Chapter 7

MEMORANDUM OPINION1

Sontchi, J.

INTRODUCTION

Charles A. Stanziale, Jr., Chapter 7 Trustee (the "Trustee") for Conex International, LLC ("Conex") filed a complaint2 alleging breaches of fiduciary duties, among other things, against Ronald W. Schuster, E.A. Roskovensky, Damien W. Kovary, Lawrence G. Wolski, Douglas A. Johnson, Dan M. Schramm, Emily Heisley Stoeckel, Stanley H. Meadows, Gary A. Raduenz, David Van Vleet, and Michael Moorhouse (collectively the "Individual Defendants"). In Count V of the Complaint, the Trustee alleges that the Individual Defendants were directors and officers of Conex as well as of Heico, or Heico divisions that directly or indirectly controlled the Debtor.3 In that capacity, they allegedly caused Conex, while insolvent, to stop paying certain creditors and to pay fraudulent transfer and preference payments to Heico.4

In response, the Individual Defendants filed motions to dismiss this count of the Complaint for failure to plead adequate facts in support of the fiduciary duty claims (collectively, the "Motions to Dismiss").5 It is these Motions to Dismiss that are before the Court.

For the reasons set forth below, the Court grants without prejudice the Motion to Dismiss Count V.6 The Trustee has not provided adequate facts in support of his claims; however, the Court grants the Trustee leave to amend the Complaint within thirty (30) days of the issuance of this opinion to adequately plead facts to support his breach of fiduciary duty claims against the Individual Defendants arising from the payments made from Conex to Heico.

JURISDICTION

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(1) and (b)(2)(O).

STATEMENT OF FACTS

A. Procedural History

On February 20, 2011 (the "Petition Date"), certain lenders of Conex Holdings, LLC, Conex, and Advantage Blasting & Coating, Inc. (collectively, the "Debtors") filed involuntary petitions for relief under Chapter 11 of the Bankruptcy Code. On February 24, 2011, the Court entered an order for relief under Chapter 7 of the Bankruptcy Code.7 Shortly thereafter, Charles A. Stanziale, Jr. was appointed as Chapter 7 trustee. On April 22, 2013, the Trustee initiated this adversary proceeding against Heico and the Individual Defendants seeking to avoid prepetition. transfers pursuant to §§ 547, 548 and 550 of the Bankruptcy Code and to delay or to disallow any claims held by Heico pursuant to § 502(d) of the Bankruptcy Code.8 Additionally, in Count V of the Complaint, the Trustee seeks entry of a judgment against the Individual Defendants for their breach of fiduciary duties pursuant to, among other things, the common law and § 3.307 of the Texas Business and Commerce Code. Motions to dismiss Count V were filed by (1) Harrington and Williams, and (2) Schuster, Roskovensky, Kovary, Wolski, Johnson, Schramm, Meadows, Raduenz, Van Vleet and Moorhouse.9 The Trustee filed an objection to the Motion to Dismiss.10 The Individual Defendants filed a reply brief in support of their Motion to Dismiss.11 Briefing is complete and the matter is ripe for decision.

B. Parties

Conex was a general mechanical contractor. It provided industrial services to refining, petrochemical, and other processing industry customers. Conex, an LLC, continued the operations of Conex International Corporation ("CIC") following CIC's conversion to a Texas limited liability company.12 The Trustee was duly appointed as the Trustee of Conex.

Conex Holdings, LLC ("Holdings") is a Delaware limited liability company with its principal place of business in Chicago, Illinois. Holdings owns 100% of all interests in Conex. Heico Holding Inc. ("Heico") is an Illinois corporation with its principal place of business in Illinois. Heico owns 100% of all interests in Holdings.

