

Defendants, which are sufficient to put them on notice of the

73 Id. ¶¶ 54–55, 59–60, 80–83, 91–92.

74 Id. ¶¶ 54–55, 59–60, 80–84, 128–41.

75 Id. ¶¶ 3–6, 51, 63, 68, 74, 92, 101, 116–25, 129, 131–32,

157, 146–59, 174.

22

specific conduct that gives rise to the breach of fiduciary claims

asserted against them.76

3. Duty of Loyalty

a. Self-interested Transaction

The Defendants argue that the Liquidating Trustee has failed

to state a claim for a breach of the duty of loyalty against the

BOD Defendants. Typically, to state a claim for breach of the

duty of loyalty, “plaintiffs must allege facts showing that a

self-interested transaction occurred, and that the transaction was

unfair to the plaintiffs.”77

The Liquidating Trustee responds that the Amended Complaint

does alleges that the BOD Defendants acted with self-interest

because they received large compensation packages from the

Debtor.78 The Defendants counter that the claim must fail because

the Amended Complaint does not allege any causal link between the

BOD Defendants’ routine compensation and their decision-making.

The Court agrees with the Defendants. The Amended Complaint

does not allege that the BOD Defendants approved management’s

recommendations in order to receive compensation, it only alleges

that they did so while receiving compensation. “An allegation

that a director received a large salary is not enough” without an

76 Id. ¶¶ 63, 72, 81–83.

77 Fedders, 405 B.R. at 540 (quoting Joyce v. Cuccia, No.

CIV.A. 14953, 1997 WL 257448, at *5 (Del. Ch. May 14, 1997)).

78 Adv. D.I. 17 ¶¶ 4-7, 159, 187.

23

allegation that there is a causal link between the payment and the

actions taken in violation of the defendant’s fiduciary duty.79

Therefore, the Court concludes that because the Amended Complaint

does not link the directors’ compensation to the conduct at issue,

the Amended Complaint’s allegation that the BOD Defendants

received compensation does not alone establish a breach of their

duty of loyalty.

b. Lack of Good Faith

The Liquidating Trustee argues, however, that a claim for

breach of the duty of loyalty “is not limited to cases involving a

financial or other cognizable fiduciary conflict of interest. It

also encompasses cases where the fiduciary fails to act in good

faith.”80 The Liquidating Trustee asserts that the Defendants

violated their duty of good faith in this case by intentionally

failing to act in the face of a known duty to act, demonstrating a

conscious disregard for their duties.81 The Liquidating Trustee

contends that there are specific allegations in the Amended

Complaint that Schoen, the CFO Defendants, and the BOD Defendants

79 Nystrom v. Vuppuluri (In re Essar Steel Minnesota LLC), Adv.

Proc. No. 17-50001, 2019 WL 2246712, at *7 (Bankr. D. Del. May

23, 2019).

80 Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

81 Adv. D.I. 17 ¶ 166. See Stone, 911 A.2d at 370 (holding

that directors of a company may breach their duty of loyalty if

they did not act in good faith by failing to consciously

discharge a known fiduciary duty to act); Walt Disney II, 906

A.2d at 67 (same).

24

consciously disregarded their fiduciary duties in a multitude of

ways.82

The Defendants counter that the allegations of the Amended

Complaint are insufficient to state a claim of gross negligence,

let alone meet the higher standard of establishing a claim for

breach of the duty of good faith.83 The Defendants assert that the

Liquidating Trustee relies on many conclusory and contradictory

statements that are inadequate to support the allegations that the

Defendants intentionally disregarded their fiduciary duties.

In particular, the BOD Defendants assert that the allegations

82 The Amended Complaint alleges that Schoen failed (i) to

ensure that the CFO Defendants maintained accurate financial

tracking of the costs of the Barnwell construction, (ii) to

provide oversight of the costs and complications from installing

complicated and costly foreign equipment, and (iii) to change how

the Debtor “managed” the buildout when it became evident that it

was over budget. (Adv. D.I. 17 ¶¶ 59-60, 63, 68–69, 72). The

Amended Complaint also alleges that the CFO Defendants failed (i)

to monitor and provide oversight for the planning and execution

of the expansion, (ii) to address significant cost and time

overruns in the expansion, (iii) to hire experienced advisors or

otherwise inform themselves on issues critical to the expansion,

(iv) to update and assure compliance with budgets for the

expansion and operations, (v) to inform themselves about the

current cost of raw materials and the mark up charged by the

Debtor’s broker, (vi) to monitor the Debtor’s compliance with its

credit agreement, which had to be amended nine times, and (vii)

to keep accurate books and records for the company. (Id. ¶¶ 37,

51, 55, 59-60, 63-65, 68–69, 72-73, 81–84, 91–94, 117-25, 130-

43). Finally, the Amended Complaint alleges that the BOD

Defendants exhibited “a conscious, grossly negligent and/or

reckless disregard for the best interests of the Debtor and its

creditors” by failing to oversee and monitor all of the above

activities of the Debtor’s management. (Id. ¶¶ 4–6, 58, 72, 132,

146–49, 152–55, 172-74.)

