In re Enivid. Inc.

345 B.R. 426

In re ENIVID. INC., et al., Debtors James B. Boles, Liquidation Trust Representative of the Liquidating Trust of Enivid, Inc., Plaintiff, v. Andrew J. Filipowski, Paul Humenansky, Michael Cullinane and Jude Sullivan, Defendants.

Bankruptcy No. 03-11472-JNF.

Adversary No. 04-1439-JNF.

United States Bankruptcy Court, D. Massachusetts.

July 12, 2006.

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Richard E. Mikels, Mintz, Levin, Cohn, Ferris, Boston, MA, for Debtors.

MEMORANDUM OF DECISION

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

The contested matters before the Court are the following: (1) "Defendant Andrew J. Filipowski's Motion to Dismiss Counts I, V-VII, and XII-XIV of the First Amended Complaint" through which defendant Andrew Filipowski ("Filipowski") seeks to dismiss, pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) (the "Filipowski Motion to Dismiss"), Counts I, V through VII and XII through XIV of the First Amended Complaint (the "Complaint") filed by James B. Boles, the Liquidation Trust Representative (the "Plaintiff') of the Liquidation Trust dated December 20, 2004, established pursuant to the enivid, inc.¹ "Official Committee of Unsecured Creditors' Amended Plan of Liquidation Under Chapter 11 of the Bankruptcy Code dated September 30, 2004, as Modified November 23, 2004" (the "Plan"); (2) the "Motion to Dismiss Claims Against Defendant Paul Humenansky" through which defendant Paul Humenansky ("Humenansky") seeks to dismiss Counts II, V through VIII, and XIII through XV of the Complaint² (the "Humenansky Motion to Dismiss"); (3) "Michael P. Cullinane's Motion to Dismiss Plaintiff's First Amended Complaint" through which defendant Michael Cullinane ("Cullinane") seeks to dismiss Counts III, V through VIII and XII of the Complaint (the "Cullinane Motion to Dismiss"); and (4) "Defendant Jude Sullivan's Motion to Dismiss the Amended Complaint" through which defendant Jude Sullivan ("Sullivan") seeks dismissal of all Counts in the Complaint against him (the "Sullivan Motion to Dismiss") (collectively, the "Motions to Dismiss")(Filipowski, Humenansky Cullinane and Sullivan, each a "Defendant" and, collectively, the "Defendants").³

Each of the Defendants filed Memoranda of Law in support of their respective Motions to Dismiss⁴ to which the Plaintiff filed responsive memoranda and each Defendant filed a reply brief. On November 14, 2005, the Court conducted a hearing after which it took the Motions to Dismiss under advisement. On December 22, 2005, the Defendants jointly filed a "Motion for Leave to Supplement Briefing on Defendants' Motion to Dismiss" (the "Motion to Supplement") through which they sought to supplement their arguments in view of the recent case of Alberts v. Tuft (In re Greater Southeast Community Hospital Corp.), 333 B.R. 506 (Bankr.D.D.C.2005). The Court allowed the Motion to Supplement on December 28, 2005. On January 9, 2006, the Plaintiff filed a response to the Motion to Supplement, and the Defendants filed a joint reply on January 19, 2006.

II. THE PLAINTIFF'S COMPLAINT A. Background

The Court, accepts the following facts alleged in the Complaint as true for purposes of this decision. See Warth v. Seldin, 422 U.S. 490, 501, 95 S.Ct. 2197, 2206, 45 L.Ed.2d 343 (1975). The following summary represents a statement of facts according to the Plaintiff and does not constitute findings or a determination of any facts.

enivid, inc., f/k/a divine, inc. ("Divine" or the "Company"), a Delaware corporation, was founded in 1999 by Filipowski as an internet-holding company, known as an "incubator" company, engaged in business-to-business e-commerce through a community of associated companies. Prior to establishing Divine, Filipowski was a founder of PLATINUM technology, inc. ("Platinum") which was ultimately sold in 1999 for $3.6 billion. Filipowski had worked with each of the Defendants in some capacity while at Platinum. Humenansky had served as Platinum's Chief Operations Officer and Cullinane had served as its Executive Vice President and Chief Financial Officer. Sullivan had been Platinum's outside counsel. While at Divine, the Defendants held the following offices and positions:

Name Office Director Status5
Filipowski     Chief Executive Officer                     Board Member from January

               January 1, 2000 through May 23, 20036      1, 2000 until Effective Date of
                                                           Confirmation of the Plan
Humenansky     President and Chief Operating Officer       Board Member from January
               October 19, 2000 through May 23, 2003       1, 2000 until Effective Date of
                                                           Confirmation of the Plan
Cullinane      Chief Financial Officer                     Board Member from January
               January 1, 2000 through May 23, 2003        1, 2000 until Effective Date of
                                                           Confirmation of the Plan
Sullivan       Secretary and General Counsel               Sullivan was not a Director
               October 19, 2000 through April 8, 2003

As an incubator company, Divine promoted itself as providing management and other resources with the goal of taking companies in its portfolio public. Divine raised over $100 million in its initial public offering ("IPO") in July, 2000. In that year, Divine acquired interests in more than 50 associated companies (the "Associated Companies"). The initial public offering market was evaporating in 2000, however, and Divine's incubator business failed to produce a single IPO for any of the Associated Companies.

Toward the end of 2000, many members of management believed that the incubator concept had failed and that Divine should pursue a new business strategy. In February 2001, Divine announced that it would acquire companies engaged in the "Enterprise Web Solutions" business and then integrate the acquired companies and their products and services into the portfolio of existing Divine products. Divine planned to reorganize and integrate the products and services of the Associated Companies into Divine's development, marketing, sales and support channels. This strategy presented significant operational and integrative challenges, in part, because the existing development, marketing, sales and support channels of Divine were in their beginning stages and also required significant development and integration efforts.

Divine actively implemented its new strategy in 2001 during which it acquired 20 companies, for which it expended almost $21 million in cash, issued more than 230 million shares of its common stock and assumed over $85 million in debt. Divine focused on acquiring financially distressed companies with operational concerns. A significant number of the acquired companies were in financial distress. While many of Divine's acquisitions helped to create the appearance of increased revenues, they failed to move Divine towards profitability. Through the first three quarters of 2001, Divine continued to incur operating losses and its cumulative operating losses for the first three quarters of 2001 totaled over $175 million. Filipowski was devoted to Divine's growth-by-acquisition strategy. Many members of management of the Company, however, questioned this business plan because of the costs, negative effect on cash flow and operational challenges associated with the acquisitions. Noting the problems facing the Company, members of management attempted to direct Filipowski's focus toward operations rather than acquisitions. With mounting financial challenges, internal dissent began to grow.

One of the companies targeted for acquisition by Divine was RoweCom, Inc. ("RoweCom") which managed library orders of large institutions for publications. It placed orders with publishers and provided customer and ancillary services for libraries. While RoweCom's business did not fit within any of Divine's business spheres, the addition of RoweCom enhanced the appearance of Divine's gross revenues. RoweCom, however, was a financially distressed company, having operated at a loss for several years. Moreover, its operations historically resulted in cyclical cash flows throughout the year. Rowe-Corn typically paid publishers in December or January of each year for subscription orders placed by its customers. As a result, RoweCom usually required additional funding in the fourth quarter when publisher payments were in excess of collections from customers. Divine's cash flow problems, as well as the lack of synergy between Divine and RoweCom's business, led some within Divine to question the acquisition. Humenansky arid Sullivan, in particular, expressed their doubts about the acquisition through e-mails to Filipowski. During the due diligence process, Humenansky wrote: "I become less and less sure of this acquisition every day that goes by, since I just don't see a lot of benefit versus a lot of work. All others are right on, but this one I have a really bad feeling about." Am. Compl. at ¶ 52. Similarly, on October 31, 2001, Sullivan wrote to Filipowski and other members of management:

I may not do this justice from the financial modeling perspective, but the Cliff's Notes version is that RoweCorn's financial position has deteriorated to a much worse position than I believe any of us were aware of... and we have been trying to get a handle on exactly how bad the situation is so that a reasonably informative report of the situation can be presented ... before we close this deal.

Id. at ¶ 53.

Notwithstanding the misgivings of some managers, the Company completed the acquisition of RoweCom on November 6, 2001. This transaction placed Divine in the zone of insolvency as of November 30, 2001. Nevertheless, following the acquisition of RoweCom, Divine...