OPINION1

LAURIE SELBER SILVERSTEIN, UNITED STATES BANKRUPTCY JUDGE.

Before the Court is Defendants' Motion to Dismiss Complaint on Jurisdictional Grounds2 through which Defendants seek to dismiss or stay this adversary proceeding on multiple grounds, some at least nominally jurisdictional, most not. Plaintiffs and Defendants have completed their briefing.3 I deferred ruling on the Motion to Dismiss pending a ruling by the Third Circuit on an appeal from an order in the main case.4 The Third Circuit has since ruled5 and this matter is now ripe for review.

Background6

Prior to its bankruptcy filing, Pursuit Capital Management, LLC ("Debtor") was the general partner of two investment partnerships—Defendant Pursuit Capital Management Fund I, L.P. ("Capital Fund") and Defendant Pursuit Opportunity Fund I, L.P. ("Opportunity Fund," and collectively with the Capital Fund, the "Feeder Funds") (D.I. 1 ¶ 1). Defendants Anthony Schepis ("Schepis") and Frank Canelas ("Canelas") were Debtor's sole owners, managers and controlling principals. They were also the sole owners, managers and controlling principals of all other entity defendants—(i) Pursuit Partners, LLC, a broker-dealer ("Pursuit-Broker Dealer"), (ii) Pursuit Investment Management, LLC, an investment management company ("Pursuit Investment Manager"), (iii) Pursuit Capital Partners (Cayman) Ltd., an offshore fund, (iv) Pursuit Capital Master (Cayman) Ltd., an offshore master fund; (v) Pursuit Opportunity Fund I, Ltd., an offshore fund; and (vi) Pursuit Opportunity Fund I Master Ltd., a master fund organized under the laws of the Cayman Islands. Plaintiffs assert that these Defendants, collectively, are a "unitary enterprise" known as the "Pursuit Hedge Fund." Defendant Northeast Capital Management, LLC was formed by Schepis and Canelas to be a successor general partner to Debtor in the Feeder Funds. Defendant Ruth Canelas is the wife of Frank Canelas.7

Plaintiffs, in then individual capacities, as well as other investors, including Alpha Beta Capital Partners, L.P. ("Alpha Beta"), were investors in the Capital Fund. (D.I. 1 ¶ 39). By 2009, the Capital Fund ceased making new investments and started to wind down. (D.I. 1 ¶ 39). Litigation ensued as the Debtor and/or other Defendants were sued in multiple jurisdictions. As detailed in the Complaint, in May 2012, the Schneiders commenced arbitration proceedings against Debtor alleging "mismanagement of [then] investment, the misuse of the Capital Fund's remaining assets, and the failure to make distributions ... promised." (D.I. 1 ¶ 40). After two phases of arbitration, and in two separate and lengthy opinions, the arbitrator awarded the Schneiders approximately $5 million. The Supreme Court of New York confirmed the arbitration awards and issued judgments against Debtor in the amounts awarded by the arbitrator. (D.I. 1 ¶ 40). Those judgments have not been paid. Plaintiffs also allege that prepetition, and during the course of the litigation, Debtor systematically transferred assets for no consideration to various of the other Defendants to make Debtor judgment proof. (D.I. 1 ¶¶ 38, 73).

Separately, Alpha Beta sued Pursuit Investment Manager, Schepis and Canelas in New York state court asserting tortious conduct in connection with their investments in the Feeder Funds; they also filed a separate arbitration proceeding against the Capital Fund and the Opportunity Fund for similar tortious conduct.8 The 2010 litigation was settled through a confidential settlement agreement, which, itself, spawned further litigation.

In the meantime, certain Defendants were prosecuting prepetition litigation. In 2008, Defendants Pursuit Broker-Dealer and Pursuit Investment Manager sued UBS Securities LLC in Connecticut state court for losses suffered by the Feeder Funds as a result of collateralized debt obligations sold to the funds by UBS. (D.I. 1 ¶ 52). Damages in excess of $104.5 million plus punitive damages were asserted against UBS. (D.I. 1 ¶ 52). The UBS matter was settled for an unknown amount, and Plaintiffs allege that certain of the settlement proceeds should have gone to Debtor. (D.I. 1 ¶ 52). Plaintiffs assert that under both the Capital Fund limited partnership agreement and the Opportunity Fund limited partnership agreement, Debtor is due an incentive fee of 20% of profits earned by investors in those funds; this fee is termed "carried interest." (D.I. 1 ¶¶ 55, 56). By extension, therefore, Debtor is entitled to 20% of any profits to the Feeder Funds from the UBS proceeds. (D.I. 1 ¶ 57). Plaintiffs allege that Schepis and Canelas secretly formed Defendant Northeast Capital Management one month before the bankruptcy filing to replace Debtor as the general partner of each Feeder Fund in order to seize Debtor's interest in the proceeds of the UBS Litigation. (D.I. 1 ¶¶ 62-67).

Further, in 2013, Debtor and other Defendants sued Alpha Beta in New York state court.9 This matter remained pending when the bankruptcy petition was filed and was listed in Debtor's Schedules.

The Bankruptcy Case

On March 21, 2014, Schepis and Canelas put Debtor into a voluntary chapter 7 proceeding. Jeoffrey L. Burtch was appointed the chapter 7 trustee ("Trustee"). About one year later, on March 2, 2015, Trustee filed his Motion for an Order Approving Agreement to Settle, Transfer and Assign Certain Claims, Rights and Interests ("Sale Motion")10 seeking approval of an agreement11 with Alpha Beta and the Claridge Group (i.e. Claridge Associates, LLC, Jamiscott LLC, Leslie Schneider, and Lillian and Leonard Schneider).12 Through the Sale Motion and agreement, Trustee sought to administer all assets and causes of action as detailed therein.

In the Sale Motion and agreement, Trustee stated that the only assets listed on Debtor's schedules were claims, specifically: (i) certain prepetition litigation Debtor brought against Alpha Beta and others in the State of New York, defined as the "New York Action" and (ii) potential indemnification claims against the Capital Fund, defined as the "Indemnification Claims." Trustee also recognized that a footnote in Debtor's Statement of Financial Affairs reflected a disbursement of $645,571.22 to Debtor's members in the year before the bankruptcy filing, defined as the "Potential Avoidance Claim."13 And, Trustee stated that the Claridge Group identified two additional potential assets: (i) certain additional rights, claims and causes of action against Debtor affiliates, including fraudulent conveyance actions, defined, collectively with the Potential Avoidance Claim as the "Debtor Claims" and (ii) Debtor's interest in the proceeds of the UBS litigation, defined as the "UBS Claim." These claims, collectively, comprise all of Debtor's assets and/or all sources of recovery for the bankruptcy estate. (Main Case D.I. 66 ¶¶ 7-9, 11).

As the estate had no funds to pursue the claims (Main Case D.I. 66 ¶ 12), Trustee decided to administer them by entering into the agreement "to settle, transfer and assign" the claims on the following terms. The Claridge Group and Alpha Beta were to pay Trustee $125,000 within twenty days after court approval of the agreement. In exchange, Trustee was to sell, transfer and convey to the Claridge Group and Alpha Beta, free and clear of all liens, claims and interests, all the right, title and interest of Debtor and the Estate to the Debtor Claims, the Indemnification Claims, the UBS Claim and all Debtor's books and records. Further, upon receipt of the $125,000 payment, the New York Action was to he settled and dismissed. The assignments, sales, transfers and conveyances were on an "as is where is" basis, with no representations or warranties of any kind. And, the agreement was to be submitted to the bankruptcy court for approval through a sale motion under § 363(b) and (f) of the Bankruptcy Code ("Sale Motion").

