FTI Consulting, Inc. v. Merit Management Group, LP

Filing 45

MEMORANDUM Opinion and Order Signed by the Honorable Joan B. Gottschall on 8/5/2014. Mailed notice(ef, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FTI CONSULTING, INC., as Trustee of
the Centaur, LLC Litigation Trust,
Plaintiff,
v.
MERIT MANAGEMENT GROUP, LP,
Defendant.

)
)
)
)
)
)
)
)
)
)

Case No. 11 CV 7670
Judge Joan B. Gottschall

MEMORANDUM OPINION & ORDER
FTI Consulting, Inc., as trustee of the Centaur, LLC Litigation Trust, sued Merit
Management, LP, in an attempt to avoid an allegedly fraudulent transfer of $16,503,850 to Merit.
Merit has filed a motion to dismiss and a motion to transfer venue to the Bankruptcy Court for
the District of Delaware. For the reasons explained below, both motions are denied.
I. BACKGROUND
In 2002, a developer named Valley View Downs, LP, applied for Pennsylvania’s last
available harness-racing license. Valley View’s goal was to obtain the racing license as well as a
gaming license so that it could develop a race track with a casino, also known as a “racino.” The
Pennsylvania State Harness Racing Commission initially denied Valley View’s application, but
gave the company an opportunity to reapply.
To strengthen its chances at securing the racing license, Valley View decided to buy out
another company that was competing with Valley View for the license—Bedford Downs
Management Corporation. The two companies entered into a Settlement Agreement whereby
Valley View agreed to pay Bedford Downs $55 million in exchange for Bedford Downs’s

promise to withdraw its application for the racing license. As a 30.007% owner of Bedford
Downs, Valley View paid Merit $16,503,850 at the closing of the deal.
With Bedford Downs out of the picture, the Racing Commission granted Valley View’s
application. To develop a “racino,” however, Valley View still needed to secure a gaming
license. Valley View applied for that license, but the Pennsylvania Gaming Control Board denied
the application. Valley View never received the gaming license, and the company filed for
bankruptcy in 2009.
The Valley View bankruptcy was administered by a bankruptcy judge in the District of
Delaware. See In re Centaur, LLC, No. 10-10799 (KJC) (Bankr. D. Del. filed Mar. 6, 2010).1
As part of the bankruptcy proceeding, the bankruptcy judge approved a “Second Modified
Fourth Amended Joint Chapter 11 Plan of Reorganization” (the Plan). Under the Plan, FTI
Consulting (the Trustee) was appointed to oversee the “Centaur, LLC Litigation Trust.” As
Trustee, FTI acquired Valley View’s right, title and interest in certain “Designated Avoidance
Actions,” which FTI alleges include the claims asserted in this case.
The Trustee brought an avoidance action against Merit in this court, seeking to avoid
Valley View’s payment of $16,503,850 to Merit. Merit now moves to dismiss for lack of
standing and to transfer venue to the Delaware Bankruptcy Court.
II. LEGAL STANDARD
A. Motion to Dismiss for Lack of Standing
Motions to dismiss for lack of standing are considered under Federal Rule of Civil
Procedure 12(b)(1) as an argument that the court lacks subject-matter jurisdiction. See Am.
Fed’n of Gov’t Emps., Local 2119 v. Cohen, 171 F.3d 460, 465 (7th Cir. 1999). When reviewing

1

Centaur, LLC is the parent company of Valley View.
2

a motion to dismiss brought under Rule 12(b)(1), the court “must accept as true all well-pleaded
factual allegations, and draw reasonable inferences in favor of the plaintiff.” Ezekiel v. Michel,
66 F.3d 894, 897 (7th Cir. 1995). To determine subject-matter jurisdiction, the court “may
properly look beyond the jurisdictional allegations of the complaint and view whatever evidence
has been submitted on the issue to determine whether in fact subject[-]matter jurisdiction exists.”
Id. The burden of proof in a Rule 12(b)(1) motion is on the party asserting jurisdiction. United
Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003), overruled on other
grounds by Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012).
B. Motion to Transfer
Under 28 U.S.C. § 1404(a),“[f]or the convenience of the parties and witnesses, in the
interest of justice, a district court may transfer any civil action to any other district or division
where it might have been brought or to any district or division to which all parties have
consented.”

Similarly, under 28 U.S.C. § 1412, “[a] district court may transfer a case or

proceeding under title 11 to a district court for another district, in the interest of justice or for the
convenience of the parties.”
“In determining whether a forum is more convenient, the court must consider the private
interests of the parties as well as the public interest of the court.” Aldridge v. Forest River, Inc.,
436 F. Supp. 2d 959, 960 (N.D. Ill. 2006). The factors related to the parties’ private interests
include: “(1) the plaintiff’s choice of forum, (2) the situs of material events, (3) the relative ease
of access to sources of proof; (4) the convenience of the witnesses; and (5) the convenience to
the parties of litigating in the respective forums.” Hanley v. Omarc, Inc., 6 F. Supp. 2d 770, 774
(N.D. Ill. 1998).

