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In re NewStarcom Holdings, Inc.

United States District Court, D. Delaware

September 6, 2019

MATCO ELECTRIC CORP., et al., Appellees. GEORGE L. MILLER, as Trustee of the Estate of NewStarcom Holdings, Inc., et al., Appellant, Adv. No. 10-50036 (CSS)

         Chapter 7


         This dispute arose in the Chapter 7 cases of debtor NewStarcom Holdings, Inc. (“NewStarcom”) and certain affiliates (together “Debtors”). Before the Court is an appeal by the Chapter 7 Trustee (“Trustee” or “Appellant”), plaintiff in the above-captioned adversary proceeding, from (1) the Bankruptcy Court's July 5, 2012 Order (Adv. D.I. 71; A266-67)[1](“Dismissal Order”) dismissing Trustee's fraudulent transfer claims against appellees Matco Electric Corporation (“New Matco”) and its officers and shareholders Ronald Barber, [2] Mark Freije, and Kenneth Elliott (collectively “New Matco Defendants” or “Appellees”), and the Bankruptcy Court's March 8, 2016 Order (A339-40), which, among other things, denied the Trustee's motion for reconsideration of the Dismissal Order for the reasons set forth in the Bankruptcy Court's accompanying opinion, Miller v. Am. Capital, Ltd. (In re NewStarcom Holdings, Inc.), 547 B.R. 106 (Bankr. D. Del. 2016) (A286-338) (“Opinion”). For the reasons set forth herein, the Orders and Opinion are affirmed.

         I. BACKGROUND[3]

         A. The Transaction and Chapter 7 Cases

         NewStarcom is a holding company that owns 100% of the equity in NSC Holdings, Inc. (“NSC”). NSC, in turn, held a 100% equity interest in three operating subsidiaries: Constar International, Inc. (“Constar”), Port City Electric, Inc. (“Port City”), and Matco Electric Corporation (“Old Matco”). Only NewStarcom, NSC, Constar, and Port City are Debtors in these Chapter 7 cases. In 2003, American Capital Ltd. (“ACAS” and together with certain officers and employees the “ACAS Defendants”), a publicly traded private equity firm, acquired an 80% stake in NewStarcom. (Adv. D.I. 43 (A67-159) (“the Amended Complaint”) ¶ 6 (A69)). Prior to the bankruptcy, ACAS controlled the Boards of Directors of the Debtors and, through their appointed directors, exerted total control over the companies.

         Constar, Port City, and Old Matco were electrical contractors operating in separate geographic areas. In 2007, after Port City experienced financial problems, NewStarcom shut down Port City and ConStar. Old Matco was not in financial trouble, and Old Matco's president, Ron Barber, was shocked when ACAS informed him that Old Matco would also be shut down. Barber asked for time to put together a purchase offer and was given a short window of time to negotiate with Citizens' Bank, the Debtors' secured lender. (A293-94). During this time, Barber and Old Matco managers Mark Freije and Kenneth Elliott tried to keep the business afloat as the bank swept cash from its account, checks bounced, vendors threatened to withhold goods and services, and project owners threatened not to pay. Barber personally guaranteed $800, 000 in bonding to pay vendor and employee claims. (A293-95). Barber, Freije, and Elliott formed New Matco and purchased Old Matco for $2 million, plus additional consideration including a note to the surety for $882, 127 in vendor claims; a $100, 000 letter of credit to the surety; Barber's personal guarantees of $990, 600 on three jobs and $1 million to the surety; assumption of liability for $25 million in ongoing jobs; and the promise to keep employees for 60 days to comply with the WARN Act, 29 U.S.C. § 2102(a). (Amended Compl. at 13; A295-96, n.38). Citizens' Bank and the NewStarcom and Old Matco Boards approved the sale. (A294-96). As the Bankruptcy Court observed:

The structure of the Old Matco sale transaction is complex, but consisted of three major parts. First, Old Matco directly sold its assets to New Matco (the “Asset Sale”). Second, the “New Matco Stock Trust” was created, with its formation documents naming New Matco as the sole beneficiary of the Trust. Third, NHI transferred its 100% equity stake in Old Matco to the New Matco Stock Trust in exchange for $1 (the “Stock Transfer”).

NewStarcom, 547 B.R. at 133-34 (footnotes omitted). The transaction closed on December 20, 2007. On January 14, 2008, NewStarcom, NSC, and the two defunct operating subsidiaries filed voluntary Chapter 7 petitions, and Appellant was appointed as Chapter 7 Trustee.

         B. The Adversary Proceeding and the Dismissal Order

         The Trustee made a pre-action discovery request to Barber pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure for documents relevant to the transaction. Barber's attorney sent the documents to the Trustee's attorneys, including a Letter of Intent regarding the transaction, and the Trustee's attorneys received those documents on December 10, 2009. The following week, on December 18, 2009, the Trustee's attorney conducted a Rule 2004 Examination of Barber, questioning him about the Asset Sale to the “Purchaser” New Matco, and the Stock Transfer to the “Purchaser's designee, ” the New Matco Stock Trust. (See M28-29; M51-52). The transcript of the Rule 2004 Examination demonstrates that the Trustee's attorney addressed certain portions of the transaction but did not address the section regarding the Stock Transfer to the New Matco Stock Trust. (See A723-24).