The Sale Motion was originally scheduled to be heard in March 2015. Before the objection deadline, Schepis, Canelas, Pursuit Investment Manager, the Opportunity Fund and the Capital Fund ("Objecting Defendants") filed a preliminary objection and a motion to continue the hearing; they also noticed several depositions.14 The crux of the objection was that Trustee was not acting in good faith as Objecting Defendants had made higher offers to acquire the claims and the Sale Motion did not permit other offers.15 After further objections were filed, I established auction procedures, a concept not encompassed in the Sale Motion as filed. At the auction the only bidders were the Claridge Group and Alpha Beta, and Objecting Defendants. Consistent with the agreement, the Claridge Group and Alpha Beta sought to purchase the claims in order to pursue the identified litigation. Objecting Defendants, who were the targets of the litigation, primarily sought to purchase the claims defensively (i.e. so that the claims would not be pursued) and to close the bankruptcy case expeditiously.16

On August 10, 2015, I held an evidentiary hearing on the Sale Motion.17 At the hearing, Trustee (through a proffer) testified to the auction as well as the improved terms of the agreement ("Agreement"). The Agreement was also provided to the court. The Agreement provided for:

After taking the matter under advisement, I subsequently issued a bench ruling granting the Sale Motion and approving the Agreement. My bench ruling included the following reservation:

I then instructed the parties to confer and submit a form of order embodying that ruling.19

Trustee's counsel filed a Certification of Counsel in which he stated that the parties could not agree on a form of order.20 Attached to the Certification of Counsel were three forms of order — one proposed by each of Trustee, the Claridge Group and Alpha Beta and Objecting Defendants.21 On August 27, 2015, I signed, and on August 28, 2015, the Clerk of the Court entered, the order approving the sale (the "Sale Order"),22 which was the form of order submitted by Objecting Defendants.23 As to defenses, the Sale Order provides:

In signing the Sale Order, I rejected language in the proposed order submitted by the Claridge Group and Alpha Beta that would have in any way qualified or limited the preservation of defenses.25

The Appeal of the Sale Order

On September 8, 2015, Objecting Defendants appealed the Sale Order to the United States District Court for the District of Delaware. Objecting Defendants did not seek or obtain a stay of the Sale Order. On September 26, 2016, the District Court affirmed the finding of good faith in connection with the sale and dismissed the appeal as statutorily moot under 11 U.S.C. § 363(m).26 As for issues about the transferability of the Avoidance Actions or Plaintiff's ability to prosecute them, the District Court stated:

Objecting Defendants then appealed the District Court's ruling to the United States Court of Appeals for the Third Circuit. The Third Circuit affirmed, likewise concluding that the appeal of the Sale Order was statutorily moot under § 363(m).28 While declining to rule on the merits of the sale/transfer issues, it also recognized that Objecting Defendants might have the opportunity to contest the validity of the transfer and/or the ability of Plaintiffs to pursue the Avoidance Actions in this adversary proceeding.29

The Adversary Proceeding

Six months after I approved the sale, on February 25, 2016, Plaintiffs filed the Complaint commencing this adversary proceeding based on the claims they obtained from Trustee.30 The Complaint sounds in eleven counts, including fraudulent conveyance claims asserted under both state law and the Bankruptcy Code, breaches of fiduciary duty and contract, conversion, unjust enrichment and turnover.31 At its core, Plaintiffs seek: (i) return of the transfer of $645,571 from Debtor to Schepis, Canelas, and Ruth Canelas (i.e. the Insider Avoidance Action) as well as any transfer to Northeast Capital Management of Debtor's interest in the proceeds of the UBS litigation (collectively, and together with any and all other improper transfers, the "Avoidance Actions"), and (ii) damages for the self-dealing transactions including in connection with the improper transfer of funds, improper removal of Debtor as general partner of the Feeder Funds, and misuse of the Feeder Funds.

Defendants responded by moving to dismiss. In the Opening Brief, Defendants make eleven arguments why some or all the counts of the Complaint should be dismissed. After briefing and supplemental briefing,32 including on whether Defendants waived arguments not fully formed in their Opening Brief, and two arguments, the matter is now ready for decision.

Jurisdiction

Bankruptcy jurisdiction exists over this adversary proceeding pursuant to 28 U.S.C. § 1334 and § 157(a) and (b) as the Complaint contains counts that are either core or non-core. The court can enter an order on this Motion to Dismiss as it relates to each Count of the Complaint consistent with the Constitution as any order is not a final order.

Analysis

I. The Complaint Will Not Be Dismissed on Any Jurisdictional Ground

A court addresses jurisdictional arguments first because it if does not have subject matter jurisdiction or personal jurisdiction over the parties, it should not reach the merits of the disputes.33 Here, Defendants label many arguments jurisdictional, As the only clear jurisdictional argument is the one challenging personal jurisdiction over Defendants organized under Cayman Islands law, I will address that matter first.

A. Personal Jurisdiction Exists over Defendants Organized Under Cayman Islands Law

Defendants assert that this Court lacks personal jurisdiction over four defendants: Pursuit Capital Partners (Cayman) Ltd., Pursuit Capital Master (Cayman) Ltd., Pursuit Opportunity Fund I, Ltd., and Pursuit Opportunity Fund I Master Ltd. (collectively "Cayman Defendants") each of which is organized under the laws of the Cayman Islands. In their Opening Brief, Defendants argue that Plaintiffs have not alleged a sufficient basis for either general or specific jurisdiction because: (i) each Cayman Defendant is domiciled outside of the United States; and (ii) Plaintiffs have not alleged any meaningful contact with the United States.34 In their Answering Brief, Plaintiffs respond that personal jurisdiction is established through: (i) the "flow of funds to and from domestic Defendants and the Cayman Defendants" which activity was directed at the United States; (ii) availing themselves of courts within the United States as plaintiffs in multiple actions and (iii) being "part and parcel of the `unitary enterprise' comprising the Pursuit Hedge Fund."35

Once a defendant challenges personal jurisdiction under Rule 12(b)(2), the plaintiff bears the burden of establishing personal jurisdiction by a preponderance of the evidence.36 In reviewing a complaint under Rule 12(b)(2), as with Rule 12(b)(6), plaintiffs are entitled to have their allegations taken as true and all factual disputes resolved in their favor.37 Unlike Rule 12(b)(6), however, review under Rule 12(b)(2) is not limited to the face of the pleadings.38 If an opposing affidavit contradicts the complaint's allegations, a plaintiff must present similar evidence in support of personal jurisdiction.39 Without an opposing affidavit, courts review the complaint for the sufficiency of its allegations, and the plaintiff need only plead a prima facie case of personal jurisdiction.40 A plaintiff may establish a prima facie case by "establishing with reasonable particularity sufficient contacts between the defendant and the forum state to support jurisdiction."41 A pre-answer, pre-discovery or a pre-trial motion is not the appropriate place to hold a plaintiff to its ultimate burden.42

Here, Defendants' argument rests on the sufficiency of the allegations in the Complaint; they did not file any affidavits in support of their personal jurisdiction defense. My decision, therefore, examines the Complaint's allegations.

Personal jurisdiction over a defendant may be either general or specific.43 A court may exercise general jurisdiction when a plaintiff's claim arises out of a defendant's "continuous and systematic" contacts with the relevant forum.44 A court may exercise specific jurisdiction when a plaintiff's claim arises out of a defendant's forum-related activities.45

A court may assert general jurisdiction over a foreign corporation when the corporation's "affiliations with the [relevant forum] are so `continuous and systematic' as to render [it] essentially at home in the [relevant forum]."46 A corporation is generally "at home" in the "paradigm all-purpose forums" of its "place of incorporation and principal place of business."47 Corporations are usually only subject to general jurisdiction in the forum where they are incorporated or have their principal place of business.48 There is no dispute here — nor do Defendants argue — that the United States (not just the state of Delaware) is the relevant forum for purposes of personal jurisdiction in bankruptcy courts.49

As I noted at argument, the briefs of both parties were rather conclusory on personal jurisdiction, citing cases to establish the general standards, but not drilling down on the application of those standards to the Complaint. Upon questioning, each position came into better focus.50 At argument, Plaintiffs contended that the allegations in the Complaint that each Cayman Defendant has its principal place of business in the United States subjected each to the general jurisdiction of this Court.51 They also suggested that the Cayman Defendants should not be surprised to find themselves in a United States court because they had United States based investors, were managed by people who reside in the United States, have their principal place of business in the United States and were accepting and releasing funds back and forth to domestic entities all with their interrelated entities.52 Thus, Plaintiffs conclude that personal jurisdiction over the Cayman Defendants does not offend "traditional notions of fair play and substantial justice."53

