In re Friedman's Inc.

385 B.R. 381

In re FRIEDMAN'S INC., et. al., Debtors Alan Cohen, as Trustee of the Friedman's Creditor Trust, Plaintiff, v. Morgan Schiff & Co., Inc., Phillip E. Cohen, Sterling Brinkley, Bradley J. Stinn, Victor M. Suglia, and Alston & Bird LLP, Defendants.

No. 407CV041.

United States District Court, S.D. Georgia, Savannah Division.

January 10, 2008.

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David W. Adams, Paul W. Painter, Jr., Ellis, Painter, Ratterree & Adams, LLP, Savannah, GA, Eric Kanefsky, William C. Fredericks, Bernstein, Lotowitz, Berger & Grossman, LLP, Glenn B. Rice, Otterbourg, Steindler, Houston & Rosen, PC, New York, NY, for Plaintiff.

M. Tyus Butler, Jr., Bouhan, Williams & Levy, LLP, Dana F. Braun, Callaway, Braun, Riddle & Hughes, PC, James L. Drake, Jr., James L. Drake, Jr, PC, Savannah, GA, D. Ross Martin, Gregory 0. Kaden, Randall W. Bodner, Ropes & Gray, LLP, Boston, MA, Mikal J. Condon, David W. Shapiro, Boies, Schiller & Flexner, LLP, Oakland, CA, Charles Davant, IV, John K. Villa, Michael Sundermeyer, Robert M. Cary, Thomas G. Ward, Williams & Connolly, LLP, Washington, DC, John J. Ossick, Jr., John P. Ossick, Jr., PC, Kingsland, GA, for Defendants.

Victor M. Suglia, pro se.

ORDER

B. AVANT EDENFIELD, District Judge.

I. INTRODUCTION

A. Overview

Friedman's Inc., a large jewelry store chain, financially collapsed and entered Chapter 11 Bankruptcy in 2005. In re Friedman's, Inc., Case No. 05-40129 (Bankr.S.D.Ga. filed 1/14/05). The "Friedman's Creditor Trust" arose from that. Its Trustee filed an Adversary Complaint, Case No. 07-04042 (Bankr.S.D.Ga. 1/12/07), since withdrawn to this Court, In re Friedman's Inc., 2007 WL 1541962 (S.D.Ga. 5/23/07) (unpublished), alleging 15 counts of wrongdoing on the part of Friedman's directors, officers, a controlling shareholder, and its attorneys. A-doc. # l.¹ All defendants now move to dismiss the Complaint against them. Doc. ## 31, 35, 36, 38, 41.

B. FED.R.CIV.P. 12(b)(6) Standard

A Rule 12(b)(6) motion generally requires a Court to accept alleged facts as true. There are a lot of facts — many of them damning — alleged here. So it is worth pausing to review the 12(b)(6) standard, which itself pivots on F.R.Civ.P. 8(a)(2).

Under Rule 8(a)(2), one need only present a short and plain statement of one's claims, showing entitlement to relief. A plaintiff must show enough to "give the defendant[s] fair notice of what the ... claim is and the grounds upon which it rests...." Bell Atl. Corp. v. Twombly, 550 U.S. ___, 127 S.Ct. 1955, 1964, 167 L.Ed.2d 929 (2007). Pre-Twombly, pleaded claims could only be dismissed when the plaintiff could prove "no set of facts" that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

Twombly "retired" the "no set of facts" standard. Twombly, 127 S.Ct. at 1969. Now, a complaint need not bear "detailed factual allegations," but must still provide "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." 127 S.Ct. at 1964-65 (citation omitted); Association of Cleveland Fire Fighters v. City of Cleveland, Ohio, 502 F.3d 545, 548 (6th Cir. 2007).

Thus, "[f]actual allegations must be enough to raise the right to relief above the speculative level, on the assumption that all the allegations in the complaint are true...." Twombly, 127 S.Ct. at 1965 (citations omitted; emphasis added). See also Weissman v. NASD, 500 F.3d 1293, 1303 (11th Cir.2007) (Pryor, J., concurring in part and dissenting in part) (advising the district court to revisit the pleadings because the Twombly decision rejected the notion that pleadings may rely on "the possibility that a plaintiff might later establish some set of undisclosed facts to support recovery") (quotes, cites and alterations omitted). The bottom line here, then, is that

while notice pleading may not require that the pleader allege a specific fact to cover every element or allege with precision each element of a claim, it is still necessary that a complaint contain either direct or inferential allegations respecting all the material elements necessary to sustain a recovery under some viable legal theory.

Financial Sec. Assur., Inc. v. Stephens, Inc., 500 F.3d 1276, 1282-83 (11th Cir. 2007) (quotes and cites omitted; emphasis added).

Too, it has long been the rule that "conclusory allegations and unwarranted deductions of fact are not admitted as true in a motion to dismiss." South Fla. Water Mgmt. Dist. v. Montalvo, 84 F.3d 402, 408 n. 10 (11th Cir.1996). A plain statement of the facts must "possess enough heft to show" entitlement to relief. Twombly, 127 S.Ct. at 1966 (quotes, cite and alterations omitted). This includes a sufficient factual allegation to justify the requested relief. Id. at 1965.

