DocketNumber: Case No. 15-11469 (LSS); Adv. No. 17-50738; Adv. No. 17-50807; Adv. No. 17-50815; Adv. No. 17-50825
Citation Numbers: 600 B.R. 294
Judges: Silverstein
Filed Date: 5/7/2019
Status: Precedential
Modified Date: 11/22/2022
The trustee of the F2 Liquidating Trust (the "Trustee" or "Plaintiff") commenced over one hundred adversary proceedings post-confirmation seeking to avoid as fraudulent conveyances and/or preferential transfers discretionary bonus payments and/or tax distributions made prepetition by F-Squared Management, LLC. In this subset of those proceedings, which with two small exceptions involve only bonus payments, Defendants moved to dismiss the fraudulent conveyance counts on a single ground-that the Trustee failed to sufficiently plead lack of reasonably equivalent value because the sole allegations in the complaint regarding value are that the bonuses were entirely discretionary and that "[n]either the Employee Handbook nor Defendant[s'] employment agreement[s] lists any criteria or targets which, if met, would entitle Defendant[s] to receive a bonus." The Trustee does not dispute this characterization of his complaints; rather, he takes the position that, as a matter of law, the payment of a discretionary bonus not tied to a previously-enunciated metric is a per se fraudulent conveyance if made while a debtor is insolvent.
*297Simply put, the Trustee argues that such a bonus can never be for reasonably equivalent value because it confers no value whatsoever. Because I disagree with this premise, the motions to dismiss the fraudulent conveyance counts are granted.
With respect to the preference counts against Defendants Flanagan, Landon and Kearney, the Trustee's complaints hinge on Defendants being insiders as none of the transfers occurred within ninety days of the filing of the bankruptcy petitions. Each complaint alleges that the relevant Defendant was an insider based on his title of "Senior Vice President" and was part of the senior management team. While each Defendant disputes this characterization, and I have my doubts, such factual issues cannot be determined on a motion to dismiss. The Trustee's allegations are sufficient for pleading purposes, and as such, the motions to dismiss will be denied as to the preference counts.
Background
F-Squared Management, LLC and its subsidiaries
In 2013, the Securities & Exchange Commission (the "SEC") began an investigation into potential violations of federal securities laws related to Debtors' advertising of the AlphaSector Indexes' performance track record between April 2001 and September 2008. On December 22, 2014, Debtors agreed to a settlement of an administrative cease-and-desist proceeding with the SEC that required Debtors to admit to false advertising during the relevant time period, pay a $ 5 million penalty to the SEC and disgorge $ 30 million in related profits. The Trustee contends that, as a result of Debtors' admitted securities law violations, Debtors were insolvent "since their inception."
Between December 2014 and March 2015, F-Squared Investments Inc. paid each Defendant a bonus (each, a "Bonus Payment"). Debtors contemplated giving bonuses to their employees as provided for in their employee handbook, which provides that:
Bonus
The Company has a discretionary annual cash bonus for all employees in good *298standing. This discretionary bonus, when given, is generally paid following the year end. Cash bonuses are payable in accordance with the Company's payroll practices in effect at the time, and the Company will deduct from any bonus all amounts required to be deducted or withheld under applicable laws or under any employee benefit plan in which you may participate.
The Company reserves a binding right to remit payment of bonuses to certain individuals in installments ("rolling bonus"), or at other such times as the company [sic] deems prudent, in its sole discretion. The rolling bonus is generally paid in two installments, with 75% of the eligible target bonus on or around February 15th and the remaining 25% on or around May 15th.3
The opportunity for a bonus was also contemplated in Defendants' respective Offer Letters.
Procedural Background
On July 8, 2015, Debtors filed voluntary petitions under chapter 11 of title 11 of the United States Bankruptcy Code.
On July 7, 2017, the Trustee filed complaints against each Defendant seeking the recovery of the Bonus Payments as fraudulent *299transfers.
