«In the matter of : Case No. 00-2691 to 00-2842 (Jointly Administered) Genesis Health Ventures, Inc. : Debtors : Richard Haskell, et al. : AMENDED ...»
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
In the matter of : Case No. 00-2691 to 00-2842
Genesis Health Ventures, Inc. :
Richard Haskell, et al. :
OPINION ON JOINT
MOTION TO DISMISS
Goldman, Sachs & Co.; Genesis :
Health Ventures, Inc.; Mellon Bank,
N.A.; Highland Capital Management,:
L.P.; George V.
APPEARANCES: R. Bruce McNew, Esq.
Taylor & McNew LLP 3711 Kennett Pike, Suite 210 Greenville, Delaware 19807 Counsel for Plaintiffs H. Adam Prussin, Esq.
Pomerantz Haudek Block Grossman & Gross LLP 100 Park Avenue, 26th Floor New York, New York 10017 Counsel for Plaintiffs Russell C. Silberglied, Esq.
Richards, Layton & Finger, P.A.
P.O. Box 551, One Rodney Square Wilmington, Delaware 19899 Counsel for NeighborCare, Inc.
Michael F. Walsh, Esq.
Weil, Gotshal & Manges, LLP 767 Fifth Avenue New York, New York 10153 Counsel for NeighborCare, Inc.
Steven K. Kortanek, Esq.
Klehr, Harrison, Harvey, Branzburg & Ellers LLP 919 Market Street, Suite 1000 Wilmington, Delaware 19809-3062 Counsel for Goldman, Sachs & Co.
Barry Sher, Esq.
Fried, Frank, Harris, Shriver & Jacobson LLP One New York Plaza New York, New York 10004-1980 Counsel for Goldman, Sachs & Co.
Daniel K. Hogan, Esq.
1701 Shallcross Avenue, Suite C Wilmington, Delaware 19806 Counsel for Highland Capital Mgmt, LLP Robert S. Brady, Esq.
Young, Conaway, Stargatt & Taylor LLP 1000 West Street, 17th Floor Wilmington, Delaware 19899-0391 Counsel for George V. Hager Menachem O. Zelmanovitz, Esq.
Morgan, Lewis & Bockius LLP 101 Park Avenue New York, New York 10178-0060 Counsel for Mellon Bank Teresa K.D. Currier, Esq.
Klett Rooney Lieber & Schorling The Brandywine Building 1000 West Street, Suite 1410 Wilmington, DE 19801 Counsel for Mellon Bank
HONORABLE JUDITH H. WIZMUR:(U.S. Bankruptcy Court, District of New Jersey, Sitting by Designation) The defendants jointly move to dismiss the plaintiffs’ complaint in its entirety because it is time-barred under section 1144, because it violates the order of confirmation, because it is barred by the doctrines of res judicata and/or collateral estoppel, and because it fails to assert a claim for fraud with specificity as required by Rule 9(b). I conclude that plaintiffs’ complaint as against the debtor is barred by operation of section 1144 and the order of confirmation, and must therefore be dismissed. Plaintiffs’ complaint as against the remaining defendants is barred by the doctrines of res judicata and collateral estoppel. The defendants’ motion is granted, and the complaint is dismissed in its entirety.
The Genesis Health Ventures, Inc. (“Genesis”) and Multicare AMC, Inc.
(”Multicare”) debtors filed separate Chapter 11 bankruptcy cases on June 22,
2000. The debtors’ Joint Plan of Reorganization was filed on July 6, 2001 and confirmation hearings were held on August 28 and 29, 2001. Debtors’ plan was confirmed on September 12, 2001 by written opinion. See In re Genesis Health Ventures, Inc., 266 B.R. 591 (Bankr. D.Del. 2001), appeal dismissed,
Two and a half years later, plaintiffs filed this complaint on January 24, 2004 in the Supreme Court for the State of New York. The complaint was removed to the United States District Court for the Southern District of New York, transferred to the United States District Court for the District of Delaware, and then referred to the Delaware bankruptcy court.
The plaintiffs are comprised of 275 investors who, on October 2, 2001, collectively held 55% of all debentures (“Senior Subordinated Notes”) issued by Genesis, with a face value in excess of $205 million. The debentures were subordinated to about $1.3 billion in senior debt. Defendant Goldman Sachs & Co. purchased about half of the Genesis senior debt participations shortly before the debtors’ bankruptcy filings. Goldman became the largest senior creditor of both Genesis and Multicare, and served as the underwriter for the DIP and exit financing.
