Newsome et al v. Gallacher et al

Filing 130

OPINION AND ORDER by Chief Judge Gregory K Frizzell as to individual capacity ; granting 86 Motion to Dismiss (hbo, Dpty Clk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA

P. DAVID NEWSOME, JR., LIQUIDATING
TRUSTEE OF MAHALO ENERGY (USA),
INC.,
Plaintiff,
v.
WILLIAM GALLACHER, DUNCAN
CHISHOLM, GARY H. DUNDAS, JEFF
G. LAWSON, JAMES BURNS, KEVIN
WOLFE, DAVID E. BUTLER and
GRANT A. MACKENZIE,
Defendants.

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OPINION AND ORDER
Before the court is the Motion to Dismiss [Dkt. #86] filed by defendants William
Gallacher, Duncan Chisholm, Gary H. Dundas, Jeff G. Lawson, James Burns, Kevin Wolfe,
David E. Butler and Grant MacKenzie (“Individual Defendants”). Plaintiff P. David Newsome,
Jr., Liquidating Trustee of Mahalo Energy (USA”), Inc. (“Trustee”) opposes the motion.
I. Background
This lawsuit arises from the failure of Mahalo Energy (USA) (“Mahalo USA”), a
Delaware corporation with its principal place of business in Oklahoma, and its parent, Mahalo
Energy Ltd. (“Parent”), a Canadian company located in Alberta, Canada. Defendants are
Canadian citizens and residents of Alberta who were officers and/or directors of Mahalo USA
and/or the Parent.

In May 2009, Mahalo USA filed a Chapter 11 bankruptcy petition in the United States
District Court for the Eastern District of Oklahoma. Plaintiff was appointed as the liquidating
trustee and successor-in-interest to the claims of the reorganized debtor. On March 8, 2011, the
Trustee filed suit against former officers and directors of Mahalo USA and the Parent. The
Trustee asserted direct claims against officers and directors of Mahalo USA (“Mahalo USA
Directors”) for breach of fiduciary duty and against officers and directors of the Parent (“Parent
Directors”) for aiding and abetting the alleged breaches of fiduciary duty by the Mahalo USA
Directors. The Trustee also asserted legal malpractice claims against Burnett, Duckworth and
Palmer, LLP (“BDP”), a Canadian law firm that provided legal services to the Parent, and
against Lawson, a law firm partner.
All defendants moved for dismissal pursuant to Fed. R. Civ. P. 12(b)(2), asserting lack of
personal jurisdiction. In the alternative, the Individual Defendants sought dismissal of claims
brought on behalf of Mahalo USA’s creditors, arguing creditors have no right to assert claims for
breach of fiduciary duty. The court granted the motions to dismiss for lack of personal
jurisdiction and did not reach the alternative motion. [Dkt. #55 at 29]. The Trustee appealed the
dismissal. The Tenth Circuit affirmed dismissal of the legal malpractice claims against BDP and
Lawson but reversed dismissal of the claims against the Individual Defendants.
After remand the Trustee—with leave of court—filed a First Amended Complaint. [Dkt.
#76]. The First Amended Complaint continues to allege direct claims on behalf of Mahalo
USA’s creditors and, for the first time, asserts a claim that the directors of the Parent owed (and
breached) fiduciary duties directly to Mahalo USA. See, i.e., Dkt. #76, ¶10 (“Each of the
Defendants, in their capacities as the officers and directors and/or agents of Mahalo USA and/or
of Parent, owed fiduciary duties to Mahalo USA and its creditors.”).

