In Re: SRC Liquidation LLC

Filing 40

MEMORANDUM OPINION re bankruptcy appeal. Signed by Judge Leonard P. Stark on 11/16/17. (ntl)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE: SRC LIQUIDATION LLC, et al.,
Debtors.
EISERAMPER LLP, not in its individual capacity
but as Trustee ofSRC LIQUIDATING GUC TRUST,

Chapter 11
Bankr. Case No. 15-10541-BLS
(Jointly Administered)
Adv. Proc. No. 15-50771-BLS

Plaintiff,

v.

Civ. No. 16-119-LPS

JOSEPH P. MORGAN, JR., ROY W. BEGLEY, JR.,
F. DAVID CLARKE, III, JOHN Q. SHERMAN, II,
JULIE D. KLAPSTEIN, JOHN J. SCHIFF, JR.,
ROBERT M. GINNAN, R. ERIC MCCARTHEY,
JOHN DOES 1-10, AND XYZ COMPANIES 1-10,.
Defendants.

MEMORANDUM OPINION
EiserAmper LLP ("Plaintiff'), as trustee of the SRC Liquidating GUC Trust ("Trust")
created in the Chapter 11 cases of The Standard Register Company and its affiliates ("Debtors"),
_,,

appeals the Bankruptcy Court's dismissal of an adversary proceeding against Robert M. Ginnan,
Joseph P. Morgan, Jr. ("Officer Defendants"), Roy W. Begley Jr., F. David Clarke, III, John Q.
Sherman, II, Julie D. Klapstein, John J. Schiff, Jr., and R. Eric Mccarthey ("Director.
Defendants"), asserting causes of action including breach of fiduciary duty and avoidance of
fraudulent transfers. The appeal is fully briefed. (See D.I. 15, 20, 36} For the reasons stated
below, the Court will affirm the dismissal.

I.

BACKGROUND
Facing economic difficulties, including a decline in the demand for traditional printing

services and underfunded pension obligations, The Standard Register Company and its
subsidiaries (the "Company") pursued restructuring and ultimately entered into a strategic

combination transaction to acquire a competitor, WorkflowOne (the "Acquisition"). In
connection with the Acquisition, Officer Defendants prepared financial projections regarding the
combined companies to determine whether the Acquisition made sense. (A62 if 18) 1 On July 31,
2013, the Company's board approved the Acquisition, along with transaction bonuses totaling
$900,000 for Morgan and $325,000 for Ginnan. 2 (A69 ifif 54, 55) Half of each b~~mus was
contingent on the Company attaining "certain performance-related thresholds" in the "first
quarter of 2014." (See SA48) Having met those thresholds, Officer Defendants later received
the full amount of the bonuses. (See A69 ifif 54-55) Ultimately, the synergies and growth that
management had projected for the combined companies were not achieved. (See D.I. 20 at 15)
The Company defaulted on its debt and, on March 15, 2015, filed for relief under Chapter 11 of
the Bankruptcy Code. In May 2015, the Bankruptcy Court granted the creditors' committee
standing to pursue causes of action on behalf of the estates. The creditors' committee filed a
complaint focused on its secured lenders, including Silver Point Capital L.P. ("Silver Point")
and, within weeks, reached a $5 million settlement with those parties. (B.D.I. 696) Following
the settlement, Plaintiff amended the complaint (Adv. D.I. 6) ("Complaint") which now focuses
on Defendants' decision to pursue the Acquisition as the alleged cause of the Company's
eventual bankruptcy.
The purported unreliability of the projections presented to the board in connection with

1

The docket of the Chapter 11 cases, In re SRC Liquidation, et al., Case No. 15-10541-BLS
(Bankr. D. Del.), is referred to herein as "B.D.I. _." The docket of the adversary proceeding,
EiserAmper LLP v. Joseph P. Morgan, et al., Adv. Pro. No. 15-50771-BLS (Bankr. D. Del.), is
referred to herein as "Adv. D.I. _." Citations to "A_" refer to Appellant's Appendix (D.I.
16). Citations to "SA_" refer to Appellees' Suppl~mental Appendix (D.I. 21).
2

The Board also approved equity grants of performance-related restricted stock and time-vested
restricted stock, neither of which are the subject of the adversary proceeding. (See SA48) The
latter would fully vest in 2016 and the former would vest "based on the achievement of certain
performance goals over three years." (See SA48-49)
2

the Acquisition is the basis of Plaintiffs breach of fiduciary duty claim. (See A154 (Plaintiff
describing projections as "the linchpin" of its claims)) Count I of the Complaint alleges that
Defendants breached their fiduciary duties under Ohio law3 by approving the Acquisition
without fully and adequately informing themselves, and by relying on unrealistic and overly
optimistic projections which they knew or should have known the Company could not achieve
following the Acquisition, and (ii) the Officer Defendants breached their fiduciary duty by
knowingly preparing unreliable and unattainable financial projections. Count I further alleges
that Defendants breached their duty of loyalty by approving the Acquisition to preserve their
positions and their compensation.
Count II of the Complaint seeks avoidance of the bonuses paid to the Officer Defendants
as constructively fraudulent transfers pursuant to§ 548(a)(l)(B) of the Bankruptcy Code .. Count
III seeks avoidance of the bonuses to the Officer Defendants as fraudulent transfers pursuant to
§ 544 of the Bankruptcy Code-which permits a bankruptcy trustee to bring a claim for . ·
fraudulent tran~fer under applicable state laws - and the Ohio Uniform Fraudulent Transfer Act,
codified at Ohio Revised Code§ 1336.01 et seq. Count IV seeks the disallowance of
Defendants' claims against the estates in accordance with§ 502(d) of the Bankruptcy Code. 4
Defendants moved to dismiss the Complaint. (Adv. D.I. 19) On February 8, 2016, the
Bankruptcy Court conducted a hearing on the motion to dismiss and ruled from the bench,

3

Debtor SRC Liquidation Company acquired W orkflowOne and was an Ohio corporation at all
times relevant to the Complaint. There is no dispute between the parties that, under the internal
affairs doctrine, Plaintiffs claims for breaches of fiduciary duty are governed by Ohio law. See
In re Fedders N Am., Inc., 405 B.R. 527, 539 (Bankr. D. Del. 2009) (stating authority to regulate
corporation's internal affairs belongs to state under which corporation is chartered).
4

Section 502(d) of the Bankruptcy Code provides, inter alia, that the court shall disallow any
claim of any entity from which property is avoidable under§ 548 (as a fraudulent transfer) unless
such entity or transferee has paid the amount, or turned over any such property, for which such
entity is liable. See 11 U.S.C. § 502(d).
3

dismissing Count I with prejudice, and dismissing Counts II, III, and IV without prejudice. On
February 19, 2016, the Bankruptcy Court entered an order dismissing the Complaint for the
reasons stated at the hearing and granting Plaintiff leave to amend Counts II-IV within 30 days.
(Adv. D.I. 53; A302-03) (the "Dismissal Order") Rather than amend, Plaintiff filed a notice of
appeal on March 1, 2016. (D.I. 1) The Bankruptcy Court then issued a Supplemental
Memorandum Order further discussing its dismissal of Count I with prejudice. (Adv. D.I. 61;
A304-12) ("Memorandum Order") Addressing its dismissal of Count I with prejudice, the
Bankruptcy Court determined that the Complaint failed to plausibly allege any facts - as opposed
to general conclusions - demonstrating that the projections were in fact "unrealistic and overly
optimistic" or that Defendants knew or should have known this at the time (see A307-08); failed
to plausibly allege entrenchment or lack of disinterestedness to support the alleged breach of
loyalty (see A309-l 1); and failed to plausibly allege facts demonstrating that any breach of
fiduciary duty was the proximate cause of the bankruptcy and any resulting damages (see A311 ).

