Don A. Beskrone, Chapter 7 Tr. Pennysaver U.S. Publ'g, LLC v. Opengate Capital Grp., LLC (In re Pennysaver U.S. Publ'g, LLC)

602 B.R. 256

IN RE: PENNYSAVER USA PUBLISHING, LLC, et al., Debtors.

Don A. Beskrone, Chapter 7 Trustee PennySaver USA Publishing, LLC, et al., Plaintiff,

v.OpenGate Capital Group, LLC, OpenGate Capital Management, LLC, PennySaver Investors, LLC, Andrew Nikou, Jay Yook, Daniel Abrams, Alan S. Chaffin, Vijay K. Mony, and Virginia Anne Thornton, Defendants.

Case No.: 15-11198 (CSS) (Jointly Administered)

Adv. Proc. No.: 17-50530 (CSS)

United States Bankruptcy Court, D. Delaware.

Signed May 21, 2019

CROSS & SIMON, LLC, Christopher P. Simon, Kevin S. Mann, David G. Holmes, 1105 North Market Street, P.O. Box 1380, Wilmington, DE 19899, Counsel for OpenGate Capital Management, LLC, OpenGate Capital Group, LLC PennySaver Investors, LLC,

DRINKER BIDDLE & REATH LLP, Steven K. Kortanek, Patrick A. Jackson, 222 Delaware Avenue, Suite 1410, Wilmington, DE 19801-1621, and Robert K. Malone, Frank F. Velocci, Kevin H. DeMaio, Andrew Nikou and Jay Yook, 600 Campus Drive, Florham Park, NJ 07932-1047, Special Litigation Counsel to Don A. Beskrone, Trustee

OPINION ¹

Sontchi, C.J.

INTRODUCTION

Before the Court is the Motion to Dismiss Pursuant to FRCP 12(b)(6)² filed by OpenGate Capital Group, LLC, OpenGate Capital Management, LLC and PennySaver Investors, LLC's (collectively, "OpenGate"), which seeks to dismiss the Complaint³ filed by Don A. Beskrone, Chapter 7 Trustee for the estates of PennySaver USA Publishing, LLC, et al. The Motion was joined by defendants Andrew Nikou and Jay Yook.⁴ The Complaint contains eighteen (18) counts against the OpenGate Defendants (as defined below) as well as the Employee Defendants (as defined below).

The Employee Defendants filed their own motion to dismiss the Complaint,⁵ which the Court granted, in part, and denied, in part, on July 11, 2018.⁶ As the Complaint is identical as to the OpenGate Defendants and the Employee Defendants, the Court hereby adopts holdings in the PennySaver Opinion in toto. However, the PennySaver Opinion only guides the Court's analysis (below) on Counts I-IX and XIII, as the Court's Opinion does not speak directly to those Counts.

As against the OpenGate Defendants, the Complaint includes the following counts:

Count Claim7 I         Fraudulent transfer allegedly made to OpenGate
  II        Fraudulent transfers allegedly made to OpenGate
  III       Fraudulent transfers allegedly made to OpenGate
  IV        Fraudulent transfers allegedly made to OpenGate
  V         Fraudulent transfers allegedly made to OpenGate
  VI        Fraudulent transfers allegedly made to OpenGate
  VII       Fraudulent transfers allegedly made to OpenGate
  VIII      Fraudulent transfers allegedly made to Opengate
  IX        Fraudulent transfers allegedly made to OpenGate
  XIII      Preferential transfers allegedly made to OpenGate
  XV        Breach of fiduciary duty claim against all Defendants
  XVI       Breach of fiduciary duty claim against all Defendants
  XVII      Accounting claim against all Defendants
  XVIII     Disallowance of claims against all Defendants

[Editor's Note: The preceding image contains the reference for footnote⁷ ].

The Court will grant the Motion to Dismiss for the reasons set forth herein.

JURISDICTION

The United States Bankruptcy Court for the District of Delaware (the "Court") has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b). This adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (F), and (H). The Court has the judicial authority to enter final judgements and orders in this adversary proceeding.

Venue is proper in the Bankruptcy Court pursuant to 28 U.S.C. § 1409(a) because this is a proceeding relating to and arising under Title 11 of the United States Code, 11 U.S.C. §§ 101 - 1532 and the above-captioned chapter 7 case. This action is brought as an adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7001.

STATEMENT OF FACTS

I. Procedural Background

On May 9, 2015 (the "Petition Date"), Pennysaver USA Publishing, LLC filed a voluntary petition for relief under Chapter 7 of the U.S. Bankruptcy Code.⁸ The Court subsequently entered an order providing for the joint administration of the Debtors' cases consolidating PennySaver USA, LLC, PennySaver USA Publishing, LLC, PennySaver USA Printing, LLC, Orbiter Properties, LLC, and Monthly Mailer, LLC (collectively the "Debtors") for procedural purposes.⁹ The Office of the United States Trustee appointed Don A. Beskrone as the interim Chapter 7 Trustee of the Debtors' cases.¹⁰ Mr. Beskrone now serves as the trustee (the "Trustee") in these cases pursuant to 11 U.S.C. § 702(d).