Subsequently, on October 19, 2017, the Trustee filed amended complaints (each a "First Amended Complaint") against Defendants Flanagan, Landon and Kearny (and, together with the complaint filed against Defendant Coyle, the "Complaints"). The First Amended Complaint against Defendants Flanagan and Landon included an additional, alternative claim that the Bonus Payments constituted preferential transfers.
The Trustee filed an answering brief on November 16, 2017.
*300I heard oral argument on March 12, 2019 and took the matter under advisement.
Jurisdiction
Subject matter jurisdiction exists over this adversary proceeding pursuant to
The Parties' Positions
Defendants moved to dismiss the Complaints for failure to sufficiently allege both reasonably equivalent value as to the fraudulent conveyance counts and insider status as to the preference count.
As for the fraudulent conveyance counts, Defendants assert that Plaintiff has not sufficiently pled reasonably equivalent value because the Complaints are devoid of any allegations with respect to the value Debtors received in exchange for the transfers. Defendants assert that the allegations in the Complaints are simply a formulaic recitation of the statute and that the sole allegations are not sufficient to permit the court to draw a reasonable inference that the Bonus Payments did not confer any value on Debtors. Defendants contend that the natural inference in awarding a discretionary bonus, and the only rational use of that discretion, is to pay a bonus only if it brings value to the employer.
As for the preference count, Defendants assert that simply setting forth each Defendants' title is not sufficient to infer that they are an officer for purposes of the longer preference period in § 547. They contend that their Offer Letters show that they had no managerial responsibilities and that this is confirmed by Debtors' filed Statements of Financial Affairs which do not list them as officers and directors.
Plaintiff asserts that the allegations in the Complaints provide Defendants with fair notice of his claims and are not simply a formulaic recitation of the statutory elements of § 548. He claims that "courts have consistently found that where a bonus is entirely discretionary, the debtor has no obligation to pay it, and the bonus is thus gratuitous."
As for the preference counts, the Trustee argues contends that his allegations that Defendants Flanagan, Landon, and Kearney were Senior Vice Presidents with managerial responsibilities are sufficient to raise a reasonable inference that they were officers.
Legal Standard
The customary recitation of the legal standard on a Rule 12(b)(6) motion goes something like this. A Rule 12 (b)(6) motion is a challenge to the sufficiency of factual allegations in a complaint.
While this standard suffices with respect to the request to dismiss the preference counts, given the Trustee's "per se" argument-that discretionary bonuses without pre-enunciated metrics are never for "value"-dismissal is appropriate if this legal position is incorrect.
*302Where the plaintiff does not intend to offer further evidence in support of his claim, discovery is unnecessary and the issue for determination on the motion to dismiss is not whether the facts and reasonable inferences permit the plaintiff to continue and discover evidence in support of his claims, but whether the facts and reasonable inferences in the complaint determine conclusively that the plaintiff is entitled to entry of judgment against the defendants. If not, the motion to dismiss should be granted.
Here, the Complaints contain three paragraphs with respect to the Bonus Payments:
26. In the year prior to the Petition Date, the Debtors paid Defendant the Bonus Payments identified on Exhibit A. Certain Bonus Payments were made less than a month after laying off 30% of its work force and less than a week after the Debtors began their cost-cutting and restructuring efforts, and all of the Bonus Payments were made after November 2015, when it became clear that F-Squared was going to be subject to the Transfer Order.
27. Pursuant to the F-Squared Employee Handbook, a copy of which is attached hereto as Exhibit B, bonuses were paid to employees on an entirely discretionary basis. Neither the Employee Handbook nor Defendant's employment agreement lists any criteria or targets which, if met, would entitle Defendant to receive a bonus.
28. Minutes of F-Squared's April 6, 2015 meeting of the Board of Managers note that no bonuses for 2015 were likely to be paid due to F-Squared's poor financial performance. Nonetheless, F-Squared made the Bonus Payments, even though it was in the midst of its death spiral.
As Defendants point out, there are no allegations in the Complaints that the Bonus Payments were excessive or not market-based or that Defendants did not honestly and diligently perform their jobs.