II.

APPELLANT'S CONTENTIONS
Plaintiff raises several issues on appeal, but its main argument is that dismissal of any of

the Counts was improper because the Bankruptcy Court failed to accept all factual allegations in
the Complaint as true and failed to draw all reasonable inferences in favor of Plaintiff. (See D.I.
15 at 16-19) Accorqillg to Plaintiff, the Bankruptcy Court also improperly subjected Plaintiff to
a "heightened pleading standard" based on Plaintiffs access to discovery produced to the
creditors' committee in the course of the Chapter 11 cases. (See id. at 19-23)
With respect to tlie breach of fiduciary duty claim, Plaintiff argues that the Bankruptcy
Court erred in granting the motion to dismiss because the Complaint plead sufficient facts to
overcome Ohio's business judgment rule. (See id. at 27-32) According to Plaintiff, the
Complaint plausibly-alleges facts demonstrating that, in light of their knowledge of the ongoing
4

declines in the print industry, Defendants breached their duty of care by preparing and accepting
projections which they knew or should have known were unrealistic and unattainable.· (See id.)
Plaintiff further argues that the Corriplaint plausibly alleges facts demonstrating that Defendants
were motivated to prepare unrealistic projections in order to retain their corporate control and
equity interests, lacked disinterestedness in the Acquisition by virtue of the possible bonuses, and
therefore breached their duty ofloyalty. (See id. at 37-41) With respect to causation, Plaintiff
contends that the Complaint plausibly alleges facts from which the Bankruptcy Court could infer
that Defendants' actions preparing and accepting unrealistic projections caused the Company to
severely overpay for th.e Acquisition, burdened it with overwhelming secured debt and highly
restrictive covenants it could not support, and was therefore the proximate cause of the
bankruptcy and resulting damages. (See id. at 41-45) Plaintiff further contends that dismissal of
the fiduciary duty claim with prejudice was an abuse of discretion because the Bankruptcy Court
did not explain its reasoning. (See id. at 45-4 7)
Regarding the fraudulent transfer claims, Plaintiff argues that the Complaint contained
sufficient factual allegations to demonstrate that Debtors were insolvent or rendered insolvent at
the time they paid the bonuses and that a strong stock price at the time of the Acquisition cannot
rebut a claim of insolvency at the pleading stage. (See id. at 49-53) Plaintiff further argues that
the Complaint contained sufficient allegations to plausibly state that Debtors did not receive
reasonably equivalent value for the transaction-related bonuses because "the board effectively
destroyed the Debtors' prospect of remaining in business by overpaying for the Acquisition" and
thus "[i]t would belie all common sense to find that the Debtors received reasonably equivalent
value" for any bonuses paid in connection with the Acquisition. (See id. at 54-58)

III.

LEGAL STANDARDS

Appeals from the Bankruptcy Court to this Court are governed by 28 U.S.C. § 158.
5

Pursuant to§ 158(a), district courts have mandatory jurisdiction to hear appeals "from final
judgments, orders, and decrees" and discretionary jurisdiction over appeals "from other
interlocutory orders and decrees." 28 U.S.C § 158(a)(l) and (3). In conducting its review of the
issues on appeal, this Court reviews the Bankruptcy Court's findings of fact for clear error and
exercises plenary review over questions of law. See Am. Flint Glass Workers Union v. Anchor

Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). Whether a party sufficiently states a claim is a
question oflaw, over which this court exercises de novo review. See Mayer v. Belichick, 605
F.3d 223, 229 (3d Cir. 2010).
Evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires
the Comi to accept as true all material allegatioi1s of the complaint. See Spruill v. Gillis, 372
F.3d 218, 223 (3d Cir. 2004). "The issue is not whether a plaintiff will ultimately prevail but
whether the claimant is entitled to offer evidence to support the claims." Jn re Burlington Coat

Fact01y Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997) (internal quotation marks omitted).
Thus, a court may grant a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6)
"only if, accepting all well pleaded allegations in the complaint as tlue, and viewing them in the
light most favorable to plaintiff, plaintiff is not entitled to relief." Id.
However, to survive a motion to dismiss, Plaintiff must allege facts that "raise a right to
relief above the speculative level." Bell At!. C01p. v. Twombly, 550 U.S. 544, 555 (2007). "A
claim has facial plausibility when the plaintiff pleads factual content that allows the comi to
draw the reasonable inference that the defendant is liable for the misconduct alleged."

Ashcrc~fi

v. Iqbal, 556 U.S. 662, 678 (2009). At bottom, "[t]he complaint must state enough facts to raise
a reasonable expectation that discovery will reveal evidence of [each] necessary element" of
Plaintiffs claim. Wilkerson v. New Media Tech. Charter Sch. Inc., 522 F.3d 315, 321 (3d Cir.
2008) (internal quotations omitted). The Court is not obligated to accept as true "bald
6

assertions," Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997) (internal
quotation marks omitted), "unsupported conclusions and unwarranted inferences," Schuylkill
Energy Res., Inc. v. Pennsylvania Power & Light Co., 113 F.3d 405, 417 (3d Cir. 1997), or

allegations that are "self-evidently false," Nami v. Fauver, 82 F.3d 63, 69 (3d Cir. 1996).
(

This Court reviews the Bankruptcy Court's decision to dismiss Count I of the Complaint
with prejudice - that is, without a further opportunity for amendment - for abuse of discretion.
See Lorenz v. CSX Co1p., 1 F.3d 1406, 1413 (3d Cir. 1993). An abuse of discretion exists ifthe

Bankruptcy Court's ruling "rests upon a clearly erroneous finding of fact, an errant conclusion of
law, or an improper application oflaw to fact." In re SGL Carbon C01p., 200 F.3d 154, 159 (3d
Cir. 1999).

IV.

DISCUSSION

A.

