Davis

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

In re: Chapter 7

Case No, 20-10337 (BLS)

THE WORTH COLLECTION, LTD.,

Debtor

DOUGLAS T. TABACHNIEK, in his

capacity as the Chapter 7 Trustee of the Adv. Pro. No. 2383-50319 (BLS)

bankruptcy estate of The Worth D.I’s 66, 67, 68, 69, 70, 71, 77, 77,

Collection, Ltd., 80, 81, 82

Plaintiff,

Vv.

CAROLINE DAVIS, e al.,

Defendants.

MEMORANDUM OPINION DENYING

DEFENDANTS’ MOTIONS TO DISMISS AMENDED COMPLAINT!

Douglas T. Tabachnik, in his capacity as the Chapter 7 Trustee of the Worth

Collection, Ltd. (the “Trustee”), filed this adversary proceeding against Caroline

Davis and fourteen other individuals.2 After the Court granted the Defendants’

motion to dismiss Counts I, IT and IT] of the original complaint,? the Trustee filed an

1This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157 and § 1334(b).

These are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(O). Venue is proper in this district

under 28 U.S.C. § 1409(a).

2 The Defendants in this adversary proceeding are Caroline Davis, Jay Rosenberg, David

DeFeo, Sandra Kim-Suk, Seth Grossman, Courtney Denby, Kelly Collins, Michael J. Farello, J.

Michael Chu, Scott Dahnke, Dirk Donath, James Hexter, Julian C. Mack, Andrew C. Taub, and

Nikhil Thukral. The Complaint also lists John Does 1-10, Doe Corporations 1-10, Doe Limited

Partnerships 1-10, and Doe Limited Liability Companies 1-10 as defendants.

3 Adv. Docket Nos. 50, 51 (the “Prior Dismissal Opinion”). The Opinion and Order allowed

the Trustee to file an amended complaint.

Amended Complaint. Before the Court are three motions to dismiss the Amended

Complaint: one filed by the Catterton Defendants,* one filed by the Davis Group

Defendants,® and one filed by Kelly Collins.? The Trustee filed a Memorandum of

Law in opposition to the Motions to Dismiss.8 The Moving Defendants filed Reply

Memoranda.’ For the reasons set forth below, the Court will deny the Defendants’

Motions to Dismiss the Amended Complaint.

BACKGROUND

This Chapter 7 case was commenced by the filing of an involuntary petition

on February 14, 2020, against The Worth Collection, Ltd. (the “Debtor”). The

petitioning creditors were inventory suppliers or service providers to the Debtor's

retail clothing sale business. On October 28, 2020, about eight months after the

filing of the voluntary petition, the putative debtor filed an answer.!° Another five

months passed before the entry of an order for relief on March 24, 2021.41 Three

4The Amended Complaint is filed at Adv. Docket No. 60.

5 The Catterton Defendants’ Motion to Dismiss the Amended Complaint is filed at Adversary

Docket Nos. 66, 67, and 68. The “Catterton Defendants” are defined as Sandra Kim-Suk, Michael J.

Farello, J. Michael Chu, Seott A. Dahnke, Dirk Donath, James Hexter, Julian C. Mack, Andrew C.

Taub, and Nikhil Thukral.

6 The Davis Group Defendants’ Motion to Dismiss the Amended Complaint is filed at Docket

Nos. 69 and 70. The “Davis Group Defendants” are defined as Caroline Davis, David DeFeo,

Courtney Denby, Seth Grossman, and Jay Rosenberg.

7 Kelly Collins filed the Motion of Defendant Kelly Collins to Dismiss Amended Complaint,

Joinder to Catterton’s Memorandum of Law, Joinder to Davis Group Defendants’ Memorandum of

Law, and Additional Statement in Support of Motion to Dismiss is filed at Docket No. 71. The

Catterton Defendants, the Davis Group Defendants, and Kelly Collins may be referred to herein as

the “Moving Defendants.”

8 Docket No. 77,

* Docket Nos. 80, 81, and 82.

10 Main Case Docket No. 40, The docket indicates that there were no fewer than fifteen

stipulations extending the time for the putative Debtor to answer or otherwise respond to the

involuntary petition.

11 Main Case Docket No. 53.

months later, on June 9, 2021, Douglas Tabachnik was elected by the creditors to

serve as the Chapter 7 Trustee.!”

The Trustee filed several adversary proceedings asserting claims arising out

of a series of leveraged buy-out transactions undertaken by the Debtor and related

entities in September 2016 (the “LBO Transaction”). A description of the factual

allegations regarding the LBO Transaction was included in the Prior Dismissal

Opinion. The Court assumes the parties are familiar with the allegations in the

Amended Complaint and thus will not repeat them here except to the extent

necessary for the Court’s ruling today.

In summary, the Amended Complaint alleges that the LBO Transaction

loaded the Debtor with “enormous and unsustainable loan obligations” of more than

$25 million in new debt and encumbered all of the Debtor’s assets, while funneling

the proceeds of that debt to others, including the Defendants." As a result, the

Complaint alleges that the Debtor was left with just over $1 million in cash, which

was “grossly insufficient” to cover its operating costs and its post-LBO debt

obligations.14 Ultimately, the Debtor’s non-insider and unsecured creditors were

left without recourse.!5 The Amended Complaint also alleges that Catterton

Management Company, L.L.C. (“Catterton”), the Former Equity Holders,'* and

later New Water Capital Partners, L.P. (New Water”) designed a corporate

12 Main Case Docket No. 87.

18 Amended Compl. { 49.

M4 Amended Compl. 4 50.

