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Judge Sontchi Grants in Part and Denies in Part Defendants’ Motion to Dismiss Debtors’ Claims Against Purchasers of Assets from Debtors’ Previous Bankruptcy

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On May 21, 2012, Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware issued a 123-page opinion in Autobacs Strauss, Inc. v. Autobacs Seven Co. (In re Autobacs Strauss, Inc.) (Adv. Proc. No. 09-52849 (CSS)), granting in part and denying in part the Defendants’ motion (the “Motion”) to dismiss Plaintiffs’ fourteen-count complaint (“Complaint”) pursuant to Bankruptcy Rule 7012(b)(6).

Plaintiffs were reorganized debtors (“Debtors”) in the third Chapter 11 bankruptcy case of a chain of auto parts stores, doing business as “Strauss Discount Auto”, and certain creditors in their second Chapter 11 bankruptcy. Defendants, through two subsidiaries, had been purchasers of the Strauss business in the Debtors’ second Chapter 11 bankruptcy. The dispute in the adversary proceeding related to the nature of the acquisition consideration. Plaintiffs argued that the Defendants’ funding of the Debtors had or should have been solely a capital contribution/equity infusion by Defendants to its subsidiaries. Defendants argued that their funding had been a permissible combination of debt and capital contribution/equity infusion to its subsidiaries.

The Complaint alleged the following counts with a brief summary of the Court’s ruling on the Defendants’ Motion as it pertains to each:

  • alter ego/piercing the veil: Motion denied, as Plaintiffs sufficiently alleged that Debtors/Defendants were a single economic unit and Defendants may have perpetrated an injustice
  • breach of fiduciary duties: Motion denied, as allegations of breaches were sufficient
  • avoidance of fraudulent transfers: Motion denied, as four badges of fraud were sufficiently plead
  • avoidance of constructive fraudulent transfers: Motion denied in part and granted in part; while Debtors received reasonably equivalent value in cash, they did not receive reasonably equivalent value for costs of incurring the debt
  • avoidance of preferential transfers: Motion denied, as elements of preferential transfers were properly plead
  • recovery of avoidable transfers: Motion granted in part and denied in part as set forth above
  • declaratory judgment: Motion denied since recharacterization count survived
  • recharacterization of debt to equity: Motion denied, as only three factors weighed against recharacterizing the debt as equity
  • equitable subordination: Motion denied, as Debtors satisfied all three parts of the Mobile Steel test for determining equitable subordination
  • breach of plan of reorganization: Motion denied, as the Debtors had no obligation to explain the term “capital contribution” since they sufficiently alleged it meant equity, not debt
  • breach of asset purchase agreement: Motion denied, as the Plaintiffs sufficiently plead a breach of the APA in light of the surrounding documents
  • fraudulent inducement: Motion granted as to certain former directors and officers of the Defendants for Plaintiffs’ failure to attribute specific misrepresentations to them and denied as to the remaining Defendants
  • objection and disallowance of Defendants’ proofs of claim (“POC”): Motion denied, as the POCs are linked or closely-linked to surviving counts

A copy of the opinion can be found here.

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