Pleading Standard

As an initial matter, Plaintiff argues that the Bankruptcy Court erred by improperly
subjecting Plaintiff to a "heightened pleading standard" in light of discovery produced during the
Chapter 11 cases. (See D.I. 15 at 19-23) In the motion to dismiss, Defendants asserted that the
Complaint failed to identify any facts demonstrating a flaw in the projections, and that this
failure was "telling" because the creditors' committee "had the benefit of thousands of pages in
discovery when it drafted its Amended Complaint" (A107), including the projections (A105),
minutes of the board meetings at which the projections were presented and discussed (id.), sworn
declarations from Morgan and Ginnan (B.D.I. 586, 588) detailing how the projections were
prepared and presented to the board (A107), and certain advisory opinions obtained by the
Company prior to the Acquisition (A107-08). 5 ~at consideration, if any, the Bankruptcy Court

5

In connection with the Acquisition, (i) Bank of America Merrill Lynch, the Company's

investment banker, provided a fairness opinion, and (ii) Capstone Valuation Services provided a
solvency opinion. (See D.I. 15 at 33 n.14) Plaintiff argues on appeal that any consideration by
7

should give to Defendants' assertions, in.light of the fact that Rule 9(b)'s standard is sometimes .
relaxed at the pleading stage for bankruptcy trustees, was discussed at the hearing on the motion
to dismiss. (See A280 at 73: 18-22) According to Plaintiff, the limited discovery received by the
creditors' committee was focused primarily on relief sought by the Debtors in connection with
post-petition financing and sale efforts and was reviewed in a compressed time frame. (D.I. 15
at 20) On appeal Plaintiff argues that "[t]he fact that pleading standards are typically relaxed for
trustees who may not have access to evidence to support [their] claim at the pleading stage, does
not imply that there ought to be a heightened pleading standard for trustees whose attorneys had
some access." (Id. at 22-23) Defendants respond that the Bankruptcy Court correctly applied
the Twombly-Iqbal standard in determining whether the Complaint contained sufficient factual allegations and did not apply a heightened standard. (D.I. 20 at 3-4)
Rule 8(a) of the Federal Rules of Civil Procedure requires that a complaint contain "a
short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ.
P. 8(a)(2). When a plaintiffs allegations involve claims of fraud, 6 the plaintiff must also meet
the threshold pleading standard set forth in Federal Rule of Civil Procedure 9(b), which requires
that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances

the Bankruptcy Court of the advisory opinions was improper because they were not referenced in
the Complaint and because they assumed and relied on the flawed projections without
independent review or validation. (See id. at 33-34) The Court finds no indication that the
Bankruptcy Court gave any consideration to the advisory opinions in determining that the
allegations in the Complaint were insufficient to state a claim. The colloquy regarding whether
"less deference" should be given where "projections are not prepared by third parties or scrubbed
by independent professionals" does not support finding the error alleged by Plaintiff. (See id. at
33 n.15 (citing A237-38, 30-31))
6

The Bankruptcy Court has held that the Rule 9(b) pleading standard applies to a fraudulent
transfer claim under§ 548, regardless of whether it is based on actual or constructive fraud. See
In re Oakwood Hoines C01p., 325 B.R. 696, 698 (Bankr. D. Del. 2005); see also In re Fruehauf
Trailer Corp., 444 F.3d 203, 210 (3d Cir. 2006) (addressing fraud in context of sections
548(a)(l)(A) and (a)(l)(B) of Bankruptcy Code).
8

constituting fraud or mistake." Fed. R. Civ. P. 9(b). Rule 9(b) is a heightened pleading standard
intended "to protect a defendant from the burdens of discovery associated with a fraud claim."
In re Liberty State Benefits ofDelaware, 541 B.R. 219, 233 (Bankr. D. Del. 2015). Courts
sometimes relax the heightened standard for bankruptcy trustees bringing fraud claims on behalf
of a debtor and its creditors where the trustee has not been afforded any discovery prior to filing
a complaint. 7
Defendants correctly explain that all claims - whether brought by a bankruptcy trustee or
not- are subject, at a minimum, to the Twombly-Iqbal standard, and applying that standard to a
bankruptcy trustee's claims does not impose a "heightened pleading standard." (D.I. 20 at 3-4)
The Court finds no indication in the hearing transcript, Dismissal Order, or Memorandum Order
that the Bankruptcy Court applied any heightened pleading standard in dismissing the
Complaint. The record merely reflects that, based on Defendants' repeated statements that
Plaintiff had the benefit of discovery, the Bankruptcy Court sought to clarify Defendants'
. posltion during oral argument as to whether some different pleading standard should apply:
Case [l]aw supports the proposition that there is a lower threshold
for [a] Trustee to meet, recognizing that they don't necessarily
have all the institutional knowledge. . . . I've wondered whether or
not [Defendants are], sort of, imposing the flip side of that coin
where you've got a Liquidating Trustee that is the successor,
effectively, to a Committee that had all the benefits of Discovery
Rule 2004 ....
(A214, 7:16-7:25) In seeking clarification from Defendants, the Bankruptcy Court inquired
whether the analysis should be "pretty strict where we have players that have, frankly, all of the

7

See e.g., Liberty, 541 B.R. at 233 (applying slightly relaxed standard to bankruptcy trustee's
RICO claims involving fraud); In re Am. Bus. Fin. Servs., Inc., 361 B.R.747, 753 (Bankr. D. Del.
2007) ("A bankruptcy trustee, as a third party outsider to the debtor's transactions, is generally
afforded greater liberality in pleading fraud."). Generally, as a third party outsider,. a trustee
must "rely oil secondhand knowledge for the benefit of the estate and all of its creditors." In re
Global Link Telecom Corp., 327 B.R. 711, 717 (Bankr. D. Del. 2005).
9

financial records of the company or had access to much more than [the court] would see in a
Chapter 7 case." (See A257, 50) While Defendants agreed to the characterization of the
argument (see A257, 50), and Plaintiff makes much of this exchange on

appeal~

the Court finds

no indication that the Bankruptcy Court "appeared to erroneously accept Defendants' argument"
that the Complaint was subject to a heightened pleading standard in light of the discovery that
was provided, as Plaintiff has asserted on appeal (D .I. 15 at 19), or that the Bankruptcy Court
applied any standard other than Twombly-Iqbal in determining that dismissal was appropriate.
Rather, the transcript reflects the Bankruptcy Court's agreement that a bankruptcy trustee is
generally afforded greater pleading liberality. (See A256-57, 49:23-50: 1 ("It is a well settled
proposition that a Bankruptcy Trustee, typically, receives more d~ference at the Rule 12 stage
... ")) The Court finds no merit in the argument that the Bankruptcy Court applied a heightened
pleading standard.

B.

