New Mexico Law
Monge v. Rojas, et al. (September 25, 2014)
Issues: Individual Debtors (as Plaintiffs), brought adversary proceeding against multiple Defendants. All secondary Defendants settled prior to and during trial; only primary Defendants remained. Most of Plaintiffs’ claims against remaining Defendants and Defendants’ counterclaims against Plaintiffs were based exclusively on state law causes of action, and some claims and counterclaims were based on the Bankruptcy Code. Prior to trial, all remaining parties consented to entry of a final judgment by the Bankruptcy Court. However, given the recent holdings of the Fifth Circuit regarding the constitutional authority of the Bankruptcy Court to enter a final judgment on state law claims even with consent of the parties, the Bankruptcy Court submitted 178 pages of Proposed Findings of Fact and Conclusions of Law to the District Court for review under 28 U.S.C. §157(c)(2) and Bankruptcy Rule 9033. Following review, the District Court largely adopted the Bankruptcy Court’s proposed findings and conclusions, and entered final judgment for Plaintiffs.
The disputes centered around four different residential properties and commercial property developments located in the States of New Mexico and Texas. In general, Plaintiffs sought turnover of and declaratory relief regarding certain real property in the possession of Defendants, and actual and exemplary damages based on breach of contract, fraud, breach of fiduciary duty, negligence, gross negligence, the Texas Deceptive Trade Practices Act, equitable theories under state law, and violation of the automatic stay. In general, the remaining Defendants asserted counterclaims and affirmative defenses based on the Texas Property Code, breach of contract, equitable theories under state law, statute of limitations, and section 365(i) of the Bankruptcy Code. The Bankruptcy Court conducted a six-day trial on the merits, which featured over 15 witnesses and thousands of documents. Holdings: The Bankruptcy Court proposed (and the District Court adopted) a judgment in favor of Plaintiffs and against the remaining Defendants for turnover of possession of one of the real properties, and actual damages, attorneys fees, and pre-judgment interest totaling about $1 million. In general, the Bankruptcy Court’s proposed findings and conclusions (1) awarded damages to Plaintiffs based on breach of contract and violation of the automatic stay; (2) determined that Plaintiffs were entitled to possession and turnover of certain real property held by Defendants; (3) found that the Texas Property Code did not apply to real property located in the State of New Mexico; (4) found that section 365(i) of the Bankruptcy Code did not apply to a lease/option which expired by its terms prior to Plaintiffs’ bankruptcy filing; (5) found that several of Plaintiffs’ causes of action relating to some of the properties were barred by the statute of limitations; (6) determined that the fraud-based claims of Plaintiffs should be denied; and (7) found that some of the damages sought by both Plaintiffs and Defendants were speculative.
Delaware Corporate Fiduciary Law
Issues: A liquidating trust under a confirmed Plan (“Plaintiff Trust”) brought an adversary proceeding against several Defendants—the former directors and a former shareholder of Xtreme Power Inc., the Debtor. Both the director Defendants and the shareholder Defendant filed Motions to Dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure (“Rules”). Issues addressed by the Court included: (1) whether the director Defendants were liable for breaches of the duties of care, loyalty, and good faith under Delaware law; (2) whether the shareholder Defendant was liable for breaches of fiduciary duties under Delaware law; (3) whether the shareholder Defendant was liable for inducing and/or aiding and abetting a breach of fiduciary duties under Delaware law; and (4) whether any of the Defendants were liable for civil conspiracy under Delaware law.
Holdings: Applying Delaware law, the Court granted in part and denied in part the Motion to Dismiss filed by the director Defendants. The Court granted the Motion to Dismiss filed by the shareholder Defendant. As to the director Defendants, the Court held that the Plaintiff Trust’s Amended Complaint failed to state a claim on which relief could be granted with regard to the breaches of the fiduciary duties of care and good faith, and civil conspiracy. With regard to the breach of the fiduciary duty of loyalty, the Court held that the Plaintiff Trust had sufficiently alleged a plausible claim as to four of the seven former director Defendants. For the other three director Defendants, the Court granted dismissal of the claim. As to the shareholder Defendant, the Court determined that the shareholder was not a controlling shareholder under Delaware law. The Court additionally concluded that the Plaintiff Trust failed to plead facts indicating an act or omission by the shareholder Defendant that would leave the shareholder Defendant liable to the Plaintiff Trust. Accordingly, the Court granted the shareholder Defendant’s Motion to Dismiss.