3

“The ‘interest of justice’ is a separate component of a § 1404(a) transfer analysis . . . .”
Coffey v. Van Dorn Iron Works, 796 F.2d 217, 220 (7th Cir. 1986). This inquiry is directed to
the “efficient administration of the court system.” Id. The court must consider “the transferor
and transferee courts’ familiarity with the applicable law and the effect of transfer on the
efficient administration of justice.” Aldridge, 436 F. Supp. 2d at 962.
III. ANALYSIS
The court first considers the motion to dismiss and then addresses the motion to transfer
venue.2
A. Motion to Dismiss3
Merit argues that the Trustee lacks standing to bring its claims against Merit because the
Trustee’s claims are not “Designated Avoidance Actions” under the Plan. Section 9.2(a) of the
Plan provides that “the Debtors [including Valley View] shall be deemed to have automatically
transferred to the Litigation Trust all of their right, title and interest in and to the Designated
Avoidance Actions.” (Mot. to Dismiss Ex. A (Plan) § 9.2(a), ECF No. 18-1.) The Plan defines
“Designated Avoidance Actions” as “any Avoidance Actions that may be asserted against
Entities or Persons other than Released Persons to avoid those certain transfers of property

2

The court may consider a motion to dismiss for lack of subject-matter jurisdiction and a
motion to transfer venue in any order. See In re LimitNone, LLC, 551 F.3d 572, 576 (7th Cir.
2008) (“[T]he district court was not required to determine its own subject-matter jurisdiction
before ordering the case transferred. Although . . . the Supreme Court [has] mandated that issues
of jurisdiction precede a determination of the merits, the Supreme Court has consistently held
that ‘there is no mandatory sequencing of jurisdictional issues.’” (quoting Sinochem Int’l Co.
Ltd. v. Malaysia Int’l Shipping Corp., 549 U.S. 422, 431 (2007))).

3

The court previously referred this case to the Bankruptcy Court for the Northern District
of Illinois for proposed findings of fact and conclusions of law on the motion to dismiss. The
court hereby withdraws that reference. See 28 U.S.C. § 157(d) (“The district court may
withdraw, in whole or in part, any case or proceeding referred [to the bankruptcy court], on its
own motion or on timely motion of any part, for cause shown.”).
4

described on Exhibit ‘I’ to the Disclosure Statement and to recover such transferred property.”
(Plan § 1.37.)4
Exhibit I to the Disclosure Statement, titled “Designated Avoidance Actions,” lists nine
transfers of property. (Mot. to Dismiss Ex. B (Disclosure Statement) Ex. I, ECF No. 18-2.) For
each of these transfers, Exhibit I identifies the nature of the transfer, the transferor, the
transferee, and the amount of transfer. The eighth transfer on Exhibit I is listed as “payment for
equity interests (pursuant to Settlement Agreement).”

(Id.)

Valley View is listed as the

transferor, and thirteen shareholders of Bedford Downs are listed as the transferees. (Id.) The
amount of transfer is listed as $55,000,000. (Id.)
Merit argues that because Merit is not listed as a “transferee” on Exhibit I, the Trustee did
not acquire Valley View’s right to sue Merit, and thus lacks standing to bring this case against
Merit. The court disagrees. The Plan does not restrict the definition of “Designated Avoidance
Actions” to actions against the transferees identified on Exhibit I. Rather, the “Designated
Avoidance Actions” include actions to “avoid those certain transfers of property described on
Exhibit ‘I’ . . . .” (Plan § 1.37 (emphasis added).) There can be no dispute that the transfer of
$16,503,850 from Valley View to Merit at issue is described on Exhibit I—the $16,503,850 was
part of the $55,000,000 transferred from Valley View to Bedford Downs (30.007% of which is
owned in part by Merit). That Merit was not identified as a transferee is irrelevant under the
Plan’s definition of Designated Avoidance Actions.
Moreover, the Plan specifically provides that certain “Designated Defendants” are not
released from liability under the Plan. (Plan § 1.37.) The “Designated Defendants” include not