Breach of Fiduciary Duty (Count I)

Directors of Ohio·corporations owe the corporation a duty of care and a duty of loyalty,
duties which are codified in the Ohio Revised Code. "[U]nder the duty of care, a director must
·perform his duties 'with the care that an ordinary prudent person in a like position would use
under similar circumstances,"' while "under the duty ofloyalty a 'director shall perform his
duties as a director ... in good faith, in a manner he reasonably believes to be in [or not opposed
to] the best interests of the corporation."' Rado/ v. Thomas, 772 F.2d 244, 256 (6th Cir. 1985)
(quoting Ohio Rev. Code§ 1701.59(B)). Ohio's business judgment rule creates a presumption
that fiduciaries have acted with care, in the best interests of the company, and in good faith. See
Ohio Rev. Code § l 701.59(D)(l) ("A director shall not be found to have violated the director's
duties ... unless it is proved by clear and convincing evidence that the director has not acted in
good faith, in a manner the director reasonably believes to be in or not opposed to the best
10

interests of the corporation, or with the care that an ordinarily prudent person in a like position
would use under similar circumstances ... "); Brosz v. Fishman, 99 F. Supp. 3d 776, 785 (S.D.
Ohio 2015) (noting presumption under Ohio law "that any action taken by a director on behalf of
the corporation is taken in good faith and for the benefit of the corporation.").
"The decisions of disinterested [fiduciaries] will not be disturbed if they can be attributed
to any rational business purpose." Ko9s v. Cent. Ohio Cellular, 641N.E.2d265, 273 (Ohio Ct.
App. 1994)). "Ohio comis adhere to the 'business judgment rule,' and will not inquire into the.
wisdom of actions taken by the directors in the absence of fraud, bad faith or abuse of
discretion." Id. at 272 (quoting Rado!, 772 F.2d at 256). A plaintiff asserting liability for
damages based on breach of fiduciary duty must show by clear and convincing evidence "that
the director's action or failure to act involved an act or omission undertaken with deliberate
intent to cause injury to the corporation or undertaken with reckless disregard for the best
interests of the corporation." Ohio Rev. Code§ 1701.59(E).
1.

Duty of Care

Under Ohio law, "[p ]laintiffs must plead facts, as distinct from generalized conclusions,
which, if proved, would overcome the presumption that the [director defendants] have acted in
good faith and in the best interests of the corporation." In re Gas Natural, Inc., 2015 WL
3557207, at *15 (N.D. Ohio June 4, 2015) (internal citation omitted). Here, the crux of
Plaintiffs duty of care claim is that Defendants "knew or should have known" that the
projections were "unrealistic and overly optimistic." (A79-80 ii~ 111, 113-14) However, the
Ohio Revised Code expressly insulates Ohio directors from liability when they rely on
information prepared by management, other directors, and outside experts, accountants, or
consultants:
In performing a director's duties, a director is entitled to rely on
information, opinions, reports, or statements, including financial
11

statements and other financial data, that are prepared or presented
by ... directors, officers, or employees of the corporation who the
director reasonably believes are reliable and competent in the
matters prepared or presented ....
Ohio Rev. Code § 1701.59(C). The fiduciary will be considered to be acting in bad faith only if
he "has knowledge concerning the matter in question that would cause reliance on [such] .
infmmation, opinions, reports, or statements ... to be unwarranted." Id. § l 701.59(D)(2). Thus,
pursuant to § 1701.59(C) and (D)(2), Defendants' reliance on the projections is insulated from
liability unless Plaintiff pleads factual allegations tending to show Defendants did not reasonably
believe management was competent to prepare the projections or had knowledge that caused
their reliance on the projections to be unwananted. See id.; see also Goodyear, 2007 WL 43557,
at *9 (rejecting plaintiffs argument that defendants' reliance on§ 1701.59(D) was inappropriate
at pleading stage).
The Bankruptcy Court carefully considered Ohio's statute in determining whether
Plaintiff plead facts sufficient to overcome the business judgment presumption. The Bankruptcy
Court dete1mined that the Complaint failed to plausibly allege that Defendants "had personal
knowledge of facts that would have called into question the capability or integrity of company
management that prepared the financial projections and endorsed the proposed transaction."
(A307-08) The Bankruptcy Court further determined that "the [Complaint] offers only
conclusory statements that the directors had actual knowledge of any methodological problems
with the projections when they were considering the [Acquisition], but alleges no facts in support
thereof." (A307)
On appeal, Plaintiff argues that the Bankruptcy Court failed to accept well-pleaded
factual allegations in the Complaint that the projections were unrealistic and unattainable and
Defendants are, thus, not entitled to the protection afforded by the business judgment rule. (See
D.I. 15 at 27-32) Plaintiff further argues that the Bankruptcy Court misinterpreted
12

§ 1701.59(D)(2) when it held that the Complaint did not plausibly allege that Defendants had
"actual knowledge" of the projections' alleged deficiencies. Plaintiff contends that "[n]othing in
section 1701.59(D)(2) requires 'actual knowledge' of problems with the methodology of
projections in order to demonstrate that a director has acted in bad faith," and the Complaint
contained sufficient allegations that Defendants knew or "ought to have-known" that reliance
was unwarranted, which courts have construed as sufficient to rebut the presumption of the
business judgment rule. (Id. at 28 (citing cases))
Defendants counter that Count I was properly dismissed because the Complaint contains
no factual allegations which, taken as true, would overcome the presumption that Defendants
prepared, considered, and relied on the projections in good faith. (See D.I. 20 at 26-27)
According to Defendants, Plaintiffs contention that the projections were unrealistic and overly
optimistic is not supported by any alleged material error in the methodology used to generate the
projections, or by any factual allegation that, if proven, would establish that Defendants were
aware or should have been aware of any such error or facts that would call into question the
assumptions regarding the potential benefits of the Acquisition (e.g., cost synergies and
expanded customer bases) which were used in making the projections. (See id. at 30)
· Defendants further assert that because the Bankruptcy Court determined that none of the factual
allegations in the Complaint would undercut the integrity of the projections, the issue of whether
the Defendants knew or should have known those facts is of no moment to the Bankruptcy
Court's holding.· (See id.)
The Complaint alleges the following facts in support of Plaintiffs claim that Defendants
knew or should have known the projections were unrealistic such that reliance on them was
unwarranted, and that Defendants, in nonetheless relying on them, acted with either deliberate
intent or with reckless disregard for the Company's best interests:
13

•

At the time of the Acquisition, WorkflowOne was worth significantly and
materially less than the $218 million purchase price (A71'if62; A75 'if 81)

•

At the time of the Acquisition, the Company was facing "industry declines"
and "secular headwinds" (A72 'if 68; A73 if 70; A77 if 91; D.I. 15 at 31-32)

•

At the time of the Acquisition, analysts forecasted a decline in average
EBITDA margin in the print industry from 2012-2015 (A70 'if 60)

•

In the year prior to the Acquisition, the Company cut SG&A expenditures and
lost revenue, "but the projections nonetheless 'contemplated a 2.0% growth
despite a 12.7% decline in SG&A expenditures' and '[t]hrough 2016, the
projections contemplated that the combined company would generate marketleading revenue gains while simultaneously slashing SG&A expenditures by
17%"' (D.I. 15 at 31-32) (citing A70 'if 58)

