In re Verestar, Inc.

343 B.R. 444

In re VERESTAR, INC., et al., Debtors Official Committee of Unsecured Creditors of Verestar, Inc., Verestar Networks, Inc. and Verstar International, Inc. for and on behalf of itself and Verstar, Inc., Verestar Networks, Inc. and Verestar International, Inc., Plaintiffs, v. American Tower Corporation, Bear, Stearns & Co., Inc., Justin Benincasa, Norman A. Bikales, Alan Box, Arnold Chavkin, Steven B. Dodge, David W. Garrison, William H. Hess, David Kagan, Marc Layne, Jack R. McDonnell, Michael Milsom, Scott Moskowitz, Steven J. Moskowitz, Raymond O'Brien, Matthew Petzold, David J. Porte, Bradley E. Singer, James Taiclet and Joseph L. Wynn, Defendants.

Bankruptcy No. 03-18077(ALG).

Adversary No. 05-03635.

Adversary No. 05-02259.

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

June 9, 2006.

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Kasowitz, Benson, Torres & Friedman LLP, by David S. Rosner, Esq., Cindy C. Kelly, Esq., Michael J. Bowe, Esq., Brian Condon, Esq., Erin Zavalkoff, Esq., New York, NY, for the Official Committee of Unsecured Creditors.

King & Spalding LLP, by Barry N. Seidel, Esq., Scott E. Eckas, Esq., New York, NY, for American Tower Corporation and the Individual Defendants.

Kramer, Levin, Naftalis & Frankel, LLP, by Barry H. Berke, Esq., Stephen M. Sinaiko, Esq., New York, NY, for the Bear Stearns Defendants.

MEMORANDUM OF OPINION

ALLAN L. GROPPER, Bankruptcy Judge.

These are motions to dismiss filed by the defendants in two separate lawsuits brought by the Official Committee of Unsecured Creditors (the "Committee") of Verestar, Inc. and affiliates ("Verestar") in connection with the above-captioned Chapter 11 cases. The Committee has sued the following defendants: American Tower Corporation ("ATC"), Verestar's parent corporation; Bear Stearns & Co., Inc. ("Bear Stearns"), financial advisor to ATC and Verestar; two Bear Stearns' officers, Marc Layne and Scott Moskowitz (together with Bear Stearns, the "Bear Stearns Defendants"); and individuals Justin Benincasa Norman A. Bikales, Alan Box, Arnold Chavkin, Steven B. Dodge, David W. Garrison, William H. Hess, David Kagan, Michael Milsom, Steven Moskowitz, Raymond O'Brien, Matthew Petzold, David Porte, Bradley E. Singer, James Taiclet and Joseph L. Wynn (the "Individual Defendants").¹ Both complaints were filed on July 8, 2005 by the Committee on behalf of Verestar and its co-debtor subsidiaries (together with Verestar, the "Debtors"). One was commenced as an adversary proceeding in this Court by a complaint filed against ATC only (the "Bankruptcy Court Complaint").² The other was commenced as a plenary action in the United States District Court for the Southern District of New York by a complaint filed against all the Defendants (the "District Court Complaint" and together with the Bankruptcy Court Complaint, the "Complaints"). The District Court Complaint was referred to this Court by Judge Patterson in strongly-worded opinions concluding that the Committee had no reasonable basis for having filed initially in the District Court rather than in this Court. Official Comm. of Unsecured Creditors of Verestar, Inc. v. Am. Tower Corp., 2005 WL 3455775, 2005 U.S. Dist. LEXIS 33340 (S.D.N.Y. Dec. 15, 2005), 2006 WL 763054, 2006 U.S. Dist. LEXIS 12820 (S.D.N.Y. Mar. 23, 2006).

The factual allegations set forth in the Complaints are virtually identical and serve as the basis for a total of twenty-one claims for relief. ATC has moved to dismiss the following claims raised in the Bankruptcy Complaint: (i) equitable subordination (B. Ct. Count III) and (ii) substantive consolidation (B. Ct. Count IV).³ The Defendants have moved to dismiss variously the following claims raised in the District Court Complaint: (i) alter ego (D. Ct. Count I), (ii) breach of fiduciary duty (D. Ct. Count II), (iii) conversion (D. Ct. Count III), (iv) aiding and abetting breach of fiduciary duty and conversion (D. Ct. Count IV), (v) conspiracy (D. Ct. Count V), (vi) tortious interference with prospective or existing business relations (D. Ct. Count VII), (vii) deepening insolvency (D. Ct. Count VIII), (viii) breach of contract (D. Ct. Count IX), (ix) state law fraudulent transfer (D. Ct. Counts X and XI), (x) Bankruptcy Code fraudulent transfer (in part) (D. Ct. Counts XII and XIII), (xi) recovery of avoidable transfers (in part) (D. Ct. Count XV), (xii) turnover (in part) (D. Ct. Count XVI), and (xiii) accounting pursuant to Bankruptcy Code § 542(e) (D. Ct. Count XVII)⁴

The motions are disposed of as follows.