At argument, Defendants countered that the Cayman Defendants did not have their principal places of business in the United States, but rather that each conducted its business in the Cayman Islands. They correctly point out that the Complaint actually alleges that the Cayman Defendants each have a "principal office" in Connecticut. And, they argue that simply having a contract with an investment manager "who makes investment management decisions under a contract in New York" does not make a Cayman entity subject to jurisdiction in New York (or, presumably, anywhere in the United States).54 Based on this argument, Defendants contend that the mere presence of an office in Connecticut would not meet the Supreme Court's jurisdictional test enunciated in Hertz Corp. v. Friend.55

In Hertz, the Supreme Court examined various competing circuit court decisions discussing the standard for corporate citizenship in the context of diversity jurisdiction.56 The Supreme Court then announced a definitive standard, and in doing so it noted that the purpose of this jurisdictional exercise is to determine "where a corporation is least likely to suffer out-of-state prejudice when it is sued in a local court."57 The Supreme Court ruled:

While it is not altogether clear that the "nerve center" standard enunciated in Hertz should be extended to the Rule 12(b)(2) context, because Defendants argued this standard and Plaintiffs did not take issue with that suggestion, I will apply it here.

The allegations in the Complaint that support Plaintiffs' jurisdictional arguments regarding the Cayman Defendants include the following:

These allegations, taken as true and accorded all reasonable inferences, lead me to conclude that Plaintiffs have made the prima facie showing necessary to withstand the Cayman Defendants' facial attack on the Complaint. The allegations that each Cayman Defendant maintains its principal office in Connecticut (and, at the same address as other non-individual Defendants), that Schepis and Canelas, Connecticut residents, are two of the three members of the board of directors, and that Schepis and Canelas completely control the Cayman Defendants, support a conclusion that Connecticut is where all decisions are made.68 Further, the Cayman Defendants are not multi-national conglomerates with multiple offices across the globe, or even the country. There are only two locales that any party has asserted could be the nerve center of the Cayman Defendants — Connecticut or the Cayman Islands. Plaintiffs have alleged enough facts in the Complaint to suggest that Connecticut is where all decisions are made.

For this reason, the Motion to Dismiss the Cayman Defendants based on personal jurisdiction is denied.

B. Plaintiffs Have Standing to Assert the Causes of Action in the Complaint

(i) The Three-Day Notice Period in the Sale Order Does Not Serve as a Basis to Dismiss the Complaint at This Stage of the Proceedings

The Sale Order imposed a notice obligation on Plaintiffs prior to commencing certain causes of action. It provides:

Defendants argue that Counts IV-XI should be dismissed for lack of standing because Plaintiffs did not plead in the Complaint that they complied with the Sale Order's three-day notice requirement.70 Defendants also assert that Counts I-III should be dismissed as a sanction for this failure. In response, Plaintiffs contend that this "assertion is both factually inaccurate and legally irrelevant."71 They also filed the declaration of Plaintiffs' counsel attesting that Plaintiffs provided more than three business days' notice to counsel for Trustee before commencing the adversary proceeding.72 Defendants moved to strike the declaration.73

Initially, it is not clear that Defendants are in a position to enforce the obligation contained in the Sale Order as, by its terms, it is an obligation running to Trustee.74 Further, even if Defendants can enforce this obligation, it is not clear that the failure to meet this obligation creates a lack of standing defense or an obligation to affirmatively plead compliance with the three-day notice requirement.75 The Sale Order does not undercut constitutional standing as the requirement does not implicate whether Plaintiffs have suffered an injury in fact, traceable to Defendants, which can be redressed by judicial decision.76 Nor does the three-day notice requirement implicate statutory standing, which is discussed below.

But, assuming for the sake of argument that the three-day notice requirement implicates some type of standing, I will treat this aspect of the Motion to Dismiss as one for summary judgment and permit Defendants to take discovery on the issue raised in the Reilly Declaration.77 The factual question at issue is a simple one and can be confirmed or refuted by an interrogatory to Trustee.78

For the reasons stated, I will deny the Motion to Dismiss on this ground as to Counts IV-XI. The request that Counts I-III be dismissed as a sanction is denied as Defendants have stated no basis on which any sanction is warranted much less the draconian sanction they request.

(ii) Plaintiffs Have Statutory Standing to Commence This Adversary Proceeding

Defendants move to dismiss Counts I-III on the basis that Trustee could not sell the fraudulent conveyance actions as they were not property of the estate, nor could Trustee sell his avoidance powers. Distilled to its essence, Defendants contend that in a chapter 7 case only the trustee may bring a fraudulent conveyance action. Both § 548(a)(1)79 and § 544(b)80 provide that "the trustee may" bring actions to avoid fraudulent transfers. Plaintiffs are not Trustee, Defendants argue, so Plaintiffs may not prosecute these claims. Defendants rely primarily on the Third Circuit's two Cybergenics decisions81 and specifically argue that Cybergenics I stands for the proposition that fraudulent transfer claims are not property of the estate and, as such, the claims "asserted in Counts I-III in the Complaint could not have been acquired from the Trustee and the Plaintiffs lack standing to prosecute them."82

Plaintiffs respond that neither the Bankruptcy Code nor Third Circuit precedent prohibits the sale of fraudulent transfer actions. They contend that the holding in Cybergenics I does not address the ability of a trustee to sell fraudulent conveyance claims. And, relying on Cybergenics II, Plaintiffs argue that a bankruptcy court has equitable power to permit the sale of fraudulent transfer claims and their prosecution by non-trustees. Plaintiffs also distinguish Defendants' cases, but, unfortunately, do not provide an affirmative analysis for the proposition that avoidance actions are property of the estate or provide a roadmap for how to use the court's equitable powers to permit non-trustees to bring the claims in the instant scenario.

Because the parties base much of their argument on Cybergenics I and II, I will analyze those cases in detail as they merit a close examination and suggest an appropriate outcome.83

The Third Circuit's Cybergenics Decisions

(a) Cybergenics I

In Cybergenics I, a creditors' committee in a chapter 11 case sought court approval to bring a derivative action on the estate's behalf to recover a fraudulent conveyance after the debtor refused to do so. Wouldbe defendants opposed the committee's motion arguing that the fraudulent conveyance claims had been sold as part of a § 363 sale earlier in the Cybergenics bankruptcy case. The bankruptcy court granted the committee's request. It did not, however, decide at that time whether the claims had been previously sold. In due course, the creditors' committee filed a complaint in the district court asserting state-law based fraudulent conveyance claims through § 544(b); the defendants moved to dismiss on the same grounds. The district court granted the motion to dismiss ruling that the claims were property of the estate that had been previously sold in the § 363 sale.

On appeal, the Third Circuit reversed. In order to answer the question of whether the fraudulent conveyance claims had been sold in the earlier § 363 sale, the Third Circuit started with the sale order and the agreement at issue. This review revealed that the sale was of "all assets of Cybergenics as debtor and debtor in possession."84 The Third Circuit therefore honed its inquiry to the following question: were the state-law based fraudulent conveyance claims assets of Cybergenics? If so, the claims were included in the sale; if not, they were not. The Third Circuit concluded that state-law based fraudulent conveyance claims are not assets belonging to a debtor. Examining the nature of fraudulent transfer actions, the court ruled that outside of bankruptcy fraudulent conveyance claims belong to a debtor's creditors. It further ruled that the filing of the bankruptcy case and the avoidance power created by § 544(b)85 did not change that result. The Court concluded therefore, that the fraudulent conveyance claims on which the committee sued did not belong to Cybergenics, and therefore were not sold in the earlier § 363 sale of Cybergenics' assets.

(b) Cybergenics II

The Third Circuit having ruled that the claims were not sold, the underlying fraudulent conveyance action proceeded. On remand, the defendants filed another motion to dismiss, which included an argument based on the Supreme Court's decision in Hartford Underwriters86 that the creditors' committee could not bring a fraudulent conveyance action under § 544 because only "the trustee may" do so. The district court granted the motion to dismiss finding dispositive Hartford Underwriters' determination that identical language in § 506(c) of the Bankruptcy Code (i.e. "the trustee may") precluded an individual creditor from prosecuting a surcharge action. Once again, the Third Circuit reversed.