83 Stone, 911 A.2d at 369.

25

in the Amended Complaint actually show that the BOD consistently

met, reviewed presentations, and did not ignore any illegal

activity or regulatory noncompliance.** This, they argue

establishes that even if they made mistakes, they did not

consciously disregard their duties.® Thus, the BOD Defendants

argue that the Amended Complaint’s allegations fail to meet the

standard for stating a claim for breach of the duty of good faith

as to them.

The Liquidating Trustee disagrees. It contends that the

Amended Complaint alleges numerous instances where the BOD

Defendants did more than simply make mistakes, they ignored their

fiduciary obligations entirely. For example, the Amended

Complaint alleges that, even if they met regularly, the BOD

Defendants did nothing more than rubber stamp management’s

ba Adv. D.I. 17 49 27-31, 37, 43-52, 156.

8s McElrath v. Kalanick, 224 A.3d 982, 993 (Del. 2020) (stating

that “there is a vast difference between an inadequate or flawed

effort to carry out fiduciary duties and a conscious disregard

for those duties”) (quoting Lyondell Chem. Co. v. Ryan, 970 A.2d

235, 243 (Del. 2009)). See also Miller v. Anconnect, LLC (In re

Our Alchemy, LLC), Adv. Proc. No. 18-50633 (KG), 2019 WL 4447541,

at *8 (Bankr. D. Del. Sept. 16, 2019) (“If the business strategy

results in deeper insolvency and ultimately fails to increase the

company’s value, it does not mean that a plaintiff can state

claims against the directors based on the result. This is [sic]

simple business failure that does not give rise to breach of

fiduciary duty claims.”) (citing Official Comm. of Unsecured

Creditors of Midway Games Inc. v. Nat’l Amusements Inc. (In re

Midway Games Inc.), 428 B.R. 303, 315 (Bankr. D. Del. 2010)); In

re Goldman Sachs Grp., Inc. S’holder Litig., No. CIV.A. 5215-VCG,

2011 WL 4826104, at *16 (Del. Ch. Oct. 12, 2011) (stating that a

director’s fiduciary duty does not require perfection or

consideration of every conceivable alternative).

26

actions.86 Further, while the Debtor had a reporting system, the

Amended Complaint alleges that the BOD Defendants failed to do

anything when they realized the reports they received were

erroneous.87 Thus, the Liquidating Trustee argues that the Amended

Complaint sufficiently alleges a breach of the BOD Defendants’

duty of good faith.88

To state a claim for violation of the duty to act in good

faith, the plaintiff must allege “conduct that is qualitatively

different from, and more culpable than, the conduct giving rise to

a violation of the fiduciary duty of care (i.e., gross

negligence).”89 Pleading a violation of the duty of good faith

requires a higher standard than a violation of the duty of care,

namely that the conduct was not merely grossly negligent but “so

far beyond the bounds of reasonable judgment that it seems

essentially inexplicable on any ground other than bad faith.”90

86 Adv. D.I. 17 ¶¶ 4–6, 58, 72, 132, 146–49, 152–55, 172-74.

87 Id. ¶¶ 29, 53, 151–54.

88 Stone, 911 A.2d at 369-70 (holding that to state a claim for

director oversight liability, a plaintiff must plead that “(a)

the directors utterly failed to implement any reporting or

information system or controls; or (b) having implemented such a

system of controls, consciously failed to monitor or oversee its

operations thus disabling themselves from being informed of risks

or problems requiring their attention.”).

89 Id. at 369.

90 In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., No.

CV 9640-VCG, 2016 WL 3044721, at *7 (Del. Ch. May 20, 2016). See

also Stone, 911 A.2d at 369.