Discussion
I. Discretionary Bonuses Are Not Per Se of No Value for Purposes of § 548.
Section 548 of the Bankruptcy Code permits the trustee to avoid the transfer of an interest of the debtor in property (here, the Bonus Payments) made within two years of the bankruptcy filing if the debtor received less than "a reasonably equivalent *304value" in exchange for the transfer and the debtor was insolvent.
In R.M.L. , the Third Circuit articulated a two-part inquiry for the determination of reasonably equivalent value.
To determine whether the threshold requirement of "any value" is satisfied, the court examines "whether [the debtor] received any benefit ... whether direct or indirect, without regard to the cost of [the] services, the contractual and arms-length nature of the relationship, and the good faith of the transferee."
As is the case here, the plaintiff in R.M.L. argued that "value" was not conferred, as a matter of law.
Applying the teaching of R.M.L. , I cannot conclude as a matter of law that the payment of a bonus pursuant to an entirely discretionary bonus plan that does not contain any pre-enunciated performance or incentivizing metrics can never be for "value."
Here, the Trustee does not plead in the Complaints, and does not intend to offer at trial, any facts regarding the circumstances surrounding the awarding and payment of the bonuses.
The Trustee's analysis is fatally flawed in that it fails to take into consideration whether Debtors received any benefit-direct or indirect, tangible or intangible. It is not hard to posit facts that would show that the payment of the Bonus Payments conferred "value" on Debtors for purposes of § 548. Indeed, at argument, counsel and I had the following colloquy:
THE COURT: Why can't I look at what the debtor evaluated when they in fact gave bonuses? You're assuming they didn't do any evaluation in your per se [argument]. Your per se [argument] says they can't articulate it at the time.
MS. DWOSKIN: We're saying that when a bonus is not based on any obligation and isn't tied in its governing documents like all of these cases say, to specific metrics to look at --
THE COURT: It cannot be [for] value[ ].
MS. DWOSKIN: -- that it can't be for value.
THE COURT: So that if I had a bonus plan that was discretionary, wholly discretionary, and at the end of the year I looked and said this is my best employee, they made the best sales, they made, they were in here working night and day, they were helping me train other employees. If I gave that employee a bonus after doing that evaluation, that that bonus would be recoverable as a fraudulent transaction because there was no value given.
MS. DWOSKIN: If the company was insolvent. Yes.
THE COURT: No. I think that's where you're confusing things, The look at value has nothing to do with solvency. Whether there's value, that's one thing. You're right, if I was solvent, no problem.
MS. DWOSKIN: That was my only point. That, in other words, in order to avoid a transfer you need to both be insolvent and make a payment for less [than] reasonable value.
THE COURT: The value, the determination of value is not dependent on whether the debtor is solvent or insolvent. Correct?
MS. DWOSKIN: Correct. Correct. You just --
THE COURT: That, you look at by itself.
MS. DWOSKIN: Yes.
THE COURT: So in that situation, let's say the debtor is insolvent, in that situation where I called, I called my management team in front of me, and I said let's sit down and evaluate our employees. And I say, you know what here's my top employee, here's my top three employees. I'm going to give them bonuses this year because they brought in sales of over $ 100 million, they helped me train my other employees, they were *307here working night and day, and I give them a reasonable bonus, $ 100,000, that that provides no value, that just provides no value under [R.M.L.]
MS. DWOSKIN: That's right, Your Honor.60
* * *
THE COURT: I think you also are going to say, you know what, if it was to stay, if I decided, you know I need to give that guy $ 100,000 to stay, because he's my best employee, you say that provides no value.
MS. DWOSKIN: And again, when courts determine retention bonuses, they look at all kinds of things. The set of factors is not before us right now.61
It seems self-evident that the awarding of a bonus in these circumstances may confer value to the employer for purposes of § 548. Rewarding your best employees(s) with a discretionary bonus (especially where the prospect of a discretionary bonus is included in both the employer's employee handbook and the employee's offer letter) undoubtedly helps to build the loyalty of the employee and increase morale, generally, if nothing else. Failure to award the bonus, even if discretionary, could cause a company's best employees to seek employment elsewhere. The Trustee's per se theory leaves no room for this outcome.
