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In re Radnor Holdings Corp.

United States District Court, D. Delaware

February 9, 2017

IN RE RADNOR HOLDINGS CORPORATION, et al., Debtors.
v.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, TENNENBAUN CAPITAL PARTNERS, LLC, ALVAREZ AND MARSHAL LLC, Appellees. MICHAEL T. KENNEDY, Appellant, Bankr. No. 06-10894-KG Adv. No. 12-51308-KG

          Appellant Michael T. Kennedy, pro se.

          David B. Stratton, Esq., Pepper Hamilton LLP, Wilmington, DE, attorney for Appellees Skadden, Arps, Slate, Meagher & Flom LLP, Gregg Galardi, Richard T. Prins, and SK Private Investment Fund 1998 LLC.

          Russell C. Silberglied, Esq., Cory D. Kandestin, Esq., Richards Layton & Finger, P.A., Wilmington, DE, attorneys for Appellees Tennenbaum Capital Partners, LLC, Tennenbaum & Co. LLC, Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC, Babson & Co. LLC, Michael E. Tennenbaum, Suzanne S. Tennenbaum, David A. Hollander, Mark K. Holdsworth, Howard M. Levkowitz, Richard E. Spencer, and Jose Feliciano.

          MEMORANDUM

          ANDREWS, UNITED STATES DISTRICT JUDGE.

         Presently before the Court is an appeal by Michael T. Kennedy from a memorandum opinion and final order (Adv. D.I. 121, 122)[1] (the "Dismissal Order") of the United States Bankruptcy Court for the District of Delaware granting with prejudice the motions to dismiss (Adv. D.I. 110, 112) filed by the Skadden Defendants[2] and the Tennenbaum Defendants[3] with respect to Kennedy's amended complaint ("Complaint")[4] and imposing sanctions.

         I. Introduction

         Kennedy was the founder, chairman, and 80% shareholder of Radnor Holdings Corporation ("Radnor"). In 2006, Radnor and numerous related subsidiaries ("Debtors") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. Radnor later sold its assets to an affiliate of its secured lender, Tennenbaum Capital Partners LLC ("Tennenbaum") (B.D.I. 698) ("Sale Order"). Skadden served as Radnor's counsel in the chapter 11 cases. In December 2012 - more than six years after the sale to Tennenbaum was approved by the Bankruptcy Court - Kennedy filed three challenges against Tennenbaum and Skadden: (1) a motion to set aside the Sale Order approving the sale of Radnor's assets to Tennenbaum; (2) an objection to Skadden's final fee application; and (3) a complaint seeking $300 million in damages and rescission of the asset sale. (See B.D.I. 1993, 1994). Each of these requests for relief alleged the same underlying wrongdoing: a conspiracy by Tennenbaum and Skadden to hide conflicts of interest, retain Skadden as Radnor's bankruptcy counsel, and ensure a sale to Tennenbaum to the exclusion of other restructuring options preferred by Kennedy. (See Adv. D.I. 6 at ¶ 30; B.D.I. 1993 at 3-4, Preliminary Statement).

         The Bankruptcy Court denied the request to set aside the Sale Order as time-barred. (See B.D.I. 2032). The Bankruptcy Court then scheduled a hearing on Kennedy's fee objection. Because the fee objection expressly incorporated all of the allegations in the Complaint, the Bankruptcy Court stayed the Complaint's response deadline until after the fee objection could be heard. (See Adv. D.I. 24). The Bankruptcy Court conducted a two-day evidentiary hearing on the fee objection and determined that Skadden and Tennenbaum did not fail to disclose conflicts or act improperly in the chapter 11 cases. In re Radnor Holdings Corp., 2013 WL 3228116 (Bankr. D. Del. June 20, 2013). This Court and the Third Circuit affirmed. Upon conclusion of the Third Circuit appeal, Skadden and Tennenbaum moved separately to dismiss the Complaint. The Bankruptcy Court granted those motions, and this appeal followed.

