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Official Committee of Unsecured Creditors v. Meltzer

United States District Court, D. Maine

May 8, 2018

OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Plaintiff,
v.
DOUGLAS MELTZER, et al., Defendants. RODNEY N. FISHER, Appellant,
v.
LINCOLN PAPER AND TISSUE, LLC, et al., Appellee.

          ORDER ON DEFENDANTS' MOTIONS TO DISMISS AND RODNEY N. FISHER'S MOTION FOR LEAVE TO APPEAL

          Nancy Torresen United States Chief District Judge

         In these consolidated adversary proceedings, the Official Committee of Unsecured Creditors of Lincoln Paper and Tissue, LCC (“the Committee”) asserts claims on behalf of Lincoln Paper and Tissue, LCC (“the Debtor”) and the Debtor's bankruptcy estate against the Debtor's former board members, Rodney N. Fisher (“Fisher”), Douglas L. Meltzer (“Meltzer”), Edward Dan Herring (“Herring”), Keith Van Scotter (“Van Scotter”), and John Wissmann (“Wissmann”) (collectively, the “Board Members”), and against the Debtor's sole member, LPT Holding, LLC (“LPTH, ” and together with the Board Members the “Defendants”).

         This action involves two operative complaints, the first against Meltzer, Herring, Fisher, and LPTH, Official Comm. of Unsecured Creditors v. Fisher, Docket No. 1:17-ap-1005 (ECF No. 1) (the “MHF Complaint”), and the second against Van Scotter and Wissmann. First Amended Complaint, Official Comm. of Unsecured Creditors v. Van Scotter, Docket No. 1:16-ap-1020 (ECF No. 139) (the “VSW Complaint, ” and with the MHF Complaint the “Complaints”).[1] The MHF Complaint asserts claims for breaches of the duties of loyalty and care against Meltzer, Fisher, and Herring (Counts I & II); claims for avoidance and recovery of transfers against LPTH, Fisher, and Meltzer (Counts III-X); and a request for declaratory judgment against Meltzer (Count XI). MHF Compl. The VSW Complaint asserts claims against Van Scotter and Wissmann for breach of the duty of loyalty (Count I), breach of the duty of care (Count II), and avoidance and recovery of transfers (Counts III-VI). VSW Compl.

         Before me are Fisher's motion to dismiss Count I of the MHF Complaint (ECF No. 150) (“Fisher Mot.”), Meltzer and Herring's motion to dismiss the MHF Complaint (ECF No. 151) (“MH Mot.”), and Van Scotter and Wissmann's motion to dismiss Count I of the VSW Complaint (ECF No. 149) (“VSW Mot.”). Also before me is Fisher's Motion for Leave to Appeal the Bankruptcy Court's April 13, 2017, Order granting the Committee derivative standing to sue Fisher and the Bankruptcy Court's June 22, 2017, Order denying Fisher's Rule 59(e) motion to alter the order granting standing. Fisher v. Lincoln Paper & Tissue, LLC, Docket No. 1:17-cv-256 (ECF No. 1). For the reasons set forth below, I GRANT Fisher's motion to dismiss, GRANT IN PART and DENY IN PART Meltzer and Herring's motion to dismiss, and GRANT Van Scotter and Wissmann's motion to dismiss. I also DENY Fisher's motion for leave to appeal.

         FACTUAL BACKGROUND[2]

         I. The Debtor and the Defendants

         The Debtor is a Delaware limited liability company, as is the Debtor's sole member, LPTH. VSW Compl. ¶¶ 7, 12. The Debtor and LPTH share the same five board members: Fisher, Herring, Meltzer, Van Scotter, and Wissmann. VSW Compl. ¶ 7. In addition to being part of the Debtor's board, Van Scotter serves as the Debtor's Chief Executive Officer and Wissmann is the Debtor's Chief Financial Officer. VSW Compl. ¶¶ 5-6. Fisher, Van Scotter, and Wissmann are also members of LPTH. VSW Compl. ¶¶ 5-6, 8.