15 Amended Compl. { 51.

16 The “Former Equity Holders” are defined in the Amended Complaint at § 62 as Worth

Acquisition, LLC (“Acquisition”), the Davis Group Defendants, Diana Manley, Wendy Selig-Prieb,

Andrea Weiss, and Lamira Fondren.

structure to complete the LBO Transaction and shield equity holders while shifting

all risk to the Debtor’s creditors in an attempt to make the LBO Transaction

bankruptcy-remote and fraudulent-transfer proof.!7

The Trustee has filed a number of adversary proceedings to avoid and recover

as fraudulent transfers the payment of over $39.9 million to the Debtor’s Former

Equity Holders, as well as other fees and payments made as part of the LBO

Transaction. The Trustee filed this Adversary Proceeding to assert a claim for

breach of fiduciary duties against the Defendants.

LEGAL STANDARD

When considering a motion to dismiss under Rule 12(b)(6), the Court will

“accept all factual allegations as true, construe the complaint in the light most

favorable to the plaintiff, and must determine whether, under any reasonable

reading of the complaint, the plaintiff may be entitled to relief.”!® “Without a

sufficient factual predicate, a complaint supported merely through the formulaic

recitation of the [statutory] factors and conclusory allegations will not survive a

motion to dismiss.”!9

The Supreme Court has instructed that a pleading must nudge claims “across

the line from conceivable to plausible.” “A claim has facial plausibility when the

pleaded factual content allows the court to draw the reasonable inference that the

MW Amended Compl. { 52.

18 Crystallex Int'l Corp. v. Petréleos De Venezuela, S.A., 879 F.3d 79, 83 n.6 (3d Cir. 2018).

19 Miller uv, Easy Star Records (In re DA Liquidating Corp.), 622 B.R. 172, 176 (Bankr. D. Del.

2020) (citing In re Liquid Holdings Grp., Inc., No. 16-10202 (KG), 2018 WL 6841351, *3 (Bankr. D.

Del. Nov. 14, 2018).

20 Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S.

544, 570 (2007)).

4A

defendant is liable for the misconduct alleged.”2! The determination is a context

specific task, drawing on the reviewing court’s judicial experience and common

sense.”22

DISCUSSION

1. Whether the claim for breach of fiduciary duty is time-barred.

The Moving Defendants argue that the Trustee’s breach of fiduciary duty

claim is barred by Delaware’s three-year statute of limitations.* As an initial

matter, the Trustee asserts that the Bankruptcy Court, as a court of equity, should

analyze the timeliness of a breach of fiduciary duty claim under the doctrine of

laches, rather than a statute of limitations, and consider whether the Trustee

unreasonably delayed in bringing his claims after learning of them.* The Third

Circuit Court of Appeals, however, recognized that when a plaintiff seeks “damages

21 Burich v. Milberg Factors, Inc., 662 F.3d 212, 221 (8d Cir. 2011) (quoting Santiago v.

Warminster Twp., 629 F.3d 121, 180 (8d Ci. 2010)).

22 Ashcroft, 556 U.S. at 679.

23 10 Del. C. § 8106. A breach of fiduciary duty claim under Delaware law is subject to a

three-year statute of limitations. Miller v. Bradley In re W.J. Bradley Mortg. Capital, LLC), 598 B.R.

150, 167 (Bankr. D. Del. 2019).

244 The Trustee relies upon Lebanon County Employees’ Retirement Fund, in which the

Delaware Court of Chancery determined that the timeliness of a breach of fiduciary duty claim

seeking equitable relief should be assessed by applying the doctrine of laches. Lebanon Cty.

Employees’ Retirement Fund v. Collis, 287 A.3d 1160, 1177 (Del. Ch. 2022). The Lebanon County

case arises from shareholder claims that the officers and directors of a company that was a wholesale

distributor of opioid pain medications “breached their fiduciary duties by making affirmative

decisions and conscious non-decisions that led ineluctably to the harm the Company suffered,” and

the plaintiffs sought to shift the responsibility for that harm from the company to the “human

fiduciaries” that caused it. Lebanon County, 287 A.3d at 1175. However, the Court in Lebanon

County also decided that “[w}hen a plaintiff seeks damages as a remedy for a breach of fiduciary

duty, the court looks to the limitations period that would apply to an analogous claim at law,” Jd. at

1178 (emphasis added). See also Vichi v. Koninklijke Philips Elec. N.V., 2009 WL 4345724, “16 (Del.

Ch, Dec. 1, 2009) (Equitable claims bearing a close resemblance to legal claims presumptively are

subject to the statute of imitations “and mere invocation of laches terminology will not render them

timely.”)(citations omitted).

for the defendants’ alleged breach of fiduciary duties, [10 Del. C.] § 8106 determines

the timeliness of their claims.”> Here, the Trustee’s Amended Complaint seeks

monetary damages and it is thus appropriate to consider the timeliness of the

Tyustee’s breach of fiduciary duty claim under Delaware’s three-year statute of

limitations.?6

“The limitations period begins from the date of the alleged harm.”?" “Alleged

harm means the moment the wrongful act accrues - - not when the harmful effects

of the act are felt - - even if the plaintiff is unaware of the wrong.””8

The Moving Defendants argue that the alleged “wrongful acts” described in

the Amended Complaint stem from decisions approving the LBO Transaction,

which closed on September 29, 2016. It follows, the Defendants argue, that the

three-year statute of limitations expired on September 29, 2019, before the filing of

