Opinion
Case No. 96-54222 JRG Chapter 11, Adversary No. 98-5089
June 25, 1999
ORDER GRANTING MOTION OF VARIABLE-PARAMETER SEEKING AUTHORITY TO PROSECUTE ADVERSARY PROCEEDING
I. INTRODUCTION
On March 4, 1999, the Court heard Variable-Parameter Fixture Development Corporation's Motion for Authorization to Prosecute Adversary Proceeding Against Comerica Bank-California and Peter Dalton. At the conclusion of the hearing, the Court ruled orally on a portion of the motion and granted it subject to certain conditions. The Court then took under submission the question of whether Variable has alleged sufficient facts to bring a claim for conspiracy to breach fiduciary duty against Comerica Bank and Peter Dalton.
For the reasons hereafter set forth, the Court finds that Variable has alleged sufficient facts to bring a claim for conspiracy to breach a fiduciary duty against Comerica and Dalton.
II. FACTUAL ALLEGATIONS IN THE COMPLAINT
Variable alleges in its proposed First Amended Complaint that Comerica caused Peter Dalton to be appointed as a state Court receiver for the debtor prior to the bankruptcy filing. After the filing, Comerica requested that Dalton become the Chapter 11 trustee of the debtor. As a result of the motion to appoint Dalton as Chapter 11 trustee, John Richardson, the CEO and sole shareholder of the debtor, resigned and Dalton became the new CEO. Dalton was allegedly paid $240,000 in annual salary as CEO. Dalton thereafter released all claims against Richardson allegedly without evaluating the claims or their value. Under a stock pledge agreement, Richardson agreed to pledge all the stock of the debtor to Comerica for the alleged purpose of giving Comerica control over the stock and the operations of the debtor. The stock pledge agreement makes confirmation of a plan of reorganization by the debtor an event of default entitling Comerica to take control of all the stock of the debtor. During the same time period as the above transactions, an affiliate bank of Comerica acquired the right to a significant number of shares of Vari-Lite International, Inc., a principal competitor of the debtor.
The proposed First Amended Complaint is attached as Exhibit A to the "Notice of Motion and Motion by Creditor Variable-Parameter Fixture Development Corporation for Authorization to Prosecute Adversary Proceeding Against Comerica Bank-California and Peter Dalton."
The complaint also alleges additional conduct by Comerica demonstrating control over the debtor. Such conduct includes substantial control over the operations of the debtor, such as the ability to set officer salaries and to control payment of the debtor's debts and obligations, and control over the settlement of a pending patent infringement lawsuit by Variable.
Variable also alleges that Dalton and Comerica have worked together to facilitate the acquisition of a controlling interest in the debtor and/or its assets, for the sole or principal benefit of Comerica and Dalton, and to the detriment of the debtor's unsecured creditors. For example, Dalton supported and adopted Comerica's position that the alleged debt to Comerica in the sum of approximately $3.9 million is fully secured. Dalton and Comerica also allegedly worked together to facilitate Comerica's retention of $1 million or more in post-petition interest payments. Furthermore, Dalton and Comerica allegedly impaired the ability of prospective bidders to compete fairly with Dalton for acquisition of the debtor's assets by refusing to produce information about the debtor and moving the debtor's operations to Redding, California.
III. DISCUSSION
Variable has asserted a claim for conspiracy to breach fiduciary duty against Comerica and Dalton. Variable argues that Comerica has exercised such control over Morpheus Lights that it has put itself in a fiduciary position and is capable of being sued for the breach of this duty. Comerica agrees that such a cause of action theoretically exists but argues that the facts alleged are not enough to satisfy what is required to assert the claim. Variable alternatively argues that, if it cannot sue on the conspiracy theory, it can proceed on the theory that Comerica induced Peter Dalton to breach his fiduciary duty. The Court finds that Variable has alleged facts sufficient to demonstrate a fiduciary duty between Comerica and the debtor. Hence, Variable's alternative argument will not be addressed.
