Lipscomb v. Clairvest Equity Partners Ltd. (In re Lmi Legacy Holdings, Inc.)

In re: LMI LEGACY HOLDINGS, INC., Reorganized Debtors.

EDWARD L. LIPSCOMB,AS SPECIAL GUC TRUSTEE OF THE LMI GUC TRUST, Plaintiff, v. CLAIRVEST EQUITY PARTNERS LIMITED PARTNERSHIP, et al., Defendants.

Case No. 13-12098 (CSS)

Adv. Proc. No. 15-51069 (CSS)

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

April 27, 2017

Chapter 11

(Jointly Administered)

OPINION¹

MORRIS JAMES LLP

Stephen M. Miller

Carl N. Kunz

500 Delaware Avenue, Suite 1500

P.O. Box 2306

Wilmington, DE 19899-2306

-and-

CHAPMAN AND CUTLER LLP

David T.B. Audley

Sara T. Ghadiri

111 West Monroe Street

Chicago, IL 60603-4080

-and-

CHAPMAN AND CUTLER LLP

Laura E. Appleby

1270 Avenue of the Americas

New York, NY 10020

Counsel for Clairvest Equity

Partners Limited Partnership,

Clairvest Group, Inc., Clairvest

Acquisition LLC, Clairvest GP

Manageco, Inc., David Sturdee

Kenneth B. Rotman, Aly Champsi

Alan Torrie, and Sidney M. Horn

POTTER ANDERSON & CORROON LLP

Jeremy W. Ryan

Etta R. Mayers

T. Brad Davey

1313 North Market Street, Sixth Floor

Wilmington, DE 19899

-and-

SEYFARTH SHAW LLP

Gregory A. Markel

Heather Murray

One World Financial Center

New York, NY 10281

Counsel to RBC Capital Markets, LLC

LANDIS ROTH & COBB LLP

Kerri K. Mumford

James S. Green, Jr.

Joseph D. Wright

Anne M. Steadman

919 Market Street, Suite 1800

Wilmington, DE 19801

Counsel to Edward L.

Lipscomb, as Special Trustee

of the LMI GUC Trust

MARKS, O'NEILL, O'BRIEN

DOHERTY & KELLY, P.C.

Michael F. Duggan

Emily K. Silverstein

300 Delaware Avenue, Suite 900

Wilmington, DE 19801

Counsel for Defendants David

Finley, Clifford Schorer, and

Thomas Blum

MARSHALL DENNEHEY WARNER

COLEMAN & GOGGIN

Nemours Building

Thomas D. Walsh

1007 North Orange Street, Suite 600

Wilmington, DE 19899

-and-

MARSHALL DENNEHEY WARNER

COLEMAN & GOGGIN

Gregory W. Fox

Sarah Kleinman

2000 Market Street

Suite 2300

Philadelphia, PA 19103

Counsel for Defendants,

Louis Rocco and Saverio Burdi

Sontchi, J. /s/_________

INTRODUCTION

Before the Court is a Complaint brought by Edward S. Lipscomb, as special GUC Trustee of the LMI GUC Trust, alleging various claims against various parties associated with LMI, Clairvest, and the failed LMR merger.

The below chart identifies all Claims contained in the Trustee's Complaint. Additionally, each party against whom a respective Claim was brought is identified, as well as the "Defendant Group" to which they belong, respectively. The following analysis will largely be conducted and organized according to the different Defendant Groups, to the extent relevant facts do not warrant an individual Defendant's separate analysis with respect to a given Claim.

Those items highlighted in grey signify that the specified Defendant has not moved to dismiss the associated Claim, and, as such, will not be addressed in this Opinion.

Count

Claim

Defendant

Defendant Group

I

Breach of Fiduciary Duties against Board

(i) Sturdee, Rotman, Champsi, Horn, Torrie;

(ii) Rocco;

(iii) Finley, Schorer, Blum

(i) Clairvest (Directors)

(ii) LMI Management

(iii) Non-Clairvest Directors

II

Breach of Fiduciary Duties

(i) CLP, CGI, CLA, CGM;

(ii) Sturdee, Rotman, Champsi, Horn, Torrie

(i) Clairvest (Entities)

(ii) Clairvest (Directors)

III

Breach of Fiduciary Duties

Rocco, Burdi

LMI Management

IV

Avoidance and Recovery of Intentional Fraudulent Transfer

Rocco, Burdi

LMI Management

V

Avoidance and Recovery of Constructive Fraudulent Transfer

Rocco, Burdi, Accumanno

LMI Management

VI

Avoidance and Recovery of Intentional Fraudulent Transfer

RiteCare

RiteCare

VII

Avoidance and Recovery of Constructive Fraudulent Transfer

RiteCare

RiteCare

VIII

Turnover of Property of the Estate

Rocco, Burdi

LMI Management

IX

Breach of Contract - Officer Notes

Rocco, Burdi

LMI Management

X

Equitable Subordination and Disallowance of Claims

(i) CLP, CGI, CLA, CGM;

(ii) Blum;

(iii) Rocco, Burdi

(i) Clairvest (Entities)

(ii) Non-Clairvest Directors

(iii) LMI Management

XI

Recharacterization of Notes as Equity

(i) CLP, CGI, CLA, CGM;

(ii) Blum;

(iii) Rocco, Burdi

(i) Clairvest (Entities)

(ii) Non-Clairvest Directors

(iii) LMI Management

XII

Breach of Fiduciary Duties Relating to the Notes

(i) CLP, CGI, CLA, CGM;

(ii) Sturdee, Rotman, Champsi, Horn, Torrie;

(iii) Blum;