the involuntary bankruptcy petition on February 14, 2020. In response, the Trustee

argues that the breach of fiduciary duty claim accrued later, when the injury from

the LBO Transaction manifested in the Debtor’s inability to pay its creditors,

25 Cantor vu. Perelman, 414 F.3d 430, 440 (8d Cir. 2005).

26 See also Eugenis VI Venture Holdings, Lid. v. Maplewood Holdings LLC (In re AMC Inv.,

LLO), 524 B.R. 62, 80 (Bankr. D. Del. 2015) (“A court of equity is not bound by the legal statute of

limitations. However, ‘[e]quity follows the law and in appropriate circumstances will apply a statute

of limitations by analogy.’ Because breach of fiduciary duty claims are ‘equitable claim{s] bearing a

close resemblance to ... legal claim[s],’ a statute of imitations analysis is appropriate here.”)(quoting

In re Lyn, 483 B.R. 440, 452 (Bankr. D. Del, 2012)); Vichi, 2009 WL 4345724, at *17).

27 W.J. Bradley Morig., 598 B.R. at 167 (citing AMC Inv,, 524 BR. at 80-81).

28 W.J. Bradley Morig., 598 B.R. at 167 (quoting Carr v. New Enter. Assocs., Inc,, 2018 WL

1472336, *8 (Del. Ch, Mar. 26, 2018))(internal punctuation omitted).

compelling creditors to file an involuntary bankruptcy petition. The Trustee argues

the Petition Date marks the “time of injury.”

The Trustee’s Amended Complaint is based on the overall theory that the

LBO Transaction loaded the Debtor with enormous and unsustainable loan

obligations of more than $25 million in new debt and encumbered all the Debtor's

assets, while funneling the proceeds of that debt to others.2° “When a fiduciary

makes an affirmative decision, such as when a board approves a contract or grants

an option, the wrongful act takes place when the decision is made, and any cause of

action for breach of fiduciary duty accrues at that point.”#! The Amended Complaint

alleges that the LBO Transaction is the wrongful act which caused harm to the

Debtor’s non-insider and unsecured creditors. Accordingly, the date of injury is

September 29, 2016 and the limitations period for filing a breach of fiduciary duty

claim arising from the LBO Transaction ended on September 29, 2019.

2 The Trustee relies upon ISN Software Corp. v. Richards, Layion & Finger, P.A., 226 A.od

727 (Del. 2020) in which the Delaware Supreme Court wrote:

Delaware is an “occurrence rule” jurisdiction, meaning a cause of action accrues at the

time of the wrongful act, even if the plaintiff is ignorant of the cause of action. In

Delaware, for contract claims, the wrongful act occurs at the time a contract is

breached, For tort claims, ... the wrongful act oceurs at the time of injury. Stated

another way, a cause of action in tort accrues at the moment when an injury, although

slight, is sustained in consequence of the wrongful act of another.

Id. at 732-33. Gnternal punctuation and citations omitted). But the Trustee’s reliance on ISN

Software is misplaced. The ISN Software Court determined that the limitations period for a

malpractice claim started when act causing the injury occurred - - in that case, when a merger that,

based on the law firm’s alleged problematic advice, gave the largest shareholder appraisal rights.

The limitations period did not begin years later when the Court of Chancery’s appraisal decision set

the damage amount. The ISN Software Court recognized that “[u]nder the Delaware occurrence rule,

injury is distinct from damages,” and “regardless of complications, inefficiencies, and possible

unfairness, a cause of action accrues at the time of the wrongful act, which in this case means when

injury occurred and not when damages were certain.” Id. at 735.

30 Amended Compl. 18.

31 Buddenhagen v. Clifford, 2024 WL 2106606, *22 (Del. Ch. May 10, 2024) Gnternal

punctuation omitted) (citing Lebanon County, 287 A.3d at 1196).

But this does not end the analysis. The Trustee argues that, even if the date

of injury is the LBO Transaction closing, the statute of limitations in this case

should be tolled. Delaware law recognizes three tolling doctrines: equitable tolling,

inherently unknowable injuries, and fraudulent concealment.” The Trustee argues

that two tolling doctrines apply here: equitable tolling and inherently unknowable

injury. 33

Under Delaware law, however, the tolling doctrines will apply “only until the

plaintiff discovers (or by exercising reasonable diligence should have discovered) his

injury.” Thus, regardless of the tolling theory, the limitations period begins to run

once the plaintiff is on “inquiry notice” of a possible injury. “Such notice does not

require full knowledge of the material facts; rather, plaintiffs are on inquiry notice

when they have sufficient knowledge to raise their suspicions to the point where

persons of ordinary intelligence and prudence would commence an investigation

that, if pursued, would lead to the discovery of the injury.”36

Thus, the 3-year statute of limitations in this case can be tolled only until a

plaintiff had inquiry notice of the injury caused by the LBO. But, as other courts

32 AMC Inv., 656 B.R. at 105; Carickhoff v. Cantor (In re Live Well Fin., Inc.), 2023 WL

3995900, *9 (Bankr. D. Del. June 13, 2023) (citing Gregorovich v. EI. duPont de Nemours, 602

Supp.2d 511, 518 (D. Del. 2009)).

33 Tn a footnote, the Trustee asserts that discovery in this case could also yield a factual basis

for arguing that the Defendants fraudulently concealed the Debtor’s insolvency from creditors,

84 Miller uv, Kirkland & Ellis LLP Un re IH 1, Inc.), 2016 WL 6394296, *12 (Bankr. D. Del.

Sept. 28, 2016) (quoting Pomeranz v. Museum Pariners, L.P., 2005 WL 217039, *3 (Del. Ch. Jan. 24,

2005) (internal punctuation omitted)).