Variable argues that Comerica is in fact a fiduciary of Variable. According to general corporate theory, a fiduciary includes an officer, director, agent, majority shareholder or a minority shareholder exercising actual control over the corporation. See In re N D Properties, Inc., 799 F.2d 726, 731-32 (11th Cir. 1986), citing 12B Fletcher, Cyclopedia Corporations § 5811 at 156-57 (1984). Variable claims that Comerica is a fiduciary because Comerica exercised that degree of control found in a fiduciary relationship.
To support its position, Variable cites In the Matter of Century Glove, Inc., 151 B.R. 327 (Bankr.D.Del. 1993), where the Court held that the debtor properly alleged facts which were sufficient to create a fiduciary relationship between the Chapter 11 debtor-in-possession, Century Glove ("Century"), and its primary lender, First American Bank of New York ("FAB"). FAB had made a seven-year term loan in the amount of $2 million and established a $1 million revolving credit line for Century. FAB also acquired a security interest on the manufacturing plant and equipment and a floating lien on certain inventory, accounts receivable, and proceeds.
Century's theory that FAB was a fiduciary of Century was based upon the legal conclusion that Iselin, president and CEO of the debtor, was the "alter-ego, agent, and instrumentality" of the bank. See Century Glove, 151 B.R. at 333. The Court held that, to pursue an "alter-ego" theory as the basis for showing a fiduciary relationship, it must be shown that the bank exerted "dominion and control" over the debtor. Id., citing In re Badger Freightways, 106 B.R. 971, 977 (Bankr.N.D.Ill. 1989). To support its control argument for finding a fiduciary relationship, the Court proposed two related, but independent, factual theories.
First, Century alleged that Iselin was a mere agent of FAB, that is, FAB's influence over Iselin was sufficient to cause him to act or fail to act as it directed. See Century Glove, 151 B.R. at 333. However, the Court stated that the allegations by Century were insufficient because the complaint merely demonstrated a relationship between Iselin and FAB and a potential for FAB to influence Iselin. The Court explained that Century must allege specifically how FAB actually influenced Iselin so as to cause him to act as directed. The Court stated that "[t]he mere potential for control is not equivalent to control." Id.
Second, Century alleged that FAB and Iselin had a common plan to control Century. The Court found that the complaint properly alleged a plan between FAB and Iselin to control Century with an objective of liquidating it to the benefit of them both, and without regard to the interests of Century. The Court carefully read the specific acts of misconduct of the complaint to determine which ones could reasonably be inferred as being consistent with this plan. Such acts of misconduct executed by Iselin with the assistance of FAB included the sale of machinery critical to productive capacity without Court approval and at less than market value; the sale of other machinery outside of the ordinary course of business without board approval, at an unreasonably low price, and with proceeds going to FAB; and causing monies to be paid to FAB that it was not entitled to under its loan agreement. Id. Thus, the Court found that Century had properly alleged facts sufficient to create a fiduciary relationship between the debtor and lender.
Similar to the Court in Century Glove, this Court has also discerned two related, but independent, factual theories in support of the control argument. First, Variable has alleged that Dalton is a mere agent of Comerica. In Century Glove, the Court did not find an agency relationship because the debtor failed to allege specifically how the creditor actually influenced the subject fiduciary to the extent to cause him to act as directed. 151 B.R. at 333-334. In this case, however, Variable has alleged that Comerica basically hand-picked Dalton to be in control of the debtor as State Court receiver and CEO of the debtor. Variable has also alleged that Comerica specifically influenced Dalton by compensating him with an annual salary of $240,000.