*308The opinions relied on by the Trustee to support his per se theory do not stand for that proposition and, in any case, neither involves a discretionary bonus.
In HDD Rotary Sales, the court addressed the proper characterization of a $ 193,167 obligation on the debtor's books and records.
Satisfaction of a pre-existing obligation is "value" under § 548, but it does not follow that "value" requires the finding of an obligation. R.M.L. recognizes value where there is any benefit, direct or indirect, tangible or intangible, including benefits that are "technically not within § 548(d)(2)(A)'s definition of 'value.' "
II. The Trustee Has Sufficiently Pled Insider Status.
Section 547 provides that a trustee may avoid a preferential transfer of property made between ninety days and a year before the petition date if the alleged *310transfer was to an "insider."
In the Complaints, the Trustee alleges that Defendants Flanagan, Landon and Kearney are Senior Vice Presidents, and are therefore "officers."
In his Answering Brief, the Trustee counters by asserting that a person holding an officer title is presumptively an officer, and thus an insider.
In Foothills , the court analyzed who is an officer under § 101(31) in the context of deciding whether to allow retention bonuses under § 503.
Unlike in Foothills, the question here is not whether Defendants were, in fact, officers of Debtors, The question here is whether a factual allegation in a complaint *311that an employee holds a "Senior Vice President" title is sufficient to draw a reasonable inference that the employee is an officer and therefore an insider for the purpose of § 547. I think it is, I concur with Foothills , that the plain meaning of "Senior Vice President" denotes an officer. And, I also agree that a person holding the title of Senior Vice President may be an officer, or he may not be depending on his responsibilities.
The Trustee alleges (though in somewhat conclusory fashion) that Defendants Flanagan, Landon and Kearney were each part of a management team and participated in management.
Drawing all reasonable inferences in favor of the Trustee, as I must on this motion, I conclude that the allegations that each Defendant is a Senior Vice President together with allegations that he participates in management is sufficient to plausibly infer that Defendants Flanagan, Landon and Kearney were officers. It follows that the Trustee has adequately pled insider status. The Motion to Dismiss the preference count is denied.
III. Miscellaneous Transfers
Exhibit B to the Complaint filed against Defendant Flanagan also indicates that on the same day Debtor paid Mr. Flanagan his Bonus Payment, Debtor also transferred $ 1,003.03 to Mr. Flanagan as a 401K matching contribution. In a footnote in their Opening Brief, Defendants assert that "the Trustee provides no allegations as to why or how this alleged transfer was fraudulent or otherwise avoidable."
Similarly, Exhibit B to the Complaint filed against Defendant Coyle indicates that in addition to the Bonus Payment made to Mr. Coyle, Debtor also transferred $ 1,221.00 to Mr. Coyle as a tax *312distribution.
Conclusion
An order will enter in each of these adversary proceedings consistent with the above rulings.
As required on a motion to dismiss, the facts recited herein are taken from the complaints. Pension Benefit Guar. Corp. v. White Consol. Indus., Inc. ,
The debtors in these cases are: F-Squared Investment Management, LLC, F-Squared Investments, Inc., F-Squared Retirement Solutions, LLC, F-Squared Alternative Investments, LLC, F-Squared Solutions, LLC, F-Squared Institutional Advisors, LLC, F-Squared Capital, LLC, AlphaSector LLS GP 1, LLC, and Active Index Solutions, LLC.