27

The Delaware Supreme Court has recognized three examples of

conduct that establish a failure to act in good faith:

A failure to act in good faith may be shown, for

instance, where the fiduciary intentionally acts with a

purpose other than that of advancing the best interests

of the corporation, where the fiduciary acts with the

intent to violate applicable positive law, or where the

fiduciary intentionally fails to act in the face of a

known duty to act, demonstrating a conscious disregard

for his duties. There may be other examples of bad

faith yet to be proven or alleged, but these three are

the most salient.91

Thus, when “directors fail to act in the face of a known duty to

act, thereby demonstrating a conscious disregard for their

responsibilities, they breach their duty of loyalty by failing to

discharge that fiduciary obligation in good faith.”92

Looking at the conduct alleged by the Amended Complaint, the

Court concludes that the Liquidating Trustee has adequately stated

a claim that the Defendants breached their duty of good faith.

The Amended Complaint contains numerous allegations that the

Defendants failed to act in the face of a known duty to act,

demonstrating a conscious disregard for their duties.93 The

allegations in the Amended Complaint specifically allege that (i)

Schoen failed to oversee and control the costs and complications

of the buildout and expansion, (ii) the CFO Defendants failed to

monitor the expansion and consistently prepared erroneous

91 Walt Disney II, 906 A.2d at 67.

92 Stone, 911 A.2d at 370.

93 See Walt Disney II, 906 A.2d at 67.

28

financial reports which they failed to correct, and (iii) the BOD

Defendants did not properly oversee management or act when it

became apparent that the financial reports were erroneous and the

expansion was a disaster.94

For the forgoing reasons, the Court concludes that the

Liquidating Trustee has stated a claim for breach of the fiduciary

duties of care and loyalty. Accordingly, the Court will deny the

Motions to Dismiss Counts I and II of the Amended Complaint.95

C. Aiding and Abetting Breach of Fiduciary Duties

In Count III, the Liquidating Trustee asserts claims of

aiding and abetting breach of fiduciary duties against the BOD

Defendants.

The BOD Defendants argue that, because the Amended Complaint

fails to state a claim for breach of fiduciary duties, this count

should also be dismissed. In addition, the BOD Defendants argue

that there are no facts in the Amended Complaint that support an

inference that the BOD Defendants did not owe fiduciary duties to

the Debtor. Thus, the BOD Defendants contend that because they

94 Adv. D.I. 17 ¶¶ 4-6, 37, 51, 55, 58-60, 63, 68–69, 72-73,

81–84, 91–94, 130-43, 146–49, 152–55, 172, 174.

95 The Defendants also argue that they have an exculpation

clause which relieves them of any responsibility. The Court need

not consider this argument because it is an affirmative defense

which should not be considered at the motion to dismiss stage.

See Friedman v. Wellspring Capital Mgmt., LLC (In re SportCo

Holdings, Inc.), Adv. Proc. No. 20-50554 (JKS), 2021 WL 4823513,

at *7 n.81 (Bankr. D. Del. Oct. 14, 2021); Guiliano v. Schnabel

(In re DSI Renal Holdings, LLC), 574 B.R. 446, 471 (Bankr. D.

Del. 2017).

29

are co-fiduciaries, there cannot be an aiding and abetting claim

asserted against them under Delaware law.

The Liquidating Trustee argues that the Amended Complaint

does state a claim against all of the Defendants for breach of

fiduciary duty. However, it contends that, if the Court concludes

that the BOD Defendants did not breach their own fiduciary duties,

the Amended Complaint nonetheless states sufficient facts to

support a claim that they aided and abetted the breach of

fiduciary duties by the remaining Defendants. In support, the

Liquidating Trustee states that the Amended Complaint alleges that

the BOD Defendants had actual knowledge of the facts and

circumstances alleged in support of the breach of fiduciary duty

claims against the other Defendants and rendered substantial

assistance to them.96 Therefore, the Liquidating Trustee asserts

that the Amended Complaint does state a claim against the BOD

Defendants for aiding and abetting the other Defendants’ breaches

of fiduciary duties. The Liquidating Trustee argues that it is

premature to dismiss the aiding and abetting claim at this stage

because it is too early to determine the culpability of each

Defendant.97

Stating “[a] valid claim for aiding and abetting a breach of

96 Adv. D.I. 17 ¶ 181.

97 W.J. Bradley, 598 B.R. at 174–75; Miller v. McCown De Leeuw

& Co., Inc. (In re The Brown Schs.), 368 B.R. 394, 402–03 (Bankr.

D. Del. 2007).

30

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.”98

The Court agrees with the Liquidating Trustee. As explained

above, the Court concludes that the Liquidating Trustee has

successfully stated claims for breach of fiduciary duties against

the Officer Defendants and BOD Defendants in Counts I and II.