Second, Variable has alleged that Comerica and Dalton had a common plan to control the debtor. Variable alleged that Comerica and Dalton worked together to facilitate the acquisition of a controlling interest in the debtor and/or its assets, for the sole or principal benefit of Comerica and Dalton and to the detriment of debtor's unsecured creditors. Dalton allegedly has, through the plan or otherwise, adopted and supported Comerica's position that the alleged debt to Comerica in the sum of approximately $3.9 million is fully secured, notwithstanding substantial evidence to the contrary. Dalton's refusal to challenge Comerica's assertion facilitated Comerica's receipt of $1 million or more in post-petition interest payments to which Comerica is allegedly not entitled. Comerica and Dalton have discouraged potential competition with Dalton for control of the debtor by refusing to give information about the debtor to potential investors on reasonable terms and conditions. The debtor abandoned the plan of reorganization and instead filed a motion to approve the sale of the debtor's assets to a new entity controlled by Dalton, which would give the new entity equity in the debtor corporation for a nominal investment. Comerica consented to the sale, which included the new entity assuming most or all of Comerica's alleged debt, subject to future renegotiation. The terms of the sale process halted competitive bidding for the assets, including the bidding of Moving Lights Resource Organization, in which Variable is a shareholder.
Variable also uses In re American Lumber Co., 7 B.R. 519, 529 (Bankr.D.Minn. 1979), to support its position. In American Lumber, the major creditor, First National Bank of St. Paul, had exercised control over all aspects of the finances and operations of the debtor. Such acts of control included payment of payables and wages, collection and use of accounts receivable and contract rights, purchase and use of supplies and materials, inventory sales, the salaries of principals, the employment of employees, and receipt of payments for sales and accounts receivable. The Court held that, by reason of control over the debtor and its operations, the creditor had the duty and obligation to deal fairly and impartially with the debtor and its other unsecured creditors. The creditor breached its duty by undertaking a course of liquidation that was designed to disadvantage general unsecured creditors and benefit the bank. In the interest of equity, the Court subordinated the bank's claim to the claims of general unsecured creditors. Id.
At this time, the Court does not believe that the dominion and control over the debtor alleged in this case rises to the level of control exercised in In re American Lumber Co. The complaint does not state that Comerica has exercised control over all aspects of the finances and operations of the debtor. However, taking all the allegations in the complaint as true, Variable has alleged conduct that amounts to a very significant level of control over the debtor. Another case that Variable uses to support its argument is N D Properties, Inc., 799 F.2d at 732, in which the fiduciary was a controlling shareholder, secretary and insider of the debtor. The Court held that a shareholder has control when she determines corporate policy, whether by personally assuming management responsibility or by selecting management personnel.Id., citing Berle, "Control" in Corporate Law, 58 Colum. L.Rev. 1212 (1958). The Court stated that the behavior of the secretary of the debtor indicated that she was acting solely for her own benefit to minimize risk of loss without any consideration for other creditors. Such pursuit of personal gain at the expense of other creditors has been recognized as a breach of fiduciary duty justifying equitable subordination. Id. citing American Lumber Co., 7 B.R. 519 .
At the hearing on this motion, Comerica agreed that the Court should take all the allegations in the complaint as true for purposes of this motion. Comerica argued that, even if all the allegations are taken as true, the conduct alleged would still not rise to the level required to create a fiduciary duty to the debtor.
Although the facts in the complaint allege similar behavior on the part of Comerica, N D Properties is distinguishable because Comerica is not in fact an officer, director, shareholder or insider of the debtor. However, using the analysis found inCentury Glove and American Lumber, the Court finds that the facts alleged in the complaint are sufficient enough to show a common plan to control the debtor and to demonstrate that a fiduciary duty does exist between Comerica and the debtor.
IV. CONCLUSION
Variable has alleged in the complaint sufficient facts to create a fiduciary duty between Comerica and the debtor. Hence, Variable has the ability to bring a claim for conspiracy to breach a fiduciary duty against Comerica and Dalton. The Court hereby grants Variable's motion to prosecute the adversary proceeding on behalf of the estate in its entirety, subject to conditions stated at the hearing.