The Individual Defendants subject to the fiduciary duty claim in Count V of the Complaint can be divided into three groups.13

First, those who allegedly have been officers or directors of Heico and Conex: Roskovensky (President and CEO of Heico and officer of Conex), Wolski (CFO of Heico and officer of Conex), Johnson (VP and Secretary of Heico and officer of Conex), Schramm (Assistant Secretary of Heico and officer of Conex) and Meadows (Director of Heico and officer of Conex);

Second, those who allegedly have been officers of Conex as well as officers, directors or in another position at Heico-affiliated entities, but not at Heico itself: Kovary (Managing Director of Heico Acquisition, LLC and officer of Conex), Schuster (an individual with last known business address of The Heico Companies and an officer of Conex), Raduenz (an individual with last known business address of Antioch Tire Inc., d/b/a Tredroc Tire Services and General Counsel for The Heico Companies, and an officer of Conex), Van Vleet (an individual with last known business address of Robertson-Ceco Corporation and Assistant General Counsel of The Heico Companies and an officer of Conex); Moorhouse (VP and CFO of Heico Construction Group, LLC and an officer of Conex), and Stoeckel (President and Chief Executive Officer of Heico Construction Group, LLC and officer of Conex);

Third, those who allegedly have only been officers of Conex: Harrington and Williams.14

In Count V of the Complaint, the Trustee elaborates as to the Individual Defendants' positions with the Debtor and Heico. He alleges that "Conex's Directors and Officers were all officers, members, or persons in control of [Conex], directly or indirectly."15 He then asserts, "the Directors and Officers were all officers, members or persons in control of Heico, or Heico divisions that directly or indirectly controlled the [Conex]."16

C. Factual Background

On August 7, 2008, the day Conex was converted from a Texas corporation to a Texas LLC, Holdings bought the interests of Conex in a $246 million leveraged buy-out.17 The next day (the "Closing Date"), Heico, through Holdings, acquired the membership interests in Conex as well as the stock of Advantage Blasting & Coating, Inc. ("ABC") in exchange for $234,130,000 in cash and certain contingent and deferred payments.18 Heico's structure of the sales transaction allegedly left Conex with significant debt and insufficient capital. According to the Complaint, "the purchase price was funded through a capital contribution to Conex from Heico in the amount of $77.8 million and bank loans to Conex totaling $163,975,000."19 The loans were secured by all of Conex's and ABC's assets. Conex allegedly received only $1,449,884 of the $234 million cash payment. The remainder of the money was used to cash-out former shareholders and to pay professionals, as well as bank and transaction fees.20

On the Closing Date, Conex allegedly did not have sufficient working capital to be able to meet its future cash payments. Almost immediately after the Closing Date, with Heico controlling Conex, Conex became insolvent.21 At the end of 2008, Conex had a negative working capital. Pursuant to the Complaint, "its current liabilities exceeded its current assets by approximately $18 million."22 At the end of 2009, Conex's current liabilities exceeded its current assets by $156 million and by the end of 2010 by $173 million.

Conex's sales revenue, gross profit and net income deteriorated significantly shortly after the Closing Date. For the first eight months of 2008, Conex's contract revenue was approximately $197.6 million, its gross profit approximately $37.3 million, and its net income $35.2 million.23 These numbers dropped to approximately $76.6 million, $14.3 million, and $4.85 million respectively during the remainder of 2008. The operating results further deteriorated in 2009 and only slightly improved for 2010. At the end of December 2009, "Conex's contract revenue was approximately $111.4 million, a decrease of approximately $162.8 million from 2008's full year contract revenue and a decrease of approximately $93 million from 2007's full year contract revenue."24

In 2009, less than 11 months after the Closing Date, Conex defaulted under its credit agreement and stopped paying its bank debt. At the same time, the transfers to Heico commenced, which allegedly continued until the filing of the involuntary bankruptcy petition.25 Heico allegedly "authorized and directed" Conex to make payments to Heico in the amount of $10,990,914 during the two years prior to the Petition Date. Further, Heico allegedly received $7,144,972 in preference payments from Conex in the one year period prior to the Petition Date.26 These transfers were allegedly made while the Debtors did not service their bank debt. In addition to these transfers, Heico allegedly caused the Debtor "to transfer to Heico Conex's right to collect a $614,377.65 receivable from Ceco Construction, LLC (a company that is owned and controlled by Heico)" and "to reduce its pre-paid insurance account by $402,276.50 and transfer its interest to Heico."27 These transfers occurred at a time at which Conex was either insolvent, rendered insolvent, or did not have enough working capital.28