Plaintiffs allege that Goldman, Highland Capital Partners, another senior debt participant, and Mellon Bank N.A., the debtors’ lead senior lender bank, (“Senior Lenders”) “conspired with Genesis management to put the Company into bankruptcy and ‘cram down’ a reorganization plan that would eliminate
virtually total ownership of Genesis to the senior creditors.” Complaint at 8.
The confirmed plan merged Genesis and Multicare, extinguished the Old Common Stock of both companies, and distributed about 94% of the newly issued stock of the reorganized, combined entities to the Senior Lenders. The junior creditors, including the Genesis Senior Subordinated Note claimants, received an approximate dividend of 7.34%, plus New Warrants.
Plaintiffs allege that the enterprise value of Genesis was misrepresented at confirmation as being about $1.3 billion. The enterprise value was based on a multiple of the Genesis budgeted EBITDA (earnings before interest, taxes, depreciation, and amortization) for 2001, which was projected at $158 million, down from between $205 and $210 million for the fiscal years 1998 and 1999.
In August 2001, shortly before the confirmation hearing, the debtor presented its historical LTM EBITDA (last twelve months EBITDA) for the preceding 12 month period, which supported the $158 million projection. Plaintiffs contend that “both the Budgeted EBITDA projections and the LTM EBITDA were ‘cooked’, to depress EBITDA and thereby depress the valuation of Genesis.” Complaint at 11. Because the LTM EBITDA was presented only six days prior to the confirmation hearing, plaintiffs complain that they were unable to challenge the EBITDA in a timely manner.
and gross negligence. More specifically, plaintiffs assert in Count One of their complaint that Genesis and Hager [the Chief Financial Officer of Genesis] were directly involved in the preparation of all the misleading financial information that led to the under-valuation of Genesis.
Goldman, Mellon and Highland controlled this entire process, periodically reviewing in detail the financial information prepared by Genesis management on a monthly basis, to assure that EBITDA data were matching the ‘target’ of about $158 million, and that sufficient adjustments were being made to the budgeted EBITDA to bring about the same result. They offered enormous financial inducements to Genesis management to perpetrate this fraud, and they were the principal beneficiaries of the fraud.
Goldman also took all the steps needed to freeze MC’s cash and lines of credit so that it could not pay its obligations to Genesis, thus forcing Genesis to draw down almost $200 million from its DIP lending facility.
Complaint at 184, 185. In support of these allegations, plaintiffs contend that Genesis management improperly decreased the debtors’ EBITDA by deducting a host of unsubstantiated and unwarranted items.
In Count Two, plaintiffs allege that Goldman, Mellon and Highland were aware that the financial information being released by Genesis, and upon which the reorganization valuation of the Company would be determined, was false and misleading and had been designed to defraud the junior creditors of Genesis, and would be relied upon by the plaintiffs and the Court.
Complaint at 191, 192. In Count Three, plaintiffs allege that By virtue of their positions as debtor in a bankruptcy proceeding, as the chief financial officer of the debtor, as senior creditors of the debtor, and as proponents of a bankruptcy reorganization plan that would drastically affect the junior creditors, defendants owed the junior creditors of Genesis a duty of care, including the duty to provide fair, accurate and complete information.
Defendants violated that duty of care by disseminating false and misleading financial information that misled the bankruptcy court and the plaintiffs concerning the true financial condition and prospects of Genesis. Defendants’ conduct was such an extreme and severe departure from due care as to constitute gross negligence, and was therefore not released as a result of the Genesis bankruptcy.
Complaint at 195, 196. Plaintiffs believe that if Genesis had been properly valued, there would have been sufficient value for the subordinated debenture holders to recover the full par value of their debentures. They seek an award of damages in an amount not less than $200 million, plus interest, costs and fees.
Defendants view plaintiffs’ complaint as another attempt to alter the distribution to creditors provided for under the debtors’ confirmed Chapter 11 plan. Allowing the plaintiffs a recovery against the debtors in this action
distributed to its former senior creditors, and a judgment against the Senior Lenders named in this suit would have the effect of transferring distributions made to them under Plan into the hands of the subordinated debentureholders.” Motion to Dismiss at 4.