Even viewing these allegations in the light most favorable to Plaintiff, they are not
sufficient to demonstrate that Defendants knew or should have known that reliance on the
projections was unwarranted or that they acted in bad faith. The duty of care claim is predicated
on Plaintiffs contention that Defendants "turned a blind eye to relevant market trends and
analysis" and "blindly relied on the projections" that Defendants "knew or should have known"
"were patently unreasonable" based on "their own knowledge of the industry." (D.I. 36 at 1314) However, the Complaint me!ely states these conclusory allegations without alleging
supporting facts. 8 While Plaintiff now argues that the board acted intentionally or with reckless
disregard because the board meeting minutes were "devoid of any evidence of significant
deliberation" in connection with the projections and approval of the Acquisition (D.I. 36 at 14),
the Complaint does not mention the board minutes. The Complaint does allege that Silver Point
believed that W orkflowOne was worth less than the final $218 million price the Company paid,
yet the Complaint does not allege that Defendants or anyone from the Company had knowledge
of Silver Point's internal valuation of WorkflowOne. (A74 'if'if 75-79) As the Bankruptcy Court

8

See e.g., A69-70 'ifif 56-59; A 73 'if 70; A69 'if 56.

14

correctly determined, these statements are not "meaningful allegations what would undercut the
integrity of the projections sufficient to render the directors' decision to rely upon those
projections as wrong or as sufficient predicate to assert liability against them." (A290, 83)
The Court also rejects Plaintiffs argument that the Bankruptcy Court misinterpreted
§ 170 l .59(D)(2) when it held that the Complaint did not plausibly allege that Defendants had
"actual knowledge" of the projections' alleged deficiencies. Plaintiff cites non-Ohio cases
holding that directors act in bad faith when they "should have known" their decisions were
flawed, even in the absence of actual knowledge. 9 Here, however, none of the allegations in the
Complaint "would undercut the integrity of the projections," so Plaintiff has failed to adequately
allege even that Defendants "should have known" of the purported deficiencies of the
projections. Thus, while the Court does not believe the Bankruptcy Court relied on the absence
of an allegation of "actual knowledge," such an error here would not be reversible, as the
Complaint does not meet even the "should have known" standard. (See D.I. 20 at 31) 10
The allegations in the Complaint establish that Plaintiffs fiduciary duty claim is based on
hindsight. "[A] court will not second-guess the fiduciary's decision as long as it has any.rational

9

In each such case cited by Plaintiff, the operative complaint also contained other allegations
giving rise to a plausible contention that defendants did not act in good faith. See DCG & Tex
rel. Battaglia/Ira Knight, 68 F. Supp. 3d 579, 587-88 (E.D. Va. 2014) (also alleging self-dealing
and intentional favoring of insiders); F.D.IC. v. Faigin, 2013 WL 3389490, at *1, 6 (C.D. Cal.
July 8, 2013) (also alleging specific errors with respect to each challenged transaction); In re
LandAmerica Fin. Grp., Inc., 470 B.R. 759, 776, 791-92 (Bankr. E.D. Va. 2012) (also alleging
numerous facts known to directors about company's liquidity issues, including allegation that
directors failed to meet or discuss those issues for extended period).
10

The Bankruptcy Court referred to Defendants' "actual knowledge" not in the context of
construing Ohio's business judgment statute, but rather in the context of addressing the
Complaint's overall theory that Defendants 'knew or should have known' that the projections
were unrealistic and overly optimistic. (A307-08 ifif 4-5) The pertinent statute - Ohio Rev.
Code § 1709.59(D)(2) - also refers to directors being entitled to rely on reports unless they have
"knowledge ... that would cause reliance on [such] information, opinions, reports, or statements
... to be unwarranted" (emphasis added).
15

business purpose, even if the decision ends up being flawed in hindsight." In re Ultimate
Escapes Holdings, LLC, 551 B.R. 749, 761 (D. Del. Feb. 23, 2016). In the face of a declining
industry, Standard Register projected that a combination with a competitor could result in
significant synergies that would reduce the combined companies' costs and potentially increase
profit margins. This turned out to be incorrect - which is unfortunate, but is also insufficient to
establish a claim of bad faith that would lead to liability. See In re Key3Media Grp., Inc., 336
B.R. 87, 95-96 (Bankr. D. Del. 2005) ("Predicting the operating performance of the [acquired]
assets was an exercise of business judgment .... "), ajf'd 2006 WL 2842462 (D. Del. Oct. 2,
2006). "The business judgment rule recognizes that niany important corporate decisions are
made under conditions of uncertainty, and it prevents courts from imposing liability on the basis
of ex post judicial hindsight and lowers the volume of costly litigation challenging directorial
actions." Rado/, 772 F .2d at 257.

2.

Duty of Loyalty

The Complaint separately alleges in Count I that Defendants sought to preserve their
"positions of control" - to entrench themselves - and that Officer Defendants were improperly
motivated by the bonuses. (See A80 ifif 115) The Bankruptcy Court determined that the
Complaint plead no facts to plausibly establish an entrenchment motive based on the bonuses
and compensation. (See A309-11)
On appeal, Plaintiff argues that the Bankruptcy Court erred because the Complaint
alleges that: (i) "Defendants ensured that Standard Register's senior management (some of
whom were descendants of Standard Register's founders) would remain in place and retain their
equity holdings" (A68 if 51 ); and (ii) Defendants were not disinterested in the Acquisition as they
stood to benefit in a manner different from all stockholders generally through their maintenance
of positions of senior officer positions and receipt of significant bonuses and other incentive
16

compensation (A69-A70 ifif 52-55; A80 if 115).
A successful claim for entrenchment "requires plaintiffs to prove that the defendant
directors engaged in action which had the effect of protecting their tenure and that the action was
motivated primarily or solely for the purpose of achieving that effect." Benihana of Tokyo, Inc.
v. Benihana, Inc., 891A.2d150, 186 (Del. Ch. 2005) aff'd906 A.2d 114 (Del. 2006) (internal

citations omitted). Ohio law provides that "directors are not deemed self-interested merely by
virtue of the fact that the subject matter upon which they are acting may or may not result in a
loss of their offices as directors or because a change or potential change in control is involved."
Ohio Rev. Code§ 1701.60, Committee Note (1986). Thus, to state a claim that Defendants acted
disloyally, Plaintiff is required to plead "in addition to a motive to retain corporate control, other
facts sufficient to state a cognizable claim that the Director Defendants acted disloyally."
Gautier v. Stephens, 965 A.2d 695, 707 (Del. 2009). That Defendants held equity in the