38 fad,

36 Td. (quoting Pomeranz, 2005 WL 217089, at *3) Gnternal punctuation omitted).

have recognized, the issue of whose knowledge is relevant for the statute of

limitations analysis - - the Debtor, shareholders, or creditors - - must be addressed.37

The Trustee argues that the Court should consider when non-LBO creditors

acquired inquiry notice of the claims because, he contends, the parties who

orchestrated the LBO controlled the post-LBO Debtor and were the only parties in a

position to bring an action on behalf of the Debtor at that time.** In particular, the

Trustee asserts that three of the pre-LBO officers stayed on as officers of the post-

LBO Debtor, and New Water (also a party to the LBO Transaction) took control of

the post-LBO Debtor.» Here, the Trustee is asserting the “adverse domination

doctrine,” which “provides that a statute of limitations is tolled for the period when

a plaintiff is controlled by the alleged tortfeasors.”* Delaware law, however, does

not recognized the adverse domination doctrine." Equitable tolling, therefore,

cannot apply solely on the grounds that the culpable parties to the LBO Transaction

were in control of the post-LBO Debtor. The court must consider the issue of when

the plaintiff acquired “inquiry notice” of the claim (regardless of who controlled the

Debtor).

37 TH 1, Inc., 2016 WL 6394296, * 13.

38 Amended Compl. {/{{ 141-143.

89 Amended Compl. {[{ 125, 138-139.

40 Miller v. Nelson (In re Art Institute of Philadelphia, LLC), 2022 WL 18401591, *11 (Bankr.

D. Del. Jan. 12, 2022).

41 Td. (citing IH 1, Ine., 2016 WL 6394296, *18 (“The Cout is persuaded that Delaware has

not adopted the adverse domination doctrine and so rejects that argument to the extent it was

suggested by the Trustee”); AMC Inv., 524 B.R. at 81 (“Tt also appears that Delaware courts do not

recognize adverse domination — when a corporation’s board is controlled by culpable directors — as

a basis for tolling a breach of fiduciary duty claim.”).

The Third Circuit has stated that proper resolution of the inquiry notice issue

requires careful analysis of (1) the precise nature of the claims asserted by the

Trustee, (2) whether and when an objectively reasonable person would have

realized the need to investigate further, and (3) what information that investigation

would have disclosed.”

In this case, the Trustee is pursuing the breach of fiduciary duty claim as the

successor to the Debtor under Bankruptcy Code § 541,*3 therefore:

Because the trustee stands in the shoes of the debtor when bringing

these claims, the trustee is subject to the same defenses as could have

been asserted by the defendant had the action been instituted by the

debtor. Unmistakably then, if the debtor is barred from bringing the

section 541 claims by the relevant statute of limitations, so too is the

chapter 7 trustee. This is true despite the trustee’s innocence in

connection with the alleged transgressions.“

Thus, for a breach of fiduciary duty claim, the debtor’s knowledge is generally the

key to determining whether “inquiry notice” would render tolling doctrines

applicable. The breach of fiduciary duty claim here was held by the post-LBO

42 TH J, Inc., 2016 WL 6394296, *14 (citing EBS Litig. LLC v. Barclays Global Inv’rs., N.A.,

304 F.3d 302, 305 (3d Cir, 2002) (considering whether tolling applied under Delaware law)).

48 The Court in JH J, Inc., analyzed this issue closely, writing:

Actions that may be pursued by bankruptcy trustees generally fall into two categories:

(1) those brought by the trustee as successor to the debtor's interest included in the

estate under Section 541, and (2) those brought under one or more of the trustee’s

avoiding powers. Under section 541 of the Bankruptcy Code, the bankruptcy estate is

comprised of all legal or equitable interests of the debtor in property as of the

commencement of the case, including whatever causes of action the debtor may have

possessed prior to the petition date. Any action included in the estate under section

541 thatis later pursued by a bankruptcy trustee is brought by the trustee as successor

to the debtor’s interest in that claim. As such, a section 541 claim is a debtor cause of

action.

TH 1, Inc., 6394296, *13 (citations and internal punctuation omitted),

44 Id. (citing Official Comm. of Unsecured Creditors v. R. F. Lafferty & Co., 267 F.3d 340, 356

(3d Cir, 2001)). See also AMC Inv., 656 B.R. at 111 ([E]quitable tolling does not apply as Debtors

knew or had reason to know of the facts constituting the wrong ...”); Spradlin v. East Coast Miner,

LLC (in re Licking River Mining, LLC), 599 B.R. 552, 571-72 (Bankr. E.D. Ky. 2019) (applying

Delaware law).

10

Debtor entity and the Court should consider whether the post-LBO Debtor had

inquiry knowledge of the claim. The Amended Complaint contains numerous

allegations that underscore the extreme financial difficulties caused by LBO

Transaction which would place the post-LBO Debtor on inquiry notice of facts that

would support a breach of fiduciary duty claim against the pre-LBO officers and

directors.

But the Trustee argues that looking solely to the Debtor’s knowledge of the

claim ignores the practical realities of who may be a plaintiff in a derivative breach

of fiduciary duty claim: generally, shareholders or, in the case of insolvency,

creditors. Courts have recognized that there are circumstances when it may be

appropriate to analyze inquiry notice from the perspective of a debtor's shareholders

or creditors who are the appropriate plaintiffs for the derivative claim.”