While on the surface, the issue in Cybergenics II appeared to be the same as in Hartford Underwriters,87 the Third Circuit saw it differently. The Third Circuit read the Hartford Underwriters case to be contextual, and styled the issue before the Supreme Court as "one of a nontrustee's right unilaterally to circumvent the Code's remedial scheme."88 In contrast, the Third Circuit styled the question before it in Cybergenics II to be "a bankruptcy court's equitable power to craft a remedy when the Code's envisioned scheme breaks down."89 Having framed the question, the Third Circuit turned to three sources to answer it — a textual analysis, an examination of the court's equitable powers and pre-Code practice.

Because a committee sought to prosecute the action, the Third Circuit's textual analysis begins with the role of creditors' committees in a chapter 11 case. Analyzing §§ 1109(b)90 and 1103(c)(5),91 the Third Circuit concludes that the Bankruptcy Code envisions creditors' committees playing a central role in chapter 11 cases. Section 1109(b) permits a committee to appear and be heard in any matter, putting it in a position to play "a vibrant and central role in [c]hapter 11 adversarial proceedings."92 Section 1103(c)(5), a catch-all provision, permits a committee to "perform such other services as are in the interest of those represented" and "suggests that Congress intended for creditors' committees to perform services on behalf of the estate."93 Further, § 1103(c)(5) reflects that "Congress consciously built a measure of flexibility" into the services a committee may perform.94 But these two sections, standing alone, did not support the conclusion that the committee should be accorded standing to sue on behalf of the estate. Rather, notwithstanding the centrality of the committee in a chapter 11 case, these sections "provide[d] at best indirect evidence that Congress granted bankruptcy courts the power to confer derivative standing upon those committees."95

For "more direct insight into bankruptcy courts' powers,"96 the Third Circuit turned to § 503(b)(3)(B). Section 503(b)(3)(B) allows courts to grant a priority in payment for the expenses of a "creditor that recovers, after the court's approval, for the benefit of the estate any property transferred or concealed by the debtor."97 The litigants and amicus urged opposing positions on the interpretation of this section, including that:

After considering these arguments, the Third Circuit determined that the "most natural reading of § 503(b)(3)(B) is that it recognizes and rewards monetarily the practice of permitting creditors' committees, with court authorization, to pursue derivative actions."102 Paired with § 1103 and § 1109, the Court concluded that Congress approved of derivative standing. But because none of these three sections, singly or together, expressly authorized derivative standing, the Third Circuit next turned to "the bankruptcy courts' equitable power to craft flexible remedies in situations where the Code's causes of action fail to achieve their intended purpose."103

Congress intended that fraudulent conveyances be recovered in order to maximize the value of the estate, and vested in the trustee the power and duty to bring such actions in order to achieve that goal.104 When a trustee refuses to bring the action, the bankruptcy court can invoke its equitable powers to effect the result the Bankruptcy Code was designed to obtain even if the remedy was not directly authorized by the Code.105 In Cybergenics II, the remedy crafted was permitting a chapter 11 creditors' committee to sue derivatively on behalf of the estate. The Court was satisfied that § 544 did not foreclose the substitution of the court for the trustee as the gatekeeper for the prosecution of avoidance actions to benefit the estate when necessary to further that goal.106 And, the Court held that granting derivative standing to a committee was consistent with the public policy concerns underpinning chapter 11 cases.107

Application to the Instant Matter

Per Cybergenics I, I look to the Sale Order and the Agreement to determine what was ordered and what relief Trustee and Plaintiffs were granted. Here, the Order approves the Agreement. Under the Agreement, all of the right, title and interest of Debtor, Trustee and the Estate to the claims and Debtor's books and records were sold, transferred and conveyed, to Plaintiffs. Unlike in Cybergenics I, therefore, the sale here included a much broader range of assets: assets owned by Debtor, assets of the Estate and Trustee's interests in those assets. But, as the Agreement is multi-faceted, it also does more. It settles the New York Action by dismissal. And, it also specifically authorizes Plaintiffs to bring the claims that were conveyed "on behalf of the bankruptcy Estate" with any net recoveries to be property of the estate and distributed in accordance with the Bankruptcy Code.

At the sale hearing, I did not deconstruct the Agreement — in either my analysis, my approval or the Order. Plaintiffs did not seek separate rulings on the different aspects of the Agreement, nor did Defendants suggest that different standards should be used for each component. Rather, I approved the Agreement as a whole using a § 363 sale standard. This is not surprising given (i) the requirement in the Agreement that approval be sought under § 363, (ii) the focus on the auction process and (iii) the single, unallocated, consideration paid by the purchaser under the Agreement.

(a) On the Briefing in this Case, I Will Not Decide Whether the Avoidance Actions are Property of the Estate or Whether they Can be Sold.

Contrary to Defendants' position, the Third Circuit has not determined whether avoidance actions are property of the estate or whether such claims or a trustee's right to pursue avoidance actions can be sold. As set forth above, Cybergenics I did not decide either of these matters as the agreement at issue did not purport to sell either. But, in dicta, the Court does posit that if property of the estate were at issue, the Court would not change its conclusion.108 The Court recognized that, with a few exceptions, property of the estate contains only a debtor's interest in property as of the bankruptcy filing.109 Citing to § 541, the Court also recognized that "property of the estate" is a term of art under the Bankruptcy Code. Thus, if the question were squarely before it, it is certainly possible that the Third Circuit might conclude that state-law based avoidance actions110 are not property of the estate, though that might not answer the question whether avoidance actions, or some aspect of them, may be sold.111

But, neither Plaintiffs nor Defendants did an analysis under § 541 or § 363, or any other provision of the Bankruptcy Code to determine whether avoidance actions are property of the estate, or whether they may be sold. Nor did either party discuss any potential differences between state-law based claims and federal-law based claims or consider whether a trustee can sell whatever he may have of value even if it is not property of the estate.112 Plaintiffs simply pointed out that Cybergenics I did not determine the issue, without addressing statements made in dicta. And, Plaintiffs stated in a conclusory fashion that nothing in the Bankruptcy Code prohibits the sale of avoidance actions. In these circumstances, without any real assistance from any party on these issues — much less any thoughtful analysis — I hesitate to rule on an issue which the Third Circuit on appeal in this case stated does not have an "obvious answer."113 Fortunately, I do not need to. Plaintiffs have standing to bring the Avoidance Actions because I authorized them to do so in the Sale Order.

(b) Derivative Standing Can Be Extended to Chapter 7 Cases

The import of Cybergenics II is that Hartford Underwriters is not a per se constraint on the ability of a nontrustee to act in instances where the Bankruptcy Code identifies the trustee as the actor as long as the nontrustee does not act unilaterally. Cybergenics II recognizes the ability of the court to permit a third party to employ the trustee's avoidance powers in appropriate circumstances, i.e. when the Code's envisioned scheme has broken down. Plaintiffs contend such circumstances exist here.114 Defendants contend that Cybergenics II either cannot, or should not, be applied in a chapter 7 case.115

I conclude that Cybergenics II can be extended to cases under chapter 7 and that individual creditors may be permitted to assert avoidance actions in appropriate circumstances with court approval. While the Third Circuit has not yet applied its Cybergenics II rationale to other chapters, I find it equally applicable to chapter 7. First, § 503(b)(3)(B) applies in chapter 7.116 Second, the Third Circuit ruled that the "most natural reading of § 503(b)(3)(B) is that it recognizes and rewards monetarily the practice of permitting creditors' committees, with court authorization, to pursue derivative actions."117 As the language in the statute, however, references only "creditors," not creditors' committees, an even more natural reading of § 503(b)(3)(B) is that it recognizes and rewards permitting actual creditors — the parties the statute explicitly mentions — with court authorization to pursue derivative actions. The Third Circuit recognizes this even more natural reading when they describe themselves as "realists" noting that if the court does not sanction suits by creditors' committees, "individual creditors could simply substitute themselves as plaintiffs under Fed, R, Civ. P. 17(a)" and continue the litigation.118

