In re Co.

456 B.R. 791

In re The ANTIOCH COMPANY, et al., Debtor.The Antioch Company Litigation Trust, W. Timothy Miller, Trustee, Plaintiff

v.Lee Morgan et al., Defendants.

Bankruptcy Nos. 08–35741

08–35742

08–35743

08–35744

08–35745

08–35746

08–35747.Adversary No. 09–3409.

United States Bankruptcy Court, S.D. Ohio, Western Division,

April 28, 2011.

Marcia Voorhis Andrew, Taft Stettinius & Hollister LLP, Beth A. Silvers, Cincinnati, OH, for Plaintiff.Ronald E. Gold, Frost Brown Todd LLC, Brian P. Muething, Michael L. Scheier, Robert A. Klingler, Cincinnati, OH, Jennifer L. Maffett, Thompson Hine LLP, David M. Duwel, Duwel and Associates, Chad E. Burton, Leppla Associates, Terence L. Fague, Scott A. King, Dayton, OH, Scott J. Stitt, James E. Arnold & Assoc., Michael N. Schaeffer, Columbus, OH, Robert R. Kracht, Cleveland, OH, Julie A. Govreau, Theodore M. Becker, Morgan Lewis & Bockius LLP, Gregory Otsuka, Richard A. Chesley, DLA Piper, Emily N. Dillingham, Chicago, IL, Wendy S. Walker, Morgan, Lewis & Bockius LLP, New York, NY, R. Daniel Prentiss, Prentiss Law Firm, Providence, RI, William Bard Brockman, Bryan Cave Powell Goldstein, Atlanta, GA, for Defendants.

Recommendations for the United States District Court for the Southern District of Ohio to Deny in Part and Grant in Part Various Defendants' Motions to Dismiss Certain Non–Core Causes of Action

GUY R. HUMPHREY, Bankruptcy Judge.

+-----------------+
¦TABLE OF CONTENTS¦
+-----------------+

I.   Introduction                                                       809
II.  Procedural Background                                              810
III. Factual Background                                                 811

    A.   The Defendants                                                 811
    B.   The 2003 Transaction                                           812
    C.   Events Following the 2003 Transaction                          814
    D.   The Levimo Transaction                                         815
    E.   Sale Considerations                                            815
    F.   The First Sale Proposal and the Replacement of Antioch's Board 818
    G.   Defaults under the ESOP Notes                                  818
    H.   The Second Sale Proposal                                       819
    I.   The Bankruptcy Filing                                          819

IV. The Litigation Trustee's Claims and the Defendants' Responses       819
V.  Legal Standard and Analysis                                         820

    A.   Legal Standard for Determining Motions to Dismiss              820
    B.   Choice of Law                                                  822
    C.   Subject Matter Jurisdiction                                    822
         The Reservation of Rights in the Confirmed Plan Meets the
    D.   Requirements of Browning v. Levy   with respect to All of the  825
         Defendants
    E.   ERISA Preemption (Claims 1–12)                                 831

         1.  Law of ERISA Preemption                                    831
             The Claim for Aiding and Abetting Breach of Fiduciary Duty
         2.  against GreatBanc Trust Company is Preempted by ERISA      836
             The Claim for Professional Negligence against Reliance is
         3.  Preempted by ERISA                                         837
         4.  The Claims against Evolve Bank & Trust are Preempted by    838
             ERISA

         5.  Possible ERISA Claims against the ESOP Trustees            839
             The Non–Core Causes of Action against Lee Morgan, Asha
         6.  Morgan Moran, and Chandra Attiken are not Preempted by     839
             ERISA
         7.  Causes of Action against Marty Moran are not Preempted     844
         8.  The Professional Negligence Counts Fail to State a Claim   844
             upon which Relief can be Granted

    F.   Statute of Limitations (Claims 1–3)                            845

         1.  Positions of the Parties                                   845
             The Litigation Trustee is an Assignee and Succeeds to All
         2.  Rights of Antioch, Subject to Any Defenses and Limitations 847
         3.  Applicable Law Concerning the Statute of Limitation        847
         4.  ORC § 2305.09 and the “Discovery Rule”                     849
         5.  Equitable Tolling Principles under Ohio Law                851
         6.  The Doctrine of Adverse Domination                         855

