In re Pack Liquidating, LLC

658 B.R. 305

IN RE: PACK LIQUIDATING, LLC, et al., Debtors.

Case No. 22-10797 (CTG) (Jointly Administered)

United States Bankruptcy Court, D. Delaware

Signed February 2, 2024

Levi Akkerman, Andrew L. Brown, Katelin A. Morales, Katelin Ann Morales, Sameen Rizvi, Christopher M. Samis, Elizabeth R. Schlecker, Aaron H. Stulman, Potter Anderson & Corroon LLP, Wilmington, DE, Mary E. Augustine, A. M. Saccullo Legal, LLC, Bear, DE, Seth A. Niederman, Fox Rothschild LLP, Wilmington, DE, Erica Richards, Cullen Drescher Speckhart, Paul J. Springer, Cooley LLP, New York, NY, for Debtors.

Timothy Jay Fox, Jr., Office of the United States Trustee, Wilmington, DE, for U.S. Trustee.

Related Docket No. 1027

MEMORANDUM OPINION

CRAIG T. GOLDBLATT, UNITED STATES BANKRUPTCY JUDGE

The debtors operated an e-commerce business, as third-party sellers of health, beauty, and other consumer products on online marketplaces.¹ They filed for bankruptcy after raising several rounds of debt and equity financing, followed by the collapse of a potential merger with a special purpose acquisition company ("SPAC") under which the debtors would have become a public company that allegedly would have been valued at $1.5 billion.² As the first-day declaration describes, after the SPAC merger failed, the debtors shifted their efforts to pursuing a going-concern sale. Those efforts, however, were unsuccessful, leaving the debtors to wind down their affairs through an orderly liquidation in bankruptcy.³

The Official Committee of Unsecured Creditors appointed in this bankruptcy case alleges that the business failure is not the result of a challenged SPAC market and generally unfavorable business conditions, but instead was caused by mismanagement and self-dealing by the company's insiders.⁴ The Committee has filed an adversary proceeding asserting those claims, as well as claims for equitable subordination, the avoidance and recovery of alleged fraudulent conveyances, and the disallowance of claims.⁵

The defendants in the adversary proceeding do not challenge the Committee's authority to pursue the claims other than those for breach of fiduciary duty. Certain of the defendants in the adversary proceeding have, however, objected to the Committee's motion for standing to pursue claims for breach of fiduciary duty.⁶ They argue that because the debtors are Delaware limited liability companies, and the Delaware Limited Liability Company Act provides that only the members of a Delaware limited liability company or the company's assignees may be given derivative standing to act on behalf of the company, the Committee cannot be given derivative standing to pursue the potential estate cause of action in bankruptcy.⁷

The defendants' argument relies primarily on three published opinions, issued by judges of this Court, that have either held or suggested that the Delaware Limited Liability Company Act and the Delaware Supreme Court opinion in CML V, LLC v. Bax that construes the Act, operate to preclude a bankruptcy court from granting an official committee standing to pursue an estate cause of action in bankruptcy.⁸

No opinion of a trial court judge is formally binding on another trial court judge. There are, however, important reasons, stemming both from rule-of-law principles as well as (for courts with business dockets) ordinary commercial sense, for judges sitting on multi-judge courts to strive for as much consistency and harmony in their rulings as is practicable. The Court is therefore loath to break with the only three written opinions by judges of this Court to have addressed the topic.

For the reasons explained below, however, this Court does not believe that those opinions can be squared with the Third Circuit's en banc opinion in In re Cybergenics, which treats the authority to grant a committee derivative standing to pursue an estate claim as one that stems from the Bankruptcy Code rather than state law.⁹ Under Cybergenics, the authority to grant committee standing is one of the many tools that the Bankruptcy Code grants to bankruptcy courts - like the power to appoint a chapter 11 trustee, to appoint an examiner, or to convert the case to one under chapter 7 - to ensure that a debtor-in-possession is performing its role in the bests interests of the estate. While an order granting a committee standing (unlike the use of the other tools) can fairly be described as authorizing a "derivative" lawsuit, it is a federal rather than state-law derivative action, and thus not the subject of the Delaware Limited Liability Company Act.