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The Individual Defendants seek dismissal of the First Amended Complaint to the extent it
purports to bring the claims on behalf of creditors of Mahalo USA. Additionally, they seek
dismissal of the new claim against the Parent Directors for breach of fiduciary duty to Mahalo
USA.1
II. Allegations of the First Amended Complaint
The First Amended Complaint alleges the following facts relevant to the Individual
Defendants’ Motion to Dismiss:
1. Mahalo USA was a Delaware corporation wholly owned by Mahalo Energy Ltd., a
Canadian company (“Parent”). [Dkt. #76, ¶23].
2. On May 21, 2009 (“Petition Date”), Mahalo USA filed a voluntary petition in
bankruptcy in the United States Bankruptcy Court for the Eastern District of Oklahoma
(“Bankruptcy Case”). [Id., ¶24].
3. On April 1, 2010, the bankruptcy court confirmed an Amended Plan of
Reorganization (“Plan”) in the Bankruptcy Case. [Id., ¶¶21, 26].2 Pursuant to the Plan, a
Liquidating Trust was established for the benefit of the holders of allowed general unsecured
claims against Mahalo USA. [Dkt. #86, Ex. A, § V(E)].3
4. Pursuant to the Plan, the Trustee was authorized to, among other things, “prosecute,
compromise, settle and/or abandon the Designated Avoidance Actions, in his/her reasonable
discretion, for the benefit of the holders of Allowed General Unsecured Claims.” [Id., §
V(E)(2)(i)]. “Designated Avoidance Actions” include:
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The First Amended Complaint asserts a claim against Parent Directors for aiding and abetting breach of fiduciary
duty to Mahalo USA. Parent Directors have not sought dismissal of this claim.
2
The First Amended Complaint alleges the Plan was confirmed April 10, 2010 and April 26, 2010 [Id., ¶¶21, 24].
However, the order confirming the Plan, attached as Ex. A to defendants’ Motion to Dismiss, was entered April 1,
2010. [Dkt. #86, Ex. A].
3
Where a plaintiff refers to a document in the Complaint, a defendant may submit a copy of the document to the
court to be considered on a motion to dismiss. MacArthur v. San Juan County, 309 F.3d 1216, 1221 (10th Cir.
2002).

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(ii) All claims, causes of action, and rights of action, at law or equity that may be
asserted on behalf of the Estate against any of the Debtor’s and/or the Parent’s
current or former directors and/or officers, and Burnet Duckworth & Palm LLP,
arising from any act or omission occurring before the Petition Date, other than
those related to the filing and prosecution of the Case.
[Id., § I(A)].
5. The Individual Defendants’ positions with Mahalo USA and/or Parent were as
follows:


William Gallacher (“Gallacher”) was the Chairman of the Board of Directors of
Parent. [Dkt. #76, ¶27].



Duncan Chisholm (“Chisholm”) was President and Chief Executive Officer of
Mahalo USA and Parent, and a director of Parent, until October 2008. [Id., ¶¶3234].



Gary H. Dundas (“Dundas”) was the sole director of Mahalo USA, and a director
of Parent. [Id., ¶¶38-39].



Jeff G. Lawson (“Lawson”) was a director of Parent until January 19, 2009. [Id.,
¶46].



James Burns (“Burns”) was President and Chief Executive Officer of Mahalo
USA and Parent and a director of Parent from October 2008 to June 2009. [Id.,
¶¶53-54].



Kevin Wolfe (“Wolfe”) was a director of Parent. [Id., ¶58].



David Butler (“Butler”) was a director of Parent. [Id., ¶62].



Grant MacKenzie (“MacKenzie”) was the corporate secretary of Mahalo USA
and Parent. [Id., ¶67].

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6. Throughout the First Amended Complaint, the Trustee alleges that each of the
Individual Defendants, in their capacity as officers and directors of Mahalo USA and/or the
Parent, owed fiduciary duties not only to Mahalo USA, but also to its creditors; that defendants
breached those fiduciary duties; and that the creditors were injured thereby. [Id., ¶¶2, 10-11, 1316, 18, 40, 83, 85, 88-89, 106-107, 109, 113, 132-134, 146, 148-149, 157-158, 165-166, 168,
174, 176, 178-180, 198-199].
III. Standard
Federal Rule of Civil Procedure 8(a) requires that complaints contain a “short and plain
statement of the claim showing that the pleader is entitled to relief.” Complaints that fail to
satisfy the rule are subject to dismissal under Fed. R. Civ. P. 12(b)(6). The current standard for
12(b)(6) motions follows a middle path between heightened fact pleading and allowing
complaints based on conclusory allegations. Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th
Cir. 2008). After setting aside conclusory statements, the court considers whether a complaint
contains “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp.
v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974, 167 L.Ed.2d 929 (2007); Ashcroft v.
Iqbal, 556 U.S. 662, 680, 129 S. Ct. 1937, 1950, 173 L. Ed. 2d 868 (2009). These facts are
viewed in the light most favorable to the plaintiff. Ridge at Red hawk, L.L.C. v. Schneider, 493
F.3d 1174, 1177 (10th Cir. 2007). Complaints must be sufficiently plausible to weed out claims
that have no reasonable prospect of success, and sufficiently specific to “inform the defendants
of the actual grounds of the claim against them.” Robbins v. Oklahoma, 519 F.3d 1242, 1248
(10th Cir. 2008). “[T]he mere metaphysical possibility that some plaintiff could prove some set
of facts in support of the pleaded claims is insufficient; the complaint must give the court reason
to believe that this plaintiff has a reasonable likelihood of mustering factual support for these

