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Bankruptcy Court Concludes that Breach of Fiduciary Claims Asserted in Adversary Proceeding are Non-Core and Seek Legal, Not Equitable, Relief

By Charlene D. Davis

On January 29, 2015, Judge Christopher Sontchi of the United States Bankruptcy Court for the District of Delaware issued an opinion in an adversary proceeding in the Allied Systems Holdings, Inc. (“Allied”) case.  See The Official Committee of Unsecured Creditors of Allied Systems Holdings, Inc. et al. v. Yucaipa American Alliance Fund I, LP, et al.  The proceeding was brought by the Official Committee of Unsecured Creditors of Allied (the “Committee”) and certain creditors that had filed an involuntary petition against one of the debtors (together with the Committee, the “Plaintiffs”) against directors and officers of Allied as well as Allied’s largest shareholder, Yucaipa, claiming that the directors and officers breached their fiduciary duties to Allied.  The complaint also stated causes of action against Yucaipa for (i) Equitable Subordination; (ii) Recharacterization; (iii) Breach of Contract; (iv) Specific Performance; (v) Conspiracy; (vi) Avoidance of Transfers; and (vii) Disallowance of Claims.

One of the directors and former CEO Mark J. Gendregske moved to dismiss the complaint.  After a hearing on the motion to dismiss, the Court denied it, a few days after Gendregske had filed motions to withdraw the reference and for a determination that the claims against him were non-core.  In the order denying the motion to dismiss, the Court had found that the proceeding against Gendregske was a core proceeding and that the Court had judicial power to enter a final order, although those issues had not been addressed in argument on the motion to dismiss.  Gendregske moved to amend the order to remove those findings.  The Plaintiff, apparently relying on the dismissal order, moved to strike Gendregske’s jury demand.

The Court considered the motion to amend and concluded that the Plaintiffs’ claims against Gendregske were non-core proceedings because claims for breach of fiduciary duty are not listed in Section 157 of the Bankruptcy Code as core proceedings and neither invoked a substantive right provided by title 11 nor arose in the context of a bankruptcy case.   As a consequence, the Court granted the motion to amend.  The Court also concluded that the Plaintiffs’ claims against Gendregske were legal, not equitable, in nature since the relief sought by the Plaintiffs is monetary damages not recovery of a specific fund or other equitable remedy.  As a result, the Court denied the motion to strike Gendregske’s jury demand.  An order will issue with respect to the opinion.

A copy of the opinion can be found here.

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