In re I Successor Corp., Bankruptcy No. 02 B 23150-23151ASH

321 B.R. 640

In re I SUCCESSOR CORP., et al., (f/k/a Interliant, Inc., et al.), Debtor.

Post-Confirmation Committee of Unsecured Creditors of I Successor Corp., et al. (f/k/a Interliant, Inc., et al.), Plaintiff, v. The Feld Group, Inc.; Mobius VI, LLC; Mobius Technology Ventures VI, LP; Contrado, Inc.; Charterhouse Group, Inc. (f/k/a Charterhouse Group, International, Inc.); Charterhouse Equity Partners III, L.P.; Softbank Technology Ventures IV, L.P.; Softbank Technology Advisors Fund, L.P.; EYT, Inc.; Telephonetics Inc. (f/k/a L & D Messaging, Inc.); Stephen Maggs; Bradley Feld; Bruce Graham; Charles Feld; Jay Gates; Thomas

Dircks; Merrill Halpern; Patricia Riley; Charles Lax; Francis Alfano; Herbert Hribar; Leonard Fassler; David Walke; Howard Diamond; James M. Lidestri; and Stephen Munroe, Defendants.

Bankruptcy Nos. 02 B 23150-23151ASH, 02 B 23153ASH, 02 B 23155ASH, 02 B 23158-23159ASH, 02 B 23160-23163ASH, 02 B 23166, 02 B 23168ASH. Adversary No. 04-8806A.

United States Bankruptcy Court, S.D. New York.

March 10, 2005.

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Robinson & Cole LLP, by Christopher J. Major, William J. Kelleher III, Steven H. Gross, New York City, for Plaintiff.

Proskauer Rose LLP, by Michael T. Mervis, Richard M. Goldstein, Steven C. Krane, New York City, for all Defendants except Telephonetics, Inc. and Stephen Maggs.

Todtman, Nachamie, Spizz & Johns, PC, by Matthew E. Hoffman, New York City, for Telephonetics, Inc. and Stephen Maggs.

DECISION AND ORDER ON MOTION TO DISQUALIFY DEFENDANTS' COUNSEL

ADLAI S. HARDIN, JR., Bankruptcy Judge.

Plaintiff, the Post-Confirmation Committee of Unsecured Creditors ("plaintiff") of I Successor Corporation, et al. ("I Successor") (f/k/a Interliant, Inc., et al. and referred to herein as "Interliant" or "debtor"), commenced this adversary proceeding on behalf of debtor pursuant to Section 11.07 of debtor's Third Amended Plan of Liquidation, which authorizes plaintiff to prosecute debtor's actions post-confirmation. Proskauer Rose, LLP ("Proskauer") represents all defendants in this adversary proceeding except Telephonetics, Inc. and Stephen Maggs.¹ Plaintiff moved to disqualify Proskauer from representing any defendants in this adversary proceeding due to an alleged conflict of interest created by work Proskauer previously did for Interliant. For the reasons set forth below, the motion is granted.

Jurisdiction

This Court has jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(a) and 157(a) and the standing order of reference to bankruptcy judges signed by Acting Chief Judge Robert J. Ward dated July 10, 1984. This is a core proceeding under 28 U.S.C. § 157(b).

Background

Interliant filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on August 5, 2002. The debtor sold substantially all of its assets to Intrepid Acquisition Corporation on May 16, 2003 and June 6, 2003 for $7 million with the approval of this Court. Section 3.2 of the Asset Purchase Agreement provides that "the Purchaser shall not be liable for any liabilities of Sellers other than the Assumed Liabilities and Purchaser shall not be deemed, considered or held to be a successor to Sellers." That Section further stated that the "purchaser is expressly not assuming any liability or obligation for... claims which arose or were incurred prior to the Petition Date, or which are based on events, transactions or occurrences prior to the Petition Date." Pursuant to Section 4.9 of the agreement, Interliant changed its name to I Successor Corporation.

On March 12, 2004, this Court entered an order confirming debtor's Third Amended Plan of Liquidation. In addition to providing for the liquidation of debtor's existing assets and distribution of cash to creditors, the confirmed plan, in section 11.07, authorized plaintiff to prosecute debtor's preference, fraudulent conveyance and post-petition transfer claims after confirmation. Any proceeds obtained by plaintiff on Debtors' behalf would be distributed according to the plan.

Pursuant to that authorization, plaintiff brought this adversary proceeding on August 4, 2004. Plaintiff alleges in the First, Third, and Fourth Claims for relief that Interliant made improper transfers of cash without fair consideration to The Feld Group, Inc. ("Feld Group") recoverable under sections 548(a)(1)(B), 547(b), and 544 of the Bankruptcy Code and under section 273 through 275 of New York Debtor and Creditor Law. Bradley Feld, Charles Feld, and Bruce Graham are the principal shareholders of the Feld Group in addition to being former officers or directors of Interliant. Plaintiff alleges that the Feld Group benefited from the allegedly improper transfer as the direct recipient but also that Bradley Feld, Charles Feld, and Bruce Graham benefited "by virtue of their control of, and ownership interest in" the Feld Group.