Compls. to Avoid & Recover Transfers Ex. B (F-Squared Investments Employee Handbook,), at 10, No. 17-50738, Dkt. No 1; No. 17-50807, Dkt. No. 1; No. 17-50815, Dkt. No. 1; No. 17-50825, Dkt. No. 1. I may consider the Employee Handbook as it was referred to in and attached to the operative complaint and relied upon. Schmidt v. Skolas ,
Opening Br. in Supp. of Mot. of Brian Flanagan, Matthew Landon & Scott Kearny Pursuant to Fed. Rule of Civil Procedure 12(b)(6) to Dismiss First Am. Compls. for Failure to State a Claim Exs. A-D, Nov. 2, 2017, No. 17-50738, Dkt. No 16; No. 17-50807, Dkt. No. 16; No. 17-50825, Dkt. No. 16. I may consider Defendants' employment agreements as they were referred to in the Complaints and relied upon. In re Burlington Coat Factory Sec. Litig. ,
THE COURT: The employment agreement was incorporated. You referred to it. You relied on it in your pleading, don't you?
MS. DWOSKIN: I believe we rely on the employee handbook, Your Honor.
THE COURT: Let's look at the complaint. I want to make sure I understand.
* * *
MS. DWOSKIN:... Oh, you know what, you're right, neither the employee handbook nor the defendants [sic] employment agreement lists any criteria or targets. Fair enough.
So, let's talk about the employment agreement and let's assume that the agreements that were attached to Mr. Keenan's briefs are, in fact, the employee agreements.
Hr'g Tr. 158:13-15, Mar. 12, 2019.
Ch. 11 Voluntary Pet., July, 8, 2015, No. 15-11469, Dkt. No. 1.
Order Confirming Joint Plan of Liquidation Under Ch. 11 of the Bankruptcy Code Proposed by Debtors and Official Comm. of Unsecured Creditors, Jan. 14, 2016, No. 15-11469, Dkt. No. 486.
Compl. to Avoid and Recover Transfers and Disallow Def.'s Claim, July, 7, 2017, No. 17-50738, Dkt. No 1; Compls. to Avoid and Recover Transfers, July 7, 2017, No. 17-50807, Dkt. No. 1; No. 17-50815, Dkt. No. 1; No. 17-50825, Dkt. No. 1.
Mot. of Brian Flanagan, Matthew Landon, Patrick Coyle & Scott Kearny to Dismiss Compls. for Failure to State a Claim Pursuant to Fed. Rule of Civil Procedure 12(b)(6), September 28, 2017, No. 17-50738, Dkt. No 6; No. 17-50807, Dkt. No. 6; No. 17-50815, Dkt. No. 6; No. 17-50825, Dkt. No. 6.
Opening Br. in Supp. of Mot, of Brian Flanagan, Matthew Landon & Scott Kearny Pursuant to Fed. Rule of Civil Procedure 12(b)(6) to Dismiss First Am. Compls. for Failure to State a Claim, Nov. 2, 2017, No. 17-50738, Dkt. No 16; No. 17-50807, Dkt. No. 16; No. 17-50825, Dkt. No. 16.
First Am. Compl. to Avoid & Recover Transfers & Disallow Def.'s Claim, Oct. 19, 2017, No. 17-50738, Dkt. No 14; First Am. Compl. to Avoid & Recover Transfers, Oct. 19, 2017, No. 17-50807, Dkt. No. 14.
First Am. Compl. to Avoid & Recover Transfers, Oct. 19, 2017, No. 17-50825, Dkt. No. 14.
Mot. of Brian Flanagan, Matthew Landon & Scott Kearny Pursuant to Fed. Rule of Civil Procedure 12(b)(6) to Dismiss First Am. Compls. for Failure to State a Claim, Nov. 2, 2017, No. 17-50738, Dkt. No 16; No. 17-50807, Dkt. No. 16; No. 17-50825, Dkt. No. 16.
Opening Br. in Supp. of Mot. of Brian Flanagan, Matthew Landon & Scott Kearny Pursuant to Fed. Rule of Civil Procedure 12(b)(6) to Dismiss First Am. Compls. for Failure to State a Claim, Nov. 2, 2017, No. 17-50738, Dkt. No 17; No. 17-50807, Dkt. No. 17; No. 17-50825, Dkt. No. 17.