Finally, the parties have referenced a considerable number of materials in the Complaint and dismissal-motion briefs. Ordinarily, courts

do not consider anything beyond the face of the complaint and documents attached thereto when analyzing a motion to dismiss. Brooks v. Blue Cross & Blue Shield of Fla., Inc., 116 F.3d 1364, 1368 (11th Cir.1997). [The Eleventh Circuit] recognizes an exception, however, in cases in which a plaintiff refers to a document in its complaint, the document is central to its claim, its contents are not in dispute, and the defendant attaches the document to its motion to dismiss. Harris v. Ivax Corp., 182 F.3d 799, 802 n. 2 (11th Cir.1999); Brooks, 116 F.3d at 1368-69.

Financial Sec. Assur., Inc. v. Stephens, Inc., 500 F.3d 1276, 1284 (11th Cir.2007).

II. BACKGROUND

A. The Defendants

Defendant Morgan Schiff (MS) was an investment banking firm with whom Friedman's contracted to provide investment banking and financial advisory services. A-doc. # 1 ¶ 2. MS ceased active operations in 2004. Id.

Defendant Phillip Cohen was the chairman, controlling shareholder and sole owner of MS. Id. ¶ 4. Additionally, Cohen held all of Friedman's Class B voting stock, thus giving him the right to elect 75% of Friedman's directors.² Id. ¶ 5. Friedman's 10-K³ for fiscal year 2002 revealed that Cohen had "significant control over [Friedman's] business, policies and affairs, including the power to appoint new management, prevent or cause a change of control and approve any action requiring the approval of the holders of [Friedman's] common stock, including adopting amendments to [Friedman's] certificate of incorporation and approving mergers or sales of all or substantially all of [Friedman's] assets." Id.

Cohen also controlled Crescent Jewelers, Inc., another jewelry retailer to whom Friedman's provided significant financial assistance from 1996 until Crescent's bankruptcy in 2004. Id. ¶¶ 24, 36.

Defendant Sterling Brinkley was a Friedman's director from 1993 until 12/23/03. Id. ¶ 8. He also served as Executive Chairman of Friedman's Board of Directors at different times, but most importantly from 1998 until his resignation in 2003. Id. During his Friedman's tenure, Brinkley also was a director at Crescent and a paid consultant to MS. Id. ¶¶ 9, 10. As of 2003, he and his wife held approximately a 6% ownership interest in Crescent's common stock. Id. ¶ 9. Brinkley similarly occupied several other positions at Cohen-controlled entities during this time. Id. ¶ 11.

Defendant Bradley Stinn served as a Friedman's director and CEO from 1993 until his resignation on 12/2/03. Id. ¶ 14. Stinn, like Brinkley, also acted as a Crescent director and CEO while serving in those positions at Friedman's too. Id. ¶ 15. By 9/03, he held almost 3% of the total ownership of Crescent and served in various other positions at Cohen-controlled entities. Id. ¶ 15-17.

Defendant Victor Suglia, who has not made an appearance in this case, acted as Friedman's Senior Vice President and CFO, as well as its corporate treasurer and secretary, from 6/97 to 11/03. Id. ¶ 19. Suglia also was Crescent's CFO during this time. Id. ¶ 37.

Finally, defendant Alston & Bird (A & B) is a law firm that acted as Friedman's outside general counsel from the 1990s until Friedman's, then run by a new board of directors, terminated A & B's representation in 2004. Id. ¶¶ 21, 187. Prior to its termination, A & B had advised special committees Friedman's appointed to approve transactions with Crescent. One special committee was Friedman's Audit Committee. A & B acted as its lead investigator after the Government alleged wrongdoing at Friedman's. Id. ¶¶ 21, 22. A & B attorney Mark McElreath, in turn, acted as A & B's main contact with Friedman's, and he became highly involved with the events of this case. Id. ¶¶ 30.

B. Friedman's and Crescent

Crescent Jewelers, Inc., was a privately held retail jewelry corporation based in California. Id. ¶ 24. By late 2002, it operated 156 stores in seven western states. Id. As stated previously, Cohen controlled both Crescent and Friedman's `through ownership of each company's class B voting stock. Id. ¶ 36.

Besides sharing the same controlling shareholder, Friedman's and Crescent had several overlapping directors. Id. 137. Brinkley and Stinn were directors at both simultaneously. Id. The two companies also shared CEOs and CFOs, Stinn and Suglia. Id.

From at least 1995 until its 2004 bankruptcy, Crescent struggled financially, operating at a loss in each of those fiscal years. Id. ¶¶ 39, 40, 41, 49, 76. Beginning in 1996, Cohen used his influence over Brinkley and Stinn to have Friedman's financially support Crescent. Id. ¶¶ 38-39.

Thus, in 1996 Friedman's gave Crescent $20 million in exchange...