United States District Court, D. Maine
ORDER ON DEFENDANTS' MOTIONS TO DISMISS AND
RODNEY N. FISHER'S MOTION FOR LEAVE TO APPEAL
Torresen United States Chief District Judge
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
(collectively, the “Board
Members”), and against the Debtor's sole
member, LPT Holding, LLC (“LPTH,
” and together with the Board Members the
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”). 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.
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.
The Debtor and the Defendants
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.
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. ¶
The Boiler Explosion and the Debtor's Insurance
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.
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. ¶¶
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.
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.
The First Distribution
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.
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.
The Second Distribution
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 voted to authorize the Debtor to
make the proposed $ 4 million distribution (the
“Second Distribution, ” and
together with the First Distribution the
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.
The Release and the Debtor's Bankruptcy
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.
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.
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.
Release 1 (ECF No. 151-1). However, Meltzer provided no
consideration for the Release. MHF Compl. ¶ 55.
months later, on September 28, 2015, the Debtor filed a
petition for relief under Chapter 11 of the Bankruptcy Code.
VSW Compl. ¶ 56.
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.
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.
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)
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
Breach of ...