4

The Plan defines “Avoidance Actions” as “all Causes of Action of the Estates that arise
under chapter 5 of the Bankruptcy Code and any analogous Causes of Action arising under state
law.” (Plan § 1.6.)
5

only “any Entity identified on Exhibit ‘I’” but also any Entity that “is or may be liable in
connection with the Designated Avoidance Actions.” (Plan § 1.38.) As the Trustee correctly
points out, this provision “expressly contemplates and accounts for the possibility that entities
may be liable in connection with the Designated Avoidance Actions that may not be listed on
Exhibit ‘I’.” (ECF No. 22, at 7.)
The cases cited by Merit in support of its argument that the Trustee lacks standing are
inapposite. In Rahl v. Bande, 328 B.R. 387 (S.D.N.Y. 2005), a Litigation Trust Agreement
provided that the trustee was assigned the “right, title and interest to all claims for relief or
causes of action ‘against the Debtors’ current or former directors and officers.’” Id. at 400. The
court concluded that the language of the Agreement did not extend to causes of actions against
third parties. Id. Here, by contrast, the Plan assigns the right to claims based on whether those
claims involve certain transactions, not certain defendants. To the extent that the Plan refers to
certain defendants at all, it does so only to clarify that entities such as Merit are not released
under the Plan.
Similarly, in Mukamal v. Bakes, 383 B.R. 798 (S.D. Fla. 2007), the trustee was
authorized to litigate “Creditor D&O Claims,” defined as “any claims Creditors may have
against Debtors or their current or former directors and officers as well as the proceeds of such
Claims.” Id. at 810. The court concluded that the trustee lacked standing to sue the debtors’
accountants because they were not “current or former directors and officers” of the debtors. Id.
But again, the Plan here does not limit “Designated Avoidance Actions” to actions against
specific defendants, and so Mukamal is irrelevant.
Because the Trustee’s action seeks to avoid a transfer of property described on Exhibit I,
it is a “Designated Avoidance Action” under the Plan. Section 9.2(a) of the Plan vests the

6

Trustee with the “right, title, and interest in and to” such actions. Accordingly, the Trustee has
standing to pursue its claims against Merit.
B. Motion to Transfer Venue
Merit offers several reasons why it believes that the “private interest” factors support
transferring this case to the Delaware Bankruptcy Court. As noted above, these factors include
(1) the plaintiff’s choice of forum, (2) the situs of material events, (3) the relative ease of access
to sources of proof, (4) the convenience of the witnesses, and (5) the convenience to the parties
of litigating in the respective forums. Hanley, 6 F. Supp. 2d at 774.
Merit argues that “[n]umerous potential witnesses, including representatives of [Valley
View] and its financial advisors, Bedford [Downs’s] shareholders[,] and the escrow agent that
facilitated the Settlement Agreement, are located in Pennsylvania, and travel to Delaware from
Pennsylvania will be significantly easier for such witnesses in terms of time, distance, and cost.”
(ECF No. 32, at 8.) It notes that Centaur, the parent company of Valley View, is a Delaware
corporation. (Id.) Finally, it contends that “[t]o the extent compulsory process is necessary, it is
much more likely that the Delaware Bankruptcy Court can provide such process considering its
proximity to Pennsylvania.” (Id.)
The Trustee counters that Delaware would be no more convenient a forum, as the Trustee
“is in possession of a significant amount of the relevant documents . . . , and any additional
relevant evidence can be accessed through third-party subpoenas with little to no difficulty.”
(ECF No. 35, at 8.) The Trustee argues that the Seventh Circuit “has a considerable connection
to the transfers at issue in this case,” as Merit has its principal place of business in Illinois, and
Valley View was based in Indiana at the time of the allegedly fraudulent transfer.

(Id.)

Moreover, the Trustee notes that it chose to prosecute its claims in the Northern District of

7

Illinois, and “unless the balance is strongly in favor of the defendant, the plaintiff’s choice of
forum should rarely be disturbed.” In re Nat’l Presto Indus., Inc., 347 F.3d 662, 664 (7th Cir.
2003) (quoting Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947)).
The court concludes that the private interest factors as a whole favor the Trustee. Most of
the specific factors do not support either party. Neither Delaware nor Illinois has a strong
connection to the material events in this case, which occurred in Pennsylvania. The witnesses
and parties are located across the country, and neither side has made a convincing argument that
it would be more convenient to travel to one forum as opposed to the other. But the fact that the
plaintiff chose the Northern District of Illinois as its forum is significant, and because the other
factors are inconclusive, the private interest factors as a whole favor the Trustee.
Merit next argues that the “public interest” factors, which include the court’s familiarity
with applicable law and the effect of transfer on the efficient administration of justice, favor a
transfer for four reasons: (1) the Delaware Bankruptcy Court is already familiar with the facts of
this case and the underlying bankruptcy; (2) there is a risk of inconsistent results if the motion to
transfer is denied; (3) the Trustee has engaged in forum shopping; and (4) under the Plan, the
Delaware Bankruptcy Court has exclusive jurisdiction to adjudicate any Designated Avoidance
Action transferred to the Trustee. The court finds none of these reasons to be persuasive.
First, although it is true that the judge in the Delaware bankruptcy proceeding was
familiar with the facts of the underlying bankruptcy case while he was presiding over it, that case
was closed on March 15, 2013. The Plan was confirmed on February 18, 2011. It is thus
unlikely that the Delaware Bankruptcy Court’s familiarity with the facts of the underlying
bankruptcy case would significantly expedite the resolution of this case, especially as this court
is also already familiar with the facts of this case.