Third, the court's equitable powers, recognized by Cybergenics II, exist in the chapter 7 context. As the Third Circuit stated, in enacting § 544, Congress expressed its intention that state-law based fraudulent conveyances be recovered in order to maximize the value of the estate.119 The same policy underlies federally-based fraudulent transfer actions under § 548 as this provision incorporates the law of fraudulent transfer into the Bankruptcy Code.120 In both §§ 544 and 548, the power and duty to bring fraudulent transfer actions is vested in a trustee.121 When a trustee refuses to bring the action, the bankruptcy court can invoke its equitable powers to effect the result the Bankruptcy Code was designed to obtain even if the remedy was not directly authorized by the Bankruptcy Code.122 There is simply no basis in the Bankruptcy Code for interpreting § 503(b)(3)(B), § 544 or § 548 differently in the chapter 7 context.123

Fourth, the public policy concerns underlying chapter 7 are consistent with the use of the court's equitable powers. Two primary goals of the Bankruptcy Code are to maximize the value of the estate for the benefit of creditors and to provide for the equality of treatment of creditors.124 In a corporate chapter 7 case, such as this one, it is hard to imagine other, or at least any more important goals.125 While a chapter 7 trustee is to close a case "expeditiously" the expedition is qualified "as is compatible with the best interests of all parties in interest."126 Where there are fraudulent conveyance actions to be brought, the expeditious closing of the estate can take a back seat to potential recoveries.

The Sixth Circuit has expressly recognized that it is appropriate for the court to use its equitable power to permit a non-trustee to prosecute avoidance actions in chapter 7 cases. In In re Trailer Source,127 the Sixth Circuit determined that derivative standing was available for creditors in a chapter 7 case based on Cybergenics II's § 503(b)(3)(B) analysis. The Sixth Circuit could find no textual support in the Code for drawing a distinction between the chapter 7 and chapter 11 contexts128 and saw "substantial policy reasons for allowing derivative standing in Chapter 7 proceedings."129 In particular the court noted that, as here (and, in contrast to chapter 11 cases), chapter 7 cases often have no liquid assets, consequently, chapter 7 trustees decline to pursue meritorious and/or sizeable claims simply because there are no funds to pursue them, In these instances, the fundamental bankruptcy goal of maximizing the estate, and thus recoveries for creditors, is jeopardized. Indeed, "[j]ust as conflicts of interest may lead to underenforcement of avoidance claims by debtors-in-possession in Chapter 11 proceedings, a lack of available funds may lead to underenforcement by trustees in Chapter 7 proceedings."130 Other courts have similarly extended Cybergenics II to both chapter 7 and chapter 13 cases.131

Certain courts have rejected creditors' attempts to bring avoidance claims in chapter 7 cases.132 One of the most extensive opinions, and the one on which Defendants heavily rely, is In re Cooper,133 which examines the issue of derivative standing from a distinctly different, and somewhat unusual posture. In In re Cooper, Mr. and Mrs. Cooper filed an individual chapter 7 case and a trustee was appointed. The chapter 7 trustee and a large, unsecured creditor, as joint plaintiffs, filed an adversary proceeding against Mr. Cooper seeking to revoke his discharge, compel turnover of non-exempt assets and obtain a judgment based on false representations. Subsequently, the chapter 7 trustee unilaterally entered into a settlement with the debtors to which the creditor/plaintiff objected, arguing that the chapter 7 trustee should not be able to settle the entire case because the creditor/plaintiff could have brought its own motion to revoke Mr. Cooper's discharge. While the bankruptcy court approved the settlement, on appeal the district court affirmed the trustee's settlement with the debtor, but reversed the portion of the ruling forcing the creditor/plaintiff to dismiss its revocation request. Left on remand with only half a loaf, the settlement fell apart. Thereafter, the creditor/plaintiff asked for "authority to prosecute all of the causes of action in the Trustee's stead."134 The trustee objected. As the court put it: "the Trustee opposed the somewhat forced abdication of her responsibilities and authority as Trustee."135

The Cooper court rejects derivative standing in a chapter 7 case because it finds no textual basis for derivative standing in any provision of the Bankruptcy Code applicable to chapter 7.136 Significantly, the Cooper court expressly rejects the Cybergenics II analysis of § 503(b)(3)(B) ruling instead that it does not explicitly or implicitly provide a basis to confer derivative standing to pursue avoidance actions.137 The court also rejects derivative standing because of the role of independent trustees in chapter 7 cases. The Cooper court correctly notes that chapter 7 trustees do not have the potential conflicts of interest inherent in chapter 11 cases and it correctly notes that there are procedures in place for creditors to challenge the business judgment of a trustee. And, the Cooper court expresses concerns regarding the "hijacking" of a chapter 7 bankruptcy case by a non-statutory fiduciary and the potential it has to run afoul of the fresh start policy for individual debtors. The court concludes that it is not good policy to usurp the trustee's role in a chapter 7 case.

While I do not disagree with some of the observations made by the Cooper court, I part ways in some significant aspects. First, Cybergenics II is the law of the Circuit and provides the textual basis, together with the use of a court's equitable powers, for derivative standing. Second, the Cooper court does not fully account for the situation sub judice — a chapter 7 trustee who has determined it is in the best interest of the estate to sell and/or otherwise permit a creditor to prosecute a cause of action because he has no funds to do so. In no sense is this a hijacking of a bankruptcy case or a derogation of a chapter 7 trustee's fiduciary duty. Indeed, the trustee here is administering this asset by finding a way to monetize it; he was not neutral or absent, and did not object to the sale. Trustee held an auction, obtained a favorable price, and successfully defended the sale to the Third Circuit. No one is usurping his role. Third, the option that a creditor should fund the trustee's pursuit of the litigation is not always a viable option. Finally, and particularly with respect to state-law based fraudulent conveyance actions, creditors should not be left worse off in a chapter 7 scenario. As the Cybergenics I court held, outside of bankruptcy such actions belong to creditors. If a chapter 7 trustee has no funds to pursue such an action and a creditor is willing to do so, the bankruptcy court should be able to determine, on a case-by-case basis, whether to permit it. Here, Trustee did his job and asked the court to approve the Agreement.

In Cybergenics II, the Third Circuit noted that fraudulent transfers present "a particularly vexing problem" in chapter 11 cases, but the court did not discount their importance in chapter 7 cases. While acknowledging the conflict of interest concerns in chapter 11 cases where a debtor-in-possession remains in management, the court also recognized the concern of a debtor-in-possession too weak financially to advocate for itself. In each of these situations, the Third Circuit observed that "the real losers are the unsecured creditors whose interests avoidance actions are designed to protect."138 I conclude that fraudulent transfers in a corporate chapter 7 case also present a particularly vexing problem. In instances, such as this one, where a debtor's prepetition corporate management is alleged to have engaged in fraudulent transfers immediately prior to the bankruptcy filing, stripping the debtor of any funds that a chapter 7 trustee could use to make distributions to those creditors and/or to investigate management's actions, the intended system has broken down, and it is appropriate for the bankruptcy court to use its equitable powers and craft a flexible remedy. In such instances, the court may substitute itself as the gatekeeper with respect to the prosecution of avoidance actions in order to benefit the estate and in furtherance of bankruptcy goals.