The Trustee, in Count V of the Complaint, alleges that the Defendants "caused Conex, while insolvent, to cease paying certain creditors, and instead caused Conex to pay the fraudulent transfers and preference payments to Heico."29 The Trustee alleges that they therefore breached their fiduciary duties to the Debtor pursuant to the common law and section 3.307 of the Texas Business and Commerce Code.30 The Trustee further alleges that the Defendants "breached their fiduciary duty of good faith and fair dealing to Conex and its creditors by preferring and paying Heico at the expense of Conex's other creditors," and that their actions caused the deepening insolvency of Conex.31

LEGAL DISCUSSION

A. Motion to Dismiss Standard

A motion under Rule 12(b)(6)32 serves to test the sufficiency of the factual allegations in the plaintiff's complaint.33 "Standards of pleading have been in the forefront of jurisprudence in recent years."34 With the Supreme Court's recent decisions in Bell Atlantic Corp. v. Twombly35 and Ashcroft v. Iqbal,36 "pleading standards have seemingly shifted from simple notice pleading to a more heightened form of pleading, requiring a plaintiff to plead more than the possibility of relief to survive a motion to dismiss."37

In Iqbal, the Supreme Court makes clear that the Twombly "facial plausibility" pleading requirement applies to all civil suits in the federal courts.38 "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements" are insufficient to survive a motion to dismiss.39 Rather, "all civil complaints must now set out sufficient factual matter to show that the claim is facially plausible."40 A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."41 Determining, whether a complaint is "facially plausible" is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.42 But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but not shown-that the pleader is entitled to relief."43

After Iqbal, the Third Circuit has instructed this Court to "conduct a two-part analysis. First the factual and legal elements of a claim should be separated. The [court] must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions."44 The court "must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a plausible claim for relief."45 The Third Circuit has further instructed that "[s]ome claims will demand relatively more factual detail to satisfy this standard, while others require less."46

B. Choice of Law as to Breach of Fiduciary Duty Claims

Under the "internal affairs" doctrine, because Conex is a Texas LLC, Texas law applies to the breach of fiduciary duty claims.47 This Court, applying Texas law, is required to determine "how the highest court in the state would decide the issue at hand."48 If the highest court of the state has not previously addressed the precise issue, then this Court "must predict how [that] court would resolve the issue."49 In deciding the issue, this Court may "look to Delaware for guidance on matters of corporate law" absent any conflicts with Texas law.50

C. Count V — Breach of Fiduciary Duty Claims

As set out more fully below, the Trustee has failed to sufficiently plead a breach of fiduciary duty claim against the Individual Defendants.

1. Breach of Texas Common Law Fiduciary Duties

Under Texas law, corporate directors owe three fiduciary duties: the duties of obedience, loyalty and due care.51 In order to state a claim for breach of fiduciary duty, a plaintiff must allege "the existence of a fiduciary duty, breach of the duty, causation, and damages."52

The Individual Defendants argue that the Complaint is deficient of specific allegations to support the Trustee's conclusions that the Individual Defendants breached any fiduciary duty. In particular, the Individual Defendants contend that the Trustee has failed to state what each individual did in connection with any particular transfer and that he has failed to sufficiently put them on notice of any alleged wrongdoing.53 They assert that the Trustee inappropriately grouped the Individual Defendants together as "Officers and Directors" without identifying what each of the them allegedly did wrong.54 They further argue that Conex is a Limited Liability Company ("LLC") without officers and directors.55 They assert that the Trustee failed to provide facts that any of the defendants were even authorized to make binding decisions under Conex's operating agreement.56

The Trustee asserts that the Complaint meets the Twombly and Iqbal pleading standard and that it sufficiently puts the Individual Defendants on notice of the alleged wrongdoing.57 To support his position that the Complaint is not "thread bare," but instead contains many factual details, the Trustee, in his oppositions to the Motion to Dismiss, recites certain paragraphs of the Complaint. For example, the Trustee asserts that:

The Court concludes that the Trustee has failed to assert a facially plausible claim and has not meet the pleading requirements under Twombly and Iqbal. Specifically, the Trustee has failed to provide facts with any specificity to support how any of the Individual Defendants breached any fiduciary duty recognized under Texas law. Trustee's allegations constitute mere conclusory statements. Other courts reached the same conclusions.