Company is insufficient. See Koos, 641 N.E.2d at 272 (observing that directors' stock ownership
"is not sufficient to deprive their decision of the benefit of the business judgment rule").
The Complaint merely alleges that Defendants acted to ensure that the Company's
management would remain in place and would retain their equity holdings. (See A68 if 51) The
Complaint falls short of alleging that Defendants acted primarily or solely to entrench
themselves. As the Bankruptcy Court observed, allegations that a transaction permitted a
defendant to remain employed and receive compensation are insufficient to plausibly allege
disloyal conduct; the standard is "much higher." (A291, 84) The only additional allegations to
support Plaintiffs theory are references to "negotiations regarding a prospective acquisition of
Standard Register by a larger competitor." (A310 if 8 (reciting allegation from Complaint); D.I.
15 at 21 (referencing negotiations with competitor that "reached an advanced stage, but suddenly
came to a halt")) As the Bankruptcy Court observed, however, the Complaint does not allege
17

that this competitor ever offered to purchase the Company. (See A3 l 0 if 8 ("With no offer to be
acquired alleged to have even been made, let alone rejected, the [Complaint] fails to allege facts
from which it can be plausibly inferred that [Defendants] ... supported or approved the
· [Acquisition] in order to maintain their positions of control.")) The Court agrees that Plaintiff
has alleged "no facts that [Defendants] chose the Acquisition over an alternative option that, if
chosen instead, would have resulted in their losing their positions." (Id.) The Court finds no
error in the Bankruptcy Court's conclusion that Plaintiff failed to plead facts sufficient to
plausibly allege entrenchment.
Plaintiff also alleges a breach of the duty of loyalty based on Defendants' lack of
disinterestedness. In this regard, the Complaint alleges that Defendants were not disinterested in
the Acquisition as they stood to benefit in a manner different from all stockholders generally,
through receipt of significant bonuses and other incentive compensation. (A69-70 ifif 52-55; A80

if 115) The Bankruptcy Court determined that the Complaint contained mere conclusory
statements that Defendants elevated their own personal interests above those of the Company.
(See A310-11) Plaintiff argues on appeal that this was error because the Complaint sufficiently

alleged that the total compensation packages for Morgan and Ginnan - including their bonuses "more than double[d] in 2013 as compared to 2012" (A79 if 106), placing them on par with those
of the CEO and CFO of a larger ~ompetitor (id.

if 107).

(D.I. 15 at 37-39; D.I. 36 at 17-19)

While "[t]he protection of the business judgment rule can only be claimed by
disinterested directors," Ohio courts have held that "disinterested directors" does not mean
indifferent directors or directors with no stake in the outcome. Koos, 64 N.E.2d at 272. Rather,
"[d]isinterested directors are those who neither appear on both sides of the transaction nor expect'
to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a
benefit which devolves upon the corporation or all stockholders generally." Id. at 272-73
18

· (internal quotation marks omitted). The Complaint does not allege that Defendants were on both
sides of the Acquisition or expected to derive financial benefit in the sense of self-dealing. The
Complaint merely contains conclusory allegations that Morgan and Ginnan were improperly
motivated by the bonuses, which were allegedly "outsized" in comparison to compensation
received by other executives. But alleging that Defendants' total compensation packages more
than doubled as compared to the prior year and that the bonuses were comparable to a larger
competitor's is insufficient rebut the business judgment presumption. (See A69 if 53; A 79

ifif 106-07) The Court finds no error in the Bankruptcy Court's determination that the Complaint
contained mere conclusory statements that Defendants elevated their own personal interests
above those of the Company to obtain certain coinpensation in connection with the transaction,
and these conclusory allegations are insufficient to survive a motion to dismiss. I I See NCS
Healthcare, Inc. v. Candlewood Partners, LLC, 827 N.E.2d 797, 803 (Ohio Ct. App. 2005)
(affirming dismissal where plaintiff "failed to plead any facts sufficient to avoid the presumption
that the directors acted in the best interests of [the company] pursuant to the business judgment
rule").

3.

Causation

Under Ohio law, "[t]he essential elements of a claim of breach of fiduciary duty are
(1) the existence of a duty arising from a fiduciary relationship, (2) the failure to observe the
duty, and (3) an injury resulting proximately therefrom." Puhl v. U.S. Bank, NA., 34 N.E.3d
530, 536 (Ohio Ct. App. 2015); see also, Kademian v. Marger, 20 N.E.3d 1176, 1205 (Ohio Ct.
App. 2014) ("If a plaintiff establishes that a defendant breached his fiduciary duty, the plaintiff

I l Based on this conclusion, the Court need not consider whether Plaintiff conceded or
abandoned its lack of disinterestedness allegation based on the bonuses in the proceedings below.
(See A163 (Plaintiffs opposition to dismissal, stating "This is not a challenge to the Board's
· actions in approving the [t]ransaction [b]onuses or awarding compensation generally."))
19

must then establish that the breach proximately caused his damages."). As a separate basis for
dismissal, the Bankruptcy Court determined that the Complaint "allege[d] no facts that would
establish that Standard Register's bankruptcy, and any resulting damages, were caused by
Defendants' breach of fiduciary duty, rather than by market forces acting on a company in the
printing and document preparation industry." (See A3 l l) On appeal, Plaintiff argues that the
Bankruptcy Court erred in determining that the Complaint failed to accept well-pleaded factual
allegations in the Complaint regarding causation. (See D.I. 15 at 44-45)
While it is true, as Plaintiff argues, that proximate cause is ordinarily a question of fact
that is inappropriate to resolve at this stage of the litigation, Plaintiffhad the burden, under Ohio
law, of pleading facts that, if proven, would establish proximate cause. See Puhl, 34 N.E.3d at
536; Kademian, 20 N.E.3d at 1205. With respect to causation, the Complaint alleges that Officer
Defendants intentionally or with reckless disregard prepared, and Director Defendants blindly
accepted, unrealistic projections which caused the Company to overpay for WorkflowOne and
overburdened the Company with debt (A79 if 111; D.I. 15 at 11); the Acquisition resulted in the
bankruptcy and asset sale, which generated insufficient proceeds to satisfy the Debtors'
obligations (A73

if 70; A 78 ifif 99, 104); and, thus, the breaches of fiduciary duty "directly and

proximately caused the waste and dissipation of Debtors' assets" and "resulted in millions of
dollars of claims remaining unpaid" (A80 if 116).
However, the Complaint acknowledges the Company's deteriorating financial condition
and underfunded pension obligations that existed even prior to the Acquisition. (A66 if 39;A73

if 73) The Complaint also acknowledges that the industry in which the Company operated was in
a state of ongoing decline. (A76-77 if 91)
The Court finds no error in the Bankruptcy Court's conclusion that it could not
reasonably infer from the factual allegations contained in the Complaint that Defendants' breach
20

of fiduciary duty in preparing and/or relying on the projections and consummating the
Acquisition - as opposed to the ongoing industry decline or any other fact or circumstance of the
Debtors' financial condition-was the proximate cause of the Company's insolvency. The
breach of fiduciary duty claim was properly dismissed on this basis as well.

4.