         Meltzer and Herring are not members of LPTH. However, both were appointed to the Debtor's and LPTH's boards by CalPERS Corporate Partners, LLC, which is a member of LPTH. VSW Compl. ¶¶ 9-11. Meltzer is the managing partner of CalPERS's managing agent, KMCP Advisors II, LLC (“KMCP”). VSW Compl. ¶ 9. In addition to being CalPERS's managing agent, KMCP is a co-founder and managing partner of Silver Canyon Group, LLC (“SCG”), a private equity firm that CalPERS used to facilitate a loan to the Debtor as part of the transaction in which CalPERS obtained its membership interest in LPTH. VSW Compl. ¶¶ 9-10. Herring is a representative and senior advisor to SCG. VSW Compl. ¶ 10.

         II. The Boiler Explosion and the Debtor's Insurance Settlement

         Until late 2015, the Debtor operated a pulp, paper, and tissue mill in Lincoln, Maine. VSW Compl. ¶ 12. As part of its operations, the Debtor produced its own pulp using a recovery boiler. VSW Compl. ¶¶ 13, 15. The boiler afforded the Debtor significant cost savings over its competitors by allowing the Debtor to avoid purchasing pulp from third parties and by generating enough steam power to meet approximately half of the mill's energy requirements. VSW Compl. ¶¶ 13-17.

         On November 2, 2013, an explosion at the mill badly damaged the boiler, which had to be shut down. VSW Compl. ¶¶ 18-19. The Debtor had an insurance policy with Factory Mutual Insurance Company (“FM Global”) that provided for replacement cost coverage, with an adjusted cash value provision, as well as business interruption coverage with a total limit of $ 543 million. VSW Compl. ¶ 24. The Debtor immediately notified its insurer of the explosion, and shortly thereafter the Board Members accepted a $ 10 million insurance advance to cover the Debtors' business interruption costs. VSW Compl. ¶¶ 25-26. The Board Members obtained two estimates for the boiler's repair, which suggested that fixing the boiler would cost approximately $ 30-32 million and would take four to six months. VSW Compl. ¶ 27. The Board Members estimated that without an operational boiler, the Debtor's earnings before interest, tax, depreciation, and amortization would drop to a loss of $ 2.9 million per month, the Debtor would not be able to retain its pre-explosion pricing structure, and the Debtor risked business interruption costs and expenses of $ 4-6 million per month. VSW Compl. ¶¶ 22-23, 26.

         On December 9, 2013, the Board Members met to discuss whether to cause the Debtor's insurer to fund the boiler repair, or whether to instead negotiate a cash settlement of the Debtor's insurance claim and to continue operating the mill without the boiler. VSW Compl. ¶ 28. The Board Members projected that if they opted to repair the boiler, LPTH and its members would not receive any distributions in 2013 or 2014. VSW Compl. ¶ 29. Alternatively, if the Debtor pursued a cash settlement, the Board Members projected that the Debtor would likely make distributions of roughly $ 10 million to LPTH in 2014 and, possibly, 2013. VSW Compl. ¶ 29. The Board Members did not consult with any independent advisors or consider outside opinions about the viability of their business plan to operate the mill without a functional boiler, relying solely on internal discussions and projections. VSW Compl. ¶ 32.

         The Board Members voted unanimously in favor of pursing the cash settlement. VSW Compl. ¶ 31. On December 10, 2013, the Board Members authorized the Debtor to accept a $ 49.8 million settlement of its insurance claim, which included the $ 10 million advance that the Debtor had previously received. VSW Compl. ¶ 33.

         III. The First Distribution

         On December 17, 2013, the Board Members voted to authorize the Debtor to distribute $ 3 million of the insurance settlement funds to LPTH, and then to LPTH's members (the “First Distribution”). VSW Compl. ¶ 35. Of that $ 3 million, Fisher, Wissmann, and Van Scotter received distributions of $ 354, 759.00, $ 487, 024.00, and $ 530, 796.00, respectively. VSW Compl. ¶ 36. Meltzer and Herring received no part of the distributions, however CalPERS received a distribution of $ 1, 050, 000.00 through its managing agent, KMCP. VSW Compl. ¶ 37.