45 The Amended Complaint alleges that the LBO Transaction devastated the Debtor's

financial condition by causing the Debtor's interest and financing-related expenses to “skyrocket □ □□

an over five thousand percent (5,000%) increase from the prior year,” and causing the Debtor to

operate at a loss following the LBO Transaction. Amended Compl. 191-192, 194, The Amended

Complaint also alleges that “[i]mmediately following the LBO Transaction, the Debtor and Debtor

Affiliates encountered significant and ultimately catastrophic financial difficulties,” and “[a]fter

closing the LBO Transaction, the Debtor did not generate enough funds to service the LBO

Obligations while also fulfilling the Debtor's other financial obligations.” Id. 164-165,

46 N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101-02 (Del.

2007) (“It is well settled that directors owe fiduciary duties to the corporation. When a corporation is

solvent, those duties may be enforced by its shareholders, who have standing to bring derivative

actions on behalf of the corporation because they are the ultimate beneficiaries of the corporation’s

growth and increased value. When a corporation is insolvent, however, its creditors take the place of

the shareholders as the residual beneficiaries of any increase in value. Consequently, the creditors

of an insolvent corporation have standing to maintain derivative claims on behalf of the corporation

for breaches of fiduciary duties.” (emphasis in original)).

47 JH 1, Inc., 2016 WL 6894296, *16 (noting that the Delaware Court of Chancery has looked

to stockholders’ constructive knowledge in derivative actions asserting tolling when the stockholders

are the plaintiffs in the action) (citing Am. Int'l Grp., Inc. v. Greenberg, 965 A.2d 763 (Del. Ch.

2009)).

11

Moreover, considering only the Debtor’s knowledge overlooks the reasoning

that underlies the tolling doctrines, which has been described as follows:

Under the theory of equitable tolling, the statute of limitations is tolled

for claims of wrongful self-dealing, even in the absence of fraudulent

concealment, where the plaintiff reasonably relies on the competence

and good faith of a fiduciary. Underlying this doctrine is the idea that

even an attentive and diligent investor relying, in complete propriety,

upon the good faith of fiduciaries may be completely ignorant of

transactions that constitute self-interested acts injurious to the

Partnership. This doctrine tolls the limitations period until an investor

knew or had reason to know of the facts constituting the wrong.”

Under the doctrine of inherently unknowable injuries, the running of

the statute of limitations is tolled while the discovery of the existence of

a cause of action is a practical impossibility. For the limitations period

to be tolled under this doctrine, there must have been no observable or

objective factors to put a party on notice of an injury, and plaintiffs must

show that they were blamelessly ignorant of the act or omission and the

injury. Often, plaintiffs can establish “blameless ignorance” by showing

justifiable reliance on a professional or expert who they have no

ostensible reason to suspect of deception. This doctrine tolls the

limitations period until a plaintiff had “reason to know” that a wrong

has been committed.5

Courts have recognized that issues of tolling doctrines and inquiry notice are

factually-intensive and case-specific.*1 The Amended Complaint alleges that

Debtor was rendered insolvent by the LBO Transaction and that the Defendants

48 In, re Dean Witter P’ship Litig., 1998 WL 442456, *6 (Del. Ch. 1998) (citing Yew v. Talley,

Del. Ch., C.A. No. 12881, at 10, Jacobs, V.C. (March 7, 1994) (Fiduciaries who benefit personally

from their wrongdoing, especially as a result of fraudulent self-dealing, will not be afforded the

protection of the statute of limitations.)).

49 Td. (citing Kahn v. Seaboard Corp., 625 A.2d 269, 275-76 (Del. Ch. 1993) (Given the

fiduciary duties that the law imposes on corporate directors, stockholders are entitled to rely on the

good faith of the directors when they act with respect to the corporation’s property or processes), and

citing In re Maxxam, Inc./ Federated Dev. Shareholders Litig., 659 A.2d 760, 769 (Del. Ch. 1995)

(internal punctuation omitted)),

50 Td. at *5 Gmternal punctuation and citations omitted).

51 Ontario Prov. Council of Carpenters’ Pension Trust Fund v. Walton, 294 A.3d 65, 96-97

(Del. Ch. 2023); Perelman, 414 F.3d at 441.

12

engaged in self-dealing.* It is not clear whether there were sufficient facts to

constitute notice of derivative breach of fiduciary duty claims to those entitled to

assert them. The matter before the Court is a motion to dismiss the Amended

Complaint. At this stage, the parties should proceed with discovery and, if

appropriate, revisit the limitations issue on summary judgment.%

2. Whether the Amended Complaint adequately pleads a breach of fiduciary

duty claim against the Moving Defendants.

The Moving Defendants argue that the Amended Complaint fails to state a

breach of fiduciary duty claim because it uses improper “group pleadings” by

lumping all the Defendants together as “D&Os” and broadly alleges that those

‘D&Os” acted wrongfully and harmed the Debtor. The Trustee argues in response

that the Amended Complaint provides sufficient notice to the Defendants of the

alleged wrongful conduct (i.e., approving and facilitating the LBO Transaction), and

the Trustee also asserts that the significant details alleged about the LBO

Transaction provide context for the wrongful actions and the resulting harm to the

Debtor and its stakeholders and creditors.