Trustee's Mem. in Opp'n to Defs.' Mots. to Dismiss, Nov. 16, 2017, No. 17-50738, Dkt. No 21; No. 17-50807, Dkt. No. 21; No. 17-50815, Dkt. No. 18; No. 17-50825, Dkt. No. 21.
Reply Br. in Supp. of Mots. of Brian Flanagan, Matthew Landon, Patrick Coyle & Scott Kearney to Dismiss Compls. and First Am. Compls for Failure to State a Claim Pursuant to Fed. Rule of Civil Procedure 12(b)(6), Nov. 22, 2017, No. 17-50738, Dkt. No 23; No. 17-50807, Dkt. No. 23; No. 17-50815, Dkt. No. 20; No. 17-50825, Dkt. No. 23.
Mot. of Pl. Craig Jalbert, Trustee of the F2 Liquidation Trust, for Leave to File Sur-Reply to Reply Br. in Supp. of Mots. of Brian Flanagan, Matthew Landon, Patrick Coyle & Scott Kearney to Dismiss Compl. and First Am. Compls. for Failure to State a Claim Pursuant to Fed. Rule of Civil Procedure 12(b)(6), Nov. 28, 2017, No. 17-50738, Dkt. No 24; No. 17-50807, Dkt. No. 24; No. 17-50815, Dkt. No. 21; No. 17-50825, Dkt. No. 24.
See Hr'g. Tr., Mar. 12, 2019, No. 15-11469, Dkt. No. 1262.
Compls., at ¶4, No. 17-50738, Dkt. No 1; No. 17-50807, Dkt. No. 1; No. 17-50815, Dkt. No. 1; No. 17-50825, Dkt. No. 1; Mots. to Dismiss, at 2, No. 17-50738, Dkt. No 6; No. 17-50807, Dkt. No. 6; No. 17-50815, Dkt. No. 6; No. 17-50825, Dkt, No. 6; First Am. Compls., at 3, No. 17-50738, Dkt. No 14; No. 17-50807, Dkt. No. 14; No. 17-50825, Dkt. No. 14; Mots. to Dismiss the Am. Compls., at 3, No. 17-50738, Dkt. No 16; No. 17-50807, Dkt. No. 16; No. 17-50825, Dkt. No. 16.
However, Defendants do not concede that the bonuses were discretionary and point to, among other things, the terms of the Offer Letters. Opening Br. Ex. A-D.
Mem. in Opp'n., at 9.
Mem. in Opp'n., at 10.
In re Amcad Holdings, LLC ,
Fowler v. UPMC Shadyside,
See In re THQ, Inc., No. 12-13398,
Fowler ,
THQ Inc.,
Bell Atl. Corp. v. Twombly,
Phillips v. Cty. of Allegheny,
Burtch v. Huston (In re USDigital, Inc. ),
In re United Tax Grp., LLC, No. 14-10486 (LSS),
See, e.g., In re Churchill Mortg. Inv. Corp.,
Borough of Moosic v. Darwin Nat. Assur. Co.,
See Churchill Mortg.,
Opening Br. ¶¶ 19-20.
See Hr'g Tr. 164:17-165:17
(THE COURT: I am looking at the facts that you plead. I think you want me to draw the inference, and if I did this what trial would we be having? Okay. Here is the question I have; if we did this what trial would we have? What discovery would we do because you would continue to argue that it could not, these bonuses could not possibly be for value because ahead of time there has been no articulated standard. Isn't that your argument?
MS. DWOSKIN: It is; although, again, I would just make one additional gloss to that and that is it seems, based on defendants' presentation here, that they disagree with the fact that it was discretionary. They believed that there was some obligation to pay.
THE COURT: Let's put that aside because that is what they're saying.
MS. DWOSKIN: You're correct.
THE COURT: So, then what trial would I have. I would have no trial.
MS. DWOSKIN: Correct.
THE COURT: So, then what trial would I have? I would have no trial.
