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Judge Sontchi Denies Motions for Partial Summary Judgment based on Res Judicata, Issue Preclusion and Statute of Limitations Defenses

By Scott D. Cousins

On January 23, 2015, Judge Christopher Sontchi of the United States Bankruptcy Court for the District of Delaware denied motions for partial summary judgment filed by a secured lender of AMC Computer Corp.  The adversary complaint was filed by Eugenia VI Venture Holdings, Ltd. (“Eugenia”) on behalf of two chapter 7 debtors.  These debtors were shareholders of AMC and the subject of an involuntary chapter 7 proceeding commenced by Eugenia in 2009.  The complaint raised claims for breach of fiduciary duty against the defendants—former officers, directors and shareholders of AMC—for mismanagement of AMC.  The defendants had been the subject of seven suits initiated by Eugenia in the U.S. District Court for the Southern District of New York (the “District Court”).  In that litigation, Eugenia had alleged fraud (on behalf of itself) and also alleged breach of fiduciary derivatively (in its capacity as a shareholder of AMC) in connection with AMC’s default under its loan agreement with Eugenia.  The District Court dismissed each of those suits finding that Eugenia’s direct claims for fraud failed as a matter of law because Eugenia “suffered no out-of-pocket loss,” and that Eugenia’s derivative claims failed to raise a genuine issue of material fact as to damages that it alleged were caused by the defendants’ mismanagement of AMC.  In 2010, the U.S. Court of Appeals for the Second Circuit affirmed the District Court’s dismissal of the suits against the defendants finding, among other things, that “at the time the parties entered the Credit Agreement, AMC was already insolvent.”

Eugenia’s complaint before Judge Sontchi did not include direct claims for fraud, but only alleged, on behalf of the chapter 7 debtors, breach of fiduciary duty based on mismanagement of AMC by the defendants.  In answering the complaint, the defendants raised the affirmative defenses of issue and claim preclusion (as a result of the prior District Court litigation) and asserted timeliness defenses with respect to statute of limitations and laches.  Eugenia filed for partial summary judgment with respect to these defenses.

Judge Sontchi analyzed New York law to determine whether the defendants’ affirmative defenses raised genuine questions of fact that would defeat Eugenia’s motion for partial summary judgment.  First, regarding the defendants’ claim-preclusion (or res-judicata) defenses, and because the plaintiff and the defendants agreed that the District Court decision constituted a final judgment on the merits, Judge Sontchi analyzed New York law to determine whether the plaintiffs in both litigations were in privity and whether the claims raised in both litigations were the same.  Judge Sontchi concluded that the defendants’ res judicata defenses were sufficient to overcome Eugenia’s motion for partial summary judgment because “undisputed facts clearly indicate that the parties are in privity” particularly since Eugenia controlled both litigations and that the claims in the District Court litigation and the Bankruptcy Court adversary proceeding “arise out of the same transaction.”

Second, regarding the defendants’ issue-preclusion defenses, Judge Sontchi analyzed New York law to determine whether there was (A) an identity of issue which was necessarily decided in the District Court litigation and (B) a full and fair opportunity to contest the District Court’s decision.  The Court concluded that because the Second Circuit “actually determined” that AMC was insolvent “at the time the parties entered the Credit Agreement,” Eugenia could not sustain a breach of duty claim that AMC was subsequently rendered insolvent as a result of mismanagement by the defendants.  With respect to whether there was a full and fair opportunity to contest the District Court’s decision, the Court found that that Eugenia failed to meet its burden that is was entitled to judgment as a matter of law because there were genuine issues of material fact as to this factor.

Finally, with respect to the timeliness of Eugenia’s breach of duty claims, the Court found persuasive the fact that the alleged harm occurred between January 2003 and May 2005 and that Eugenia did not bring its claims until the adversary proceeding was initiated in June 2011, well beyond the three-year statute of limitations under Delaware law.  Judge Sontchi also found that Eugenia had not shown a basis for tolling Delaware’s statute of limitations.  As a result, Eugenia failed to establish that it was entitled to judgment as a matter of law with respect to defendants’ statute of limitations and laches defenses.

A copy of the opinion can be found here.

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