Pursuant to Federal Rule of Bankruptcy Procedure 7012(b), Rule 12(b)(6) of the Federal Rules of Civil Procedure, dismissal of a complaint for failure to state a claim upon which relief may be granted, is available to defendants in adversary proceedings filed in bankruptcy cases. To determine such a motion, the court must accept all of the facts pleaded in the complaint as true, and draw all reasonable inferences in plaintiff’s favor. In re Great Atlantic & Pacific Tea Co., Inc. Securities Litigation, 103 Fed.Appx. 465, 467-68 (3d Cir. 2004);
Mele v. Federal Reserve Bank of New York, 359 F.3d 251, 253 (3d Cir. 2004);
Doug Grant, Inc. v. Greate Bay Casino Corp., 232 F.3d 173, 183 (3d Cir. 2000), cert. denied, 532 U.S. 1038, 121 S. Ct. 2000, 149 L.Ed.2d 1003 (2001). The focus of the court on a 12(b)(6) motion “is whether under any reasonable reading of the pleadings, plaintiff may be entitled to relief.” Simon v. Cebrick, 53 F.3d 17, 19 (3d Cir. 1995). See also Haynes v. Metropolitan Life Ins. Co., 94
is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations”).
On this joint motion to dismiss the plaintiffs’ complaint in its entirety, the defendants contend that no relief could be granted under any set of facts that could be proved consistent with the allegations because the plaintiffs’
(1) is time-barred under 11 U.S.C. § 1144;
(2) violates the order of confirmation and discharge injunction;
(3) is barred by the doctrine of res judicata;
(4) is barred by the doctrine of collateral estoppel, and (5) fails to assert a claim for fraud with specificity as required by Fed.R.Civ.P. 9(b).
I. Plaintiffs’ Complaint is Time-Barred Under 11 U.S.C. § 1144 The Confirmation Order approving the debtors’ reorganization plan was entered on September 12, 2001. The plaintiffs’ complaint was filed on January 24, 2004.
time before 180 days after the entry of the order of confirmation, and after notice and a hearing, the court may revoke such order if and only if such order was procured by fraud.” 11 U.S.C. § 1144. This six month time limitation is strictly construed, and courts have enforced the bar even where fraud is later discovered beyond the deadline. See, e.g., In re Midstate Mortgage Investors, Inc., 105 Fed.Appx. 420, 423 (3d Cir. 2004); In re Orange Tree Assocs., Ltd., 961 F.2d 1445, 1447 (9th Cir. 1992) (“courts have held uniformly that strict compliance with section 1144 is a prerequisite to relief”); In re Space Bldg.
Corp., 206 B.R. 269, 273 (D.Mass. 1996). The allegation by the plaintiffs that they had insufficient opportunity to uncover the fraud prior to the confirmation of the debtors’ plan, and only discovered the alleged fraud by various means after the expiration of the six month limitation, does not alter the effectiveness of the bar here.
Instead, the threshold question is whether the plaintiffs’ quest for money damages from the debtors and the other defendants, based on allegations of pre-confirmation fraud, constitutes a collateral attack on the confirmation order, which would be time-barred, or whether it represents a separate cause of action against the various defendants, which is not proscribed by § 1144.
order procured by fraud. Some courts have viewed fraud allegations seeking monetary damages, made against the debtor and others associated with a confirmed plan of reorganization, to constitute an impermissible collateral attack on a debtor’s reorganization which would “allow [the plaintiffs] to do indirectly what they no longer may do directly because of 11 U.S.C. § 1144.” Hotel Corp. of the South v. Rampart 920, Inc., 46 B.R. 758, 770-71 (E.D. La.
1985), aff’d, 781 F.2d 901 (5th Cir. 1986).
Other courts adopt a more nuanced approach to the applicability of § 1144, examining whether the case involves an attempt to “‘redivide the pie’ by a disgruntled participant in the Plan,” or whether the relief sought would upset the confirmed plan. In re Coffee Cupboard, Inc., 119 B.R. 14, 19 (E.D.N.Y.
1990) (citing to In re Emmer Bros. Co., 52 B.R. 385, 392 (D. Minn. 1985)). If a judgment awarding the plaintiff money damages would not ultimately affect the plan distributions made to the creditor body, the cause of action premised on fraud may proceed. For example, in In re Circle K Corp., 181 B.R. 457 (Bankr.