However, if the Liquidating Trustee is unable to prove its

allegations with respect to any BOD Defendant, the Court concludes

that the Amended Complaint has nonetheless alleged enough facts to

support its claims that the BOD Defendants knowingly participated

in the breach of fiduciary duties by the other Defendants.99

Accordingly, the Court will deny the Motions to Dismiss Count III.

98 SportCo, 2021 WL 4823513, at *12 (citing Fedders, 405 B.R.

at 543–44).

99 Adv. D.I. 17 ¶¶ 4–6, 60-62, 70-74, 92-94, 129, 132, 134-37,

139-49, 152–57, 167, 172-74. See W.J. Bradley, 598 B.R. at

174–75 (holding that at the motion to dismiss stage, it is too

early to determine the precise boundaries of each defendant’s

fiduciary duties, but directors shielded from liability by an

exculpation clause could still be held liable for aiding and

abetting a breach of a fiduciary duty by another defendant); The

Brown Schs., 368 B.R. at 402–03 (“While a corporate director owes

the corporation fiduciary duties, in some instances those duties

may be limited (by corporate charter or statute). Thus, the

Court may find that a director had no fiduciary duty but aided

and abetted a party that did.”).

31

D. Fraudulent Transfers

The Defendants move to dismiss Count IV of the Liquidating

Trustee’s Amended Complaint which alleges claims for avoidance of

constructively fraudulent transfers (namely, the compensation and

benefits paid to the Defendants) under state law and the

Bankruptcy Code.

1. Insolvent

The Defendants preliminarily contend that the Amended

Complaint fails to allege any facts supporting a reasonable

inference that the Debtor was insolvent at the time of the

transfers. The Liquidating Trustee responds that the Amended

Complaint contains numerous factual allegations sufficient to

establish that the Debtor was insolvent.100

The Court agrees with the Defendants that to state a claim to

avoid a constructively fraudulent transfer under state law or the

Code,101 the plaintiff must allege, inter alia, facts showing that

100 Adv. D.I. 17 ¶¶ 60-62, 68, 70-74, 92-94, 129, 134-37, 139-

45, 156-59, 167, 174.

101 11 U.S.C. §§ 544 & 548; Del. C. §§ 1302 – 1306. The

relevant Delaware’s Uniform Fraudulent Transfer Act and

applicable Bankruptcy Code provisions mirror each other, and

“Delaware Courts have interpreted and applied them uniformly.”

Crystallex Int’l Corp. v. Petróleos De Venezuela, S.A., 879 F.3d

79, 86 (3d Cir. 2018) (citations omitted). See also In re PHP

Healthcare Corp., 128 F. App’x 839, 847 (3d Cir. 2005) (“We need

not discuss the provisions of the Delaware Fraudulent Transfer

Act . . . because they are substantially the same as the relevant

parts of the Bankruptcy Code.”).

32

the debtor was insolvent at the time of the transfer.102

While the allegations of the Amended Complaint with respect to the

solvency of the Debtor are conclusory,103 the Court concludes that

the Amended Complaint contains detailed allegations of the

significant continuing losses suffered by the Debtor during the

expansion efforts.104 Those continuing losses resulted in at least

nine breaches of the Debtor’s agreement with its Lenders,

requiring that the Debtor agree to more onerous terms to avoid a

default.105 The Court concludes that these allegations are

sufficient to state a plausible claim that the Debtor (1) was

insolvent at the time of the transfers or became insolvent as a

result thereof, (2) was engaged, or was about to engage in

business or a transaction, for which the remaining assets of the

Debtor was unreasonably small in relation to the business or

transaction, or (3) intended to incur, or believed or reasonably

should have believed that it would incur, debts beyond its ability

to pay as they came due.106

2. Reasonably Equivalent Value

The Defendants also argue that the Amended Complaint fails to

102 SportCo, 2021 WL 4823513, at *14.

103 Adv. D.I. 17 ¶¶ 188-89.

104 Id. ¶¶ 60-62, 68, 70-74, 92-94, 143-45, 155-59.

105 Id. ¶¶ 137, 139-45, 158.

106 11 U.S.C. § 548(a)(1)(B).