(c) The Sale Order Granted Plaintiffs Derivative Standing; Alternatively, Derivative Standing is Granted, Nunc Pro Tunc, to the Commencement of the Adversary Proceeding

Having determined that derivative standing may be extended to chapter 7 cases, a question remains: did my prior approval of Plaintiff's prosecution of the Avoidance Actions employ a permissible standard? In Cybergenics II, the Third Circuit did not establish procedures the bankruptcy court should follow to allow a creditor to sue derivatively, but as part of its textual analysis the Court cited to cases in the Second Circuit and Seventh Circuit.139 The Court cited In re Commodore Int'l Ltd.140 for the Second Circuit's requirements for derivative standing:

And, the Court cited Fogel v. Zell142 for the Seventh Circuit's requirements for derivative standing:

As is evident, these standards are not identical and the Commodore requirement is a lesser standard than the Fogel requirement.144

My approval of the Agreement using the § 363 standard clearly meets the Commodore standard for derivative standing. In using the § 363 standard I concluded that a sound business judgment existed for the sale, there was fair notice, and the purchaser acted in good faith. As part of my ruling, I also concluded that Trustee's entry into the Agreement was a sound exercise of his business judgment. My ruling as well as the evidence to support it clearly reflects the Trustee's consent. And, as the Sale Order provides that any settlement of the Avoidance Claims will be submitted to the bankruptcy court for approval under a Rule 9019 standard, some measure of court supervision was maintained over the prosecution of the action. Because the Commodore requirements for derivative standing were met as part of the approval of the Agreement, the effect of the entry of the Sale Order under the Commodore standard was to grant Plaintiffs derivative standing.

My approval of the Agreement using the § 363 standard, however, did not require me to consider if the claim to be prosecuted is "colorable," as required under the Fogel standard. In this aspect, the Fogel standard comports closely with the three-part test for derivative standing generally employed by district courts and bankruptcy judges within the Third Circuit. This test asks whether: "(i) the [trustee] has unjustifiably refused to pursue the claim or refused to consent to the moving party's pursuit of the claim on behalf of the [estate]; (ii) the moving party has alleged colorable claims; and (iii) the moving party has received leave to sue from the bankruptcy court."145 As part of my approval of the Agreement, I did not expressly rule one way or the other on the colorability of the Avoidance Actions. But, to the extent I used an incorrect standard for approval, on the facts and in the posture of this case, I can correct that now by granting Plaintiffs derivative standing nunc pro tunc to the commencement date of this adversary proceeding.146

The first prong of the derivative standing standard is met because Trustee consented to Plaintiffs' prosecution of the Avoidance Actions. The third prong of the standard is met because Plaintiffs have received permission from the court to sue. This leaves only the second prong of the standard—whether the Avoidance Actions are colorable.

A claim is colorable if it would survive a motion to dismiss.147 Defendants have supplied the answer to this question; they did not bring a motion to dismiss the Avoidance Actions for failure to state a claim. Defendants have filed four briefs in support of this Motion to Dismiss as well as several letter submissions and nowhere in any of these filings did they move to dismiss the Avoidance Actions for failure to state a claim. Defendants moved to dismiss the Complaint on no less than eleven separate grounds, including that "Plaintiffs have failed to plead a cause of action for Unjust Enrichment and Count IX must be dismissed" and "The Plaintiffs' Aiding and Abetting Claim fails to State a Claim."148 If the Avoidance Actions were susceptible to a motion to dismiss for failure to state a claim, Defendants would have moved on those grounds.

Moreover, based on the allegations in Counts I-III, it is easy to conclude the claims are colorable. Plaintiffs allege, among other things, that in violation of representations made by counsel for Defendants, incentive fees owing to Debtor were transferred from the Capital Fund to Debtor and then into the personal accounts of Schepis and Mr. and Mrs. Canelas, and the transfers were made in secret, for no consideration and for no valid purpose.149 Plaintiffs also allege that Debtor's contractual right to the carried interest was improperly transferred to Northeast Management Corporation in exchange for no consideration when Schepis and Canelas withdrew Debtor as the general partner of each Feeder Fund and installed Northeast Management Corporation as the successor general partner.150 For purposes of a motion to dismiss, the allegations in the Complaint sufficiently detail valid causes of action. Plaintiffs have, therefore, met the test for derivative standing.

In hindsight, it may have been better to have judged the Agreement under three standards: the § 363 standard with respect to the sale of the non-avoidance causes of action,151 the Bankruptcy Rule 9019 standard with respect to the dismissal of the New York Action,152 and the derivative standing standard with respect to the Avoidance Actions.153 Nonetheless, by the Sale Order, I gave Plaintiffs permission to bring the Avoidance Claims on behalf of the bankruptcy estate, with the net recoveries to be property of the estate and distributed in accordance with the priorities established by the Bankruptcy Code. And, to the extent necessary, I have now specifically granted Plaintiffs permission to proceed derivatively on the Avoidance Actions. The Motion to Dismiss on these grounds is denied.

C. The Doctrine of Champerty Does Not Deprive Plaintiffs of Standing

In the Supplemental Briefing, Defendants raise for the first time the doctrine of champerty as a reason why Plaintiffs cannot prosecute each of the claims asserted in the Complaint.154 "The doctrine of champerty `is based upon the ground that no encouragement should be given to litigation by the introduction of a party to enforce those rights which the owners are not disposed to prosecute.'"155 In Delaware, the doctrine of champerty invalidates agreements "between the owner of a claim and a volunteer that the latter may take the claim and collect it, dividing the proceeds with the owner, if they prevail; the champertor to carry on the suit at his own expense."156 The doctrine only applies to "volunteers" or "strangers"—"those who have no legal interest in the subject matter of the dispute; those who have no relation to either of the parties to the dispute . . . ."157 Agreements are not champertous when "the assignee has some legal or equitable interest in the subject matter of the litigation independent from the terms of the assignment under which the suit was brought."158 The standard by which courts judge an assignee's preexisting legal or equitable interest is a "low threshold."159 The doctrine's purpose is to keep "strangers" from perpetuating litigation.160

Defendants argue that the Agreement is champertous because Trustee "expressed that he lacks the wherewithal and is not disposed to bring the causes of action"161 and because Plaintiffs are, in the first instance, picking up the expense of the litigation. These contentions, and Defendants' further contention that Trustee saw no benefit in pursuing these claims, are belied by Trustee's actions. While Trustee did not have the funds to pursue the lawsuit, he negotiated the Agreement, including a provision that 100% of the net proceeds would come to the estate, and defended his process through two levels of appeal. These are not the actions of a trustee who sees no benefit in pursuing the claims.

Further, Plaintiffs are not strangers to these causes of action or to the parties involved. Plaintiffs are creditors of Debtor whose claims at the moment are "deemed allowed" as no objections to their proofs of claims have been filed.162 As creditors with allowed claims, they are entitled to a distribution from the estate, and the estate will be the ultimate recipient of any litigation proceeds from this adversary proceeding. It is thus far from accurate to characterize Plaintiffs as strangers to the parties of the litigation.163

Moreover, as discussed above, § 503(b)(3)(B) of the Bankruptcy Code independently authorizes recovery of expenses should Plaintiffs recover "property transferred or concealed by the debtor." Congress contemplated that creditors would be engaged in litigation seeking to recover on debtor's claims. Congress's decision to explicitly approve recovery of expenses for such an action is an indication that Plaintiffs, as creditors of the estate, are not strangers to the subject matter of this litigation.

The Motion to Dismiss because the Agreement is champertous is denied.

II. The Limited Partnership Agreements Compel Arbitration of Claims IV-X Against the Feeder Funds and Northeast Capital Management

Defendants request that I dismiss this case in favor of arbitration, or that any non-arbitrable claims be stayed pending arbitration.164 "Arbitration is a matter of contract between the parties."165 The Federal Arbitration Act provides that "[a] written provision" in a contract showing an agreement to settle disputes by arbitration "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."166 To stay a suit in favor of arbitration, there must be "an agreement in writing"167 requiring arbitration, and courts must be "satisfied that the making of the agreement for arbitration. . . is not in issue" before ordering arbitration.168

If the complaint, and the documents it relies on, make clear that a party's claims "are subject to an enforceable arbitration clause, a motion to compel arbitration should be considered under a Rule 12(b)(6) standard without discovery's delay."169 By contrast, "if the complaint and its supporting documents are unclear [about] the agreement to arbitrate, or if the plaintiff has responded to a motion to compel arbitration with additional facts sufficient to place the agreement to arbitrate in issue, then `the parties [are] entitled to discovery . . . [and] further briefing'" on arbitrability.170

Here, the Complaint does not refer to or attach an arbitration agreement nonetheless, the Complaint invokes specific provisions of and duties created by the limited partnership agreements that govern the Capital Fund and the Opportunity Fund.171 To support their position, Defendants submitted two limited partnership agreements and declared each to be a true and correct copy thereof: the Capital Fund LPA172 and the Opportunity Fund LPA.173 Each limited partnership agreement provides:

The limited partnerships agreements are unsigned.175 Debtor, as General Partner, did not sign on the signature lines indicated for it on either agreement; neither did Defendants supply any signature pages for any limited partners of either partnership. Further, neither partnership agreement specifically states that the partnership is a party.