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claims.” Ridge at Red Hawk, 493 F.3d at 1177. “The issue on a 12(b)(6) motion ‘is not whether
a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support
the claims.’” Dickman v. Lahood, 2012 WL 442644, at *5 (D. Kan. Sept. 26, 2012) (quoting
Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 511, 122 S. Ct. 992, 997, 152 L. Ed. 2d 1 (2002)).
IV. Analysis
A. Whether Individual Defendants Owed a Duty to Creditors of Mahalo USA
The parties agree that because Mahalo USA was a Delaware corporation, the duties of
defendants to Mahalo USA and/or its creditors are governed by Delaware law. See Restatement
(Second) Conflicts of Law § 309 (1971) (law of state of incorporation applies to determine
extent of director’s or officer’s liability to corporation, creditors and shareholders unless another
state has a more significant interest in the issue); Tomlinson v. Combined Underwriters Life Ins.
Co., 684 F. Supp.2d 1296, 1298 (N.D. Okla. 2010) (federal district court predicted that although
Oklahoma courts had not directly addressed the issue, Delaware law would be applied to
Delaware corporation operating in Oklahoma).
The parties agree that claims for officers’ and directors’ breach of fiduciary duty are—as
plaintiff puts it—“quintessential corporate claims and belong to Mahalo USA.” [Dkt. #94 at 3].
Indeed, the Trustee states, “[C]laims such as those brought by the Trustee are always owned by
the corporation and are never owned by creditors, because no direct fiduciary duty is owed to
them.” [Id. at 4] citing N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d
92, 101-03 (Del. 2007). He denies he is attempting to assert claims on behalf of creditors, but
asserts he is entitled to allege facts relating to damages they suffered. [Id. at 6].4 However,
citing In re Scott Acquisition Corp., 344 B.R. 283, 290-91 (Bankr. D. Del. 2006)—which in turn

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Defendants argue “Plaintiff appears to operate under the belief that in asserting claims on behalf of the Company,
it may introduce damages suffered by the creditors as a way to bolster damages.” [Dkt. #106 at 3].

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quotes Bondi v. Grant Thornton It’l. (In re Parmalat Sec. Litig.), 377 F. Supp.2d 390, 420 (S.D.
N.Y. 2005)—the Trustee contends “the claims owned by the bankrupt ‘may include the interests
of creditors.’” [Id. at 5] . A reading of Parmalat, however, does not support such an expansive
view of the law. The court in that case stated:
Under federal bankruptcy law, bankruptcy trustees have standing to pursue the
claims of the bankruptcy estate, that is, the insolvent corporation. While a
bankruptcy trustee may assert only the claims that belong to the bankruptcy
estate, those claims may include the interests of creditors in the sense that the
trustee has the duty to marshal the assets of the estate so that they can be
distributed to the creditors on a pro rata basis. However, while a trustee pursues
the interests of the bankruptcy estate and derivatively the interests of its creditors,
he or she does not have standing to pursue the individual claims of creditors or
even of creditors as a class.
377 F. Supp.2d at 420 (emphasis added) (citations omitted).
The Trustee’s First Amended Complaint does not merely allege that harm to Mahalo
USA also caused harm to the creditors. Rather, it alleges that the Individual Defendants owed
fiduciary duties not only to Mahalo USA, but also to its creditors; that they breached those
fiduciary duties; and that the creditors were injured thereby. These allegations overstate the
bounds of the Trustee’s authority and contravene well-settled Delaware law that neither creditors
nor the Trustee on behalf of the creditors has standing to assert direct claims of damage for
breach of fiduciary duty against the insolvent corporation’s directors.
Therefore, the Individual Defendants’ Motion to Dismiss is granted with respect to such
allegations.