                 General Principles under the Adverse Domination
             a.  Doctrine                                               855
             b.  Relationship to Agency Law                             856
             c.  Relationship to Close Corporation Law                  857
                 Ohio has Long Recognized the Corporate Agency
             d.  Principles Underlying the Adverse Domination Doctrine  857
                 Ohio Close Corporation Law Supports Application of the
             e.  Adverse Domination Doctrine                            859
                 There is not a Sufficient Basis to Conclude that the
             f.  Supreme Court of Ohio would Recognize Adverse          859
                 Domination as a Separate Doctrine to Toll a Statute of
                 Limitation

         7.  Conclusion as to the Statute of Limitation Pertaining to   860
             Counts 1, 2, and 3

    G.   Breaches of Fiduciary Duties (Counts 1, 3, 6, 8 and 10)        860

         1.  Fiduciary Duties of Directors and Officers Generally       860
             Count 1: Breach of Fiduciary Duty in Connection with the
         2.  2003 Transaction                                           861
         3.  Count 3: Breach of Fiduciary Duty Related to the Condor    862
             Transaction

             a.  It is Premature to Dismiss Counts 3, 8, and 9 against  862
                 CRG Based on CRG's Contractual Agreement with Antioch

                 The Litigation Trustee has Plead Sufficient Facts to
                 State a Claim for Breach of Fiduciary Duty as to the
             b.  Condor Transaction against All of the Count 3          864
                 Defendants
                 Count 3 and Other Counts Against CRG, Epstein, and
             c.  Ravaris should not be Dismissed at this Stage of the   866
                 Litigation Based on the Doctrine of In Pari Delicto
             d.  Count 3 is not Barred by the 4 Year Statute of         866
                 Limitation

             Count 6: Breach of Fiduciary Duty with respect to the
         4.  Levimo Transaction                                         867
             Count 8: Breach of Fiduciary Duty with respect to the Sale
         5.  Process (The Recapitalization or Refinancing Alternative   869
             Strategy)
             Count 10: Breach of Fiduciary Duty with respect To the
         6.  Sale Process (The J.H.Whitney Offer)                       871
         7.  Summary as to the Breach of Fiduciary Duty Counts          872

    H.   Aiding and Abetting Breaches of Fiduciary Duty (Counts 2, 7,   872
         9, & 11)

             Count 2: Aiding and Abetting Breach of Fiduciary Duty in
         1.  Connection with the 2003 Transaction                       875
             Count 7: Aiding and Abetting Breach of Fiduciary Duty with
         2.  respect to the Levimo Transaction                          876
             Count 9: Aiding and Abetting Breach of Fiduciary Duty with
         3.  respect to Sale Process (The Recapitalization and          877
             Refinancing Alternatives)
             Count 11: Aiding and Abetting Breach of Fiduciary Duty
         4.  with respect to Sale Process (Interference With the J.H.   879
             Whitney Sale Offer)

    I.   Count 12: Tortious Interference With Business Contracts with   880
         respect to Sale Process

         1.  Candlewood                                                 882
         2.  Lee Morgan                                                 883
         3.  Marty Moran                                                883

    J.   Count 15: Attorney Fees                                        884

VI. Conclusion                                                          885

I. INTRODUCTION

W. Timothy Miller, as Trustee of The Antioch Company Litigation Trust (the “Litigation Trustee”), initiated this adversary proceeding on December 23, 2009 against thirty defendants, most of whom were identified in the complaint either as former trustees of the Antioch Company's employee stock ownership plan, or current or former officers and directors who served on the Antioch board of directors at various times from 2003 to the Chapter 11 filing. In addition to tort claims, including breach of fiduciary duty, aiding and abetting breach of fiduciary duty, professional negligence and tortious interference with contracts, the Litigation Trustee is asserting bankruptcy claims for equitable subordination and preferential transfers. The tort claims concern the role that the defendants played in connection with a transaction designed to transfer all of Antioch's equity to Antioch's employee stock ownership plan, decisions subsequent to that transaction, and the financial debacle that ensued. In a nutshell, the Litigation Trustee alleges that some of the defendants either placed their own interest ahead of that of the company, its employees, and creditors or assisted other defendants in furthering that aim. All of the defendants filed motions to dismiss the complaint. For the reasons discussed below, the court recommends that the motions to dismiss the tort claims be denied in part and granted in part.

II. PROCEDURAL BACKGROUND

This adversary proceeding arises out of the Chapter 11 bankruptcy cases filed by The Antioch Company and certain of its subsidiaries on November 13, 2008 (“Antioch” or the “Company”).¹ Cplt. ¶ 6. On January...