To state a claim for breach of fiduciary duty, “the Trustee must plead

sufficient facts showing both the existence of a fiduciary duty and that the fiduciary

52 See, e.g., Amended Compl. 7¥ 297 — 304, 306-307, 316-317.

53 TH 1, Inc., 2016 WL 6394296, *9 (deciding that “the [law of the case] doctrine does not

preclude a grant of summary judgment in favor of a defendant whose motion to dismiss had been

previously denied, as the court must now take into consideration evidence that has been developed

through discovery.”) (citations and internal punctuation omitted). See also Am. Intl Grp., 965 A.2d

at 812 n. 186 (noting that the defendants could renew their limitations defense on sammary

judgment if they had actual proof of inquiry notice).

13

breached that duty.” Under Delaware law, breach of fiduciary duty claims may be

dismissed when the complaint lumps individual defendants together as “Officers

and Directors” without supplying specific facts about: G) each defendant's

wrongdoing, (ii) which transactions a particular defendant authorized, and (in)

what authority a particular defendant had to approve such transactions.

However, Delaware Courts may reject the defendants’ “group pleading” contentions

“when the complaint identifies the ‘dates, parties, and actions or inactions’ of the

defendants which were ‘sufficient to put them on notice of the specific conduct that

give rise to the breach of fiduciary claims asserted against them.””5

Here, the Moving Defendants argue that the Amended Complaint identifies

the Defendants’ roles in terms that are too broad by alleging that each individual

defendant was “an officer and/or director of the Debtor, or of the Debtor's prior or

current affiliates or related entities, prior to and/or at the time of the LBO

Transaction.”5? The Trustee defends the general description by claiming that the

pre-LBO Debtor, along with Catterton and the Catterton SPVs, owned one another

and were controlled by the same group of people and were not separate entities in

any meaningful sense®* and he argues that he should be permitted to conduct

54 Miller v. Anconnect, LLC (In re Our Alchemy, LLC), 2019 WL 4447541, *10 (Bankr. D. Del.

Sept. 16, 2019) (citing Beskrone v. OpenGate Capital Grp. (In re PennySaver USA Publ’g, LEC), 587

B.R. 445, 463-64 (Bankr, D. Del. 2018)).

55 Balasiano v. Borell (In re Furniture Factory Ultimate Holding, L.P.), 2023 WL 5662747,

*10 (Bankr. D. Del. Aug. 31, 2028) (citing Stanziale v. Heico Haldings, Inc. (in re Conex Holdings,

LLC), 514 B.R. 405, 414 (Bankr. D. Del. 2014) Gnternal punctuation omitted)). See also Burich v.

Zachem, 2023 WL 6140247, *3 (Bankr. D. Del. Sept. 19, 2023) (same).

56 Furniture Factory, 2023 WL 5662747, *10, n. 92 (collecting cases).

5? Amended Compl. 8, 10, 12, 14, 16, 18, 20, 22, 24, 26, 28, 30, 34, and 36.

58 As support for this argument, the Trustee cites to the Amended Compl. 9 61-64. The

Catterton Defendants reply, however, that the Amended Complaint asserts veil-piercing and

14

discovery to gain a full picture Defendants’ officer and director positions with the

Debtor and other Catterton entities.

The Trustee further argues that the Amended Complaint is detailed enough

to provide each Defendant with notice of the dates of the alleged wrongful actions,

the alleged wrongful conduct, and the alleged effects of the wrongful conduct. In

short, each individual Defendant is claimed to have used a position of control in or

around September 2016 to approve or facilitate the LBO Transaction, consisting of

the Stock Purchase Agreement and the accompanying loan agreements, to further

his or her own interests while resulting in serious harm to the Debtor and its non-

LBO stakeholders and crediters.

The Amended Complaint is not a model of clear and precise allegations for a

breach of fiduciary duty claim. However, the Court is satisfied that Amended ~

Complaint’s allegations state enough details about the specific time frame, the

specific transactions approved by the Defendants, and the specific harm caused by

the Defendants’ alleged wrongful conduct to provide adequate notice of the claims to

the Defendants.

The Catterton Defendants further argue that the Amended Complaint fails to

adequately state a breach of fiduciary duty claim against them because (i) all the

substantive consolidation claims against the Worth Entities (defined in the Amended Complaint as

NWC Worth Collection Holdings, LLC (NWCWCH”), (Gi) Worth Investment Holdings (“WIH”) (an

entity wholly owned by NWCWCH), and (iii) Worth Collection Intermediate Holdings, LLC (Worth

Intermediate”) (the “purchaser” in the LBO Transaction, an entity wholly owned by WIR)).

Amended Compl. J{ 96, 103, and 129. The Catterton Defendants argue that the Trustee cannot

amend his complaint through his brief, alleging claims of veil-piercing or consolidation of undefined

entities with “Catterton” in their names. The Court notes that the Trustee is not asserting a

consolidation claim or piercing the corporate veil claim against Catterton; he is asking for discovery

to assist in sorting out the various entities and the Defendants’ roles therein.

15

directors are protected by an exculpatory provision in the Debtor's corporate

charter; and (ii) the Trustee fails to plead a non-exculpated claim for breach of the

duty of loyalty against them. In response the Trustee argues that asserting

protection under an exculpatory provision is an affirmative defense that the Court

should not consider on a motion to dismiss. Further, the Trustee argues that the

Amended Complaint pleads adequate breach of fiduciary duty claims by alleging

that the Defendants acted in bad faith and in furtherance of their own self-interests

in approving and facilitating the LBO Transaction.

Delaware law imposes the following fiduciary duties on officers and directors

of a Delaware corporation:

(1) The “duty of care” has been described as the duty to act on an |

informed basis. To prove a breach of the duty of care, a plaintiff

must demonstrate gross negligence.