For example, in Kaye v. Lone Star Fund v. (U.S.), L.P., the court dismissed claims for breach of fiduciary duty against certain individual defendants who allegedly "were [only] involved with" or "participated in certain transactions."58 The court held that those statements "even if accepted as true, do not more than raise the possibility of liability-they do not nudge a plaintiff's claim into the territory of plausibility."59 The Court reasoned that "such conclusory allegations are insufficient to withstand a motion to dismiss."60 The court dismissed the claims without prejudice and permitted the plaintiff to amend his pleading as to those claims.

Similarly, in In re Troll Communications, LLC, the court dismissed the breach of fiduciary duty claim against certain officers because the bankruptcy trustee failed to plead sufficient facts that would identify which officers were involved in the transaction at issue to support a cause of action for a breach of a fiduciary duty.61 The court stated, "the Amended Complaint's allegations regarding the officers are vague and lack sufficient detail about which officers, if any, knowingly participated in the payments."62

In addition, in Bank of America, N.A. v. Knight, the Seventh Circuit held that "liability is personal.... Each defendant is entitled to know what he or she did that is asserted to be wrongful. A complaint based on a theory of collective responsibility must be dismissed."63 The court thus affirmed the dismissal of a complaint in which the plaintiff alleged that "officers and the KE Board caused and permitted" certain wrongdoing while being aware of the company's liquidity crisis.64

In sum, the Trustee has failed to satisfy the Twombly and Iqbal pleading standard. Similar to the Plaintiff in Knight, the Trustee lumps all of the Individual Defendants together as "Officers and Directors" (and incorrectly, at least as to the reference to "directors") without supplying specific facts as to each defendant's wrongdoing. As in Knight, and partly as in Troll Communications and in Kaye, the Trustee has not provided any specific facts as to which transactions a particular defendant authorized, nor did the Trustee allege what authority any particular defendant had to approve such transactions. Similar to Troll Communications, the allegations are "vague and lack sufficient detail about which officers, if any, knowingly participated." This is not a close question. Much more specificity is needed here to satisfy the legal standard.

2. Breach of Fiduciary Duty Pursuant to Section 3.307 of Texas Business and Commerce Code

The Trustee alleges in Count V of the Complaint that the Individual Defendants breached their fiduciary duty under Section 3.307 of the Texas Business and Commerce Code. This allegation is wholly unsupported. Section 3.307 of the Texas Business and Commerce Code does not appear to provide for such a claim and is inapposite to the alleged facts. Thus, this claim in Count V will be dismissed with prejudice as a matter of law.65

3. Deepening Insolvency

The Trustee further asserts that the Individual Defendants actions "caused the deepening insolvency of the Debtors."66 Deepening insolvency, however, is not a cause of action under Delaware or Texas law.67 This claim in Count V will be dismissed with prejudice.

In sum, the Trustee's allegations are "thread-bare." However, as evidenced by some more detailed allegations the Trustee was able to provide in the briefing the Trustee appears to possess more detailed knowledge about the Individual Defendants, their alleged conduct and the alleged transfers. Thus, this Court will allow the Trustee to amend Count V of the Complaint within thirty (30) days of the issuance of an order to make more specific allegations in support of his claim for breach of fiduciary duty under Texas common law. Fed.R.Civ.P. 15(a) ("[A] party may amend the party's pleading ... by leave of court ... and leave shall be freely given when justice so requires.") Specifically, the Trustee must specify the relationship of each individual to Conex and how and which "officer or director" or any other individual breached a fiduciary duty recognized under Texas law with respect to the payments to Heico.

CONCLUSION

For the reasons set forth above, the Motion to Dismiss Count V of the Complaint will be granted, in part, with prejudice and, in part, without prejudice. The Trustee will be given an opportunity to amend the Complaint within 30 days of the issuance of this opinion to include specific allegations to support his breach of fiduciary duty claims under Texas common law against the Individual Defendants. The claims based upon section 3.307 of the Texas Business Commerce Code and for deepening insolvency will be dismissed with prejudiced.

An order will be issued.