         II. Background

         A. Skadden's Retention

         On August 25, 2006, the Debtors filed an application to retain Skadden as their bankruptcy counsel, effective as of the petition date, pursuant to an engagement agreement dated July 5, 2006. (See B.D.I. 96). At the time, Tennenbaum was a secured lender to Radnor and controlled one of Radnor's four board seats by virtue of its appointment of Jose Feliciano, who served on the board from February 9, 2006 until June 26, 2006. Counsel to a debtor must be "disinterested" and not "hold or represent an interest adverse to the estate." 11 U.S.C. § 327(a). Likewise, Bankruptcy Rule 2014 requires debtors' counsel to disclose connections with parties in interest in the bankruptcy case. Fed.R.Bankr.P. 2014(a). In support of its retention, Skadden filed several declarations disclosing its ties with Tennenbaum. (See B.D.I. 96, dated August 29, 2006; B.D.I. 223, dated September 18, 2006; and B.D.I. 1222, dated December 19, 2007). The declaration annexed to the retention application disclosed Skadden's representation of Tennenbaum in matters unrelated to Radnor; that Skadden previously provided approximately five hours of tax advice to Tennenbaum in matters related to Radnor; that Skadden obtained a full waiver from Tennenbaum in connection with its proposed retention; and that during the previous 12-month period, the value of time Skadden billed to Tennenbaum accounted for .027% of the value of time billed to all Skadden client matters. (See B.D.I. 96 at 11-12). On September 13, 2006, the U.S. Trustee opposed Skadden's retention, arguing that Skadden's relationship with Tennenbaum was a conflict of interest. (See B.D.I. 169). This objection created a contested matter. At issue was whether Skadden's relationship with Tennenbaum would disqualify it from becoming counsel to the Debtors. Skadden filed a supplemental declaration describing Skadden's work for Tennenbaum, which included representing Tennenbaum in its capacity as a registered investment advisor and occasionally on corporate matters, as well as assisting Tennenbaum's two affiliates - funds that make investments in companies like Radnor - in formation, raising capital, SEC regulatory and reporting requirements, and day to day corporate matters. (See B.D.I. 223).

         The Bankruptcy Court held a contested evidentiary hearing on September 20, 2006, at which time Skadden's connections with Tennenbaum were explored and evaluated. (See B.D.I. 298, 9/20/06 Hr'g. Tr.). Skadden further disclosed that certain Skadden partners invested in Tennenbaum-affiliated funds, over which they had no investment authority. (See Id. at 36-37). Based on these disclosures and the evidence presented at the hearing, the Bankruptcy Court concluded that Tennenbaum was not a significant client and Skadden's relationship with Tennenbaum was not a disabling conflict of interest. On September 21, 2006, the Bankruptcy Court authorized Skadden's retention, and this order was not appealed. (B.D.I. 246). This final order resolved the issue of whether Skadden was conflicted, which is a core allegation of the Complaint.

         B. Litigation Against Tennenbaum

         Tennenbaum's secured claims were heavily litigated during the chapter 11 cases. On the first day of the chapter 11 cases, Skadden recommended to Radnor's board that it form a special committee and hire separate counsel that had not represented Tennenbaum to investigate any potential claims and causes of action against Tennenbaum and the liens securing Tennenbaum's claims. (See B.D.I. 298, 9/20/06 Hr'g. Tr. at 36). WilmerHale was retained by the special committee, and its retention was approved by the Bankruptcy Court. (See B.D.I. 276). On October 25, 2006, the Debtors filed an objection to Tennenbaum's claims. (B.D.I. 476). The objection was filed by WilmerHale as counsel for the special committee and by Skadden as counsel for the Debtors.

         After attempts at restructuring proved unsuccessful, the Debtors initiated a sale process, and ultimately requested that Tennenbaum make an offer to purchase Radnor's operating business. During the sale process, the Official Committee of Unsecured Creditors ("Committee') initiated an adversary proceeding against Tennenbaum and Feliciano, asserting causes of action based on recharacterization, equitable subordination, breaches of fiduciary duty, fraudulent conveyances, avoidance of liens, and objections to claims. (See B.D.I. 526). The Committee alleged that Tennenbaum became Radnor's secured lender so that it could engineer a bankruptcy fire sale and buy the company at a low price, leaving unsecured creditors with nothing:

[I]f Tennenbaum is permitted to consummate its scheme and to proceed with its acquisition plan, the unsecured creditors stand to recover nothing. That outcome is by design, the result of a deliberate, coordinated plan by Tennenbaum to increase the debt load of the already over-leveraged Debtors, take them into default, and then acquire Debtors' valuable assets and business operations in a fire-sale at a discount so steep that it constitutes a constructively fraudulent transfer.

(See Id. at 2). On November 17, 2006, following an eight-day trial, the Bankruptcy Court entered a judgment against the Committee on each count of its complaint not previously withdrawn by the Committee ("Tennenbaum Judgment"). See Official Comm. of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum Capital Partners LLC, 353 B.R. 820, 827 (Bankr. D. Del. 2006). Kennedy was a key witness against Tennenbaum during the trial, and the Bankruptcy Court determined that:

TCP [Tennenbaum Capital Partners] did not engage in misconduct; TCP did not seek to benefit itself at the expense of others; TCP did not seek to mislead trade creditors, public noteholders or other stakeholders. TCP at all times acted in good faith with a view to maximize Radnor's value to all constituents.