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B. Whether the Trustee Can Sue the Parent Directors for Breach of Fiduciary Duty to
Mahalo USA
The Trustee alleges Parent Directors owed and breached a fiduciary duty to Mahalo USA.
Under Delaware law, where the subsidiary has minority stockholders, its directors owe
fiduciary duties to all of the subsidiary’s stockholders. Weinberger v. UOP, Inc., 457 A.2d 701,
710 (Del. 1983). And the parent of a subsidiary with minority stockholders may also owe
fiduciary duties to the subsidiary’s minority stockholders. Kahn v. Lynch Communication
Systems, Inc., 638 A.2d 1110, 1115 (Del. 1994). Indeed, “the fiduciary duties owed by a parent
of a non-wholly-owned subsidiary may stretch a long way up the corporate ladder—at least from
an entity standpoint.” R. Silberglied and B. Rohrbacher, TOUSA, USACafes, and the Fiduciary
Duties of a Parent’s Directors upon a Subsidiary’s Insolvency, 2011 Ann. Sur. of Bankr. Law 2,
p. 4 [Dkt. #106, Ex. 1].
In contrast, a parent corporation does not owe fiduciary duties to its wholly-owned
subsidiaries. See Trenwick America Lit. v. Ernst & Young, 906 A.2d 168, 173 (Del. Ch. 2006).
Rather, “in a parent and wholly-owned subsidiary context, the directors of the subsidiary are
obligated only to manage the affairs of the subsidiary in the best interests of the parent and its
shareholders.” Anadarko Petro. v. Panhandle Eastern, 545 A.2d 1171, 1174 (Del. 1988).
Further, under Delaware law, a plaintiff may “not assert claims on behalf of [the subsidiary]
against the [parent] board of directors without piercing [the parent’s] veil in some manner.”
Trenwick, 906 A.2d at 194.
However, when a wholly-owned subsidiary becomes insolvent, the parent corporation
must consider what is in the best interests of the subsidiary as a whole, including creditors. See
Gheewalla, 930 A.2d at 101; Trenwick, 906 A.2d at 195. And depending on the corporate

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structure of the controlling entity, individual directors of the parent may owe fiduciary duties to
the subsidiary.
In In re USACafes, L.P., Litigation, 600 A.2d 43 (Del. Ch. 1991), the Delaware Court of
Chancery, applying trust law concepts, held that individual directors of a corporate general
partner could be liable for breach of fiduciary duty to holders of limited partnership interests. In
denying a motion to dismiss the claims against the individual directors, the court stated, “[T]he
principle of fiduciary duty, stated most generally, [is] that one who controls property of another
may not, without implied or express agreement, intentionally use that property in a way that
benefits the holder of the control to the detriment of the property or its beneficial owner.” Id. at
48. The court declined to “delineate the full scope of [the] duty” of the individual director of a
general partner, and acknowledged that “[i]t may well not be so broad as the duty of the director
of a corporate trustee,” but stated, “it surely entails the duty not to use control over the
partnership’s property to advantage the corporate director at the expense of the partnership.” Id.
at 49.
Following USACafes, Delaware courts have reached a similar conclusion in suits
involving limited partnerships, holding that under limited circumstances,5 directors of a
corporate general partner may owe fiduciary duties to the partnership and the limited partners.
See James River-Pennington Inc. v. CRSS Capital, Inc., 1995 WL 106554, at *11 (Del. Ch.
1995); In re Boston Celtics Ltd. Partnership Shareholders Litigation, 1999 WL 641902, at *4
(Del. Ch. 1999); Wallace ex. rel. Cencom Cable Income Partners II, Inc. L.P. v. Wood, 752 A.2d
1175 (Del. Ch. 1999); Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 2000 WL
147663, at **20-22 (Del. Ch. 2000).

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Specifically, in each of the cases, the directors of the corporate general partner were alleged to have benefited
themselves at the limited partnership’s expense.

