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In re Ashinc Corp.

United States District Court, D. Delaware

June 27, 2017

In re ASHINC CORPORATION, et al., Debtors.
v.
BDCM OPPORTUNITY FUND II, LP, et al., Appellees-Plaintiffs. YUCAIPA AMERICAN ALLIANCE FUND II, LP, et al., Appellants-Defendants, Bank. No. 12-11564 (CSS) Adv. No 14-50971 (CSS)

          MEMORANDUM ORDER

         At Wilmington this 27day of June, 2017, having reviewed defendants' (together, "Yucaipa") motion for leave to file an interlocutory appeal (D.I. 1) ("motion for leave"), and the papers filed in connection therewith;

         IT IS ORDERED that the motion for leave is denied for the reasons that follow:

         1. Introduction.

         In the above-captioned adversary proceeding, [1] the bankruptcy court entered an order[2] denying Yucaipa's motion to compel discovery in support of certain of its affirmative defenses ("motion to compel") and granting plaintiffs' (together, "BD/S") cross-motion to strike certain of Yucaipa's affirmative defenses ("motion to strike").[3]Yucaipa seeks leave to appeal that portion of the interlocutory order which granted BD/S's motion to strike.

Background.[4]

This adversary proceeding is part of a years' long dispute between Yucaipa and BD/S over a credit agreement that arose out of chapter 11 debtor Allied's[5] May 2007 plan of reorganization. By August 2008, Allied had defaulted under the credit agreement, leading to litigation in the bankruptcy court and other courts over a variety of issues, including the validity of certain subsequent amendments to the credit agreement and the identity of the "Requisite Lenders"[6] thereunder. Among the actions are: Allied's October 2012 declaratory judgment action, which sought a determination of the identity of the Requisite Lenders under the credit agreement ("Allied action");[7] the unsecured creditors' committee's February 2013 action, which alleged breaches of fiduciary duties against Yucaipa and sought derivative equitable subordination of Yucaipa's first lien debt claims ("Committee action");[8] the instant BD/S action, filed in November 2014, by which BD/S seeks direct equitable subordination of Yucaipa's first lien debt claims; and Yucaipa's May 2015 RICO action against BD/S, which was recently dismissed by this court with prejudice.[9]

2. In the Allied action, Yucaipa filed cross-claims asserting that it was the Requisite Lender under the credit agreement[10] and alleging that BD/S engaged in a "double-dealing, self-serving scheme" in which BD/S: "supported] Yucaipa's plan to acquire the Requisite Lender position" by investing "tens of millions of dollars to acquire a majority of the first lien debt pursuant to an amendment that reversed restrictions on ownership contained in the Third Amendment [to the credit agreement];[11] "encouraged Yucaipa's proposed plan, a fact on which Yucaipa relied in executing the plan";[12] and then "chose to double-cross Yucaipa" by "surreptitiously sen[ding] a letter to their agent, [CIT], questioning the validity of Yucaipa's Requisite Lender status."[13] "Thus, while Yucaipa was working toward what it believed to be that shared goal, [BD/S was] scheming to challenge Yucaipa's Requisite Lender status."[14] In February 2013, the bankruptcy court dismissed Yucaipa's cross-claims on several grounds, including that the factual allegations underlying the cross-claims were implausible.[15] On summary judgment in the Allied action, the bankruptcy court determined that BD/S was the Requisite Lender under the credit agreement, [16] and that decision has been affirmed by this court and the Court of Appeals for the Third Circuit.[17]

         3. In the BD/S action, Yucaipa asserted a counterclaim[18] against BD/S for equitable subordination, similarly alleging that BD/S engaged in a lengthy, complex, multi-year scheme to equitably subordinate Yucaipa's debt. The counterclaim alleged that BD/S's scheme consisted of a "carefully orchestrated series of lies, payoffs and legal maneuvers designed to improperly enrich themselves at the expense of Yucaipa."[19] In August 2015, the bankruptcy court entered a 65-page opinion and order dismissing Yucaipa's counterclaim with prejudice on several independent grounds, including that "the[] alleged facts do not tell a plausible story."[20] After rejecting several specific factual allegations, the bankruptcy court noted that the alleged scheme was dependent upon each in a series of "unpredictable events occurring in a manner favorable to [BD/S], " including a series of unpredictable litigation outcomes. As the bankruptcy court observed, the alleged scheme required BD/S's success in:

(i) invalidating the [f]ourth [a]mendment [to the credit agreement] through litigation; (ii) obtaining judicial declaration that [BD/S] are the Requisite Lenders; (iii) acquiring Allied's assets through a credit bid on behalf of all Lenders (including Yucaipa, subject to the equitable subordination claims); (iv) prevailing in their equitable subordination claims against Yucaipa and obtaining substantial recovery; and (v) hoping the Allied assets they acquired would increase in value to the point where the asset value plus any recovery realized from the equitable subordination litigation exceeded a par plus accrued interest recovery years after [another potential purchaser] had offered them a 100% recovery.

