Deutsche Bank Tr. Co. Am. v. Gymboree Grp.

DEUTSCHE BANK TRUST COMPANY AMERICAS, Appellant, v. GYMBOREE GROUP, INC., et. al., Appellees.

No. 3:20cv419

United States District Court, E.D. Virginia, Richmond Division

August 16, 2021

MEMORANDUM OPINION

M Hannah Lauck United States District Judge

This matter comes before the Court on Appellant Deutsche Bank Trust Company Americas (“Deutsche Bank”) appeal from the May 26, 2020 Order of the Honorable Keith L Phillips, United States Bankruptcy Court Judge, granting summary judgment to Appellee Gymboree Group, Inc (“Gymboree”).^[1] (Bankr. Case No. 19-03071, ECF No. 1.) Gymboree filed a Response Brief, (ECF No. 9), and Deutsche Bank replied, (ECF No. 11). Gymboree also filed a motion to dismiss the appeal as frivolous (the “Motion to Dismiss”). (ECF No. 8.) Deutsche Bank responded to the Motion to Dismiss, (ECF No. 10), and Gymboree replied, (ECF No. 12).

The Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions and argument would not aid the decisional process. Accordingly, the matters are ripe for disposition. The Court exercises jurisdiction pursuant to 28 U.S.C. § 158(a)(1).^[2] For the reasons that follow, the Court will deny the Motion to Dismiss and affirm the judgment of the Bankruptcy Court.

I. Factual and Procedural Background

This appeal considers whether Gymboree improperly transferred two million dollars in alleged trust funds to an account subject to a lien in favor of its secured creditors. Deutsche Bank-an unsecured creditor in the bankruptcy proceedings below-and Gymboree dispute whether the confirmed Chapter 11 plan required the funds at issue to be held in trust for the general unsecured creditors. The Bankruptcy Court ruled that the Chapter 11 plan did not create such a trust and ruled in favor of Gymboree. Deutsche Bank appealed.

A. Deutsche Bank and Gymboree Stipulate to the Undisputed Facts

In the underlying bankruptcy proceeding, Deutsche Bank and Gymboree filed a stipulation of undisputed facts, which the Court refers to here. (App. 757, ECF No. 9.)^[3] On June 11, 2017, Gymboree filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (“the 2017 Bankruptcy Case”). (App. 759.) On September 7, 2017, the Bankruptcy Court entered its order confirming (“Confirmation Order”) the Joint Chapter 11 Reorganization Plan of Gymboree (the “2017 Plan”). (Id.) The 2017 Plan became effective on September 29, 2017. (Id.) Relevant to this appeal, the 2017 Plan defined the “[General Unsecured Creditors] Distribution” as “$4, 500, 000 in Cash, to be funded on the Effective Date into the Class 5 Claims Reserve and distributed in accordance with the Plan.” (Order Confirming the Joint Chapter 11 Plan of Reorganization of the Gymboree Corporation and its Debtor Affiliates, “2017 Plan, ” 84, ECF No. 2-7.) The 2017 Plan further provided that:

On the Effective Date, the Reorganized Debtors shall establish the Class 5 Claims Reserve, which Class 5 Claims Reserve shall be funded with the [General Unsecured Creditors] Distribution and shall be administered by the Reorganized Debtors. As soon as practicable after the Effective Date, the Reorganized Debtors shall make a Pro Rata distribution to all Allowed Class 5 Claims from the Class 5 Claims Reserve using the [General Unsecured Creditors] Amount as the denominator in calculating such Pro Rata Distribution. The Reorganized Debtors shall make one or more additional distributions to Class 5 Allowed Claims, in its discretion, until all Class 5 Claims have been resolved. The Reorganized Debtors shall hold Cash in the Class 5 Claims Reserve in the same Pro Rata share in trust for the benefit of the Holders of Disputed Class 5 Claims. Once all Class 5 Claims have been resolved, the Reorganized Debtors shall make a final distribution in order to distribute the remaining Cash in the Class 5 Claims Reserve Pro Rata to all Class 5 Allowed Claims using the total amount of Class 5 Allowed Claims as the denominator ....

(2017 Plan 114 (emphasis added).)^[4] Paragraph 140 of the Confirmation Order further provided that “the Debtors or the Reorganized Debtors, as applicable, shall establish on the Effective Date, a segregated account by depositing the [General Unsecured Creditors] Distribution into the Class 5 Claims Reserve for the benefit of Holders of Allowed Class 5 Claims to be paid as set forth in Article VII.D of the plan.” (2017 Plan 64.)