         On January 12, 2010, the Trustee filed his original complaint (A38-66), seeking damages arising out of the “transfer of NewStarcom's operating subsidiary Matco Electric Corporation to insiders for substantially less than its fair market value.” (A68). All Defendants moved to dismiss. The Bankruptcy Court dismissed the original complaint with leave to amend, observing that “the Court's primary stumbling block has been that it cannot make heads nor tails of the complaint.” (M2).

         The Trustee filed the Amended Complaint on November 16, 2011, alleging claims of fraudulent transfer, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty. (A67-159). The fraudulent transfer claims are Counts 5, 6, 7, and 8 of the Amended Complaint. Those claims seek (1) avoidance of a transfer under 11 U.S.C. 544 and 6 Del. C. §§ 1304 and 1305, based on the Trustee's ability to bring state law claims for alleged fraudulent transfers; (2) avoidance of a transfer under 11 U.S.C. §§ 548(a)(1)(A) and (B), which enable the Trustee to avoid transfers of property of a Debtor that are either actually or constructively fraudulent; and (3) recovery of transferred property from a transferee pursuant to 11 U.S.C. § 550. The Amended Complaint focuses on the transfer of non-Debtor Old Matco's assets to New Matco, and the Old Matco-New Matco Asset Purchase and Membership Purchase agreements are exhibits to the Amended Complaint.

         All Defendants moved to dismiss the Amended Complaint on multiple grounds including its failure to allege a transfer of “property of the Debtor” (11 U.S.C. § 544) or “an interest of the Debtor in property” (11 U.S.C. § 548(a)(1)) as required for avoidance and recovery of fraudulent transfers under 11 U.S.C. § 544, 548, and 550. Defendants argued that the Amended Complaint alleged “in a formulaic and conclusory [manner] that property of the Debtor was transferred” however “the documents attached to the Amended Complaint as evidence of the transfer show beyond a doubt that the transferring party was not a Debtor but non-Debtor Old Matco.” (A165). After oral argument on May 24, 2012, the Bankruptcy Court dismissed the fraudulent transfer claims from the bench based on the Trustee's failure to allege the transfer of property of a Debtor, which ruling was entered in the July 5, 2012 Dismissal Order. (See Order at ¶ 266-67; 5/24/12 Hr'g Tr. at ¶ 370-433).

         C. Summary Judgment Motion and Motion for Reconsideration

         The New Matco Defendants answered the remaining claims for breach of fiduciary duty and aiding and abetting such breaches (A268-85), and the parties conducted discovery on those claims. On February 13, 2015, the New Matco Defendants moved for summary judgment on all remaining claims. In response, the Trustee asked the Bankruptcy Court to reconsider its July 5, 2012 Dismissal Order dismissing the fraudulent transfer claims. (A434-694). The Trustee asserted that the New Matco Defendants withheld responsive documents during the Trustee's Rule 2004 discovery and that, but for the New Matco Defendants' failure to produce said documents, the Trustee would have properly alleged an avoidable transfer. See NewStarcom, 547 B.R. at 132 (citing Adv. D.I. 167 at 1-2). The Trustee further argued that the New Matco Defendants misled both the Bankruptcy Court and the Trustee, and, therefore, reconsideration was necessary to prevent manifest injustice. See Id. (citing Adv. D.I. 167 at 1-5).

         D. March 8, 2016 Order and Opinion

         The Bankruptcy Court granted the New Matco Defendants' motion for summary judgment and denied the Trustee's Motion for Reconsideration. NewStarcom, 547 B.R at 112. “After a careful review of the record and prior hearings, ” the Bankruptcy Court reached several conclusions. First, the Bankruptcy Court believed that the Trustee had asserted an entirely new fraudulent transfer claim, “a claim that has never previously been presented to or dismissed by the Bankruptcy Court” - i.e., the Stock Transfer. Id. Second, the Bankruptcy Court ruled that “even if the Court's earlier ruling dismissed this fraudulent transfer claim, the Trustee has failed to prove that new evidence or the concerns of justice warrant reconsideration.” Id. Third, the Bankruptcy Court determined that “the Trustee's delay in asserting this fraudulent transfer is unacceptable.” Id. Finally, the Bankruptcy Court ruled that “the proper defendant for the Trustee's newly asserted fraudulent transfer is the ‘New Matco Stock Trust,' a party the Trustee has never named as a defendant, and therefore the claim is improperly asserted in this proceeding.” Id.

         On March 10, 2017, the Bankruptcy Court entered its Order Granting Approval of a Compromise and Settlement with a separate group of defendants, the ACAS Defendants, pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure (A341-65) (“9019 Order”). The 9019 Order disposed of the last remaining claims in the adversary proceeding and rendered final and appealable the Orders from which the Trustee now appeals. The claims against the ACAS Defendants were resolved via the approved Compromise and Settlement Agreement, and the ACAS Defendants are not party to this appeal. (See Joint Status Report, D.I. 30). Thereafter, the ...

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