MS. DWOSKIN: Correct.
THE COURT: So, shouldn't I just decide this now as a matter of law?
MS, DWOSKIN: You could if you agree with us that the bonuses are discretionary.);
Hr'g Tr. 167:21-168:2
(THE COURT: That's why I asked what is your allegation. Your allegation is not -- you're not saying that if they -- if they came forward and said, and they have testimony that says here's how it was assessed at the time and when we awarded it. You would still argue that doesn't matter, right?
MS. DWOSKIN: I would, Your Honor[ ] ...);
Hr'g Tr. 180:21-181:6
(THE COURT: ...Go ahead and make your other points. I just want to make sure I understand this because I think it's coming clear to me what I thought as I started reviewing this which is that this is a per se argument and I'd have to buy the argument -- to deny the motions to dismiss I have to accept the argument that a discretionary bonus with no metrics can never be given for value.
MS. DWOSKIN: That's correct. I can't say anything else about that, Your Honor, that that's just correct.
THE COURT: Good. I want to be clear.).
The Trustee's theory developed from its briefing (i.e., a discretionary bonus can never be for value) to state that a discretionary bonus without a pre-enunciated, performance-based metric cannot be for value. See Hr'g Tr. 166:3-11.
(THE COURT: I understand your argument to be that there is no way at all, ever, that a discretionary bonus can be for value because it is discretionary.
MS. DWOSKIN: Unless it is tied to some value specifically in a plan.
THE COURT: Unless it is tied to a specific incentivizing metric.
MS. DWOSKIN: Correct, And that's what the cases say.)
See also Hr'g. Tr. 185:1-4 ("MS. DWOSKIN: Again, just to make sure that we're clear discretionary bonuses means no obligation to pay and not tied to any value.").
In the Motion to Dismiss, Defendants argue that, as evidenced by the Employee Handbook, Debtors had a bonus program in place and that their respective Offer Letters specified a target bonus for each of them. They conclude that this, together with a course of conduct, created an enforceable obligation to award and pay (or, perhaps to in good faith consider awarding and paying) the Bonus Payments. They may be correct, but this creates a factual issue. Given my ruling, I need not address this argument.
While defendants in other adversary proceedings commenced by the Trustee challenged the sufficiency of the allegations regarding insolvency, Defendants here did not. The sufficiency of the allegations regarding insolvency will be addressed in a separate opinion.
See In re R.M.L., Inc. ,
Because such intangibles are technically not within § 548(d)(2)(A)'s definition of "value," courts have struggled to develop a workable test for reasonably equivalent value. See generally In re Young,82 F.3d 1407 (8th Cir.1996) (determining whether debtors obtained "value" in exchange for charitable contributions to church); In re Chomakos,69 F.3d 769 (6th Cir.1995) (examining whether debtors obtained "value" in exchange for $ 7,710 in gambling losses), cert. denied ,517 U.S. 1168 ,116 S.Ct. 1568 ,134 L.Ed.2d 667 (1996) ; In re Morris Communications NC, Inc., 914 F.2d [458] at 458 [ (4th Cir. 1990) ] (attempting to determine "value" of shares in corporation whose only asset was a license application pending before the FCC that had a one in twenty-two chance of approval); In re Fairchild Aircraft Corp.,6 F.3d 1119 , 1125-26 (5th Cir.1993) (deciding whether money debtor spent in failed attempt to keep commuter airline afloat conferred "value" on the debtor).
Id. at 149.
Id. at 150 (emphasis added). See also In re Fruehauf Trailer Corp.,
See supra note 43.
See R.M.L,
The court concluded that the best solution is to make a determination based on the circumstances that existed at the time the investment was contemplated, whether there was any chance that the investment would generate a positive return.
See Hr'g. Tr. 166: 3-11.
R.M.L.,
See Hr'g. Tr. 154:17-155:1; 183:4-13.
See Hr'g. Tr. 169:1-10.
Reply Br. ¶9 (citing to Black's Law Dictionary 74 (2d ed. 2001)).