Plaintiffs maintain that the arbitration provisions are not applicable because none of Defendants are parties to the limited partnership agreements and thus cannot invoke the arbitration clauses.176 Alternatively, Plaintiffs argue that the fraudulent conveyance counts are not subject to arbitration. Defendants counter that at least the partnerships themselves, and perhaps Mr. Schepis and Mr. Canelas are parties to the limited partnership agreements.177 Defendants then argue that by virtue of Plaintiff's unitary enterprise characterization of all Defendants, that the arbitration provision should cover all defendants.178 Defendants also argue that the court in the Southern District of New York action ("SDNY Action") "easily applied the arbitration clause to the similar allegations made in a similar case" and thus I should do the same here.179

Plaintiffs' argument that no Defendant is a party to one of the limited partnership agreements is incorrect. Under Delaware law, "a limited partnership is not required to execute its partnership agreement."180 And "[a] limited partnership is bound by its partnership agreement whether or not the limited partnership executes the partnership agreement."181 Thus, Defendant Capital Fund is a party to the Capital Fund LPA, and Defendant Opportunity Fund is a party to the Opportunity Fund LPA. Further, Debtor, as the general partner of each of these limited partnerships, is expressly a party to each of the Capital Fund LPA and Opportunity Fund LPA.182 And, Defendant Northeast Capital Management, as the alleged successor general partner, is also a party to each limited partnership agreement.

But, Defendants' argument that the remainder of the Defendants should be able to enforce an arbitration provision in an agreement to which they are not expressly a party is unpersuasive. Defendants have not cited to any cases to support that position nor expressed a policy reason why that should be the case. The only argument they make is that Plaintiffs' allegations of unitary enterprise should be imported into this context. The merit of Plaintiffs' unitary enterprise theory is not before me at this phase of the litigation and neither party has fully addressed the theory's application to the facts of this case.183

As for the SDNY court's decision sending another lawsuit to arbitration, it is not res judicata for the simple reason that it is not a final judgment. In the SDNY Action, Plaintiffs, in their individual capacities, sued certain Defendants here, Schepis, Mr. and Mrs. Canelas and Northeast Capital. In their motion to dismiss in that case, the defendants argued, among other things, that the SDNY Action was barred by a previous arbitration proceeding. In an Opinion and Order issued in May 2016,184 the SDNY court dismissed various counts and compelled "arbitration of the arbitrability of Defendants' res judicata defense."185 The SDNY court then stayed the case pending resolution of the arbitration proceeding, hence the SDNY Action remains pending. Without a final judgment in the SDNY Action, res judicata is inapplicable.186 As importantly, the SDNY court's analysis of the applicable arbitration provision, which appears to be the Capital Fund LPA, does not include an analysis of the parties bound by the provision. In the Opinion and Order the relevant issue was who should decide the res judicata effect of the previous arbitration—the court or the arbitrator. The parties bound by the arbitration provision was not the subject of the Opinion and Order.187

Having reviewed the arbitration provision and the parties bound by it, I conclude that Counts IV-X against Defendant Capital Fund, Defendant Opportunity Fund and Defendant Northeast Capital Management are subject to arbitration. Counts IV-X are based on Debtor's prepetition state law claims acquired by Plaintiffs in the sale process. According to Plaintiffs' Complaint, Debtor was the general partner of the Capital Fund and the Opportunity Fund. The arbitration clauses in both limited partnership agreements mandate arbitration of "any controversy" between "the partnership" and "any partner" or between "any party" "arising out of or relating to" the limited partnership agreement or the breach of the agreement. Debtor is both a party to each limited partnership agreement as well as a partner in each limited partnership. Further, Plaintiffs did not argue that Counts IV-X are not within the scope of the arbitration provision. Thus, based on the arbitration clause in the limited partnership agreements, I will grant the request to compel arbitration as to Counts IV-X against the Capital Fund, the Opportunity Fund and Northeast Capital Management.188 The request is denied as to all other Defendants on Counts IV-X.

As to Counts I-III and XI, the result is different. Counts I-III seek to set aside various transfers under actual and constructive fraudulent conveyance theories brought under the Bankruptcy Code and through importation of state law, and thus those claims must remain in this Court. Fraudulent transfer actions, whether brought under § 544(b) or § 548, do not belong to a debtor; "[t]hey are creatures of statute, available in bankruptcy solely for the benefit of creditors of the debtor, whose rights the trustee enforces."189 "[C]reditors may not be compelled indirectly through their representative to arbitrate fraudulent transfer claims pursuant to a pre-petition contract to which they were not parties."190 Count XI is a request pursuant to § 543 for turnover of Debtor's books and records, which belong to the estate. This Count arises under the Bankruptcy Code and is a core proceeding. As neither creditors nor the estate are parties to either limited partnership agreement or bound by it, Counts I-III and XI are not subject to arbitration.

The final issue is whether to grant Defendants' request to stay any non-arbitrable claims pending arbitration.191 Plaintiffs oppose that request and argue that if any claims are arbitrable, I should allow all non-arbitrable claims to proceed before compelling arbitration.192 Although it perhaps may be more efficient to stay the remaining claims while arbitration is pending, judicial efficiency alone is not a sufficient reason for a court to "refuse to exercise its jurisdiction in favor of proceedings in an alternative forum."193 Courts ought to be cautious in staying litigation while arbitration is pending, because staying litigation for that reason may effectively deny the plaintiff its day in court.194 Indeed, [t]he right to litigate would mean little if the substance of the litigation, when [the plaintiff's] day in court finally dawns, may be driven by something that may have occurred during arbitration."195

Plaintiffs have a right to litigate their fraudulent transfer claims (Counts I-III) and turnover claim (Count XI) against all Defendants. The prosecution of these counts will not be stayed. The fraudulent conveyance counts assert that Debtor transferred funds or assets that it received or had a right to receive with the actual intent to harm its creditors or in exchange for no value. These claims are not based on the limited partnership agreement and there could be actionable claims even if certain actions taken by Defendants comported with the limited partnership agreements. The turnover action seeks to obtain the Debtor's books and records in the possession of other parties.

As to the remaining counts, I will stay prosecution of Counts VI (Breach of Contract), VII (Conversion) and IX (Unjust Enrichment). In these counts, Plaintiffs seeks to recover fees allegedly owed to Debtor under the Capital Fund LPA and the Opportunity Fund LPA and redress for the removal of Debtor as general partner of those partnerships. Recovery for these alleged wrongs are directly impacted by relevant provisions of the limited partnership agreement and are directed, in the first instance, at the Capital Fund and the Opportunity Fund.

On the other hand, I will not stay prosecution of Counts IV (Breach of Fiduciary Duty), Count V (Breach of the Fiduciary Duty of Loyalty), Count VIII (Aiding and Abetting Breaches of Fiduciary Duty) and Count X (Accounting). In the first three of these counts, Plaintiffs allege that Debtor's managers, Schepis and Canelas (as well as the remaining Defendants, which they controlled), breached their fiduciary duties to the Debtors or aided and abetted the breaches of others. These alleged breaches are not based on provisions of the Capital Fund LPA or the Opportunity Fund LPA, but on fiduciary obligations arising under state law and/or Debtor's limited liability company agreement.196 Similarly, the request for an accounting is not grounded in the limited partnership agreements. To retain these counts but stay prosecution pending arbitration would effectively deny Plaintiffs their day in court against Defendants at the center of the Complaint. Such a result would take away with one hand the very thing awarded with the other. That I will not do. Defendants' request for a total stay of this adversary proceeding pending arbitration is denied.