In a separate article, the 2017 Plan further stated that certain fees would be held in trust and not considered property of the estates:

On the Effective Date, the Reorganized Debtors shall establish and fund the Professional Fee Escrow Account with Cash equal to the Professional Fee Reserve Amount. The Professional Fee Escrow Account shall be maintained in trust solely for the Professionals. Such funds shall not be considered property of the Estates. The amount of Professional Fee Claims owing to the Professionals shall be paid in Cash to such Professionals by the Reorganized Debtors as soon as reasonably practicable after such Professional Fee Claims are Allowed. When all Allowed amounts owing to the Professionals have been paid in full, any amount remaining in the Professional Fee Escrow Account shall promptly be paid to the Reorganized Debtors without any further action or order of the Bankruptcy Court. If the Professional Fee Escrow Account is insufficient to fund the full Allowed amounts of Professional Fee Claims, the remaining unpaid Allowed Professional Fee Claims will be paid by the Reorganized Debtors.

(2017 Plan 92.)

On or about September 29, 2017, the effective date of the 2017 Plan, David Inouye, a Gymboree employee, deposited the General Unsecured Creditors distribution into an account pursuant to the 2017 Plan and Confirmation Order. (App. 759.) With the $4, 500, 000 deposited, Inouye then purchased investments using the General Unsecured Creditors distribution. (Id.) On May 3, 2018, Gymboree removed $2, 532.283.94 from that investment account to make an initial distribution to “holders of allowed Class 5 Claims under the 2017 [P]lan.” (Id.) Deutsche Bank held an allowed Class 5 Claim and “as the former indenture trustee, received $2, 510, 193.01 of the Initial Distribution for the benefit of itself and the holders of the 2018 Notes.” (Id.)

One year later, on October 1, 2018, Gymboree engaged Berkeley Research Group to provide services regarding its cash management and distributions. (Id. at 759-60.) On January 9, 2019, Berkeley Research Group directed [Inouye] to transfer the remainder of the General Unsecured Creditors distribution, $2, 027, 304.08, into a different account, referred to as the “Concentration Account.” (Id. 760.) Following that transfer, the General Unsecured Creditors account had a balance of $0.00 and the Concentration Account had a balance of $3, 146, 826.75. (Id.) Deutsche Bank received no further payments from the General Unsecured Creditors Distribution. On January 11, 2019, the last transfer from the Concentration Account occurred, consisting of an outgoing wire transfer of $5, 849, 678.26. (Id.) Five days later, on January 16, 2019, Gymboree filed a second voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (“the 2019 Bankruptcy Case”). (Id.)

B. Deutsche Bank Initiates an Adversary Proceeding Against Gymboree Seeking a Determination that Gymboree Improperly Transferred Funds to an Account Subject to a Lien in Favor of its Secured Creditors

Deutsche Bank did not receive any proceeds from the final distribution of the Concentration Account. (R. 14, 22, ECF No. 2.) Deutsche Bank received only the $2, 532.283.94 initial distribution as a holder of an Allowed Class 5 Claim in accordance with the 2017 Plan. (App. 759.) The remainder of the General Unsecured Creditors Distribution amount went to secured creditors after being transferred to the Concentration Account.

After Deutsche Bank learned that Gymboree had the funds transferred to the Concentration Account, which was subject to a lien in favor of Gymboree's secured creditors, Deutsche Bank initiated the underlying adversary proceedings. (R. 3, ECF No. 3.) In its Complaint, Deutsche Bank asserted that it suffered “breach of trust and conversion of funds that had been held by Gymboree” under the 2017 Plan. (App. 16-17.) Deutsche Bank also brought two aiding and abetting claims based on breach of trust and conversion, along with a claim for turnover of property and a claim for civil contempt. (App. 28-30.) Deutsche Bank claimed that the 2017 Plan “expressly obligated [Gymboree] to hold the reserve in a segregated account in trust for the benefit of Class 5 (general unsecured creditors) pending interim distributions and the final distribution to such creditors.” (App. 21.) Rather than distributing the funds to Class 5 Claims holders, Gymboree transferred the money to the Concentration Account, which “was subject to a lien in favor of the certain secured lenders.” (App. 25.)

Gymboree filed a motion to dismiss, (R. 4-5), and Deutsche Bank responded in opposition, (R. 6). Deutsche Bank filed a motion for summary judgment for civil contempt, (R. 8), and Gymboree filed a renewed motion to dismiss and motion for summary judgment. (R. 9). In its motion for summary judgment for civil contempt, Deutsche Bank argued, relevant to this appeal, that

when the claim allowance process was completed in December 2018, [Gymboree] violated the Confirmation Order by withholding the mandatory final distribution of the Reserve to the holders of allowed Class 5 Claims, and, instead transferring the funds to a Reorganized Debtor operating account so that they could be applied in repayment of certain secured debts of the Reorganized Debtors before

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