Think3 Litigation Trust v. Zuccarello, et al. (January 5, 2015)
Issues: Plaintiff Litigation Trust brought adversary proceeding against multiple Defendants, who were former officers and directors of the Debtor. Defendants filed multiple Motions to Dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure (“Rules”), which is incorporated into Bankruptcy Rule 7012. In general, the Defendants asserted that Plaintiff failed to state a claim for: (1) breach of fiduciary duties under Delaware law; (2) gross negligence; (3) fraud on stockholders; (4) preferential transfers under 11 U.S.C. §547; (5) fraudulent transfers under 11 U.S.C. § 548; (6) breach of contract; (7) disallowance of claims under 11 U.S.C. §502(b)(2); (8) subordination of claims under 11 U.S.C. §510(b) and/or 11 U.S.C. §510(c). Alternatively, Defendants requested transfer of venue to the U.S. District Court for the District of Delaware (the state where Debtor was incorporated). Holdings: The Court denied most of the Motions to Dismiss under Rule 12(b)(6), providing every reasonable inference to Plaintiff as required under Rule 12(b)(6). First, the Court concluded that Plaintiff had sufficiently alleged a plausible claim that the Defendants (the Debtor’s former directors and officers) breached their fiduciary duties to the Debtor, including the duty of care, duty of loyalty, and duty of good faith. The Court refused to consider, in the context of Rule 12(b)(6), an affirmative defense and extrinsic evidence which purportedly contained an exculpatory provision in the Debtor’s charter under Delaware General Corporate Law §102(b)(7). The Court also found that the business judgment rule defense and the Bangor Punta doctrine did not provide a basis to dismiss Plaintiff’s claims for breach of fiduciary duty in the Rule 12(b)(6) context. Second, the Court dismissed the fraud on the stockholders claim for Plaintiff’s failure to sufficiently allege standing and damages. Third, the Court denied dismissal of Plaintiff’s preferential transfer claims, and adopted the “exact date” approach and rejected the “arranged transfer” theory for the date of a preferential transfer. Fourth, the Court found that Plaintiff sufficiently alleged a plausible claim for an actual fraudulent transfer claim (applying a Rule 9(b) standard) and constructive fraudulent transfer (applying a Rule 8(a) standard). Fifth, the Court held that Debtor’s confirmed plan contained a sufficient reservation to preserve and maintain Plaintiff’s claim for breach of contract. Sixth, to the extent that the Defendants could assert a claim back against the Debtor’s estate, the Court determined that Plaintiff sufficiently alleged a cause of action under 11 U.S.C. §502(d) to disallow their claims. Seventh, the Court dismissed any mandatory subordination claims of Plaintiff under 11 U.S.C. §510(b) as they were inapplicable to the facts of the case, but determined that the equitable subordination claims of Plaintiff under 11 U.S.C. §510(c) would survive dismissal. Eighth, the Court denied dismissal of Plaintiff’s declaratory judgment seeking disallowance and subordination of the claims of the Defendants, to the extent that the Defendants could file a claim back against the Debtor’s estate.
Finally, the Court denied the Defendants’ Motion to Transfer Venue of the adversary proceeding to the District of Delaware. The Court determined that the Defendants failed to demonstrate by a preponderance of the evidence that the transfer of venue furthered the “interest of justice” or “convenience of the parties” under 28 U.S.C. §1412. The only real connection to Delaware was that the Debtor was incorporated in Delaware so that Delaware law applied to certain issues in the adversary proceeding, which by itself was not sufficient to warrant transfer of venue.