Background

The Facts as Alleged in the Complaints

The following factual allegations in the Complaints are assumed to be true for purposes of these motions to dismiss.

Verestar was founded in 1999 as a wholly owned subsidiary of ATC, a telecommunications company, for the purpose of owning and operating ATC's teleport business. ATC initially capitalized Verestar with $1,000, an amount that the Committee asserts was inadequate given the size and nature of the teleport business. Verestar allegedly remained undercapitalized and dependent on ATC for financing throughout its existence. The Committee asserts that a all relevant times ATC treated Verestar as a mere division and used Verestar to reap financial rewards from the teleport business while attempting to shield itself from any associated liability or risk. (D.Ct.Compl. ¶¶ 33-34.)

ATC was Verestar's 100% shareholder, and according to the Complaint, there was an almost complete overlap of its officers and directors with those of Verestar, allowing ATC to dominate and control Verestar's Board and all material business decisions, including its teleport acquisitions and other transactions. (D.Ct. Compl. ¶¶ 35, 37.) As evidence of control, the Committee asserts that (i) the majority of Verestar's Board meetings were held on the same day as ATC's board meetings at ATC's regional offices or headquarters in Massachusetts, and not at Verestar's headquarters in Virginia (D.Ct.Compl. ¶ 35); (ii) ATC's officers and directors attended and directed Verestar Board meetings and engaged in transactions on Verestar's behalf, even though they did not hold positions at Verestar (D.Ct.Compl. ¶ 36); and (iii) by the end of 2001, Verestar did not have a properly constituted board, due to the resignation of several board members and the failure to fill vacancies as required by Verestar's by-laws. (D.Ct.Compl. ¶ 52.)

ATC and its directors and officers also allegedly held out to creditors and the public in general that Verestar was part of a single operation with ATC, describing Verestar as a division of ATC. (D.Ct. Compl. ¶ 37.) As further evidence of ATC's dominion over Verestar, the Committee asserts that ATC maintained Verestar's records and controlled all of its core corporate functions. ATC provided Verestar's corporate support services, including human resources, accounts payable, accounts receivable, tax, internet and information technology functions. Verestar employees were paid by ATC with checks drawn on ATC accounts, and ATC provided employee benefits and all forms of business insurance. (D.Ct.Compl. ¶ 39.)

With respect to financing, the Committee alleges that Verestar's main bank account was in the name of ATC, and ATC officers were authorized signatories on all other ancillary Verestar accounts. ATC used its control over Verestar to sweep funds from Verestar's accounts on a daily basis and then co-mingled these funds with those from its own operations without returning adequate consideration to Verestar. (D.Ct.Compl. ¶ 40.)

According to the Complaint, ATC also caused Verestar to engage in an extremely aggressive acquisition strategy, secure in the belief that in the event the teleport business failed, it could extract the value of the business at the expense of Verestar's other creditors. (D.Ct.Compl. ¶¶ 37, 43.) Between 1997 (before Verestar's separate incorporation) and 2003, ATC allegedly pursued over thirteen acquisitions and other transactions on Verestar's behalf without regard to Verestar's purported separate legal existence and with the result that its business was grossly over-expanded. (D.Ct.Compl. ¶ 44.) These transactions included, inter alia, (i) the acquisition of InterPacket Networks, Inc. ("IPN") in December 2000, which was not approved by the Verestar Board and was consummated despite ATC's knowledge that the acquisition would generate substantial losses for Verestar (D.Ct.Compl. ¶¶ 45-46); (ii) the purchase of additional satellite capacity from PanAmSat International Systems, Inc. ("PanAmSat") in March 2001, despite the knowledge of ATC, the Bear Stearns Defendants and certain of the Individual Defendants that Verestar would continue to incur losses and not be able to meet its financial commitments (D.Ct. Compl. ¶¶ 47-48); and (iii) the acquisition of Integrated Systems Design, Inc. ("ISD") in October 2001, which allegedly was neither considered nor approved by the Verestar Board (D.Ct.Compl. ¶¶ 51.) Each of these transactions contributed to Verestar's increased operating costs and major revenue and EBITDA losses (D.Ct. Compl. ¶¶ 47, 49-50.)

The Committee alleges that in the spring of 2002, when it was clear that Verestar would ultimately have to be liquidated, ATC's and Verestar's officers and directors (mostly the same individuals) and Bear Stearns agreed on a scheme entitled "Project Harvest," a program to transfer as many of Verestar's assets and as much of its value as possible to ATC before Verestar's inevitable collapse. Bear Stearns, which was retained by Verestar as the financial advisor for Project Harvest at the same time it was serving as financial advisor to ATC, allegedly played a leading role in the scheme through its managing director, Scott Moskowitz, and one of its vice...