In light of the Cybergenics analysis (which is controlling in this Court), it necessarily follows that a decision authorizing a committee to assert an estate cause of action (which will be described herein as a "Cybergenics action") does not conflict with Bax. Cybergenics actions and state-law derivative actions are simply two different kinds of creatures. Alternatively, however, even if one were to view the principles of Cybergenics and Bax as being in conflict, ordinary principles of federal supremacy would require the authority that the Third Circuit found implicit in the Bankruptcy Code to preempt any contrary state law.

None of the prior opinions on this issue by judges of this Court addresses the import of the Third Circuit's decision in Cybergenics. The Court accordingly concludes that its overriding obligation faithfully to apply binding Third Circuit precedent must prevail over the prudential concern for maintaining uniformity among the judges of this Court. The Court therefore holds that the Delaware Limited Liability Company Act does not preclude it from granting the Committee standing to pursue an estate cause of action if the established standards for granting that relief are otherwise met.

On that question, the Court concludes that the Committee's claim against the objecting defendants is sufficiently colorable to be permitted to proceed. In fairness, the objecting defendants assert serious arguments that the claims may be barred by virtue of the company's formation documents that exculpate them from any claim for breach of fiduciary duty. The Committee, however, has a fair response that the exculpation provisions are limited to the defendants' capacities as managers, and do not extend to their separate roles as officers. While those issues are touched on in the parties' briefing, the Court does not believe it appropriate to issue a definitive ruling on this question based on the limited briefing now before it. Specifically, the question of the "capacity" in which the defendants are sued was raised only in a post-hearing brief filed by the Committee, to which the objecting defendants have not had the opportunity to respond. Accordingly, although in many contexts courts have (sensibly) found that the question whether a claim is "colorable" to depend on a showing that the claim will survive a motion to dismiss, in the unusual circumstances presented here, the Court concludes only that, based on the current state of the record and briefing before it, the claims are sufficiently colorable for the Court to grant the Committee standing to assert the estate's claim. That ruling, however, is without prejudice to any of the rights of the parties on the question whether the complaint, in its current form, states a claim that will survive a motion to dismiss.

Factual and Procedural Background

In 2010, Andrew Vagenas, Bradley Tramunti, and James Mastronardi formed a company that would eventually become Packable, which is the lead debtor and ultimate parent company of the other debtors in these bankruptcy cases. Packable, a Delaware limited liability company, operated as a third-party seller of health and beauty products on online marketplaces in North America.¹⁰ Since the company's inception, the debtors relied on "proceeds of debt and equity capital raises to fund their operations and grow their business."¹¹

The heart of the Committee's complaint is the allegation that the company's insiders have, over many years, put their own interests ahead of the those of the company itself. The insiders in question include the company's original founders, as well as strategic partners that invested in the company and obtained the right to appoint members to the company's board.

The current motion, however, involves only the claims asserted against the original founders and entities they control. The Committee alleges, among other things, that these defendants used the proceeds of a substantial capital infusion to redeem their own shares, rather than invest those proceeds in the company's infrastructure. It is alleged that this decision drained the company of the capital that was necessary to the ultimate success of the business.

The Committee's standing to assert the various bankruptcy claims set out in the complaint was the subject of a prior stipulation approved by the Court.¹² And while the Committee suggests that this stipulation (as well as a prior one) implicitly authorized it also to assert the fiduciary duty claims on behalf of the estate, it now (as an abundance of caution, it says) moves the Court for standing to assert the fiduciary duty claims on behalf of the estate.¹³ The Court, however, does not believe that the existing stipulations cover the claims for breach of fiduciary duty. One stipulation applies to the entities that were Term Lenders, while the defendants are different entities. Another stipulation applies to avoidance actions, which are different from the claims for breach of fiduciary duty at issue here. The Court will therefore proceed to address the merits of the motion.

Approximately two weeks before argument on the instant motion, this Court issued a letter ruling in an unrelated case that touched on the questions presented in this motion.¹⁴ To ensure that the parties were aware of that ruling, the Court docketed a "notice" that called the parties' attention to it and suggested that the parties be prepared to...