(Adv. D.I. 82 at 64) The bankruptcy court dismissed the counterclaim, concluding that "Yucaipa's reliance on this sequence of events is not plausible."[21] Yucaipa sought leave to appeal the bankruptcy court's interlocutory order dismissing its counterclaim with prejudice and, on November 13, 2015, this court denied that request.[22]

         4. The parties have exchanged substantial discovery since these proceedings began in 2013. In July of 2016, Yucaipa filed its motion to compel discovery regarding factual allegations supporting its affirmative defenses, [23] and BD/S filed its combined opposition and motion to strike certain of Yucaipa's affirmative defenses, including unclean hands, waiver, estoppel, consent, and laches.[24] The motion to strike asserted that Yucaipa improperly sought discovery in support of irrelevant factual allegations for the purpose of reviving its dismissed cross-claims and counterclaim and that those affirmative defenses should be stricken pursuant to Rule 12(f) of the Federal Rules of Civil Procedure.[25]Following oral argument, [26] the bankruptcy court entered an order on January 18, 2017, which denied Yucaipa's motion to compel and granted BD/S's motion to strike the defenses. The order did not specify a basis for the bankruptcy court's decision. On February 16, 2017, Yucaipa filed its motion for leave to appeal that portion of the order striking its affirmative defenses. (D.I. 1)

         5. Standard of review.

         The court may, in its discretion, grant leave to parties in bankruptcy to appeal interlocutory orders. See 28 U.S.C. § 158(a)(3). In deciding whether an interlocutory order is appealable in the bankruptcy context, courts have typically borrowed the standard found in 28 U.S.C. § 1292(b), which governs interlocutory appeals from the district courts to the courts of appeal. See In re SemCrude, L.P., 407 B.R. 553, 556-57 (D. Del. 2009); In re Magic Rests., Inc., 202 B.R. 24, 25 (D. Del. 1996). Under § 1292(b), leave to file an interlocutory appeal may be granted when the order at issue (1) involves a controlling question of law upon which there is (2) substantial ground for difference of opinion as to its correctness, and (3) if appealed immediately, the resolution may materially advance the ultimate termination of the litigation. See Katz v. Carte Blanche Corp., 496 F.2d 747, 754 (3d Cir. 1974). Leave may be denied for reasons apart from this specified criteria, including such matters as the state of the appellate docket or the desire to have a full record before considering the disputed legal issue. Id.; SemCrude, 407 B.R. at 557. The party seeking leave to appeal an interlocutory order must establish that "exceptional circumstances justify a departure from the basic policy of postponing review until after the entry of final judgment." In re Del. and Hudson Ry. Co., 96 B.R. 469, 472-73(D. Del. 1989), aff'd, 884 F.2d 1383 (3d Cir. 1989). Piecemeal litigation is generally disfavored by the Third Circuit. See In re White Beauty View, Inc., 841 F.2d 524, 526 (3d Cir. 1988).

         6. Analysis.

         The court is not persuaded that Yucaipa has established the criteria necessary to justify an interlocutory appeal. A "controlling question of law" includes every order which, "if erroneous, would be reversible error on final appeal." Accenture Global Servs., GmbH v. Guidewire Software, Inc., 80 F.Supp.2d 613, 622 n.5 (D. Del. 2011) (quoting Katz, 496 F.2d at 755). Yucaipa argues this requirement is met because, in striking its affirmative defenses, the bankruptcy court committed reversible error by "applying the Rule 12(b)(6) 'plausibility' standard and/or Rule 9(b)'s 'particularity' standard" which are the "wrong legal standard[s] to assess the sufficiency of [Yucaipa's] affirmative defenses." (D.I. 2 at 1, 9) Yucaipa argues that there is no dispute that its defenses are legally sufficient defenses to equitable claims, such as BD/S's claims for equitable subordination and breach of fiduciary duty, and that the bankruptcy court erred in striking those defenses as insufficiently pled under Rule 12(b)(6) and/or Rule 9(b). (See Id. at 8-9) Conversely, BD/S argues that the order was not premised on pleading standards but on the "well-established principle that affirmative defenses should be stricken as legally insufficient where they are based on the same allegations as previously dismissed claims or counterclaims and the issues underlying those counterclaims." (See D.I. 3 at 2) Because Yucaipa has admitted that its stricken affirmative defenses were based on the same allegations as the previously dismissed cross-claims, counterclaim, and RICO claims, BD/S contends that dismissal of these defenses was required to avoid prejudice. (See id.)