Dismissal with Prejudice

Plaintiff argues that even if dismissal of the breach of fiduciary duty claim was proper,
the Bankruptcy Court erred in dismissing Count I with prejudice. Plaintiff argues that the United
States Supreme Court has characterized dismissal with prejudice as a "harsh remedy" and has
made clear that "outright refusal to grant [l]eave without any justifying reason appearing for the
denial is not an exercise of discretion; it is merely abuse of that discretion and inconsistent with
the spirit of the Federal Rules." (D.1. 15 at 45 (quoting New York v. Hill, 528 U.S. 110, 118
(2000); Foman v. Davis, 371 U.S. 178, 182 (1962)) Plaintiff argues that the Bankruptcy Court
did not explain its reasoning for dismissing Count I with prejudice. (See id. at 46-4 7)
Under the Federal Rules of Civil Procedure, a plaintiff is entitled to amend his complaint
once; courts may grant subsequent amendments "when justice so requires." Fraser v.

Nationwide Mut. Ins. Co., 352 F.3d 107, 116 (3d Cir. 2003) (citing Fed. R. Civ. P. 15(a)). While
leave to amend should be "freely given," the Bankruptcy Court had discretion to deny a request
to amend (i.e., to dismiss with prejudice) "if it is apparent from the record that ... amendment
would be futile." Id.
It is clear from the record that, following comprehensive briefing and oral argument, the

Bankruptcy Court concluded that permitting 'Plaintiff to amend Count I of the Complaint for a
second time would be futile. (See A76, 86:12-13 ("I find no allegations that would support it.
And I don't believe that there is a meaningful purpose to be served.")) That dismissal with
prejudice was made on futility grounds is further confirmed in the Memorandum Order, which
21

was drafted for the purpose of "address[ing] the [Bankruptcy] Court's reasoning behind its
dismissal of Count ~ with prejudice" (A305 n.2), and which expfained that dismis~al was granted
because the Complaint alleged "no facts to plausibly establish entrenchment" (A309 if 6); "no
facts" to support an entrenchment theory (A309-10 ifif 7-8); "no facts" to plausibly allege
disloyal conduct (A3 l 0 if 9); and "no facts" that would establish proximate cause (A311

if 10).

Based on the record and proceedings in this case, the Court concludes that the
Bankruptcy Court did not abuse its discretion in determining that the breach of fiduciary duty
claim would not be salvaged by further amendment and, therefore, should be dismissed with
prejudice. The Bankruptcy Court's oral and written rulings included a detailed treatment of the
deficiencies in the factual allegations, and indicate that the Bankruptcy Court had "little
reservation with respect to the breach of fiduciary duty counts," ultimately viewing this cause of
action as illustrating "the reason why there is a business judgment rule." (A288-89, 81-82) The
Bankruptcy Court's decision is supported by the facts that the Complaint had been am.ended once
already (see Adv. D.I. 6); 12 that Plaintiff had access to documents and discovery (A214, 7; A284,
77); 13 that there had been comprehensive briefing and oral argument (A288, 81-82 ("I would
conclude from my review ... of the full briefing, as well as the argument I've received today,
that I have little reservation with respect to breach of fiduciary duty counts."); and, as set forth
herein, that the factual allegations in the Complaint were insufficient to state a claim under any

12

The Court recognizes that the first amendment merely reflected that a settlement had been
reached and deleted the allegations against former party Silver Point. (See D.I. 20 at 56)
Although Plaintiff did not choose to make substantive amendments at this time, it was not
precluded from doing so, and there was no abuse of discretion in the Bankruptcy Court viewing
the situation before it as involving a request for a second amendment. In any event, even if the
Court were to view the circumstances as involving Plaintiffs first substantive opportunity for
amendment, there was no abuse of discretion in finding that amendment would be futile, for the
reasons stated throughout this Opinion.
13

See SA122-29 (disclosing time spent on review of information board relied on in analyzing
Acquisition, including board meeting minutes/materials, projections, and advisory opinions).
22

of the theories posited (A309-11). The Court cannot say thatthe Bankruptcy Court abused its
discretion in dismissing Count I with prejudice.

C.

Avoidance of Fraudulent Transfers (Counts II, III, & IV)

The Complaint sought to avoid and recover the bonuses paid to the Officer Defendants in
connection with the Acquisition as constructive fraudulent transfers. Under§ 548(a)(l)(B), any
transfer or obligation incurred by a debtor for which it "received less than a reasonably
equivalent value in exchange" may be avoided if any one of four conditions set forth in
§ 548(a)(l )(B)(ii)(I)-(IV) is met: (i) the debtor was or thereby became insolvent, (ii) the debtor
was engaged in business or was about to engage in business for which any property remaining
with the debtor was an unreasonably small capital, (iii) the debtor intended to incur or believed it
would incur debts that would be beyond its ability to repay as they matured, or (iv) the debtor
made the transfer or incmred the obligation to or for the benefit of an insider under an
employment contract and not in the ordinary course of business., See 11 U.S.C. § 548(a)(l)(B).
Section 544 of the Bankruptcy Code also permits a bankruptcy trustee to bring a claim for
fraudulent transfer under applicable state laws, including the Ohio Uniform Fraudulent Transfer
Act ("UFTA"), which is codified at Ohio Revised Code§ 1336.01, et seq. See 11 U.S.C. § 544.
The Bankruptcy Court determined that the Complaint contained insufficient allegations to
meet the statutory elements above and dismissed the claims without prejudice to re-plead them.
Regarding reasonably equivalent value, the Bankruptcy Court observed that the bonuses did not
"shock the Court" in the context of the overall transaction (see A291, 84) and the Complaint
failed to otherwise articulate that the Company failed to obtain reasonably equivalent value in
exchange for the bonuses (see A292, 85). The Bankruptcy Court further determined that the
Complaint contained insufficient facts to plausibly allege that the Company was insolvent at the
time of the Acquisition and bonuses or was rendered insolvent (see A292-93).
23

1.