         The same day that the Board Members voted to approve the First Distribution, they discussed the possibility that the Debtor would eventually need to shut down its operations at the mill due to its poor financial condition. VSW Compl. ¶ 41. At the time that they made their decisions to accept the insurance settlement and to make the First Distribution, the Board Members also knew or should have known of various risks to the Debtor's financial health that could materialize if the boiler was not rebuilt. These included that (1) JPMorgan Chase, the Debtor's lender, considered the explosion a material adverse development that would allow JPMorgan to accelerate the Debtor's $ 20.8 million debt if the boiler was not rebuilt; (2) the Debtor would incur costs of approximately $ 10.85 million in changing its operations to accommodate the loss of the ability to produce pulp and power; and (3) the Debtor had already spent approximately $ 6 million of the settlement funds to cover business interruption costs as of December 9, 2013, and the Debtor would continue accruing such costs. VSW Compl. ¶ 38. The Board Members also knew that if the Debtor did not rebuild the boiler, the Debtor's primary natural-gas using asset, the Debtor would not meet its minimum purchase requirement with its natural gas supplier, causing the Debtor to breach its supply contract and exposing it to $ 1 million in damages. VSW Compl. ¶ 40. The Board Members were further aware that the Federal Energy Regulatory Commission had issued an order imposing a $ 5 million penalty against the Debtor for alleged regulatory violations and demanding disgorgement of $ 379, 016.00 in past payments. VSW Compl. ¶ 39.

         IV. The Second Distribution

         On May 12, 2014, the Board Members convened again to discuss whether to authorize a $ 4 million distribution from the settlement funds to LPTH and to LPTH's members. VSW Compl. ¶ 43. During that meeting, Herring asked Wissmann and Van Scotter to provide updated financial projections for the Debtor in support of the proposed distribution. VSW Compl. ¶ 44. Wissmann and Van Scotter did not provide the updated projections. VSW Compl. ¶ 45. Nevertheless, on May 16, 2014, a majority of the Board Members comprising Van Scotter, Wissmann, and Fisher[3] voted to authorize the Debtor to make the proposed $ 4 million distribution (the “Second Distribution, ” and together with the First Distribution the “Distributions”). See VSW Compl. ¶ 46. Of the $ 4 million distribution, Fisher, Wissmann, and Van Scotter received distributions of $ 475, 398.00, $ 652, 628.00, and $ 711, 285.00, respectively. VSW Compl. ¶ 47. CalPERS received $ 1, 407, 035.00 through KMCP. VSW Compl. ¶ 48.

         V. The Release and the Debtor's Bankruptcy

         The Distributions left the Debtor in financial distress and without adequate capital. VSW Compl. ¶ 51. Approximately seven months after the Second Distribution, the Debtor was forced to seek additional financing in order to maintain its operations. VSW Compl. ¶ 52. On December 11, 2014, the Debtor entered into a set of loan agreements with Siena Lending Group LLC, pursuant to which Siena provided the Debtor with a credit line with a $ 6 million limit. VSW Compl. ¶ 53.

         The Debtor was unable to survive as a going concern, and in April 2015 it retained SSG Advisors LLC to market its business. VSW Compl. ¶¶ 54-55. SSG was unable to find a buyer. VSW Compl. ¶ 54.

         On July 27, 2015, CalPERs entered into a Membership Assignment Agreement through which it purported to sell all of its Class C LLC Units and Membership Interest in LPTH to Van Scotter, Fisher, Wissmann, and Stanley Okoro (“Okoro”) (a member of LPTH). MHF Compl. ¶ 56. In connection with that transaction, CalPERS and Meltzer entered into a general, mutual release of liability with the Debtor, LPTH, Fisher, Van Scotter, Wissmann, and Okoro (the “Release”). MHF Compl. ¶ 55. The Release stated that:

In consideration of the mutual covenants contained herein, and in reliance upon the agreements and releases of the parties as set forth herein, the parties, intending to be legally bound, agree as follows: . . .
[CalPERS] and Meltzer, each on their behalf . . . hereby irrevocably and unconditionally releases, covenants not to sue, acquits and forever discharges LPT Holding, LPT, Fisher, Okoro, Van Scotter, Wissmann . . . from, regarding, and/or on account of any and all claims, debts, causes of action, liens, suits or other liabilities whatsoever, whether known or unknown, suspected or unsuspected, from the beginning of time up to and including the date of this General Release.