         7. While the Third Circuit has not yet opined as to whether affirmative defenses are subject to plausibility standards under Twombly and Iqbal, [27] this court has joined other district courts in the Third Circuit in holding that they are not. See Internet Media Corp. v. Hearst Newspapers, LLC, 2012 WL 3867165, at *3 (D. Del. Sept. 6, 2012) ("Twombly and Iqbal do not apply to affirmative defenses . . . which need not be plausible to survive. [An affirmative defense] must merely provide fair notice of the issue involved.") (quoting Tyco Fire Prods. LP v. Victaulic Co., Ill. F.Supp.2d 893, 900 (E.D. Pa. 2011)). Indeed, Rule 12(b)(6) does not offer a mechanism for dismissing affirmative defenses because it refers only to "claim[s]." See Senju Pharm. Co. v. Apotex, Inc., 921 F.Supp.2d 297, 301 (D. Del. 2013). However, there is no indication in the order that the bankruptcy court granted the motion to strike the defenses because they were insufficiently pled under Rule 12(b)(6) or, alternatively, Rule 9(b), or that the bankruptcy court applied an incorrect legal standard in striking the defenses. (See Adv. D.I. 194)

         8. In absence of a written or oral ruling, the court must assume that the bankruptcy court granted BD/S's request pursuant to the applicable rule - Rule 12(f) - which provides that "[t]he court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed.R.Civ.P. 12(f). A court's determination on a "motion to strike under Rule 12(f) is discretionary." F.T.C. v. Hope Now Modifications, LLC, 2011 WL 883202, at *2 (D.N.J. Mar. 10, 2011). According to Yucaipa, the controlling issue of law is whether the bankruptcy court failed to adhere to the Third Circuit's rule that a court may not strike defenses under Rule 12(f) "unless the insufficiency of the defenses is clearly apparent" and, therefore, applied the incorrect standard in striking its defenses. (See D.I. 2 at 1) In reality, Yucaipa has appealed from the bankruptcy court's discretionary application of Rule 12(f) to these affirmative defenses in determining that they were insufficient, redundant, immaterial, impertinent, or scandalous. This is not a controlling question of law. See MCI WorldCom Commc'ns v. Commc'ns Network Int'l, 358 B.R. 76, 79 (S.D.N.Y. 2006) ("the question of law must refer to a pure question of law that the reviewing court could decide quickly and cleanly without having to study the record.").

         9. Nor is the court persuaded that substantial grounds for difference of opinion exist as to the correct legal standard to dismiss an affirmative defense under Rule 12(f). "A party's disagreement with the [bankruptcy] court's ruling does not constitute 'a substantial ground for difference of opinion'within the meaning of [§] 1292(b)." Hurst v. City of Dover, 2006 WL 2347707, at *2 (D. Del. Mar. 21, 2006). "The difference of opinion must arise out of genuine doubt as to the correct legal standard." Id. (internal quotations omitted). Moreover, "[t]he difference of opinion must be legally significant (e.g., multiple courts disagree as to the applicable legal standard." In re SemCrude, LP., 2010 WL 4537921, *3 (D. Del. Oct. 26, 2010) (internal citation omitted).

         10. Yucaipa's difference of opinion here does not arise out of genuine doubt as to the correct legal standard. BD/S asked the bankruptcy court to strike the affirmative defenses pursuant to Rule 12(f) because those defenses asserted the same factual allegations that had already been considered and rejected by the bankruptcy court and other courts. (See Adv. D.I. 158 at 9; D.I. 3 at 11) Because Rule 12(f) indisputably governs the relief requested in the motion to strike, and there is no indication that the bankruptcy court ruled to ...


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