8

Second, Merit’s concern that denying the motion to transfer could lead to inconsistent
results is speculative. It is true that another case, which originated in Florida and involved
similar defendants, is currently pending in the Delaware Bankruptcy Court. And the parties
appear to agree that under Third Circuit law, § 546(e) of the Bankruptcy Code would effectively
bar the Trustee’s claims against Merit and the defendants in the Florida case.5 But the plaintiff in
the Florida case has filed a motion to re-transfer the case back to Florida, and that motion is
currently pending in the Delaware Bankruptcy Court. If the Delaware Bankruptcy Court grants
the motion, there would be less risk of inconsistent results, as the law in the Eleventh Circuit is
more favorable to the Trustee. Additionally, this case is still at an early stage, and Merit may
still prevail for a variety of reasons. In short, it is far from clear that denying the motion to
transfer would lead to inconsistent results, and such a speculative concern should not trump the
Trustee’s choice of forum.
Third, the fact that the Trustee has filed this lawsuit in a district with favorable law is not
a reason to transfer venue. “Unlike defendant forum shopping, plaintiff forum shopping is not an
evil to be avoided, but rather is an inherent part of our federal court network. A plaintiff may
have available numerous places of equal convenience to bring his or her suit, and has every right
to file in the forum that is most geographically convenient or that has the most favorable law.”
United States v. Cinemark USA, Inc., 66 F. Supp. 2d 881, 889 (N.D. Ohio 1999) (internal
quotation marks omitted).

5

Section 546(e) of the Bankruptcy Code provides, in pertinent part, “[T]he trustee may not
avoid a transfer that is a . . . settlement payment, as defined in section 101 or 741 of this title,
made by or to (or for the benefit of) a commodity broker, forward contract merchant,
stockbroker, financial institution, financial participant, or securities clearing agency . . . .” 11
U.S.C. § 546(e).
9

Fourth, with respect to Merit’s argument that, under the Plan, the Delaware Bankruptcy
Court has exclusive jurisdiction to adjudicate the Designated Avoidance Actions, “it is well
settled that[] a Plan may not delegate unlimited authority to a bankruptcy judge . . . .”
Kalamazoo Realty Venture Ltd. P’ship v. Blockbuster Entm’t Corp., 249 B.R. 879, 886 (N.D. Ill.
2000) (internal quotation marks omitted). “A reorganization court will frequently insert a clause
in a plan that reserves jurisdiction to protect the confirmation decree.” Id. (internal quotation
marks omitted). But “when a bankruptcy court retains jurisdiction over a certain dispute, it does
not divest any other court of concurrent jurisdiction.” Id. (internal quotation marks omitted).
Moreover, “several courts have opined that a bankruptcy court’s attempt to retain
jurisdiction beyond that which is necessary to effectuate the plan of reorganization is beyond the
authority of that court[] and that a boilerplate retention of jurisdiction clause inserted into a plan
cannot expand that court’s authority.” Unico Holdings, Inc. v. Nutramax Products, Inc., 264
B.R. 779, 785 (Bankr. S.D. Fla. 2001) (collecting cases). Thus, in Unico, the court denied
defendant’s motion to transfer venue to the Delaware Bankruptcy Court, notwithstanding that the
plan of reorganization contained an exclusive-jurisdiction provision that purported to cover the
plaintiff’s claims. Id.
Here, as in Unico, the court finds that the exclusive-jurisdiction provision does not
require this case to be transferred to the Delaware Bankruptcy Court. To give the provision the
effect urged by Merit would be to transform a boilerplate provision aimed at “protect[ing] the
confirmation decree,” Kalamazoo, 249 B.R. at 886, into a pivotal term dramatically affecting the
scope of the creditors’ right to recovery. It would significantly undermine the purpose of the
Litigation Trust. The parties could not have intended the provision to have such an effect.

10

Thus, the court concludes that none of the “public interest” factors support transferring
venue to the Delaware Bankruptcy Court. Because neither the “public interest” nor the “private
interest” factors support transferring this case, Merit’s motion is denied.
IV. CONCLUSION
For the foregoing reasons, Merit’s motion to dismiss and its motion to transfer venue are
both denied. The reference to the bankruptcy court is withdrawn. A status hearing is set for
September 5, 2014, at 9:30 a.m.

ENTER:

/s/
JOAN B. GOTTSCHALL
United States District Judge
DATED: August 5, 2014

11