Insolvency

The Bankruptcy Code defines insolvency as the "financial condition such that the sum of ·
[the] entity's debts is greater than all of [the] entity's property, at a fair yaluation." 11 U.S.C.
§ 101(32)(A). Similarly, under Ohio law, "a debtor is insolvent if the sum of the debts of the
debtor is greater than all of the assets of the debtor at a fair valuation." Ohio Rev. Code.
§ 1336.02(A)(l). In their motion to dismiss, Defendants argued that Plaintiffs allegations
regarding insolvency were implausible based on, among other arguments, the fact that the
Company's stock price jumped approximately 360% when the Acquisition was announced and
continued to trade at pre-Acquisition levels for at least a year thereafter. (See All 0)
The Memorandum Opinion did not address the fraudulent transfer counts, but in ruling
from the bench, the Bankruptcy Court simply observed that it "struggle[ d] to see, under these
circumstances, as alleged, that the debtor was insolvent at the time of the transaction, or that it
was rendered insolvent." (A292, 85) In so ruling, the Bankruptcy Court declined to attribute
any significance to the stock price (A292, 85) - though it did observe that the stock price would
be relevant to a solvency analysis, even though such evidence was "not appropriate for a Rule 12
motion." (See A292-93, 85-86 ("[W]hen courts look to see what people with skin in the game,
with actual market~based information do, we can look to that as an indicator of value .... [T]he
trading price of a security or a debt instrument is, indeed, meaningful evidence of value and
relevant to the solvency analysis."))
On appeal, Plaintiff argues that the Complaint contained sufficient.factual allegations to
demonstrate that Debtors were insolvent at the time of, or became insolvent as a result of, the
Acquisition and payment of the transaction bonuses, and that a strong stock price at the time of
the Acquisition cannot rebut a claim of insolvency at the motion to dismiss stage. (See D.I. 15 at
24

49-50 (citing In re W.R. Grace & Co., 446 B.R 96, 106 & n.11 (Bankr. D. Del. 2011) (holding,
in the context of plan confirmation, that while "market valuation is strong evidence" of solvency,
lenders had not "backed up their contention that Debtors' market capitalization is.conclusively
one of solvency" and that "arguments for a presumption of solvency are not supported in the
record or by operation of law."))
In particular, the Complaint alleges that the Debtors became insolvent as a result of the
Acquisition and payment of the bonuses (A81

if 122) and alleges the following facts in support:

immediately following the Acquisition, the Debtors' liabilities exceeded the fair value of their
assets (see A75 if 84); at the time of the Acquisition, the proforma combined company had
approximately $261 million of funded debt obligations, $7 million of capital lease obligations,
$235 million of unfunded pension liability, $3 million of deferred compensation obligations, and
$4 million of reported environmental liabilities, for a combined total debt and non-operating
liabilities of $511 million (see id.

if 85); and following the Acquisition, Debtors' total debt and

· non-operating liabilities of $511 million exceeded the midpoint fair value of their assets (based
on a comparable companies analysis, comparable transactions analysis, discounted cash flow
analysis including synergies, and net operating losses) by approximately $218 million (see A76

ir 86).
Defendants argue that these allegations are insufficient and insolvency is implausible
based on the stock price. Defendants further argue that the Complaint implicitly concedes that
the Company did not become insolvent until well after the closing of the Acquisition. (See D.I.
20 at 54 (citing Complaint at A 78 if 99 ("Within months after the closing date of the
[Acquisition] it became apparent that the Debtors would breach covenants ... "))) According to
Defendants, if the Company was not insolvent at the time the bonuses were paid (immediately
after the closing and in the first quarter of 2014), then the fraudulent transfer claim must fail.
25

(See id.) Defendants further assert that Plaintiff fails to point out that the valuation on which it

relies was conducted by Silver Point, a defendant in this action that has since settled with
Plaintiff. (See id. at 56) Defendants argue this "self-interested valuation by Silver Point" cannot
trump contrary evidence, including the board's contemporaneous determination that the
Acquisition was accretive; the advisory opinion 14 stating that the Company was solvent; and the
contemporaneous reaction from investors. (See id.)
It is clear that any disagreement over the value of the Debtors' assets is one of fact and

does not provide a basis for dismissal. The factual allegations in the Complaint, with all
reasonable inferences drawn in favor of Plaintiff, were sufficient to plausibly allege that, at the
time of the transfers, the Company's debts were greater than its assets at fair valuation under the
relevant definitions of insolvency. Defendants' issues with the alleged asset value may be wellfounded, but they do not provide a basis for dismissal at this stage of the proceedings.

2.

Reasonably Equivalent Value

The Bankruptcy Code does not define "reasonably equivalent value." Courts "have
.rejected the application of any fixed mathematical formula to determine reasonable equivalence."
Fedders, 405 B.R. at 546. The Third Circuit employs a "common sense" approach and has held

that "a party receives reasonably equivalent value for what it gives up if it gets roughly the value·

it gave." VFB LLC v. Campbell Soup Co., 482 F.3d 624, 631 (3d Cir. 2007) (internal quotation
marks omitted). In conducting the factual analysis of reasonably equivalent value, the court
looks to the totality of the circumstances. See Fruehauf, 444 F.3d at 213.
Plaintiff argues that the Complaint contained sufficient allegations to plausibly state that
Debtors did not receive reasonably equivalentvalue in exchange forthe bonuses given the failure
14

Contrary to Plaintiffs arguments, there is no indication that the Bankruptcy Court considered
the a4visory opinions in ruling on the motion to dismiss, and the Bankruptcy Court expressly
declined to consider the stockprices. (See A292, 85)
26

of the Acquisition. (See D.I. 15 at 54-58) Conversely, Defendants argue there are no plausible
allegations in the Complaint that Defendants did not actually earn the bonuses they were
awarded. (See D.I. 20 at 52) Defendants argue that the first half of each bonus was paid upon
closing of the Acquisition to compensate Defendants for their work over many years, including
exploring numerous potential mergers and strategic transactions; and the second half of each
bonus was performance-based, to be paid only after the combined company achieved certain
financial benchmarks, which it did achieve. (See id.)
As Plaintiff points out, the Bankruptcy Court stated that the bonuses did not "shock the
Court." (A291, 84) However, contrary to Plaintiffs contention, the record does not show that·
the Bankruptcy Court dismissed the claims based on a disagreement with the Complaint's factual
allegations. (See D.I. 15 at 56) Rather, the Bankruptcy Court found no plausible allegations in
the Complaint that the Officer Defendants did not earn the bonuses. The amount of the bonuses
is not the issue, but whether the Company received reasonably equivalent value in exchange. It
is undisputed that the bonuses were approved by the board's independent compensation
committee and awarded to Defendants for their work in pursuing the Acquisition. (See SA71)
Plaintiffs assertion that the Acquisition was ultimately unsuccessful in saving the Company does
not detract from the work undertaken by Defendants for which they were compensated.· Taking
all the facts in the Complaint as true, and drawing all reasonable inferences in favor of Plaintiff,
the Complaint does not suffiCiently allege that the Company failed to receive reasonably
equivalent value for the bonuses it paid. The Court, therefore, affirms the Bankruptcy Court's
dismissal of the fraudulent· transfer counts. 15
15

Defendants also argue that the bonuses were payments for pre-existing debt, incurred on July
31, 2013 - one day before the Acquisition closed on August 1, 2013. (See D.I. 20 at 51)
Because the Court concludes that the Complaint failed to plausibly allege that the Company did
not receive reasonably equivalent value in exchange for the bonuses, the Court does not consider
this additional argument.
27

V.

CONCLUSION
For the reasons explained above, the Court will affirm the Dismissal. A separate Order

will be entered.

November 16, 2017
Wilmington, Delaware

HON. LEO ARD P. STARK
UNITED STATES DISTRICT JUDGE

28