(2) The “duty of loyalty’ mandates that the best interests of the

corporation and its shareholders takes precedence over any

interest possessed by a director, officer or controlling shareholder

and not shared by the stockholders generally. To prove a breach

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

self-interested transaction occurred and the transaction was

unfair to the shareholders.

(3) The “duty of good faith” is a subsidiary element of the

fundamental duty of loyalty. The Delaware Supreme Court has

recognized three non-exclusive categories of conduct indicative of

a failure to act in good faith G) a director intentionally acts with

a purpose other than that of advancing the best interests of the

corporation; (i) a director acts with the intent to violate

applicable positive law; or (iii) a director intentionally fails to act

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

disregard for his duties.®9

The Defendants assert that the Debtor’s Certificate of Incorporation

(attached as Exhibit A to the Catterton Defendants’ Motion to Dismiss) contains an

exculpation provision stating:

The personal liability of the Directors of the Corporation to the

Corporation or its stockholders for monetary damages is hereby

eliminated to the fullest extent permitted under Section 102(b)(‘7) of the

General Corporation Law of the State of Delaware.

Courts have recognized that. Section 102(b)(7) of the Delaware General

Corporation Law permits a corporation “to protect its directors from monetary

liability for duty of care violations, 1.e., liability for gross negligence,” by including

an exculpation clause in its certificate of incorporation.” The parties agree that

there is a split of authority among Delaware federal courts as to whether a Section

102(b)(7) exculpatory clause may be properly raised at the motion to dismiss stage.°!

The Court has already determined that it is appropriate to allow the Trustee to

engage in discovery and sort out the roles of the Defendants with the pre-LBO

59 Burtch v. Huston dn re USDigital, Inc.), 448 B.R. 22, 41 (Bankr. D. Del. 2011) (citations

and internal punctuation omitted)).

60 The Off! Comm. of Unsecured Creditors v. Nat'l Amusements Inc. (In re Midway Games,

Ine.), 428 B.R. 303, 316 (Bankr. D. Del. 2010) (quoting 5 Balotti & Finkelstein, The Delaware Law of

Corporations and Business Organizations, Ch. 4, § 4.19, p. 200.10 (1986)).

61 Compare Midway Games, 428 B.R. at 317 (dismissing a claim upon deciding that the

Committee’s complaint did not have sufficient facts to create a plausible claim that the director

defendants violated their duty of care and, to the extent the directors did so, the exculpation clause

shielded them from liability), and In re Fedders N. Am., Inc., 405 B.R. 527, 543 (Bankr, D. Del. 2009)

(dismissing a claim against director defendants when the debtor's “certificate of incorporation

exculpates Fedders’ directors from paying monetary damages for breaching the duty of care... and

Plaintiff seeks only monetary damages for this breach”) with Miller v. McCown De Leeuw & Co., Inc.

(in re The Brown Schools), 368 B.R. 394, 402 (Bankr. D. Del. 2007) (“The exculpation clause is an

affirmative defense and the determination of the viability of that defense is not proper at this

stage.”).

17

Debtor and related entities. Based upon these circumstances at this stage of the

proceeding, the Court will not consider the exculpation provision’s effect on the

claims for breach of the duty of care.

The Trustee also argues, however, that even if the exculpation clause

prevents him from pursuing claims for breaching the duty of care, the exculpation

clause cannot block him from pursuing claims for breaching the duty of loyalty. He

asserts that numerous allegations in the Amended Complaint support a breach of

the duty of loyalty claim. For example: asserting that the Defendants “acted in

their own interests” when approving the LBO Transaction because the Defendants

“veceived cash proceeds,” or “received transaction bonuses,” or “received a release of

loan obligations.”6?

The Catterton Defendants, however, claim that the Amended Complaint fails

to adequately plead that they were self-interested in or otherwise benefitted from

LBO Transaction because there are no allegations that any of the Catterton

Defendants received any cash distributions, transaction bonuses, or forgiveness of

loan obligations.s3 There are no allegations that the Catterton Defendants received

any improper personal benefits from the LBO Obligation.

While there are no allegations that the Catterton Defendants received direct

payouts or benefits from the LBO Transaction, there are allegations that the pre-

62 Amended Compl. 4 119-120, 123-124, 128, 297-298, 300-312.

63 The “Catterton Defendants” (see n. 5, supra.) are not included as part of the “Former

Equity Holders,” as that term is defined in the Amended Complaint who received distributions from

the LBO Transaction.

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LBO Debtor was controlled by Catterton-owned entities.“ In particular, the

Amended Complaint alleges that Worth Acquisition — controlled by Catterton-

entity CMPV — received the lion’s share of the Closing Distributions in the amount

of over $31 Million. Consistent with the Court’s earlier decision, the Court will

allow the Trustee to conduct discovery to sort out the relationships between the

Catterton Defendants and the Catterton entities that owned and controlled the pre-

LBO Debtor and its affiliates. Therefore, based on these circumstances and at this

stage of the proceeding, the Court will not dismiss the breach of fiduciary duty

claims asserted against the Catterton Defendants.

3. Whether the Amended Complaint adequately pleads facts showing that

the Debtor was insolvent and, thus, owed fiduciary duties to creditors.

“(T]he creditors of an insolvent corporation have standing to maintain

derivative claims against directors on behalf of the corporation for breaches of

fiduciary duties.” The Moving Defendants argue that the Amended Complaint

fails to plead facts showing that the Debtor was insolvent at the time the LBO

Transaction was approved and, therefore, owed fiduciary duties to creditors. In

yesponse, the Trustee asserts that insolvency is a factual issue and should not be

addressed in a motion to dismiss. Regardless, the Trustee also claims that the

Amended Compl. ff] 63-68.