Hr'g. Tr. 209:21-211:13. We continued:
THE COURT: Okay. You're being consistent. I love that.
MS. DWOSKIN: Yeah, I mean I can't tell you something that, you know, we can't say.
THE COURT: No, I love that, because some people don't go there, and I think you're, that's the logical extension of your argument and you're owning it and I love that and you should be and I give you total credit for that. I just want to make sure I'm understanding it. And, you know, that's where you had to go with it.
Hr'g. Tr. 211:14-23.
Hr'g. Tr. 209:21-212:5. Trustee's counsel seems to be making a distinction between the Bonus Payments and a retention bonus. We will not know if retention played any part in Debtors' decision to award Defendants bonuses because the Trustee does not intend to put on evidence regarding Debtors' decision- making process. See supra note 38. But, given the allegations in the Complaint that "[c]ertain Bonus Payments were made less than a month after laying off 30% of its work force and less than a week after Debtors began their cost-cutting and restructuring efforts," it is not implausible that retention factored into Debtors' decision to make the Bonus Payments. Compls. ¶ 26. As argued by another Defendant, in nearly every bankruptcy case filed in this court, debtors file first day motions seeking permission to pay their employees unpaid prepetition wages and benefits and to continue those benefits postpetition in order to maintain workplace morale and to retain employees in the face of the bankruptcy filing. See Hr'g. Tr. 150:15-153:16. Indeed, debtors argue, and courts often agree when granting such motions, that employees are the "life blood" of a company. That, as the Trustee counters, bonus plans are not (unsurprisingly) included in such motions does not belie the fact that debtors argue the benefit of maintaining employee morale and retention.
Compare In re Nelco ,
operated the business, and when the bonus was paid management believed that Nelco had generated substantial profits for the company during 1995. Nelson was essential to Nelco's business operations: was the founder of the company, and it was through his efforts that Nelco operated as a successful computer leasing company until the discovery of the stealth fraud. In exchange for the bonus payment, Nelco received the continuing goodwill and loyalty of Nelson in his capacity as president of the debtor .
At argument, the Trustee argued that were I to conclude that a discretionary bonus could be for value, I would be the first-and only-court to do so. Hr'g. Tr. 166:23-167:1. When pressed, the Trustee came up with only two decisions which he says stand for the per se rule. Hr'g. Tr. 183:11-184:7.
In re Computer Personalities Sys., Inc., No. 01-1017,
Id. at *4.
Id. at *1.
Id. at *2.
Id. at *2, *5.
Id. at *5.
Given that the lack of reasonably equivalent value is an element of the cause of action and not a defense to it, some of the references in the decision to the defendant's failure to provide proof seem anomalous.
In re HDD Rotary Sales, LLC,
See R.M.L. ,
First Am. Compls., at ¶7.
Mots, to Dismiss First Am. Compls., at ¶¶22-28.
Mem. in Opp'n, at ¶¶37-38.
In re Foothills Texas, Inc.,
Mem. in Opp'n., at ¶¶ 37-39.
Id. at ¶ 40.
Foothills ,
First Am. Compls., at ¶7.
Relying again on Foothills , the Trustee suggests that Defendants must rebut the presumption that they are officers. I do not rule here on whether there is a presumption as all I must find is that there is a reasonable inference that Defendants are officers. Further, I will note that in order to use the longer look back period of § 547, the recipient of the transfer must be an officer. As such, it appears that being an "insider" is an element of the cause of action and the Trustee will have the burden of proof on this issue. For the same reason, however, I also need not decide that issue now.
Opening Br., at ¶10 n. 7.
Mem. in Opp'n., at ¶23 n. 5.
Compl. Ex. B.
Opening Br., at ¶10 n. 6.
In other adversary proceedings commenced by the Trustee he also seeks to avoid tax distributions. Certain defendants in those adversary proceedings moved to dismiss their respective complaints arguing that the allegations in the complaints were deficient. I will address those adversary proceedings in another decision.