In a 28 page opinion released November 25, 2014 in the Tropicana Entertainment bankruptcy (Bank. D. Del. 08-10856), Judge Carey of the Delaware Bankruptcy Court provided an opinion regarding a defendant’s motion to dismiss an amended complaint. Judge Carey granted the majority of the motion to dismiss, denying a second request for leave to amend because “The Trustee has now had ample opportunity to present a properly pled complaint.” This ruling illustrates the importance of providing all the necessary details and required allegations in a complaint, particularly if the Court has already provided you with one “do-over”. Judge Carey’s opinion is available here (the “Opinion”).
Pursuant to the confirmed plans in the Tropicana bankruptcy cases, Lightsway Litigation Services, LLC was appointed as the trustee of a Litigation Trust (the “Trustee”) tasked with pursuing claims against insiders of the Debtors. On February 17, 2010, the Trustee filed a complaint against Yung, Wimar, Columbia and others asserting claims for breach of fiduciary obligations, breach of contract, breach of the implied covenant of fair dealing, and equitable subordination. The defendants filed a motion to dismiss the complaint and, after a hearing, the Court entered an Order denying the motions to dismiss, but directing the Trustee to file an amended complaint. On February 9, 2011, the Trustee filed the First Amended Complaint against Yung, Wimar and Columbia (the “Defendants”). Opinion at *3.
The Defendants filed another motion to dismiss. After briefing and oral argument, the Court entered the Opinion and corresponding Order granting the motion in part and denying it in part.
Judge Carey’s Ruling
While the amended complaint contains five claims, all of which are addressed in the motion to dismiss and the Opinion, the only claim this post will discuss is the Trustee’s amended claim that “[Defendant] Yung breached fiduciary duties owed to the Debtors based upon his equity ownership and control of the management, operation, and finances of the Debtors.” Opinion at *17 (internal quotations omitted).
This section of the Opinion spans pages 17-21, providing a detailed analysis of who is owed fiduciary duties, and when. Beginning when a company is healthy, and all duties are owed to the equity holders, in this case the parent company, and ending when a company is distressed and all duties are owed to the creditors, at the individual company level. As stated by the Court, “[t]he solvency or insolvency of the corporation determines which constituency has the right to pursue a derivative claim based on a breach of fiduciary obligation.” Opinion at *20.
Citing the Delaware Chancery Court’s decision Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 792 (Del. Ch. 2004), the Opinion states that “To meet the burden of pleading insolvency, a plaintiff must plead facts showing that the debtor-corporation has either 1) a deficiency of assets below liabilities with no reasonable prospect that the business can be successfully continued in the fact thereof, or 2) an inability to meet maturing obligations as they fall due in the ordinary course of business.” Opinion at *20-21. In this case, the Trustee failed to plead specific facts, alleging only that “[the Defendant's] misconduct propelled the Debtors into insolvency, which ultimately led to the filing of the bankruptcy cases in the Spring of 2008.” Opinion at *20.
While there is no doubt that the Debtors filed for bankruptcy, “[the complaint contains] no facts to provide a basis from which [the Court] can infer whether any or all of the Debtors were insolvent or when insolvency occurred.” Opinion at *21. And although the Defendants did not raise insolvency in their motion to dismiss the original complaint, the Defendants are not required to defend against claims that were not included in the complaint. This led to the Court’s ruling that “The Trustee has now had ample opportunity to present a properly pled complaint. The request for leave to again amend the complaint is denied.” Opinion at *21.
In this case, the failures of the Trustee in crafting a complaint that satisfied the standards of the Delaware Bankruptcy Court, even with two bites at the apple, led to the Court’s dismissal of a cause of action that could have resulted in significant damage awards for the Trustee. If you read no other parts of this decision, make sure to carefully review pages 17-21 before filing any amended complaints in the Delaware Bankruptcy Court.
John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP. John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at email@example.com.