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Trustee's Claims for Breach of Fiduciary Duty Survive Judgment on the Pleadings and Not Eliminated Because Governing Exculpation Provisions did not Eliminate Causes of Action

The Delaware Bankruptcy Court permitted the breach of fiduciary and related claims of a Chapter 7 Trustee to proceed over motions of defendants. Judge Kevin Gross was asked to dismiss the complaint following briefing on a motion for judgment on the pleadings.  The opinion is styled as Stanziale v. Versa Capital Mgmt., LLC (In re Simplexity, LLC), No. 16-50212 (KG), 2017 WL 2385404 (Bankr. D. Del. June 1, 2017).

The motion for judgment on the pleadings followed a motion to dismiss the complaint that was decided in the Chapter 7 Trustee's favor in January and styled as Stanziale v. Versa Capital Mgmt., LLC (In re Simplexity, LLC), Case No. 14-10569 (KG), 2017 WL 65069 (Bankr. D. Del. Jan. 5, 2017).

The Court held that the exculpation provisions contained in the LLC Agreements could be properly considered as a basis for dismissal on a Rule 12(c) motion, but concluded that the Chapter 7 Trustee’s claims were not dismissed because, for among other reasons, the governing exculpation provision preserved causes of action for breach of duties of loyalty, good faith, and fair dealing.

In the complaint (the “Complaint”) the Chapter 7 Trustee alleged that the Defendants, including Simplexity's officers and authorized persons, failed to act to preserve the value of the Debtors as a going concern. The Chapter Trustee claimed that the Defendants’ actions and/or inaction exposed Simplexity to the employment related claims. The Chapter 7 Trustee asserted claims for breach of fiduciary duty for exposing Debtors to the WARN Act charges. The other alleged breaches of fiduciary duty were those resulting from breaches and aiding and abetting breaches of fiduciary duties resulting from, among other things, failing to seek bankruptcy protection for the Debtors prior to each sweep of cash by the Debtors’ secured creditor, which the Chapter 7 Trustee alleged precipitated the permanent loss of tens of millions of dollars of going concern value. In addition, the Chapter 7 Trustee asserted claims against the Defendants for failing to monetize the Debtors’ business in the years preceding the bankruptcy filing. See Complaint, passim.
The Defendants previously moved to dismiss the Chapter 7 Trustee’s claims on various grounds, including certain exculpation provisions of the Debtors’ LLC Agreements. The Court issued a memorandum opinion(the “Opinion”) on January 5, 2017. In the Opinion, the Court dismissed veil-piercing claims, but declined to dismiss the Trustee’s remaining claims on the basis that an “exculpatory clause is considered an affirmative defense and will not provide the basis for dismissal.” Opinion at 13.

The Court noted that Delaware law allows enforcement of clear exculpation provisions.  However, the operating document, here, referred to as the Simplexity Agreement, lacked such exculpations.  Under the Simplexity Agreement, the Defendants owed fiduciary duties and duties of loyalty to the entity and its members. According to the Court, the Simplexity Agreement did not restrict fiduciary duties and associated liability to the fullest extent permissible.

The Chapter 7 Trustee also sought to assert breach of fiduciary duty claims against certain parties, known as the Versa Defendants, on behalf of Holdings.  Versa Capital Management, LLC managed two funds owing debtor Adeptio INPC Holdings, LLC (“Holdings”).  The Court dismissed those  causes of action.  The Complaint alleged injury to Holdings stemning from the injury to Simplexity, namely, the Versa Defendants neglected to declare bankruptcy at the expense of Simplexity. The Court held that the Chapter 7 Trustee failed to satisfy the analysis under Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1038–39 (Del. 2004), in that he has a direct claim against the Versa Defendants. The Court found that the Trustee does not have standing with respect to Holdings and dismissed the claims brought on Holdings’ behalf.