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Delaware courts, citing USACafes, have also expanded the application of fiduciary duties
to parents and controlling entities of the corporate general partner. See Wallace, 752 A.2d at
1182; Bigelow/Diversified Secondary Partnership Fund 1990 v. Damson/Birtcher Partners,
2001 WL 1641239, at *8 n.42 (Del. Ch. 2001); Cargill, Inc. v. JWH Special Circumstance LLC,
959 A.2d 1096, 1120-21 (Del. Ch. 2008).
However, as Silberglied and Rohrbacher observed in their article, “Cases applying
USACafes to individual directors generally did so in a hesitant manner.” [Dkt. #106, Ex. 1, p. 6].
Most recently, in Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL
1124451, at **9-10 (Del. Ch. Apr. 20, 2009), the court explicitly limited application of the
doctrine to situations involving breach of “the duty not to use control over the partnership’s
property to advantage the corporate director at the expense of the partnership.” In a footnote, the
court commented:
I have noted in the past that the imposition of fiduciary duties on individuals who
work for a corporate fiduciary charged with managing an alternative entity raises
some difficult policy issues and disregards corporate formalities in a manner
unusual for Delaware law. See Gelfman v. Weeden Investors, L.P., 792 A.2d 977,
992 n. 24 (Del. Chl. 2001); Gotham Partners, 2000 WL 147663, at *20. Some
commentators have also raised concerns about the effect of USACafes. See
LUBAROFF & ALTMAN § 11.2.11 AT 11-32.3 (“[USACafes puts] directors in
the situation of having potentially conflicting and irreconcilable fiduciary duties
to stockholders of the [corporate general partner] and to limited partners of the
limited partnership.”). But given the defendants’ acceptance of the USACafes line
of cases, I simply apply that line.
Id. at *9 n.44. Silberglied and Rohrbacher point out two other “troubling aspects” of USACafe.
First, “the directors of a corporate general partner may owe a direct duty to the limited partners
that could be breached even if the general partner itself has not breached its duty.” [Dkt. #106,
Ex. 1, pp. 7-8. Second, as the authors put it:
Delaware case law in the corporate context suggests [another] problem:
traditionally, directors of a controlling stockholder do not owe direct fiduciary
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duties to the controlled subsidiary. The Court of Chancery has suggested that it
would be “unwise to extend the application of those duties as it would undermine
a primary benefit of the corporate form.” In its 2006 Trenwick decision, the Court
of Chancery stated that, as a matter of Delaware law, the plaintiff could “not
assert claims on behalf of [subsidiary] Trenwick America against the [parent]
board of directors without piercing Trenwick’s veil in some manner.” In other
words, if there was a “breach of fiduciary duty by conduct at the Trenwick-level
toward Trenwick America, the proper defendant is Trenwick itself, as the parent
corporation, not the directors of Trenwick.”
[Id., p. 8] (citations omitted).
Significantly, to date, no Delaware court has extended the holding in USACafes to the
parent directors of wholly owned subsidiaries. It appears the sole case in which this has
happened is In re TOUSA, 437 F.R. 447 (Bkrtcy. S.D. Fla. 2010). There, the bankruptcy court—
relying principally on USACafes—held that directors of parent TOUSA owed fiduciary duties to
creditors of their insolvent subsidiaries. Id. at 460.
The Trustee urges the court to follow TOUSA. However, absent case authority from
Delaware, the court is reluctant to expand liability in such a manner. Furthermore, based on the
same facts, plaintiff has pled alternative claims against the Parent Defendants for aiding and
abetting breach of fiduciary duty, and those claims remain active.6
Therefore, the court concludes the motion to dismiss claims against the Parent
Defendants for breach of fiduciary duty to Mahalo USA should be granted.

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Silberglied and Rohrbacher suggest that “[i]n the absence of well-pleaded allegations of personal benefit, it would
be preferable for courts in the future to focus on [aiding and abetting], not [USACafes liability].”[Dkt. #106, Ex. 1,
p. 12].

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V. Conclusion
For the reasons set forth above, the Individual Defendants’ Motion to Dismiss [Dkt. #86]
is granted.
ENTERED this 27th day of May, 2014.

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