To summarize, I will compel arbitration of Counts IV-X against the Capital Fund, the Opportunity Fund and Northeast Capital Management. I will stay prosecution of Counts VI, VII and IX against all other Defendants. I will not stay prosecution of Counts IV, V, VIII and X against all other Defendants. Counts I — III and XI may proceed against all Defendants.

III. The Exculpation Provisions in the Limited Partnership Agreement Do Not Compel Dismissal of the Complaint

Defendants argue that Plaintiffs' breach of fiduciary duty claims (Counts IV, V, and VIII) fail to state a claim on which relief can be granted because of the exculpation provisions in the limited partnership agreements.197 Plaintiffs respond by arguing that the exculpation provisions do not apply to at least ten Defendants, that their claims fall within the clause's exception, and that Defendants have duties under Delaware law regardless.198 In their reply, Defendants distinguish cases cited by Plaintiffs involving corporations and argue that Plaintiffs' Complaint pleads breaches of the duty of loyalty, but that the exculpation clause removes liability for a breach of the duty of loyalty and such a breach does not fall into the exceptions in the exculpation clause.199 Defendants conclude by arguing that Defendants are included in the exculpation clause as "Affiliates" of the General Partner.

The exculpation clauses in the limited partnership agreements, which are identical, provide that:

By its terms, therefore, the general partner is on the receiving end of exculpation from the partnership and limited partners. Plaintiffs' claims here present the reverse situation. Neither partnership (Capital Fund or Opportunity Fund) is suing the general partner (Debtor) or any of Debtors' shareholders, managers, etc. Indeed, Capital Fund and Opportunity Fund are not suing any party. Rather, Plaintiffs are suing on Debtor's claims, in other words, bringing the claims of the General Partner against the Partnership. There is no exculpation running in that direction.

Further, even if the exculpation clauses covered Plaintiffs' claims, Plaintiffs' claims arguably fall within the exception. Counts IV, V, and VIII allege breach of fiduciary duty, breach of loyalty, and aiding and abetting breaches of fiduciary duty respectively. The exculpation clause carves out claims for fraud, willful misconduct, and gross negligence. Under Delaware law, "[g]ross negligence is the standard for evaluating a breach of the duty of care,"201 and "[w]illful misconduct is one standard for evaluating whether a fiduciary breached the duty of loyalty by acting in bad faith."202 Thus, by carving out willful misconduct and gross negligence, the exculpation clause does not remove liability for (1) breach of the duty of care and (2) at least one way of evaluating breach of the duty of loyalty. Reading the allegations in the Complaint favorably to Plaintiffs, their allegations fall within these exceptions.

The Motion to Dismiss based on the exculpation clause is denied.

IV. None of Defendants' Remaining Arguments Warrant Dismissal of the Complaint

Defendants seek to dismiss the complaint on multiple other grounds. Some of the discussion of these remaining grounds is little more than a paragraph, or even a sentence. I address certain of the remaining arguments below. I deny the Motion to Dismiss to the extent that it is based on any remaining argument that is not discussed.

1. Non-Core Claims. Defendants argue that Counts I-X are non-core claims and thus I may not enter a final order on those claims. Defendants are not contesting subject matter jurisdiction. Defendants are exercising their right to not consent to entry of final judgments by the bankruptcy court on any non-core claims. This matter does not require a determination of the core/non-core status of Plaintiffs' claims, and I leave that analysis for another day.

2. Cayman Law on Derivative Suits. In their Opening Brief, Defendants contend that all claims must be dismissed against all Cayman Defendants because Cayman Islands law prohibits derivative shareholder suits,203 and that creditors have no standing to assert claims derivatively on Debtor's behalf.204 In their Reply Brief, Defendants refer to only two of the Cayman Defendants—Pursuit Capital Partners Cayman (Ltd.) and Pursuit Capital Master (Cayman Ltd.). In response to questions at argument, Defendants stated that they are relying on the unitary enterprise theory to show that somehow the claims against the Cayman Defendants must be derivative and not direct. Defendants admitted that they were not "precise" in their contentions with respect to derivative standing, neither evaluating the relationship between the Debtor and each Cayman Defendant nor the relationship between the claims asserted in the Complaint and each Cayman Defendant.205 Plaintiffs expressed confusion with respect to Defendants' contentions, but in any event argue that they are asserting direct claims against each Cayman Defendant.

After reviewing the briefing and the transcript of the argument, I conclude that Defendants' contentions with respect to derivative standing are too imprecise, and my attempt to ferret out the contentions at argument was unsuccessful. Defendants' request for dismissal on this basis will be denied.206

3. Failure to State a Claim Upon Which Relief Can Be Granted. Defendants argue that Counts IV and V must be dismissed for failure to state a claim for breach of fiduciary duty and that Count VIII must be dismissed for failure to state a claim for aiding and abetting a breach of fiduciary duty. The arguments directed to Counts IV and V comprise two paragraphs and are based on the exculpation clause in the limited partnership agreements and on a general statement that Plaintiffs have not alleged that Debtor, as general partner, "is an investor in or creditor[ ] of any of the corporate entities . . . ."207 The exculpation argument has been addressed above. The derivative standing argument here is also imprecise, and does not take into account the allegations that Defendants were acting as a unitary enterprise.

Defendants' arguments directed to Count VIII largely repeat arguments already dealt with in this section and those requests will be denied for the same reasons.208 Defendants also point out that Plaintiffs have not sufficiently alleged that Defendants are a "third party" that could have misled the directors into a breach. I find Plaintiffs allegations to be sufficient in this regard. And to the extent that Defendants argue that Plaintiffs cannot plead in the alternative (alleging that a Defendant both breached a fiduciary duty and aided and abetted a breach of fiduciary duty), Fed. R. Civ. P. 8(d)(3) forecloses that argument at the pleading stage.

Defendants argue that Count IX must be dismissed because a claim for unjust enrichment cannot stand in the face of an express contract. The express contracts Defendants refer to are the limited partnership agreements. Plaintiffs are entitled to plead in the alternative, and Defendants have raised no other basis for dismissal of this count.

For all these reasons, Defendants' request for dismissal because Counts IV, V, VIII and IX fail to state a claim upon which relief can be granted will be denied.

4. Judicial Estoppel. Defendants argue that the doctrine of judicial estoppel prevents Plaintiffs from taking a position in this lawsuit that is contrary to a position taken by Alpha Beta Capital Partners, L.P. in its case against Pursuit Investment Management LLC in Connecticut state court.209 Defendants state that Alpha Beta is in privity with Plaintiffs and thus I should attribute Alpha Beta's position in the Connecticut case to Plaintiffs' position here. Defendants urge that it is inconsistent for Alpha Beta to have taken the position that "no incentive fee should be paid with respect to the UBS settlement"210 in the Connecticut case while Plaintiffs argue here that Debtor "should have earned an incentive fee."211 Plaintiffs counter that the parties and facts in the Connecticut case are different than the parties and facts here such that judicial estoppel is inapplicable.212

The doctrine of judicial estoppel prevents "a litigant from asserting a position that is inconsistent with one he or she previously took before a court or agency."213 The application of judicial estoppel requires the following: (i) "the party to be estopped must have taken two positions that are irreconcilably inconsistent,"214 (ii) the party must have changed his position "`in bad faith—i.e., with intent to play fast and loose with the court'"215 and (iii) "no lesser sanction would adequately remedy. . . the litigant's misconduct."216 I will not apply judicial estoppel here. While Alpha Beta is one of the parties to the Agreement and has authorized Plaintiffs to bring the claims on their behalf,217 the claims asserted in this action belonged to Debtor, not to Alpha Beta. Debtor was not a party to the Connecticut Action218 and therefore made no representations in the Connecticut Action. Further, Defendants represent that the decision in the Connecticut Action is (i) based on agreements not involved in this matter and (ii) "the Connecticut Court's decision on those matters related to the relation between any of the Defendants and Alpha Beta is not relevant to the Complaint."219 Under these circumstances, I will not grant the Motion to Dismiss on judicial estoppel grounds.

Conclusion

An Order will enter consistent with the above rulings.