As mentioned above, on November 13, 2017, Defendants Daniel Abrams, Alana S. Chaffin, Vijay K. Mony, and Virginia Anne Thornton (the "Employee Defendants") filed a Motion to Dismiss Plaintiff's Complaint. Defendants OpenGate Capital Group, LLC ("Capital"), OpenGate Capital Management, LLC ("Management"), and Pennysaver Investors, LLC ("Investors," and collectively with Management and Capital, "OpenGate") also moved to dismiss and joined the Employee Defendants.¹¹ Andrew Nikou and Jay Yook (collectively with OpenGate, the "OpenGate Defendants") then joined OpenGate's Motion to Dismiss.¹² As mentioned above, the Employee Defendant's motion to dismiss was granted, in part, and denied, in part, on July 11, 2018;¹³ however, the Court did not rule upon the OpenGate Defendants' Motion to Dismiss at that time. This is the Court's ruling on OpenGate Defendants' Motion to Dismiss.

II. Factual Background

Collectively, the Debtors formed the substance of Pennysaver, a business founded in 1962 that published a "shopper"—i.e., a weekly California newspaper that provided advertising space for local business, as well as classified ads. The Debtors filed for chapter 7 bankruptcy relief in this Court on the Petition Date.

The Debtors are Delaware limited liability companies. The other three non-Debtor Delaware LLCs at issue are Investors, Capital, and Management. Throughout the Complaint, the Trustee uses the term "OpenGate" to refer to a single entity and fails to distinguish between Capital, Management, and Investors.

OpenGate is a private equity firm that acquired Pennysaver in September 2013 from then-owner Harte-Hankes, Inc., in a leveraged buy-out that included $ 4 million in equity and $ 20.5 million of new secured debt from Capital One Business Credit Corp. ("COBC").¹⁴

The Trustee alleges the following relationship between the LLCs at issue. Management and Capital directly managed Investors. Capital owned 98% of Investors' equity. Investors owned, directly or indirectly, the Debtors. Specifically, Investors was the sole member and manager of Debtor PennySaver USA, LLC. Management, Capital, and Investors are indistinct as a matter of day-to-day control. The OpenGate group acquired the Debtors on September 27, 2013.

III. Factual Allegations in the Complaint¹⁵

The Trustee has filed claims against managers, members and employees of the Debtors, on behalf of the Debtors. The Debtors are separate Delaware limited liability companies, governed by operating agreements. The Debtors' rights and claims, if any, against managers and members are inherently contractual. The Trustee alleges that all of the OpenGate entities or individual defendants are jointly responsible for the alleged mismanagement of the Debtors, which, the Trustee alleges, resulted in harm to the Debtors' creditors.

As the OpenGate entities are limited liability companies, direct claims of the Debtors against their managers and members must start and end with each Debtor's limited liability company operating agreement. The Trustee is in possession of all the Debtors' corporate records, and has even conducted a Rule 2004 examination of OpenGate. The Trustee's legal theory is that "OpenGate" and others are liable to all of the Debtors.¹⁶

To acquire financing for its leveraged acquisition of Pennysaver, OpenGate presented putative lenders with rosy financial projections for Pennysaver that were premised upon a labor cost savings plan that it never attempted to implement (and likely, never intended to), and that were consistently more bullish about Pennysaver's future revenues than OpenGate's own internal projections (e.g., by showing the banks EBITDA 27-54% higher than the internal projections).¹⁷ Whether measured by going-concern value or liquidation value, the Debtors were never worth more than the amount of the COBC debt—they were insolvent from day one, and OpenGate was fully aware of that fact.¹⁸

On or shortly after the Closing Date for the Pennysaver acquisition, OpenGate caused the Debtors to make $ 2 million in "[d]istributions to Member" to OpenGate (the "Dividend"). In addition, OpenGate caused the Debtors to pay $ 868,000 of closing expenses in connection with the acquisition (the "Closing Expenses"). The Debtors' payment of the Dividend and the Closing Expenses, according to the Trustee, was gratuitous—the Debtors received no value or other consideration in exchange for these payments.¹⁹

In April 2014, OpenGate caused the Debtors to distribute approximately $ 1.8 million to OpenGate for alleged tax obligations (the "Tax Payment"). The Trustee alleges that the Debtors received no value or other consideration in exchange for the Tax Payment.²⁰

Shortly after the Closing Date, OpenGate caused one or more of the Debtors to enter into a management agreement with OpenGate whereby OpenGate was to provide certain "management" services to the Debtors, in exchange for a monthly "fee" of $ 83,333.33 (the "Management Fees"). The Trustee alleged that OpenGate caused the Debtors to pay Management Fees from October 2013 through December 2014, but it did not provide any management services—rather, it used the management agreement as a means to siphon cash out of Pennysaver.²¹

The Trustee continues that on January 9, 2014, Defendant Yook advised the Debtors' then-CEO, Liz Gaier, that Fusion Paperboard, one of OpenGate's...