63 Amended Compl. 4 63, 120.

86 Gheewalla, 930 A.2d at 101,

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allegations in the Amended Complaint are sufficient to establish that the LBO

Transaction caused the Debtor’s insolvency.

“Insolvency is adequately pled if plaintiffs allegations allow a reasonable

inference of either ‘(1) a deficiency of assets below liabilities with no reasonable

prospect that the business can be successfully continued in the face thereof or (2) an

inability to meet maturing obligations as they fall due in the ordinary course of

business.’s? The Trustee is not required to prove insolvency in the context of a

motion to dismiss. * Instead a plaintiff must allege sufficient facts to provide notice

of the basis of a plausible claim that the Debtor was insolvent.

Here, the Amended Complaint asserts that the Debtor became insolvent

when the LBO Transaction harmed the Debtor financially by leaving it

inadequately capitalized or unable to pay its debts as they come due. For example,

the Amended Complaint alleges:

e Upon the closing of the LBO Transaction, the Debtor was obligated for

over $25,000,000 in debt.

The staggering debt resulting from the LBO Transaction caused the

Debtor’s interest and financing related expenses to skyrocket to

$1,760,000 in 2016 — an over five thousand percent (5,000%) increase

from the prior year, despite closing of the LBO Transaction occurring

after approximately nine of the twelve months in that calendar year.”

81 Gheewalla, 980 A.2d at 98. See also In re Opus East, LLC, 528 B.R. 30, 51 (Bankr. D. Del.

2015) (To prove insolvency, a plaintiff must demonstrate that at the time of each of the challenged

transfers, the debtor was balance sheet insolvent, inadequately capitalized, or unable to pay its debts

as they came due.).

88 In re PennySaver USA Publishing, LLC, 587 B.R. 445, 459 (Bankr. D. Del. 2018) (A

motion to dismiss is not the proper place to bring in experts to determine insolvency.”).

63 Amended Compl. 7 189.

7 Amended Compl. { 191.

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e The Debtor operated at a net loss of $1,610,000 in 2016.71

« In 2017 the Debtor's interest and financing related expenses increased

to $2,483,000.”

e The Debtor operated at a net loss of $9,317,000 in 2017, the first

calendar year after the LBO Transaction.”

e The Debtor had approximately $12 million in cash and cash

equivalents at the end of 2014.”

e Th Debtor had almost $5 million in cash and cash equivalents at the

end of 2015.%

e The Debtor's cash dwindled to $445,000 in cash and cash equivalents

at the end of 2016,.%

e The Debtor’s cash position at the end of 2017 was lower than its cash

position at the end of 2016.7

* The LBO Transaction amounted to a windfall payout to the Debtor's

Former Equity Holders, with the Debtor picking up the tab in the form

of $25 million in debt and leaving the Debtor's creditors at risk,

maintaining a bleak amount of operating cash in relation to its

significant post-LBO Transaction debt obligations, and pledging all of

its assets ag security for the newly-incurred debt.#

« Notwithstanding the Debtor’s dire financial condition following the

LBO Transaction, New Water continued to drain the insolvent Debtor

of resources through the Consulting Fees and the New Water

Transfers.”

71 Amended Compl. { 192.

7 Amended Compl. § 193.

738 Amended Compl. J 194.

74 Amended Compl. | 195.

75 Amended Compl. 7 196.

76 Amended Compl. ¥ 197.

77 Amended Compl. { 198.

78 Amended Compl. J 200.

79 Amended Compl. § 201.

21

e Ofthe $45,279,000 of Closing Distributions, after $2,373,966.22 was

used to pay off certain indebtedness, the Debtor was left with a paltry

$1,058,178.92 of cash to sustain all of its operating expenses and

massive debt service on a going-forward basis.®

e The Defendants were aware of the Debtor’s financial condition prior to

the LBO Transaction and understood that saddling the Debtor with

over $25,000,000 in debt, upon the closing of the acquisition of the

Debtor by NWC, would render the Debtor insolvent.*

Fox purposes of a motion to dismiss, these allegations are sufficient to support the

Trustee’s claim that the LBO Transaction caused the Debtor to become insolvent.

4. Whether the remaining claims for declaratory judgment must be

dismissed?

The Moving Defendants argue that Counts I, II, and HI (for substantive

consolidation of the Worth Entities, Piering the Corporate Veil against the Worth

Entities, and collapsing transactions that were part of the LBO Transaction) should

be dismissed because those claims are not asserted against the Defendants. The

Trustee objects to dismissal of those claims, arguing that the Amended Complaint

alleges that the Defendants may also be officers or directors of the Worth Entities,

which the Trustee alleges were inextricably intertwined with the Debtor. The

Trustee claims discovery is needed to determine whether any Defendants were

officers or directors of the overlapping entities, thereby owing fiduciary duties to the

80 Amended Compl. { 204.

8 Amended Compl. { 205.

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Debtor. Recognizing the Trustee’s need for more discovery in this matter (as

discussed above), the Court will not dismiss Counts I, II or II at this stage of the

proceeding.

CONCLUSION

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

Complaint filed by the Catterton Defendants, the Davis Group Defendants, and

Kelly Collins will be denied. An appropriate Order will issue.

FOR THE COURT:

SS pie

BRENDAN N SHANNON

UNITED STATES BANKRUPTCY JUDGE

Dated: June 18, 2026

23.