         General Release 1 (ECF No. 151-1). However, Meltzer provided no consideration for the Release. MHF Compl. ¶ 55.

         Two months later, on September 28, 2015, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. VSW Compl. ¶ 56.

         PROCEDURAL BACKGROUND

         On September 13, 2016, the Committee began an adversary proceeding by filing a complaint against the Defendants. (ECF No. 1) (the “Initial Complaint”). On November 16, 2016, Meltzer and Herring moved to dismiss the Initial Complaint. (ECF No. 34.) Fisher moved to dismiss the Initial Complaint on December 5, 2016 (ECF No. 48), and on February 28, 2017, LPTH joined in the other defendants' motions to dismiss. (ECF No. 91.) On March 3, 2017, Judge Cary granted the motions and dismissed Meltzer, Herring, Fisher, and LPTH for lack of standing. (ECF No. 93.) The Committee subsequently moved for leave to assert claims against the dismissed parties on behalf of the Debtor's estate, and the Bankruptcy Court granted the Committee standing to sue Meltzer, Herring, Fisher, and LPTH on April 13, 2017. In re Lincoln Paper & Tissue, LLC, Docket No. 15-10715 (ECF No. 980). On April 27, 2017, Fisher moved for reconsideration of the Bankruptcy Court's decision to grant the Committee standing to sue. In re Lincoln Paper & Tissue, LLC, Docket No. 15-10715 (ECF No. 998). The Bankruptcy Court denied Fisher's motion for reconsideration during a hearing on June 20, 2017. In re Lincoln Paper & Tissue, LLC, Docket No. 15-10715 (ECF No. 1035).[4]

         On April 17, 2017, the Committee commenced a separate adversary proceeding against Meltzer, Herring, Fisher, and LPTH by filing the MHF Complaint. MHF Compl. On May 30, 2017, the Committee moved to consolidate the adversary proceedings, and Judge Cary granted the motion to consolidate on July 6, 2017. In the interim, Meltzer, Herring, Fisher, and LPTH moved to withdraw the reference to this Court as to both adversary proceedings, and I temporarily stayed those motions for settlement negotiations. See Meltzer v. Official Comm. of Unsecured Creditors, Docket No. 1:17-mc-144 (ECF Nos. 1, 6). During the run of that stay, on September 19, 2017, the Committee filed a First Amended Complaint against Van Scotter and Wissmann, which included limited amendments to the Initial Complaint's factual allegations and which added a claim for breach of the duty of loyalty. See VSW Compl. After the stay was lifted, the Committee elected not to object to the motions to withdraw the reference, which I granted on January 31, 2018. Meltzer v. Official Comm. of Unsecured Creditors, Docket No. 1:17-mc-144 (ECF No. 13). My consideration of the motions to dismiss, which had been pending before the Bankruptcy Court, followed.

         LEGAL STANDARD

         Federal Rule of Civil Procedure 8(a)(2) requires complaints to contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Such a statement “needs only enough detail to provide a defendant with fair notice of what the . . . claim is and the grounds upon which it rests.” Manning v. Boston Med. Ctr. Corp., 725 F.3d 34, 43 (1st Cir. 2013) (quotations omitted).

         Federal Rule of Civil Procedure 12(b)(6) allows a party to seek dismissal of “a claim for relief in any pleading” if that party believes that the pleading fails “to state a claim upon which relief can be granted.” In assessing a motion to dismiss under Rule 12(b)(6), a court “assume[s] the truth of all of the well-pleaded facts in the complaint and draw[s] all reasonable inferences in the plaintiff's favor.” Román- Oliveras v. Puerto Rico Elec. Power Auth., 655 F.3d 43, 45 (1st Cir. 2011) (quotations omitted). “Well-pleaded facts must be ‘non-conclusory' and ‘non-speculative.' ” Barchock v. CVS Health Corp., No. 17-1515, 2018 WL 1444333, at *4 (1st Cir. Mar. 23, 2018). To overcome a motion to dismiss, a plaintiff must establish that their allegations raise a plausible basis for a fact finder to conclude that the defendant is legally responsible for the claims at issue. Román-Oliveras, 655 F.3d at 49.

         LEGAL BACKGROUND

         I. Breach of ...


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