33

allege facts showing that the Debtor did not receive reasonably

equivalent value in exchange for their compensation. They note

that the Amended Complaint fails to allege that the amounts paid

to the Defendants were over-market or otherwise excessive. They

also contend that there are no allegations that the Defendants did

not render the services for which they were paid.107

The Liquidating Trustee argues that the Debtor received less

than reasonably equivalent value in exchange for the compensation

and benefits paid to the Defendants because they breached their

fiduciary duties as detailed in the Amended Complaint.108

Neither the Delaware statute nor the Bankruptcy Code defines

“reasonably equivalent value.” However, the Third Circuit has

held that courts should define the scope and meaning of the term

by conducting a totality of the circumstances analysis.109 The

Court explained that this analysis consists of three factors: “(1)

107 Even when the activities of officers and directors are

ultimately unsuccessful in saving the company, it “does not

detract from the work undertaken by Defendants for which they

were compensated.” EiserAmper LLP v. Morgan (In re SRC

Liquidation LLC), 581 B.R. 78, 97–98 (D. Del. 2017) (holding that

complaint failed to sufficiently allege that the company received

less than reasonably equivalent value for the bonuses it paid).

See also Midway Games, 428 B.R. at 323 (concluding that plaintiff

failed to state a claim for avoidance of fees paid to its

directors as fraudulent transfers where it failed to allege that

the fees were excessive or sufficient facts to support a claim

for breaching their fiduciary duties).

108 Adv. D.I. 17 ¶¶ 145, 159, 187–89.

109 Midway Games, 428 B.R. at 323 (citing In re R.M.L., Inc., 92

F.3d 139, 153 (3d Cir. 1996)).

34

whether the transaction was at arm’s length, (2) whether the

transferee acted in good faith, and (3) the degree of difference

between the fair market value of the assets transferred and the

price paid.”.110

The Third Circuit has held that, even where a transaction is

at arm’s length and the transferee acted in good faith, a transfer

may nonetheless be avoidable if the actual value of what was given

in exchange was not equivalent to the value of the transfer.111

Similarly, the Court will be required to determine in this case

whether the services provided by the Defendants were worth the

compensation paid to them. The allegations of the Amended

Complaint that the Defendants failed to act in good faith or to

perform their essential fiduciary duties in conducting and

monitoring the Debtor’s operations and expansion do raise a

question as to the value of the services the Defendants provided

to the Debtor. Therefore, the Court concludes that the Amended

Complaint does contain factual allegations sufficient, if true, to

establish that the Debtor received less than reasonably equivalent

value for the compensation paid to the Defendants.

3. Identification of Transfers

The Defendants finally contend, however, that the Amended

110 Id.

111 R.M.L., 92 F.3d at 154 (“Thus, essential to a proper

application of the totality of the circumstances test in this

case is a comparison between the value that was conferred and

fees Intershoe paid.”).

35

Complaint is deficient because it fails to identify the specific

transfers or the total amounts sought to be avoided.

The Court agrees with the Defendants on this point. In order

“to satisfy Twombly and Igbal, the Trustee would have to provide

specific facts as to which [defendant] received which transfer.”*'?

The Liquidating Trustee must put the individual Defendants on

notice by pleading with particularity the details of the alleged

transfers it seeks to avoid: namely the transfer date, the amount,

the name of the transferor, and the name of the transferee.'!?

In this case, the Amended Complaint provides only a list of

each Defendant’s name and the time period during which he/she

received compensation and benefits.’'* Nowhere in the Amended

Complaint does the Liquidating Trustee identify the specific

amounts or dates of the transfers. Consequently, the Court

concludes that the Amended Complaint fails to provide sufficient

facts to put the Defendants on notice of what fraudulent transfers

are sought to be avoided.''

ite Beskrone v. OpenGate Capital Grp., LLC, (In re PennySaver

USA Publishing, LLC), 602 B.R. 256, 268 (Bankr. D. Del. 2019).

us DBSI, 445 B.R. at 355. See also Giuliano v. U.S. Nursing

Corp. (In re Lexington Healthcare Grp., Inc.), 339 B.R. 570, 575

(Bankr. D. Del. 2006) (holding that a chart summarizing the

transfers without specific amounts or other details about the

alleged transfers was insufficient to support the trustee’s

allegations of fraudulent transfers). See also Pardo v. Gonzaba

(In re APF Co.), 308 B.R. 183, 188 (Bankr. D. Del. 2004).

Adv. D.I. 17 97 187.

11s See, e.g., PennySaver, 602 B.R. at 270.

36

Therefore, the Court finds that the Amended Complaint fails

to state a claim for avoidance of the compensation and benefits

paid to the Defendants as fraudulent transfers. As a result, the

Court will dismiss Count IV.

V. CONCLUSION

For the reasons set forth above, the Motions to Dismiss will

be granted with respect to Count IV and denied with respect to

Counts I-III.

An appropriate Order is attached.

Dated: March 14, 2022 BY THE COURT:

Mary F. Walrath

United States Bankruptcy Judge

37