Id. at 841 (emphasis in original). The Committee appealed the Tennenbaum Judgment but later voluntarily dismissed the appeal. The Tennenbaum Judgment resolved the issue of whether Skadden and Tennenbaum conspired in the bankruptcy cases to ensure a sale to Tennenbaum, which is a core allegation of the Complaint.[5]

         C. Sale of Debtors' Assets to Tennenbaum's Affiliate

         On November 21, 2006, the Bankruptcy Court entered the Sale Order approving the sale of substantially all of the Debtors' assets to an affiliate of Tennenbaum. The Sale Order contains specific findings, including that: (1) the sale to Tennenbaum represented the highest and best offer after a fair marketing process (B.D.I. 698 at ¶ M); (2) the asset purchase agreement and sale transaction were negotiated by the Debtors and Tennenbaum at arms' length, without collusion or fraud, and in good faith within the meaning of sections 363(m)[6] and (n)[7] of the Bankruptcy Code (id. at ¶ N); (3) Tennenbaum did not engage in any conduct that would permit the sale to be avoided, or costs or damages imposed, under section 363(n) (id.); (4) there was no evidence of insider influence, improper conduct, fraud, or collusion by Tennenbaum or its affiliate in connection with the negotiation and the sale (id. at ¶ W); and (5) the sale was undertaken by Tennenbaum in good faith and Tennenbaum was a purchaser in good faith within the meaning of section 363(m) (id. at 15, ¶ 5). The Bankruptcy Court further found that a restructuring or reorganization (as opposed to the sale and liquidation) was precluded by Radnor's circumstances, not by improper conduct on Skadden or Tennenbaum's part. (See Id. at ¶ L). The Sale Order was not appealed. Thus, the Sale Order resolved the issue of whether Tennenbaum's purchase of the Debtors' assets was somehow wrongful, which is a core allegation of the Complaint.

         D. The Plan of Liquidation

         On September 10, 2012, the Bankruptcy Court held a hearing to consider confirmation of the Debtors' plan of liquidation. Kennedy's counsel requested that confirmation be delayed so that Kennedy could object to the plan on the basis of an unspecified "matter" that Kennedy had "uncovered." See Radnor, 2013 WL 3228116, at * 11. It is now clear that the newly uncovered matter was the same wrongdoing alleged in the Complaint. (See Complaint at ¶ 209 (alleging that Kennedy learned of the wrongdoing while preparing for the confirmation hearing)). The Bankruptcy Court extended Kennedy's deadline to object for 30 days, and Radnor later voluntarily extended that deadline by an additional 90 days. Radnor, 2013 WL 3228116, at *11. Despite these extensions, Kennedy failed to file any objection to the proposed plan; rather he filed another motion to extend his objection deadline. See Id. at *11 ("On July 15, 2012, the Court denied Kennedy's Motion to Extend, and Kennedy was time-barred from filing any objection to confirmation of the Debtors' plan in the above-captioned cases"). On September 10, 2012, the Bankruptcy Court entered the Confirmation Order (B.D.I. 1976), which was not appealed. The Confirmation Order included a finding that Debtors had acted in good faith in negotiating, formulating, and soliciting votes for acceptance of the plan (id. at 17-18, 22-23); enjoined claimholders from taking any action inconsistent with the provisions of the plan (id. at 27-28); and released the Debtors and their professionals from any liability for any post-petition act or omission arising out of the chapter 11 cases, except for willful misconduct or gross negligence (id. at 28). The plan also resulted in the elimination of all of Kennedy's equity in Radnor.

         E. Final Fee Order

         As consideration in the asset sale, Tennenbaum paid cash and also "credit bid" a portion of its secured claim. Because Tennenbaum did not credit bid its entire claim, it still held claims against Radnor after the sale. Kennedy had personally guaranteed up to $10 million of those claims, so Tennenbaum sought to enforce the guaranty. When Kennedy refused to pay, Tennenbaum sued him for breach of contract in New York and prevailed.[8] Tennenbaum and Kennedy have been embroiled in litigation for years. But it was only after plan confirmation - when his objections were barred - that Kennedy initiated his challenges against Tennenbaum and Skadden alleging misconduct in the chapter 11 cases.