(iv) Rocco, Burdi

(i) Clairvest (Entities)

(ii) Clairvest (Directors)

(iii) Non-Clairvest Directors

(iv) LMI Management

XIII

Aiding and Abetting Breach of Fiduciary Duty

RBC

RBC

XIV

Breach of Contract - Engagement Letter

RBC

RBC

XV

Avoidance and Recovery of Preferential Transfer

CGM

Clairvest (Entities)

XVI

Avoidance and Recovery of Intentional Fraudulent Transfer

CGM

Clairvest (Entities)

XVII

Avoidance and Recovery of Constructive Fraudulent Transfer

CGM

Clairvest (Entities)

XVIII

Claim Objection

(i) CLP, CGI, CLA, CGM;

(ii) Blum;

(iii) Rocco, Burdi, Accumanno

(i) Clairvest (Entities)

(ii) Non-Clairvest Directors

(iii) LMI Management

BACKGROUND

Before filing for bankruptcy in 2013, LMI² and its affiliates collectively operated as a regional home medical equipment supplier in the northeastern United States.³ Most of LMI's sales and rentals were paid for by third party payer groups. Since 2002, certain Medicare contracts have been periodically awarded through a competitive biddingprocess ("Competitive Bidding") run by the Center for Medicare Services ("CMS"); bids are evaluated based on the bidder's eligibility, financial stability and the bid price.⁴ Approximately 35% of LMI's historical revenues were derived directly from Medicare and Medicaid programs.⁵

Clairvest, a Toronto-based private equity firm,⁶ was LMI's controlling shareholder pre-petition; on the petition date, Clairvest owned a 62.5% equity interest in LMI.⁷ Clairvest also controlled LMI's Board through its power to nominate five of the nine members of LMI's Board (the "Clairvest Board Members" and the "Board," respectively).⁸ Clairvest began investing in LMI through its private equity funds in December 2002 and quickly obtained a controlling position in LMI.⁹ Clairvest also holds a claim against the estate for $5.2 million derived from three loans made to LMI between March 2010 and February 2011; Clairvest's claim accounts for approximately 30% of the Debtors' estimated general unsecured creditor pool.¹⁰ The Trustee currently seeks to re-characterize these notes as equity.¹¹

In 2011, LMI initiated a sale process and retained RBC as its investment banker.¹² The Trustee alleges that the Clairvest Board Members initiated this sale process and signed an engagement letter with RBC before involving the non-LMI Board Members.¹³ RBC was an investor in a separate Clairvest fund and apparently this preexisting relationship was not disclosed to the Board.¹⁴ The Complaint alleges that RBC only communicated with and reported to Clairvest and its Board Members. The Trustee asserts that RBC never appeared at a Board meeting during 2011 and 2012.¹⁵ This initial sale process apparently ended in May of 2012, without a single acceptable bid having been received.¹⁶ It is unclear what constituted an "acceptable bid," but the Trustee alleges that Clairvest—not LMI—had provided RBC with guidelines for what would be acceptable.¹⁷ The Trustee believes that Clairvest received offers that valued LMI in excess of $70 million.¹⁸

After a number of years of growth, LMI's revenue peaked in 2011 with reported net revenue of $139,656,000. LMI's net revenue fell slightly to $137,160,000 in fiscal year 2012 and suffered a steeper fall to $128,500,000 in fiscal year 2013. LMI's EBITDA thosethree years was $12,034,000, $18,524,000 and $13,200,000, respectively.¹⁹ The primary cause of LMI's bankruptcy filing was not its profitability or cashflow in 2011-2013, but its failure to win a single service area in Medicare's 2013 Competitive Bidding.²⁰ LMI's bids were rejected, despite their competitive pricing, because CMS determined that LMI might not be financially capable of providing the services upon which it had bid.²¹ LMI received notification that it had been disqualified from Competitive Bidding on January 30, 2013.²²

Clairvest apparently anticipated a negative ruling from CMS and had already renewed its effort to sell LMI. By the end of January of 2013, Clairvest had negotiated a non-disclosure agreement with a potential suitor.²³ By March 2013, Clairvest had begun negotiating with Passaic Healthcare Services, LLC, d/b/a Allcare Medical ("Allcare"). On March 4, 2013, for the first time after CMS's ruling, LMI's Board met and began discussing sale and merger options. The minutes appear to show that Clairvest and its Board Members did not disclose the negotiations with Allcare, the letter of intent Clairvest had received from Allcare that day, or discuss RBC's involvement in a new sale process.²⁴

Over the following months, a number of transactions were explored by the Board; Board Members independently pursued different potential transactions, which resultedin growing internal strife.²⁵ Eventually, LMI entered into a letter of intent with Allcare on April 29, 2013.²⁶ The Trustee alleges that there are no Board minutes indicating that the Board approved this sale or was aware that this LOI had been executed and signed.²⁷ After receiving offers from two other companies, the Trustee alleges that Clairvest sought to expeditiously finalize a deal with Allcare, exclusive of the Board.²⁸ At the May 13, 2013 Board meeting, Champsi—not RBC nor the Special Committee—provided updates regarding the current M&A transactions being pursued, and specifically reported that the most serious proposal received was from Allcare.²⁹ On May 16, 2013, Allcare and LMI issued a press release announcing their merger.³⁰

However, on May 20, 2013, LMI was notified that the U.S. Attorney General's office had initiated a civil investigative demand (the "CID") with respect to alleged violations by LMI under the Federal False Claims Act.³¹ Upon notification of the CID by LMI, Allcare demanded renegotiation of their previously announced merger agreement, with the aim of mitigating any potential risk...