Plaintiff alleges in the Second, Third, and Fifth claims for relief that Debtors made improper transfers of cash to Contrado, Inc. ("Contrado") recoverable under sections 548(a)(1)(B), 547(b), and 544 of the Bankruptcy Code and under section 273 through 275 of New York Debtor and Creditor Law. Mobius VI, LLC and Mobius Technology Ventures VI (collectively, "Mobius") and the Feld Group are the principal shareholders in Contrado, and Bradley Feld is a director of Mobius. Plaintiff alleges that "defendants Bruce Graham, Bradley Feld, and Charles Feld are the directors of Contrado, and as such exercise control over Contrado." Again plaintiff alleges not only that Contrado benefited directly from the transfers but also that Bruce Graham, Bradley Feld, and Charles Feld benefited "by virtue of their control of, and ownership interest in" Contrado.

In the Sixth Claim for relief, plaintiff alleges that Interliant sold shares of EYT, Inc. ("EYT") back to EYT for less than fair consideration giving rise to damages recoverable under section 544 of the Bankruptcy Code and sections 273 through 275 of New York Debtor and Creditor Law. Charterhouse Group, Inc. (f/k/a Charterhouse Group, International, Inc.), Charterhouse Equity Partners III, L.P., SOFBANK Technology Ventures IV, L.P., SOFTBANK Technology Advisors Fund L.P. (together with SOFTBANK Technology Ventures IV, L.P., "SOFTBANK"), and Mobius were the other shareholders of EYT. Thomas Dircks, Jay Gates, and Merrill Halpern are officers of Charterhouse Group, Inc. in addition to being former officers of Interliant. Bradley Feld and Charles Lax are partners in SOFTBANK in addition to being former directors of Interliant. Plaintiff alleges that "by virtue of their control of, and ownership interest in, EYT, Defendants Charterhouse, SOFTBANK, Thomas Dircks, Jay Gates, Merrill Halpern, Bradley Feld, and Charles Lax each benefited from Interliant's sale of EYT stock."

In the Tenth Claim for relief, plaintiff alleges that the director and officer defendants breached their fiduciary duties. Plaintiff alleges that the directors and officers did so by "entering into multiple transactions with interested Directors and Officers and/or entities that were controlled by interested Directors and Officers, which were not in the best interests of Interliant and/or not properly authorized by Interliant's Board." Plaintiff also alleges that the directors and officers breached their duty by "failing to exercise prudent and informed business decisions with requisite care, including but not limited to, failing to engage in minimally adequate due diligence before authorizing acquisitions and failing to obtain fairness opinions in connection with transactions."

In essence, then, plaintiff alleges a pattern of conduct extending over a period of time to funnel the corporation's money or property to the defendant director and officers or entities controlled by them in breach of their fiduciary duty. Claim Eleven mirrors the allegations in Claim Ten except that in Claim Eleven plaintiff alleges a breach of fiduciary duty by the director and officer defendants to Interliant's creditors.

Proskauer represents all defendants, corporate and individual, in Claims One through Six. Proskauer also represents the director and officer defendants in Claims Ten and Eleven except Stephen Maggs.²

On November 11, 2005, plaintiff brought this motion to disqualify Proskauer from representing any defendants in this adversary proceeding. Plaintiff alleges in its motion to disqualify, and defendants admit on this motion, that Proskauer represented Interliant in the acquisitions of Soft Link, Inc. and reSOURCE Partners, Inc. in February of 2000. Plaintiff also alleges that Proskauer represented Interliant in NaviSite's proposed purchase of Interliant's assets in the Spring of 2002 prior to Interliant's bankruptcy filing. Defendants acknowledge that Proskauer did work relating to the NaviSite proposal but allege that the work was related to the regulatory disclosure implications of the proposed transaction and did not relate to the merits of it.

Plaintiff argues that Proskauer's prior work for Interliant on these transactions is substantially related to Claims Ten and Eleven in the current adversary proceeding because they are specifically included in those claims in plaintiff's complaint. Plaintiff also argues that because the transactions alleged in Claims One through Six are incorporated into Claims Ten and Eleven along with the transactions on which Proskauer worked, Proskauer's prior work is substantially related to the transactions in Claims One through Six because the three transactions together with the transactions in Claims One through Six are part of the ongoing scheme that constitutes the breaches of fiduciary duty by the directors and officers alleged in Claims Ten and Eleven.

Defendants contend that, because Interliant sold all of its assets and I Successor is not an ongoing concern, no attorneyclient privilege passed from Interliant to the...