         On November 18, 2012, Skadden filed its final fee application seeking compensation for services rendered and reimbursement of expenses incurred as counsel to Debtors for the period from August 21, 2006 through and including September 28, 2012. (B.D.I. 1989). On December 26, 2012, Kennedy filed a combined motion and objection, in which he objected to the Skadden's final fee application and moved to set aside the Sale Order under Rule 60(b) (B.D.I. 1993) ("Objection"). The Objection purported to seek various forms of relief in addition to "setting aside" the Sale Order, including "revesting" in the Debtors' estates the assets sold to Tennenbaum's affiliate; invalidating certain plan releases approved in the Confirmation Order; and appointing an examiner, trustee, and special counsel to conduct an investigation and bring certain causes of action at Kennedy's behest. (See id.) Contemporaneously therewith, Kennedy also filed the Complaint which sought $300 million in damages and rescission of the sale. Kennedy's Objection expressly incorporated the allegations of the Complaint: (1) Tennenbaum was a major client of Skadden; (2) Skadden failed to disclose this to Kennedy, Radnor's board, or the Bankruptcy Court; (3) Tennenbaum steered Radnor to retain Skadden; (4) Tennenbaum and Skadden colluded and conspired to advance Tennenbaum's objectives in the Debtors' chapter 11 cases to the exclusion of Kennedy's goals; (5) Skadden "effectively represented" Tennenbaum's interests in Radnor's chapter 11 cases; (6) Skadden prevented Kennedy from participating in the chapter 11 cases and orchestrated a sale of Debtor's assets to Tennenbaum; and (7) Skadden frustrated Kennedy's and Radnor's attempts to reorganize Radnor. (See Adv. D.I. 6).

         The Bankruptcy Court denied the request to set aside the Sale Order as time-barred, as more than six years had passed since its entry. (See B.D.I. 2032). The Bankruptcy Court then stayed Defendants' deadline to respond to the Complaint until after the resolution of the Objection. (See Adv. D.I. 24). On May 1 and 2, 2013, the Bankruptcy Court conducted a two-day evidentiary hearing on the Objection, and Kennedy was represented by counsel and personally testified at the hearing. (See B.D.I. 2053 at 2 (listing counsel); Radnor, 2013 WL 3228116, *6 (credibility findings on Kennedy's testimony)). In hearing evidence, several of the Bankruptcy Court's rulings turned on Kennedy's incorporation of the Complaint's allegations into his Objection. (See, e.g., B.D.I. 2053, 5/1/2013 Hr'g. Tr. at 62 ("Mr. Kennedy has injected his complaint into this [Objection]")).

         Following the evidentiary hearing and post-trial briefing (B.D.I. 2068, 2073), the Bankruptcy Court overruled Kennedy's Objection in all respects and approved Skadden's final fee application in its entirety ("Final Fee Order"). See In re Radnor, 2013 WL 3228116 (Bankr. D. Del. June 20, 2013). The Final Fee Order contains numerous and detailed findings of fact and conclusions of law upon which the Bankruptcy Court determined that the claims and allegations of misconduct by Skadden asserted in the Complaint and Objection were without basis in fact and lacked legal foundation. (See id.) The Bankruptcy Court rejected Kennedy's allegations that Tennenbaum and Skadden had colluded or conspired in the chapter 11 cases:

Skadden did not wrongfully collude or conspire with Tennenbaum to orchestrate or manipulate these Chapter 11 cases and the sale process for the benefit of Tennenbaum at the expense of the Debtors' creditors and equity interest holders, or Kennedy and his affiliates ... There was no collusion or conspiracy between Skadden and its affiliates on the one hand, and Tennenbaum or its affiliates on the other in connection with any matter in these Chapter 11 cases.

Radnor, 2013 WL 3228116, at *9. The Bankruptcy Court further rejected Kennedy's allegations that Tennenbaum engaged in any wrongdoing in the bankruptcy case:

Tennenbaum did not engage in misconduct, wrongful conduct, fraud, illegal conduct or a breach of fiduciary duty ... Tennenbaum at all times acted in good faith with a view to maximizing Radnor's value to all constituents.

Id. The Bankruptcy Court further rejected Kennedy's allegations that Skadden made insufficient disclosures and concealed conflicts of interest:

Given the full record of Skadden disclosures, Skadden did not misrepresent its relationships with Tennenbaum to the Court or the UST. Skadden's numerous disclosures in these Chapter 11 cases (including the Galardi declarations and Skadden's statements at the September 20, 2006 hearing) were extensive, publicly filed, ...

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